AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 27, 1996
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
ADMINISTAFF, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 7363 76-0479645
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
19001 CRESCENT SPRINGS DRIVE RICHARD G. RAWSON
KINGWOOD, TEXAS 77339-3802 19001 CRESCENT SPRINGS DRIVE
(713) 358-8986 KINGWOOD, TEXAS 77339-3802
(ADDRESS, INCLUDING ZIP CODE, AND (713) 358-8986
TELEPHONE NUMBER, INCLUDING, (NAME, ADDRESS, INCLUDING ZIP CODE,
AREA CODE, OF REGISTRANT'S AND TELEPHONE NUMBER, INCLUDING
PRINCIPAL EXECUTIVE OFFICES) AREA CODE, OF AGENT FOR SERVICE)
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Copies to:
G. MICHAEL O'LEARY ROBERT F. GRAY, JR.
ANDREWS & KURTH L.L.P. FULBRIGHT & JAWORSKI L.L.P.
4200 TEXAS COMMERCE TOWER 1301 MCKINNEY, SUITE 5100
HOUSTON, TEXAS 77002 HOUSTON, TEXAS 77010-3095
(713) 220-4200 (713) 651-5151
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
ADMINISTAFF, INC.
CROSS-REFERENCE SHEET
PURSUANT TO ITEM 501(B) OF REGULATION S-K
ITEM
NO. ITEM IN FORM S-1 LOCATION OR HEADING IN PROSPECTUS
- ---- ----------------- ---------------------------------
1. Forepart of the Registration Statement and Outside
Front Cover Page of Prospectus................... Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages
of Prospectus.................................... Inside Front Cover Page; Available
Information
3. Summary Information, Risk Factors and Ratio of
Earnings to Fixed Charges........................ Prospectus Summary; Risk Factors
4. Use of Proceeds.................................... Use of Proceeds
5. Determination of Offering Price.................... Outside Front Cover Page;
Underwriters
6. Dilution........................................... Dilution
7. Selling Security Holders........................... Outside Front Cover Page; Principal
and Selling Stockholders
8. Plan of Distribution............................... Front Cover Page; Underwriters
9. Description of the Securities to be Registered..... Front Cover Page; Summary;
Capitalization; Description of
Capital Stock; Underwriters
10. Interests of Named Experts and Counsel............. Legal Matters; Experts
11. Information With Respect to the Registrant......... Front Cover Page; Summary; Risk
Factors; The Company; Dividend
Policy; Selected Historical
Consolidated Financial Data;
Management's Discussion and
Analysis of Financial Condition
and Results of Operations;
Business; Industry Regulation;
Description of Capital Stock;
Shares Eligible for Future Sale;
Underwriters
12. Disclosure of Commission Position on
Indemnification for Securities Act Liabilities... Not Applicable
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*************************************************************************** * * * INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A * * REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED * * WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT * * BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE * * REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT * * CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY * * NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH * * SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO * * REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH * * STATE. * |
* * ***************************************************************************
PROSPECTUS (Subject to Completion)
Issued , 1996
3,000,000 Shares
Administaff, Inc.
COMMON STOCK
------------------------
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THE 3,000,000 SHARES OFFERED HEREBY ARE BEING SOLD BY THE COMPANY. PRIOR TO THIS
OFFERING, THERE HAS BEEN NO PUBLIC MARKET FOR THE COMMON STOCK OF THE
COMPANY. IT IS CURRENTLY ESTIMATED THAT THE INITIAL PUBLIC OFFERING
PRICE WILL BE BETWEEN $ AND $ PER SHARE. SEE
"UNDERWRITERS" FOR A DISCUSSION OF THE FACTORS TO BE CONSIDERED
IN DETERMINING THE INITIAL PUBLIC OFFERING PRICE. THE
COMMON STOCK HAS BEEN APPROVED FOR LISTING ON THE NEW
YORK STOCK EXCHANGE, SUBJECT TO OFFICIAL NOTICE
OF ISSUANCE, UNDER THE SYMBOL "ASF."
SEE "RISK FACTORS" ON PAGE 9 FOR INFORMATION
THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
UNDERWRITING
PRICE DISCOUNTS AND PROCEEDS TO
TO PUBLIC COMMISSIONS(1) COMPANY (2)
----------------------- ----------------------- -----------------------
Per Share................ $ $ $
Total (3)................ $ $ $
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(2) Before deducting expenses payable by the Company estimated at $ .
(3) The Selling Stockholders have granted to the Underwriters an option, exercisable within 30 days of the date hereof, to purchase up to an aggregate of 450,000 additional Shares at the price to public less underwriting discounts and commissions, for the purpose of covering over-allotments, if any. See "Principal and Selling Stockholders." The Company will not receive any of the proceeds from any such sale of Shares by the Selling Stockholders. If the Underwriters exercise this option in full, the total price to public, underwriting discounts and commissions, and proceeds to Selling Stockholders will be $ , $ and $ , respectively. See "Underwriters."
The Shares are offered, subject to prior sale, when, as and if accepted by the Underwriters named herein and subject to the approval of certain legal matters by Fulbright & Jaworski L.L.P., counsel for the Underwriters. It is expected that delivery of the Shares will be made on or about , 1996 at the office of Morgan Stanley & Co. Incorporated, New York, N.Y., against payment therefor in New York funds.
MORGAN STANLEY & CO. DONALDSON, LUFKIN & JENRETTE
Incorporated Securities Corporation
[Octagonal chart depicting the Company's Personnel Management System, including a graphic depiction of the services which the Company provides.]
NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION TO SUCH PERSON.
TABLE OF CONTENTS
PAGE
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Available Information.................... Inside Cover
Summary......................................... 3
Risk Factors.................................... 9
The Company..................................... 16
Use of Proceeds................................. 16
Dividend Policy................................. 16
Capitalization.................................. 17
Dilution........................................ 18
Selected Historical Consolidated Financial
Data.......................................... 19
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 21
PAGE
----
Business........................................ 32
Industry Regulation............................. 42
Management...................................... 47
Principal and Selling Stockholders.............. 53
Description of Capital Stock.................... 55
Shares Eligible for Future Sale................. 57
Underwriters.................................... 59
Legal Matters................................... 60
Experts......................................... 60
Index to Consolidated Financial Statements...... F-1
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The Company intends to furnish its stockholders annual reports containing consolidated financial statements examined by an independent public accounting firm.
AVAILABLE INFORMATION
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE, IN THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
SUMMARY
The following summary is qualified in its entirety by the more detailed information and financial statements, including the notes thereto, which appear elsewhere in this Prospectus.
This Prospectus contains certain forward-looking statements with respect to the business of the Company and the industry in which it operates. These forward-looking statements are subject to certain risks and uncertainties which may cause actual results to differ significantly from such forward-looking statements. See "Risk Factors."
THE COMPANY
Administaff, Inc. ("Administaff" or the "Company") is a leading provider of professional employer services, both in terms of number of worksite employees and in terms of revenues, with current operations in 10 markets. The Company serves over 1,400 client companies with approximately 23,000 worksite employees as of September 30, 1996 and believes that it currently ranks, in terms of revenues, as one of the three largest professional employer organizations in the United States. The Company has grown significantly since it was founded in 1986. Revenues (which include the payroll of worksite employees) were $4.1 million for 1987, the Company's first full year of operations, and increased to over $716 million for fiscal 1995, with 1995 gross profit and net income of $28.9 million and $1.1 million, respectively. Houston is the Company's original location and accounts for approximately 50% of the Company's revenue base as of September 30, 1996, with other Texas markets accounting for an additional 30%. In October 1993, the Company opened a sales office in Dallas as the first step in implementing a long-term internal growth and expansion strategy. Subsequent to obtaining expansion capital in May 1994, the Company opened sales offices in Atlanta, Phoenix, Chicago and Washington D.C. during a twelve month period beginning in October 1994. The Company opened a second office in Dallas in January 1996 and opened an office in Denver in September 1996. The Company plans to enter at least one new market or open at least one additional sales office in an existing market in each quarter of 1997 and 1998.
Administaff's goal is to improve the productivity and profitability of
small businesses (generally, businesses with 100 or fewer employees) by
relieving business owners and key executives of administrative and regulatory
burdens, enabling them to focus on the core competencies of their businesses,
and by promoting employee satisfaction through human resource management
techniques that improve employee performance. The Company provides a
comprehensive personnel management system which encompasses a broad range of
services, including benefits and payroll administration, medical and workers'
compensation insurance programs, tax filings, personnel records management,
liability management and other human resource services. The fees charged by the
Company (which averaged approximately 123.6% of total payroll costs during the
nine-month period ended September 30, 1996) are invoiced along with each
periodic payroll of the client and include the gross payroll of each client plus
the Company's estimated costs of paying employment related taxes, providing
human resource services, performing administrative functions, providing
insurance coverages and benefit plans and performing other services offered by
the Company. Administaff provides these services by entering into a Client
Service Agreement which establishes a three party relationship whereby the
Company and client act as co-employers of the worksite employees.
Responsibilities are allocated between the co-employers pursuant to the Client
Service Agreement, with Administaff assuming responsibility for personnel
administration and compliance with most employment-related governmental
regulations. The client company retains the employee's services in its business
and remains the employer for various other purposes. Companies providing
comprehensive services in this manner have come to be known as professional
employer organizations, or PEOs, as distinguished from "fee for service"
companies, such as payroll processing firms, human resource consultants and
safety consulting firms, that provide a specific service to a client under a
traditional two party contract.
Growth in the PEO industry has been significant. According to the National Association of Professional Employer Organizations ("NAPEO"), the number of employees under PEO arrangements in the United States has grown from approximately 10,000 in 1984 to approximately 2.0 million in 1995. NAPEO statistics also reflect gross revenues earned by the PEO industry grew from $5.0 billion in 1991 to $13.8 billion in 1995,
representing a compounded annual growth rate of approximately 29%. Despite this industry growth, the Company believes that the target markets for its business remain relatively untapped. NAPEO estimates that at the end of 1995 the PEO industry served only approximately 70,000 businesses in the United States. In contrast, the Small Business Administration (the "SBA") estimates that net annual growth in the number of small businesses is approximately 75,000.
Administaff believes that growth in the PEO industry is driven by the
increasingly complex legal and regulatory burdens placed on employers as well as
trends relating to the growth and productivity of the small business community
in the United States. The Company believes that the key factors which drive
small businesses to consider PEO services include (i) 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,
(ii) the need to provide competitive health care and related benefits to attract
and retain quality employees to small businesses and (iii) the increasing costs
associated with workers' compensation and health insurance coverage, workplace
safety programs and employee related complaints and litigation. Growth in the
PEO industry has also been influenced by growth of the small business sector.
According to reports published by the SBA, at year end 1993 there were more than
5.8 million businesses in the United States with fewer than 100 employees, up
from 3.9 million of such businesses at the end of 1980. In addition, the Company
believes that attempts to achieve higher levels of productivity in the workplace
have supported a movement toward the outsourcing of services such as payroll
administration and consulting on benefits, safety and other employee related
issues. Administaff believes that its specific model for delivery of a
comprehensive package of PEO services directly supports the small business goal
of improving productivity and competitiveness.
STRATEGY
The Company's objective is to become the leading provider of PEO services in the United States while achieving sustainable revenue and income growth. Key elements of the Company's strategy were developed by the Company's core management team which has remained in place since the Company's founding in 1986. Since that time, the Company has concentrated substantial financial and management resources on developing, defining and optimizing a personnel management system for small businesses and on building an organizational infrastructure designed to enable the Company to replicate proven growth patterns while balancing revenue and income growth objectives. The key elements of the Company's strategy include:
o Providing the highest quality services to help improve the productivity and profitability of the Company's clients.
Administaff focuses on providing high quality services that directly enhance the productivity and profitability of small businesses. Achieving these efficiencies not only provides an obvious benefit to clients, it also benefits the Company in three distinct ways. First, to the extent that enhanced productivity results in client growth, Administaff's revenue base also grows. Second, clients who experience improved profitability best understand the value of Administaff's services and prove to be the Company's most effective referral sources. Finally, client productivity facilitated by Administaff promotes a long-term client relationship. Although the Company's client service agreement provides for only a one year initial term and is terminable on 30-day's notice at any time, in excess of 80% of Administaff's clients remain for more than one year and the retention rate increases for clients who remain with Administaff for longer periods. In accordance with NAPEO standards, retention rates are calculated by dividing the number of Company clients at December 31 by the number of clients at January 1 of the same year plus clients added during such year.
o Continuing to enter and establish a leading position in new markets.
In 1993, the Company identified 36 markets as its most attractive expansion targets and since that time has opened sales offices in six of these markets. The Company plans to enter at least one new market or open one additional sales office in an existing market in each quarter of 1997 and 1998 and believes that the proceeds from this offering will be sufficient to cover the costs of such expansion. Through the use of a market selection model which evaluates a broad range of criteria, Administaff selects new markets where it believes it is most likely to replicate its historical growth patterns and market
penetration. While most of the Company's expansion has been the result of opening sales offices, the Company has and will continue to consider expansion through strategic acquisitions. The Company believes that increasing industry regulatory complexity, including the difficulties of complying with the applicable state laws and the increasing capital commitments required of PEOs to provide larger service delivery infrastructures and management information systems should lead to significant consolidation opportunities in the PEO industry. The Company's market development strategy combines intensive direct marketing efforts with a fully integrated public relations and advertising campaign. While the expense associated with entering and developing a new market is significant, the Company views this investment as essential to achieving desired growth and extending its national leadership position. The Company generally expects expenses in a new market to be covered by the gross profit from that market within two years.
o Growing existing markets through additional market penetration and marketing alliances.
The Company believes that additional market penetration in established markets offers significant growth potential. Based on information contained in a database developed by American Business Information, Inc. ("ABI"), the Company believes that it serves less than 6.0% of the total number of businesses in Houston meeting its target criteria described below. In established markets, the Company's ability to achieve its growth objectives is enhanced by a higher number of referrals, a higher client retention rate, a more experienced sales force and momentum in its marketing efforts. The Company is also actively pursuing the formation of certain strategic alliances with other providers of various administrative and office services to small businesses as an alternative method for achieving growth in existing markets. The Company selectively opens additional sales offices and hires additional sales personnel in established markets to capitalize on these advantages and to achieve higher penetration.
o Targeting and enrolling clients that are consistent with the Company's overall strategy and risk profile objectives.
The Company seeks to attract clients whose objectives in utilizing Administaff's PEO services primarily relate to enhancing productivity rather than short-term cost cutting. The Company's clients tend to be established, financially successful and likely to recognize the value of a broad range of services which enable the client to concentrate on its core business. Administaff's target client has from five to 100 employees and must meet certain additional criteria relating to industrial classification, workers' compensation, health and unemployment claims history and operating stability. These criteria, which constitute part of the Company's screening process, are intended to avoid a skewing of the Company's client base to higher risk clients. Through this process, the Company seeks to continue to build a solid client base characterized by high year-to-year retention and client employee growth while maintaining a predictable and controllable direct cost structure.
o Capitalizing on economies of scale while actively managing and controlling direct costs.
The Company enjoys economies of scale which allow it to provide small businesses with a level of human resource management typically found only in large corporations. The Company aggressively pursues scale advantages in order to maximize profits and to provide its clients with premium services at competitive prices. In this regard, Administaff focuses on key relationships with insurance providers to design coverage and premium structures that not only provide cost effective and appropriate protection for clients, but also enable the Company to control major components of its direct costs. These economies and tailored coverages are achievable both because of the Company's sophistication as a purchaser of insurance products and its status as a large customer of such providers. The Company also employs a variety of proactive personnel management techniques to help minimize the incidence and magnitude of employee claims, complaints and related costs. The Company expects the economies resulting from active control and management of direct costs will continue to enhance profitability.
No assurance can be given that the Company will be successful in implementing its strategy or that, even if successful, such implementation will have the intended effects on the Company's future revenue, operating expenses or net income.
THE OFFERING
Common Stock offered by the
Company.................. 3,000,000 shares
Common Stock offered by the
Selling Stockholders..... 450,000 shares if the Underwriters' over-allotment
option is exercised in full
Common Stock to be
outstanding after the
offering................. 13,377,329 shares(1)
Use of proceeds to the
Company.................. Of the $ million of estimated net proceeds to
the Company (based on an offering price of $
per share), approximately $12 million will be
reserved to support expansion of the Company's
operations, including the opening of new geographic
markets, further penetration of existing markets by
opening new sales offices and, as opportunities
arise, expansion of the Company's client base in
new or existing markets through acquisitions.
Approximately $4.0 million of the remaining net
proceeds will be used to repay certain outstanding
subordinated notes, $2.5 million to exercise
certain options to repurchase Common Stock and
Common Stock warrants, and $0.7 million to repay
certain mortgage indebtedness. The balance of the
net proceeds will be used for working capital
purposes, which may include acquisitions of
existing PEO operations. The Company will not
receive any of the net proceeds attributable to the
sale of shares of Common Stock by the Selling
Stockholders. See "Use of Proceeds."
Proposed New York Stock
Exchange listing......... The New York Stock Exchange (the "NYSE") has
approved the Common Stock for listing, subject to
official notice of issuance, under the symbol
"ASF."
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(1) The number of shares to be outstanding after the offering gives effect to the repurchase of Common Stock and Common Stock warrants as described under "Use of Proceeds," and excludes the 995,196 shares of Common Stock issuable upon the exercise of options and warrants (at a weighted average exercise price of $5.57 per share as of September 30, 1996) which will remain outstanding after consummation of the offering.
RISK FACTORS
See "Risk Factors" on page 9 for information that should be considered by prospective investors. Such risk factors include an ongoing audit by the Internal Revenue Service (the "IRS") of the Company's 401(k) plan (the "401(k) Plan") and a related market segment study by the IRS; certain 401(k) Plan compliance costs incurred by the Company; state and local regulations; risks of increases in health insurance, unemployment taxes and workers' compensation rates; liabilities for client and employee actions; liability for worksite employee payroll; possible loss of benefit plans; possible adverse application of other federal and state laws; geographic market concentration; adequacy of accrued workers' compensation claims; quarterly fluctuations in earnings and impact of employment related taxes; potential client liability for employment taxes; dependence on key personnel; expenses associated with expansion; failure to manage growth; need to renew or replace client companies; anti-takeover effects of certain charter and bylaw provisions and Delaware Law; control by existing stockholders; absence of prior trading market and potential volatility of stock price; shares eligible for future sale; dilution; and no dividends.
SUMMARY FINANCIAL DATA
The following summary financial data should be read in conjunction with the Consolidated Financial Statements, including the Notes thereto, and "Management's Discussion and Analysis of Financial Condition and Results of Operations." The statement of operations data set forth below with respect to the years ended December 31, 1993, 1994 and 1995 are derived from, and are qualified by reference to, the audited consolidated financial statements included elsewhere in this Prospectus. The statement of operations data for the years ended December 31, 1991 and 1992 are derived from audited consolidated financial statements not included herein. The statement of operations data for the nine months ended September 30, 1995 and 1996 and the balance sheet data as of September 30, 1996 are unaudited. The unaudited results of operations for the nine months ended September 30, 1996 are not necessarily indicative of results expected for the full year. (See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Quarterly Operating Results").
NINE MONTHS
ENDED
SEPTEMBER 30,
YEAR ENDED DECEMBER 31, (UNAUDITED)
-------------------------------------------------------- --------------------
1991 1992 1993 1994 1995 1995 1996
-------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT FOR PER SHARE AND STATISTICAL DATA)
STATEMENT OF OPERATIONS DATA:
Revenues(1)............................. $300,051 $409,046 $496,058 $564,459 $716,210 $505,619 $635,252
Direct costs(1):
Salaries and wages of worksite
employees........................... 241,471 328,223 397,662 453,750 582,893 408,379 517,820
Benefits and payroll taxes............ 49,542 67,272 78,614 85,513 104,444 76,964 91,307
-------- -------- -------- -------- -------- -------- --------
Gross profit............................ 9,038 13,551 19,782 25,196 28,873 20,276 26,125
Operating expenses:
Salaries, wages and payroll taxes..... 3,090 5,077 6,136 8,094 10,951 8,055 10,475
General and administrative expenses... 3,008 4,788 5,571 5,648 7,597 5,497 5,937
Commissions........................... 1,787 2,569 2,975 3,231 3,942 2,908 2,939
Advertising........................... 849 888 1,612 1,797 3,268 2,125 2,488
Depreciation and amortization......... 260 282 361 567 894 627 1,063
-------- -------- -------- -------- -------- -------- --------
Total operating expenses.............. 8,994 13,604 16,655 19,337 26,652 19,212 22,902
-------- -------- -------- -------- -------- -------- --------
Operating income (loss)(2).............. 44 (53) 3,127 5,859 2,221 1,064 3,223
Net income(2)........................... $ 70 $ 33 $ 1,949 $ 3,766 $ 1,116 $ 617 $ 1,054(3)
======== ======== ======== ======== ======== ======== ========
Net income per share(4)................. $ 0.01 $ 0.00 $ 0.22 $ 0.37 $ 0.10 $ 0.06 $ 0.10(3)
Weighted average shares
outstanding(4)........................ 6,429 8,581 8,838 10,337 10,807 10,757 10,862
Supplemental net income per share(5).... $ 0.16 $ 0.14
STATISTICAL DATA:
Worksite employees at period end(6)..... 11,380 13,490 15,165 15,780 20,502 20,124 22,993
Client companies at period end.......... 501 598 687 809 1,130 1,085 1,441
Gross payroll per employee per
month(7).............................. $ 1,823 $ 1,919 $ 2,117 $ 2,268 $ 2,331 $ 2,297 $ 2,522
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SEPTEMBER 30, 1996
(UNAUDITED)
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ACTUAL ADJUSTED(8)
-------- -----------
CONSOLIDATED BALANCE SHEET DATA:
Working capital........................................................................... $ 3,290 $
Total assets.............................................................................. 45,134
Total debt................................................................................ 4,648
Total stockholders' equity................................................................ 11,743
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(1) Revenues consist of service fees paid by the Company's clients under its Client Service Agreements. In consideration for payment of such service fees, the Company agrees to pay the following direct costs associated with the worksite employees: (i) salaries and wages, (ii) employment related taxes, (iii) employee benefit plans and (iv) workers' compensation insurance.
(2) Operating income (loss) and net income include the effects of expenses associated with the Company's expansion plan which began in 1993. See "Management's Discussion and Analysis of Financial Condition and Results of Operations."
(3) For the nine months ended September 30, 1996, net income and net income per
share were $1,791,000 and $0.16, respectively, excluding the impact of a
non-recurring charge relating to certain issues involving the failure of the
Company's 401(k) Plan to comply with certain nondiscrimination tests
required by the Internal Revenue Code of 1986, as amended, which impact has
been adjusted for income taxes and is net of amounts recoverable from the
401(k) Plan record keeper. See "Risk Factors -- Costs of 401(k) Plan
Compliance," "Industry Regulation -- Employee Benefit Plans" and Note 4 of
Notes to Consolidated Financial Statements (unaudited) for the interim
period ended September 30, 1996.
(4) Computed as described in Note 1 of Notes to Consolidated Financial Statements.
(5) Computed as described in Note 11 of Notes to Consolidated Financial Statements.
(6) Reflects the number of employees paid during the last month of the period shown.
(7) Excludes bonus payroll of worksite employees, which is not subject to the Company's normal service fee.
(8) Adjusted to reflect the sale of 3,000,000 shares of Common Stock by the Company pursuant to the offering made hereby (assuming an offering price of $ per share) and the application of the net proceeds therefrom as described in "Use of Proceeds."
RISK FACTORS
An investment in the Company involves a significant degree of risk. Prospective purchasers should carefully consider the factors set forth below, as well as the other information provided elsewhere in this Prospectus, before making an investment in the Common Stock.
When used in this Prospectus, the words "anticipate," "estimate," "project" and similar expressions are intended to identify forward-looking statements. Such statements are subject to certain risks, uncertainties and assumptions. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated or projected. Among the key factors that have a direct bearing on the Company's results of operations and the industry in which it operates are the effects of various governmental regulations, the fluctuation of the Company's direct costs and the costs and effectiveness of the Company's expansion strategy. These and other factors are discussed below and elsewhere in this Prospectus.
IRS AUDIT OF THE COMPANY'S 401(K) PLAN; IRS MARKET SEGMENT STUDY
The Company's 401(k) Plan is currently under audit by the IRS for the year ended December 31, 1993. Although the audit is for the 1993 plan year, certain conclusions of the IRS would be applicable to subsequent years as well. In addition, the IRS has established a Market Segment Study Group on Employee Leasing for the purpose of identifying specific compliance issues prevalent in certain segments of the PEO industry. Approximately 70 PEOs, including the Company, have been randomly selected by the IRS for audit pursuant to this program. One issue that has arisen from these audits is whether a PEO can be a co-employer of worksite employees, including officers and owners of client companies, for various purposes under the Internal Revenue Code of 1986, as amended (the "Code"), including participation in the PEO's 401(k) plan. For a discussion of the issues being considered by the Market Segment Study Group, see "Industry Regulation -- Employee Benefit Plans" and "-- Federal Employment Taxes." With respect to the 401(k) Plan audit, the Company understands that the IRS group conducting the audit intends to seek technical advice from the IRS National Office about whether participation in the 401(k) Plan by officers of client companies is permitted under the Code (the "Technical Advice Request"). The Company also understands that, with respect to the Market Segment Study, the IRS is similarly referring to the National Office the issue of whether a PEO and a client company may be treated as co-employers of worksite employees for certain federal tax purposes (the "Industry Issue"). The IRS audit group leader has advised the Company that the finding of facts from the Company's audit will be submitted with the group leader's conclusion that such a co-employer status is not recognized under current tax law.
Whether the National Office will address the Technical Advice Request independently of the Industry Issue is unclear. The Company is not able to predict either the timing or the nature of any conclusions that may be reached with respect to the 401(k) Plan audit or the Market Segment Study. Should the IRS conclude that the Company is not a "co-employer" of worksite employees for purposes of the Code, worksite employees could not continue to make salary deferral contributions to the 401(k) Plan or pursuant to the Company's cafeteria plan or continue to participate in certain other employee benefit plans of the Company. The Company believes that, although unfavorable to the Company, a prospective application of such a conclusion (that is, one applicable only to periods after such a conclusion is reached) would not have a material adverse effect on its financial position or results of operations, as the Company could continue to make available comparable benefit programs to its client companies at comparable cost to the Company. However, if such conclusion were applied retroactively to disqualify the 401(k) Plan for 1993 and subsequent years, employees' vested account balances under the 401(k) Plan would become taxable, the Company would lose its tax deductions to the extent its matching contributions were not vested, the 401(k) Plan's trust would become a taxable trust and the Company would be subject to liability with respect to its failure to withhold applicable taxes with respect to certain contributions and trust earnings. Further, the Company would be subject to liability, including penalties, with respect to its cafeteria plan for the failure to withhold and pay taxes applicable to salary deferral contributions by employees, including worksite employees. In such a scenario, the Company also would face the risk of client dissatisfaction and potential litigation. A retroactive
application by the IRS of an adverse conclusion would have a material adverse effect on the Company's financial position and results of operations.
COSTS OF 401(K) PLAN COMPLIANCE
In 1991 the Company engaged a third party vendor to be the 401(k) Plan's
record keeper and to perform certain required annual nondiscrimination tests for
the 401(k) Plan. Each year such record keeper reported to the Company that such
nondiscrimination tests had been satisfied. However, in August 1996 the 401(k)
Plan's record keeper advised the Company that certain of these tests had been
performed incorrectly for prior years and, in fact, that the 401(k) Plan had
failed certain tests for the 1993, 1994 and 1995 plan years. The Company has
subsequently determined that the 401(k) Plan also failed a nondiscrimination
test for 1991, a closed year for tax purposes. At the time the Company received
such notice, the period in which the Company could voluntarily "cure" an
operational defect had lapsed for all such years, except 1995. With respect to
the 1995 year, the Company will cause the 401(k) Plan to refund the required
excess contributions and earnings thereon to affected highly compensated
participants, and the Company will pay an excise tax of approximately $51,000.
Because the 401(k) Plan is under a current IRS audit, the IRS voluntary
correction program for this type of operational defect is not available to the
Company for years prior to 1995. Accordingly, the Company informed the IRS of
the prior testing errors for each of 1991, 1993 and 1994 and proposed a
correction that consists of corrective contributions by the Company to the
401(k) Plan with respect to these years and the payment by the Company of the
minimum penalty ($1,000) that the IRS is authorized to accept to resolve this
matter. The IRS responded that resolution of the nondiscrimination test failures
is premature until the National Office resolves the Technical Advice Request.
The Company recorded a reserve during the third quarter of 1996 with respect to
these 401(k) Plan matters. The amount of such reserve is the Company's estimate
of the cost of corrective measures and penalties, although no assurance can be
given that the actual amount that the Company may ultimately be required to pay
will not substantially exceed the amount so reserved. Based on its preliminary
discussions with the IRS and its understanding of the settlement experience of
other companies, the Company does not believe that the ultimate resolution of
the nondiscrimination test issue will have a material adverse effect on the
Company's financial condition or results of operations, although no assurance
can be given by the Company because the ultimate resolution of this matter will
be determined in a negotiation process with the IRS.
STATE AND LOCAL REGULATION
The Company is subject to regulation by local and state agencies pertaining to a wide variety of labor related laws. As is the case with the provisions of the Code discussed above, many of these regulations were developed prior to the emergence of the PEO industry and do not specifically address non-traditional employers. Prior to 1993, the State Board of Insurance of Texas and the Texas Employment Commission challenged the ability of a PEO to provide workers' compensation insurance and health benefits and to pay unemployment taxes as an employer of worksite employees. These challenges were ultimately addressed through the passage of specific professional employer licensing legislation in Texas. There can be no assurance that additional challenges will not be faced in Texas or that similar challenges will not be encountered in other jurisdictions in which the Company may choose to do business. See "Industry Regulation -- State Regulation."
While many states do not explicitly regulate PEOs, 16 states (including Texas and Florida) have passed laws that have licensing or registration requirements for PEOs and at least four states are considering such regulation. Such laws vary from state to state but generally provide for monitoring the fiscal responsibility of PEOs. While the Company generally supports licensing regulation because it serves to validate the PEO relationship, there can be no assurance that the Company will be able to satisfy licensing requirements or other applicable regulations of any particular state in which it is not currently operating but later commences operations. In addition, there can be no assurance that the Company will be able to renew its licenses in the states in which it currently operates upon expiration of such licenses. For a more complete description of these regulations, see "Industry Regulation -- State Regulation."
INCREASES IN HEALTH INSURANCE PREMIUMS, UNEMPLOYMENT TAXES AND WORKERS' COMPENSATION RATES
Health insurance premiums, state unemployment taxes and workers' compensation rates are in part determined by the Company's claims experience and comprise a significant portion of the Company's direct costs. The Company employs extensive risk management procedures in an attempt to control its claims incidence. However, should the Company experience a large increase in claim activity, its unemployment taxes, health insurance premiums or workers' compensation insurance rates may increase. The Company's ability to incorporate such increases into service fees to clients is constrained by contractual arrangements with clients, which may result in a delay before such increases can be reflected in service fees. As a result, such increases could have a material adverse effect on the Company's financial condition or results of operations.
LIABILITIES FOR CLIENT AND EMPLOYEE ACTIONS
A number of legal issues remain unresolved with respect to the co-employment arrangement between a PEO and its worksite employees, including questions concerning the ultimate liability for violations of employment and discrimination laws. The Administaff Client Service Agreement establishes the contractual division of responsibilities between the Company and its clients for various personnel management matters, including compliance with and liability under various governmental regulations. However, because the Company acts as a co-employer, the Company may be subject to liability for violations of these or other laws despite these contractual provisions, even if it does not participate in such violations. Although the Client Service Agreement provides that the client is to indemnify the Company for any liability attributable to the conduct of the client, the Company may not be able to collect on such a contractual indemnification claim and thus may be responsible for satisfying such liabilities. In addition, worksite employees may be deemed to be agents of the Company, subjecting the Company to liability for the actions of such worksite employees. See "Business -- Customers" and "Industry Regulation."
LIABILITY FOR WORKSITE EMPLOYEE PAYROLL
Under the Administaff Client Service Agreement, the Company becomes a co-employer of worksite employees and assumes the obligations to pay the salaries, wages and related benefit costs and payroll taxes of such worksite employees. As such a co-employer, the Company assumes such obligations as a principal, not merely as an agent of the client company. The Company's obligations include responsibility for (i) payment of the salaries and wages for work performed by worksite employees, regardless of whether the client company makes timely payment to the Company of the associated service fee, and (ii) providing benefits to worksite employees even if the costs incurred by Administaff to provide such benefits exceed the fees paid by the client company. During the period from January 1, 1987 through September 30, 1996, the Company has recorded a total of $419,000 in bad debt expense on approximately $3.4 billion of total revenues. No assurance can be given whether the Company's ultimate liability for worksite employee payroll and benefits costs will have a material adverse effect on its financial condition or results of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Direct Costs."
LOSS OF BENEFIT PLANS
The maintenance of health and workers' compensation insurance plans that cover worksite employees is a significant part of the Company's business. The current health and workers' compensation contracts are provided by vendors with whom the Company has an established relationship, and on terms that the Company believes to be favorable. While the Company believes that replacement contracts could be secured on competitive terms without causing significant disruption to the Company's business, there can be no assurance in this regard.
POSSIBLE ADVERSE APPLICATION OF OTHER FEDERAL AND STATE LAWS
As a major employer, the Company's operations are affected by numerous federal and state laws relating to labor, tax (in addition to the provisions of the Code discussed above) and employment matters. By entering into a co-employer relationship with employees assigned to work at client company locations, the Company
assumes certain obligations and responsibilities of an employer under these laws. However, many of these laws (such as ERISA and federal and state employment tax laws) do not specifically address the obligations and responsibilities of non-traditional employers such as PEOs, and the definition of "employer" under these laws is not uniform. In addition, many of the states in which the Company operates have not addressed the PEO relationship for purposes of compliance with applicable state laws governing the employer/employee relationship. If these other federal or state laws are ultimately applied to the Company's PEO relationship with its worksite employees in a manner adverse to the Company, such an application could adversely affect the Company's results of operations or financial condition. See "Industry Regulation."
GEOGRAPHIC MARKET CONCENTRATION
While the Company has operations in 10 markets, six of these represent recent expansions. The Company's Houston and Texas (including Houston) markets accounted for approximately 50% and 80%, respectively, of the Company's revenue base as of September 30, 1996. Accordingly, while a primary aspect of the Company's strategy is expansion in its current and future markets outside of Texas, for the foreseeable future a significant portion of the Company's revenues may be subject to economic factors specific to Texas (including Houston). In addition, while the Company believes that its market expansion plans will eventually lessen or eliminate this risk in addition to generating significant revenue growth, there can be no assurance that the Company will be able to duplicate in other markets the revenue growth and operating results experienced in its Houston market. See "Business -- Strategy."
COMPETITION AND NEW MARKET ENTRANTS
The PEO industry is highly fragmented, with approximately 2,000 companies performing PEO services to some extent. Many of these companies have limited operations and fewer than 1,000 worksite employees, but there are several industry participants which are comparable in size to the Company. These companies include Staff Leasing, Inc, headquartered in Bradenton, Florida, Employee Solutions, Inc., headquartered in Phoenix, Arizona and The Vincam Group, Inc., headquartered in Coral Gables, Florida. The Company also encounters competition from "fee for service" companies such as payroll processing firms, insurance companies and human resource consultants. Moreover, the Company expects that as the PEO industry grows and its regulatory framework becomes better established, well organized competition with greater resources than the Company may enter the PEO market, possibly including large "fee for service" companies currently providing a more limited range of services.
ADEQUACY OF ACCRUED WORKERS' COMPENSATION CLAIMS
Prior to November 1994, when the Company purchased a guaranteed cost workers' compensation insurance policy, the Company maintained loss-sensitive policies, effectively leaving primary liability for workers' compensation claims with the Company. The Company maintains an accrual for workers' compensation claims for the periods such policies were in place and bases the amount of such accruals on periodic reviews of open claims. While the Company believes all such open claims are covered through an existing insurance contract, the Company cannot predict with certainty whether the ultimate liability associated with these open claims will exceed the limits of the insurance contract. Accordingly, future changes in estimated amounts of the ultimate liability with respect to these claims could have a material adverse effect on the Company's financial condition or results of operations. See Note 1 of Notes to Consolidated Financial Statements.
QUARTERLY FLUCTUATIONS IN EARNINGS AND IMPACT OF EMPLOYMENT RELATED TAXES
The Company's operating results have historically fluctuated from quarter to quarter. In addition, due to the timing of the assessment of employment related taxes, the Company's gross profit margin typically improves from quarter to quarter within each year with the first quarter generally the least favorable. Employment related taxes are based on the cumulative earnings of individual employees up to specified wage levels. Since the Company's revenues related to an individual employee are earned and collected at a relatively
constant rate throughout each year, payment of such unemployment tax obligations has a substantial impact on the Company's financial condition or results of operations during the first six months of each year.
POTENTIAL CLIENT LIABILITY FOR EMPLOYMENT TAXES
Pursuant to the Company's Client Service Agreement with its clients, the Company assumes sole responsibility and liability for the payment of federal employment taxes imposed under the Code with respect to wages and salaries paid to its worksite employees. There are essentially three types of federal employment tax obligations: (i) income tax withholding requirements; (ii) obligations under the Federal Income Contribution Act ("FICA"); and (iii) obligations under the Federal Unemployment Tax Act ("FUTA"). Under the Code, employers have the obligation to withhold and remit the employer portion and, where applicable, the employee portion of these taxes. Most states impose similar employment tax obligations on the employer. While the Client Service Agreement provides that the Company has sole legal responsibility for making these tax contributions, the IRS or applicable state taxing authority could conclude that such liability cannot be completely transferred to the Company. Accordingly, in the event the Company fails to meet its tax withholding and payment obligations, the client company may be held jointly and severally liable therefor. While this interpretive issue has not, to the Company's knowledge, discouraged clients from enrolling with the Company, there can be no assurance that a definitive adverse resolution of this issue would not do so in the future.
DEPENDENCE ON KEY PERSONNEL
The Company's success is dependent upon the continued contributions of its key management personnel, some of whom were founders of the Company. Many of the Company's key personnel would be difficult to replace. The Company's executives are not subject to noncompetition agreements.
EXPENSES ASSOCIATED WITH EXPANSION
Past and future operating results are impacted by the Company's market expansion activities, including establishing and maintaining sales office facilities, compensating newly hired sales associates and expanding advertising efforts. The Company's operating results for 1993, 1994 and 1995 have included $0.2 million, $1.0 million and $4.3 million, respectively, of operating expenses incurred in new markets. For the nine months ended September 30, 1996, these costs have totaled $4.5 million. The Company expects that investments in new markets will continue at levels comparable to or greater than 1995 and 1996 through at least 1998, and that expenses in a new market will not be covered by the gross profit from that market's revenues for approximately two years. While the Company believes that its expansion program will ultimately lead to increased profitability, there can be no assurance whether losses or diminished profitability will be incurred in future periods as a result of the Company's planned expansion.
FAILURE TO MANAGE GROWTH
The Company has experienced significant growth and expects such growth to continue for the foreseeable future. The Company plans to enter at least one new market or open at least one additional sales office in an existing market in each quarter of 1997 and 1998. As is described under the caption "-- Expenses Associated with Expansion," expenses incurred in connection with the initial expansion into new markets are significant. In addition, because each market entry is affected by circumstances unique to its particular locale, there are uncertainties associated with each new market entry. Accordingly, the Company's expansion plan may place a significant strain on the Company's management, financial, operating and technical resources. Failure to manage this growth effectively could have a material adverse effect on the Company's financial condition or results of operations.
NEED TO RENEW OR REPLACE CLIENT COMPANIES
The Company's standard Client Service Agreement has an initial one-year term and is subject to cancellation on 30 days' notice by either the Company or the client. Accordingly, the short-term nature of the
Client Service Agreement makes the Company vulnerable to potential cancellations by existing clients which could materially and adversely effect the Company's financial condition and results of operations. In addition, the Company's results of operations are dependent in part upon the Company's ability to retain or replace its client companies upon the termination or cancellation of the Client Service Agreement. Historically, between 15% and 20% of the Company's clients have remained clients for less than one year and there can be no assurance that the number of contract cancellations will not increase in the future.
ANTI-TAKEOVER EFFECTS OF CERTAIN CHARTER AND BYLAW PROVISIONS AND DELAWARE LAW
The Company's Certificate of Incorporation and Bylaws include provisions that may have the effect of discouraging proposals by third parties to acquire a controlling interest in the Company, which could deprive stockholders of the opportunity to consider an offer that would be beneficial to them. These provisions include (i) a classified Board of Directors, (ii) the ability of the Board of Directors to establish a rights plan, establish a sinking fund for the purchase or redemption of shares, fix the number of directors and fill vacancies on the Board of Directors, and (iii) restrictions on the ability of stockholders to call special meetings, act by written consent or amend the foregoing provisions. In addition, under certain conditions Section 203 of the General Corporation Law of the State of Delaware (the "DGCL") would impose a three-year moratorium on certain business combinations between a Delaware corporation and an "interested stockholder" (in general, a stockholder owning 15 percent or more of a corporation's outstanding voting stock). The existence of such provisions may have a depressive effect on the market price of the Common Stock in certain situations. See "Description of Capital Stock -- Provisions Having Possible Anti-takeover Effect."
CONTROL BY EXISTING STOCKHOLDERS
After this offering, the Company's officers, directors and principal stockholders will beneficially own an aggregate of shares of Common Stock of the Company, constituting approximately % of the outstanding shares of Common Stock ( % if the Underwriters' over-allotment option is exercised in full). Accordingly, such persons will be in a position to control actions that require the consent of a majority of the Company's outstanding voting stock, including the election of directors. A person beneficially owning more than one-fifth of the Company's outstanding voting stock will be able to prevent certain actions that require the affirmative vote of at least four-fifths of the Company's outstanding voting stock. See "Principal and Selling Stockholders."
ABSENCE OF PRIOR TRADING MARKET; POTENTIAL VOLATILITY OF STOCK PRICE
Prior to this offering, there has been no public market for the Common Stock. Although the Common Stock has been approved for listing on the NYSE, there can be no assurance that an active trading market will develop for the Common Stock or, if one does develop, that it will be maintained. The public offering price of the Common Stock will be negotiated between the Company and the representatives of the Underwriters. See "Underwriters" for information relating to the factors considered in determining the initial public offering price. The market price of the shares of Common Stock could be highly volatile, fluctuating in response to factors such as variations in the Company's operating results, announcements of new services or market expansions by the Company or its competitors, or developments relating to regulatory or other issues affecting the PEO industry.
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of the Common Stock in the public market following this offering could have an adverse effect on prevailing market prices of the Common Stock. All of the shares of the Company's currently outstanding Common Stock are eligible for sale pursuant to the exemption from registration under Rule 144 under the Securities Act, subject to applicable holding period, volume and other limitations. In addition, after giving effect to the use of proceeds described herein, certain holders of Common Stock will have registration rights for an aggregate of up to 2,464,082 shares of Common Stock. However, the officers, directors and certain stockholders of the Company who, upon the completion of this offering, will beneficially own an aggregate of approximately shares of Common Stock have agreed with the Underwriters not to
sell any of their shares for a period of 180 days from the date of this Prospectus without the prior written consent of the Representatives of the Underwriters. See "Shares Eligible for Future Sale."
DILUTION
Purchasers of the Common Stock offered hereby will experience immediate and significant dilution (approximately $ per share assuming an initial public offering price of $ per share of Common Stock) in the net tangible book value of their shares. See "Dilution."
NO DIVIDENDS
The Company intends to retain all of its earnings to finance the expansion of its business and for general corporate purposes and does not anticipate paying any cash dividends on its Common Stock for the foreseeable future. In addition, the Company's credit facility includes certain restrictions on the ability of the Company to pay dividends. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources."
THE COMPANY
The Company was originally organized in 1986 as a Texas corporation. Prior to the consummation of this offering, the Company reorganized into Delaware by completing a merger with a subsidiary of a Delaware corporation established by the Company for this purpose. In conjunction with such merger, each of the Company's stockholders exchanged their shares in the Texas corporation for Common Stock of the Company on the basis of two shares of Common Stock for every three shares of common stock of the Texas corporation. The Company's resulting structure is that of a Delaware holding company whose only asset is the capital stock of its operating subsidiary. All information in this Prospectus gives effect to this reorganization.
The Company's corporate headquarters are located at 19001 Crescent Springs Drive, Kingwood, Texas 77339-3802, and its telephone number is (713) 358-8986.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 3,000,000 shares of Common Stock being offered by the Company hereby (assuming an offering price of $ per share, the midpoint of the price range set forth on the cover of this Prospectus, and after deducting estimated underwriting discounts and commissions and estimated expenses of $ ) are estimated to be $ . Of these proceeds, the Company currently expects to allocate approximately $12.0 million to the opening of sales offices in new geographic markets as well as in established markets and believes that this allocation will be sufficient to fund the Company's expansion plans through 1997 and 1998. In addition, the Company intends to utilize approximately $7.7 million of such proceeds as follows: (i) $4.0 million to repay all of its 13% Subordinated Notes (the "Notes") held by the Board of Trustees of the Texas Growth Fund, as Trustee for the Texas Growth Fund-1991 Trust ("TGF"), (ii) approximately $2.5 million to exercise its option to repurchase 348,945 shares of Common Stock from Pyramid Ventures, Inc. ("PVI") and its option to repurchase 173,609 warrants to purchase shares of Common Stock from TGF, and (iii) approximately $0.7 million to retire the current balances of certain secured loans (the "Secured Loans") incurred in connection with the purchase of real estate for the Company's headquarters. The balance of the proceeds (estimated to be approximately $ million), will be used for working capital purposes, which may include acquisitions of existing PEO operations should favorable acquisition opportunities arise. Pending the application of such funds, the Company intends to invest the net proceeds of this offering in diversified, highly-liquid, investment grade, interest-bearing instruments.
The Notes, which are to be redeemed pursuant to optional prepayment provisions, mature in May 1999 and accrue interest at an annual rate of 13% payable quarterly. The Secured Loans consist of three separate notes ranging from $73,000 to $462,000 in outstanding principal amount, with payments aggregating from approximately $11,000 to $84,000 annually, and with interest rates ranging from approximately 8.4% to 9.5% as of September 30, 1996. See Note 3 of Notes to Consolidated Financial Statements (unaudited) for the Interim Period Ended September 30, 1996.
DIVIDEND POLICY
The Company has not paid cash dividends on its Common Stock since its formation and does not anticipate declaring or paying dividends on its Common Stock in the foreseeable future. The Company expects that it will retain all available earnings generated by the Company's operations for the development and growth of its business. Any future determination as to the payment of dividends will be made at the discretion of the Board of Directors of the Company and will depend upon the Company's operating results, financial condition, capital requirements, general business conditions and such other factors as the Board of Directors deems relevant. In addition, the Company's $10 million revolving credit agreement prohibits the payment of dividends or other distributions on the Common Stock, except that, so long as no default exists thereunder and, after giving effect to such dividend or distribution, will exist thereunder, the Company may pay dividends on its Common Stock. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources."
CAPITALIZATION
The following table sets forth the capitalization of the Company as of September 30, 1996, and the capitalization as of such date as adjusted to give effect to (i) the sale of the 3,000,000 shares of Common Stock offered by the Company hereby (assuming an offering price of $ per share) and (ii) the application of the net proceeds therefrom as described in "Use of Proceeds." This table should be read in conjunction with the Consolidated Financial Statements of the Company and the Notes thereto included elsewhere in this Prospectus.
AS OF SEPTEMBER 30, 1996
------------------------
AS
ACTUAL ADJUSTED
-------- --------
(IN THOUSANDS)
Total debt(1)......................................................... $ 4,648 $
Stockholders' equity:
Preferred stock, par value $0.01 per share
Shares authorized -- 20,000,000
Shares issued and outstanding -- none............................ --
Common stock, par value $0.01 per share
Shares authorized -- 60,000,000
Shares issued and outstanding -- 10,726,274 and 13,377,329,
respectively(2)................................................. 107
Additional paid-in capital.......................................... 5,706
Retained earnings................................................... 5,930
Less treasury stock, at cost ( and shares of
common stock, respectively)...................................... --
-------- --------
Total stockholders' equity....................................... 11,743
-------- --------
Total capitalization.................................................. $ 16,391 $
======== ========
|
(1) Includes current maturities of $74,000. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources" and Note 3 of Notes to Consolidated Financial Statements for information regarding the Company's long term debt.
(2) The number of shares to be outstanding after the offering gives effect to the repurchase of Common Stock and Common Stock warrants as described under "Use of Proceeds," and excludes the 995,196 shares of Common Stock issuable upon the exercise of options and warrants which will remain outstanding after consummation of the offering.
DILUTION
The net tangible book value of the Company's Common Stock as of September 30, 1996 was $10.7 million, or $1.00 per share. Net tangible book value per share represents the amount of total tangible assets less total liabilities, divided by the number of shares of Common Stock outstanding. After giving effect to the sale of shares of Common Stock offered by the Company hereby at an assumed initial public offering price of $ per share and receipt of the estimated net proceeds therefrom, the net tangible book value of the Company as of September 30, 1996 would have been $ , or $ per share, representing an immediate increase in net tangible book value of $ per share to existing stockholders and an immediate dilution of $ per share to new investors purchasing shares at the assumed initial public offering price. The following table illustrates the resulting per share dilution with respect to the shares of Common Stock offered hereby:
Assumed initial public offering price per share................... $ Net tangible book value per share before offering............... $1.00 Increase per share attributable to new investors................ Net tangible book value per share after offering.................. Dilution per share to new investors............................... |
The following table summarizes the differences, on a pro forma basis as of September 30, 1996, between the existing stockholders and the new investors with respect to the number of shares purchased from the Company, the total consideration paid and the average price per share paid (based upon an assumed initial public offering price of $ per share for new investors):
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
--------------------- --------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
---------- ------- ---------- ------- ----------
Existing stockholders............. 10,377,329 78% $ % $
New investors..................... 3,000,000 22% %
---------- ---- ---------- ---- ----------
Total................... 13,377,329 100% 100%
========== ==== ========== ==== ==========
|
The tables assume no exercise of any outstanding options or warrants to purchase Common Stock. To the extent such options or warrants are exercised, there will be further dilution to new investors.
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The following selected historical consolidated financial data should be read in conjunction with the Consolidated Financial Statements, including the Notes thereto, and "Management's Discussion and Analysis of Financial Condition and Results of Operations." The statement of operations data set forth below with respect to the years ended December 31, 1993, 1994 and 1995 and the balance sheet data as of December 31, 1994 and 1995 are derived from, and are qualified by reference to, the audited consolidated financial statements included elsewhere in this Prospectus. The statement of operations data for the years ended December 31, 1991 and 1992 and the balance sheet data as of December 31, 1991, 1992 and 1993 are derived from audited consolidated financial statements not included herein. The statement of operations data for the nine months ended September 30, 1995 and 1996 and the balance sheet data as of September 30, 1996 are unaudited. The unaudited results of operations for the nine months ended September 30, 1996 are not necessarily indicative of results expected for the full year. (See "Management's Discussion and Analysis of Financial Condition and Results of Operation -- Nine Months Ended September 30, 1996 Compared to Nine Months Ended September 30, 1995.")
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------------------------------------- --------------------
1991 1992 1993 1994 1995 1995 1996
-------- -------- -------- -------- -------- -------- --------
(UNAUDITED)
(IN THOUSANDS, EXCEPT FOR PER SHARE AND STATISTICAL DATA)
STATEMENT OF OPERATIONS DATA:
Revenues(1).............................. $300,051 $409,046 $496,058 $564,459 $716,210 $505,619 $635,252
Direct costs(1):
Salaries and wages of worksite
employees............................ 241,471 328,223 397,662 453,750 582,893 408,379 517,820
Benefits and payroll taxes............. 49,542 67,272 78,614 85,513 104,444 76,964 91,307
-------- -------- -------- -------- -------- -------- --------
Gross profit............................. 9,038 13,551 19,782 25,196 28,873 20,276 26,125
Operating expenses:
Salaries, wages and payroll taxes...... 3,090 5,077 6,136 8,094 10,951 8,055 10,475
General and administrative expenses.... 3,008 4,788 5,571 5,648 7,597 5,497 5,937
Commissions............................ 1,787 2,569 2,975 3,231 3,942 2,908 2,939
Advertising............................ 849 888 1,612 1,797 3,268 2,125 2,488
Depreciation and amortization.......... 260 282 361 567 894 627 1,063
-------- -------- -------- -------- -------- -------- --------
Total operating expenses............... 8,994 13,604 16,655 19,337 26,652 19,212 22,902
-------- -------- -------- -------- -------- -------- --------
Operating income (loss)(2)............... 44 (53) 3,127 5,859 2,221 1,064 3,223
Net income(2)............................ $ 70 $ 33 $ 1,949 $ 3,766 $ 1,116 $ 617 $ 1,054(3)
======== ======== ======== ======== ======== ======== ========
Net income per share(4).................. $ 0.01 $ 0.00 $ 0.22 $ 0.37 $ 0.10 $ 0.06 $ 0.10(3)
Weighted average shares outstanding(4)... 6,429 8,581 8,838 10,337 10,807 10,757 10,862
Supplemental net income per share(5)..... $ 0.16 $ 0.14
STATISTICAL DATA:
Worksite employees at period end(6)...... 11,380 13,490 15,165 15,780 20,502 20,124 22,993
Client companies at period end........... 501 598 687 809 1,130 1,085 1,441
Gross payroll per employee per
month(7)............................... $ 1,823 $ 1,919 $ 2,117 $ 2,268 $ 2,331 $ 2,297 $ 2,522
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YEAR ENDED DECEMBER 31, SEPTEMBER 30, 1996
-------------------------------------------------------- ----------------------
1991 1992 1993 1994 1995 ACTUAL ADJUSTED(8)
-------- -------- -------- -------- -------- -------- -----------
(IN THOUSANDS) (UNAUDITED)
CONSOLIDATED BALANCE SHEET:
Working capital........................ $ (4,049) $ (2,431) $ (2,340) $ 8,797 $ 4,737 $ 3,290 $
Total assets........................... 18,096 19,929 19,401 41,081 39,474 45,134
Total debt............................. 5,077 1,502 1,196 5,007 4,679 4,648
Total stockholders' equity (deficit)... (1,834) (1,371) 569 8,056 10,689 11,743
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(1) Revenues consist of service fees paid by the Company's clients under its Client Service Agreements. In consideration for payment of such service fees, the Company agrees to pay the following direct costs associated with the worksite employees: (i) salaries and wages, (ii) employment related taxes, (iii) employee benefit plans and (iv) workers' compensation insurance.
(2) Operating income (loss) and net income include the effects of expenses associated with the Company's expansion plan which began in 1993. See "Management's Discussion and Analysis of Financial Condition and Results of Operations."
(3) For the nine months ended September 30, 1996, net income and net income per share were $1,791,000 and $0.16, respectively, excluding the impact of a non-recurring charge relating to certain issues involving the failure of the Company's 401(k) Plan to comply with certain nondiscrimination tests required by the Code, which impact has been adjusted for income taxes and is net of amounts recoverable from the 401(k) Plan record keeper. See "Risk Factors -- Costs of 401(k) Plan Compliance," "Industry Regulation -- Employee Benefit Plans" and Note 4 of Notes to Consolidated Financial Statements (unaudited) for the Interim Period Ended September 30, 1996.
(4) Computed as described in Note 1 of Notes to Consolidated Financial Statements.
(5) Computed as described in Note 11 of Notes to Consolidated Financial Statements.
(6) Reflects the number of employees paid during the last month of the period shown.
(7) Excludes bonus payroll of worksite employees, which is not subject to the Company's normal service fee.
(8) Adjusted to reflect the sale of 3,000,000 shares of Common Stock by the Company pursuant to the offering made hereby (assuming an offering price of $ per share) and the application of the net proceeds therefrom as described in "Use of Proceeds."
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with, and is qualified in its entirety by, the Company's Consolidated Financial Statements and Notes thereto included elsewhere in this Prospectus. Historical results are not necessarily indicative of trends in operating results for any future period.
OVERVIEW
Administaff provides a comprehensive personnel management system encompassing a broad range of services, including personnel management, benefits and payroll administration, medical and workers' compensation insurance programs, tax filings, personnel records management, liability management and related human resource services. Prior to October 1993, the Company's operations were primarily the result of sales and marketing activity in the Houston market. In October 1993 the Company opened a sales office in Dallas as the first step in implementing a long-term internal growth and expansion strategy. Subsequent to obtaining expansion capital in May 1994, sales offices were opened in Atlanta and Phoenix in accordance with Administaff's market expansion plan. In the first half of 1995, the Company established a presence in Chicago both by entering into a referral agreement with an unaffiliated PEO organization and by opening a sales office. The Company completed the scheduled opening of its Baltimore/Washington, D.C. office in October 1995, opened a second office in Dallas in January 1996, and a new office in Denver in September 1996. The costs associated with this expansion into new markets (which for the purposes hereof refers to Dallas and subsequently opened markets) have been significant and have affected the results of operations for 1994, 1995 and the first nine months of 1996.
REVENUES
Administaff's clients enter into a Client Service Agreement which establishes a three-party relationship among the Company, the client and the worksite employees. The agreement provides for an initial one year term, subject to cancellation on 30 days' notice by either the Company or the client, and sets forth the service fee payable to the Company. Such service fee, which constitutes the Company's revenues, is based on the gross payroll of each employee plus the estimated costs of employment related taxes, providing human resource services, performing administrative functions, providing insurance coverages and benefit plans and performing other services offered by the Company. This structure yields a comprehensive service fee percentage to be applied to each employee's gross pay. These fees are invoiced along with each periodic payroll. Pursuant to the Client Service Agreement, the Company has the obligation to provide the benefits and services enumerated in that agreement as well as to pay the direct costs associated with such services, regardless of whether the client company makes timely payment to the Company of the associated service fee. The most significant direct costs associated with each Client Service Agreement are the salaries and wages of worksite employees which generally are disbursed promptly after the applicable client service fee is received. For a description of additional direct costs, see "-- Direct Costs" below.
The Company's revenues are dependent on the number of clients enrolled, the resulting number of employees paid each period, the gross payroll of such employees and the number of employees enrolled in benefit plans. The Company's expansion program is designed to broaden the scope of the Company's sales and marketing efforts into new, strategically selected markets, where the Company's objective is to duplicate the sales and marketing success experienced in the Houston market to date. The Company has expanded its sales force from 22 at December 31, 1993 to 80 at September 30, 1996. In addition to the Denver office opened in September 1996, the Company expects to open at least one new market or one additional sales office in existing markets in each quarter during 1997 and 1998. The Company further expects that each new sales office will have a staff of six to ten sales associates.
DIRECT COSTS
The Company's primary direct costs are (i) the salaries and wages of worksite employees (payroll cost), (ii) employment related taxes, (iii) employee benefit plans and (iv) workers' compensation insurance.
Salaries and wages of worksite employees are affected by the inflationary effects on wage levels and by differences in the local economies of the Company's markets. Changes in payroll costs have a proportionate impact on the Company's revenues.
Employment related taxes consist of the employer's portion of payroll taxes required under the Federal Income Contribution Act ("FICA"), which includes Social Security and Medicare, and federal and state unemployment taxes. The federal tax rates are defined by the appropriate federal regulations. State unemployment rates are subject to claims histories and vary from state to state.
Employee benefit costs are comprised primarily of medical insurance costs but also include costs of other employee benefits such as prescription card, vision care, disability insurance and an employee assistance plan.
Workers' compensation costs include premiums, administrative costs and claims related expenses under the Company's workers' compensation program. Currently, the Company is insured under a guaranteed cost plan whereby monthly premiums are paid for coverage of all accident claims occurring during the policy period. Prior to November 1994, the Company had been insured under two other types of workers' compensation policies: a retrospective rating plan, whereby monthly premiums were paid to the insurance carrier based on estimated actual losses plus an administrative fee and a high deductible paid loss plan, whereby monthly premiums were paid based on a $500,000 deductible per occurrence. Costs related to these prior plans include estimates of ultimate claims amounts that are recorded as accrued workers' compensation claims. Changes in these estimates are reflected as a component of direct costs in the period of the change.
The Company's gross profit margin is determined in part by its ability to accurately estimate and control direct costs and its ability to incorporate such costs into the service fees charged to clients. The Company attempts to reflect changes in the primary direct costs through adjustments in service fees charged to clients, subject to contractual arrangements.
OPERATING EXPENSES
The Company's primary operating expenses are salaries, wages and payroll taxes of both corporate employees and sales associates, general and administrative expenses and sales and marketing expenses. Prior to October 1993, all of the Company's operating expenses were incurred through its corporate offices in Houston. As a result of the Company's market expansion program, however, operating expenses have increased significantly. The increases include expenses associated with establishing and maintaining each new sales office facility, the increased compensation related expenses of newly hired sales associates and expansion of the Company's advertising efforts. In addition, the anticipated growth as a result of the sales expansion is also reflected in increased corporate operating expenses to provide expansion of the Company's service capacity. The Company expects that the investment in new markets will continue at a level comparable to or greater than 1995 and 1996 through at least 1998.
INCOME TAXES
The Company's provision for income taxes typically differs from the U.S. statutory rate of 34% due primarily to state income taxes. 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 accrued workers' compensation claims, depreciation and amortization, state income taxes, client list acquisition costs, allowance for uncollectible accounts receivable, net operating loss carryforwards and other accrued liabilities. Changes in these items are reflected in the Company's financial statements though the Company's deferred income tax provision.
QUARTERLY OPERATING RESULTS
The Company's revenues have generally increased on a quarter-to-quarter basis. Revenues in the fourth quarter of each year include the effects of bonus payrolls of worksite employees, which are substantially higher in December of each year. Gross profit margin typically improves from quarter to quarter within a year, with
the first quarter generally the least favorable. Employment related taxes are based on the cumulative earnings of individual employees up to a specified wage level. Therefore, these expenses tend to decline over the course of the year. Since the Company's revenues related to an individual employee are earned and collected at a relatively constant rate throughout each year, payment of such unemployment tax obligations has a substantial impact on the Company's working capital and results of operations during the first six months of each year. Other factors affecting the primary components of direct cost have enhanced or mitigated this tendency. Examples of these factors include the effects of trends in medical and workers' compensation claims, adjustments to benefit premiums and changes in the types of benefit plans and workers' compensation programs. In addition, beginning in October 1993, operating income and net income have been affected by expenses incurred to open new markets and to increase sales and service capacity and, in the third quarter of 1996, net income was affected by a non-recurring charge relating to certain issues involving the failure of the Company's 401(k) Plan to comply with certain nondiscrimination tests required by the Code. See "Risk Factors -- Costs of 401(k) Plan Compliance," "Industry Regulation -- Employee Benefit Plans" and Note 4 of Notes to Consolidated Financial Statements (unaudited) for the interim period ended September 30, 1996.
The following table presents certain unaudited results of operations data for the interim quarterly periods from 1994 through the third quarter of 1996. The Company believes that all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the results of operations in accordance with generally accepted accounting principles, have been made. The results of operations for any interim period are not necessarily indicative of the operating results for a full year or any future period.
QUARTER ENDED
----------------------------------------------------------------------------------------------------------------------
1994 1995 1996
----------------------------------------- ----------------------------------------- ------------------------------
MAR. 31 JUNE 30 SEPT. 30 DEC. 31 MAR. 31 JUNE 30 SEPT. 30 DEC. 31 MAR. 31 JUNE 30 SEPT. 30
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
(OPERATING RESULTS IN THOUSANDS)
Revenues... $128,875 $135,660 $141,929 $157,995 $158,223 $167,064 $180,332 $210,591 $194,336 $209,726 $231,190
Gross
profit... 2,934 7,511 7,602 7,149 4,761 6,704 8,811 8,597 6,189 8,651 11,285
Gross
profit
margin... 2.3% 5.5% 5.4% 4.5% 3.0% 4.0% 4.9% 4.1% 3.2% 4.1% 4.9%
Operating
income
(loss)... (1,094) 3,070 2,744 1,139 (1,675) 67 2,672 1,157 (1,302) 1,049 3,476
Net income
(loss)... (631) 1,887 1,738 772 (1,149) 47 1,718 500 (909) 552 1,411
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RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1995.
The following table presents certain information related to the Company's results of operations for the interim periods ended September 30, 1996 and 1995.
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------
1995 1996 CHANGE
--------- -------- ------
(OPERATING RESULTS IN THOUSANDS)
OPERATING RESULTS:
Revenues.................................................. $ 505,619 $635,252 25.6%
Gross profit.............................................. 20,276 26,125 28.9%
Gross profit margin....................................... 4.0% 4.1%
Operating income.......................................... 1,064 3,223 202.9%
STATISTICAL DATA:
Monthly revenue per worksite employee..................... $ 2,867 $ 3,117 8.7%
Monthly payroll cost per worksite employee................ 2,297 2,522 9.8%
Monthly gross markup per worksite employee................ 569 596 4.7%
Average number of worksite employees paid per month during
period................................................. 18,849 21,721 15.2%
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Revenues
The Company's revenues increased 25.6% over the comparable nine month period in 1995 due to an increased number of worksite employees paid during the period and an increase in the revenue per employee. The Company's continued expansion of its sales force through new market and sales office openings is the primary factor contributing to the increased number of worksite employees. The Company's new markets contributed $150.7 million of the Company's total revenues for the first nine months of 1996 versus $72.3 million for the same period in 1995. In addition, the 1995 period includes approximately 1,400 new employees enrolled through a referral agreement with an unaffiliated PEO in Chicago. The Company added to its sales force in the Dallas market in January 1996 and the Denver market in September 1996 and expects continued growth in the number of worksite employees throughout the remainder of 1996 due to the continued effect of sales in existing markets and expansion into new markets.
The increase in revenue per employee of 8.7% directly relates to increases in payroll cost per employee of 9.8%. This increase reflects the continuing effects of the net addition, through the Company's sales efforts, of worksite employees with higher average base pay than the existing client base.
Gross Profit Margin
The Company's gross profit margin increased from 4.0% for the first nine months of 1995 to 4.1% for the first nine months of 1996. The primary factors contributing to the increased gross profit margin were a decrease in unemployment taxes relative to payroll cost and a slight decrease in the cost of providing employee benefits as a percent of revenue. These factors were partially offset by a decrease in the gross markup per person as a percent of revenue.
Employment related taxes as a percent of payroll cost declined from 8.5% in the first nine months of 1995 to 7.6% for the same period in 1996. This reduction was primarily due to reduced unemployment tax expense in the State of Texas. The Company's unemployment tax rate in the State of Texas was substantially lower in 1996 than 1995 due to the effects of a reorganization of the Company's operating subsidiaries completed on January 1, 1996.
The cost of providing employee benefits was slightly lower in 1996 versus the same period in 1995 primarily due to decreased workers' compensation costs. Workers' compensation costs decreased from 2.5% of payroll cost during the first nine months of 1995 to 2.0% of payroll cost in the same period in 1996. This reduction was due to the overall rate on the Company's current fixed premium policy being lower than the previous policy. The current policy is in effect through October 31, 1996. The Company expects to renew the workers' compensation policy at rates comparable to the current policy. These reductions reflect a reduced risk sensitivity of the current composition of the Company's client base. In addition, the 1995 period included adjustments to accrued workers' compensation claims relating to high deductible policies in place prior to November 1994, which adjustments were not present in the 1996 period. Medical plan premiums increased only slightly as a percent of revenues from 6.0% in the first nine months of 1995 to 6.1% in the 1996 period.
The markup per employee, while increasing 4.7%, decreased as a percent of revenue from 19.8% in the 1995 period to 19.1% in the 1996 period. This reduction was primarily due to the continued addition of higher wage, less risk sensitive employees on which the Company charges lower overall rates as a percentage of gross payroll.
Operating Expenses
Operating expenses decreased slightly as a percent of revenue from 3.8% in the first nine months of 1995 to 3.6% for the comparable period in 1996. Total operating expenses increased 19.2% while revenues and gross profit increased 25.6% and 28.9%, respectively. The overall increase in operating expenses can be attributed to the following factors: (1) increased compensation related costs (salaries, wages and payroll taxes and commissions) which increased in proportion to revenues; (2) increased advertising expenses; and (3) increased depreciation and amortization expense. General and administrative expenses were slightly higher than the 1995 period. The factors noted above include the effects of continued significant operating expenses in new
markets. These costs totaled $4.5 million for the nine months ended September 30, 1996 versus $2.8 million for the comparable period in 1995. Excluding the impact of expenses incurred in the new markets, operating expenses as a whole increased only $1.9 million, or 10.0% as compared to the same 1995 period.
Total compensation costs, which include salaries, wages, payroll taxes and commissions, increased 22.4% compared to the same period in 1995. Salaries and wages increased at a higher rate while commissions were relatively unchanged due to a restructuring of the Company's sales compensation plan to a more salary based system. Overall, corporate staff, including sales personnel, increased 13.9% versus the same period in 1995. This increase is primarily due to increased sales personnel and continued increases in corporate service capacity during the second half of 1995. Since December 31, 1995, the corporate staff level has remained relatively constant and is expected to increase only slightly through the end of 1996.
Advertising expenses increased by 17.1% primarily due to planned increases relative to overall growth and expansion into new markets.
Depreciation and amortization expense increased 69.5% over the same 1995 period. The Company placed into service a new corporate facility in February 1996 which has resulted in higher depreciation and amortization expense for the nine month period as compared to 1995. In addition, capital expenditures incurred during the previous 12 months related to the opening of new sales offices as part of the Company's market expansion process and increases in corporate service capacity contributed to the increase.
General and administrative expenses as a percent of revenue declined slightly versus the comparable 1995 period from 1.1% to 0.9%. This trend is due to the Company's focused efforts to contain costs in its selling, service and administrative functions.
Net Income
Interest expense increased $233,000 due to financing charges related to the payment plan for the Company's annual workers' compensation insurance policy and short-term borrowings on the Company's revolving line of credit. Interest income decreased $38,000 versus the first nine months of 1995 due to lower level of funds available to invest during the period.
Other income (expense), net includes a non-recurring charge relating to certain issues involving the failure of the Company's 401(k) Plan to comply with certain nondiscrimination tests required by the Code, which charge is net of amounts recoverable from the 401(k) Plan record keeper. See "Risk Factors -- Costs of 401(k) Plan Compliance," "Industry Regulation -- Employee Benefit Plans" and Note 4 of Notes to Consolidated Financial Statements (unaudited) for the interim period ended September 30, 1996.
The Company's provision for income taxes, which includes the effects of the non-recurring charge for 401(k) Plan issues, differs from the U.S. statutory rate of 34% due primarily to certain portions of the non-recurring charge being non-deductible for income tax purposes. In addition, the Company's provision for income taxes differs from the U.S. statutory rate due to state income taxes.
Net income for the first nine months was $1.1 million. Excluding the non-recurring charge and the related income tax effects of such charge, net income would have been $1.8 million versus $0.6 million for the same period in 1995. The increased net income, excluding the non-recurring charge, as compared with the 1995 period is attributable to the increased gross profit resulting from the Company's overall revenue growth combined with slower growth in overall operating expenses as discussed above.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
The following table represents certain information related to the Company's results of operations for the years ended December 31, 1994 and 1995.
YEAR ENDED DECEMBER 31,
-----------------------
1994 1995 CHANGE
-------- -------- ------
(OPERATING RESULTS IN THOUSANDS)
OPERATING RESULTS:
Revenues............................................... $564,459 $716,210 26.9%
Gross profit........................................... 25,196 28,873 14.6%
Gross profit margin.................................... 4.5% 4.0%
Operating income....................................... 5,859 2,221 (62.1)%
STATISTICAL DATA:
Monthly revenue per worksite employee.................. $ 2,860 $ 2,904 1.5%
Monthly payroll cost per worksite employee............. 2,268 2,331 2.8%
Monthly gross markup per worksite employee............. 592 573 (3.2)%
Average number of worksite employees paid per month.... 15,500 19,255 24.2%
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Revenues
The Company's revenues increased 26.9% over 1994 due primarily to an increased number of worksite employees paid during the period. The Company continued to expand its sales force in late 1994 and throughout 1995 by opening sales offices in Atlanta (October 1994), Phoenix (January 1995), Chicago (April 1995) and Washington, D.C. (October 1995). These sales offices, along with the continued maturation of the Dallas sales office (opened in the fourth quarter of 1993) were the primary factors contributing to the increased number of worksite employees. The Company's new markets contributed $109.8 million of the Company's 1995 total revenues. In addition, in January 1995, the Company enrolled, through a referral agreement with an unaffiliated professional employer organization in Chicago, approximately 1,400 worksite employees which also contributed to the increase over 1994. Revenue per employee increased only slightly versus 1994.
Gross Profit Margin
Gross profit margin decreased from 4.5% in 1994 to 4.0% in 1995. The factors that caused this decline were a decline in the gross markup per worksite employee (the net of revenue per worksite employee and payroll cost per worksite employee) partially offset by a reduction, as a percent of revenue, in the costs of providing employee benefits.
The monthly revenue per worksite employee increased slightly during 1995 compared to 1994. The monthly payroll cost per worksite employee increased at a greater rate than the increased revenue per worksite employee in the same period resulting in a 3.2% reduction in the gross markup per worksite employee. This reduction reflects the effects of a shift in the relative mix of worksite employees paid by the Company to higher wage, less risk sensitive employees on which the Company charges lower overall rates as a percentage of gross payroll.
The reduction in employee benefits costs relative to revenues was primarily due to a reduction in workers' compensation costs partially offset by increased medical plan premiums. Workers' compensation costs declined primarily due to the Company's conversion to a guaranteed cost policy in the fourth quarter of 1994 from the previous high deductible policy. The high deductible policy resulted in increases to accrued workers' compensation claims which were significantly higher during 1994 than during 1995. In addition, during the third quarter of 1995, the Company settled the remaining outstanding claims under certain retrospective rating policies in effect in prior years resulting in a $1 million reduction in overall workers' compensation costs during 1995. Medical plan premiums increased compared to 1994 as favorable medical claims experience during 1993 and early 1994 resulted in reduced health insurance premiums during much of 1994.
Employment related taxes relative to payroll costs increased slightly due to state unemployment tax rate increases.
Operating Expenses
The Company's operating income decreased from $5.9 million in 1994 to $2.2 million in 1995. In addition to the decline in gross profit margin discussed above, operating expenses increased from 3.4% of revenue in 1994 to 3.7% of revenue in 1995. The increase in operating expenses relative to revenues can be attributed primarily to increased salaries, wages and payroll taxes and the selling, advertising and other general and administrative expenses incurred in connection with the Company's market expansion plan.
The operating expenses associated with the Company's market expansion plan consist of those incurred in the new markets and those necessary for expansion of sales and service capacity to meet expected growth. Expenses incurred in new markets generally commence 90 days prior to the opening of a new sales office. The Company generally expects the expenses in a new market to be covered by the gross profit from that market's revenues within approximately two years. The expenses in each new market are comprised of salaries, payroll taxes, benefits, recruiting and training costs of newly hired sales associates, advertising and public relations costs and general office expenses. These expenses for 1995 totaled approximately $4.3 million versus $987,000 in 1994.
Costs associated with the expansion of sales and service capacity primarily relate to the addition of corporate employees and other general and administrative expenses. Excluding expenses directly incurred in new markets, salaries, wages and payroll taxes increased $2.1 million during 1995 over those incurred in 1994. The Company's average staff increased from 221 for 1994 to 320 for 1995. These increases reflected both an increase in the size of the Company's sales force, from 22 at January 1, 1994 to 84 at December 31, 1995, and an increase in the corporate infrastructure to manage the overall growth of the Company.
Advertising expenses in the Company's expansion markets were $1.8 million in 1995 versus $516,000 during 1994. The Company's total advertising expenses increased by $1.5 million, or 82%, over 1994.
The higher level of revenues during 1995 also contributed to an increase of approximately $711,000 for sales commissions. Such increase did not represent a significant change from costs incurred during 1994 when considered as a percent of payroll costs of worksite employees.
Depreciation and amortization expense increased $327,000 in 1995 as compared to 1994 due to capital expenditures incurred in connection with the establishment of a disaster recovery computer and operations center and the opening of new sales offices as part of the Company's market expansion plan.
Net Income
Interest expense increased $289,000 over 1994 due to a full year of interest on the $4,000,000 subordinated debt borrowings compared to only seven months in 1994. Interest income increased $219,000 over 1994 due to higher level of funds available for investment during the period.
The Company's provision for income taxes differs from the U.S. statutory rate of 34% primarily due to state income taxes.
Net income for 1995 was $1.1 million versus $3.8 million in 1994. The decline in net income is attributable primarily to a decline in the overall gross profit margin combined with increases in operating expenses associated with the Company's market expansion plan as discussed above.
YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993
The following table represents certain information related to the Company's results of operations for the years ended December 31, 1993 and 1994.
YEAR ENDED DECEMBER 31,
-----------------------
1993 1994 CHANGE
-------- -------- ------
(OPERATING RESULTS IN THOUSANDS)
OPERATING RESULTS:
Revenues................................................. $496,058 $564,459 13.8%
Gross profit............................................. 19,782 25,196 27.4%
Gross profit margin...................................... 4.0% 4.5%
Operating income......................................... 3,127 5,859 87.4%
STATISTICAL DATA:
Monthly revenue per worksite employee.................... $ 2,676 $ 2,860 6.9%
Monthly payroll cost per worksite employee............... 2,117 2,268 7.1%
Monthly gross markup per worksite employee............... 559 592 5.9%
Average number of worksite employees paid per month...... 14,590 15,500 6.2%
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Revenues
The Company's revenues increased 13.8% over 1993 due to a 6.2% increase in the number of worksite employees paid during the year combined with a 6.9% increase in the revenue per employee. The increased number of worksite employees paid primarily resulted from the ongoing sales effort in existing markets. The increase in revenue per worksite employee is directly related to the increase in payroll cost per worksite employee discussed below.
Gross Profit Margin
Gross profit margin increased from 4.0% in 1993 to 4.5% in 1994. The key factor that caused this increase was an overall reduction, as a percent of revenue, in the costs of providing employee benefits, partially offset by a slight increase in employment related taxes.
The reduction in employee benefits costs relative to revenues was primarily due to a reduction in health insurance premiums, which were lowered from 1993 levels as a result of the Company's favorable medical claims experience during 1993 and early 1994. However, workers' compensation costs increased in 1994 versus 1993 partially offsetting the effect of reduced health insurance costs. Prior to November 1994 the Company was insured under a high deductible workers' compensation policy. This type of policy resulted in the Company recording significant additions to its accrued workers' compensation claims during 1994 resulting from revised ultimate loss estimates that relate to accidents covered under this policy. In order to achieve more predictable costs for its workers' compensation program, the Company purchased a guaranteed cost policy in the fourth quarter of 1994. This policy provides "first dollar" coverage on all claims arising under the policy with a fixed monthly premium for one year.
The monthly revenue per worksite employee increased 6.9% over 1993, an increase proportionate with the 7.1% increase in monthly payroll cost per worksite employee. These factors combined for a 5.9% increase in gross markup per employee, which reflect the Company's continuing efforts to attract higher wage earners through its strategic target customer selection criteria. Increases in wage levels throughout the Company's worksite employee population are also reflected in the increases in monthly revenue and payroll cost per worksite employee. These increases contributed to the overall 27.4% increase in gross profit versus 1993.
Operating Expenses
The Company's operating income increased 87.4% from $3.1 million in 1993 to $5.9 million in 1994. This increase resulted primarily from the increase in gross profit discussed above. Operating expenses remained essentially unchanged as a percentage of revenues.
The operating expenses directly associated with the Company's market expansion plan were $987,000 in 1994 versus $249,000 in 1993. Excluding expenses directly incurred in the new markets, salaries, wages and payroll taxes of corporate employees increased $1.7 million compared to 1993. The Company's average corporate staff increased from 170 in 1993 to 221 in 1994 and the Company had 192 corporate employees at December 31, 1993 versus 271 at December 31, 1994. These increases reflected both an increase in the size of the Company's sales force from 22 at December 31, 1993 to 51 at December 31, 1994 and an increase in the corporate infrastructure required to process current and future expansion. Included in this increase was the Company's formation of an internal Information Technology department in July 1993 to assume responsibilities previously outsourced by the Company.
Higher revenues contributed to an increase of $256,000 in sales commissions which are based on the gross payroll of worksite employees. These costs did not change significantly from 1993 as a percent of payroll costs of worksite employees. Advertising expenses increased by $185,000, or 11%, a movement consistent with increasing revenues. The second half of 1994 reflected a further acceleration in advertising expenditures which the Company expects to continue into 1995 as part of its market expansion plan.
Depreciation and amortization expense increased $206,000 over 1993 due to capital expenditures incurred during the year related to the establishment of a disaster recovery computer and operations center in Las Colinas (a suburb of Dallas, Texas). Capital expenditures related to the opening of new sales offices as part of the Company's market expansion plan also contributed to the increase.
Net Income
Interest expense increased $307,000 in 1994 due to the $4.0 million subordinated debt incurred in May 1994. Interest income increased $129,000 over 1993 due to higher levels of funds available for investment following the capital investment and subordinated debt proceeds received in May 1994.
The Company's provision for income taxes differs from the U.S. statutory rate of 34% due to state income taxes.
All of the factors noted above, particularly the revenue growth and resulting effect on gross profit, partially offset by the impact of the initial stages of the Company's market expansion program, resulted in net income increasing from $1.9 million in 1993 to $3.8 million in 1994.
LIQUIDITY AND CAPITAL RESOURCES
The Company periodically evaluates its liquidity requirements, capital needs and availability of resources in view of, among other things, expansion plans, accrued workers' compensation insurance claims liabilities, debt service requirements and other operating cash needs. As a result of this process, the Company has, in the past, and may, in the future, seek to raise additional capital or take other steps to increase or manage its liquidity and capital resources. The Company currently believes that its cash on hand, cash flows from operations and available borrowing capacity under the Credit Agreement will be adequate to meet its liquidity requirements through at least 1997. The Company will rely on these same sources, as well as public and private debt and equity financing, to meet its long-term liquidity needs.
The Company has $9.6 million in cash and cash equivalents at September 30, 1996 which is available to the Company for general corporate purposes, including, but not limited to, current working capital requirements, expenditures related to the continued expansion of the Company's sales force through the opening of new sales offices, capital expenditures and repayments of existing indebtedness. The Company has no significant long-term debt repayment requirements during 1996.
At September 30, 1996 the Company had positive working capital of $3.3 million which is a slight decline from $4.7 million at December 31, 1995. This decline is due primarily to capital expenditures incurred during the period offset partially by the net income for the period.
Cash Flows From Operating Activities
The Company's cash flows from operating activities increased substantially from the comparable period in 1995. This increase resulted from federal and state income tax payments relating to 1994 totaling $2.0 million paid in the 1995 period versus federal income tax refunds received totaling $3.5 million during same period in 1996; higher payments in the 1995 period for previously accrued workers' compensation claims; and the timing of accounts receivable collection at the end of the respective periods.
Cash Flows From Investing Activities
Capital expenditures during the 1996 period totaled $3.4 million and were incurred primarily in the first quarter to complete, furnish and equip a Company-owned facility to accommodate continued growth in corporate employees. This facility was opened in February 1996.
Net dispositions of marketable securities of $4.0 million in the 1995 period resulted primarily from marketable securities with a carrying value of $3.8 million reaching maturity and being converted to cash equivalents.
In January 1995, the Company acquired a client base in its Chicago market through a referral agreement calling for a referral fee which totaled $420,000 payable to the referring organization based on the number of worksite employees enrolled by Administaff. The remainder of the increase in intangible assets in both years relates to costs incurred for the rewrite of the Company's computerized payroll software system in both periods.
Cash Flows From Financing Activities
Cash flows from financing activities in both periods include loans to employees related to the federal income tax impact of the exercise of stock options and, in the 1995 period, from the proceeds received from the exercise of such options. In the 1996 period, the Company borrowed, on two occasions, amounts against its $10 million revolving credit agreement totaling $2.5 million. Both borrowings were repaid during the third quarter of 1996.
Credit Agreement
In October 1995 the Company's wholly-owned subsidiary, Administaff of Texas, Inc. ("Administaff of Texas"), entered into a $10 million revolving credit agreement (the "Credit Agreement") with a bank. Such Credit Agreement includes an agreement to issue standby letters of credit (in an amount not to exceed a sublimit of $5,000,000). The Company is a guarantor under the Credit Agreement. The Credit Agreement includes, among other covenants, a limitation on the declaration and payment of dividends, a change of control provision and other covenants customary in lending transactions of this type. At September 30, 1996 no borrowings were outstanding under the Credit Agreement. Borrowings under the Credit Agreement bear interest at rates based on the bank's Corporate Base Rate of LIBOR plus an applicable margin at the time of the borrowing.
Expansion Plan
The Company currently intends to allocate approximately $12 million of the estimated $ million it will receive in net proceeds from this offering to its expansion plan. The Company's expansion plan currently calls for opening a sales office in each quarter of 1997 and 1998. While costs associated with opening additional sales offices vary from market to market due to a number of factors, including costs of advertising, the Company believes, based on historical experience, that its expansion plan will require investments of approximately $6 million in each of 1997 and 1998. The Company believes that the portion of the offering proceeds allocated to expansion will be sufficient to fund this expansion plan for the next two years. The balance of the proceeds of the offering will be used for general corporate purposes and for acquisitions of existing PEO operations should favorable acquisition opportunities arise. Pending the application of the proceeds, the Company will invest such funds in diversified, highly-liquid, investment grade, interest bearing
instruments. The Company anticipates that such investments will generally consist of U.S. government obligations, certificates of deposit issued by large commercial banks, investment grade commercial paper, Eurodollar time deposits and investment grade municipal bonds. See "Use of Proceeds."
OTHER MATTERS
The Company's net deferred income tax assets and liabilities have fluctuated significantly from December 31, 1994 to September 30, 1996. At December 31, 1994, the Company had net deferred tax assets of $2.2 million, relating primarily to accrued workers' compensation claims for which tax deductions were not available until the claims were paid. During 1995, a significant portion of these claims were paid resulting in substantial deductions for income tax purposes. Therefore, as of December 31, 1995, net deferred tax assets were reduced to near zero. The Company has net deferred tax liabilities of $1.4 million at September 30, 1996 due primarily to the phase in of a change in accounting method for income tax purposes. In January and May 1996, the Internal Revenue Service approved the Company's request for a change in the method of accounting for PEO service fees and worksite employee payroll costs to the accrual method. These changes were adopted for financial reporting purposes effective January 1, 1994. For PEO service fees the change was approved effective January 1, 1995 with a three year phase in period for the cumulative effect of the change. For worksite employee payroll costs, the change was approved effective January 1, 1995 with a one year phase in period for the cumulative effect of the change. As a result, the Company amended its 1995 consolidated federal income tax return to account for these changes. The Company received $3.5 million in federal income tax refunds in May and July 1996 related to the original and amended tax returns. Deferred income taxes at September 30, 1996 reflect the effect of the three year phase in for the cumulative effect of the change in accounting for PEO service fees as a component of net current and noncurrent deferred tax liabilities. See Note 3 of Notes to Consolidated Financial Statements (unaudited) for the interim period ended September 30, 1996.
During the third quarter of 1996, the Company recorded an accrual for its estimate of the cost of corrective measures and penalties relating to the 401(k) Plan's failure to comply with certain nondiscrimination tests required by the Code. See "Risk Factors -- Costs of 401(k) Plan Compliance," "Industry Regulation -- Employee Benefit Plans" and Note 4 of Notes to Consolidated Financial Statements (unaudited) for the interim period ended September 30, 1996. In addition, during the third quarter of 1996, the Company recorded an asset for an amount recoverable from the 401(k) Plan's record keeper should the Company ultimately be required to pay the amount accrued for such corrective measures and penalties. The income tax effects of these items are reflected in the Company's net deferred tax liabilities as of September 30, 1996. Based on its understanding of the settlement experience of other companies in similar situations, the Company does not believe the ultimate resolution of this 401(k) Plan matter will have a material adverse effect on the Company's financial condition, results of operations or liquidity.
SEASONALITY, INFLATION AND QUARTERLY FLUCTUATIONS
The timing of the assessment of employment related taxes has a seasonal effect on the Company's cash flows, with the Company generally having lower cash flow from operations during the first six months of each year. As individual worksite employees meet applicable wage limits for such taxes, the Company's employment tax obligation declines which increases cash flows from operations during the balance of the year.
The Company believes the effects of inflation have not had a significant impact on its results of operations or financial condition.
The Company's operating results have historically fluctuated from quarter to quarter. In addition, due to the timing of the assessment of employment related taxes, the Company's gross profit margin typically improves from quarter to quarter within each year with the first quarter generally being the least favorable. Employment related taxes are based on the cumulative earnings of individual employees up to a specified wage level. Since the Company's revenues related to an individual employee are generally earned and collected at a relatively constant rate throughout each year, payment of such unemployment tax obligations has a substantial impact on the Company's financial condition or results of operations during the first six months of each year.
BUSINESS
Administaff is a leading provider of professional employer services, both in terms of number of worksite employees and in terms of revenues, with current operations in 10 markets, including Houston, San Antonio, Austin, Orlando, Dallas, Atlanta, Phoenix, Chicago, Baltimore/Washington, D.C. and Denver. The Company serves over 1,400 client companies with approximately 23,000 worksite employees as of September 30, 1996 and believes that it currently ranks, in terms of revenues and worksite employee base, as one of the three largest professional employer organizations in the United States. The Company has grown significantly since it was founded in 1986. Revenues (which include the payroll of worksite employees) were $4.1 million for 1987, the Company's first full year of operations, and increased to over $716 million for fiscal 1995, with corresponding gross profit and net income of $28.9 million and $1.1 million, respectively. Houston is the Company's original location and accounts for approximately 50% of the Company's current revenue base as of September 30, 1996, with other Texas markets accounting for an additional 30%. In October 1993 the Company opened a sales office in Dallas as the first step in implementing a long-term internal growth and expansion strategy. Subsequent to obtaining expansion capital in May 1994, the Company opened sales offices in Atlanta and Phoenix in accordance with its market expansion plan. During 1995, the Company established a presence in Chicago, both by entering into a referral agreement with an unaffiliated PEO organization and by opening a sales office, and opened an additional sales office in the Baltimore/Washington, D.C. area. The Company opened a second office in Dallas in January 1996 and opened an office in Denver in September 1996. The Company plans to enter at least one new market or open at least one additional sales office in an existing market in each quarter of 1997 and 1998.
Administaff's goal is to improve the productivity and profitability of small businesses (generally, businesses with 100 or fewer employees) by relieving business owners and key executives of administrative and regulatory burdens, enabling them to focus on the core competencies of their businesses, and by promoting employee satisfaction through human resource management techniques that improve employee performance. The Company provides a comprehensive personnel management system which encompasses a broad range of services, including benefits and payroll administration, medical and workers' compensation insurance programs, tax filings, personnel records management, liability management and other human resource services. Administaff delivers these services by becoming an employer for substantially all personnel management matters. The client company retains the employee's services and remains the employer for a limited number of other purposes.
PEO INDUSTRY
The PEO industry began to evolve in the early 1980's largely in response to the burdens placed on small to medium sized employers by an increasingly complex legal and regulatory environment. While various service providers, such as payroll processing firms, benefits and safety consultants and temporary services firms were available to assist these businesses with specific tasks, PEOs began to emerge as providers of a more comprehensive range of services relating to the employer/employee relationship. As initially conceived, these services involved the concept of staff leasing, whereby a service provider would become an employer of the client company's employees, and would lease these employees to the client to perform their intended functions at the worksite. As the industry has evolved the term "professional employer organization" has come to describe an entity which enters into a three-party relationship among the PEO, the client business and the employee.
Administaff establishes such three-party relationships through the Client
Service Agreement entered between the Company and the client business. The
Client Service Agreement provides for an initial one year term (subject to
cancellation on 30 days notice), sets forth the service fee payable to the
Company and establishes the division of responsibilities between Administaff and
the client as co-employers. In consideration for payment of the service fee
(which vary based upon relative employment tax rates, benefits participation,
workers' compensation risk profile, and level of pay of worksite employees, and
averaged approximately 123.6% of total payroll costs incurred during the
nine-month period ended September 30, 1996), the Company has the obligation to
pay the direct costs associated with the agreement, which generally consist of
(i) the salaries and wages of the worksite employees, (ii) employment related
taxes, (iii) employee
benefit plans, and (iv) workers' compensation insurance, regardless of whether the client company pays Administaff the associated service fee. For a further description of the Client Service Agreement and the responsibilities of Administaff and the client company thereunder, see "-- Customers."
PEO arrangements (including the Client Service Agreement) generally transfer broad aspects of the employer/employee relationship to the PEO. Because the business of the PEO is to enter into these relationships and provide employee related services to a large number of employees, the PEO can achieve economies of scale as a professional employer and perform the employment related functions at a level typically available only to large corporations with substantial resources to devote to human resources management.
Growth in the PEO industry has been significant. According to NAPEO, the number of employees under PEO arrangements in the United States has grown from approximately 10,000 in 1984 to approximately 2.0 million in 1995. Administaff believes that the key factors driving demand for PEO services include (i) 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, (ii) the need to provide competitive health care and related benefits to employees of small businesses, (iii) the increasing costs associated with workers' compensation and health insurance coverage, workplace safety programs, employee related complaints and litigation and (iv) trends relating to the growth and productivity of the small business community in the United States.
A critical aspect of the growth of the PEO industry has been increasing recognition and acceptance by federal and state governmental authorities of PEOs and the employer/employee relationship created by PEOs. As the concept of PEO services became understood by regulatory authorities, the regulatory environment began to shift from one of hostility and skepticism to one of regulatory cooperation with the industry. During the mid to late 1980's, legitimate industry participants were challenged to overcome well publicized failures of financially unsound and in some cases unscrupulous operators. Given this environment, Administaff and other industry leaders, in concert with NAPEO, have worked with the relevant government entities for the establishment of a regulatory framework that would protect clients and employees and discourage unscrupulous and financially unsound operators, and thereby promote the legitimacy and further development of the industry. For a description of the states in which the Company operates that require licensing or registration, see "Industry Regulation -- State Regulation -- Other State Regulation."
While many states do not explicitly regulate PEOs, 16 states (including Texas and Florida) have enacted legislation containing licensing or registration requirements and at least four states are considering such regulation. Such laws vary from state to state but generally provide for monitoring the fiscal responsibility of PEOs. State regulation assists in screening insufficiently capitalized PEO operations and, in the Company's view, has the effect of legitimizing the PEO industry generally by resolving interpretive issues concerning employee status for specific purposes under applicable state law. The Company has actively supported such regulatory efforts. As an active member of NAPEO, the Company participated in the development of regulations affecting all member organizations, and believes that these regulations further enhance the credibility of the PEO industry. The Company does not view the burdens of compliance with these regulations as material to its business operations.
As the PEO industry has developed, the more established PEOs are experiencing an increasing level of support from vendors who have a stake in the success of the industry. For example, increased cooperation and flexibility from insurance carriers have proved invaluable to Administaff in designing policies that meet the needs of a large PEO.
STRATEGY
The Company's objective is to become the leading provider of PEO services in the United States while achieving sustainable revenue and income growth. Key elements of the Company's strategy were developed by the Company's core management team which has remained in place since the Company's founding in 1986. Since that time, the Company has concentrated substantial financial and management resources on developing, defining and optimizing a personnel management system for small businesses and on building an
organizational infrastructure designed to enable the Company to replicate proven growth patterns while balancing revenue and income growth objectives. The key elements of the Company's strategy include:
o Providing the highest quality services to help improve the productivity and profitability of the Company's clients.
Administaff focuses on providing high quality services that directly enhance the productivity and profitability of small businesses. Achieving these efficiencies not only provides an obvious benefit to clients, it also benefits the Company in three distinct ways. First, to the extent that enhanced productivity results in client growth, Administaff's revenue base also grows. Second, clients who experience improved profitability best understand the value of Administaff's services and prove to be the Company's most effective referral sources. Finally, client productivity facilitated by Administaff promotes a long-term client relationship. Although the Company's client services contracts provide for only a one year initial term and are terminable on 30-days' notice at any time, in excess of 80% of Administaff's clients remain for more than one year and the retention rate increases for clients who remain with Administaff for longer periods. In accordance with NAPEO standards, retention rates are calculated by dividing the number of Company clients at December 31 by the number of clients at January 1 of the same year plus clients added during such year.
o Continuing to enter and establish a leading position in new markets.
In 1993, the Company identified 36 markets as its most attractive expansion targets and has opened sales offices in six of these markets. The Company plans to enter at least one new market or open one additional sales office in an existing market in each quarter of 1997 and 1998 and believes that the proceeds from this offering will be sufficient to cover such expansion. Through the use of a market selection model which evaluates a broad range of criteria, Administaff selects new markets where it believes it is most likely to replicate its historical growth patterns and market penetration. While most of the Company's expansion has been the result of opening sales offices, the Company has and will continue to consider expansion through strategic acquisitions. The Company believes that increasing industry regulatory complexity, including the difficulties of complying with the applicable state laws, and the increasing capital commitments required of PEOs to provide larger service delivery infrastructures and management information systems should lead to significant consolidation opportunities in the PEO industry. The Company's market development strategy combines intensive direct marketing efforts with a fully integrated public relations and advertising campaign. While the expense associated with entering and developing a new market is significant, the Company views this investment as essential to achieving desired growth and extending its national leadership position. The Company generally expects expenses in a new market to be covered by the gross profit from that market within two years.
o Growing existing markets through additional market penetration and marketing alliances.
The Company believes that additional market penetration in established markets offers significant growth potential. Based on information contained in a database developed by ABI, the Company believes that it serves less than 6.0% of the total number of businesses in Houston meeting its target criteria described below. In established markets, the Company's ability to achieve its growth objectives is enhanced by a higher number of referrals, a higher client retention rate, a more experienced sales force and momentum in its marketing efforts. The Company is also actively pursuing the formation of certain strategic alliances with other providers of various administrative and office services to small businesses as an alternative method for achieving growth in existing markets. The Company selectively opens additional sales offices and hires additional sales personnel in established markets to capitalize on these advantages and to achieve higher penetration.
o Targeting and enrolling clients that are consistent with the Company's overall strategy and risk profile objectives.
The Company seeks to attract clients whose objectives in utilizing Administaff's PEO services primarily relate to enhancing productivity rather than short-term cost cutting. The Company's clients
tend to be established, financially successful and likely to recognize the value of a broad range of services which enable the client to concentrate on its core business. Administaff's target client has from five to 100 employees and must meet certain additional criteria relating to industrial classification, workers' compensation, health and unemployment claims history and operating stability. These criteria, which constitute part of the Company's screening process, are intended to avoid a skewing of the Company's client base to higher risk clients. Through this process, the Company seeks to continue to build a solid client base characterized by high year-to-year retention and client employee growth while maintaining a predictable and controllable direct cost structure.
o Capitalizing on economies of scale while actively managing and controlling direct costs.
The Company enjoys economies of scale which allow it to provide small businesses with a level of human resource management typically found only in large corporations. The Company aggressively pursues scale advantages in order to maximize profits and to provide its clients with premium services at competitive prices. In this regard, Administaff focuses on key relationships with insurance providers to design coverage and premium structures that not only provide cost effective and appropriate protection for clients, but also enable the Company to control major components of its direct costs. These economies and tailored coverages are achievable both because of the Company's sophistication as a purchaser of insurance products and its status as a large customer of such providers. The Company also employs a variety of proactive personnel management techniques to help minimize the incidence and magnitude of employee claims, complaints and related costs. The Company expects the economies resulting from active control and management of direct costs will continue to enhance profitability.
No assurance can be given that the Company will be successful in implementing its strategy or that, even if successful, such implementation will have the intended effects on the Company's future revenue, operating expenses or net income.
CLIENT SERVICES
Administaff provides a comprehensive Personnel Management System encompassing a broad range of services, including personnel management, benefits and payroll administration, medical and workers' compensation insurance programs, tax filings, personnel records management, liability management and related human resource services. Among the laws and regulations that may affect a small business are the following:
o Internal Revenue Code (IRC)
o Federal Income Contribution Act (FICA)
o Employee Retirement Income Security Act (ERISA)
o Occupational Safety and Health Act (OSHA)
o Federal Unemployment Tax Act (FUTA)
o Fair Labor Standards Act (FLSA)
o Consolidated Omnibus Budget Reconciliation Act of 1987 (COBRA)
o Immigration Reform and Control Act (IRCA)
o Title VII (Civil Rights Act of 1964)
o Civil Rights Act of 1991
o American with Disabilities Act (ADA)
o Tax Equalization and Fiscal Responsibility Act (TEFRA)
o Age Discrimination in Employment Act (ADEA)
o Drug-Free Workplace Act
o Consumer Credit Protection Act
o The Family and Medical Leave Act of 1993
o State unemployment and employment securities laws
o State workers' compensation laws
While these regulations are complex and in some instances overlapping, Administaff assists in achieving compliance through providing services in four primary categories: administrative functions, benefit plans and administration, personnel management and liability management. Once a client company has executed a Client Service Agreement, the Client Services Department serves as the client's principal point of contact
with Administaff and coordinates the delivery of all of the services described below. For a more detailed description of responsibility for compliance with each of the laws set forth above, see "-- Customers."
Administrative Functions. Administrative functions encompass a wide variety of processing and record keeping tasks, mostly related to payroll administration, government compliance and employee benefit filing. Specific examples include payroll processing, payroll tax deposits, quarterly tax reporting, employee file maintenance, unemployment claims, workers' compensation reporting, and monitoring and responding to changing regulatory requirements.
Benefit Plans and Administration. Administaff currently offers the
following plans that the client may elect to provide worksite employees:
comprehensive health, dental, vision, prenatal care, prescription card,
counseling, education assistance and adoption assistance. Insurance coverages
also include group term life, universal life, accidental death and dismemberment
and long-term disability. Each client company can select from among several
different packages of these plans in accordance with its needs. Administaff also
offers a retirement savings (401(k)) plan to its eligible employees. As part of
its service package, the Company administers these benefit plans and is
responsible for negotiating the benefits and costs of such plans. The Company's
Benefits Administration department serves as liaison for the delivery of such
services to the worksite employee and monitors and reviews claims for loss
control purposes. The Company believes that this type of intensive benefit
management is usually found only in larger companies that can spread program
costs across many employees. Moreover, the Company believes that the
availability and administration of these benefits tends to mitigate the
competitive disadvantage small businesses normally face in the areas of cost
control and employee recruiting and retention.
Personnel Management. The wide variety of personnel management services provided by Administaff allow its client companies access to resources normally found only in the human resources departments of large companies. On-site supervisors are provided with a detailed personnel guide, which sets forth a systematic approach to administering personnel policies and practices including recruiting, discipline and termination procedures. Personnel policies and employee handbooks are reviewed and revised, if necessary, or customized handbooks can be created. The Company assists clients with the development of refined job descriptions as well as a systematic performance appraisal process. A variety of employee assistance programs can be implemented where needed, including orientation, training, counseling, substance abuse awareness and outplacement services. In addition, clients' management are provided with detailed information, compiled from the Company's experience, regarding competitive salaries for a wide range of positions across the country.
Liability Management. Liability management services consist of several functions. First, pursuant to the Company's Client Service Agreement and basic to the Administaff client relationship, the Company assumes many of the liabilities associated with being an employer. These include liability for compliance with payroll tax reporting and payment obligations, workers' compensation regulations, COBRA, the Immigration Reform and Control Act and the Consumer Credit Protection Act. For those potential liabilities that Administaff does not assume, the Company assists its clients in managing and limiting exposure. This management for many clients includes first time and ongoing safety inspections as well as the implementation of safety programs designed to reduce workers' compensation claims. Administaff also advises clients on avoiding liability for discrimination, sexual harassment and civil rights violations and participates in termination decisions to attempt to secure protection from liability on those grounds. When a claim arises, the Company often assists in the client's defense regardless of whether the Company has been named directly. The Company's Legal Department employs attorneys specializing in several areas of employment law and has broad experience in disputes concerning the employer/employee relationship. This expertise allows Administaff's clients to contest many claims which they might otherwise have been inclined to settle. The Company also monitors changing government regulations and notifies clients of their effect on potential employer liability.
Additional Services. All of Administaff's clients receive the foregoing services as part of the Company's basic package in consideration for payment by the clients of a comprehensive service fee. Administaff also provides supplemental services to its clients for additional fees, with the actual fee determined on the basis of the particular supplemental service to be rendered. These services include prospective employee screening and
background investigations, drug testing, and pre-employment testing, scoring and reporting. The Company will also stage a wide variety of seminars for both employees and management, on subjects such as communication, leadership, motivation and time and stress management skills. While these services constitute an immaterial source of additional revenue to Administaff, they also afford the Company an opportunity to solidify its relationships with existing clients. Moreover, to the extent these services tend to reduce liability these services serve as an additional element of the Company's liability and risk management process.
CUSTOMERS
Administaff's customer base consists of over 1,400 client companies, representing approximately 23,000 worksite employees as of September 30, 1996. The Company's clients have an average of 16 employees, with approximately 72% having between five and 49 employees. The Company's client base is broadly distributed throughout a wide variety of industries. As of September 30, 1996 the Company had customers representing approximately 430 Standard Industrial Classification ("SIC") codes, and no more than 7% of the Company's customers were classified in any one SIC code. Administaff's approximate client company distribution by major SIC code industry grouping as of September 30, 1996 is set forth below:
Services................................................................ 26% Construction............................................................ 14% Manufacturing........................................................... 13% Wholesale Trade......................................................... 12% Finance, Insurance, Real Estate......................................... 10% Medical................................................................. 7% Retail Trade............................................................ 6% Transportation, Communications, & Utilities............................. 5% Agriculture (Landscaping)............................................... 1% Legal................................................................... 1% Mining.................................................................. 1% Other................................................................... 4% |
The Company attempts to maintain diversity within its client base to lower its exposure to downturns or volatility in any particular industry and help insulate the Company to some extent from general economic cyclicality. As part of its client selection strategy, the Company offers its services to businesses falling within specified SIC codes, essentially eliminating certain industries that it believes present a higher risk of employee injury (such as roofing, logging and oil and gas exploration). Businesses falling within other SIC codes are not accepted by Administaff. All prospective customers are also evaluated individually on the basis of workers' compensation risk, group medical history, unemployment history and operating stability. On average, Administaff's clients have been in business approximately 14 years before entering into the Administaff relationship.
All clients enter into Administaff's Client Service Agreement. The Client Service Agreement provides for an initial one year term, subject to termination by the Company or the client at any time upon 30 days' prior written notice. After the initial term the contract may be renewed, terminated or continued on a month-to-month basis, although the Company's standard practice is to contact its clients prior to expiration of the initial term and attempt to renew the relationship for another one year term.
The Company's service fee is set forth in the Client Service Agreement, and is based on a pricing model that takes into account the gross payroll of each employee plus the estimated costs of paying employment related taxes, providing human resource services, performing administrative functions and providing insurance coverages and benefit plans and other services offered by the Company. These items are combined to yield a service fee which is stated as a percentage of gross pay. Fees are invoiced along with each periodic payroll. Client specific information used to determine service fees is taken from a client census which reflects information on each employee of the client, including gross pay, workers' compensation classification, payroll frequency, whether medical benefits are provided, and various other data. Fees for a particular client are also influenced by that client's claims histories and other client specific factors. Payroll data on an employee by
employee basis is entered into the Company's payroll database so that changes in the client's employee base will be automatically reflected in client invoices and in payroll disbursements made by Administaff.
The Client Service Agreement also establishes the division of responsibilities between Administaff and the client as joint employers. Pursuant to the Client Service Agreement, Administaff is solely responsible for all personnel administration and is liable for purposes of certain government regulation. In addition, Administaff assumes liability for payment of salaries and wages of its worksite employees and responsibility for providing employee benefits to such persons, regardless of whether the client company makes timely payment of the associated service fee. The client retains the employee's services and remains liable for the purposes of certain government regulations, compliance with which requires control of the worksite or daily supervisorial responsibility or is otherwise beyond Administaff's 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 Client Service Agreement is as follows:
ADMINISTAFF CLIENT JOINT
----------- ------ -----
- - Tax reporting and payment - Assignment to, and ownership - Implementation of policies and
(state and federal withholding, of, all intellectual property practices relating to the
FICA, FUTA, state unemployment) rights employer/employee relationship
- - Workers' compensation - Section 414(o) of the Code - Selection of fringe benefits,
compliance, procurement, regarding benefit including employee leave
management, reporting discrimination policies
- - Employee benefit procurement - Professional liability or - Employer liability under
malpractice workers' compensation laws
- - Compliance with COBRA, - Compliance with OSHA - Compliance with Title VII of
Immigration Reform and Control regulations, EPA regulations the Civil Rights Act of 1964, the
Act, and Consumer Credit and any state or legal Age Discrimination in
Protection Act, Title III, as equivalent government Employment Act, the Employment
well as monitoring changes in contracting provisions, the Retirement Income Security Act,
other governmental regulations Fair Labor Standards Act, the the Polygraph Protection Act,
governing the employer/employee Worker Adjustment and Retaining the Federal Drug Free Workplace
relationship and updating the Notification Act, professional Act (and any state or local
client when necessary licensing requirements, equivalent), state employment
fidelity bonding requirements discrimination laws
|
Because Administaff is a co-employer with the client company, it is possible that Administaff could incur liability for violations of such laws even if it is not responsible for the conduct giving rise to such liability. The Client Service Agreement addresses this issue by providing that the Company or the client will indemnify the other party for liability incurred to the extent the liability is attributable to conduct by the indemnifying party. Notwithstanding this contractual right to indemnification, however, it is possible that Administaff could be unable to collect on a claim for indemnification and may therefore be ultimately responsible for satisfying the liability in question. The Company's total expense incurred with respect to such exposure was approximately $117,000 for the year ended December 31, 1995 and $49,000 for the nine months ended September 30, 1996.
Administaff's client retention record reflects that a high percentage of its clients remain with the Company from year to year. Historical retention patterns indicate that in excess of 80% of Administaff's clients remain for over one year and that the attrition rate declines for clients who remain with Administaff for longer periods. Client attrition experienced by Administaff is attributable to a variety of factors, including (i) termination by Administaff resulting from the client's inability to make timely payments, (ii) client's non-renewal due to price, (iii) client business failure or downsizing and (iv) sale or disposition of the client company. The Company believes that only a small percentage of nonrenewing clients withdrew due to dissatisfaction with service or to retain the services of a competitor.
Clients are required to pay Administaff no later than one day prior to the applicable payroll date by wire transfer or automatic clearinghouse transaction, and receipt of funds is verified prior to release of payroll. Although the Company is ultimately liable as employer to pay employees for work previously performed, it retains the ability to terminate the Client Service Agreement as well as the employees upon non-payment by a client. This right and the periodic nature of payroll, combined with client credit checks and the natural
screening effect of the Company's client selection process, has resulted in an excellent collections history. During the period from January 1, 1987 to September 30, 1996, the Company has recorded a total of $419,000 in bad debt expense on approximately $3.4 billion of total revenues.
MARKETING AND SALES
Administaff's marketing strategy is based on the application of techniques that have produced predictable results for the Company in the past. The Company develops a mix of advertising media and a placement strategy tailored to each individual market. After selecting a market and developing its marketing mix, but prior to entering the market, Administaff engages in an organized media and public relations campaign to prepare the market for the Company's entry, and to begin the process of generating sales leads. Administaff markets its services through a broad range of media outlets, including radio, newspapers, periodicals and direct mail. The Company employs a local public relations firm in each of its markets as well as an advertising firm to coordinate and implement its marketing campaigns, and has developed an inventory of proven, successful radio and newsprint advertisements which are utilized in this effort.
In order to identify the most promising potential markets, the Company
employs a systematic market evaluation and selection process. The Company
evaluates a broad range of factors in the selection process, using a market
selection model that weights various criteria that the Company believes are
reliable predictors of successful penetration based on its experience. Among the
factors considered are (i) market size, in terms of small businesses engaged in
selected industries that meet the Company's risk profile, (ii) market
receptivity to PEO services, including considerations such as regulatory
environment, and relevant history with other PEO providers, (iii) existing
relationships within a given market, such as vendor or client relationships,
(iv) expansion cost issues, such as advertising and overhead costs, (v)
potential direct cost issues that bear on the Company's effectiveness in
controlling and managing the cost of its services, such as workers' compensation
and health insurance costs, unemployment risks and various legal and other
factors, (vi) a comparison of the services offered by Administaff to
alternatives available to small businesses in the relevant market, such as the
cost to the target clients of procuring services directly or through other PEOs
and (vii) long-term strategy issues, such as general perception of markets and
long-term revenue growth potential. Each of the Company's six newly opened
markets, beginning with Dallas in October 1993, was selected in this manner.
Administaff generates sales leads from three primary sources: direct sales efforts, advertising and referrals. These leads result in initial presentations to prospective clients, and, ultimately, a predictable number of client census reports. The client's census report reflects information gathered by the sales associate about the prospect's employees, including job classification, state of employment, workers' compensation claims history, health insurance claims history, salary, and similar information for each employee, and a desired level of benefits for the prospective client. This information is entered into the Company's data processing system, which applies the prospect's employee characteristics to Administaff's pricing model, leading to preparation of a bid. Concurrently with this process, the prospective client's workers' compensation and health insurance histories are forwarded to Company headquarters, where they are evaluated from a risk management perspective. Unfavorable aspects of either of these histories will result in termination of the sales effort and rejection of the prospect. This prospective client screening process plays a vital role in controlling the Company's benefits costs and limiting its exposure to liability.
Upon completion of a favorable risk evaluation, the sales associate then presents the prospective client with the Company's bid and attempts to enroll the prospect. Each bid includes detailed information as to the rate (as a percentage of gross payroll) that will be charged for each employee by category (state of employment and job classification) and level of benefits. If a prospect accepts Administaff's proposal, the new client is quickly incorporated into the Company's system. The client executes the Client Service Agreement, and an orientation team initiates the process of transferring employee related functions to Administaff. See "-- Customers." The client's database is transferred to the Client Services Department, where Account Executives assume responsibility for administering the client's personnel and benefits, coordinate the Company's response to the client's needs for administrative support and respond to any questions or problems encountered by the client. See "-- Client Services."
VENDOR RELATIONSHIPS
Administaff provides benefits to its worksite employees under arrangements with a variety of vendors. Although the Company believes that any of its benefit contracts could be replaced if necessary with minimal disruption to its operations, the Company considers four of such contracts to be significant elements of the package of benefits provided to employees.
The Company's group health insurance plan is a fully insured plan provided by Aetna Life & Casualty Insurance Co. ("Aetna"). Each client company selects from a range of health plan coverages available under the plan and Administaff's fees to that client reflect the coverage options selected. The Company initiated insurance coverage with Aetna in 1989, became fully insured in 1992 and has maintained a fully-insured policy with Aetna since that time. The current policy expires December 31, 1996. The policy requires the Company to fund claims and premiums up to a specified monthly cap amount. Aetna is required to fund all claims and premiums, if any, in excess of the monthly cap amount. Monthly cap amounts are in place for quarterly periods and such cap amounts are adjustable, based on claims experience, with six months' notice by Aetna. While Aetna bears ultimate legal responsibility for all claims, because the Company bears the burden of higher costs as claims experience increases, the Company seeks to minimize health care claims through its benefits administration management practices.
The Company's workers' compensation policy, a guaranteed cost plan whereby monthly premiums are paid for complete coverage of all claims under the policy, was originally put in place with Reliance National Indemnity Co. ("Reliance") in November 1994, and the current policy will continue in effect until October 31, 1996. The Company expects to renew the policy for another one-year term on comparable terms to the current policy. Reliance has provided the Company's workers' compensation policies since 1990.
In addition to its health and workers' compensation insurance policies, significant benefits contracts include the Company's long and short term disability policies with Fortis Benefits Insurance Co., which were put in place in January 1993 and August 1995, respectively, and continue until they are replaced or canceled.
INFORMATION TECHNOLOGY
The Company has developed state-of-the-art information technology capable of meeting the demands of payroll and related processing for the Company's worksite employees, satisfying the Company's administrative and management information needs, and providing productivity enhancement tools to the Company's corporate staff. While the Company utilizes commercially available software for standard business functions such as finance and accounting, it has developed a proprietary professional employer information system for the delivery of its primary services. This system manages data relating to worksite employee enrollment, human resource management, benefits administration, payroll processing, management information, and sales proposal bid calculation capabilities that are unique to the PEO industry and to Administaff. At the heart of the system is a high volume payroll processing system that allows the Company to produce and deliver hundreds of payrolls per day, each customized to the needs of the client companies.
Administaff's proprietary PEO information system is now in its third generation, with the fourth generation nearing completion. The software has been developed using Informix, a relational database and program development language, and PowerBuilder, a state-of-the-art, object oriented client/server development system. The software is designed to provide high volume professional employer services utilizing a combination of on-line and batch processing facilities and can be readily expanded to handle additional processing needs. The system is accessed through a graphical user interface engineered to maximize both the quality of Administaff's services and the efficiency with which they are delivered.
Administaff's primary information processing facility is located at the Company's corporate headquarters in Kingwood, Texas (near Houston). A second processing facility is located in Las Colinas, Texas (near Dallas). The Kingwood facility handles approximately two-thirds of the Company's daily client service load as well as administrative and management information processing. The Las Colinas facility handles approximately one-third of the daily client service load as well as acting as a disaster recovery facility for the Company capable of handling all of the Company's operations for a short period of time.
Administaff's principal computing platform is the IBM RISC/6000. The Company utilizes six IBM RISC/6000s at its Kingwood facility and two at its Las Colinas facility. These processing facilities are linked by a high speed wide area network utilizing dedicated telecommunications facilities. The IBM RISC/6000 computers are also connected by local area networks to more than 300 IBM PC workstations running Microsoft Windows(C) software. The Company's district sales offices are equipped with Microsoft NT Advanced Server(C) networks and are linked to the Kingwood and Las Colinas facilities through public telecommunications facilities.
COMPETITION
The PEO industry consists of approximately 2,000 companies, most of which serve a single market or region. The Company believes that it is one of three PEOs with annual revenue exceeding $500 million. The Company considers its primary competition to be the traditional in-house provision of employee services. In addition, the Company competes to some extent with fee-for-service providers such as payroll processors and human resource consultants.
Competition in the PEO industry revolves primarily around price, quality of service, choice and quality of benefits and reputation. The Company believes that reputation, national presence, regulatory expertise, financial resources, risk management and data processing capability distinguish leading PEOs from the rest of the industry. The Company believes that it competes favorably in these areas.
CORPORATE OFFICE EMPLOYEES
The Company had over 360 corporate office and sales employees as of September 30, 1996. These employees are divided among the Company's 10 functional departments, with 25 employees in Corporate Services, 27 in Finance, 29 in Benefits Administration, 13 in Legal, 10 in Marketing, 28 in Information Technology, 70 in Client Services, 125 in Sales (including 80 sales associates), 31 in Human Resources and three in Emerging Business Services, each as of September 30, 1996. Approximately 240 employees are located at the Kingwood headquarters, 26 are based at the Las Colinas facility, and the remainder (principally the sales associates) are based at the Company's sales offices.
FACILITIES
Administaff maintains two primary facilities. The corporate headquarters are located in Kingwood, Texas (20 miles north of Houston), on approximately 17 acres owned by the Company. This location includes a 66,000 square foot campus style facility and a recently renovated 76,000 square foot facility that serves as the Company's operations and records retention facility. Together these facilities house the Company's executive offices, corporate staff, data-processing center, training facilities and all other corporate functions.
The Company's other primary facility is located in Las Colinas, near Dallas, Texas. This 15,300 square foot leased facility, which became operational in October 1994, currently handles approximately one-third of the Company's data processing needs and serves as a backup data processing facility.
The Company also leases eight other facilities in Houston, Orlando, Atlanta, Phoenix, Chicago, Washington, D.C./Baltimore and Denver that serve as sales offices. These offices are typically staffed by six to eight sales associates and a district sales manager.
The Company believes that its facilities (certain portions of which have recently been completed) are adequate for the purposes for which they are intended and that its headquarters have sufficient additional capacity to accommodate the Company's foreseeable expansion plan.
LEGAL PROCEEDINGS
The Company is not a party to any material pending legal proceedings other than ordinary routine litigation incidental to its business that the Company believes would not have a material adverse effect on its financial condition or results of operations.
INDUSTRY REGULATION
INTRODUCTION
The Company's operations are affected by numerous federal and state laws relating to labor, tax and employment matters. By entering into a co-employer relationship with employees who are assigned to work at client company locations (sometimes referred to as "worksite employees"), the Company assumes certain obligations and responsibilities of an employer under these federal and state laws. Because many of these federal and state laws were enacted prior to the development of nontraditional employment relationships, such as professional employer, temporary employment and outsourcing arrangements, many of these laws do not specifically address the obligations and responsibilities of non-traditional employers. In addition, the definition of "employer" under these laws is not uniform.
Some governmental agencies that regulate employment and labor laws have developed rules that specifically address labor and employment issues raised by the relationship among PEOs, in general, and the Company, in particular, client companies and worksite employees. This is particularly true in Texas where management has worked with numerous regulatory agencies and was instrumental in the ultimate passage of the Staff Leasing Services Licensing Act, an act which formally recognized the PEO industry in Texas and resolved prior interpretive disputes as to the status of PEOs. Existing regulations are relatively new and, therefore, their interpretation and application by administrative agencies and federal and state courts is limited or non-existent. The development of additional regulations and interpretation of existing regulations can be expected to evolve over time. While the Company cannot predict with certainty the nature or direction of the development of federal, state and local regulations, management will continue to pursue a proactive strategy of educating administrative authorities as to the advantages of PEOs and achieving regulation which appropriately accommodates their legitimate business function.
Certain federal and state statutes and regulations use the terms "employee leasing" or "staff leasing" to describe the arrangement among a PEO, such as the Company, and its clients and worksite employees. The terms "employee leasing," "staff leasing" and "professional employer arrangements" are generally synonymous in such contexts and describe the arrangements entered into by the Company, its clients and worksite employees.
As an employer, the Company is subject to all federal statutes and regulations governing its employer-employee relationships. Subject to the issues discussed below, the Company believes that its operations are in compliance in all material respects with all applicable federal statutes and regulations.
EMPLOYEE BENEFIT PLANS
The Company offers various employee benefit plans to its employees, including its worksite employees. These employee benefit plans are treated by the Company as constituting "single-employer" plans of the Company rather than multiple employer plans. These plans include the 401(k) Plan (a profit-sharing plan with a cash or deferred arrangement ("CODA") under Code Section 401(k) and a matching contributions feature under Code Section 401(m)), a cafeteria plan under Code Section 125, a group health plan, a group life insurance plan, a group disability insurance plan, an educational assistance plan, an adoption assistance program and an employee assistance plan. Generally, employee benefit plans are subject to provisions of both the Code and the Employee Retirement Income Security Act of 1974, as amended ("ERISA").
Employer Status. In order to qualify for favorable tax treatment under the Code, the plans must be established and maintained by an employer for the exclusive benefit of its employees. Generally, an entity is an "employer" of certain workers for federal employment tax purposes if an employment relationship exists between the entity and the workers 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. That test is generally applied to determine whether an individual is an independent contractor or an employee for federal employment tax purposes and not to determine whether each of two or more companies is a "co-employer."
Substantial weight is typically given to the question of whether the purported employer has the right to direct and control the details of an individual's work. Among the various categories of factors which appear to be considered more important by the IRS are (1) the employer's degree of behavioral control (the extent of instructions, training and the nature of the work), (2) the financial control or the economic aspects of the relationship and (3) the intended relationship of the parties (are employee benefits provided, intent as evidenced by any contracts, permanency (that is, are services ongoing or for a project), any penalties for discharge/termination, and the frequency of the business activity).
In 1992, the Company applied for and received a favorable determination from the IRS regarding the qualified status of the 401(k) Plan. In that application, the Company disclosed to the IRS that the Company is involved in the business of leasing employees to recipient companies and that the 401(k) Plan covered worksite employees who satisfied the plan's eligibility requirements. However, the statement that the 401(k) Plan covered worksite employees does not necessarily resolve the issue of who is the employer of those employees for purposes of the 401(k) Plan.
The Company amended and restated the 401(k) Plan on December 15, 1994. Among other amendments, the Company added the matching contributions feature under Code Section 401(m) to the plan. In March 1995, the Company submitted the amended and restated 401(k) Plan to the IRS for a determination on its continued tax qualified status. The amended and restated 401(k) Plan is currently under review by the IRS. An IRS finding that the plan document merits tax qualified status is a determination as to the plan's form only and would not preclude a subsequent disqualification based on the plan's operation, including a finding that certain worksite employees are not employees of the Company for 401(k) Plan purposes.
Separate from its review of the pending determination request, the IRS is currently auditing the Company's 401(k) Plan for the 1993 plan year. Although the audit is for the 1993 plan year, certain conclusions of the IRS would be applicable to subsequent years as well. In addition, the IRS has established a Market Segment Study Group on Employee Leasing for the purpose of identifying specific compliance issues prevalent in certain segments of the PEO industry. Approximately 70 PEOs, including the Company, have been randomly selected by the IRS for audit pursuant to this program. One issue that has arisen from these audits is the Industry Issue (whether a PEO can be a co-employer of worksite employees, including officers and owners of client companies, for various purposes under the Code, including participation in the PEO's 401(k) plan). NAPEO and the Company are cooperating with the IRS in this study of the PEO industry. With respect to the 401(k) Plan audit, the Company understands that the IRS group conducting the audit intends to submit the Technical Advice Request to the IRS National Office. The Company also understands that, with respect to the Market Segment Study, the IRS is similarly referring to the National Office the Industry Issue. The IRS audit group leader has advised the Company that the finding of facts from the Company's audit will be submitted with the group leader's conclusion that such a co-employer status is not recognized under current tax law. If the Market Segment Study were to reach a conclusion that is adverse to the PEO industry, there is an administrative procedure available to appeal that conclusion. In addition to working with the Market Segment Study, NAPEO is actively engaged in policy discussions with both the Treasury Department and with members of Congress in an effort to reduce the likelihood of unfavorable conclusions and to procure favorable legislation.
Whether the National Office will address the Technical Advice Request independently of the Industry Issue is unclear. The Company is not able to predict either the timing or the nature of any conclusions that may be reached by the IRS with respect to the 401(k) Plan audit or with respect to the Technical Advice Request or the Market Segment Study Group and the ultimate outcome of such conclusions. Further, the Company is unable to predict whether the Treasury Department will issue a policy statement with respect to its position on the issues or, if issued, whether such a statement would be favorable to the Company. The Company intends to vigorously pursue a favorable resolution of the issues through one or more of the following methods: the audit-technical advice, the Market Segment Study process, the policy and legislative efforts, and, if necessary, legal action. If, however, any of these processes were to conclude that a PEO is not a co-employer of its worksite employees and such conclusion were to ultimately prevail, worksite employees could not continue to make salary deferral contributions to the 401(k) Plan or pursuant to the Company's cafeteria plan or continue to participate in certain other employee benefit plans of the Company. The Company believes that,
although unfavorable to the Company, a prospective application by the IRS of such an adverse conclusion (that is, one applicable only to periods after such a conclusion is reached) would not have a material adverse effect on its financial position or results of operations, as the Company could continue to make available similar benefit programs to its client companies at comparable cost to the Company. However, if such conclusion were applied retroactively to disqualify the 401(k) Plan for 1993 and subsequent years, employees' vested account balances under the 401(k) Plan would become taxable, the Company would lose its tax deductions to the extent its matching contributions were not vested, the 401(k) Plan's trust would become a taxable trust and the Company would be subject to liability with respect to its failure to withhold applicable taxes with respect to certain contributions and trust earnings. Further, the Company would be subject to liability, including penalties, with respect to its cafeteria plan for the failure to withhold and pay taxes applicable to salary deferral contributions by employees, including worksite employees. In such a scenario, the Company also would face the risk of client dissatisfaction and potential litigation. A retroactive application by the IRS of an adverse conclusion would have a material adverse effect on the Company's financial position and results of operations. While the Company believes that a retroactive disqualification is unlikely, there can be no assurance as to the ultimate resolution of these issues by the IRS.
Additional 401(k) Plan Issues. In 1991 the Company engaged a third party vendor to be the 401(k) Plan's record keeper and to perform the required annual nondiscrimination tests for the plan. Each year such record keeper reported to the Company that such nondiscrimination tests had been satisfied. However, in August 1996 the 401(k) Plan's record keeper advised the Company that certain of these tests had been performed incorrectly for prior years and, in fact, that the 401(k) Plan had failed certain tests for the 1993, 1994 and 1995 plan years. The Company has subsequently determined that the 401(k) Plan also failed a nondiscrimination test for 1991, a closed year for tax purposes. At the time the Company received such notice, the period in which the Company could voluntarily "cure" an operational defect had lapsed for all such years, except 1995. With respect to the 1995 year, the Company will cause the 401(k) Plan to refund the required excess contributions and earnings thereon to affected highly compensated participants, and the Company will pay an excise tax of approximately $51,000. Because the 401(k) Plan is under a current IRS audit, the IRS voluntary correction program for this type of operational defect is not available to the Company for years prior to 1995. Accordingly, the Company informed the IRS of the prior testing errors for each of 1991, 1993 and 1994 and proposed a correction that consists of corrective contributions by the Company to the 401(k) Plan with respect to these years and the payment by the Company of the minimum penalty ($1,000) that the IRS is authorized to accept to resolve this matter. The IRS responded that resolution of the nondiscrimination test is premature until the National Office resolves the Technical Advice Request. The Company has recorded a reserve during the third quarter of 1996 for amounts it may ultimately be required to pay in connection with corrective action with respect to the 401(k) Plan. The amount of such reserve is the Company's estimate of the cost of corrective measures and penalties, although no assurance can be given that the actual amount that the Company may ultimately be required to pay will not substantially exceed the amount so reserved. Based on its preliminary discussions with the IRS and its understanding of the settlement experience of other companies with respect to similar matters, the Company does not believe that the ultimate resolution of the nondiscrimination test issue will have a material adverse effect on the Company's financial condition or results of operations, although no assurance can be given by the Company because the ultimate resolution of this matter will be determined in a negotiation process with the IRS.
In addition to the nondiscrimination test errors, the Company has discovered that it failed to timely adopt a technical amendment to the 401(k) Plan by year end 1995, which it has now adopted retroactively. The Company has, however, determined that since January 1, 1995, the 401(k) Plan has been operated as if such amendment had been effective. Resolution of this failure also has been deferred by the IRS audit group until the National Office resolves the Technical Advice Request. Although the Company does not believe that its failure to timely adopt the technical amendment to the 401(k) Plan in 1995 will have a material adverse effect on the Company's financial condition or results of operations, no assurance can be given by the Company with respect to such matter because its ultimate resolution will be determined in a negotiation process with the IRS.
ERISA Requirements. Employee pension and welfare benefit plans are also governed by ERISA. ERISA defines "employer" as "any person acting directly as an employer, or indirectly in the interest of an employer, in relation to an employee benefit plan." ERISA defines the term "employee" as "any individual employed by an employer." The United States Supreme Court has held that the common law test of employment must be applied to determine whether an individual is an employee or an independent contractor under ERISA. A definitive judicial interpretation of "employer" in the context of a PEO or employee leasing arrangement has not been established.
If the Company were found not to be an employer for ERISA purposes, its plans would not comply with ERISA. Further, as a result of such finding the Company and its plans would not enjoy, with respect to worksite employees, the preemption of state laws provided by ERISA and could be subject to varying state laws and regulations, as well as to claims based upon state common laws. Even if such a finding were made, however, the Company would not be materially adversely affected because it could continue to make available similar benefits at comparable cost.
In addition to ERISA and the Code provisions discussed herein, issues related to the relationship between the Company and its worksite employees may also arise under other federal laws, including other federal income tax laws.
Possible Multiple Employer Plan Treatment. The DOL issued an Advisory Opinion in December 1995 to a staff leasing company advising that particular company that its health plan, which covered worksite employees, was a multiple employer plan, rather than a single employer plan. Because the Company believes it is a co-employer of worksite employees, the Company views its group health plan, which also covers worksite employees, to be a single employer plan. However, if this DOL opinion were applied to the Company, it is possible, although the Company believes it is unlikely, that the DOL would assert penalties against the Company for having incorrectly filed annual reports treating its plan as a single employer plan. Such a conclusion, if applied to the other employee benefit plans that cover worksite employees, could result in additional liabilities of the Company. The Company does not believe that any such penalties will, individually or in the aggregate, be material. Further, even if such a conclusion is reached, however, the Company believes that it would continue to be able to make available comparable benefit programs to client companies.
FEDERAL EMPLOYMENT TAXES
The Company assumes responsibility and liability for the payment of federal and state employment taxes with respect to wages and salaries paid to its employees, including worksite employees. There are essentially three types of federal employment tax obligations: (i) withholding of income tax requirements governed by Code Section 3401, et seq.; (ii) obligations under FICA, governed by Code Section 3101, et seq.; and (iii) obligations under the FUTA, governed by Code Section 3301, et seq. Under these Code sections, employers have the obligation to withhold and remit the employer portion and, where applicable, the employee portion of these taxes.
The Market Segment Study Group discussed above is examining, among other issues, whether PEOs, such as the Company, are employers of worksite employees under the Code provisions applicable to federal employment taxes and, consequently, responsible for payment of employment taxes on wages and salaries paid to such worksite employees.
Code Section 3401, which applies to federal income tax withholding requirements, contains an exception to the general common law test applied to determine whether an entity is an "employer" for purposes of federal income tax withholding. Section 3401(d)(1) states that if the person for whom services are rendered does not have control of the payment of wages, the "employer" for this purpose is the person having control of the payment of wages. The Treasury regulations issued under Section 3401(d)(1) state that a third party can be deemed to be the employer of workers under this section for income tax withholding purposes where the person for whom services are rendered does not have legal control of the payment of wages.
While Section 3401(d)(1) has been examined by several courts, its ultimate scope has not been delineated. Moreover, the IRS has to date relied extensively on the common law test of employment in
determining liability for failure to withhold. Accordingly, while the Company believes that it can assume the client company's withholding obligations, in the event the Company fails to meet these obligations the client company may be held jointly and severally liable therefor. While this interpretive issue has not to the Company's knowledge discouraged clients from enrolling with the Company, there can be no assurance that a definitive adverse resolution of this issue would not do so in the future. These interpretive uncertainties may also impact the Company's ability to report employment taxes on its own account rather than for the accounts of its clients.
STATE REGULATION
TEXAS
As an employer, the Company is subject to all Texas statutes and regulations governing the employer-employee relationship. Subject to the discussion below, the Company believes that its operations are in compliance in all material respects with all applicable Texas statutes and regulations.
Prior to 1993, the PEO industry was not regulated as an industry in Texas. Various state agencies attempted to apply their statutory schemes to PEOs on a case-by-case basis and the Company faced various challenges from both the Texas Employment Commission and the State Board of Insurance of Texas. Each of these challenges was resolved with the passage of Texas' PEO licensing act described below.
Staff Leasing Services Licensing Act. The Company was instrumental in obtaining enactment of the Staff Leasing Services Licensing Act (the "Act"), which now regulates and establishes a legal framework for PEOs in Texas. The Act, which became effective on September 1, 1993, established a mandatory licensing scheme for PEOs and expressly recognizes a licensee as the employer of the assigned employee for purposes of the Texas Unemployment Compensation Act. The Act also provides, to the extent governed by Texas law, that a licensee may sponsor and maintain employee benefit plans for the benefit of assigned employees. In addition, the Act not only provides that a licensee may elect to obtain workers' compensation insurance coverage for its assigned employees but also provides that, for workers' compensation insurance purposes, a licensee and its client company are treated as co-employers. After February 28, 1994, it became a class A misdemeanor to engage in PEO activities in Texas without a license. In order to obtain a license, applicants must undergo a background check, demonstrate a history of good standing with tax authorities and meet certain capitalization requirements that increase with the number of worksite employees employed. The Act specifies that the Texas Department of Licensing and Regulation ("TDLR") is responsible for enforcement of the Act and TDLR has adopted regulations under the Act. The Company believes that it is in compliance with such regulations in all material respects.
OTHER STATE REGULATION
While many states do not explicitly regulate PEOs, 16 states have passed laws that have licensing or registration requirements for PEOs and at least four states are considering such regulation. Such laws vary from state to state but generally provide for monitoring the fiscal responsibility of PEOs. In addition to holding a license in Texas, Administaff holds licenses in Arkansas, Florida and New Hampshire, has been registered or certified in Massachusetts, Minnesota, New Mexico and Nevada, and has applied for licenses in Montana, Oregon, South Carolina, Tennessee and Utah. Whether or not a state has licensing, registration or certification requirements, the Company faces a number of other state and local regulations that could impact its operations. The Company believes that its prior experience with Texas regulatory authorities will be valuable in surmounting regulatory obstacles or challenges it may face in the future.
MANAGEMENT
The Company's Board of Directors currently has nine members. In accordance with the Certificate of Incorporation of the Company, the members of the Board of Directors are divided into three classes and are elected for a term of office expiring at the third succeeding annual stockholders' meeting following their election to office or until a successor is duly elected and qualified. The Certificate of Incorporation also provides that such classes shall be as nearly equal in number as possible. The terms of office of the Class I, Class II and Class III directors expire at the annual meeting of stockholders in 1999, 1997 and 1998, respectively.
The following table sets forth certain information on the directors and executive officers of the Company as of October 1, 1996:
DIRECTOR
NAME AGE POSITION CLASS
---- --- -------- --------
Paul J. Sarvadi(1)....................... 39 President and Chief Executive Officer and II
Director
Gerald M. McIntosh....................... 55 Senior Vice President, Emerging Business II
Services and Director
James W. Hammond......................... 58 Senior Vice President, Corporate Services I
and Director
Scott C. Hensel.......................... 50 Senior Vice President, Benefits I
Administration and Director
William E. Lange......................... 50 Senior Vice President, Legal, General III
Counsel, Secretary and Director
Richard G. Rawson........................ 48 Senior Vice President, Finance, Chief III
Financial Officer, Treasurer and Director
Linda Fayne Levinson(1)(2)(3)............ 54 Director I
Paul S. Lattanzio(1)(2)(3)............... 32 Director III
Stephen M. Soileau(1)(2)(3).............. 38 Director II
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Paul J. Sarvadi. Mr. Sarvadi is President, CEO and co-founder of the Company. He attended Rice University and the University of Houston prior to starting and operating several small companies. Mr. Sarvadi has served as President of NAPEO and has been on its Board of Directors for five years. Mr. Sarvadi has also served as President of the Texas Chapter of the National Staff Leasing Association ("NSLA") for three years of the first four years of its existence. He was recently selected as Houston's Entrepreneur of the Year for service industries.
Gerald M. McIntosh. Mr. McIntosh is a co-founder of the Company and serves as Senior Vice President of Emerging Business Services. Prior to founding Administaff, he was founder and President of Kingwood Trails, Inc., a planned community maintenance company and ISSCO Trading Company, an import/export firm. He also founded and sold three other private businesses. Mr. McIntosh has a Bachelor of Science degree from LaSierra University and a Master of Science degree in Public Administration from the University of Southern California.
James W. Hammond. Mr. Hammond is Senior Vice President, Corporate Services. Prior to joining Administaff in 1987, Mr. Hammond was President of Technology and Business Consultants, Inc., a computer consulting firm. Mr. Hammond spent 23 years with Exxon U.S.A. designing a variety of automated systems related to operations and corporate planning. Mr. Hammond has a Bachelor of Science degree in Chemical Engineering from Virginia Polytechnic Institute.
Scott C. Hensel. Mr. Hensel, who serves as Senior Vice President, Benefits Administration, joined Administaff in 1987. Prior to joining Administaff, he spent 14 years with Exxon U.S.A., and subsequently became Vice President of Technology and Business Consultants, Inc., a computer consulting firm. Mr. Hensel has a Bachelor of Science degree in Engineering and a Bachelor of Arts degree with a minor in Political Science from Brown University and a Master of Business Administration degree in Management from Fairleigh-Dickinson University.
William E. Lange. Mr. Lange, who serves as Senior Vice President, Legal, Secretary and General Counsel, joined Administaff in 1987. Prior to joining Administaff, Mr. Lange was an attorney in private practice concentrating in the areas of oil and gas and general business law. He has served as a director of NAPEO and is the Past President of the Texas Chapter of NAPEO. As a lawyer formerly in private practice, Mr. Lange has trial and administrative law experience, having practiced before the U.S. Patent and Trademark Office, OSHA, the Immigration and Naturalization Service, the U.S. Equal Employment Opportunity Commission, the U.S. Department of Labor, the Texas Department of Labor and Standards, and the Texas Employment Commission. Mr. Lange is a Vietnam veteran and recently retired from the U.S. Marine Corps Reserve as a Colonel. Mr. Lange has a Bachelor of Business Administration degree from Southern Methodist University and Juris Doctorate degree from South Texas College of Law.
Richard G. Rawson. Mr. Rawson, who serves as Chief Financial Officer, Treasurer and Senior Vice President, Finance, joined Administaff in 1989. From 1983 to 1989 he was founder and owner of Texas Business Consultants, a financial consulting firm serving small-to-medium-sized businesses. Prior to that time, Mr. Rawson served as a senior financial officer and comptroller for several companies in the manufacturing and seismic data processing industries. Mr. Rawson served as Chairman of the Accounting Practices Committee of NAPEO for five years and currently serves as Treasurer of NAPEO and a member of its Board of Directors. Mr. Rawson has a Bachelor of Business Administration Degree in Finance and Accounting from the University of Houston.
Linda Fayne Levinson. Ms. Levinson, a director of the Company since April of 1996, has served as President of Fayne Levinson Associates, an independent consulting firm located in Santa Monica, California that advises both major corporations and start-up entrepreneurial ventures, since 1994. Prior to starting Fayne Levinson Associates, Ms. Levinson served as an executive with Creative Artists Agency, Inc. in 1993, a partner of Wings Partners, Inc., a merchant banking firm, from 1989 to 1992, Senior Vice President for American Express Travel Related Services Co., Inc. from 1984 to 1987, and as a partner at the consulting firm of McKinsey & Co. from 1979 to 1981. Ms. Levinson holds a Bachelor of Arts degree in Russian Studies from Barnard College, a Master of Business Administration degree from New York University School of Business and a Master of Arts degree in Russian Literature from Harvard University. Ms. Levinson also currently serves as a Director for Genentech, Inc., Egghead Software, Inc. and Jacobs Engineering Group Inc.
Paul S. Lattanzio. Mr. Lattanzio, a director of the Company since 1995, is a Managing Director with BT Capital Partners, Inc., an affiliate of Bankers Trust New York Corporation. Mr. Lattanzio joined Bankers Trust in 1984 and has experience in a variety of investment banking disciplines including mergers and acquisitions, private placements and restructuring advisory areas. Since 1987 his primary focus has been on the structuring, execution and monitoring of private equity investments for BT Capital Partners, Inc. Mr. Lattanzio received his Bachelor of Science degree in Economics with Honors from the University of Pennsylvania's Wharton School of Business in 1984.
Stephen M. Soileau. Mr. Soileau joined the Company as a director in October 1996. He has been Executive Vice President of TGF Management Corp., an investment management firm, since August 1992. From July 1989 to August 1992, Mr. Soileau was Executive Vice President of Creekwood Capital Corporation, an asset financing company. He was Investment Manager of Houston Industries, Inc., a utility holding company, from December 1986 to July 1989. He has a Bachelor of Arts degree in Economics from Rice University and a Master of International Management from the American Graduate School of International Management. Mr. Soileau also currently serves as a director for Calspan/SRL Corporation, Independent Gas Company Holdings, Inc., Sovereign Business Forms Inc. and Total Safety, Inc.
Mr. Lattanzio and Mr. Soileau were elected to the Board of Directors pursuant to a voting agreement executed in connection with a financing completed in May of 1994. See "-- Related Party Transactions." Following this offering, an affiliate of BT Capital Partners, Inc. will retain the ability to hold a seat on the Board of Directors until its ownership of Common Stock represents less than 4% of the outstanding Common Stock or has a market value of less than $10 million. All directors hold office until their successors have been elected and qualified. Officers serve at the discretion of the Board of Directors. The Company's Bylaws provide that directors and officers be indemnified against liabilities arising from their service as directors or officers to the fullest extent permitted by law, which generally requires that the individual act in good faith and in a manner he or she reasonably believes to be in or not opposed to the Company's best interests. See "Description of Capital Stock -- Limitation on Directors and Officers Liability."
BOARD COMMITTEES
The Board of Directors has appointed an Audit Committee, a Compensation Committee and a Nominating Committee. The membership of such committees is indicated by the footnotes to the table above. The Audit Committee reviews the scope and results of the annual audit of the Company's consolidated financial statements conducted by the Company's independent accountants, the scope of other services provided by the Company's independent accountants, proposed changes in the Company's financial and accounting standards and principles, and the Company's policies and procedures with respect to its internal accounting, auditing and financial controls, and makes recommendations to the Board of Directors on the engagement of the independent accountants, as well as other matters which may come before it or as directed by the Board of Directors. The Compensation Committee administers the Company's compensation programs, including the Stock Option Plan, and performs such other duties as may from time to time be determined by the Board of Directors. The Nominating Committee considers and makes recommendations to the Board of Directors regarding persons to be nominated by the Board of Directors for election as directors.
BOARD COMPENSATION
Non-employee directors of the Company receive compensation consisting of
(i) $10,000.00 annually, (ii) a fee of $2,500.00 for each quarterly meeting of
the Board attended, (iii) an annual fee of $1,000.00 payable for each committee
of the Board (if any) of which such person is the chairman and (iv)
reimbursement of reasonable expenses incurred in serving as a director. The
annual compensation can be taken in cash or Administaff stock, at the Director's
option. In addition, pursuant to the Company's stock option plan each director
of the Company who is neither an employee of the Company or an employee,
director, officer, partner, principal or affiliate of Texas Growth Fund, Pyramid
Ventures, Inc. or any of their respective control persons automatically receives
on the date such person first becomes a director a grant of non-qualified
options to purchase 7,500 shares of Common Stock, which will vest one-third on
each anniversary of the date of grant. In addition, following each annual
meeting of the Company's stockholders, each such outside director will receive
an annual grant of options to purchase an additional 2,500 shares of Common
Stock, all of which are fully vested on the date of grant. The exercise price of
all such options is the fair market value at the time the options are granted.
Options to purchase a total of 7,500 shares of Common Stock have been granted
under such arrangement to Ms. Levinson. Directors who are employees of the
Company or affiliates of Texas Growth Fund or Pyramid Ventures, Inc. receive no
compensation for their services as directors.
EMPLOYMENT AND CONSULTING AGREEMENTS
None of the Company's executive officers have employment or consulting agreements with the Company.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Board of Directors was formed in February of 1995, and currently consists of Linda Fayne Levinson, Paul S. Lattanzio and Stephen M. Soileau. Prior to the formation of the Compensation Committee, compensation decisions were made and approved by the Company's Board of Directors.
EXECUTIVE COMPENSATION
The following table sets forth in summary form all compensation paid by the Company to the Chief Executive Officer and its other five most highly compensated executive officers (collectively, the "Named Executive Officers") for services rendered in all capacities to the Company for the year ended December 31, 1995:
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
NAME AND ----------------------------- ALL OTHER
PRINCIPAL POSITION YEAR SALARY($) BONUS($) COMPENSATION(1)
------------------------------------------ ---- --------- -------- ---------------
Paul J. Sarvadi, President and Chief
Executive Officer....................... 1995 $ 198,600 $36,000 $ 922
Gerald M. McIntosh, Senior Vice
President............................... 1995 198,200 36,000 4,032
William E. Lange, Senior Vice President... 1995 198,600 36,000 2,163
James W. Hammond, Senior Vice President... 1995 198,400 36,000 2,326
Scott C. Hensel, Senior Vice President.... 1995 198,600 36,000 1,157
Richard G. Rawson, Senior Vice President
and Chief Financial Officer............. 1995 198,600 71,000 2,139
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(1) Represents the Company's payments with respect to life insurance policies benefitting the named executive. Excludes perquisites and other personal benefits, because such compensation did not exceed the lesser of $50,000 or 10% of the total annual salary reported for each executive officer.
STOCK OPTION PLAN
In April 1995, the Company established the 1995 Administaff Employee Stock Option Plan. At the annual meeting of the Company's stockholders held in April 1996, the Company's stockholders approved an amendment and restatement of such plan to provide for automatic grants of options to non-employee directors (the plan, as so amended and restated is referred to as the "Stock Option Plan"). Pursuant to the Stock Option Plan options may be granted to eligible employees of the Company or its subsidiaries for the purchase of an aggregate of 357,957 shares of Common Stock of the Company. Stock options granted under the Stock Option Plan are intended to qualify as "incentive stock options" within the meaning of Section 422 of the Code. The purpose of the Stock Option Plan is to further the growth and development of the Company and its subsidiaries by providing, through ownership of stock of the Company, an incentive to employees of the Company and its subsidiaries to increase such persons' interests in the Company's welfare and to encourage them to continue their services to the Company and its subsidiaries.
In addition, the Stock Option Plan authorizes grants of nonqualified options to directors of the Company, other than any director who is also an employee of the Company or an affiliate or an employee, director, officer or principal of The Texas Growth Fund, Pyramid Ventures, Inc. or any of their respective controlling persons. Each qualifying non-employee director will receive options to purchase 7,500 shares of Common Stock on the date first elected or appointed to the Board and an additional grant of options to purchase 2,500 shares of Common Stock as of each annual meeting of stockholders on which the director continues to serve on the Board. On April 23, 1996 (the date the Company's stockholders approved the amendment and restatement referred to above), Ms. Levinson received options to purchase a total of 7,500 shares of Common Stock. The exercise price for these director options will be the fair market value of the stock on the date of grant and each option will have a term of 10 years. The 7,500 share option grants will vest as to one-third of the shares on each anniversary of the option's grant date, while the 2,500 share option grants will be fully vested when granted. In addition, the options cannot be exercised after the third anniversary of the date the director ceases to be a member of the Board. The purpose of such grants to non-employee directors is to provide a means whereby such persons may develop a source of proprietorship and personal involvement in the Company, to encourage them to devote their best efforts to the Company's success and to enhance the Company's ability to attract and retain the services of highly capable individuals to serve as directors.
The Stock Option Plan is administered by the Board of Directors. The Board of Directors 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, and the number of shares to be covered by and all of the terms of the options. The Board of Directors may delegate any or all of its administrative duties pertaining to the Stock Option Plan to a committee (the "Committee") of not less than three individuals, at least two of whom shall be members of the Board of Directors.
Eligible employees under the Stock Option Plan are all employees, including
any officer who is an employee, of the Company or any of its subsidiaries.
Except for the automatic grants to non-employee directors described above, no
director of the Company is eligible to receive options under the Stock Option
Plan unless the granting of such options is approved by a majority of
disinterested directors which comprise a majority of the Board of Directors, or
by the Committee, all of whom must be disinterested directors. The term of any
option granted under the Stock Option Plan shall be determined by the Board of
Directors or the Committee; provided, however, that the term of any stock option
cannot exceed 10 years from the date of the grant, and any stock option granted
to an employee who possesses more than 10% of the total combined voting power of
all classes of stock of the Company or of its subsidiaries within the meaning of
Section 422(b)(6)of the Code must not be exercisable after the expiration of
five years from the date of grant. The exercise price per share of Common Stock
of options granted under the Stock Option Plan will be the fair market value of
a share of Common Stock on the date the option is granted, determined in good
faith by the Board of Directors or the Committee. Further, the exercise price of
any stock option granted to an employee who possesses more than 10% of the total
combined voting power of all classes of stock of the Company or of its
subsidiaries within the meaning of Section 422(b)(6) of the Code must be at
least 110% of the fair market value of the share at the time such option is
granted. The exercise price of any shares purchased pursuant to an option
granted under the Stock Option Plan shall be paid in full upon exercise of such
option in cash, or by check, or at the discretion of the Board of Directors or
the Committee.
Unless sooner terminated by action of the Board of Directors in its discretion, the Stock Option Plan will terminate on the tenth anniversary of its effective date. The Stock Option Plan was originally approved by the Board of Directors on April 24, 1995, and by the shareholders of the Company on April 25, 1995, and the amendment and restatement thereof was approved by the Board of Directors and by the Company's shareholders in April 1996. Options granted under the Stock Option Plan are not transferable except in the event of death and must be exercised by the optionee within 10 years after the date the option is granted or within three months following the date the optionee's employment with the Company terminates for any reason. The Board of Directors or the Committee, in its discretion, may set the term for any option granted under the Stock Option Plan; provided, however, that 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 Code. The Board of Directors and the Committee have the authority to prescribe, upon the granting of options, the vesting schedule under which such options will become exercisable by each optionee and the conditions of any such exercise, including the events or circumstances resulting in the acceleration of any vesting schedule applicable to the purchase of shares pursuant to any grant under the Stock Option Plan.
The Board of Directors may at any time terminate or amend the Stock Option Plan; provided that no such amendment may adversely affect the rights of optionees with regard to outstanding options. Further, no material amendment to the Stock Option Plan, such as an increase in the total number of shares covered by the Stock Option Plan, a change in the class of persons eligible to receive options, a reduction in the exercise price of options, and extension of the latest date upon which options may be exercised, shall be effective without stockholder approval.
In April 1995 the Company granted options to purchase 96,791 shares of Common Stock to certain non-executive officer employees with an exercise price of $6.00 per share, which have all vested, and in August 1995 the Company granted options to purchase 241,431 shares of Common Stock to certain non- executive employees at $13.50 per share, 20% of which vest each year for the ensuing five year period. At September 30, 1996, 321,139 options were outstanding pursuant to these grants, of which 141,661 were exercisable. No options have been exercised pursuant to these grants through September 30, 1996.
RELATED PARTY TRANSACTIONS
On May 13, 1994, the Company completed a financing (the "Financing") whereby, in exchange for an aggregate investment of $4 million, the Company issued to TGF (i) $4 million principal amount of
subordinated notes maturing five years from the date of issue carrying interest of 13% per annum, and (ii) warrants to purchase 694,436 shares of Common Stock (the "TGF Investment"). In connection with the TGF Investment, Robert V. Walsh, a representative of TGF, became a member of the Board of Directors.
The Financing also involved the issuance by the Company of 1,532,303 shares of Common Stock to PVI at a purchase price of $2.61 per share, or an aggregate of $4 million (the "PVI Investment"). In connection with the PVI Investment, Paul S. Lattanzio, a representative of PVI, became a member of the Board of Directors of the Company. Also in connection with the PVI Investment, PVI acquired 606,667 shares of Common Stock of the Company from the following existing stockholders in the respective amounts: McIntosh Charitable Remainder Trust, 13,333 shares; the Reed Foundation, 10,000 shares; Gary F. Reed, 523,333 shares; Hammond Family Foundation, 20,000 shares; James W. Hammond, 20,000 shares; and Scott C. Hensel, 20,000 shares. James W. Hammond and Scott C. Hensel are members of the Board of Directors and the McIntosh Charitable Remainder Unit Trust and the Hammond Family Foundation are affiliates of members of the Board of Directors. At the time of the PVI Investment, Gary F. Reed was a member of the Board of Directors and the Reed Foundation was an affiliate of Mr. Reed.
In connection with the PVI Investment and the TGF Investment, the Company, TGF, PVI and certain holders of Common Stock entered into an Investor Agreement (the "Investor Agreement") and a Voting Agreement (the "Voting Agreement"), each dated May 13, 1994. Pursuant to the Investor Agreement, PVI has a right of first refusal to purchase any equity securities issued by the Company other than those issued pursuant to a registered public offering, employee compensation plan or certain warrants held by TGF and Rauscher Pierce Refsnes, Inc. ("Rauscher"), or, in certain instances, those issued after repurchase by the Company. In addition, pursuant to the Voting Agreement, PVI has the right to elect at least one member of the Company's Board of Directors. Both the right of first refusal and the board seat provisions contained in the Investor Agreement and Voting Agreement, respectively, terminate if and when PVI ceases to own either (i) four percent or more of the outstanding Common Stock, on a fully diluted basis, or (ii) $10 million or more of Common Stock based on the average closing price of the Common Stock for the 30 previous trading days.
In June 1995, Richard G. Rawson, Chief Financial Officer and a director of the Company, exercised options to purchase 448,667 shares of Common Stock at a price of $0.75 per share. The purchase price was paid in cash by Mr. Rawson. In connection with the exercise of the options, the Company entered into a loan agreement with Mr. Rawson in the amount of $694,000, whereby the Company paid certain federal income tax withholding requirements related to the stock option exercise. The loan agreement called for an additional amount to be advanced to Mr. Rawson in the event the ultimate tax liability resulting from the exercise exceeds the statutory withholding requirements. In April 1996, an additional $300,000 was loaned to Mr. Rawson pursuant to this provision of the agreement. The loan is repayable in five years, accrues interest at 6.83% and is secured by 448,667 shares of Common Stock. See "Principal and Selling Stockholders."
Mr. Rawson, James W. Hammond and Scott C. Hensel, each of whom is a director, stockholder and officer of the Company, are the stockholders of Technology and Business Consultants, Inc. ("TBC"), which has in the past provided various equipment, supplies, and services to the Company. The Company paid $40,000 in 1994 for such services and equipment from TBC. In addition, the Company has an account receivable in the amount of $93,000 from TBC Orthopedics, Inc., a venture established by TBC. This debt has been guaranteed by TBC.
In April 1996, the Company entered into a settlement agreement relating to litigation in which the Company and TBC were co-defendants. In accordance with the settlement agreement, $285,000 was paid to the plaintiff. The Company paid the entire amount of the settlement; however, TBC has agreed to reimburse the Company for the entire amount of the settlement not recovered through the Company's general liability insurance. In August 1996, the Company received $113,000 pursuant to such coverage. The remaining $172,000 is expected to be reimbursed by TBC prior to the end of 1996.
In October 1996, the Company purchased various computer equipment from TBC at a total cost of $209,000.
BT Securities Inc., an affiliate of PVI, will participate in the underwriting syndicate for this offering and will receive customary compensation in connection with such participation.
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock as of October 21, 1996 and as
adjusted to reflect the sale of the shares of Common Stock offered hereby, by:
(i) each of the Named Executive Officers, (ii) each of the Company's directors,
(iii) all executive officers and directors of the Company as a group, (iv) each
other person (or group of affiliated persons) who is known by the Company to own
beneficially 5% or more of the Company's Common Stock and (v) each Selling
Stockholder as if the Underwriters' over-allotment option is exercised in full.
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED OWNED AFTER
PRIOR TO OFFERING(2) NUMBER OF OFFERING(2)(3)
NAME AND ADDRESS --------------------- SHARES BEING ---------------------
OF BENEFICIAL OWNERS(1) NUMBER PERCENT OFFERED(3) NUMBER PERCENT
- --------------------------------------- ---------- ------- ------------ ---------- -------
Executive Officers, Directors and 5%
Stockholders:
Paul J. Sarvadi(4)................... 2,179,167 20.3%
Gerald M. McIntosh(5)................ 1,853,240 17.3%
James W. Hammond(6).................. 783,952 7.3%
Scott C. Hensel(7)................... 822,250 7.7%
William E. Lange(8).................. 850,905 7.9%
Richard G. Rawson(9)................. 841,185 7.8%
Paul S. Lattanzio(10)................ 2,138,970 19.9%
Linda F. Levinson.................... 0 *
Stephen M. Soileau(11)............... 694,436 6.1%
Pyramid Ventures Inc................. 2,138,970 19.9%
Texas Growth Fund -- 1991
Trust(12)......................... 694,436 6.1%
Executive Officers and Directors as a
group (9 persons)................. 10,164,105 89.0%
Other Selling Stockholders:
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* Percentage of shares beneficially owned is less than 1.0%.
(1) The address of all executive officers and directors is in care of the Company, 19001 Crescent Springs Drive, Kingwood, Texas 77339-3802.
(2) The number of shares of Common Stock deemed outstanding prior to this offering consists of 10,726,274 shares outstanding as of October 21, 1996. This number excludes 989,327 shares issuable upon exercise of options and warrants to purchase Common Stock outstanding and exercisable as of October 21, 1996. The number of shares of Common Stock deemed outstanding after this offering includes an additional 3,000,000 shares of Common Stock being offered for sale by the Company in this offering. Shares not outstanding but deemed beneficially owned by virtue of the right of a person or group to acquire them within 60 days are treated as outstanding only for purposes of determining the number of and percent owned by such person or group.
(3) The shares of Common Stock to be offered by the Selling Stockholders will be offered only as part of the Underwriters' over-allotment option, and the number of shares of Common Stock being offered in, and beneficially owned after, this offering assumes that the Underwriters exercise in full such option to purchase 450,000 shares of Common Stock from the Selling Stockholders.
(4) Includes 1,155,200 shares owned by Our Ship Limited Partnership, LTD., 589,000 shares owned by the Sarvadi Children Limited Partnership LTD. and 214,967 shares owned by the Sarvadi Family Foundation.
(5) Includes 1,022,798 shares held in trust by David W. Russell, Trustee of the McIntosh Charitable Remainder Unit Trust.
(6) Represents 742,285 shares owned by the Hammond 1994 Family L.P. and 41,667 shares owned by the Hammond Family Foundation.
(7) Represents shares owned by the Hensel Family L.P.
(8) Includes 442,112 shares owned by Jennifer W. Lange, Mr. Lange's wife.
(9) Includes 369,051 shares owned by R&D Rawson LP and 369,049 shares owned by RDKB Rawson LP.
(10) Represents shares owned by Pyramid Ventures, Inc. The address of Pyramid Ventures, Inc. is c/o BT Capital Partners, Inc., 130 Liberty Street, 25th Floor, New York, New York 1006.
(11) Represents shares subject to warrants that are currently exercisable by the Texas Growth Fund -- 1991 Trust. Mr. Soileau disclaims beneficial ownership of the shares.
(12) Represents shares subject to warrants that are currently exercisable. The address of the Texas Growth Fund -- 1991 Trust is c/o TGF Management Corp., 100 Congress Avenue, Suite 980, Austin, Texas 78701.
DESCRIPTION OF CAPITAL STOCK
AUTHORIZED AND OUTSTANDING CAPITAL STOCK
At the date hereof, the authorized capital stock of the Company is 80,000,000 shares, consisting of 60,000,000 shares of Common Stock of the Company, par value $0.01 per share ("Common Stock"), and 20,000,000 shares of Preferred Stock of the Company, par value $0.01 per share ("Preferred Stock"). The following summary is qualified in its entirety by reference to the Company's Certificate of Incorporation (the "Charter") and Bylaws (the "Bylaws"), copies of which are included as exhibits to the Registration Statement of which this Prospectus is a part. All outstanding shares of Common Stock and Preferred Stock are fully paid and non-assessable.
Common Stock. The holders of Common Stock are entitled to dividends in such amounts and at such times as may be declared by the Board of Directors out of funds legally available therefor. See "Dividend Policy." Holders of the Common Stock are entitled to one vote per share for the election of directors and other corporate matters. In the event of liquidation, dissolution or winding up of the Company, holders of Common Stock would be entitled to share ratably in all assets of the Company available for distribution to the holders of Common Stock. The Common Stock carries no preemptive rights. All outstanding shares of Common Stock are, and the shares of Common Stock to be sold by the Company in this offering when issued will be, duly authorized, validly issued, fully paid and nonassessable.
Preferred Stock. The Board of Directors is authorized to issue from time to time, without stockholder authorization, in one or more designated series, shares of preferred stock with such dividend, redemption, conversion and exchange provisions as are provided in the particular series. Prior to the date hereof, none of such shares have been issued. Except as by law expressly provided, or except as may be provided by resolution of the Board of Directors, the Preferred Stock shall have no right or power to vote on any question or in any proceeding or to be represented at, or to receive notice of, any meeting of stockholders of Administaff. The issuance of the Preferred Stock could have the effect of delaying or preventing a change in control of the Company. The Board of Directors has no present plans to issue any of the Preferred Stock.
PROVISIONS HAVING POSSIBLE ANTI-TAKEOVER EFFECT
Statutory Provisions. Section 203 ("Section 203") of the General Corporation Law of the State of Delaware (the "Delaware Act") restricts certain transactions between a corporation organized under Delaware law (or its majority-owned subsidiaries) and any person holding 15% or more of the corporation's outstanding voting stock, together with the affiliates or associates of such person (an "Interested Stockholder"). Section 203 generally prohibits a publicly held Delaware corporation from engaging in the following transactions with an Interested Stockholder, for a period of three years from the date the stockholder becomes an Interested Stockholder (unless certain conditions, described below, are met): (a) all mergers or consolidations, (b) sales, leases, exchanges or other transfers of 10% or more of the aggregate assets of the corporation, (c) issuances or transfers by the corporation of any stock of the corporation which would have the effect of increasing the Interested Stockholder's proportionate share of the stock of any class or series of the corporation, (d) any other transaction which has the effect of increasing the proportionate share of the stock of any class or series of the corporation which is owned by the Interested Stockholder, and (e) receipt by the Interested Stockholder of the benefit (except proportionately as a stockholder) of loans, advances, guarantees, pledges or other financial benefits provided by the corporation.
The three-year ban does not apply if either the proposed transaction or the transaction by which the Interested Stockholder became an Interested Stockholder is approved by the board of directors of the corporation prior to the date such stockholder becomes an Interested Stockholder. Additionally, an Interested Stockholder may avoid the statutory restriction if, upon the consummation of the transaction whereby such stockholder becomes an Interested Stockholder, the stockholder owns at least 85% of the outstanding voting stock of the corporation without regard to those shares owned by the corporation's officers and directors or certain employee stock plans. Business combinations are also permitted within the three-year period if approved by the board of directors and authorized at an annual or special meeting of stockholders, by the
holders of at least 66 2/3% of the outstanding voting stock not owned by the Interested Stockholder. In addition, any transaction is exempt from the statutory ban if it is proposed at a time when the corporation has proposed, and a majority of certain continuing directors of the corporation have approved, a transaction with a party which is not an Interested Stockholder of the corporation (or who becomes such with board approval) if the proposed transaction involves (a) certain mergers or consolidations involving the corporation, (b) a sale or other transfer of over 50% of the aggregate assets of the corporation, or (c) a tender or exchange offer for 50% or more of the outstanding voting stock of the corporation.
Prior to the effective date of Section 203, a corporation, by action of its board of directors, had the option of electing to exclude itself from the coverage of Section 203. Since the effective date of such section, a corporation may, at its option, exclude itself from the coverage of Section 203 by amending its Certificate of Incorporation or Bylaws by action of its stockholders to exempt itself from coverage, provided that such charter or bylaw amendment shall not become effective until 12 months after the date it is adopted. The Company has not adopted such a charter or bylaw amendment.
Charter and Bylaw Provisions. The Board of Directors is divided into three classes, designated Class I, Class II and Class III. Each class of directors consists, as nearly as possible, of one-third of the total number of directors constituting the entire Board of Directors. The Charter provides that the number of directors will be fixed by, or in the manner provided in, the Bylaws. The Bylaws provide that the number of directors may be fixed from time to time by resolution of the Board of Directors, but will consist of not less than three nor more than 15 members. The term for directors in Class I expires at the annual meeting of stockholders to be held in 1999; the initial term for directors in Class II expires at the annual meeting of stockholders to be held in 1997; and the initial term for directors in Class III expires at the annual meeting of stockholders to be held in 1998. A director of the Company may be removed only for cause and only upon the affirmative vote of the holders of a majority of the outstanding capital stock entitled to vote at an election of directors.
The Charter provides that the Company may, by action of its Board of Directors, adopt a rights plan. The Company does not currently have a rights plan in effect.
The Charter provides that the Company may, by action of its Board of Directors, provide for a sinking fund for the purchase or redemption of shares of any series and specify the terms and conditions governing the operations of any such fund. The Company does not currently have any such fund.
The Bylaws provide that the Board of Directors shall fix the number of directors and that a stockholder may nominate directors only if written notice is delivered to the Company by such stockholder not less than 30 days nor more than 60 days prior to the meeting or no later than ten days after the date of notice by the Company of such meeting if such notice is given less than 40 days in advance of the meeting. The Charter and the Bylaws also provide that any newly created directorship resulting from an increase in the number of directors or a vacancy on the Board of Directors shall be filled by vote of a majority of the remaining directors then in office, even though less than a quorum. The Bylaws also provide that special meetings of the stockholders may only be called by the Board of Directors and the holders of not less than 25% of the Company's voting stock and that the stockholders may not act by written consent. The Charter provides that these provisions of the Charter and the Bylaws may not be amended without the approval of at least 66 2/3% of the voting power of all shares of the Company entitled to vote generally in the election of directors, voting together as a single class.
The foregoing provisions of the Charter and the Bylaws and of Section 203, together with the ability of the Board of Directors to issue Preferred Stock without further stockholder action, could delay or frustrate the removal of incumbent directors or the assumption of control by the holder of a large block of Common Stock even if such removal or assumption would be beneficial, in the short term, to stockholders of the Company. The provisions could also discourage or make more difficult a merger, tender offer or proxy contest even if such event would be favorable to the interests of stockholders.
LIMITATION ON DIRECTORS AND OFFICERS LIABILITY
The Delaware Act authorizes corporations to limit or eliminate the personal liability of directors to corporations and their stockholders for monetary damages for breach of directors fiduciary duty of care. The duty of care requires that, when acting on behalf of the corporation, directors must exercise an informed business judgment based on all material information reasonably available to them. Absent the limitations authorized by such legislation, directors are accountable to corporations and their stockholders for monetary damages for conduct constituting gross negligence in the exercise of their duty of care. Although the Delaware Act does not change directors' duty of care, it enables corporations to limit available relief to equitable remedies such as injunction or rescission. The Charter limits the liability of the Company's directors to the Company or its stockholders (in their capacity as directors but not in their capacity as officers) to the fullest extent permitted by the Delaware Act. Specifically, directors of the Company will not be personally liable for monetary damages for breach of a director's fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the Company or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the Delaware Act or (iv) for any transaction from which the director derived an improper personal benefit.
The inclusion of this provision in the Charter may have the effect of reducing the likelihood of derivative litigation against directors and may discourage or deter stockholders or management from bringing a lawsuit against directors for breach of their duty of care, even though such an action, if successful, might otherwise have benefited the Company and its stockholders.
TRANSFER AGENT
The Transfer Agent for the Common Stock is KeyCorp Shareholder Services, Inc.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, there will be 13,377,329 shares of Common Stock outstanding. All of the shares purchased in this offering will be freely tradeable without registration or other restriction under the Securities Act of 1933, as amended (the "Securities Act"), except for any shares purchased by an affiliate of the Company. All of the remaining shares of Common Stock outstanding (the "Restricted Shares") may be sold only pursuant to an effective registration statement filed by the Company or pursuant to an applicable exemption, including an exemption under Rule 144 under the Securities Act.
In general, Rule 144 provides that if a person (including an affiliate) holds Restricted Shares (regardless of whether such person is the initial holder or a subsequent holder of such shares), and if at least two years have elapsed since the later of the date on which the Restricted Shares were issued or the date that they were acquired from an affiliate, then such person is entitled to sell within any three-month period a number of shares that does not exceed the greater of 1% of the then outstanding shares of Common Stock or the average weekly trading volume of such stock during the four calendar weeks preceding the sale. After Restricted Shares are held for three years, a person who is not deemed an "affiliate" of the Company would be entitled to sell such shares under Rule 144 without regard to the volume limitations described above. As of , 1996, approximately shares of Common Stock are currently eligible for unrestricted sale under Rule 144. The balance of the shares of Common Stock are available for sale subject to holding, volume and other restrictions provided in Rule 144.
PVI, the holder of 2,138,970 shares of Common Stock (the "PVI Shares"), TGF, the holder of warrants to purchase 694,436 shares of Common Stock (the "TGF Warrants"), and Rauscher, the holder of warrants to purchase 153,230 shares of Common Stock, have certain rights to require the Company to register sales of such shares, or shares acquired pursuant to such warrants, under the Securities Act, subject to certain restrictions. If, subsequent to the consummation of this offering, the Company proposes to register any of its securities under the Securities Act, such holders are entitled to notice of such registration and to include their shares in such registration with their expenses borne by the Company, subject to the right of an underwriter participating in the offering to limit the number of shares included in such registration. In addition, PVI and
TGF have the right to demand, on five occasions, that the Company file a registration statement covering sales of their respective shares, and the Company is obligated to pay the expenses of the first two of such registrations. Upon completion of the offering, the Company plans to use a portion of the proceeds of the offering to exercise its option to repurchase 348,945 of the PVI Shares and its option to repurchase 173,609 of the TGF Warrants (or shares acquired upon exercise thereof).
The effect, if any, that future market sales of shares or the availability of shares for sale will have on the prevailing market prices for the Common Stock cannot be predicted. Nevertheless, sales of a substantial number of shares in the public market could adversely affect prevailing market prices for the Common Stock.
The Company, its directors, officers and certain of its principal stockholders holding in the aggregate shares of Common Stock have agreed that they will not, without the prior written consent of the Representatives of the Underwriters, agree to sell, contract to sell or otherwise dispose of any shares of Common Stock or other securities of the Company for a period of 180 days after the date of this Prospectus, except for the grant of stock options, or the issuance of shares upon the exercise of options granted, under the Stock Option Plan.
UNDERWRITERS
Under the terms and subject to the conditions contained in an Underwriting Agreement dated the date hereof (the "Underwriting Agreement"), each of the Underwriters named below, for whom Morgan Stanley & Co. Incorporated and Donaldson, Lufkin & Jenrette Securities Corporation are serving as Managers, has severally agreed to purchase, and the Company has agreed to sell to each of the Underwriters, the respective number of shares of Common Stock set forth opposite the names of such Underwriters below:
NUMBER OF
UNDERWRITER SHARES
----------- ---------
Morgan Stanley & Co. Incorporated
Donaldson, Lufkin & Jenrette Securities Corporation
---------
Total........................................................... 3,000,000
=========
|
The Underwriting Agreement provides that the obligations of the several Underwriters to pay for and accept delivery of the shares of Common Stock offered hereby are subject to the approval of certain legal matters by their counsel and to certain other conditions. The Underwriters are committed to take and pay for all of the shares of Common Stock offered hereby (other than those shares covered by the over-allotment option described below) if any such shares are taken.
The Underwriters initially propose to offer part of the Common Stock directly to the public at the public offering price set forth on the cover page hereof and to certain dealers at a price that represents a concession not in excess of $ per share under the public offering price. Any Underwriter may allow, and such dealers may reallow, a concession not in excess of $ a share to other Underwriters or to certain dealers. After the initial offering of the shares of Common Stock, the offering price and other selling terms may from time to time be varied by the Underwriters.
The Selling Stockholders have granted the Underwriters an option, exercisable for 30 days from the date of this Prospectus, to purchase up to an additional 450,000 shares of Common Stock at the public offering price set forth on the cover page hereof, less underwriting discounts and commissions. The Underwriters may exercise such option to purchase solely for the purpose of covering over-allotments, if any, incurred in the sale of the shares of Common Stock offered hereby. To the extent such option is exercised, each Underwriter will become obligated, subject to certain conditions, to purchase approximately the same percentage of such additional shares as the number set forth next to such Underwriter's name in the preceding table bears to the total number of shares of Common Stock offered by the Underwriters hereby.
The Underwriters have informed the Company that they do not intend sales to discretionary accounts to exceed five percent of the total number of shares of Common Stock offered by them.
The Company and the executive officers and directors of the Company and certain other stockholders have agreed that, without the prior written consent of Morgan Stanley & Co. Incorporated, they will not offer, sell, contract to sell or otherwise dispose of any shares of Common Stock or any securities convertible into or
exercisable or exchangeable for Common Stock, for a period of 180 days after the date of this Prospectus, other than the shares of Common Stock offered hereby.
Prior to the offering of Common Stock hereby, there has been no public market for the Common Stock. The initial public offering price has been determined by negotiations between the Company and the Underwriters. Among the factors considered in determining the initial public offering price were the future prospects of the Company and its industry in general, sales, earnings and certain other financial and operating information of the Company in recent periods, and the price-earnings ratios, price-sales ratios, market prices of securities and certain financial and operating information of companies engaged in activities similar to those of the Company.
The NYSE has approved the Common Stock for listing, subject to official notice of issuance, under the symbol "ASF." In order to meet one of the requirements for listing the Common Stock on the NYSE, the Underwriters have undertaken to sell lots of 100 or more shares to a minimum of 2,000 beneficial holders.
The Company and the Selling Stockholders have agreed to indemnify the Underwriters against certain liabilities, including civil liabilities under the Securities Act.
BT Securities Inc., an affiliate of PVI, will participate in the underwriting syndicate for this offering and will receive customary compensation in connection with such participation.
LEGAL MATTERS
Certain legal matters in connection with the Common Stock being offered hereby will be passed upon for the Company by Andrews & Kurth L.L.P., Houston, Texas and for the Underwriters by Fulbright & Jaworski L.L.P., Houston, Texas.
EXPERTS
The consolidated financial statements of Administaff, Inc. at December 31, 1994 and 1995, and for each of the three years in the period ended December 31, 1995, appearing in this Prospectus and Registration Statement have been audited by Ernst & Young LLP, independent auditors, as set forth in their report thereon appearing elsewhere herein and in the Registration Statement, and are included in reliance upon such report given upon the authority of such firm as experts in accounting and auditing.
ADMINISTAFF, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Auditors......................................................... F-2 Consolidated Balance Sheets as of December 31, 1994 and 1995........................... F-3 Consolidated Statements of Operations for the years ended December 31, 1993, 1994 and 1995................................................................................. F-4 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1993, 1994 and 1995........................................................................ F-5 Consolidated Statements of Cash Flows for the years ended December 31, 1993, 1994 and 1995................................................................................. F-6 Notes to Consolidated Financial Statements............................................. F-7 Consolidated Balance Sheets as of December 31, 1995 and September 30, 1996 (unaudited).......................................................................... F-18 Consolidated Statements of Operations for the nine months ended September 30, 1995 and 1996 (unaudited)..................................................................... F-19 Consolidated Statement of Stockholders' Equity for the nine months ended September 30, 1996 (unaudited)..................................................................... F-20 Consolidated Statements of Cash Flows for the nine months ended September 30, 1995 and 1996 (unaudited)..................................................................... F-21 Notes to Consolidated Financial Statements (unaudited)................................. F-22 |
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Administaff, Inc.
We have audited the accompanying consolidated balance sheets of Administaff, Inc., as of December 31, 1994 and 1995, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. 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, 1994 and 1995, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1995 in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Houston, Texas
March 1, 1996
ADMINISTAFF, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
DECEMBER 31,
-------------------
1994 1995
------- -------
Current assets:
Cash and cash equivalents........................................................ $11,535 $ 6,460
Cash and cash equivalents -- restricted.......................................... 697 --
Marketable securities............................................................ 4,753 728
Accounts receivable:
Trade.......................................................................... 2,482 2,908
Unbilled receivables........................................................... 7,647 10,763
Related parties................................................................ 249 720
Other.......................................................................... 1,126 379
Workers' compensation deposits................................................... 3,814 1,038
Prepaid expenses................................................................. 518 2,980
Refundable income taxes.......................................................... -- 2,204
Deferred income taxes............................................................ 855 58
------- -------
Total current assets...................................................... 33,676 28,238
Property and equipment:
Land............................................................................. 786 817
Buildings and improvements....................................................... 2,850 2,915
Computer equipment............................................................... 1,322 2,163
Furniture and fixtures........................................................... 1,100 2,093
Vehicles......................................................................... 514 705
Construction in progress......................................................... 48 2,444
------- -------
6,620 11,137
Accumulated depreciation......................................................... (1,262) (2,008)
------- -------
Total property and equipment.............................................. 5,358 9,129
Other assets:
Notes receivable from employees.................................................. -- 835
Deferred financing costs, net of accumulated amortization of $67 and $176 at
December 31, 1994 and 1995..................................................... 440 430
Intangible assets, net of accumulated amortization of $172 and $319 at December
31, 1994 and 1995.............................................................. 137 599
Other assets..................................................................... 134 243
Deferred income taxes............................................................ 1,336 --
------- -------
Total other assets........................................................ 2,047 2,107
------- -------
Total assets.............................................................. $41,081 $39,474
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................................. $ 749 $ 1,487
Payroll taxes and other payroll deductions payable............................... 10,202 9,829
Accrued worksite employee payroll expense........................................ 7,692 10,094
Accrued workers' compensation claims............................................. 2,338 404
Other accrued liabilities........................................................ 1,631 1,613
Income taxes payable............................................................. 1,939 --
Current maturities of long-term debt............................................. 328 74
------- -------
Total current liabilities................................................. 24,879 23,501
Noncurrent liabilities:
Accrued workers' compensation claims............................................. 3,467 621
Long-term debt................................................................... 4,679 4,605
Deferred income taxes............................................................ -- 58
------- -------
Total noncurrent liabilities.............................................. 8,146 5,284
Commitments and contingencies Stockholders' equity:
Preferred stock, par value $0.01 per share
Shares authorized -- 20,000
Shares issued and outstanding -- none.......................................... -- --
Common stock, $0.01 par value
Shares authorized -- 60,000
Shares issued and outstanding -- 10,238 and 10,726 at December 31, 1994 and
1995........................................................................... 102 107
Additional paid-in capital....................................................... 4,194 5,706
Retained earnings................................................................ 3,760 4,876
------- -------
Total stockholders' equity................................................ 8,056 10,689
------- -------
Total liabilities and stockholders' equity................................ $41,081 $39,474
======== ========
|
See accompanying notes.
ADMINISTAFF, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31,
----------------------------------
1993 1994 1995
-------- -------- --------
Revenues.................................................... $496,058 $564,459 $716,210
Direct costs:
Salaries and wages of worksite employees.................. 397,662 453,750 582,893
Benefits and payroll taxes................................ 78,614 85,513 104,444
-------- -------- --------
Gross profit................................................ 19,782 25,196 28,873
Operating expenses:
Salaries, wages and payroll taxes......................... 6,136 8,094 10,951
General and administrative expenses....................... 5,571 5,648 7,597
Commissions............................................... 2,975 3,231 3,942
Advertising............................................... 1,612 1,797 3,268
Depreciation and amortization............................. 361 567 894
-------- -------- --------
16,655 19,337 26,652
-------- -------- --------
Operating income............................................ 3,127 5,859 2,221
Other income (expense):
Interest income........................................... 320 449 668
Interest expense.......................................... (117) (424) (713)
Other, net................................................ (27) 33 9
-------- -------- --------
176 58 (36)
-------- -------- --------
Income before income tax expense............................ 3,303 5,917 2,185
Income tax expense.......................................... 1,354 2,151 1,069
-------- -------- --------
Net income.................................................. $ 1,949 $ 3,766 $ 1,116
======== ======== ========
Net income per share of common stock........................ $ 0.22 $ 0.37 $ 0.10
======== ======== ========
Weighted average common shares outstanding.................. 8,838 10,337 10,807
======== ======== ========
|
See accompanying notes.
ADMINISTAFF, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
PREFERRED STOCK COMMON STOCK
OUTSTANDING OUTSTANDING ADDITIONAL RETAINED
---------------- ---------------- PAID-IN EARNINGS
SHARES AMOUNT SHARES AMOUNT CAPITAL (DEFICIT) TOTAL
------ ------ ------ ------ ---------- -------- -------
Balance at December 31,
1992........................ 1 $ 98 8,668 $ 87 $ 390 $ (1,945) $(1,370)
Sale of common stock........ -- -- 27 -- 40 -- 40
Redemption and repurchase of
preferred stock.......... (1) (98) 11 -- 58 (10) (50)
Net income............... -- -- -- -- -- 1,949 1,949
------ ---- ------ ---- ------ ------- -------
Balance at December 31,
1993........................ -- -- 8,706 87 488 (6) 569
Sale of common stock, net of
issuance costs of $429... -- -- 1,532 15 3,556 -- 3,571
Issuance of common stock
purchase warrants in
connection with
subordinated debt........ -- -- -- -- 150 -- 150
Net income............... -- -- -- -- -- 3,766 3,766
------ ---- ------ ---- ------ ------- -------
Balance at December 31,
1994........................ -- -- 10,238 102 4,194 3,760 8,056
Exercise of stock options... -- -- 488 5 392 -- 397
Income tax benefit from
exercise of stock
options.................. -- -- -- -- 1,120 -- 1,120
Net income............... -- -- -- -- -- 1,116 1,116
------ ---- ------ ---- ------ ------- -------
Balance at December 31,
1995........................ -- $ -- 10,726 $107 $5,706 $ 4,876 $10,689
====== ==== ====== ==== ====== ======= =======
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See accompanying notes.
ADMINISTAFF, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
-----------------------------
1993 1994 1995
------- ------- -------
Cash flows from operating activities:
Net income.................................................... $ 1,949 $ 3,766 $ 1,116
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization................................. 361 567 1,104
Deferred income taxes......................................... 908 (1,344) 2,191
Loss on disposal of assets.................................... 30 9 2
Changes in operating assets and liabilities:
Cash and cash equivalents -- restricted.................... (698) 1 697
Accounts receivable and unbilled revenues.................. (1,052) (5,054) (3,266)
Workers' compensation deposits............................. (1,769) (1,986) 2,776
Prepaid expenses........................................... (225) (143) (2,462)
Other assets............................................... 32 (40) (109)
Accounts payable........................................... 408 (650) 738
Payroll taxes and other payroll deductions payable......... (1,887) 7,589 (373)
Accrued workers' compensation claims....................... (2,116) 3,007 (4,780)
Other accrued liabilities.................................. 1,530 (1,107) 2,384
Income taxes payable....................................... (99) 1,543 (3,023)
------- ------- -------
Total adjustments..................................... (4,577) 2,392 (4,121)
------- ------- -------
Net cash provided by (used in) operating activities... (2,628) 6,158 (3,005)
------- ------- -------
Cash flows from investing activities:
Marketable securities:
Purchases.................................................. (240) (7,333) (2,521)
Dispositions............................................... -- 2,845 6,530
Purchases of property and equipment........................... (1,535) (1,768) (4,619)
Increase in intangible assets................................. -- (63) (610)
Proceeds from the sale of assets.............................. 116 10 15
------- ------- -------
Net cash used in investing activities................. (1,659) (6,309) (1,205)
------- ------- -------
Cash flows from financing activities:
Long-term debt:
Proceeds................................................... -- 4,000 --
Repayments................................................. (465) (189) (328)
Deferred financing costs................................... -- (357) (99)
Loans to employees............................................ -- -- (835)
Sale of common stock.......................................... 40 3,571 --
Proceeds from the exercise of stock options................... -- -- 397
Repurchase of preferred stock................................. (50) -- --
------- ------- -------
Net cash provided by (used in) financing activities............. (475) 7,025 (865)
------- ------- -------
Net increase (decrease) in cash and cash equivalents............ (4,762) 6,874 (5,075)
Cash and cash equivalents at beginning of year.................. 9,423 4,661 11,535
------- ------- -------
Cash and cash equivalents at end of year........................ $ 4,661 $11,535 $ 6,460
======= ======= =======
Supplemental disclosures:
Cash paid for interest........................................ $ 117 $ 424 $ 787
Cash paid for income taxes.................................... $ 520 $ 1,953 $ 1,900
Noncash financing activity -- issuance of common stock
purchase warrants in connection with subordinated debt
borrowings................................................. $ -- $ 150 $ --
|
See accompanying notes.
ADMINISTAFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
1. ACCOUNTING POLICIES
Description of Business
Administaff, Inc. (the Company) is a professional employer organization (PEO) that provides a comprehensive personnel management system which encompasses a broad range of services, including benefits and payroll administration, medical and workers' compensation programs, tax filings, personnel records management, liability management, and other human resource services to small to medium sized businesses in several strategically selected markets. The Company operates primarily in the State of Texas.
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.
During 1995, the Company completed a reorganization by which it formed Administaff of Delaware, Inc., (the Holding Company) as a wholly-owned subsidiary of the Company. At the same time, the Holding Company formed a wholly-owned subsidiary, Administaff of Texas, Inc. into which the Company merged. The stockholders of the Company exchanged shares of Common Stock of the Company for shares of Common Stock of the Holding Company at a ratio of 3 for 2. All outstanding warrants and stock options of the Company were exchanged for warrants and stock options of the Holding Company at the same exchange ratio. The Holding Company then changed its name to Administaff, Inc. The reorganization had no effect on net income. Share amounts in the consolidated financial statements and accompanying notes have been restated to reflect the reorganization into the Holding Company (herein referred to as the Company) and the 3-for-2 exchange.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Impairment of Long-Lived Assets
In March 1995, Statement of Financial Accounting Standards (SFAS) No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, was issued. This Statement requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. SFAS No. 121 also addresses the accounting for long-lived assets that are expected to be disposed of. The Company will adopt SFAS No. 121 in the first quarter of 1996 and, based on current circumstances, believes there will be no effect on the consolidated financial statements from such adoption.
Cash and Cash Equivalents
Cash and cash equivalents include bank deposits and short-term investments with original maturities of three months or less when purchased.
Cash and Cash Equivalents -- Restricted
Prior to October 1995, the Company had cash equivalents which were restricted from withdrawal under the terms of a security agreement with a bank whereby the Company agreed to maintain a deposit account
ADMINISTAFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
securing the bank's exposure to the return of client payments due to insufficient funds. At December 31, 1995, no such restrictions are in place.
Marketable Securities
The Company's marketable securities are classified as available-for-sale and are carried at amortized cost which approximates fair value. Unrealized gains and losses, if any, are accumulated as a separate component of stockholders' equity. Realized gains and losses are computed based on specific identification of the securities sold.
Property and Equipment
Property and equipment is recorded at cost. Maintenance and repairs are charged to expense as incurred; renewals and betterments are capitalized. The cost of property and equipment sold or otherwise retired and the accumulated depreciation applicable thereto are eliminated from the accounts, and the resulting profit or loss is reflected in operations.
The cost of property and equipment is depreciated over the estimated useful lives of the related assets using the straight-line method. The estimated useful lives of property and equipment for purposes of computing depreciation are as follows:
Buildings and improvements.............................. 7-30 years Computer equipment...................................... 5-10 years Furniture and fixtures.................................. 3-10 years Vehicles................................................ 5 years |
Construction in progress at December 31, 1995 includes costs incurred in connection with the construction of an additional corporate facility which was completed in February 1996. Interest capitalized in connection with this project was $74,000 in 1995.
PEO Service Fees and Worksite Employee Payroll Costs
The Company's revenues consist of service fees paid by its clients under its Client Service Agreements. In consideration for payment of such service fees, the Company agrees to pay the following direct costs associated with the worksite employees: (i) salaries and wages, (ii) employment related taxes, (iii) employee benefit plan premiums and (iv) workers' compensation insurance premiums. The Company accounts for PEO service fees and the related direct payroll costs using the accrual method. Under the accrual method, PEO service fees relating to worksite employees with earned but unpaid wages at the end of each period are recognized as unbilled revenues and the related direct payroll costs for such wages are accrued as a liability during the period in which wages are earned by the worksite employee. Subsequent to the end of each period, such wages are paid and the related PEO service fees are billed. Unbilled receivables at December 31, 1994 and 1995 are net of prepayments received prior to year end of $1,252,000 and $661,000, respectively.
Intangible Assets
Intangible assets include software development costs, referral fee costs paid for the enrollment of certain clients previously with an unrelated PEO, and organizational costs. Software development costs include costs related to designing and installing the Company's computerized payroll system and are being amortized using the straight-line over a period of five years.
The referral fee costs are being amortized over a period of five years, which is the expected retention period for the related clients.
ADMINISTAFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Certain costs incurred in the initial formation of the Company were capitalized. As of December 31, 1995, such costs were fully amortized.
Accrued Workers' Compensation Claims
The Company has, from time to time, been insured under various types of workers' compensation policies. These have included a retrospective rating plan, whereby monthly premiums were paid to the insurance carrier based on estimated actual losses plus an administrative fee; a high deductible paid loss plan, whereby monthly premiums were paid based on a $500,000 deductible per occurrence; and a guaranteed cost plan whereby monthly premiums are paid for complete coverage of all claims under the policy.
Accrued workers' compensation claims relate to policies in place prior to November 1, 1994 and are based on an estimate of reported and unreported losses, net of amounts covered under the applicable insurance policy, for injuries occurring on or before the balance sheet date. The loss estimates are based on several factors including the Company's current experience, relative health care costs, regional influences and other factors. While estimated losses may not be paid for several years, an accrual for outstanding claims on the retrospective rating plan and high deductible paid loss plan is maintained using the estimated net present value of such claims calculated at an interest rate of 6.25%, with changes in the accrual reflected as a component of direct costs in the period of the change. These estimates are continually reviewed and any adjustments are reflected in operations as they become known.
In September 1995, the Company settled the remaining outstanding claims
under certain retrospective rating workers' compensation policies in effect in
prior years resulting in a reduction in workers' compensation costs of $1
million in 1995. This amount is included as a reduction in Direct costs:
Benefits and payroll taxes on the Consolidated Statements of Operations. In
exchange for transferring the responsibility for all remaining claims under such
policies, the Company paid the insurer $232,000. Prior to the settlement, the
Company had accrued workers' compensation claims of approximately $1.2 million
related to the settled policies.
Beginning November 1, 1994, the Company has been insured under a guaranteed cost workers' compensation policy which is currently in effect through October 31, 1996.
Stock Based Compensation
The Company accounts for stock based compensation arrangements under the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and intends to continue to do so.
Advertising
The Company expenses all advertising costs as incurred.
Income Taxes
The Company uses the liability method in accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and income tax carrying amounts of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.
Per Share Information
Per share amounts have been computed based on the weighted average number of common shares and common stock equivalents outstanding during the respective periods. Common stock equivalent shares consist of the incremental shares issuable upon the exercise of stock options and warrants (using the treasury stock or
ADMINISTAFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
if-converted method where applicable). Shares for which stock options were granted within a twelve month period prior to an initial public offering are treated as outstanding for all periods presented. Therefore, shares for which options were granted subsequent to September 1994 have been considered as having been outstanding for purposes of the calculation (using the treasury stock method with the offering price used for fair market value) for all periods presented. Common stock equivalent shares from stock options and warrants granted prior to the twelve months preceding the initial public offering are excluded from computations if their effect is antidilutive.
Reclassifications
Certain prior year amounts have been reclassified to conform to the 1995 presentation.
2. MARKETABLE SECURITIES
At December 31, 1994 and 1995, the Company's marketable securities consisted of debt securities issued by U.S. government entities and local municipalities. The balance at December 31, 1994 consisted of securities with contractual maturities of less than one year from the date of purchase. The balance at December 31, 1995 consisted of securities with contractual maturities ranging from ten years to 15 years from the date of purchase. All of the Company's marketable securities are classified as available-for-sale and are carried at amortized cost which approximates fair value. There are no unrealized holding gains or losses at December 31, 1994 and 1995.
At December 31, 1994, marketable securities with a carrying value of $3,737,000 were pledged as collateral under outstanding letter of credit agreements with a bank (none at December 31, 1995).
3. LONG-TERM DEBT
Following is a summary of long-term debt:
DECEMBER 31,
-------------------
1994 1995
------ ------
(IN THOUSANDS)
Subordinated notes to a related party............................ $4,000 $4,000
$610,000 note payable to bank.................................... 526 492
$350,000 note payable to bank.................................... 261 --
Mortgage note payable to developers.............................. 105 73
Mortgage note payable to bank.................................... 115 114
------ ------
Total long-term debt............................................. 5,007 4,679
Less current maturities.......................................... (328) (74)
------ ------
Noncurrent portion............................................... $4,679 $4,605
====== ======
|
In May 1994, the Company issued $4,000,000 in subordinated notes to a private investor pursuant to a Securities Purchase Agreement. The subordinated notes mature in May 1999 and contain certain optional prepayment clauses. Interest accrues at the annual rate of 13% and is payable quarterly. The subordinated notes are subordinate to the $610,000 note payable to bank. The Securities Purchase Agreement provides the Company with the right of first refusal to repurchase the subordinated notes in the event of a proposed transfer of the subordinated notes by the investor. In connection with the subordinated notes, the Company issued the investor warrants to purchase 694,436 shares of common stock. In connection with this transaction, a representative of the investor became a member of the Board of Directors of the Company. Interest expense includes $325,000 and $520,000 in 1994 and 1995, respectively, related to the subordinated notes. See Note 5.
ADMINISTAFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The $610,000 note is payable to the bank in monthly installments of $7,000, including interest, with a final balloon payment of all remaining principal due on December 31, 1997. Interest accrues at the bank's prime rate plus 1% (9.5% at December 31, 1995). The note is secured by land, buildings and improvements.
The $350,000 note payable to bank related to land, buildings and improvements and was repaid in 1995.
The mortgage note payable to developers is payable in annual installments of $41,327, including interest at 8.5%, through December 31, 1997. The note is secured by land with a cost of $218,000.
The mortgage note payable to bank is payable in monthly installments of $884, including interest at 8.375%, with a final balloon payment of all remaining principal due on July 1, 2008. The note is secured by land with a cost of $160,000.
The subordinated notes and the $610,000 note payable require the Company to maintain certain specified financial ratios and contain other restrictions customary in lending transactions of this type.
In October 1995, the Company's wholly-owned subsidiary, Administaff of Texas, Inc. (AT), entered into a revolving credit agreement with The First National Bank of Chicago, as agent, pursuant to which the lenders that are parties thereto have agreed to advance funds to AT on a revolving basis in an amount not to exceed $10 million for general corporate purposes. Such agreement includes an agreement to issue standby letters of credit in an amount not to exceed a sublimit of $5 million. Borrowings under the agreement will bear interest at rates based on the bank's Corporate Base Rate or LIBOR plus an applicable margin at the time of borrowing. The Company is a guarantor under the agreement. The agreement requires the Company to maintain certain specified financial ratios and contains other restrictions customary in lending transactions of this type, including a prohibition on the declaration and payment of dividends if a default exists or, after giving effect to such dividend, would exist under such agreement. As of December 31, 1995 there is no amount outstanding under the agreement and AT has $10 million available for borrowings under the agreement.
Maturities of long-term debt at December 31, 1995 are summarized as follows (in thousands):
1996................................................................. $ 74
1997................................................................. 492
1998................................................................. 2
1999................................................................. 4,002
2000................................................................. 2
Thereafter........................................................... 107
------
$4,679
======
|
ADMINISTAFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. 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,
----------------
1994 1995
------ -----
(IN THOUSANDS)
Deferred tax liabilities:
Accrual of PEO service fees and costs..................................... $ (477) $ --
Client list acquisition costs............................................. -- (133)
State income taxes........................................................ -- (117)
Depreciation and amortization............................................. (68) (203)
------ -----
Total deferred tax liabilities.................................... (545) (453)
Deferred tax assets:
Accrued workers' compensation claims...................................... 2,293 404
Other accrued liabilities................................................. 221 16
State income taxes........................................................ 188 --
Property and equipment.................................................... 34 33
------ -----
Total deferred tax assets......................................... 2,736 453
------ -----
Net deferred tax assets..................................................... $2,191 $ --
====== =====
Net noncurrent deferred tax liabilities..................................... $ -- $ (58)
Net current deferred tax assets............................................. 855 58
Net noncurrent deferred tax assets.......................................... 1,336 --
------ -----
$2,191 $ --
====== =====
|
At December 31, 1994 and 1995, the Company had no valuation allowance related to the deferred tax assets, primarily accrued workers' compensation claims, as these deferred tax assets relate to tax deductions available to the Company as incurred in the future for which sufficient income taxes have been paid in prior years to ensure recoverability.
The components of income tax expense are as follows:
YEAR ENDED DECEMBER 31,
------------------------------
1993 1994 1995
------ ------- -------
(IN THOUSANDS)
Current income tax expense (benefit):
Federal............................................... $ 364 $ 3,013 $ (948)
State................................................. 82 482 (174)
------ ------- -------
Total current income tax expense (benefit).... 446 3,495 (1,122)
------ ------- -------
Deferred income tax expense (benefit):
Federal............................................... 778 (1,160) 1,902
State................................................. 130 (184) 289
------ ------- -------
Total deferred income tax expense (benefit)... 908 (1,344) 2,191
------ ------- -------
Total income tax expense...................... $1,354 $ 2,151 $ 1,069
====== ======= =======
|
In 1995, a tax benefit of $1.1 million resulting from deductions relating to the exercise of certain non-qualified employee stock option was recorded as an increase in stockholders' equity.
ADMINISTAFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The reconciliation of income tax expense computed at U. S. federal statutory tax rates to the reported income tax expense is as follows:
YEAR ENDED DECEMBER 31,
----------------------------
1993 1994 1995
------ ------ ------
(IN THOUSANDS)
Expected income tax expense at 34%........................ $1,123 $2,012 $ 743
State income taxes, net of federal benefit................ 187 135 218
Other, net................................................ 44 4 108
------ ------ ------
Reported total income tax expense......................... $1,354 $2,151 $1,069
====== ====== ======
|
5. STOCKHOLDERS' EQUITY
In May 1994, the Company entered into a Stock Purchase Agreement with a private investor whereby the investor purchased 1,532,303 shares of common stock from the Company at a price of $2.61 per share. The Company realized net proceeds of $3,571,000. The Stock Purchase Agreement contains various restrictive covenants and provides the investor with certain antidilution privileges. An Investor Agreement provides the Company with the right of first refusal to repurchase the shares in the event of a proposed transfer of the shares by the investor. In addition, the Investor Agreement provides the Company with an option to repurchase up to 348,945 of the shares through June 1999 at prices beginning at $5.73 per share through June 1997 and escalating annually thereafter. See Note 11.
In connection with the issuance of $4,000,000 in subordinated notes, the Company issued warrants to purchase 694,436 shares of common stock at a price of $2.61 per share to the noteholder. The Investor Agreement provides the Company with an option to repurchase 173,609 of the warrants or related shares through June 1999 at a price of $5.73 per warrant or related share less $2.61 per warrant if not yet exercised, through June 1997 and escalating annually thereafter. The holder of the subordinated notes may elect to exercise a portion or all of the warrants at the exercise price as a reduction of the outstanding balance of the subordinated notes. The warrants are exercisable through May 13, 2001 and contain certain antidilution provisions. See Note 11.
The Investor Agreement also provides the holders of the shares of common stock sold pursuant to the Stock Purchase Agreement and the common stock purchase warrants issued in connection with the subordinated notes with the right, subject to certain conditions, to require the Company to repurchase all or any portion of the shares and warrants at a price to be calculated in accordance with the Investor Agreement. This right becomes partially exercisable in November 1998 and fully exercisable in November 2002 and terminates upon a qualified public offering as defined in the Stock Purchase Agreement.
In connection with the Stock Purchase Agreement and the subordinated notes, the Company issued warrants to purchase 153,230 shares of common stock to a third party as partial payment of fees related to the transactions. The warrants are exercisable through June 1999 at prices commencing at $2.61 per share with annual escalations to $5.42 per share for the final year. The warrants contain certain antidilution provisions.
During 1992, the Company granted options to an officer/director to purchase an additional 448,667 shares of common stock at a price of $.75 per share. These options were exercised in 1995. During 1993, the Company granted options to an employee to purchase 40,000 shares of common stock at a price of $1.50 per share. These options were exercised in 1995.
There have been no outstanding warrants or options cancelled through December 31, 1995.
During 1993, the Company retired all of its outstanding 10% nonvoting, convertible preferred stock. The Company paid $49,500 for 450 of the preferred shares and issued 10,600 shares of its common stock in exchange for 530 preferred shares.
ADMINISTAFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. OPERATING LEASES
The Company leases various furniture, equipment, and office facilities under operating leases. Most of the leases contain purchase and/or renewal options at fair market and fair rental value, respectively. Rental expense relating to all operating leases was $638,000, $905,000 and $1,126,000 in 1993, 1994 and 1995, respectively. At December 31, 1995, future minimum rental payments under noncancelable operating leases are as follows (in thousands):
1996............................................ $1,023
1997............................................ 835
1998............................................ 584
1999............................................ 332
2000............................................ 151
------
$2,925
======
|
7. EMPLOYEE SAVINGS PLAN
The Company has adopted a 401(k) profit sharing plan (the Plan) for the benefit of all eligible employees as defined in the plan agreement. The Plan is a defined-contribution plan to which eligible employees may make contributions, on a before-tax basis, of from 1% to 20% of their compensation during each year while they are a plan participant. Under the Plan, employee salary deferral contributions are limited to amounts established by tax laws. Participants are at all times fully vested in their salary deferral contributions to the Plan and the earnings thereon. All amounts contributed pursuant to the Plan are held in a trust and invested, pursuant to the participant's election, in one or more investment funds offered by a third party record keeper.
Employees are eligible to participate in the plan on the entry date coincident with or next following age 21 and upon completion of at least 1,000 hours of service in a consecutive 12-month period. Highly compensated employees assigned to clients which have less than 100% of their workforce employed by the Company are not eligible to participate. Entry dates are the first day of each calendar month. Service with a client company is credited for eligibility and vesting purposes under the plan.
Effective June 1, 1994 the plan was amended to add the option of offering matching contributions to certain worksite employees under Section 401(m) of the Internal Revenue Code (the "Code"). The Company does not make matching contributions to the plan for its corporate employees. Under this option, client companies may elect to participate in the matching program, pursuant to which the client companies contribute 50% of an employee's contributions up to 6% of the employee's compensation each pay period. Participants vest in these matching contributions on a graduated basis over five years with 20% vesting after one year of service and 100% vesting after five years of service. For employees participating in the matching program, the maximum salary deferral contribution is 17% rather than 20%. In addition, participants shall be fully vested in these matching contributions upon normal retirement (i.e., attainment of age 65) or death. Total matching contributions related to worksite employees for the year ended December 31, 1994 and 1995 were $41,000 and $420,000, respectively (none in 1993), all of which were reimbursed to the Company by the client companies.
8. RELATED PARTY TRANSACTIONS
Accounts receivable from related parties at December 31, 1994 and 1995 includes $93,000 from a company in which three of the directors of the Company own a minority interest. Accounts receivable from related parties also includes $156,000 and $627,000 from employees of the Company at December 31, 1994 and 1995, respectively.
ADMINISTAFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Three of the Company's stockholders and officers are the stockholders of Technology and Business Consultants, Inc. ("TBC"), an entity which has provided various equipment, supplies, and services to the Company. The Company paid $754,000 and $40,000 in 1993 and 1994, respectively for such services and equipment from TBC (none in 1995). Such costs are included primarily as a component of general and administrative expenses.
In June 1995, an officer of the Company exercised options to purchase 448,667 shares of common stock at a price of $0.75 per share. The purchase price was paid in cash by the officer. In connection with the exercise of the options, the Company entered into a loan agreement with the officer, whereby the Company paid certain federal income tax withholding requirements related to the stock option exercise on behalf of the officer in the amount of $694,000. The loan agreement calls for an additional amount to be advanced to the officer in the event the ultimate tax liability resulting from the exercise exceeds the statutory withholding requirements. The loan is repayable in five years, accrues interest at 6.83%, and is secured by 448,667 shares of the Company's common stock.
In September 1995, an employee of the Company exercised options to purchase 40,000 shares of common stock at a price of $1.50 per share. The purchase price was paid in cash by the employee. In connection with the exercise of the options, the Company entered into a loan agreement with the employee, whereby the Company paid certain federal income tax withholding requirements related to the stock option exercise on behalf of the employee in the amount of $141,000. The loan agreements calls for an additional amount to be advanced to the employee in the event the ultimate tax liability resulting from the exercise exceeds the statutory withholding requirements. The loan is repayable in five years, accrues interest at 6.83%, and is secured by 40,000 shares of the Company's common stock.
9. COMMITMENTS AND CONTINGENCIES
The Company's 401(k) Plan for the year ended December 31, 1993 is currently under audit by the Internal Revenue Service ("IRS"). The Company understands that one of the issues under review is the relationship of the Company to certain worksite employees and the Company's status as their employer for 401(k) Plan purposes. If the IRS concludes that the Company is not the "employer" of certain worksite employees for purposes of the Code, worksite employees could not continue to make salary deferral contributions to the 401(k) Plan or continue to participate in certain other employee benefit plans of the Company, including the Company's cafeteria plan. The Company believes that, although unfavorable to the Company, a prospective application of such a conclusion would not have a material adverse effect on its financial position or results of operations. If such conclusion were applied retroactively, however, employees' vested account balances would become taxable, the Company would lose its tax deduction to the extent its matching contributions were not vested, the plan's trust would become a taxable trust, and the Company could be subject to liability with respect to its failure to withhold income and payroll taxes in respect of such contributions and trust earnings thereon. In addition, the Company could be subject to liability for failure to withhold applicable taxes under certain other employee benefit plans in which worksite employees participate. In such a scenario, the Company would also face the risk of client dissatisfaction as well as potential litigation. While the ultimate outcome of the audit is unknown, the Company believes that a retroactive application is unlikely. The Company also believes that a prospective application of an unfavorable outcome will not have a material adverse effect on the Company's consolidated financial position or results of operations.
The Company is a defendant in various lawsuits and claims arising in the normal course of business. Management believes it has valid defenses in these cases and is defending them vigorously. While the results of litigation cannot be predicted with certainty, management believes the final outcome of such litigation will not have a material adverse effect on the Company's consolidated financial position or results of operations.
The Company had outstanding letters of credit aggregating $4,666,000 at December 31, 1994 (none at December 31, 1995).
ADMINISTAFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. EMPLOYEE STOCK OPTION PLAN
In April 1995, the Company established the 1995 Administaff Employee Stock Option Plan (the "Stock Option Plan"), pursuant to which options may be granted to eligible employees of the Company or its subsidiaries for the purchase of an aggregate of 357,957 shares of Common Stock of the Company. Stock options granted under the Stock Option Plan are intended generally to qualify as "incentive stock options" within the meaning of Section 422 of the Code. The purpose of the Stock Option Plan is to further the growth and development of the Company and its subsidiaries by providing, through ownership of stock of the Company, an incentive to employees of the Company and its subsidiaries to increase such persons' interests in the Company's welfare and to encourage them to continue their services to the Company and its subsidiaries.
The Stock Option Plan is administered by the Board of Directors (the "Board"). The Board 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, and the number of shares to be covered by and all of the terms of the options. The Board may at any time terminate or amend the Stock Option Plan; provided that no such amendment may adversely affect the rights of optionees with regard to outstanding options. Further, no material amendment to the Stock Option Plan, such as an increase in the total number of shares covered by the Stock Option Plan, a change in the class of persons eligible to receive options, a reduction in the exercise price of options, and extension of the latest date upon which options may be exercised, shall be effective without stockholder approval.
In April 1995, the Board granted options to purchase 96,791 shares of common stock at a price of $6.00 per share to certain non-management employees. In August 1995, the Board granted options to purchase 241,431 shares of common stock at a price of $13.50 per share to certain non-management employees. The April grants are primarily fully vested, except for 9,013 shares which vest in 1996. The August grants vest at 20% per year over a five year period from the date of grant. At December 31, 1995, 87,778 shares are exercisable pursuant to the April grants. Through December 31, 1995, no options have been exercised pursuant to these grants.
11. INITIAL PUBLIC OFFERING
The Company filed a registration statement with the Securities and Exchange Commission ("SEC") in September 1995 to register the sale of up to 3,000,000 shares of its common stock. The Company intends to use the net proceeds of the sale to support expansion of the Company's operations including the opening of new geographic markets, further penetration of existing markets by opening new sales offices and, as opportunities arise, expansion of the Company's client base in new or existing markets through acquisitions. A portion of the proceeds will also be used to repay certain outstanding indebtedness, including the subordinated notes, and to exercise certain options to repurchase 348,945 shares of common stock and 173,609 warrants to purchase common stock. See Note 5.
In connection with the preparation of consolidated financial statements to be filed with the SEC, the Company elected to restate its financial statements for certain previously reported accounting changes made in 1994 and 1993. Accordingly, the accompanying consolidated financial statements and related notes reflect this restatement. See Note 12.
As of December 31, 1995, the Company remains in registration with the SEC and the timetable for completion of the proposed offering is uncertain. The Company has incurred costs totaling $745,000 through December 31, 1995 related to the offering which are included in prepaid expenses on the consolidated balance sheet. Upon consummation of the offering, such costs will be reflected as a reduction to stockholders' equity.
Supplemental net income per share is $0.16 for the year ended December 31, 1995 and is determined by adding back the interest expense, net of income taxes, associated with the debt which will be retired by the proceeds of the offering to net income. The number of shares outstanding used in calculating supplemental net
ADMINISTAFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
income per share was the weighted average common shares outstanding after giving effect to the estimated number of shares that would be required to be sold in the offering to repay the debt and to repurchase the common stock and warrants.
12. ACCOUNTING CHANGES
As reflected in its previously issued financial statements for 1994, the Company changed its method of accounting for client enrollment costs and changed its method of accounting for PEO service fees and worksite employee payroll costs and in 1993 the Company changed its method of accounting for income taxes in accordance with Statement of Financial Accounting Standards ("SFAS") No. 109. In connection with the proposed initial public offering of the Company's common stock, the Company elected to retroactively restate its financial statements for these changes effective at the date of its inception.
Deferred Client Enrollment Costs
The Company changed its method of accounting for certain costs related to acquiring new business, including advertising, review, quotation, and enrollment expenses that vary with and are primarily related to the enrollment of new clients, from the deferral method to the expense method. Under the expense method, all such costs, including all advertising costs, are charged to expense as incurred. Previously, under the deferral method, all such costs were deferred and amortized using the straight-line method over a period of five years. The new method of accounting was adopted partially to comply with the requirements of Statement of Position 93-7 which requires all nondirect advertising costs to be expensed when incurred. Such expenses were a significant portion of the costs which were previously deferred. In addition, as the Company has grown, other enrollment costs have become less material as a component of operating expenses. As a result, the Company believes that expensing all enrollment costs will result in a more accurate matching of costs and revenues.
Accrual of PEO Service Fees and Worksite Employee Payroll Costs
The Company changed its method of accounting for PEO service fees and the related direct payroll costs to the accrual method. Under the accrual method, PEO service fees are recognized as unbilled revenue and the related direct payroll costs are accrued as a liability during the period in which wages are earned by the worksite employee. Previously, the Company recorded the PEO service fees and direct payroll costs in the period in which the payroll was disbursed. The new method of accounting for these fees and expenses was adopted to comply with the accrual method of accounting for revenues and expenses required by generally accepted accounting principles, for which the difference was not previously material to the financial position or results of operations of the Company.
Income Taxes
Effective January 1, 1993, the Company adopted SFAS No. 109, "Accounting for Income Taxes." As permitted, prior years financial statements have been restated.
ADMINISTAFF, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
ASSETS
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ -------------
Current assets:
Cash and cash equivalents........................................ $ 6,460 $ 9,594
Marketable securities............................................ 728 --
Accounts receivable:
Trade......................................................... 2,908 1,336
Unbilled receivables.......................................... 10,763 15,845
Related parties............................................... 720 614
Other......................................................... 379 270
Prepaid expenses................................................. 2,980 2,343
Workers' compensation deposits................................... 1,038 --
Refundable income taxes.......................................... 2,204 --
Deferred income taxes............................................ 58 --
------- -------
Total current assets..................................... 28,238 30,002
Property and equipment:
Land............................................................. 817 1,081
Buildings and improvements....................................... 2,915 6,262
Computer equipment............................................... 2,163 2,696
Furniture and fixtures........................................... 2,093 3,634
Vehicles......................................................... 705 723
Construction in progress......................................... 2,444 --
------- -------
11,137 14,396
Accumulated depreciation......................................... (2,008) (2,950)
------- -------
Total property and equipment............................. 9,129 11,446
Other assets:
Notes receivable from employees.................................. 835 1,188
Deferred financing costs......................................... 430 321
Intangible assets................................................ 599 710
Other assets..................................................... 243 1,467
------- -------
Total other assets....................................... 2,107 3,686
------- -------
Total assets............................................. $ 39,474 $45,134
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................. $ 1,487 $ 1,562
Payroll taxes and other payroll deductions payable............... 9,829 5,718
Accrued worksite employee payroll expense........................ 10,094 15,644
Accrued workers' compensation claims............................. 404 43
Other accrued liabilities........................................ 1,613 1,775
Current maturities of long-term debt............................. 74 74
Income taxes payable............................................. -- 788
Deferred income taxes............................................ -- 1,108
------- -------
Total current liabilities................................ 23,501 26,712
Noncurrent liabilities:
Accrued workers' compensation claims............................. 621 --
Other accrued liabilities........................................ -- 1,851
Deferred income taxes............................................ 58 254
Long-term debt................................................... 4,605 4,574
------- -------
Total noncurrent liabilities............................. 5,284 6,679
Commitments and contingencies Stockholders' equity:
Preferred stock.................................................. -- --
Common stock..................................................... 107 107
Additional paid-in capital....................................... 5,706 5,706
Retained earnings................................................ 4,876 5,930
------- -------
Total stockholders' equity............................... 10,689 11,743
------- -------
Total liabilities and stockholders' equity............... $ 39,474 $45,134
======= =======
|
See accompanying notes.
ADMINISTAFF, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
1995 1996
-------- --------
Revenues............................................................... $505,619 $635,252
Direct costs:
Salaries and wages of worksite employees............................. 408,379 517,820
Benefits and payroll taxes........................................... 76,964 91,307
-------- --------
Gross profit........................................................... 20,276 26,125
Operating expenses:
Salaries, wages and payroll taxes.................................... 8,055 10,475
General and administrative expenses.................................. 5,497 5,937
Commissions.......................................................... 2,908 2,939
Advertising.......................................................... 2,125 2,488
Depreciation and amortization........................................ 627 1,063
-------- --------
19,212 22,902
-------- --------
Operating income....................................................... 1,064 3,223
Other income (expense):
Interest income...................................................... 487 449
Interest expense..................................................... (514) (747)
Other, net........................................................... 27 (692)
-------- --------
-- (990)
-------- --------
Income before income taxes............................................. 1,064 2,233
Income taxes........................................................... 447 1,179
-------- --------
Net income............................................................. $ 617 $ 1,054
======== ========
Net income per share of common stock................................... $ 0.06 $ 0.10
Weighted average common shares outstanding............................. 10,757 10,862
|
See accompanying notes.
ADMINISTAFF, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 1996
(IN THOUSANDS)
(UNAUDITED)
COMMON STOCK
OUTSTANDING ADDITIONAL
---------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
------ ------ ---------- -------- -------
Balance at December 31, 1995................... 10,726 $107 $5,706 $4,876 $10,689
Net income..................................... -- -- -- 1,054 1,054
------ ---- ------ ------ -------
Balance at September 30, 1996.................. 10,726 $107 $5,706 $5,930 $11,743
====== ==== ====== ====== =======
|
See accompanying notes.
ADMINISTAFF, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
1995 1996
------- -------
Cash flows from operating activities:
Net income............................................................... $ 617 $ 1,054
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization.......................................... 778 1,231
Deferred income taxes.................................................. 2,015 1,362
Loss (gain) on disposal of assets...................................... 3 (9)
Changes in operating assets and liabilities:
Cash and cash equivalents -- restricted............................. 697 --
Accounts receivable and unbilled revenues........................... (1,527) (3,295)
Workers' compensation deposits...................................... 2,060 1,038
Prepaid expenses.................................................... (170) 637
Other assets........................................................ (27) (1,224)
Accounts payable.................................................... 488 75
Payroll taxes and other payroll deductions payable.................. (3,451) (4,111)
Accrued workers' compensation claims................................ (4,132) (982)
Other accrued liabilities........................................... 1,736 7,563
Income taxes payable (refundable)................................... (3,569) 2,992
------- -------
Total adjustments.............................................. (5,099) 5,277
------- -------
Net cash provided by (used in) operating activities............ (4,482) 6,331
------- -------
Cash flows from investing activities:
Marketable securities:
Purchases.............................................................. (2,521) --
Dispositions........................................................... 6,540 728
Purchases of property and equipment...................................... (2,349) (3,372)
Increase in intangible assets............................................ (579) (185)
Proceeds from the sale of assets......................................... 22 19
------- -------
Net cash provided by (used in) investing activities............ 1,113 (2,810)
------- -------
Cash flows from financing activities:
Long term debt and short-term borrowings:
Proceeds............................................................... -- 2,500
Repayments............................................................. (99) (2,531)
Deferred financing costs............................................... -- (3)
Loans to employees....................................................... (848) (353)
Proceeds from the exercise of stock options.............................. 397 --
------- -------
Net cash used in financing activities.......................... (550) (387)
------- -------
Net increase (decrease) in cash and cash equivalents..................... (3,919) 3,134
Cash and cash equivalents at beginning of period......................... 11,535 6,460
------- -------
Cash and cash equivalents at end of period............................... $ 7,616 $ 9,594
======= =======
Supplemental disclosures:
Cash paid for interest................................................. 514 807
Cash paid (refunds received) for income taxes.......................... 2,001 (3,175)
|
See accompanying notes.
ADMINISTAFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
Administaff, Inc. (the Company) is a professional employer organization (PEO) that provides a comprehensive personnel management system which encompasses a broad range of services, including benefits and payroll administration, medical and workers' compensation programs, tax filings, personnel records management, liability management, and other human resource services to small to medium sized businesses in several strategically selected markets.
The consolidated financial statements include the accounts of Administaff, Inc. and its wholly owned subsidiaries. Intercompany accounts and transactions have been eliminated.
During 1995, the Company completed a reorganization by which it formed Administaff of Delaware, Inc. (the Holding Company) as a wholly-owned subsidiary of the Company. At the same time, the Holding Company formed a wholly-owned subsidiary, Administaff of Texas, Inc. into which the Company merged. The stockholders of the Company exchanged shares of common stock of the Company for shares of common stock of the Holding Company at a ratio of 3-for-2. All outstanding warrants and stock options of the Company were exchanged for warrants and stock options of the Holding Company at the same exchange ratio. The Holding Company then changed its name to Administaff, Inc. The reorganization had no effect on net income. Share amounts in the consolidated financial statements and accompanying notes have been restated to reflect the 3-for-2 exchange.
The Company's consolidated balance sheet at September 30, 1996 and the consolidated statements of operations, cash flows and stockholders' equity for the interim periods ended September 30, 1996 and September 30, 1995 have been prepared by the Company without audit. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the consolidated financial position, results of operations and cash flows have been made. The results of operations for the interim periods are not necessarily indicative of the operating results for a full year or of future operations.
Per share amounts have been computed based on the weighted average number of common shares and common stock equivalents outstanding during the respective periods. Common stock equivalent shares consist of the incremental shares issuable upon the exercise of stock options and warrants (using the treasury stock or the if-converted method where applicable). Shares for which stock options were granted within a twelve month period prior to an initial public offering are treated as outstanding for all periods presented. Therefore, shares for which options were granted subsequent to September 1994 have been considered as having been outstanding for purposes of the calculation (using the treasury stock method with the offering price used for fair market value) for all periods presented. Common stock equivalent shares from stock options and warrants granted prior to twelve months preceding the initial public offering are excluded from computations if their effect is antidilutive.
Supplemental net income per share is $0.14 for the nine months ended September 30, 1996 and is determined by adding back the interest expense, net of income taxes, associated with the debt which will be retired by the proceeds of the offering, to the net income. The number of shares outstanding used in calculating supplemental net income per share was the weighted average common shares outstanding after giving effect to the estimated number of shares that would be required to be sold in the offering to repay the debt and to repurchase the common stock and warrants.
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. The accompanying
ADMINISTAFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
consolidated financial statements should be read in conjunction with the Company's audited consolidated financial statements for the year ended December 31, 1995.
2. LONG-TERM DEBT
Following is a summary of long-term debt:
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ -------------
(IN THOUSANDS)
Subordinated notes to related party........................ $4,000 $ 4,000
$610,000 note payable to bank.............................. 492 462
Mortgage note payable to developers........................ 73 73
Mortgage note payable to bank.............................. 114 113
------ ------
Total long-term debt....................................... 4,679 4,648
Less current maturities.................................... (74) (74)
------ ------
Noncurrent portion......................................... $4,605 $ 4,574
====== ======
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The subordinated notes and the $610,000 note payable require the Company to maintain certain specified financial requirements and contain other restrictions customary in lending transactions of this type. The Company has obtained a waiver of the quick ratio covenant in both agreements (a requirement covering two consecutive quarters) for the two quarters ended September 30, 1996. This waiver cures any noncompliance with the covenant as of September 30, 1996.
In October 1995 the Company's wholly-owned subsidiary, Administaff of Texas, Inc. (Administaff of Texas), entered into a $10 million revolving credit agreement (Credit Agreement) with a bank. Such Credit Agreement includes an agreement to issue standby letters of credit in an amount not to exceed a sublimit of $5 million. The Company is a guarantor under the Credit Agreement. The Credit Agreement requires the Company to maintain certain specified financial ratios and contains other restrictions customary in lending transactions of this type, including a limitation on the declaration and payment of dividends. As of September 30, 1996 the Company has no borrowings outstanding under the agreement and has $10 million available for borrowings under the agreement.
3. INCOME TAXES
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. The items resulting in deferred tax assets and liabilities include accrued workers' compensation claims, depreciation and amortization, state income taxes, client list acquisition costs, allowance for uncollectible accounts receivable, net operating loss carryforwards and other accrued liabilities.
In January and May 1996, the Internal Revenue Service approved the Company's request for a change in the method of accounting for PEO service fees and worksite employee payroll costs to the accrual method for income tax purposes. These changes were adopted for financial reporting purposes effective January 1, 1994. For PEO service fees the change was approved effective January 1, 1995 with a three year phase in period for the cumulative effect of the change. For worksite employee payroll costs, the change was approved effective January 1, 1995 with a one year phase in period for the cumulative effect of the change. As a result, the Company amended its 1995 consolidated federal income tax return to account for these changes. The Company received refunds totaling $3.5 million in May and July 1996 resulting from the original and amended federal income tax returns. Deferred income taxes at September 30, 1996 includes the effect of the three year
ADMINISTAFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
phase in for the cumulative effect of the change in accounting for PEO service fees as a component of net current and noncurrent deferred income taxes.
The Company's provision for income taxes, which includes the effects of the non-recurring charge for 401(k) Plan issues, differs from the U.S. statutory rate of 34% due primarily to certain portions of such non-recurring charge being non-deductible for income tax purposes. In addition, the Company's provision for income taxes differs from the U.S. statutory rate due to state income taxes.
4. COMMITMENTS AND CONTINGENCIES
The Company is a defendant in various lawsuits and claims arising in the normal course of business. Management believes it has valid defenses in these cases and is defending them vigorously. While the results of litigation cannot be predicted with certainty, management believes the final outcome of such litigation will not have a material adverse effect on the Company's consolidated financial position.
The Company's 401(k) plan is currently under audit by the Internal Revenue Service (the "IRS") for the year ended December 31, 1993. Although the audit is for the 1993 plan year, certain conclusions of the IRS would be applicable to subsequent years as well. In addition, the IRS has established a Market Segment Study Group on Employee Leasing for the purpose of identifying specific compliance issues prevalent in certain segments of the PEO industry. Approximately 70 PEOs, including the Company, have been randomly selected by the IRS for audit pursuant to this program. One issue that has arisen from these audits is whether a PEO can be a co-employer of worksite employees, including officers and owners of client companies, for various purposes under the Internal Revenue Code of 1986, as amended (the "Code"), including participation in the PEO's 401(k) plan. With respect to the 401(k) Plan audit, the Company understands that the IRS group conducting the audit of the Company with respect to these issues intends to seek technical advice from the IRS National Office about whether participation in the 401(k) Plan by officers of client companies is permitted under the Code (the "Technical Advice Request"). The Company also understands that, with respect to the Market Segment Study, the IRS is similarly referring to the National Office the issue of whether a PEO and a client company may be treated as co-employers of worksite employees for certain federal tax purposes (the "Industry Issue").
Whether the National Office will address the Technical Advice Request
independently of the Industry Issue is unclear. Should the IRS conclude that the
Company is not a "co-employer" of worksite employees for purposes of the Code,
worksite employees could not continue to make salary deferral contributions to
the 401(k) Plan or pursuant to the Company's cafeteria plan or continue to
participate in certain other employee benefit plans of the Company. The Company
believes that, although unfavorable to the Company, a prospective application of
such a conclusion (that is, one applicable only to periods after such a
conclusion is reached) would not have a material adverse effect on its financial
position or results of operations, as the Company could continue to make
available comparable benefit programs to its client companies at comparable cost
to the Company. However, if such conclusion were applied retroactively to
disqualify the 401(k) Plan for 1993 and subsequent years, employees' vested
account balances under the 401(k) Plan would become taxable, the Company would
lose its tax deductions to the extent its matching contributions were not
vested, the 401(k) Plan's trust would become a taxable trust and the Company
would be subject to liability with respect to its failure to withhold applicable
taxes with respect to certain contributions and trust earnings. Further, the
Company would be subject to liability, including penalties, with respect to its
cafeteria plan for the failure to withhold and pay taxes applicable to salary
deferral contributions by employees, including worksite employees. In such a
scenario, the Company also would face the risk of client dissatisfaction and
potential litigation. While, the Company is not able to predict either the
timing or the nature of any conclusions that may be reached as a result of the
401(k) Plan audit or the Market Segment Study, the Company believes that a
retroactive application of an unfavorable determination is unlikely. The Company
ADMINISTAFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
also believes that a prospective application of an unfavorable determination will not have a material adverse effect on the Company's consolidated financial position or results of operations.
In addition to the 401(k) Plan audit and Market Segment Study, the Company notified the IRS of certain operational issues concerning nondiscrimination test results for certain prior plan years. In 1991 the Company engaged a third party vendor to be the 401(k) Plan's record keeper and to perform certain required annual nondiscrimination tests for the 401(k) Plan. Each year such record keeper reported to the Company that such nondiscrimination tests had been satisfied. However, in August 1996 the 401(k) Plan's record keeper advised the Company that certain of these tests had been performed incorrectly for prior years and, in fact, that the 401(k) Plan had failed certain tests for the 1993, 1994 and 1995 plan years. The Company has subsequently determined that the 401(k) Plan also failed a nondiscrimination test for 1991, a closed year for tax purposes. At the time the Company received such notice, the period in which the Company could voluntarily "cure" an operational defect had lapsed for all such years, except 1995.
With respect to the 1995 plan year, the Company is still within the time allowable to correct the testing failure. Such correction involves refunding, from the plan, the excess contributions and earnings thereon to the affected employees. In connection with this correction, the Company has accrued approximately $51,000 for an excise tax applicable to this plan year. With respect to all other plan years, the Company has proposed a corrective action to the IRS under which the Company would make additional contributions to certain plan participants which bring the plan into compliance with the discrimination tests.
The Company has recorded an accrual for its estimate of the cost of corrective measures and penalties for all of the affected plan years, which accrual is reflected in Other accrued liabilities -- noncurrent on the Consolidated Balance Sheet. The Company calculated its estimates based on its understanding of the resolution of similar issues with the IRS. Separate calculations were made to determine the Company's estimate of both the cost of corrective measures and penalties for each plan year. In addition, the Company has recorded an asset for an amount recoverable from the 401(k) Plan's record keeper should the Company ultimately be required to pay the amount accrued for such corrective measures and penalties, which amount is reflected in Other assets on the Consolidated Balance Sheet. The amount of the accrual is the Company's estimate of the cost of corrective measures and practices, although no assurance can be given that the actual amount that the Company may be ultimately required to pay will not substantially exceed the amount accrued. The net of these amounts is reflected on the Company's Consolidated Statement of Operations as a component of other income (expense), net, and their tax effect is included in the provision for income taxes. Based on its understanding of the settlement experience of other companies with the IRS, the Company does not believe the ultimate resolution of this 401(k) Plan matter will have a material adverse effect on the Company's financial condition or results of operations.
5. RELATED PARTY TRANSACTIONS
In connection with an exercise of stock options in 1995, the Company entered into a loan agreement with an officer, whereby the Company paid certain federal income tax withholding requirements related to the stock option exercise on behalf of the officer in the amount of $694,000. The loan agreement called for an additional amount to be advanced to the officer in the event the ultimate tax liability resulting from the exercise exceeded the statutory withholding requirements. In April 1996, the Company loaned the officer an additional $300,000 relating to this transaction. The loans are repayable in five years, accrue interest at 6.83%, and are secured by 448,667 shares of the Company's common stock.
In April 1996, the Company entered into a settlement agreement relating to litigation in which the Company and Technology and Business Consultants, Inc. ("TBC") were co-defendants. TBC is a company whose stockholders are three directors/officers of the Company. In accordance with the settlement agreement, $285,000 was paid to the plaintiff. The Company paid the entire amount of the settlement; however, TBC has agreed to reimburse the Company for the entire amount of the settlement not recovered through the
ADMINISTAFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
Company's general liability insurance. In August 1996, the Company received $113,000 pursuant to such coverage. The remaining $172,000 is expected to be reimbursed by TBC prior to the end of 1996.
In October 1996 the Company purchased various computer equipment from TBC at a total cost of $209,000.
6. INITIAL PUBLIC OFFERING
The Company remains in registration with the Securities and Exchange Commission for the offering of up to 3,450,000 shares of its common stock. The timetable of the proposed offering is uncertain; however, the Company filed an amendment to its registration statement in October 1996, responding to comments from its initial filing and updating all information to September 30, 1996. The Company has incurred costs totaling $1.1 million through September 30, 1996 related to the offering which are included in prepaid expenses on the consolidated balance sheet. Upon consummation of the offering, such costs will be reflected as a reduction to stockholders' equity.
[Graphic depiction of traditional small business/employee relationship which presents each of the responsibilities of the employer. A second graphic depicts the three party relationship between a small business, the employee and the Company as well as the division of responsibilities between the Company and the small business owner.]
[ADMINISTAFF LOGO]
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION(1)
SEC Registration Fee.................................... $ 15,518
NASD Filing Fee......................................... 5,000
NYSE Listing Fee........................................ *
Accounting Fees and Expenses............................ *
Legal Fees and Expenses................................. *
Printing Expenses....................................... *
Blue Sky Qualification Fees and Expenses................ *
Transfer Agent's Fees................................... *
Miscellaneous........................................... *
--------
TOTAL......................................... $ *
========
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(1) The amounts set forth above, except for the SEC, NASD and NYSE fees, are in
each case estimated.
* To be completed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Subsection (a) of section 145 of the General Corporation Law of the State of Delaware empowers a corporation to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation) by reason of the fact that he is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful.
Subsection (b) of Section 145 empowers a corporation to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that such person acted in any of the capacities set forth above, against expenses (including attorneys' fees) actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, except that no indemnification may be made in respect of any claim, issue or matter as to which such person shall have been made to be liable to the corporation unless and only to the extent that the Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper.
Section 145 further provides that to the extent a director or officer of a corporation has been successful on the merits or otherwise in the defense of any action, suit or proceeding referred to in subsections (a) and (b) of Section 145 in the defense of any claim, issue or matter therein, he shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by him in connection therewith; that indemnification provided for by Section 145 shall not be deemed exclusive of any other rights to which the indemnified party may be entitled; that indemnification provided for by Section 145 shall, unless otherwise provided when authorized or ratified, continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of such person's heirs, executors and administrators; and empowers the
II-1
corporation to purchase and maintain insurance on behalf of a director or officer of the corporation against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such whether or not the corporation would have the power to indemnify him against such liabilities under Section 145.
Section 102(b)(7) of the General Corporation Law of the State of Delaware
provides that a certificate of incorporation may contain a provision eliminating
or limiting the personal liability of a director to the corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director
provided that such provision shall not eliminate or limit the liability of a
director (i) for any breach of the director's duty of loyalty to the corporation
or its stockholders, (ii) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, (iii) under
Section 174 of the Delaware General Corporation Law, or (iv) for any transaction
from which the director derived an improper personal benefit.
Article Eleventh of the Company's Certificate of Incorporation states that:
No director of the Corporation shall be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty by such director as a director; provided, however, that this Article
Eleventh shall not eliminate or limit the liability of a director to the extent
provided by applicable law (i) for any breach of the director's duty of loyalty
to the Corporation or its stockholders, (ii) for acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law,
(iii) under Section 174 of the General Corporation Law of the State of Delaware
or (iv) for any transaction from which the director derived an improper personal
benefit. No amendment to or repeal of this Article Eleventh shall apply to, or
have any effect on, the liability or alleged liability of any director of the
Corporation for or with respect to any facts or omissions of such director
occurring prior to such amendment or repeal. If the General Corporation Law of
the State of Delaware is amended to authorize corporate action further
eliminating or limiting the personal liability of directors, then the liability
of a director of the Corporation shall be eliminated or limited to the fullest
extent permitted by the General Corporation Law of the State of Delaware, as so
amended.
In addition, Article VI of the Company's Bylaws further provides that the Company shall indemnify its officers, directors and employees to the fullest extent permitted by law.
Pursuant to the Underwriting Agreement filed as Exhibit 1.1 to this Registration Statement, the Underwriters have agreed to indemnify, under certain conditions, the Company, its officers and directors, and persons who control the Company within the meaning of the Securities Act of 1933, as amended, against certain liabilities.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Set forth below is certain information concerning all sales of securities by the Company during the past three years that were not registered under the Securities Act of 1933. The description presented below gives effect to the Company's recent reorganization and accompanying two for three share exchange.
(a) On May 13, 1994, the Company issued $4 million principal amount of subordinated notes and stock purchase warrants representing the right to purchase 694,436 shares of Common Stock of the Company to the Texas Growth Fund, in exchange for an aggregate purchase price of $4 million.
(b) On May 13, 1994, the Company issued 1,532,303 shares of its Common Stock at a price of $2.61 per share to Pyramid Ventures, Inc., in exchange for an aggregate purchase price of $4 million.
(c) On May 13, 1994, the Company issued a stock purchase warrant entitling the holder to purchase up to 153,230 shares of the Company's Common Stock to Rauscher Pierce Refsnes, Inc. ("Rauscher"), in exchange for $100.00 and Rauscher's services in securing the TGF and Pyramid investments described in paragraphs (a) and (b) of this item.
(d) On June 12, 1995, Mr. Rawson exercised options to purchase 448,667 shares of Common Stock at a price of $0.75 per share. The aggregate exercise price of $336,500 was paid in cash by Mr. Rawson.
II-2
(e) On September 15, 1995, Mr. Broussard exercised options to purchase 40,000 shares of Common Stock at a price of $1.50 per share. The aggregate exercise price of $60,000 was paid in cash by Mr. Broussard.
These transactions were completed without registration under the Securities Act of 1933 in reliance on the exemption provided by Section 4(2) of the Securities Act of 1933.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
EXHIBIT DESCRIPTION
------- -----------
*1.1 -- Form of Underwriting Agreement.
*3.1 -- Certificate of Incorporation.
*3.2 -- Bylaws.
**4.1 -- Specimen Common Stock Certificate.
*4.2 -- Registration Rights Agreement, as amended, dated May 13, 1994, by and
among Administaff, Inc., Pyramid Ventures, Inc. and the Board of
Trustees of the Texas Growth Fund as Trustee for the Texas Growth
Fund-1991 Trust.
*4.3 -- Investor Agreement, as amended, dated May 13, 1994, by and among
Administaff, Inc., Pyramid Ventures, Inc. and the Board of Trustees
of the Texas Growth Fund as Trustee for the Texas Growth Fund-1991
Trust.
*4.4 -- Common Stock Warrant, as amended, issued to the Texas Growth
Fund-1991 Trust on May 13, 1994.
*4.5 -- Warrant Agreement, as amended, dated May 13, 1994, between Rauscher
Pierce Refsnes, Inc. and Administaff, Inc.
*4.6 -- Voting Agreement, as amended, dated May 13, 1994, by and among
Administaff, Inc., Pyramid Ventures, Inc., the Board of Trustees of
the Texas Growth Fund as Trustee for the Texas Growth Fund-1991 Trust
and certain stockholders of Administaff, Inc.
**4.7 -- Subordinated Note of Administaff, Inc. in favor of The Board of
Trustees of the Texas Growth Fund, as Trustee.
**5.1 -- Opinion of Andrews & Kurth L.L.P. as to the legality of the
securities being registered.
***10.1 -- Promissory Note dated June 22, 1995, between Administaff, Inc. and
Richard G. Rawson.
***10.2 -- Promissory Note dated September 15, 1995, between Administaff, Inc.
and Jerald L. Broussard.
**10.3 -- Credit agreement between Administaff, Inc. and First National Bank of
Chicago, dated as of October 16, 1995.
**10.4 -- Amendment No. 1 and Waiver to Credit Agreement, dated as of March 12,
1996.
**11.1 -- Statement re: Computation of Per Share Earnings.
*21.1 -- Subsidiaries of Administaff, Inc.
23.1 -- Consent of Andrews & Kurth L.L.P. (included in Exhibit 5.1).
**23.2 -- Consent of Ernst & Young LLP.
*24.1 -- Powers of Attorney.
*24.2 -- Power of Attorney of Paul S. Lattanzio.
*24.3 -- Power of Attorney of Linda Fayne Levinson.
*24.4 -- Power of Attorney of Stephen M. Soileau.
*27.1 -- Financial Data Schedule
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* Previously filed as an Exhibit to this Registration Statement.
** Filed with this Amendment.
*** To be filed by Amendment.
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Pursuant to Item 601(b)(4)(iii) of Regulation S-K, the Company has not filed any instrument with respect to long-term debt not being registered if the total amount of securities authorized thereunder does not exceed 10 percent of the total assets of the Company and agrees to file a copy of such instruments with the Commission upon request.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act, and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes:
(1) That for purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective.
(2) That for the purpose of determining any liability under the Securities Act of 1933, each posteffective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
(3) To provide to the underwriters at the closing specified in the underwriting agreement certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser.
II-4
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Amendment No. 3 to Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized in the City of Houston, State of Texas, on November 27, 1996.
ADMINISTAFF, INC.
By: /s/ RICHARD G. RAWSON
------------------------------------
Richard G. Rawson
Senior Vice President, Chief
Financial Officer and Treasurer
|
Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities indicated on November 27, 1996.
SIGNATURE TITLE
--------- -----
/s/ PAUL J. SARVADI* President, Chief Executive Officer and
- -------------------------------------------- Director (Principal Executive Officer)
Paul J. Sarvadi
/s/ RICHARD G. RAWSON Senior Vice President, Chief Financial
- -------------------------------------------- Officer, Treasurer and Director (Principal
Richard G. Rawson Financial Officer and Principal Accounting
Officer)
/s/ WILLIAM E. LANGE* Senior Vice President, General Counsel,
- -------------------------------------------- Secretary and Director
William E. Lange
/s/ GERALD M. McINTOSH* Senior Vice President and Director
- --------------------------------------------
Gerald M. McIntosh
/s/ JAMES W. HAMMOND* Senior Vice President and Director
- --------------------------------------------
James W. Hammond
/s/ SCOTT C. HENSEL* Senior Vice President and Director
- --------------------------------------------
Scott C. Hensel
/s/ LINDA FAYNE LEVINSON* Director
- --------------------------------------------
Linda Fayne Levinson
/s/ PAUL S. LATTANZIO* Director
- --------------------------------------------
Paul S. Lattanzio
/s/ STEPHEN M. SOILEAU* Director
- --------------------------------------------
Stephen M. Soileau
*By: /s/ RICHARD G. RAWSON
----------------------------------------
Richard G. Rawson
(Attorney-in-fact for persons indicated)
|
II-5
INDEX TO EXHIBIT
EXHIBIT DESCRIPTION
------- -----------
*1.1 -- Form of Underwriting Agreement.
*3.1 -- Certificate of Incorporation.
*3.2 -- Bylaws.
**4.1 -- Specimen Common Stock Certificate.
*4.2 -- Registration Rights Agreement, as amended, dated May 13, 1994, by and
among Administaff, Inc., Pyramid Ventures, Inc. and the Board of
Trustees of the Texas Growth Fund as Trustee for the Texas Growth
Fund-1991 Trust.
*4.3 -- Investor Agreement, as amended, dated May 13, 1994, by and among
Administaff, Inc., Pyramid Ventures, Inc. and the Board of Trustees
of the Texas Growth Fund as Trustee for the Texas Growth Fund-1991
Trust.
*4.4 -- Common Stock Warrant, as amended, issued to the Texas Growth
Fund-1991 Trust on May 13, 1994.
*4.5 -- Warrant Agreement, as amended, dated May 13, 1994, between Rauscher
Pierce Refsnes, Inc. and Administaff, Inc.
*4.6 -- Voting Agreement, as amended, dated May 13, 1994, by and among
Administaff, Inc., Pyramid Ventures, Inc., the Board of Trustees of
the Texas Growth Fund as Trustee for the Texas Growth Fund-1991 Trust
and certain stockholders of Administaff, Inc.
**4.7 -- Subordinated Note of Administaff, Inc. in favor of The Board of
Trustees of the Texas Growth Fund, as Trustee.
**5.1 -- Opinion of Andrews & Kurth L.L.P. as to the legality of the
securities being registered.
***10.1 -- Promissory Note dated June 22, 1995, between Administaff, Inc. and
Richard G. Rawson.
***10.2 -- Promissory Note dated September 15, 1995, between Administaff, Inc.
and Jerald L. Broussard.
**10.3 -- Credit agreement between Administaff, Inc. and First National Bank of
Chicago, dated as of October 16, 1995.
**10.4 -- Amendment No. 1 and Waiver to Credit Agreement, dated as of March 12,
1996.
**11.1 -- Statement re: Computation of Per Share Earnings.
*21.1 -- Subsidiaries of Administaff, Inc.
23.1 -- Consent of Andrews & Kurth L.L.P. (included in Exhibit 5.1).
**23.2 -- Consent of Ernst & Young LLP.
*24.1 -- Powers of Attorney.
*24.2 -- Power of Attorney of Paul S. Lattanzio.
*24.3 -- Power of Attorney of Linda F. Levinson.
*24.4 -- Power of Attorney of Stephen M. Soileau.
*27.1 -- Financial Data Schedule
|
* Previously filed as an Exhibit to this Registration Statement.
** Filed with this Amendment.
*** To be filed by Amendment.
INCORPORATED UNDER THE EXHIBIT 4.1
LAWS OF THE STATE OF DELAWARE COMMON STOCK
PAR VALUE $0.01
NUMBER_______ ADMINISTAFF _______ SHARES
THIS CERTIFICATE IS CUSIP 007094 10 5
TRANSFERABLE IN SEE REVERSE FOR CERTAIN
HOUSTON, TEXAS; DEFINITIONS
CLEVELAND, OHIO; OR
NEW YORK, NEW YORK
|
ADMINISTAFF, INC.
THIS CERTIFIES THAT
is the owner of
FULLY PAID AND NON-ASSESSABLE
SHARES OF COMMON STOCK OF
Administaff, Inc. transferable on the books of the Corporation by the holder hereof in person or by a duly authorized attorney upon surrender of this certificate properly endorsed. This certificate is not valid until countersigned by the Transfer Agent and registered by the Registrar.
Witness the seal of the Corporation and the signatures of its duly authorized officers.
Dated:
PRESIDENT
SECRETARY
Countersigned and Registered:
KEYCORP SHAREHOLDER SERVICES, INC.
Transfer Agent and Registrar
ADMINISTAFF, INC.
The Corporation will furnish to any shareholder, upon request and without charge, a statement of the powers, designations, relative rights, preferences and limitations of each class of stock or series thereof of the Corporation and the qualifications, limitations, or restrictions of such preferences and/or rights. Such request may be made to the Corporation or the Transfer Agent.
The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations:
TEN COM - as tenants in common UNIF GIFT MIN ACT - Custodian
TEN ENT - as tenants by the entireties ----- -----
JT TEN - as joint tenants with right of (Cust) (Minor)
survivorship and not as tenants under Uniform Gifts to
in common Minors Act
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(State)
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Additional abbreviations may also be used though not in the above list.
For Value Received, hereby sell, assign and transfer unto ------------------------
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
Dated,
--------------------------------- x
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NOTICE: THE SIGNATURE(S) TO (Signature)
THIS ASSIGNMENT MUST CORRESPOND
WITH THE NAME(S) AS WRITTEN UPON
THE FACE OF THE CERTIFICATE IN EVERY
PARTICULAR, WITHOUT ALTERATION OR
ENLARGEMENT OR ANY CHANGE
WHATEVER.
x
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(Signature)
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THE SIGNATURE(S) SHOULD BE
GUARANTEED BY AN ELIGIBLE
GUARANTOR INSTITUTION (BANKS,
STOCKBROKERS, SAVINGS AND LOAN
ASSOCIATIONS AND CREDIT UNIONS
WITH MEMBERSHIP IN AN APPROVED
SIGNATURE GUARANTEE MEDALLION
PROGRAM), PURSUANT TO S.E.C.
RULE 17Ad-18.
SIGNATURE(S) GUARANTEED BY:
EXHIBIT 4.7
ADMINISTAFF, INC.
13% SUBORDINATED NOTE DUE MAY 13, 1999
$4,000,000 MAY 13, 1994
FOR VALUE RECEIVED, the undersigned, Administaff, Inc. (herein called the "Company"), a corporation organized and existing under the laws of the State of Texas, hereby promises to pay to The Board of Trustees of The Texas Growth Fund, as Trustee for the Texas Growth Fund - 1991 Trust ("TGF"), or its registered assigns, the principal sum of Four Million Dollars ($4,000,000) together with interest thereon (computed on the basis of a 360-day year of twelve 30-day months) at the rate of 13% per annum payable as provided below; provided, however, that, for purposes of (i) the interest payment for the partial period ending June 30, 1994 shall be calculated based on a 365-day year and (ii) any prepayment of principal, accrued interest payable with respect thereto shall be calculated based on a 365-day year.
The Company shall pay accrued interest on the outstanding principal balance hereof on the last day of March, June, September and December of each year commencing on June 30, 1994, and continuing until May 13, 1999, when this Note shall mature and the principal balance hereof along with all accrued and unpaid interest shall be due.
Payments of principal and interest are to be made at the office of TGF Management Corp., 100 Congress Avenue, Suite 980, Austin, Texas 78701, or such other place as the holder hereof shall designate to the Company in writing, in lawful money of the United States of America.
All amounts paid hereunder shall be applied first to all interest then accrued and unpaid hereunder, and the balance, if any, to principal. All past due principal and interest on this Note shall bear interest at 13% per annum from the due date thereof until paid.
This Subordinated Note is issued pursuant to a Securities Purchase Agreement dated as of May 13, 1994, between the Company and TGF (the "Agreement"), and the holder hereof is entitled to the benefits thereof and subject to the restrictions on transfer contained therein. In addition, the holder hereof may be entitled to certain rights pursuant to the Voting Agreement (as defined in the Agreement).
The sale or other transfer of this Subordinated Note is restricted by the Company's right of first refusal as described in the Agreement.
The payment of this Subordinated Note is subordinated to the prior payment of Senior Debt (as defined in the Agreement) under the circumstances described in the Agreement and in that certain Subordination Agreement effective as of May 13, 1994 by TGF and the Company in favor of Texas Commerce Bank National Association.
Upon the satisfaction of the conditions set forth in the Agreement and subject to the other terms and conditions of the Agreement, the Company may prepay this Subordinated Note in whole or in part, plus accrued interest thereon, as provided in the Agreement. The Company agrees to make any prepayments of principal that may be required pursuant to the terms of the Agreement on the dates and in the amounts specified in the Agreement.
In addition, this Subordinated Note is subject to mandatory prepayment of the full principal amount then owing, plus accrued interest, upon the occurrence of certain events set forth in the Agreement.
In case an Event of Default (as defined in the Agreement) shall occur and be continuing, the principal of this Subordinated Note may be declared or otherwise become due and payable in the manner and with the effect provided in the Agreement.
The Company hereby waives presentment and demand for payment, notice of intent to accelerate maturity, notice of acceleration of maturity, protest or notice of protest and nonpayment, bringing of suit and diligence in taking any action to collect any sums owing hereunder and in proceeding against any of the rights and properties securing payment hereof, and agrees that its liability on this Subordinated Note shall not be affected by any release of or change in any security for the payment of this Subordinated Note.
It is expressly stipulated and agreed to be the intent of the Company and the registered holder hereof to at all times comply with the usury and other laws applicable to this Subordinated Note and any instruments securing the payment hereof (the "Security Instruments") and any subsequent revisions, repeals, or judicial interpretations thereof, to the extent any of the same are applicable hereto. If any amount called for under this Subordinated Note or under any of the Security Instruments, or contracted for, charged, or received with respect to the indebtedness evidenced by this Subordinated Note, or if the exercise of the option herein contained to accelerate the maturity of this Subordinated Note or any prepayment by the Company results in the Company having paid any interest in excess of that permitted by law, then it is the express intent of the Company and the registered holder hereof that all excess amounts theretofore collected by the registered holder hereof be credited on the principal balance of this Subordinated Note (or, if this Subordinated Note has been paid in full, refunded to the Company), and the provisions of this Subordinated Note and the Security Instruments immediately be deemed reformed and the amounts thereafter collectable hereunder and thereunder reduced, without the necessity of the execution of any new document, so as to comply with the then applicable law, but so as to permit the recovery of the fullest amount otherwise called for hereunder and thereunder.
ADMINISTAFF, INC.
By: /s/ PAUL J. SARVADI
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Paul J. Sarvadi
Title:
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EXHIBIT 5.1
[LETTERHEAD OF ANDREWS & KURTH L.L.P.]
November 27, 1996
Board of Directors
Administaff, Inc.
19001 Crescent Springs Drive
Kingwood, Texas 77339-3802
Gentlemen:
We have acted as counsel for Administaff, Inc., a Delaware corporation (the "Company"), in connection with the Company's Registration Statement on Form S-1 (the "Registration Statement") relating to the registration under the Securities Act of 1933, as amended, of the offering and sale of up to an aggregate of 3,450,000 shares (the "Shares") of common stock of the Company, $.01 par value per share (the "Common Stock"). The Shares include 3,000,000 shares being offered by the Company and 450,000 shares of Common Stock which may be sold pursuant to an over-allotment option granted to the Underwriters named in the Registration Statement by the selling stockholders (the "Selling Stockholders") identified in the Registration Statement.
As the basis for the opinion hereinafter expressed, we have examined such statutes, regulations, corporate records and documents, certificates of corporate and public officials, and other instruments as we have deemed necessary or advisable for the purposes of this opinion. In such examination we have assumed the authenticity of all documents submitted to us as originals and the conformity with the original documents of all documents submitted to us as copies.
Based on the foregoing and on such legal considerations as we deem relevant, we are of the opinion that:
1. The Shares to be issued by the Company will, when issued and paid for as described in the Registration Statement, be validly issued, fully paid and non-assessable.
Administaff, Inc.
November 27, 1996
2. The Shares to be sold by the Selling Stockholders as described in the Registration Statement are validly issued, fully paid and non- assessable.
We hereby consent to the use of this opinion as an exhibit to the Registration Statement and the reference to our firm under the caption "Legal Matters" therein.
Very truly yours,
ANDREWS & KURTH L.L.P.
EXHIBIT 10.3
CREDIT AGREEMENT
AMONG
ADMINISTAFF, INC.
THE LENDERS PARTY HERETO,
AND
THE FIRST NATIONAL BANK OF CHICAGO,
AS AGENT
Dated as of October 16, 1995
TABLE OF CONTENTS
ARTICLE I - DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
ARTICLE II - THE CREDITS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
2.1. Commitment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
2.2. Ratable Loans; Types of Advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
2.3. Minimum Amount of Each Advance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
2.4. Applicable Margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
2.5. Fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
2.5.1 Commitment Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
2.5.2. Agent's Fee. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
2.6. Reductions in Aggregate Commitment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
2.7. Principal Payments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
2.7.1. Optional Principal Payments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
2.7.2. Payment on Termination Date. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
2.8. Method of Selecting Types and Interest Periods for New Advances . . . . . . . . . . . . . . . . . 12
2.9. Conversion and Continuation of Outstanding Advances . . . . . . . . . . . . . . . . . . . . . . . 13
2.10. Changes in Interest Rate, etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
2.11. Rates Applicable After Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
2.12. Method of Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
2.13. Notes; Telephonic Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
2.14. Interest Payment Dates; Interest and Fee Basis . . . . . . . . . . . . . . . . . . . . . . . . . . 14
2.15. Notification by Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
2.16. Lending Installations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
2.17. Non-Receipt of Funds by the Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
2.18. Withholding Tax Exemption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
2.19. Extension of Termination Date. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
ARTICLE III - THE LETTER OF CREDIT SUBFACILITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
3.1. Obligation to Issue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
3.2. Types and Amounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
3.3. Conditions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
3.4. Procedure for Issuance of Facility Letters of Credit . . . . . . . . . . . . . . . . . . . . . . . 17
3.5. Reimbursement Obligations; Duties of Issuing Banks . . . . . . . . . . . . . . . . . . . . . . . . 18
3.6. Participation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
3.7. Payment of Reimbursement Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
3.8. Compensation for Facility Letters of Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
3.9. Letter of Credit Collateral Account. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
ARTICLE IV - CHANGE IN CIRCUMSTANCES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
4.1. Yield Protection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
4.2. Changes in Capital Adequacy Regulations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
4.3. Availability of Types of Advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
4.4. Funding Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
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4.5. Lender Statements; Survival of Indemnity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
ARTICLE V - CONDITIONS PRECEDENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
5.1. Initial Advance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
5.2. Each Advance or Issuance of a Facility Letter of Credit . . . . . . . . . . . . . . . . . . . . . 24
ARTICLE VI - REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
6.1. Corporate Existence and Standing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
6.2. Authorization and Validity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
6.3. No Conflict; Government Consent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
6.4. Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
6.5. Material Adverse Change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
6.6. Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
6.7. Litigation and Contingent Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
6.8. Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
6.9. ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
6.10. Accuracy of Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
6.11. Regulation U . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
6.12. Material Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
6.13. Compliance With Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
6.14. Ownership of Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
6.15. Investment Company Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
6.16. Public Utility Holding Company Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
6.17. Subordinated Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
6.18. Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
ARTICLE VII - COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
7.1. Financial Reporting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
7.2. Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
7.3. Notice of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
7.4. Conduct of Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
7.5. Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
7.6. Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
7.7. Compliance with Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
7.8. Maintenance of Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
7.9. Inspection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
7.10. Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
7.11. Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
7.12. Mergers and Consolidations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
7.13. Sale of Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
7.14. Sale of Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
7.15. Sale and Leaseback . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
7.16. Investments and Acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
7.16.1. Investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
7.16.2. Acquisitions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
7.17. Liens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
7.18. Affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
7.19. Subordinated Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
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7.20. Financial Undertakings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
7.21. Financial Covenants. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
7.21.1. Leverage Ratio. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
7.21.2. Fixed Charge Coverage Ratio. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
7.21.3. Tangible Net Worth. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
7.22. Interim Period. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
7.23. Guaranty of Holdings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
ARTICLE VIII - DEFAULTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
ARTICLE IX - ACCELERATION, WAIVERS, AMENDMENTS AND REMEDIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
9.1. Acceleration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
9.2. Amendments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
9.3. Preservation of Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
ARTICLE X - GENERAL PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
10.1. Survival of Representations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
10.2. Governmental Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
10.3. Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
10.4. Headings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
10.5. Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
10.6. Several Obligations; Benefits of this Agreement . . . . . . . . . . . . . . . . . . . . . . . . . 40
10.7. Expenses; Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
10.8. Numbers of Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
10.9. Accounting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
10.10. Severability of Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
10.11. Nonliability of Lenders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
10.12. Interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
10.13. CHOICE OF LAW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
10.14. CONSENT TO JURISDICTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
10.15. WAIVER OF JURY TRIAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
10.16. Confidentiality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
ARTICLE XI - THE AGENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
11.1. Appointment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
11.2. Powers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
11.3. General Immunity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
11.4. No Responsibility for Loans, Recitals, etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
11.5. Action on Instructions of Lenders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
11.6. Employment of Agents and Counsel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
11.7. Reliance on Documents; Counsel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
11.8. Agent's Reimbursement and Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
11.9. Rights as a Lender . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
11.10. Lender Credit Decision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
11.11. Successor Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
ARTICLE XII - SETOFF; RATABLE PAYMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
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12.1. Setoff . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
12.2. Ratable Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
ARTICLE XIII - BENEFIT OF AGREEMENT; ASSIGNMENTS; PARTICIPATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . 45
13.1. Successors and Assigns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
13.2. Participations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
13.2.1. Permitted Participants; Effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
13.2.2. Voting Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
13.2.3. Benefit of Setoff . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
13.3. Assignments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
13.3.1. Permitted Assignments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
13.3.2. Effect; Effective Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
13.4. Dissemination of Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
13.5. Tax Treatment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
ARTICLE XIV - NOTICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
14.1. Giving Notice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
14.2. Change of Address . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
ARTICLE XV - COUNTERPARTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
EXHIBITS
--------
EXHIBIT "A" - NOTE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
EXHIBIT "B-1" - FORM OF OPINION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
EXHIBIT "B-2" - FORM OF OPINION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
EXHIBIT "C" - COMPLIANCE CERTIFICATE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
EXHIBIT "D" - ASSIGNMENT AGREEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
EXHIBIT "E" - LOAN/CREDIT RELATED MONEY TRANSFER INSTRUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
EXHIBIT "F" - GUARANTY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
EXHIBIT "G" - SUBORDINATED NOTE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76
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SCHEDULES
SCHEDULE "1" - PERCENTAGES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82 SCHEDULE "2" - SUBSIDIARIES AND OTHER INVESTMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83 SCHEDULE "3" - INDEBTEDNESS AND LIENS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84 SCHEDULE "4" - AFFILIATE TRANSACTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85 SCHEDULE "5" - LITIGATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86 |
CREDIT AGREEMENT
This Agreement, dated as of October 16, 1995, is among Administaff, Inc., the Lenders and The First National Bank of Chicago, as Agent. The parties hereto agree as follows:
ARTICLE I
DEFINITIONS
As used in this Agreement:
"Acquisition" means any transaction, or any series of related transactions, consummated on or after the date of this Agreement, by which the Borrower or any of its Subsidiaries (i) acquires any going business or all or substantially all of the assets of any firm, corporation or division thereof, whether through purchase of assets, merger or otherwise or (ii) directly or indirectly acquires (in one transaction or as the most recent transaction in a series of transactions) at least a majority (in number of votes) of the securities of a corporation which have ordinary voting power for the election of directors (other than securities having such power only by reason of the happening of a contingency) or a majority (by percentage or voting power) of the outstanding partnership interests of a partnership.
"Acquisition Corp." means Administaff of Texas, Inc., a Texas corporation, which is a Wholly-Owned Subsidiary of Holdings, and its successors and assigns.
"Adjusted Earnings" means, for any period, earnings before interest expense, income taxes, rental expense and extraordinary items, all determined on a consolidated basis for the Borrower and its Subsidiaries in accordance with Agreement Accounting Principles.
"Advance" means a borrowing hereunder consisting of the aggregate amount of the several Loans made by the Lenders to the Borrower of the same Type and, in the case of Eurodollar Advances, for the same Interest Period.
"Affiliate" of any Person means any other Person directly or indirectly controlling, controlled by or under common control with such Person. A Person shall be deemed to control another Person if the controlling Person owns 10% or more of any class of voting securities (or other ownership interests) of the controlled Person or possesses, directly or indirectly, the power to direct or cause the direction of the management or policies of the controlled Person, whether through ownership of stock, by contract or otherwise.
"Agent" means The First National Bank of Chicago in its capacity as agent for the Lenders pursuant to Article XI, and not in its individual capacity as a Lender, and any successor Agent appointed pursuant to Article XI.
"Aggregate Available Commitment" means at any time the Aggregate Commitment minus the Facility Letter of Credit Obligations.
"Aggregate Commitment" means $10,000,000, as such amount may be reduced from time to time pursuant to the terms hereof.
"Agreement" means this Credit Agreement, as it may be amended or modified and in effect from time to time.
"Agreement Accounting Principles" means generally accepted accounting principles as in effect from time to time, applied in a manner consistent with that used in preparing the financial statements referred to in Section 6.4.
"Alternate Base Rate" means, for any day, a rate of interest per annum equal to the higher of (i) the Corporate Base Rate for such day and (ii) the sum of the Federal Funds Effective Rate for such day plus 1/2% per annum.
"Alternate Base Rate Advance" means an Advance which bears interest at the Alternate Base Rate.
"Alternate Base Rate Loan" means a Loan which bears interest at the Alternate Base Rate.
"Applicable Margin" means, at any date of determination thereof with
respect to any Eurodollar Advance, the commitment fees payable pursuant to
Section 2.5.1 and the Facility Letter of Credit Fees, the respective rates per
annum for such Eurodollar Advances, commitment fees and Letter of Credit Fees
calculated in accordance with the terms of Section 2.4.
"Article" means an article of this Agreement unless another document is specifically referenced.
"Assignment Agreement" is defined in Section 13.3.1.
"Authorized Officer" means any of the President, the Chief Executive Officer or the Chief Financial Officer of the Borrower, acting singly.
"Borrower" means Administaff, Inc., a Texas corporation (which, after the Merger, if any, shall change its name to Administaff of Texas, Inc.), and its successors and assigns.
"Borrowing Date" means a date on which an Advance is made hereunder.
"Borrowing Notice" is defined in Section 2.8.
"Business Day" means (i) with respect to any borrowing, payment or rate selection of Eurodollar Advances, a day (other than a Saturday or Sunday) on which banks generally are open in Chicago and New York for the conduct of substantially all of their commercial lending activities and on which dealings in United States dollars are carried on in the London interbank market and (ii) for all other purposes, a day (other than a Saturday or Sunday) on which banks generally are open in Chicago for the conduct of substantially all of their commercial lending activities.
"Capitalized Lease" of a Person means any lease of Property by such Person as lessee which would be capitalized on a balance sheet of such Person prepared in accordance with Agreement Accounting Principles.
"Capitalized Lease Obligations" of a Person means the amount of the obligations of such Person under Capitalized Leases which would be shown as a liability on a balance sheet of such Person prepared in accordance with Agreement Accounting Principles.
"Change in Control" means:
(i) prior to the Merger, if any, James W. Hammond, Scott C. Hensel, William E. Lange, Gerald M. McIntosh, Richard G. Rawson and Paul J. Sarvadi (collectively, the "Permitted Holders" and individually, a "Permitted Holder") shall cease to own, in the aggregate, free and clear of all Liens or other encumbrances, at least 51% of the outstanding shares of voting stock of the Borrower on a fully diluted basis;
(ii) after the Merger, if any, and before the Initial Public Offering, if any, (a) Holdings shall cease to own, free and clear of all Liens or other encumbrances, 100% of the outstanding shares of voting stock of the Borrower on a fully diluted basis or (b) any one or more of the Permitted Holders shall cease to own, in the aggregate, free and clear of all Liens or other encumbrances, at least 51% of the outstanding shares of voting stock of Holdings on a fully diluted basis; or
(iii) after the Initial Public Offering, if any, (a) Holdings shall cease to own, free and clear of all Liens or other encumbrances, 100% of the outstanding shares of voting stock of the Borrower on a fully diluted basis or (b) the acquisition by any Person (other than any Permitted Holder), or two or more Persons (other than any one or more of the Permitted Holders) acting in concert, of beneficial ownership (within the meaning of Rule 13d-3 of the Securities and Exchange Commission under the Securities Exchange Act of 1934) of 30% or more of the outstanding shares of voting stock of Holdings.
"Code" means the Internal Revenue Code of 1986, as amended, reformed or otherwise modified from time to time.
"Commitment" means, for each Lender, the obligation of such Lender to make Loans and participate in Facility Letters of Credit equal to its Percentage of the Aggregate Commitment.
"Condemnation" is defined in Section 8.8.
"Contingent Obligation" of a Person means any agreement, undertaking or arrangement by which such Person assumes, guarantees, endorses, contingently agrees to purchase or provide funds for the payment of, or otherwise becomes or is contingently liable upon, the obligation or liability of any other Person, or agrees to maintain the net worth or working capital or other financial condition of any other Person, or otherwise assures any creditor of such other Person against loss, including, without limitation, any comfort letter, operating agreement, take-or-pay contract or application for a Letter of Credit but excluding the endorsement of instruments for deposit or collection in the ordinary course of business.
"Conversion/Continuation Notice" is defined in Section 2.9.
"Controlled Group" means all members of a controlled group of corporations and all trades or businesses (whether or not incorporated) under common control which, together with the Borrower, are treated as a single employer under Section 414 of the Code.
"Corporate Base Rate" means a rate per annum equal to the corporate base rate of interest announced by First Chicago from time to time, changing when and as said corporate base rate changes.
"Default" means an event described in Article VIII.
"Effective Date" is defined in Section 5.1.
"ERISA" means the Employee Retirement Income Security Act of l974, as amended from time to time, and any rule or regulation issued thereunder.
"Eurodollar Advance" means an Advance which bears interest at a Eurodollar Rate.
"Eurodollar Base Rate" means, with respect to a Eurodollar Advance for
the relevant Interest Period, the rate of interest per annum determined by the
Agent to be equal to the rate at which deposits in U.S. dollars, in the
approximate amount of First Chicago's relevant Eurodollar Loan and having a
maturity approximately equal to such Interest Period, are offered by First
Chicago to first-class banks in the London interbank market at approximately 11
a.m. (London time) two Business Days prior to the first day of such Interest
Period.
"Eurodollar Loan" means a Loan which bears interest at a Eurodollar Rate.
"Eurodollar Rate" means, with respect to a Eurodollar Advance for the relevant Interest Period, the sum of (i) the quotient of (a) the Eurodollar Base Rate applicable to such Interest Period, divided by (b) one minus the Reserve Requirement (expressed as a decimal) applicable to such Interest Period, plus (ii) the Applicable Margin. The Eurodollar Rate shall be rounded to the next higher multiple of 1/16 of 1% if the rate is not such a multiple.
"Existing Subordinated Debt" means that certain $4,000,000 of 13% subordinated notes issued pursuant to that certain Securities Purchase Agreement dated as of May 13, 1994 between the Borrower and The Board of Trustees of the Texas Growth Fund, as Trustee for the Texas Growth Fund - 1991 Trust.
"Extension Date" is defined in Section 2.19.
"Extension Request" is defined in Section 2.19.
"Facility Letter of Credit" means an irrevocable standby Letter of Credit issued by the Issuing Bank pursuant to Section 3.1.
"Facility Letter of Credit Fee" is defined in Section 3.8.
"Facility Letter of Credit Obligations" means, as at the time of determination thereof, all liabilities, whether actual or contingent, of the Borrower with respect to Facility Letters of Credit, including the sum
of (a) the Reimbursement Obligations and (b) the aggregate undrawn face amount of the then outstanding Facility Letters of Credit.
"Federal Funds Effective Rate" means, for any day, an interest rate per annum equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers on such day, as published for such day (or, if such day is not a Business Day, for the immediately preceding Business Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any day which is a Business Day, the average of the quotations at approximately 10 a.m. (Chicago time) on such day on such transactions received by the Agent from three Federal funds brokers of recognized standing selected by the Agent in its sole discretion.
"Financial Undertaking" of a Person means (i) any repurchase
obligation or liability of such Person or any of its Subsidiaries with respect
to accounts or notes receivable sold by such Person or any of its Subsidiaries,
(ii) any sale and leaseback transactions which do not create a liability on the
consolidated balance sheet of such Person and its Subsidiaries, (iii) any other
transaction which is the functional equivalent of or takes the place of
borrowing but which does not constitute a liability on the consolidated balance
sheets of such Person and its Subsidiaries or (iv) any Rate Hedging Agreements
of such Person.
"First Chicago" means The First National Bank of Chicago in its individual capacity, and its successors.
"Fixed Charge Coverage Ratio" means a ratio of (i) Adjusted Earnings
for such fiscal quarter and the three immediately preceding fiscal quarters to
(ii) the sum of interest expense and rental expense for such fiscal quarter and
the three immediately preceding fiscal quarters, all determined on a
consolidated basis for the Borrower and its Subsidiaries in accordance with
Agreement Accounting Principles.
"Guaranty" means a guaranty substantially in the form of Exhibit "F" hereto executed by Holdings in favor of the Agent for the benefit of the Lenders.
"Holdings" means Administaff of Delaware, Inc., a Delaware corporation, which is owned by the Borrower (and which, after the Merger, if any, shall change its name to Administaff, Inc. and shall be the sole owner of the Borrower), and its successors and assigns.
"Holdings Subordinated Debt" means any Indebtedness incurred after the Merger owing by the Borrower to Holdings that is evidenced by a subordinated note substantially in the form of Exhibit "G" attached hereto.
"Indebtedness" of a Person means such Person's (i) obligations for
borrowed money, (ii) obligations representing the deferred purchase price of
Property or services (other than accounts payable arising in the ordinary
course of such Person's business payable on terms customary in the trade),
(iii) obligations, whether or not assumed, secured by Liens or payable out of
the proceeds or production from property now or hereafter owned or acquired by
such Person, (iv) obligations which are evidenced by notes, acceptances, or
other instruments, (v) Capitalized Lease Obligations, (vi) net liabilities
under Rate Hedging Agreements, and (vii) Contingent Obligations.
"Initial Public Offering" means, at any time after the consummation of the Merger, the issuance of Holding's common stock to the public pursuant to an offering registered under the Securities Act of 1933.
"Interest Period" means, with respect to a Eurodollar Advance, a period of one, two or three months commencing on a Business Day selected by the Borrower pursuant to this Agreement. Such Interest Period shall end on (but exclude) the day which corresponds numerically to such date one, two or three months thereafter, provided, however, that if there is no such numerically corresponding day in such next, second or third succeeding month, such Interest Period shall end on the last Business Day of such next, second or third succeeding month. If an Interest Period would otherwise end on a day which is not a Business Day, such Interest Period shall end on the next succeeding Business Day, provided, however, that if said next succeeding Business Day falls in a new calendar month, such Interest Period shall end on the immediately preceding Business Day.
"Investment" of a Person means any loan, advance (other than commission, travel and similar advances to officers and employees made in the ordinary course of business), extension of credit (other than accounts receivable arising in the ordinary course of business on terms customary in the trade) or contribution of capital by such Person to any other Person or any investment in, or purchase or other acquisition of, the stock, partnership interests, notes, debentures or other securities of any other Person made by such Person or the opening or maintaining of and/or investment in any deposit account by such Person in any other Person.
"IRS Audit" means the audit by the Internal Revenue Service of the Borrower's 401(k) Plan for the 1993 plan year as further described in Schedule "5" hereto.
"Issuance Date" is defined in Section 3.4(a).
"Issuance Notice" is defined in Section 3.4(c).
"Issuing Bank" means First Chicago.
"Lenders" means the lending institutions listed on the signature pages of this Agreement and their respective successors and assigns.
"Lending Installation" means, with respect to a Lender or the Agent, any office, branch, subsidiary or affiliate of such Lender or the Agent.
"Letter of Credit" of a Person means a letter of credit or similar instrument which is issued upon the application of such Person or upon which such Person is an account party or for which such Person is in any way liable.
"Letter of Credit Collateral Account" is defined in Section 3.9.
"Letter of Credit Request" is defined in Section 3.4(a).
"Level I Status" is defined in Section 2.4.
"Level II Status" is defined in Section 2.4.
"Level III Status" is defined in Section 2.4.
"Level IV Status" is defined in Section 2.4.
"Leverage Ratio" means, as of the end of each fiscal quarter, a ratio of (i) total liabilities less the amount of cash and cash equivalents in excess of $5,000,000 to (ii) Total Capital, all determined as at such date on a consolidated basis for the Borrower and its Subsidiaries in accordance with Agreement Accounting Principles.
"Lien" means any lien (statutory or other), mortgage, pledge, hypothecation, assignment, deposit arrangement, encumbrance or preference, priority or other security agreement or preferential arrangement of any kind or nature whatsoever (including, without limitation, the interest of a vendor or lessor under any conditional sale, Capitalized Lease or other title retention agreement but specifically excluding the interest of a lessor under an operating lease).
"Loan" means, with respect to a Lender, such Lender's portion of any Advance.
"Loan Documents" means this Agreement, the Notes and the Facility Letters of Credit.
"Market Segment Study Group" means the Market Segment Study Group on Employee Leasing established by the Internal Revenue Service to study matters relating to Professional Employer Organizations and further described in Schedule "5" hereto.
"Material Adverse Effect" means a material adverse effect on (i) the business, Property, condition (financial or otherwise) or results of operations of the Borrower and its Subsidiaries taken as a whole, (ii) the ability of the Borrower to perform its obligations under the Loan Documents, or (iii) the validity or enforceability of any of the Loan Documents or the rights or remedies of the Agent or the Lenders thereunder.
"Maximum Amount" and Maximum Rate" respectively mean, for any day and for any Lender, the maximum non-usurious amount and the maximum non-usurious rate of interest that, under applicable law, that Lender is permitted to contract for, charge, take, reserve or receive on its portion of the Obligations.
"Merger" means the merger of Acquisition Corp. with and into the Borrower, with the Borrower continuing thereafter as the surviving corporation and as a Wholly-Owned Subsidiary of Holdings.
"Multiemployer Plan" means a Plan maintained pursuant to a collective bargaining agreement or any other arrangement to which the Borrower or any member of the Controlled Group is a party to which more than one employer is obligated to make contributions.
"Net Worth" means the aggregate amount of shareholders' equity as determined from a consolidated balance sheet of the Borrower and its Subsidiaries, prepared in accordance with Agreement Accounting Principles.
"Note" means a promissory note, in substantially the form of Exhibit "A" hereto, duly executed by the Borrower and payable to the order of a Lender in the amount of its Commitment, including any amendment, modification, renewal or replacement of such promissory note.
"Notice of Assignment" is defined in Section 13.3.2.
"Obligations" means all unpaid principal of and accrued and unpaid interest on the Notes, the Facility Letter of Credit Obligations, all accrued and unpaid fees and all expenses, reimbursements, indemnities and other obligations of the Borrower to the Lenders or to any Lender, the Agent or any indemnified party hereunder arising under the Loan Documents.
"Participants" is defined in Section 13.2.1.
"Payment Date" means the last day of each March, June, September and December.
"PBGC" means the Pension Benefit Guaranty Corporation, or any successor thereto.
"Percentage" means, for each Lender the percentage set forth opposite its name on Schedule "1" attached hereto, as such percentage (and such schedule) may be modified from time to time pursuant to the terms hereof, including but not limited to the provisions of Section 13.3.2.
"Person" means any natural person, corporation, firm, joint venture, partnership, limited liability company, association, enterprise, trust or other entity or organization, or any government or political subdivision or any agency, department or instrumentality thereof.
"Plan" means an employee pension benefit plan which is covered by Title IV of ERISA or subject to the minimum funding standards under Section 412 of the Code as to which the Borrower or any member of the Controlled Group may have any liability.
"Property" of a Person means any and all property, whether real, personal, tangible, intangible, or mixed, of such Person, or other assets owned, leased or operated by such Person.
"Purchasers" is defined in Section 13.3.1.
"Rate Hedging Agreements" means (i) any and all agreements, devices or arrangements designed to protect at least one of the parties thereto from the fluctuations of interest rates, exchange rates or forward rates applicable to such party's assets, liabilities or exchange transactions, including, but not limited to, dollar-denominated or cross-currency interest rate exchange agreements, forward currency exchange agreements, interest rate cap or collar protection agreements, forward rate currency or interest rate options, puts and warrants, and (ii) any and all cancellations, buy backs, reversals, terminations or assignments of any of the foregoing.
"Rate Hedging Obligations" of a Person means any and all obligations of such Person, whether absolute or contingent and howsoever and whensoever created, arising, evidenced or acquired (including all renewals, extensions and modifications thereof and substitutions therefor), under any Rate Hedging Agreements.
"Regulation D" means Regulation D of the Board of Governors of the Federal Reserve System as from time to time in effect and any successor thereto or other regulation or official interpretation of said Board of Governors relating to reserve requirements applicable to member banks of the Federal Reserve System.
"Regulation U" means Regulation U of the Board of Governors of the Federal Reserve System as from time to time in effect and any successor or other regulation or official interpretation of said Board of Governors relating to the extension of credit by banks for the purpose of purchasing or carrying margin stocks applicable to member banks of the Federal Reserve System.
"Reportable Event" means a reportable event as defined in Section 4043
of ERISA and the regulations issued under such section, with respect to a Plan,
excluding, however, such events as to which the PBGC by regulation waived the
requirement of Section 4043(a) of ERISA that it be notified within 30 days of
the occurrence of such event, provided, however, that a failure to meet the
minimum funding standard of Section 412 of the Code and of Section 302 of ERISA
shall be a Reportable Event regardless of the issuance of any such waiver of
the notice requirement in accordance with either Section 4043(a) of ERISA or
Section 412(d) of the Code.
"Required Lenders" means Lenders whose Commitments, in the aggregate, are equal to at least 66 2/3% of the Aggregate Commitment or, if the Aggregate Commitment has been terminated, Lenders in the aggregate holding at least 66 2/3% of the sum of (i) the aggregate unpaid principal amount of the outstanding Advances plus (ii) the Facility Letter of Credit Obligations.
"Reserve Requirement" means, with respect to any Interest Period, the maximum aggregate reserve requirement (including all basic, supplemental, marginal and other reserves) which is imposed under Regulation D on Eurocurrency liabilities.
"Section" means a numbered section of this Agreement, unless another document is specifically referenced.
"Single Employer Plan" means a Plan maintained by the Borrower or any member of the Controlled Group for employees of the Borrower or any member of the Controlled Group.
"Status" means, at any date of determination thereof, whichever of Level I Status, Level II Status, Level III Status or Level IV Status exists at such date.
"Subordinated Indebtedness" means the Existing Subordinated Debt, the Holdings Subordinated Debt, if any, and any other Indebtedness of the Borrower or any of its Subsidiaries the payment of which is subordinated to payment of the Obligations to the written satisfaction of the Required Lenders.
"Subsidiary" of a Person means (i) any corporation more than 50% of the outstanding securities having ordinary voting power of which shall at the time be owned or controlled, directly or indirectly, by such Person or by one or more of its Subsidiaries or by such Person and one or more of its Subsidiaries, or (ii) any partnership, association, limited liability company, joint venture or similar business organization more than 50% of the ownership interests having ordinary voting power of which shall at the time be so owned or controlled. Unless otherwise expressly provided, all references herein to a "Subsidiary" shall mean a Subsidiary of the Borrower.
"Substantial Portion" means, with respect to the Property of the Borrower and its Subsidiaries, Property which (i) represents more than 10% of the consolidated assets of the Borrower and its Subsidiaries as would be shown in the consolidated financial statements of the Borrower and its Subsidiaries as at the beginning of the twelve-month period ending with the month in which such determination is made, or (ii)
is responsible for more than 10% of the consolidated net sales or of the consolidated net income of the Borrower and its Subsidiaries as reflected in the financial statements referred to in clause (i) above.
"Tangible Net Worth" means Net Worth plus Existing Subordinated Debt and Holdings Subordinated Debt minus Intangible Assets. For purposes of this definition "Intangible Assets" means the amount (to the extent reflected in determining Net Worth) of (i) all write-ups (other than write-ups resulting from foreign currency translations) subsequent to December 31, 1994 in the book value of any asset owned by the Borrower or a consolidated Subsidiary, (ii) all investments in unconsolidated Subsidiaries and all equity investments in Persons which are not Subsidiaries and (iii) all unamortized debt discount and expense, unamortized deferred charges, goodwill, patents, trademarks, service marks, trade names, copyrights, organization or developmental expenses and other intangible items.
"Termination Date" means October 15, 1997, as the same may be extended pursuant to Section 2.19, or such earlier date on which the Agreement is terminated by the parties hereto
"Total Capital" means, as of any date of determination, the sum of Net Worth plus the outstanding principal amount of all Indebtedness (other than Advances under this Agreement), all determined as at such date on a consolidated basis for the Borrower and its Subsidiaries in accordance with Agreement Accounting Principles.
"Transferee" is defined in Section 13.4.
"Type" means, with respect to any Advance, its nature as an Alternate Base Rate Advance or Eurodollar Advance.
"Unfunded Liabilities" means the amount (if any) by which the present value of all vested nonforfeitable benefits under all Single Employer Plans exceeds the fair market value of all such Plan assets allocable to such benefits, all determined as of the then most recent valuation date for such Plans.
"Unmatured Default" means an event which but for the lapse of time or the giving of notice, or both, would constitute a Default.
"Wholly-Owned Subsidiary" of a Person means (i) any Subsidiary all of the outstanding voting securities of which shall at the time be owned or controlled, directly or indirectly, by such Person or one or more Wholly-Owned Subsidiaries of such Person, or by such Person and one or more Wholly-Owned Subsidiaries of such Person, or (ii) any partnership, association, limited liability company, joint venture or similar business organization 100% of the ownership interests having ordinary voting power of which shall at the time be so owned or controlled.
The foregoing definitions shall be equally applicable to both the singular and plural forms of the defined terms.
ARTICLE II
THE CREDITS
2.1. Commitment. From and including the date of this Agreement and prior to the Termination Date, each Lender severally agrees, on the terms and conditions set forth in this Agreement, to make Loans to the Borrower from time to time in amounts not to exceed in the aggregate at any one time outstanding (after giving effect to the intended use of proceeds of any Advance used to pay any outstanding Reimbursement Obligations) the amount equal to such Lender's Percentage of the Aggregate Available Commitment. Subject to the terms of this Agreement, the Borrower may borrow, repay and reborrow at any time prior to the Termination Date. The Commitments to lend hereunder shall expire on the Termination Date.
2.2. Ratable Loans; Types of Advances. Each Advance hereunder shall consist of Loans made from the several Lenders ratably in proportion to the ratio that their respective Commitments bear to the Aggregate Commitment. The Advances may be Alternate Base Rate Advances or Eurodollar Advances, or a combination thereof, selected by the Borrower in accordance with Sections 2.8 and 2.9.
2.3. Minimum Amount of Each Advance. Each Eurodollar Advance shall be in the minimum amount of $100,000 (and in multiples of $50,000 if in excess thereof), and each Alternate Base Rate Advance shall be in the minimum amount of $50,000 (and in multiples of $50,000 if in excess thereof), provided, however, that any Alternate Base Rate Advance may be in the amount of the unused Aggregate Available Commitment.
2.4. Applicable Margin. The Applicable Margin set forth below with
respect to each Eurodollar Advance and for commitment fees and Facility Letter
of Credit Fees payable hereunder, shall be subject to adjustment (upwards or
downwards, as appropriate) based on the Borrower's Status as at the end of each
fiscal quarter in accordance with the table set forth below. The Borrower's
Status as at the last day of each fiscal quarter shall be determined from the
then most recent annual or quarterly financial statements of the Borrower, in
either case, delivered with the compliance certificate required pursuant to
Section 7.1(iii) (collectively, the "Financials"). The adjustment, if any, to
the Applicable Margin shall take place on, and be effective from and after, the
second day following the date on which the Agent has received the Financials.
In the event that the Borrower shall at any time fail to furnish to the Lenders
the Financials within the time limitations specified by Section 7.1, then the
Borrower's Status shall be Level IV Status from the date of such failure until
two days after such Financials are so delivered. Notwithstanding anything to
the contrary contained herein, the Borrower's Status as of the Effective Date
shall be Level III Status, which shall be adjusted, if required, on the second
day after the Agent receives the Financials for the quarter ending September
30, 1995 and each quarter thereafter.
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APPLICABLE MARGIN LEVEL I LEVEL II LEVEL III LEVEL IV
STATUS STATUS STATUS STATUS
- ----------------------------------------------------------------------------------------------------
Eurodollar Rate .75% 1.00% 1.50% 2.00%
Facility Letter of Credit Fee .75% 1.00% 1.50% 2.00%
Commitment Fee .25% .30% .375% .50%
====================================================================================================
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For purposes of this Agreement, the Borrower's Status will be determined based on the following definitions:
"Level I Status" exists at any date if, as of the last day of the fiscal quarter of the Borrower referred to in the Financials, the Leverage Ratio is less than or equal to 0.50 to 1.0.
"Level II Status" exists at any date if, as of the last day of the fiscal quarter of the Borrower referred to in the Financials, (i) the requirements necessary to achieve Level I Status shall not have been satisfied and (ii) the Leverage Ratio is less than or equal to 1.20 to 1.0.
"Level III Status" exists at any date if, as of the last day of the fiscal quarter of the Borrower referred to in the Financials, (i) the requirements necessary to achieve either Level I Status or Level II Status shall not have been satisfied and (ii) the Leverage Ratio is less than or equal to 2.60 to 1.0.
"Level IV Status" exists at any date if the requirements necessary to achieve Level I Status, Level II or Level III Status shall not have been satisfied.
2.5. Fees. In addition to the Facility Letter of Credit Fees and issuance fees identified in Section 3.8, the Borrower agrees to pay the following fees:
2.5.1 Commitment Fee. The Borrower agrees to pay to the Agent for the account of each Lender a commitment fee, at a rate per annum equal to the rate indicated as the Applicable Margin for the commitment fee, on the daily unused portion of such Lender's Commitment from the date hereof to and including the Termination Date, payable on each Payment Date hereafter and on the Termination Date. For purposes of calculating utilization, the Aggregate Commitment shall be deemed used to the extent of the principal amount of the Advances then outstanding plus the amount of the Facility Letter of Credit Obligations.
2.5.2. Agent's Fee. The Borrower agrees to pay to the Agent, for its own account, the fees agreed to by the Borrower and the Agent pursuant to that certain letter agreement dated June 6, 1995, as amended from time to time in a writing executed by the Borrower and the Agent.
2.6. Reductions in Aggregate Commitment. The Borrower may permanently reduce the Aggregate Commitment in whole, or in part ratably among the Lenders in integral multiples of $250,000, upon at least ten Business Days' written notice to the Agent, which notice shall specify the amount of any such reduction, provided, however, that the amount of the Aggregate Commitment may not be reduced below the aggregate principal amount of the outstanding Advances. All accrued commitment fees shall be payable on the effective date of any termination of the obligations of the Lenders to make Loans hereunder.
2.7. Principal Payments.
2.7.1. Optional Principal Payments. The Borrower may from time to time pay, without penalty or premium, all outstanding Alternate Base Rate Advances, or, in a minimum aggregate amount of $50,000, any portion of the outstanding Alternate Base Rate Advances, in each case
upon at least two Business Days' prior notice to the Agent. A Eurodollar Advance may not be paid prior to the last day of the applicable Interest Period.
2.7.2. Payment on Termination Date. Any outstanding Advances and all other unpaid Obligations shall be paid in full by the Borrower on the Termination Date.
2.8. Method of Selecting Types and Interest Periods for New Advances. The Borrower shall select the Type of Advance and, in the case of each Eurodollar Advance, the Interest Period applicable to each Advance from time to time. The Borrower shall give the Agent irrevocable notice (a "Borrowing Notice") not later than 10:00 a.m. (Chicago time) on the Borrowing Date of each Alternate Base Rate Advance, and at least three Business Days before the Borrowing Date for each Eurodollar Advance, specifying:
(i) the Borrowing Date, which shall be a Business Day, of such Advance,
(ii) the aggregate amount of such Advance,
(iii) the Type of Advance selected, and
(iv) in the case of each Eurodollar Advance, the Interest Period applicable thereto.
Not later than noon (Chicago time) on each Borrowing Date, each Lender shall make available its Loan or Loans, in funds immediately available in Chicago to the Agent at its address specified pursuant to Article XIV. The Agent will make the funds so received from the Lenders available to the Borrower at the Agent's aforesaid address.
2.9. Conversion and Continuation of Outstanding Advances. Alternate Base Rate Advances shall continue as Alternate Base Rate Advances unless and until such Alternate Base Rate Advances are converted into Eurodollar Advances. Each Eurodollar Advance shall continue as a Eurodollar Advance until the end of the then applicable Interest Period therefor, at which time such Eurodollar Advance shall be automatically converted into an Alternate Base Rate Advance unless the Borrower shall have given the Agent a Conversion/Continuation Notice requesting that, at the end of such Interest Period, such Eurodollar Advance continue as a Eurodollar Advance for the same or another Interest Period. Subject to the terms of Section 2.3, the Borrower may elect from time to time to convert all or any part of an Alternate Base Rate Advance into a Eurodollar Advance. The Borrower shall give the Agent irrevocable notice (a "Conversion/Continuation Notice") of each conversion of an Alternate Base Rate Advance or continuation of a Eurodollar Advance not later than 10:00 a.m. (Chicago time) at least three Business Days prior to the date of the requested conversion or continuation, specifying:
(i) the requested date which shall be a Business Day, of such conversion or continuation;
(ii) the aggregate amount and Type of the Advance which is to be converted or continued; and
(iii) the amount and Type(s) of Advance(s) into which such Advance is to be converted or continued and, in the case of a conversion into or continuation of a Eurodollar Advance, the duration of the Interest Period applicable thereto.
2.10. Changes in Interest Rate, etc. Each Alternate Base Rate Advance shall bear interest on the outstanding principal amount thereof, for each day from and including the date such Advance is made or is converted from a Eurodollar Advance into an Alternate Base Rate Advance pursuant to Section 2.9 to but excluding the date it becomes due or is converted into a Eurodollar Advance pursuant to Section 2.9 hereof, at a rate per annum equal to the Alternate Base Rate for such day. Changes in the rate of interest on that portion of any Advance maintained as an Alternate Base Rate Advance will take effect simultaneously with each change in the Alternate Base Rate. Each Eurodollar Advance shall bear interest from and including the first day of the Interest Period applicable thereto to (but not including) the last day of such Interest Period at the interest rate determined as applicable to such Eurodollar Advance. No Interest Period may end after the Termination Date.
2.11. Rates Applicable After Default. Notwithstanding anything to
the contrary contained in Section 2.8 or 2.9, during the continuance of a
Default or Unmatured Default the Required Lenders may, at their option, by
notice to the Borrower, declare that no Advance may be made as, converted into
or continued as a Eurodollar Advance. During the continuance of a Default the
Required Lenders may, at their option, by notice to the Borrower, declare that
(i) each Eurodollar Advance shall bear interest for the remainder of the
applicable Interest Period at the rate otherwise applicable to such Interest
Period plus 2% per annum and (ii) each Alternate Base Rate Advance shall bear
interest at a rate per annum equal to the Alternate Base Rate plus 2% per
annum.
2.12. Method of Payment. All payments of the Obligations hereunder shall be made, without setoff, deduction, or counterclaim, in immediately available funds to the Agent at the Agent's address specified pursuant to Article XIV, or at any other Lending Installation of the Agent specified in writing by the Agent to the Borrower, by noon (local time) on the date when due and shall be applied ratably by the Agent among the Lenders. Each payment delivered to the Agent for the account of any Lender shall be delivered promptly by the Agent to such Lender in the same type of funds that the Agent received at its address specified pursuant to Article XIV or at any Lending Installation specified in a notice received by the Agent from such Lender. The Agent is hereby authorized, upon notice to the Borrower, to charge the account of the Borrower maintained with First Chicago for each payment of principal, interest and fees as it becomes due hereunder.
2.13. Notes; Telephonic Notices. Each Lender is hereby authorized to record the principal amount of each of its Loans and each repayment on the schedule attached to its Note, provided, however, that the failure to so record shall not affect the Borrower's obligations under such Note. The Borrower hereby authorizes the Lenders and the Agent to extend, convert or continue Advances, effect selections of Types of Advances and to transfer funds based on telephonic notices made by any person or persons the Agent or any Lender in good faith and in the exercise of its reasonable judgment believes to be acting on behalf of the Borrower. The Borrower agrees to deliver promptly to the Agent a written confirmation signed by an Authorized Officer, if such confirmation is requested by the Agent or any Lender, of each telephonic notice. If the written confirmation differs in any material respect from the action taken by the Agent and the Lenders in accordance with any such telephonic notice, the records of the Agent and the Lenders shall govern absent manifest error.
2.14. Interest Payment Dates; Interest and Fee Basis. Interest accrued on each Alternate Base Rate Advance shall be payable on each Payment Date, commencing with the first such date to occur after the date hereof and at maturity. Interest accrued on each Eurodollar Advance shall be payable on the last day of its applicable Interest Period, on any date on which the Eurodollar Advance is prepaid, whether by
acceleration or otherwise, and at maturity. Interest on Eurodollar Advances and commitment fees shall be calculated for actual days elapsed on the basis of a 360-day year; interest on Alternate Base Rate Advances shall be calculated for actual days elapsed on the basis of a 365, or when applicable 366, day year. Interest shall be payable for the day an Advance is made but not for the day of any payment on the amount paid if payment is received prior to 1:00 p.m. (local time) at the place of payment. If any payment of principal of or interest on an Advance shall become due on a day which is not a Business Day, such payment shall be made on the next succeeding Business Day and, in the case of a principal payment, such extension of time shall be included in computing interest in connection with such payment.
2.15. Notification by Agent. Promptly after receipt thereof, the
Agent will notify each Lender of the contents of each Aggregate Commitment
reduction notice, Borrowing Notice, Conversion/Continuation Notice, Letter of
Credit Request, Issuance Notice and repayment notice (required pursuant to
Section 2.7.1) received by it hereunder. The Agent will notify each Lender of
the interest rate applicable to each Eurodollar Advance promptly upon
determination of such interest rate and will give each Lender prompt notice of
each change in the Alternate Base Rate.
2.16. Lending Installations. Each Lender may book its Loans at any Lending Installation selected by such Lender and may change its Lending Installation from time to time. All terms of this Agreement shall apply to any such Lending Installation and the Notes shall be deemed held by each Lender for the benefit of such Lending Installation. Each Lender may, by written or telex notice to the Agent and the Borrower, designate a Lending Installation through which Loans will be made by it and for whose account Loan payments are to be made.
2.17. Non-Receipt of Funds by the Agent. Unless the Borrower or a Lender, as the case may be, notifies the Agent prior to the date on which it is scheduled to make payment to the Agent of (i) in the case of a Lender, the proceeds of a Loan or its share of the unreimbursed amount pursuant to Section 3.6(b) or (ii) in the case of the Borrower, a payment of principal, interest or fees to the Agent for the account of the Lenders, that it does not intend to make such payment, the Agent may assume that such payment has been made. The Agent may, but shall not be obligated to, make the amount of such payment available to the intended recipient in reliance upon such assumption. If such Lender or the Borrower, as the case may be, has not in fact made such payment to the Agent, the recipient of such payment shall, on demand by the Agent, repay to the Agent the amount so made available together with interest thereon in respect of each day during the period commencing on the date such amount was so made available by the Agent until the date the Agent recovers such amount at a rate per annum equal to (i) in the case of payment by a Lender, the Federal Funds Effective Rate for such day or (ii) in the case of payment by the Borrower, the interest rate applicable to the relevant Loan.
2.18. Withholding Tax Exemption. Upon the execution hereof (or upon the execution of any Assignment Agreement for any Lender not an original signatory to this Agreement), each Lender that is not organized under the laws of the United States of America, or a state thereof, or which books its Loans at a Lending Installation which is not organized under the United States of America, or a state thereof, agrees that it will deliver to each of the Borrower and the Agent two duly completed copies of United States Internal Revenue Service Form 1001 or 4224, certifying in either case that such Lender is entitled to receive payments under this Agreement and the Notes without deduction or withholding of any United States federal income taxes. Each Lender which so delivers a Form 1001 or 4224 further undertakes to deliver to each of the Borrower and the Agent two additional copies of such form (or a successor form) on or before the date that such form expires (currently, three successive calendar years for Form 1001 and
one calendar year for Form 4224) or becomes obsolete or after the occurrence of any event requiring a change in the most recent forms so delivered by it, and such amendments thereto or extensions or renewals thereof as may be reasonably requested by the Borrower or the Agent, in each case certifying that such Lender is entitled to receive payments under this Agreement and the Notes without deduction or withholding of any United States federal income taxes, unless an event (including without limitation any change in treaty, law or regulation) has occurred prior to the date on which any such delivery would otherwise be required which renders all such forms inapplicable or which would prevent such Lender from duly completing and delivering any such form with respect to it and such Lender advises the Borrower and the Agent that it is not capable of receiving payments without any deduction or withholding of United States federal income tax. If any Lender is required under this Section 2.18 to provide a form described above and fails to deliver such form to the Borrower and the Agent (other than as a result of any change in treaty, law or regulation which renders all such forms inapplicable or which prevents such Lender from duly completing and delivering any such form with respect to it), then to the extent required by law, the Borrower shall be entitled to deduct or withhold taxes from the payments owed to such Lender and the Borrower shall not be obligated to make any payment to such Lender under Section 4.1 or otherwise with respect to the amount so deducted or withheld.
2.19. Extension of Termination Date. The Borrower may request up to two one year extensions of the Termination Date by submitting a request for an extension to the Agent (an "Extension Request") no more than 60 days prior to any anniversary of the date of this Agreement. The Extension Request must specify the date (which must be at least 30 days after the Extension Request is delivered to the Agent) as of which the Lenders must respond to the Extension Request (the "Extension Date"). Promptly upon receipt of an Extension Request, the Agent shall notify each Lender of the contents thereof and shall request each Lender to approve the Extension Request. Each Lender approving the Extension Request shall deliver its written consent no later than the Extension Date. Any consent delivered by a Lender to the Agent prior to the Extension Date may be revoked prior to the Extension Date by the Lender giving written notice of such revocation to the Agent before the Extension Date. If the consent of each of the Lenders is received by the Agent and remains in effect on the Extension Date, the Termination Date shall automatically be deemed to have been extended by one year and the Agent shall promptly notify the Borrower and each Lender of the new Termination Date.
ARTICLE III
THE LETTER OF CREDIT SUBFACILITY
3.1. Obligation to Issue. Subject to the terms and conditions of this Agreement and in reliance upon the representations and warranties of the Borrower herein set forth, the Issuing Bank hereby agrees to issue for the account of the Borrower through such of the Issuing Bank's branches as it and the Borrower may jointly agree, one or more Facility Letters of Credit in accordance with this Article III, from time to time during the period, commencing on the Effective Date and ending on the Business Day prior to the Termination Date.
3.2. Types and Amounts. The issuance of a Facility Letter of Credit shall be subject to the following conditions:
(a) the aggregate maximum amount then available for drawing under Letters of Credit issued by the Issuing Bank, after giving effect to the Facility Letter of Credit requested hereunder, shall not exceed any limit imposed by law or regulation upon the Issuing Bank;
(b) after giving effect thereto, the sum of (a) the aggregate unpaid principal balance of the Advances plus (b) the Facility Letter of Credit Obligations do not exceed the Aggregate Commitment as then in effect;
(c) it does not have an expiration date after the Termination Date;
(d) it does not have an expiration date more than twelve
(12) months after the date of its issuance or extension; or
(e) the Facility Letter of Credit Obligations, after giving effect to any Facility Letter of Credit requested hereunder, do not exceed $5,000,000.
3.3. Conditions. In addition to being subject to the satisfaction of the conditions contained in Section 5.2, the obligation of the Issuing Bank to issue any Facility Letter of Credit is subject to the satisfaction in full of the following conditions:
(a) the Borrower shall have delivered to the Issuing Bank at such times and in such manner as the Issuing Bank may reasonably prescribe such documents and materials as may be required pursuant to the terms of the proposed Facility Letter of Credit (it being understood that if any inconsistency exists between such documents and the Loan Documents, the terms of the Loan Documents shall control) and the proposed Facility Letter of Credit shall be reasonably satisfactory to the Issuing Bank as to form and content;
(b) as of the date of issuance, no order, judgment or decree of any court, arbitrator or governmental authority shall purport by its terms to enjoin or restrain the Issuing Bank from issuing the requested Facility Letter of Credit and no law, rule or regulation applicable to the Issuing Bank and no request or directive (whether or not having the force of law) from any governmental authority with jurisdiction over the Issuing Bank shall prohibit or request that the Issuing Bank refrain from the issuance of Letters of Credit generally or the issuance of the requested Facility Letter or Credit in particular; and
(c) the Issuing Bank and the Borrower having agreed on the issuance fee referred to in Section 3.8(b).
3.4. Procedure for Issuance of Facility Letters of Credit.
(a) The Borrower shall give the Issuing Bank and the Agent prior written notice of any requested issuance of a Facility Letter of Credit under this Agreement (a "Letter of Credit Request"), which written notice must be received no later than 10:00 a.m. (Chicago time) on a day which is at least two (2) Business Days prior to the date of issuance thereof (except that, in lieu of such written notice, the Borrower may give the Issuing Bank and the Agent telephonic notice of such request if confirmed in writing by delivering to the Issuing Bank and the Agent (i) immediately (A) a facsimile of the written notice required hereunder which has been signed by an Authorized Officer or (B) a telex containing all information required to be contained in such written notice and (ii) promptly thereafter (but in no event later than the
requested date of issuance), the written notice required hereunder containing the original signature of an Authorized Officer). Each Letter of Credit Request shall be irrevocable and shall specify:
(1) the stated amount of the Facility Letter of Credit requested (which stated amount shall not be less than $100,000);
(2) the effective date (which day shall be a Business Day) of issuance of such requested Facility Letter of Credit (the "Issuance Date");
(3) the date on which such requested Facility Letter of Credit is to expire (which date shall be a Business Day and shall in no event be later than the earlier of the Termination Date and a date which is twelve (12) months after the Issuance Date);
(4) the purpose for which such Facility Letter of Credit is to be issued; and
(5) the Person for whose benefit the requested Facility Letter of Credit is to be issued.
At the time any such Letter of Credit Request is made, the Borrower shall also provide the Agent and the Issuing Bank with a copy of the form of the Facility Letter of Credit it is requesting be issued.
(b) Subject to the terms and conditions of this Article III and provided that the applicable conditions set forth in Section 5.2 hereof have been satisfied, the Issuing Bank shall, on the Issuance Date, issue a Facility Letter of Credit on behalf of the Borrower in accordance with the Issuing Bank's usual and customary business practices unless the Issuing Bank has actually received (i) written notice from the Borrower specifically revoking the Letter of Credit Request with respect to such Facility Letter of Credit, (ii) written notice from a Lender, which complies with the provisions of Section 3.6(a) or (iii) written or telephonic notice from the Agent stating that the issuance of such Facility Letter of Credit would violate Section 3.2.
(c) The Issuing Bank shall give the Agent and the Borrower written or telex notice, or telephonic notice confirmed promptly thereafter in writing, of the issuance of a Facility Letter of Credit (the "Issuance Notice").
(d) The Issuing Bank shall not extend or amend any Facility Letter of Credit or allow any Facility Letter of Credit to be automatically extended unless the requirements of this Agreement are met as though a new Facility Letter of Credit was being requested and issued.
3.5. Reimbursement Obligations; Duties of Issuing Banks.
(a) (i) The Issuing Bank shall promptly notify the
Borrower and the Agent of any draw under a Facility Letter of Credit and the
Borrower shall reimburse the Issuing Bank in accordance with Section 3.7; and
(ii) any Reimbursement Obligation with respect to any Facility Letter of Credit
shall bear interest from the date of the relevant drawings under the pertinent
Facility Letter of Credit until payment in full is received by the Issuing Bank
at (A) the Alternate Base Rate until the next succeeding Business Day and (B)
the Default interest rate for Alternate Base Rate Advances calculated in
accordance with Section 2.11 for each day thereafter.
(b) Any action taken or omitted to be taken by the
Issuing Bank under or in connection with any Facility Letter of Credit, if
taken or omitted in the absence of willful misconduct or gross negligence,
shall not put the Issuing Bank under any resulting liability to any Lender or,
assuming that the Issuing Bank has complied with the procedures specified in
Section 3.4, all conditions to the issuance of a Facility Letter of Credit have
been satisfied and such Lender has not given a notice contemplated by Section
3.6(a) that continues in full force and effect, relieve that Lender of its
obligations hereunder to the Issuing Bank. In determining whether to pay under
any Facility Letter of Credit, the Issuing Bank shall have no obligation
relative to the Lenders other than to confirm that any documents required to be
delivered under such Letter of Credit appear to have been delivered in
compliance and that they appear to comply on their face, with the requirements
of such Letter of Credit.
3.6. Participation.
(a) Immediately upon issuance by the Issuing Bank of any
Facility Letter of Credit in accordance with the procedures set forth in
Section 3.4, each Lender shall be deemed to have irrevocably and
unconditionally purchased and received from the Issuing Bank, without recourse,
representation or warranty, an undivided interest and participation equal to
its Percentage in such Facility Letter of Credit (including, without
limitation, all obligations of the Borrower with respect thereto) and any
security therefor or guaranty pertaining thereto; provided, that a Letter of
Credit issued by the Issuing Bank shall not be deemed to be a Facility Letter
of Credit for purposes of this Section 3.6 if the Issuing Bank shall have
received written notice from any Lender on or before the Business Day prior to
the date of its issuance of such Letter of Credit that one or more of the
conditions to the issuance of a Facility Letter of Credit is not then
satisfied, and, in the event the Issuing Bank receives such a notice, it shall
have no further obligation to issue any Facility Letter of Credit until such
notice is withdrawn by that Lender or it receives a notice from the Agent that
such condition has been effectively waived in accordance with the provisions of
this Agreement.
(b) In the event that the Issuing Bank makes any payment under any Facility Letter of Credit and the Borrower shall not have repaid such amount to the Issuing Bank pursuant to Section 3.7 hereof, the Issuing Bank shall promptly notify the Agent, which shall promptly notify each Lender, of such failure, and each Lender shall promptly and unconditionally pay to the Agent for the account of the Issuing Bank the amount of such Lender's Percentage of the unreimbursed amount of such payment, and the Agent shall promptly pay such amount to the Issuing Bank. The failure of any Lender to make available to the Agent for the account of the Issuing Bank its Percentage of the unreimbursed amount of any such payment shall not relieve any other Lender of its obligation hereunder to make available to the Agent for the account of the Issuing Bank its Percentage of the unreimbursed amount of any payment on the date such payment is to be made, but no Lender shall be responsible for the failure of any other Lender to make available to the Agent its Percentage of the unreimbursed amount of any payment on the date such payment is to be made.
(c) Whenever the Issuing Bank receives a payment on account of a Reimbursement Obligation, including any interest thereon, it shall promptly pay to the Agent and the Agent shall promptly pay to each Lender which has funded its participating interest therein, in immediately available funds, an amount equal to such Lender's Percentage thereof.
(d) Upon the request of the Agent or any Lender, the Issuing Bank shall furnish to the Agent or Lender copies of any Facility Letter of Credit to which that Issuing Bank is party and such other documentation as may reasonably be requested by the Agent or Lender.
(e) The obligations of a Lender to make payments to the Agent for the account of the Issuing Bank with respect to a Facility Letter of Credit shall be absolute, unconditional and irrevocable, not subject to any counterclaim, set-off, qualification or exception whatsoever and shall be made in accordance with the terms and conditions of this Agreement under all circumstances.
3.7. Payment of Reimbursement Obligations.
(a) The Borrower agrees to pay to the Issuing Bank the amount of all Reimbursement Obligations, interest and other amounts payable to the Issuing Bank under or in connection with any Facility Letter of Credit immediately when due (and in any event shall reimburse the Issuing Bank for drawings under a Facility Letter of Credit issued by it no later than the next succeeding Business Day after the payment by that Issuing Bank), irrespective of any claim, set-off, defense or other right which the Borrower or any Subsidiary may have at any time against the Issuing Bank or any other Person, under all circumstances, including without limitation any of the following circumstances:
(i) any lack of validity or enforceability of this Agreement or any of the other Loan Documents;
(ii) the existence of any claim, setoff, defense or other right which the Borrower may have at any time against a beneficiary named in a Facility Letter of Credit or any transferee of any Facility Letter of Credit (or any Person for whom any such transferee may be acting), the Agent, the Issuing Bank, any Lender, or any other Person, whether in connection with this Agreement, any Facility Letter of Credit, the transactions contemplated herein or any unrelated transactions (including any underlying transactions between the Borrower or any Subsidiary and the beneficiary named in any Facility Letter of Credit);
(iii) any draft, certificate or any other document presented under the Facility Letter of Credit proving to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect;
(iv) the surrender or impairment of any security for the performance or observance of any of the terms of any of the Loan Documents; or
(v) the occurrence of any Default or Unmatured Default.
(b) In the event any payment by the Borrower or any Subsidiary received by the Issuing Bank with respect to a Facility Letter of Credit and distributed by the Agent to the Lenders on account of their participations is thereafter set aside, avoided or recovered from the Issuing Bank in connection with any receivership, liquidation, reorganization or bankruptcy proceeding, each Lender which received such distribution shall, upon demand by the Issuing Bank, contribute such Lender's Percentage of the amount set aside, avoided or recovered together with interest at the rate required to be paid by the Issuing Bank upon the amount required to be repaid by it.
3.8. Compensation for Facility Letters of Credit.
(a) The Borrower shall pay to the Agent, for the ratable account of the Lenders, based upon the Lenders' respective Percentages, a fee (the "Facility Letter of Credit Fee") with respect to each Facility Letter of Credit, in an amount equal to the product of the average daily undrawn amount of such Facility Letter of Credit times the percentage indicated as the Applicable Margin for the Facility Letter of Credit Fee, for the period from the Issuance Date thereof to but including the final expiration date thereof. The Facility Letter of Credit Fee shall be due and payable in arrears on each Payment Date and, to the extent any such fees are then due and unpaid, on the Termination Date. The Agent shall promptly remit such Facility Letter of Credit Fees, when paid, to the other Lenders in accordance with their Percentages thereof.
(b) The Issuing Bank shall have the right to receive solely for its own account such amounts as it and the Borrower may agree, in writing, to pay to the Issuing Bank with respect to issuance fees for any Facility Letter of Credit. In addition, the Issuing Bank shall be entitled to receive its reasonable out-of-pocket costs of issuing and servicing Facility Letters of Credit.
3.9. Letter of Credit Collateral Account. The Borrower hereby agrees that at the request of the Agent following an acceleration of the Obligations pursuant to Section 9.1 it will, until the Termination Date, maintain a special collateral account (the "Letter of Credit Collateral Account") at the Agent's office at the address specified pursuant to Article XIV, in the name of the Borrower but under the sole dominion and control of the Agent, for the benefit of the Lenders, and in which the Borrower shall have no interest other than as set forth in Section 9.1. In addition to the foregoing, the Borrower hereby grants to the Agent, for the benefit of the Lenders, a security interest in and to the Letter of Credit Collateral Account and any funds that may hereafter be on deposit in such account.
ARTICLE IV
CHANGE IN CIRCUMSTANCES
4.1. Yield Protection. If, on or after the date hereof, the adoption of any applicable law, rule, regulation, policy, or directive, or any change in any applicable law, rule, regulation, policy or directive or any change in the interpretation or administration thereof by any governmental or quasi-governmental authority charged with the interpretation or administration thereof (whether or not having the force of law) or compliance by any Lender therewith,
(i) subjects any Lender or any applicable Lending Installation to any tax, duty, charge or withholding on or from payments due from the Borrower (excluding federal taxation of the overall net income of any Lender or applicable Lending Installation), or changes the basis of taxation of payments to any Lender in respect of its Loans, its interest in the Facility Letters of Credit or other amounts due it hereunder, or
(ii) imposes or increases or deems applicable any reserve, assessment, insurance charge, special deposit or similar requirement against assets of, deposits with or for the account of, or credit extended by, any Lender or any applicable Lending Installation (other than
reserves and assessments taken into account in determining the interest rate applicable to Eurodollar Advances), or
(iii) imposes any other condition the result of which is to increase the cost to any Lender or any applicable Lending Installation of making, funding, issuing, participating in or maintaining the Loans or the Facility Letters of Credit or reduces any amount receivable by any Lender or any applicable Lending Installation in connection with the Loans or the Facility Letters of Credit, or requires any Lender or any applicable Lending Installation to make any payment calculated by reference to the amount of the Loans held, Facility Letters of Credit issued or participated in or interest received by it, by an amount deemed material by such Lender,
then, within 30 days of demand by such Lender, the Borrower shall pay such Lender that portion of such increased expense incurred or reduction in an amount received which such Lender determines is attributable to making, funding and maintaining its Loans, its interest in the Facility Letters of Credit and its Commitment; provided, however, that notwithstanding the foregoing, the Borrower shall only be obligated to compensate such Lender for any such amount arising or accruing during (1) any time or period commencing not more than 90 days prior to the date on which such Lender notifies the Borrower that it proposes to demand such compensation and identifies to the Borrower the law, rule, regulation, policy, directive or other basis upon which the claimed compensation is or will be based and (ii) any time or period during which, because of the retroactive application of such law, rule, regulation, policy, directive or other basis, such Lender did not know that such amount would arise or accrue.
4.2. Changes in Capital Adequacy Regulations. If a Lender determines the amount of capital required or expected to be maintained by such Lender, any Lending Installation of such Lender or any corporation controlling such Lender is increased as a result of a Change, then, within 30 days of demand by such Lender, the Borrower shall pay such Lender the amount necessary to compensate for any shortfall in the rate of return on the portion of such increased capital which such Lender determines is attributable to this Agreement, its Loans, its interest in the Facility Letters of Credit or its obligation to make Loans, participate in or issue Facility Letters of Credit hereunder (after taking into account such Lender's policies as to capital adequacy); provided, however, that notwithstanding the foregoing, the Borrower shall only be obligated to compensate such Lender for any such amount arising or accruing during (1) any time or period commencing not more than 90 days prior to the date on which such Lender notifies the Borrower that it proposes to demand such compensation and identifies to the Borrower the Change upon which the claimed compensation is or will be based and (ii) any time or period during which, because of the retroactive application in respect of such Change, such Lender did not know that such amount would arise or accrue. "Change" means (i) any change after the date of this Agreement in the Risk-Based Capital Guidelines or (ii) any adoption of or change in any other law, governmental or quasi-governmental rule, regulation, policy, guideline, interpretation, or directive (whether or not having the force of law) after the date of this Agreement which affects the amount of capital required or expected to be maintained by any Lender or any Lending Installation or any corporation controlling any Lender. "Risk-Based Capital Guidelines" means (i) the risk-based capital guidelines in effect in the United States on the date of this Agreement, including transition rules, and (ii) the corresponding capital regulations promulgated by regulatory authorities outside the United States implementing the July 1988 report of the Basle Committee on Banking Regulation and Supervisory Practices Entitled "International Convergence of Capital Measurements and Capital Standards," including transition rules, and any amendments to such regulations adopted prior to the date of this Agreement.
4.3. Availability of Types of Advances. If any Lender determines that maintenance of its Eurodollar Loans at a suitable Lending Installation would violate any applicable law, rule, regulation, or directive, whether or not having the force of law, or if the Required Lenders determine that (i) deposits of a type and maturity appropriate to match fund Eurodollar Advances are not available or (ii) the Eurodollar Rate does not accurately reflect the cost of making or maintaining a Eurodollar Advance, then the Agent shall so notify the Borrower and shall suspend (until such time as the circumstances giving rise to such suspension shall no longer exist) the availability of Eurodollar Advances and require any Eurodollar Advances to be repaid.
4.4. Funding Indemnification. If any payment of a Eurodollar Advance occurs on a date which is not the last day of the applicable Interest Period, whether because of acceleration, prepayment or otherwise (but excluding any prepayment required to be made pursuant to Section 4.3(ii)), or a Eurodollar Advance is not made on the date specified by the Borrower for any reason other than default by the Lenders, the Borrower will indemnify each Lender for any loss or cost incurred by it resulting therefrom, including, without limitation, any loss or cost in liquidating or employing deposits acquired to fund or maintain the Eurodollar Advance; provided, however, that notwithstanding the foregoing, the Borrower shall only be obligated to compensate such Lender for any such amount arising or accruing during any time or period commencing not more than 60 days prior to the date on which the Lender notifies the Borrower that payment of such amount is owing to it by the Borrower.
4.5. Lender Statements; Survival of Indemnity. To the extent reasonably possible, each Lender shall designate an alternate Lending Installation with respect to its Eurodollar Loans to reduce any liability of the Borrower to such Lender under Sections 4.1 and 4.2 or to avoid the unavailability of Eurodollar Advances under Section 4.3, so long as such designation is not disadvantageous to such Lender. Each Lender shall deliver a written statement of such Lender as to the amount due, if any, under Sections 4.1, 4.2 or 4.4. Such written statement shall set forth in reasonable detail the calculations upon which such Lender determined such amount and shall be final, conclusive and binding on the Borrower in the absence of manifest error. In determining such amount, such Lender may use any reasonable averaging and attribution methods. Determination of amounts payable under such Sections in connection with a Eurodollar Loan shall be calculated as though each Lender funded its Eurodollar Loan through the purchase of a deposit of the type and maturity corresponding to the deposit used as a reference in determining the Eurodollar Rate applicable to such Loan, whether in fact that is the case or not. Unless otherwise provided herein, the amount specified in the written statement shall be payable on demand after receipt by the Borrower of the written statement. The obligations of the Borrower under Sections 4.1, 4.2 and 4.4 shall survive payment of the Obligations and termination of this Agreement.
4.6. Substitution of Lenders. If, in respect of any Lender,
circumstances arise which would or would upon the giving of notice result in
(i) an increase in the liability of a Borrower to such Lender under Section 4.1
or 4.2, or (ii) the unavailability of Eurodollar Advances under Section 4.3,
and such Lender has been unable to take, or has not taken, steps to mitigate
the effect of the circumstances in question, such Lender shall be obliged, at
the request of the Borrower, pursuant to an Assignment Agreement, to sell its
Note and assign all its rights and obligations hereunder to another Person
nominated by the Borrower and willing to purchase such Note, assume the
Commitment of such Lender and participate in the facility in place of such
Lender; provided that such Person satisfies all of the requirements of this
Agreement, including, but not limited to, providing the forms required by
Section 2.18. Upon such purchase and assumption by such substituted Person,
(a) such Person shall for all purposes be a Lender party to this Agreement and
any other Loan Document executed by the Lenders and shall have all the rights
and obligations of a Lender under the Loan Documents, to the same extent as if it were an original party hereto, and (b) the transferor Lender shall be released with respect to the Loans and Commitment so assigned. Notwithstanding any such assignment, unless otherwise agreed to by the transferor Lender, the obligations of the Borrower under Sections 4.1, 4.2 and 4.3 shall survive any such assignment and be enforceable by such transferor Lender.
ARTICLE V
CONDITIONS PRECEDENT
5.1. Initial Advance. The Lenders shall not be required to make the initial Advance and, if the initial Advance shall not have been made, the Issuing Bank shall not be obligated to issue any Facility Letter of Credit hereunder unless the Borrower has furnished to the Agent with sufficient copies for the Lenders the following items (and the date upon which all such items shall have been so furnished is referred to as the "Effective Date"):
(i) Copies of the articles of incorporation of the Borrower, together with all amendments, and a certificate of good standing, both certified as of a recent date by the appropriate governmental officer in its jurisdiction of incorporation.
(ii) Copies, certified by the Secretary or Assistant Secretary of the Borrower, of its by-laws and of its Board of Directors' resolutions (and resolutions of other bodies, if any are deemed necessary by counsel for any Lender) authorizing the execution of the Loan Documents, which resolutions (i) were in place on or before the date of this Agreement or (ii) ratify the execution of the Loan Documents previously signed.
(iii) An incumbency certificate, executed by the Secretary or Assistant Secretary of the Borrower, which shall identify by name and title and bear the signature of the officers of the Borrower authorized to sign the Loan Documents (as of the dates any such documents were signed) and to make borrowings hereunder, upon which certificate the Agent and the Lenders shall be entitled to rely until informed of any change in writing by the Borrower.
(iv) A bring down certificate, signed by the chief financial officer of the Borrower, stating that on the Effective Date the representations and warranties contained in Article VI are true and correct and no Default or Unmatured Default has occurred and is continuing.
(v) A written opinion of Andrews & Kurth L.L.P., special counsel to the Borrower in substantially the form of Exhibit "B-1" hereto and of William Lange, General Counsel of the Borrower in substantially the form of Exhibit "B-2" hereto, each dated as of the Effective Date.
(vi) Notes payable to the order of each of the Lenders.
(vii) Written money transfer instructions, in substantially the form of Exhibit "E" hereto, addressed to the Agent and signed by an Authorized Officer, together with such other related money transfer authorizations as the Agent may have reasonably requested.
(viii) Payment of all fees described in Section 2.5, which are required to be paid on the date this Agreement is executed.
(ix) The insurance certificate described in Section 6.18, which certificate shall be in form and substance satisfactory to the Agent.
(x) Such other documents as any Lender or its counsel may have reasonably requested.
5.2. Each Advance or Issuance of a Facility Letter of Credit. The Lenders shall not be required to make any Advance (other than an Advance that, after giving effect thereto and to the application of the proceeds thereof, does not increase the aggregate amount of outstanding Advances) and the Issuing Bank shall not be obligated to issue any Facility Letter of Credit, unless on the applicable Borrowing Date or Issuance Date:
(i) There exists no Default or Unmatured Default.
(ii) The representations and warranties contained in Article VI are true and correct as of such Borrowing Date or Issuance Date except to the extent any such representation or warranty is stated to relate to an earlier date, in which case such representation or warranty (to the extent it relates to such earlier date) shall be true and correct on and as of such earlier date (other than the representation and warranty made under Section 6.4, which shall be deemed to refer to the most recent annual audited financial statements furnished to the Lenders pursuant to Section 7.1(i) hereof).
Each Borrowing Notice with respect to each such Advance and each Letter of Credit Request with respect to each Facility Letter of Credit shall constitute a representation and warranty by the Borrower that the conditions contained in Sections 5.2(i) and (ii) have been satisfied. Any Lender or Issuing Bank may require a duly completed compliance certificate in substantially the form of Exhibit "C" hereto as a condition to making an Advance or issuing a Facility Letter of Credit.
ARTICLE VI
REPRESENTATIONS AND WARRANTIES
The Borrower represents and warrants to the Lenders that:
6.1. Corporate Existence and Standing. Each of the Borrower and its Subsidiaries is a corporation duly incorporated, validly existing and in good standing under the laws of its jurisdiction of incorporation and has all requisite authority to conduct its business in each jurisdiction in which its business is conducted, except where the failure to have such authority could not reasonably be expected to have a Material Adverse Effect.
6.2. Authorization and Validity. The Borrower has the corporate power and authority and legal right to execute and deliver the Loan Documents and to perform its obligations thereunder. The execution and delivery by the Borrower of the Loan Documents and the performance of its obligations thereunder have been duly authorized by all necessary corporate action, and the Loan Documents constitute legal, valid and binding obligations of the Borrower enforceable against the Borrower in accordance with their terms, except as enforceability may be limited by bankruptcy, insolvency or similar laws affecting the enforcement of creditors' rights generally.
6.3. No Conflict; Government Consent. Neither the execution and delivery by the Borrower of the Loan Documents, nor the consummation of the transactions therein contemplated, nor compliance with the provisions thereof will violate (i) any law, rule, regulation, order, writ, judgment, injunction, decree or award binding on the Borrower or any of its Subsidiaries, (ii) the Borrower's or any Subsidiary's articles of incorporation or by-laws or (iii) the provisions of any indenture, instrument or agreement to which the Borrower or any of its Subsidiaries is a party or is subject, or by which it, or its Property, is bound, or conflict with or constitute a default thereunder, or result in the creation or imposition of any Lien in, of or on the Property of the Borrower or a Subsidiary pursuant to the terms of any such indenture, instrument or agreement, other than, in the case of the foregoing clause (iii), any such violations or defaults that, singly or in the aggregate, could not reasonably be expected to have a Material Adverse Effect. No order, consent, approval, license, authorization, or validation of, or filing, recording or registration with, or exemption by, any governmental or public body or authority, or any subdivision thereof, which has not been obtained by the Borrower or any Subsidiary, is required to authorize, or is required in connection with the execution, delivery and performance of, or the legality, validity, binding effect or enforceability of, any of the Loan Documents.
6.4. Financial Statements. The December 31, l994 consolidated financial statements of the Borrower and its Subsidiaries heretofore delivered to the Lenders were prepared in accordance with generally accepted accounting principles in effect on the date such statements were prepared and fairly present the consolidated financial condition and operations of the Borrower and its Subsidiaries at such date and the consolidated results of their operations for the period then ended.
6.5. Material Adverse Change. Since December 31, 1994, there has been no change in the business, Property, condition (financial or otherwise) or results of operations of the Borrower and its Subsidiaries which could reasonably be expected to have a Material Adverse Effect.
6.6. Taxes. The Borrower and its Subsidiaries have filed all United States federal tax returns and all other tax returns which are required to be filed and have paid all taxes due pursuant to said returns or pursuant to any assessment received by the Borrower or any of its Subsidiaries, except such taxes, if any, as are being contested in good faith and as to which adequate reserves have been provided. The United States income tax returns of the Borrower and its Subsidiaries have been audited by the Internal Revenue Service through the fiscal year ended December 31, 1991. No tax liens have been filed and no claims are being asserted with respect to any such taxes. The charges, accruals and reserves on the books of the Borrower and its Subsidiaries in respect of any taxes or other governmental charges are adequate.
6.7. Litigation and Contingent Obligations. Except as set forth in Schedule "5" hereto, there is no litigation, arbitration, governmental investigation, proceeding or inquiry pending or, to the knowledge of any of their officers, threatened against or affecting the Borrower or any of its Subsidiaries which, if determined adversely, could reasonably be expected to have a Material Adverse Effect. The Borrower has
no material contingent obligations not provided for or disclosed in the financial statements referred to in Section 6.4.
6.8. Subsidiaries. Schedule "2" hereto contains an accurate list of all of the presently existing Subsidiaries of the Borrower, setting forth their respective jurisdictions of incorporation and the percentage of their respective capital stock owned by the Borrower or other Subsidiaries. All of the issued and outstanding shares of capital stock of such Subsidiaries have been duly authorized and issued and are fully paid and non-assessable.
6.9. ERISA. There are no Unfunded Liabilities for any Single Employer Plans which could reasonably be expected to have a Material Adverse Effect. Neither the Borrower nor any other member of the Controlled Group has incurred, or is reasonably expected to incur, any withdrawal liability to Multiemployer Plans which could reasonably be expected to have a Material Adverse Effect. Each Single Employer Plan complies in all material respects with all applicable requirements of law and regulations, no Reportable Event has occurred with respect to any Single Employer Plan, neither the Borrower nor any other members of the Controlled Group has withdrawn from any Single Employer Plan or initiated steps to do so, and no steps have been taken to reorganize or terminate any Single Employer Plan. To the knowledge of the Borrower, each Multiemployer Plan complies in all material respects with all applicable requirements of law and regulations, no Reportable Event has occurred with respect to any Multiemployer Plan, neither the Borrower nor any other members of the Controlled Group has withdrawn from any Multiemployer Plan or initiated steps to do so, and no steps have been taken to reorganize or terminate any Multiemployer Plan.
6.10. Accuracy of Information. The information, exhibits and reports furnished by the Borrower or any of its Subsidiaries to the Agent or to any Lender in connection with the negotiation of, or compliance with, the Loan Documents, taken as a whole and in light of the circumstances under which they are made, do not contain any material misstatement of fact or omit to state a material fact or any fact necessary to make the statements contained therein not misleading as of the date made.
6.11. Regulation U. Margin stock (as defined in Regulation U) constitutes less than 25% of those assets of the Borrower and its Subsidiaries which are subject to any limitation on sale, pledge, or other restriction hereunder.
6.12. Material Agreements. Except as set forth on Schedule "5" hereto, neither the Borrower nor any Subsidiary is a party to any agreement or instrument or subject to any charter or other corporate restriction which could reasonably be expected to have a Material Adverse Effect. Neither the Borrower nor any Subsidiary is in default in the performance, observance or fulfillment of any of the obligations, covenants or conditions contained in (i) any agreement to which it is a party or (ii) any agreement or instrument evidencing or governing Indebtedness, which default, in either case, could reasonably be expected to have a Material Adverse Effect.
6.13. Compliance With Laws. The Borrower and its Subsidiaries have complied with all applicable statutes, rules, regulations, orders and restrictions of any domestic or foreign government or any instrumentality or agency thereof, having jurisdiction over the conduct of their respective businesses or the ownership of their respective Property, except where the failure to so comply could not reasonably be expected to have a Material Adverse Effect. Neither the Borrower nor any Subsidiary has received any notice to the effect that its operations are not in material compliance with any of the requirements of
applicable federal, state and local environmental, health and safety statutes and regulations or the subject of any federal or state investigation evaluating whether any remedial action is needed to respond to a release of any toxic or hazardous waste or substance into the environment, which non-compliance or remedial action could reasonably be expected to have a Material Adverse Effect.
6.14. Ownership of Properties. Except as set forth on Schedule "3" hereto, on the date of this Agreement, the Borrower and its Subsidiaries will have good title, free of all Liens other than those permitted by Section 7.17, to all of the Property and assets reflected in the financial statements as owned by it.
6.15. Investment Company Act. Neither the Borrower nor any Subsidiary thereof is an "investment company" or a company "controlled" by an "investment company", within the meaning of the Investment Company Act of 1940, as amended.
6.16. Public Utility Holding Company Act. Neither the Borrower nor any Subsidiary is a "holding company" or a "subsidiary company" of a "holding company", or an "affiliate" of a "holding company" or of a "subsidiary company" of a "holding company", within the meaning of the Public Utility Holding Company Act of 1935, as amended.
6.17. Subordinated Indebtedness. The Obligations constitute senior indebtedness which is entitled to the benefits of the subordination provisions of all outstanding Subordinated Indebtedness.
6.18. Insurance. The certificate signed by the President or Chief Financial Officer of the Borrower, that attests to the existence and adequacy of, and summarizes, the property and casualty insurance program carried by the Borrower and that has been furnished by the Borrower to the Agent and the Lenders, is complete and accurate.
ARTICLE VII
COVENANTS
During the term of this Agreement, unless the Required Lenders shall otherwise consent in writing:
7.1. Financial Reporting. The Borrower will maintain, for itself and each Subsidiary, a system of accounting established and administered in accordance with generally accepted accounting principles, and furnish to the Lenders:
(i) Within 120 days after the close of each of its fiscal years, an unqualified audit report certified by independent certified public accountants, acceptable to the Lenders, prepared in accordance with Agreement Accounting Principles on a consolidated and consolidating basis (consolidating statements need not be certified by such accountants) for itself and the Subsidiaries, including balance sheets as of the end of such period, related profit and loss and reconciliation of surplus statements, and a statement of cash flows. Any management letter prepared by said accountants in connection with the foregoing annual audit report shall be furnished to the Lenders within five days after it is received by the Borrower.
(ii) Within 45 days after the close of the first three quarterly periods of each of its fiscal years, for itself and the Subsidiaries, consolidated and consolidating unaudited balance sheets as at the close of each such period and consolidated and consolidating profit and loss and reconciliation of surplus statements and a statement of cash flows for the period from the beginning of such fiscal year to the end of such quarter, all certified by its chief financial officer.
(iii) Together with the financial statements required hereunder, a compliance certificate in substantially the form of Exhibit "C" hereto signed by its chief financial officer showing the calculations necessary to determine compliance with this Agreement and stating that no Default or Unmatured Default exists, or if any Default or Unmatured Default exists, stating the nature and status thereof.
(iv) As soon as possible and in any event within 10 Business Days thereafter, notice of the establishment of any Single Employer Plan; thereafter, within 270 days after the close of each fiscal year, a statement of the Unfunded Liabilities of each Single Employer Plan, certified as correct by an actuary enrolled under ERISA.
(v) As soon as possible and in any event within 10 Business Days after the Borrower knows that any Reportable Event has occurred with respect to any Plan, a statement, signed by the chief financial officer of the Borrower, describing said Reportable Event and the action which the Borrower proposes to take with respect thereto.
(vi) As soon as possible and in any event within 10 Business Days after receipt by the Borrower, a copy of (a) any notice or claim to the effect that the Borrower or any of its Subsidiaries is or may be liable to any Person as a result of the release by the Borrower, any of its Subsidiaries, or any other Person of any toxic or hazardous waste or substance into the environment, and (b) any notice alleging any violation of any federal, state or local environmental, health or safety law or regulation by the Borrower or any of its Subsidiaries, which, in either case, could reasonably be expected to have a Material Adverse Effect.
(vii) As soon as available, but in any event within 30 days after the beginning of each fiscal year of the Borrower, a copy of the plan and forecast (including a projected consolidated and consolidating balance sheet, income statement and funds flow statement) of the Borrower for such fiscal year.
(viii) Promptly upon the furnishing thereof to the shareholders of the Borrower, copies of all financial statements, reports and proxy statements so furnished.
(ix) Promptly upon the filing thereof, copies of all registration statements and annual, quarterly, monthly or other regular reports which the Borrower or any of its Subsidiaries files with the Securities and Exchange Commission.
(x) Such other information (including non-financial information) as the Agent or any Lender may from time to time reasonably request.
7.2. Use of Proceeds. The Borrower will, and will cause each Subsidiary to, use the proceeds of the Advances for general corporate purposes, and to repay outstanding Advances. The Borrower will not, nor will it permit any Subsidiary to, use any of the proceeds of the Advances to purchase or carry any "margin stock" (as defined in Regulation U).
7.3. Notice of Default. The Borrower will, and will cause each Subsidiary to, give prompt notice in writing to the Lenders of the occurrence of any Default or Unmatured Default and of any other development, financial or otherwise, which could reasonably be expected to have a Material Adverse Effect.
7.4. Conduct of Business. The Borrower will, and will cause each Subsidiary to, carry on and conduct its business in substantially the same fields of enterprise as it is presently conducted and to do all things necessary to remain duly incorporated, validly existing and in good standing as a domestic corporation in its jurisdiction of incorporation and maintain all requisite authority to conduct its business in each jurisdiction in which its business is conducted, except where the failure to maintain such authority could not reasonably be expected to have a Material Adverse Effect.
7.5. Taxes. The Borrower will, and will cause each Subsidiary to, pay when due all taxes, assessments and governmental charges and levies upon it or its income, profits or Property, except those which are being contested in good faith by appropriate proceedings and with respect to which adequate reserves have been set aside.
7.6. Insurance. The Borrower will, and will cause each Subsidiary to, maintain with financially sound and reputable insurance companies insurance on such of their Property and in such amounts and covering such risks as is consistent with sound business practice, and the Borrower will furnish to any Lender upon request full information as to the insurance carried; provided, however, that the foregoing shall not prohibit the Borrower or any of its Subsidiaries from maintaining self-insurance to the extent consistent with sound business practices.
7.7. Compliance with Laws. The Borrower will, and will cause each
Subsidiary to, comply with all laws, rules, regulations, orders, writs,
judgments, injunctions, decrees or awards to which it may be subject, except
(i) those which are being contested in good faith and by appropriate
proceedings or (ii) where the failure to so comply could not reasonably be
expected to have a Material Adverse Effect.
7.8. Maintenance of Properties. The Borrower will, and will cause each Subsidiary to, do all things necessary to maintain, preserve, protect and keep its Property in good repair, working order and condition, ordinary wear and tear excepted, and make all necessary and proper repairs, renewals and replacements so that its business carried on in connection therewith may be properly conducted at all times; provided, however, that nothing shall prohibit the Borrower or any of its Subsidiaries from discontinuing the maintenance, preservation, protection or operation of any of its Property if such discontinuance, as determined by Borrower or any such Subsidiary in the exercise of its good faith business judgment, is desirable in the conduct of the business of the Borrower and its Subsidiaries taken as a whole and such discontinuance could not reasonably be expected to have a Material Adverse Effect.
7.9. Inspection. The Borrower will, and will cause each Subsidiary to, permit the Lenders, at the Lenders' sole expense so long as no Default shall exist at such time, by their respective representatives and agents, to inspect any of the Property, corporate books and financial records of the Borrower and each
Subsidiary, to examine and make copies of the books of accounts and other financial records of the Borrower and each Subsidiary, and to discuss the affairs, finances and accounts of the Borrower and each Subsidiary with, and to be advised as to the same by, their respective officers at such reasonable times and intervals as the Lenders may designate upon at least five Business Days' prior written notice.
7.10. Dividends. The Borrower will not, nor will it permit any
Subsidiary to, declare or pay any dividends on its capital stock (other than
dividends payable in its own capital stock) or redeem, repurchase or otherwise
acquire or retire any of its capital stock at any time outstanding, except that
(i) any Subsidiary may declare and pay cash dividends to the Borrower or to a
Wholly-Owned Subsidiary and (ii) so long as prior to and after giving effect
thereto no Default or Unmatured Default shall exist, the Borrower may declare
or pay cash and other dividends on its capital stock or redeem, repurchase or
otherwise acquire or retire any of its capital stock.
7.11. Indebtedness. The Borrower will not, nor will it permit any Subsidiary to, create, incur or suffer to exist any Indebtedness, except:
(i) The Loans.
(ii) Indebtedness existing on the date hereof and described in Schedule "3" hereto.
(iii) Rate Hedging Obligations related to the Loans.
(iv) Indebtedness arising in connection with the IRS Audit or the Market Segment Study Group.
(v) Subordinated Indebtedness.
(vi) Indebtedness secured by real property; provided that such Indebtedness does not exceed eighty five percent (85%) of the fair market value of such real property on the date such Indebtedness was incurred.
(vii) The Facility Letters of Credit and until November 2, 1995, the Borrower's existing Letter of Credit dated February 6, 1995 in the amount of $3,000,000.
(viii) Additional Indebtedness not to exceed, in the aggregate, for the Borrower and its Subsidiaries at any one time outstanding, $500,000.
(ix) Any refinancings, extensions or renewals of any of the
foregoing.
.
7.12. Mergers and Consolidations. The Borrower will not, nor will
it permit any Subsidiary to, merge or consolidate with or into any other
Person, except that (i) a Subsidiary may merge with and into the Borrower or a
Wholly-Owned Subsidiary; (ii) the Borrower or any Subsidiary may merge or
consolidate with any Person in a transaction constituting an Acquisition so
long as (a) such Acquisition is permitted by Section 7.16.2 and (b) in the case
of any such merger or consolidation to which the Borrower is a party, the
Borrower is the surviving corporation; (iii) any Subsidiary may merge or
consolidate with or into another Person in a transaction constituting a
disposition of assets by the Borrower so long as such disposition is permitted
by Section 7.13; and (iv) the Merger may be consummated, so long as the
Borrower (a) has delivered to the Lenders, on or prior to the consummation of the Merger, a copy of the executed merger agreement related thereto and (b) delivers to the Lenders, promptly after consummation of the Merger a balance sheet of Acquisition Corp. (which reflects that such entity was formed to facilitate the Merger and has not conducted any other business) and a certificate of merger from the Secretary of State of Texas, together with certified copies of the amendments to the Borrower's and Holdings' articles of incorporation showing their respective name changes.
7.13. Sale of Assets. The Borrower will not, nor will it permit any
Subsidiary to, lease, sell or otherwise dispose of its Property, to any other
Person except for (i) sales of inventory in the ordinary course of business,
(ii) sales or other dispositions permitted by Section 7.8, (iii) sales or other
dispositions permitted by Section 7.14, (iv) the sale or other disposition of
Property which is replaced with Property of equal or greater value which is
similar or which is operated for the same or substantially similar purpose and
(v) additional leases, sales or other dispositions of its Property that,
together with all other Property of the Borrower and its Subsidiaries
previously leased, sold or disposed of (other than sales or other dispositions
pursuant to the foregoing clauses (i), (iii) and (iv)) as permitted by this
Section during the twelve-month period ending with the month in which any such
lease, sale or other disposition occurs, do not constitute a Substantial
Portion of the Property of the Borrower and its Subsidiaries.
7.14. Sale of Accounts. The Borrower will not, nor will it permit any Subsidiary to, sell or otherwise dispose of any notes receivable or accounts receivable, with or without recourse, except that the Borrower or any Subsidiary may, in the ordinary course of business, reduce or otherwise compromise or settle accounts receivable.
7.15. Sale and Leaseback. The Borrower will not, nor will it permit any Subsidiary to, sell or transfer any of its Property in order to concurrently or subsequently lease as lessee such or similar Property.
7.16. Investments and Acquisitions.
7.16.1. Investments. The Borrower will not, nor will it permit any Subsidiary to, make or suffer to exist any Investments (including without limitation, loans and advances to, and other Investments in, Subsidiaries), or commitments therefor, or to create any Subsidiary or to become or remain a partner in any partnership or joint venture, except:
(i) Short-term obligations of, or fully guaranteed by, the United States of America.
(ii) Commercial paper rated A-l or better by Standard and Poor's Ratings Group or P-l or better by Moody's Investors Service, Inc.
(iii) Demand deposit accounts maintained in the ordinary course of business.
(iv) Certificates of deposit issued by and time deposits with commercial banks (whether domestic or foreign) having capital and surplus in excess of $100,000,000.
(v) Investments in (a) commercial paper rated A-2 by Standard and Poor's Ratings Group or P-2 by Moody's Investors Service, Inc., (b) Eurodollar time deposits with commercial banks (whether domestic or foreign) having capital and surplus in excess of $100,000,000
and/or (c) municipal bonds rated MG-1 or MG-2 by Moody's Investors Service, Inc.; provided, however, that after giving effect to any such Investment, the aggregate cost of all Investments made pursuant to this Section 7.16.1(v) does not at any time exceed 50% of the Borrower's then available cash on hand.
(vi) Loans to the Borrower's executive officers; provided, however, that the aggregate amount of such loans shall not exceed $1,500,000.
(vii) Existing Investments in Subsidiaries and other Investments in existence on the date hereof and described in Schedule "2" hereto.
(viii) The creation of any new Wholly-Owned Subsidiary.
(ix) For the Borrower only: any Investment consisting of (A) the
acquisition of stock or other equity interests which
constitutes an Acquisition permitted pursuant to the terms of
Section 7.16.2; (B) the creation of any new Subsidiary to act
as the purchaser in an Acquisition permitted pursuant to the
terms of Section 7.16.2; and (C) an Investment in a Subsidiary
for the purpose of facilitating an Acquisition permitted
pursuant to the terms of Section 7.16.2, provided, however,
that the aggregate amount of Investments made pursuant to this
clause (C) since the Effective Date is less than $1,000,000.
7.16.2. Acquisitions. The Borrower will not, nor will it permit any Subsidiary to, make any Acquisition of any Person, except for an Acquisition: (i) for which the board of directors of the Person being acquired has approved the terms of the Acquisition, (ii) for which the Borrower has first provided the Lenders with (a) financial information with respect to the entity to be acquired (including historical financial statements, pro-forma statements after giving effect to the Acquisition and projections) and (b) to the extent available, a detailed description of the entity to be acquired, its products, markets served and customer concentrations and (iii) which, after giving effect thereto, on a pro-forma basis (as shown in the statements referred to above), would allow the Borrower to maintain a ratio of (a) total Indebtedness to (b) earnings before interest expense, income taxes, depreciation expense and amortization expense, all for the prior 12 month period which does not exceed 3.0 to 1.0.
7.17. Liens. The Borrower will not, nor will it permit any Subsidiary to, create, incur, or suffer to exist any Lien in, of or on the Property of the Borrower or any of its Subsidiaries, except:
(i) Liens for taxes, assessments or governmental charges or levies on its Property if the same shall not at the time be delinquent or thereafter can be paid without penalty, or are being contested in good faith and by appropriate proceedings and for which adequate reserves in accordance with generally accepted principles of accounting shall have been set aside on its books.
(ii) Liens imposed by law, such as carriers', warehousemen's and mechanics' liens and other similar liens arising in the ordinary course of business which secure payment of obligations not more than 60 days past due.
(iii) Liens arising out of pledges or deposits under worker's compensation laws, unemployment insurance, old age pensions, or other social security or retirement benefits, or similar legislation.
(iv) Utility easements, building and zoning restrictions and such other encumbrances or charges against real property as are of a nature generally existing with respect to properties of a similar character and which do not in any material way affect the marketability of the same or interfere with the use thereof in the business of the Borrower or the Subsidiaries.
(v) Liens existing on the date hereof and described in Schedule "3" hereto.
(vi) Liens incurred in connection with purchase money financing of equipment in the ordinary course of business.
(vii) Liens on real property which relate to Indebtedness permitted pursuant to Section 7.11(vi).
(viii) Liens created by this Agreement or any other Loan Document.
(ix) Liens incurred in the ordinary course of business to secure obligations on surety, bid or performance bonds or other obligations of a like general nature.
(x) Liens in favor of issuers of appeal or supersedeas bonds (including, without limitation, surety bonds and letter of credit and other instruments serving a similar purpose arising in connection with judicial or similar proceeding) securing amounts not in excess of, in the aggregate for the Borrower and its Subsidiaries at any one time outstanding, $5,000,000.
(xi) Rights of lessees or sublessees under leases or subleases of property, whether real, personal or mixed, to other Persons to the extent such leases or subleases are permitted by the terms of this Agreement.
(xii) Statutory and common law rights of setoff and rights of setoff under general depository agreements and under reimbursement agreements executed in connection with Letters of Credit issued for the account of the Borrower or any Subsidiary (to the extent such Letters of Credit are permitted pursuant to the terms of this Agreement) with respect to financial institution depository accounts maintained by the Borrower or any of its Subsidiaries in the ordinary course of business.
(xiii) Any attachment or other judgment Lien provided that the judgments and awards secured thereby do not exceed, in the aggregate for all such Liens, $200,000.
7.18. Affiliates. Except as set forth on Schedule "4" hereto, the Borrower will not, and will not permit any Subsidiary to, enter into any transaction (including, without limitation, the purchase or sale of any Property or service) with, or make any payment or transfer to, any Affiliate except in the ordinary course of business and pursuant to the reasonable requirements of the Borrower's or such Subsidiary's business and upon fair and reasonable terms no less favorable to the Borrower or such Subsidiary than the Borrower or such Subsidiary would obtain in a comparable arms-length transaction.
7.19. Subordinated Indebtedness. The Borrower will not, and will
not permit any Subsidiary to, make any amendment or modification to the
indenture, note or other agreement evidencing or governing any Subordinated
Indebtedness, or directly or indirectly voluntarily prepay, defease or in
substance defease, purchase, redeem, retire or otherwise acquire, any
Subordinated Indebtedness, except that the Borrower may at any time prepay,
defease or in substance defease, purchase, redeem, retire or otherwise acquire
(i) the Existing Subordinated Debt and (ii) the Holdings Subordinated Debt;
provided that, in each such case, prior to and after giving effect thereto no
Default or Unmatured Default shall exist.
7.20. Financial Undertakings. The Borrower will not, and will not permit any Subsidiary to, enter into or remain liable upon any Financial Undertaking, except Rate Hedging Obligations not to exceed a notional amount of $10,000,000.
7.21. Financial Covenants. The Borrower shall maintain, for itself and its Subsidiaries on a consolidated basis, each of the following financial covenants, each calculated in accordance with Agreement Accounting Principles.
7.21.1. Leverage Ratio. The Borrower shall maintain, on a consolidated basis, as of the end of each fiscal quarter a Leverage Ratio not exceeding 3.00 to 1.0.
7.21.2. Fixed Charge Coverage Ratio. The Borrower shall maintain, on a consolidated basis, (i) as of the end of each of the fiscal quarters ending September 30, 1995 and December 31, 1995, a Fixed Charge Coverage Ratio not less than 2.25 to 1.0 and (ii) as of the end of each fiscal quarter thereafter, a Fixed Charge Coverage Ratio not less than 3.00 to 1.0.
7.21.3. Tangible Net Worth. The Borrower shall maintain, on a consolidated basis, at all times a Tangible Net Worth that is greater than or equal to the sum of (i) $7,750,000 plus (ii) 50% of the Borrower's quarterly Net Income, if positive, for each fiscal quarter ending after the Effective Date.
7.22. Interim Period. During the period after the Merger and prior to the Initial Public Offering, Holdings shall own as its sole asset (other than cash and cash equivalents) the stock of the Borrower and shall conduct no business other than such preparations or actions as shall be necessary or appropriate (i) in anticipation of and to effect the Initial Public Offering and (ii) as the sole shareholder of the Borrower.
7.23. Guaranty of Holdings. Promptly after the Merger (or on the Effective Date if it has not yet occurred), Holdings shall deliver to the Agent, on behalf of the Lenders, the Guaranty, together with:
(a) Copies of the articles of incorporation of Holdings, together with all amendments, and a certificate of good standing, both certified by the appropriate governmental officer in its jurisdiction of incorporation;
(b) Copies, certified by the Secretary or Assistant Secretary of Holdings, of its by-laws and of its Board of Directors' resolutions (and resolutions of other bodies, if any are deemed necessary by counsel for any Lender) authorizing the execution of the Guaranty;
(c) An incumbency certificate, executed by the Secretary or Assistant Secretary of Holdings, which shall identify by name and title and bear the signature of the officers of Holdings
authorized to sign the Guaranty, upon which certificate the Agent and the Lenders shall be entitled to rely until informed of any change in writing by Holdings; and
(d) A written opinion of Holdings' counsel, addressed to the Lenders in form and substance reasonably satisfactory to the Agent.
ARTICLE VIII
DEFAULTS
The occurrence of any one or more of the following events shall constitute a Default:
8.1. Any representation or warranty made or, pursuant to Section 5.2, deemed made by or on behalf of the Borrower or any of its Subsidiaries to the Lenders or the Agent under or in connection with this Agreement, any Loan, any Facility Letters of Credit, or any certificate or information delivered in connection with this Agreement or any other Loan Document shall be materially false on the date as of which made.
8.2. Nonpayment of principal of any Note when due, nonpayment of any Reimbursement Obligation when due, or nonpayment of interest upon any Note or of any fee or other obligations under any of the Loan Documents within five days after the same becomes due.
8.3. The breach by the Borrower of any of the terms or provisions of Section 7.2, 7.10, 7.11, 7.12, 7.13, 7.14, 7.15, 7.16, 7.17, 7.18, 7.20, 7.21, 7.22 or 7.23.
8.4. The breach by the Borrower (other than a breach which constitutes a Default under Section 8.1, 8.2 or 8.3) of any of the terms or provisions of this Agreement which is not remedied within thirty days after the earlier of (i) written notice from the Agent or any Lender or (ii) the date the Borrower obtains knowledge of such breach.
8.5. Failure of the Borrower or any of its Subsidiaries to pay any Indebtedness in excess of $100,000 when due, which failure continues beyond any applicable grace period; or the default by the Borrower or any of its Subsidiaries in the performance of any term, provision or condition contained in any agreement under which any Indebtedness in excess of $100,000 was created or is governed, or any other event shall occur or condition exist, the effect of which is to cause, or to permit the holder or holders of such Indebtedness to cause, such Indebtedness to become due prior to its stated maturity; or any Indebtedness in excess of $100,000 of the Borrower or any of its Subsidiaries shall be declared to be due and payable or required to be prepaid (other than by a regularly scheduled payment) prior to the stated maturity thereof; or the Borrower or any of its Subsidiaries shall not pay, or admit in writing its inability to pay, its debts generally as they become due.
8.6. The Borrower or any of its Subsidiaries shall (i) have an order for relief entered with respect to it under the Federal bankruptcy laws as now or hereafter in effect, (ii) make an assignment for the benefit of creditors, (iii) apply for, seek, consent to, or acquiesce in, the appointment of a receiver, custodian, trustee, examiner, liquidator or similar official for it or any Substantial Portion of its Property,
(iv) institute any proceeding seeking an order for relief under the Federal
bankruptcy laws as now or hereafter in effect or seeking to adjudicate it a
bankrupt or insolvent, or seeking dissolution, winding up, liquidation,
reorganization, arrangement, adjustment or composition of it or its debts under
any law relating to bankruptcy, insolvency or reorganization or relief of
debtors or fail to file an answer or other pleading denying the material
allegations of any such proceeding filed against it, (v) take any corporate
action to authorize or effect any of the foregoing actions set forth in this
Section 8.6 or (vi) fail to contest in good faith any appointment or proceeding
described in Section 8.7 prior to the last day on which the filing of a response
thereto is required to be made under applicable law.
8.7. Without the application, approval or consent of the Borrower or any of its Subsidiaries, a receiver, trustee, examiner, liquidator or similar official shall be appointed for the Borrower or any of its Subsidiaries or any part of its Property which constitutes a Substantial Portion, or a proceeding described in Section 8.6(iv) shall be instituted against the Borrower or any of its Subsidiaries and such appointment continues undischarged or such proceeding continues undismissed or unstayed for a period of 60 consecutive days.
8.8. Any court, government or governmental agency shall condemn, seize or otherwise appropriate, or take custody or control of (each a "Condemnation"), all or any portion of the Property of the Borrower and its Subsidiaries which Condemnation, when taken together with all other Property of the Borrower and its Subsidiaries so condemned, seized, appropriated, or taken custody or control of, during the twelve-month period ending with the month in which any such Condemnation occurs, could reasonably be expected to have a Material Adverse Effect.
8.9. The Borrower or any of its Subsidiaries shall fail to pay, bond or otherwise discharge any final judgment or award for the payment of money in excess of $50,000, which is not stayed on appeal or which is otherwise not contested in good faith, within 30 days after the entry thereof.
8.10. The Unfunded Liabilities of all Single Employer Plans shall exceed in the aggregate $1,000,000; or any Reportable Event shall occur in connection with any Plan that could reasonably be expected to have a Material Adverse Effect.
8.11. The Borrower or any other member of the Controlled Group shall have been notified by the sponsor of a Multiemployer Plan that it has incurred withdrawal liability to such Multiemployer Plan which withdrawal liability could reasonably be expected to have a Material Adverse Effect.
8.12. The Borrower or any other member of the Controlled Group shall have been notified by the sponsor of a Multiemployer Plan that such Multiemployer Plan is in reorganization or is being terminated, within the meaning of Title IV of ERISA, if as a result of such reorganization or termination the aggregate annual contributions of the Borrower and the other members of the Controlled Group (taken as a whole) to all Multiemployer Plans which are then in reorganization or being terminated have been or will be increased over the amounts contributed to such Multiemployer Plans for the respective plan years of each such Multiemployer Plan immediately preceding the plan year in which the reorganization or termination occurs and such increase could reasonably be expected to have a Material Adverse Effect.
8.13. The Borrower or any of its Subsidiaries shall be the subject of any proceeding or investigation pertaining to the release by the Borrower or any of its Subsidiaries, or any other Person of any toxic or hazardous waste or substance into the environment, or any violation of any federal, state or
local environmental, health or safety law or regulation, which, in either case, if adversely determined against the Borrower or any of its Subsidiaries, could reasonably be expected to have a Material Adverse Effect.
8.14. Any Change in Control shall occur.
8.15. At any time prior to an Initial Public Offering, twenty-five percent (25%) or more of the value of any class of equity interests in the Borrower shall be held by "benefit plan investors" within the meaning of 29 C.F.R. Section 2510.3-101(f).
8.16. The Guaranty shall fail to remain in full force or effect or any action shall be taken to discontinue or to assert the invalidity or unenforceability of the Guaranty, or Holdings shall fail to comply with any of the terms or provisions of the Guaranty, or Holdings denies that it has any further liability under the Guaranty, or gives notice to such effect.
ARTICLE IX
ACCELERATION, WAIVERS, AMENDMENTS AND REMEDIES
9.1. Acceleration. If any Default described in Section 8.6 or 8.7 occurs with respect to the Borrower, the obligations of the Lenders to make Loans and of the Issuing Bank to issue Facility Letters of Credit hereunder shall automatically terminate and the Obligations shall immediately become due and payable without any election or action on the part of the Agent or any Lender. If any other Default occurs, the Required Lenders may terminate or suspend the obligations of the Lenders to make Loans and of the Issuing Bank to issue Facility Letters of Credit hereunder, or declare the Obligations to be due and payable, or both, whereupon the Obligations shall become immediately due and payable, without presentment, demand, protest or notice of any kind, all of which the Borrower hereby expressly waives. In addition to the foregoing following any acceleration of the Obligations as set forth above, so long as any Facility Letter of Credit has not been fully drawn and has not been cancelled or expired by its terms, upon demand by the Agent the Borrower shall deposit in the Letter of Credit Collateral Account cash in an amount equal to the aggregate undrawn face amount of all outstanding Facility Letters of Credit and all fees and other amounts due or which may become due with respect thereto. The Borrower shall have no control over funds in the Letter of Credit Collateral Account, which funds shall be invested by the Agent from time to time in its discretion in certificates of deposit of First Chicago having a maturity not exceeding thirty days. Such funds shall be promptly applied by the Agent to reimburse the Issuing Bank for drafts drawn from time to time under the Facility Letters of Credit. Such funds, if any, remaining in the Letter of Credit Collateral Account following the payment of all Obligations in full shall, unless the Agent is otherwise directed by a court of competent jurisdiction, be promptly paid over to the Borrower.
9.2. Amendments. Subject to the provisions of this Article IX, the Required Lenders (or the Agent with the consent in writing of the Required Lenders) and the Borrower may enter into agreements supplemental hereto for the purpose of adding or modifying any provisions to the Loan Documents or changing in any manner the rights of the Lenders or the Borrower hereunder or waiving any Default hereunder; provided, however, that no such supplemental agreement shall, without the consent of each Lender directly or indirectly affected thereby:
(i) Extend the maturity of any Loan or Note or forgive all or any portion of the principal amount thereof, or reduce the rate or extend the time of payment of interest or fees thereon.
(ii) Reduce the percentage specified in the definition of Required Lenders.
(iii) Extend the Termination Date, or reduce the amount or extend
the payment date for the mandatory payments required under
Section 2.7.2, or increase the amount of the Commitment of any
Lender hereunder, or permit the Borrower to assign its rights
under this Agreement.
(iv) Amend this Section 9.2 or Section 3.2, 3.4(b), 3.6(a), 8.6 or 8.7.
(v) Increase the maximum drawable amount or extend the expiration date of any outstanding Facility Letter of Credit (other than in accordance with Article III) or reduce the principal amount of or extend the time of payment of any Reimbursement Obligation or fee associated with any Facility Letter of Credit.
(vi) Release any guarantor of any Obligations or, release all or substantially all of the collateral, if any, securing the Obligations.
No amendment of any provision of this Agreement relating to the Agent shall be effective without the written consent of the Agent. The Agent may waive payment of the fee required under Section 13.3.2 without obtaining the consent of any other party to this Agreement.
9.3. Preservation of Rights. No delay or omission of the Lenders or the Agent to exercise any right under the Loan Documents shall impair such right or be construed to be a waiver of any Default or an acquiescence therein, and the making of a Loan or the issuance of a Facility Letter of Credit notwithstanding the existence of a Default or the inability of the Borrower to satisfy the conditions precedent to such Loan or Facility Letter of Credit shall not constitute any waiver or acquiescence. Any single or partial exercise of any such right shall not preclude other or further exercise thereof or the exercise of any other right, and no waiver, amendment or other variation of the terms, conditions or provisions of the Loan Documents whatsoever shall be valid unless in writing signed by the Lenders required pursuant to Section 9.2, and then only to the extent in such writing specifically set forth. All remedies contained in the Loan Documents or by law afforded shall be cumulative and all shall be available to the Agent and the Lenders until the Obligations have been paid in full.
ARTICLE X
GENERAL PROVISIONS
10.1. Survival of Representations. All representations and warranties of the Borrower contained in this Agreement shall survive delivery of the Notes and the making of the Loans and the issuance of the Facility Letters of Credit herein contemplated.
10.2. Governmental Regulation. Anything contained in this Agreement to the contrary notwithstanding, no Lender shall be obligated to extend credit to the Borrower in violation of any limitation or prohibition provided by any applicable statute or regulation.
10.3. Taxes. Any taxes (excluding federal income taxes on the overall net income of any Lender) or other similar assessments or charges made by any governmental or revenue authority in respect of the Loan Documents shall be paid by the Borrower, together with interest and penalties, if any.
10.4. Headings. Section headings in the Loan Documents are for convenience of reference only, and shall not govern the interpretation of any of the provisions of the Loan Documents.
10.5. Entire Agreement. The Loan Documents embody the entire agreement and understanding among the Borrower, the Agent and the Lenders and supersede all prior agreements and understandings among the Borrower, the Agent and the Lenders relating to the subject matter thereof.
10.6. Several Obligations; Benefits of this Agreement. The respective obligations of the Lenders hereunder are several and not joint and no Lender shall be the partner or agent of any other (except to the extent to which the Agent is authorized to act as such). The failure of any Lender to perform any of its obligations hereunder shall not relieve any other Lender from any of its obligations hereunder. This Agreement shall not be construed so as to confer any right or benefit upon any Person other than the parties to this Agreement and their respective successors and assigns.
10.7. Expenses; Indemnification. The Borrower shall reimburse the Agent for any reasonable costs, internal charges and out-of-pocket expenses (including reasonable attorneys' fees and reasonable time charges of attorneys for the Agent, which attorneys may be employees of the Agent) paid or incurred by the Agent in connection with the amendment, modification, and administration of the Loan Documents. The Borrower also agrees to reimburse the Agent and the Lenders for any reasonable costs, internal charges and out-of-pocket expenses (including reasonable attorneys' fees and reasonable time charges of attorneys for the Agent and the Lenders, which attorneys may be employees of the Agent or the Lenders) paid or incurred by the Agent or any Lender in connection with the collection and enforcement of the Loan Documents. The Borrower further agrees to indemnify the Agent and each Lender, its directors, officers and employees against all losses, claims, damages, penalties, judgments, liabilities and expenses (including, without limitation, all expenses of litigation or preparation therefor whether or not the Agent or any Lender is a party thereto) which any of them may pay or incur arising out of or relating to this Agreement, the other Loan Documents, the transactions contemplated hereby or the direct or indirect application or proposed application of the proceeds of any Loan or the use or intended use of any Facility Letter of Credit hereunder or the issuance or performance under or the participation in any Facility Letter of Credit, except to the extent that any of the same arises or results from the gross negligence or willful misconduct of any Lender or the Agent. The obligations of the Borrower under this Section shall survive the termination of this Agreement.
10.8. Numbers of Documents. All statements, notices, closing documents, and requests hereunder shall be furnished to the Agent with sufficient counterparts so that the Agent may furnish one to each of the Lenders.
10.9. Accounting. Except as provided to the contrary herein, all accounting terms used herein shall be interpreted and all accounting determinations hereunder shall be made in accordance with Agreement Accounting Principles.
10.10. Severability of Provisions. Any provision in any Loan Document that is held to be inoperative, unenforceable, or invalid in any jurisdiction shall, as to that jurisdiction, be inoperative, unenforceable, or invalid without affecting the remaining provisions in that jurisdiction or the operation, enforceability, or validity of that provision in any other jurisdiction, and to this end the provisions of all Loan Documents are declared to be severable.
10.11. Nonliability of Lenders. The relationship between the Borrower and the Lenders and the Agent shall be solely that of borrower and lender. Neither the Agent nor any Lender shall have any fiduciary responsibilities to the Borrower. Neither the Agent nor any Lender undertakes any responsibility
to the Borrower to review or inform the Borrower of any matter in connection with any phase of the Borrower's business or operations.
10.12. Interest. It is the intention of the parties hereto to comply strictly with applicable usury laws; accordingly, notwithstanding any provision to the contrary in this Agreement, the Notes or in any of the Loan Documents securing the payment hereof or otherwise relating hereto, in no event shall this Agreement, the Notes or such other Loan Documents require or permit the payment, charging, taking, reserving, or receiving of any sums constituting interest under applicable laws which exceed the maximum nonusurious amount permitted by such laws. If any such excess interest is contracted for, charged, taken, reserved, or received in connection with the Loans evidenced by the Notes or in any of the Loan Documents securing the payment hereof or otherwise relating hereto, or in any communication by Agent or the Lenders or any other person to the Borrower or any other person, or in the event all or part of the principal or interest thereof shall be prepaid or accelerated, so that under any of such circumstances or under any other circumstance whatsoever the amount of interest contracted for, charged, taken, reserved, or received on the amount of principal actually outstanding from time to time under the Notes shall exceed the maximum nonusurious amount of interest permitted by applicable usury laws, then in any such event it is agreed as follows: (i) the provisions of this paragraph shall govern and control, (ii) any such excess shall be deemed an accidental and bona fide error and canceled automatically to the extent of such excess, and shall not be collected or collectible, (iii) any such excess which is or has been paid or received notwithstanding this paragraph shall be credited against the then unpaid principal balance of the Notes, or, if no principal balance is then outstanding, refunded to the applicable Borrower, and (iv) the effective rate of interest shall be automatically reduced to the maximum nonusurious rate allowed under applicable laws as construed by courts having jurisdiction thereof or hereof. Without limiting the foregoing, all calculations of the rate of interest contracted for, charged, taken, reserved, or received in connection with the Notes or this Agreement which are made for the purpose of determining whether such rate exceeds the maximum nonusurious rate shall be made to the extent permitted by applicable laws by amortizing, prorating, allocating and spreading during the period of the full term of the Loans, including all prior and subsequent renewals and extensions, all interest at any time contracted for, charged, taken, reserved, or received. The terms of this paragraph shall be deemed to be incorporated in every document and communication relating to the Notes, the Loans or any other Loan Document.
10.13. CHOICE OF LAW. THE LOAN DOCUMENTS (OTHER THAN THOSE CONTAINING A CONTRARY EXPRESS CHOICE OF LAW PROVISION) SHALL BE CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS (AND NOT THE LAW OF CONFLICTS) OF THE STATE OF ILLINOIS, BUT GIVING EFFECT TO FEDERAL LAWS APPLICABLE TO NATIONAL BANKS.
10.14. CONSENT TO JURISDICTION. THE BORROWER HEREBY IRREVOCABLY SUBMITS TO THE NON-EXCLUSIVE JURISDICTION OF ANY UNITED STATES FEDERAL OR ILLINOIS STATE COURT SITTING IN CHICAGO IN ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO ANY LOAN DOCUMENTS AND THE BORROWER HEREBY IRREVOCABLY AGREES THAT ALL CLAIMS IN RESPECT OF SUCH ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED IN ANY SUCH COURT AND IRREVOCABLY WAIVES ANY OBJECTION IT MAY NOW OR HEREAFTER HAVE AS TO THE VENUE OF ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN SUCH A COURT OR THAT SUCH COURT IS AN INCONVENIENT FORUM. NOTHING HEREIN SHALL LIMIT THE RIGHT OF THE AGENT OR ANY LENDER TO BRING PROCEEDINGS AGAINST THE BORROWER IN THE COURTS OF ANY
OTHER JURISDICTION. ANY JUDICIAL PROCEEDING BY THE BORROWER AGAINST THE AGENT OR ANY LENDER OR ANY AFFILIATE OF THE AGENT OR ANY LENDER INVOLVING, DIRECTLY OR INDIRECTLY, ANY MATTER IN ANY WAY ARISING OUT OF, RELATED TO, OR CONNECTED WITH ANY LOAN DOCUMENT SHALL BE BROUGHT ONLY IN A COURT IN CHICAGO, ILLINOIS.
10.15. WAIVER OF JURY TRIAL. THE BORROWER, THE AGENT AND EACH LENDER HEREBY WAIVE TRIAL BY JURY IN ANY JUDICIAL PROCEEDING INVOLVING, DIRECTLY OR INDIRECTLY, ANY MATTER (WHETHER SOUNDING IN TORT, CONTRACT OR OTHERWISE) IN ANY WAY ARISING OUT OF, RELATED TO, OR CONNECTED WITH ANY LOAN DOCUMENT OR THE RELATIONSHIP ESTABLISHED THEREUNDER.
10.16. Confidentiality. The Agent and each Lender hereby agree to
treat as confidential all "Confidential Information" (hereinafter defined),
except that the Agent and each Lender may disclose Confidential Information (i)
to other Lenders, (ii) to Affiliates of the Lenders and to the directors,
officers and employees of the Agent, the Lenders and their respective
Affiliates, in each case to the extent required in the course of their
respective duties, (iii) to legal counsel, accountants, and other professional
advisors to the Agent, a Lender or a Transferee to the extent required in the
course of their respective duties, (iv) to regulatory officials having
jurisdiction over a Lender or its Affiliate in connection with any regular or
special audit or investigation, (v) to any Person as requested pursuant to or
as required by law, regulation, or legal process, (vi) to any Person in
connection with any legal proceeding to which the Agent or that Lender is a
party, and (vii) as permitted by Section 13.4; provided, however, that the
Agent and each Lender shall use its best efforts to ensure that any
Confidential Information disclosed pursuant to the foregoing clauses (ii),
(iii) and (vii) shall only be disclosed after such Person(s) shall have been
informed that the information should be treated in a confidential manner. For
purposes hereof, "Confidential Information" shall mean information with respect
to the Borrower which is non-public, confidential or proprietary in nature
which the Agent or any Lender may receive from, or on behalf of, the Borrower
or any Subsidiary pursuant to this Agreement or any of the other Loan
Documents, except such information which was publicly known at or prior to the
time such information is provided to the Agent and/or any such Lender, as the
case may be, or which subsequent thereto becomes publicly known through no act
or omission by the Agent or any Lender or any Person acting on their behalf.
ARTICLE XI
THE AGENT
11.1. Appointment. The First National Bank of Chicago is hereby appointed Agent hereunder and under each other Loan Document, and each of the Lenders irrevocably authorizes the Agent to act as the agent of such Lender. The Agent agrees to act as such upon the express conditions contained in this Article XI. The Agent shall not have a fiduciary relationship in respect of the Borrower or any Lender by reason of this Agreement.
11.2. Powers. The Agent shall have and may exercise such powers under the Loan Documents as are specifically delegated to the Agent by the terms of each thereof, together with such powers as are reasonably incidental thereto. The Agent shall have no implied duties to the Lenders, or any obligation
to the Lenders to take any action thereunder except any action specifically provided by the Loan Documents to be taken by the Agent.
11.3. General Immunity. Neither the Agent nor any of its directors, officers, agents or employees shall be liable to the Borrower, the Lenders or any Lender for any action taken or omitted to be taken by it or them hereunder or under any other Loan Document or in connection herewith or therewith except for its or their own gross negligence or willful misconduct.
11.4. No Responsibility for Loans, Recitals, etc. Neither the Agent nor any of its directors, officers, agents or employees shall be responsible for or have any duty to ascertain, inquire into, or verify (i) any statement, warranty or representation made in connection with any Loan Document or any borrowing hereunder; (ii) the performance or observance of any of the covenants or agreements of any obligor under any Loan Document, including, without limitation, any agreement by an obligor to furnish information directly to each Lender; (iii) the satisfaction of any condition specified in Article V, except receipt of items required to be delivered to the Agent; (iv) the validity, effectiveness or genuineness of any Loan Document or any other instrument or writing furnished in connection therewith; or (v) the value, sufficiency, creation, perfection or priority of any interest in any collateral security. The Agent shall have no duty to disclose to the Lenders information that is not required to be furnished by the Borrower to the Agent at such time, but is voluntarily furnished by the Borrower to the Agent (either in its capacity as Agent or in its individual capacity).
11.5. Action on Instructions of Lenders. The Agent shall in all cases be fully protected in acting, or in refraining from acting, hereunder and under any other Loan Document in accordance with written instructions signed by the Required Lenders, and such instructions and any action taken or failure to act pursuant thereto shall be binding on all of the Lenders and on all holders of Notes. The Agent shall be fully justified in failing or refusing to take any action hereunder and under any other Loan Document unless it shall first be indemnified to its satisfaction by the Lenders pro rata against any and all liability, cost and expense that it may incur by reason of taking or continuing to take any such action.
11.6. Employment of Agents and Counsel. The Agent may execute any of its duties as Agent hereunder and under any other Loan Document by or through employees, agents, and attorneys-in-fact and shall not be answerable to the Lenders, except as to money or securities received by it or its authorized agents, for the default or misconduct of any such agents or attorneys-in-fact selected by it with reasonable care. The Agent shall be entitled to advice of counsel concerning all matters pertaining to the agency hereby created and its duties hereunder and under any other Loan Document.
11.7. Reliance on Documents; Counsel. The Agent shall be entitled to rely upon any Note, notice, consent, certificate, affidavit, letter, telegram, statement, paper or document believed by it to be genuine and correct and to have been signed or sent by the proper person or persons, and, in respect to legal matters, upon the opinion of counsel reasonably selected by the Agent, which counsel may be employees of the Agent.
11.8. Agent's Reimbursement and Indemnification. The Lenders agree
to reimburse and indemnify the Agent ratably in proportion to their respective
Commitments (i) for any amounts not reimbursed by the Borrower for which the
Agent is entitled to reimbursement by the Borrower under the Loan Documents,
(ii) for any other expenses incurred by the Agent on behalf of the Lenders, in
connection with the preparation, execution, delivery, administration and
enforcement of the Loan Documents and (iii)
for any liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind and nature whatsoever which may be imposed on, incurred by or asserted against the Agent in any way relating to or arising out of the Loan Documents or any other document delivered in connection therewith or the transactions contemplated thereby, or the enforcement of any of the terms thereof or of any such other documents, provided that no Lender shall be liable for any of the foregoing to the extent they arise from the gross negligence or willful misconduct of the Agent. The obligations of the Lenders under this Section 11.8 shall survive payment of the Obligations and termination of this Agreement.
11.9. Rights as a Lender. In the event the Agent is a Lender, the Agent shall have the same rights and powers hereunder and under any other Loan Document as any Lender and may exercise the same as though it were not the Agent, and the term "Lender" or "Lenders" shall, at any time when the Agent is a Lender, unless the context otherwise indicates, include the Agent in its individual capacity. The Agent may accept deposits from, lend money to, and generally engage in any kind of trust, debt, equity or other transaction, in addition to those contemplated by this Agreement or any other Loan Document, with the Borrower or any of its Subsidiaries in which the Borrower or such Subsidiary is not restricted hereby from engaging with any other Person. The Agent, in its individual capacity, is not obligated to remain a Lender.
11.10. Lender Credit Decision. Each Lender acknowledges that it has, independently and without reliance upon the Agent or any other Lender and based on the financial statements prepared by the Borrower and such other documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement and the other Loan Documents. Each Lender also acknowledges that it will, independently and without reliance upon the Agent or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement and the other Loan Documents.
11.11. Successor Agent. The Agent may resign at any time by giving written notice thereof to the Lenders and the Borrower, such resignation to be effective upon the appointment of a successor Agent or, if no successor Agent has been appointed, forty-five days after the retiring Agent gives notice of its intention to resign. Upon any such resignation, the Required Lenders shall have the right to appoint, on behalf of the Lenders, a successor Agent reasonably acceptable to the Borrower. If no successor Agent shall have been so appointed by the Required Lenders within thirty days after the resigning Agent's giving notice of its intention to resign, then the resigning Agent may appoint, on behalf of the Lenders, a successor Agent reasonably acceptable to the Borrower. If the Agent has resigned and no successor Agent has been appointed, the Lenders may perform all the duties of the Agent hereunder and the Borrower shall make all payments in respect of the Obligations to the applicable Lender and for all other purposes shall deal directly with the Lenders. No successor Agent shall be deemed to be appointed hereunder until such successor Agent has accepted the appointment. Any such successor Agent shall be either a Lender hereunder or a commercial bank organized under the laws of the United States or any state thereof having capital and retained earnings of at least $100,000,000. Upon the acceptance of any appointment as Agent hereunder by a successor Agent, such successor Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the resigning Agent. Upon the effectiveness of the resignation of the Agent, the resigning Agent shall be discharged from its duties and obligations hereunder and under the Loan Documents. After the effectiveness of the resignation of an Agent, the provisions of this Article XI shall continue in effect for the benefit of such Agent in respect of any actions taken or omitted to be taken by it while it was acting as the Agent hereunder and under the other Loan Documents.
ARTICLE XII
SETOFF; RATABLE PAYMENTS
12.1. Setoff. In addition to, and without limitation of, any rights of the Lenders under applicable law, if the Borrower becomes insolvent, or any Default or Unmatured Default occurs, any and all deposits (including all account balances, whether provisional or final and whether or not collected or available) and any other Indebtedness at any time held or owing by any Lender to or for the credit or account of the Borrower may be offset and applied toward the payment of the Obligations then due and payable to such Lender.
12.2. Ratable Payments. If any Lender, whether by setoff or otherwise, has payment made to it upon its share of any Advance or Reimbursement Obligation (other than payments received pursuant to Sections 4.1, 4.2 or 4.4) in a greater proportion than that received by any other Lender, such Lender agrees, promptly upon demand, to purchase a portion of that Advance or Reimbursement Obligation held by the other Lenders so that after such purchase each Lender will hold its ratable proportion that Advance or Reimbursement Obligation. If any Lender, whether in connection with setoff or amounts which might be subject to setoff or otherwise, receives collateral or other protection for its Obligations or such amounts which may be subject to setoff, such Lender agrees, promptly upon demand, to take such action necessary such that all Lenders share in the benefits of such collateral ratably in proportion to their Loans. In case any such payment is disturbed by legal process, or otherwise, appropriate further adjustments shall be made.
ARTICLE XIII
BENEFIT OF AGREEMENT; ASSIGNMENTS; PARTICIPATIONS
13.1. Successors and Assigns. The terms and provisions of the Loan Documents shall be binding upon and inure to the benefit of the Borrower and the Lenders and their respective successors and assigns, except that (i) the Borrower shall not have the right to assign its rights or obligations under the Loan Documents and (ii) any assignment by any Lender must be made in compliance with Section 13.3. Notwithstanding clause (ii) of this Section, any Lender may at any time, without the consent of the Borrower or the Agent, assign all or any portion of its rights under this Agreement and its Notes to a Federal Reserve Bank; provided, however, that no such assignment shall release the transferor Lender from its obligations hereunder. The Agent may treat the payee of any Note as the owner thereof for all purposes hereof unless and until such payee complies with Section 13.3 in the case of an assignment thereof or, in the case of any other transfer, a written notice of the transfer is filed with the Agent. Any assignee or transferee of a Note agrees by acceptance thereof to be bound by all the terms and provisions of the Loan Documents. Any request, authority or consent of any Person, who at the time of making such request or giving such authority or consent is the holder of any Note, shall be conclusive and binding on any subsequent holder, transferee or assignee of such Note or of any Note or Notes issued in exchange therefor.
13.2. Participations.
13.2.1. Permitted Participants; Effect. Any Lender may, in the ordinary course of its business and in accordance with applicable law, at any time sell to one or more banks or other entities ("Participants") participating interests in any Loan owing to such Lender, any Note held by such Lender, any interest in Facility Letters of Credit, any Commitment of such Lender or any other interest of such Lender under the Loan Documents. In the event of any such sale by a Lender of participating interests to a Participant, such Lender's obligations under the Loan Documents shall remain unchanged, such Lender shall remain solely responsible to the other parties hereto for the performance of such obligations, such Lender shall remain the holder of any such Note for all purposes under the Loan Documents, all amounts payable by the Borrower under this Agreement shall be determined as if such Lender had not sold such participating interests, and the Borrower and the Agent shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under the Loan Documents.
13.2.2. Voting Rights. Each Lender shall retain the sole right to approve, without the consent of any Participant, any amendment, modification or waiver of any provision of the Loan Documents other than any amendment, modification or waiver with respect to any Loan, Facility Letter of Credit or Commitment in which such Participant has an interest which forgives principal, interest or fees or reduces the interest rate or fees payable with respect to any such Loan, Facility Letter of Credit or Commitment, postpones any date fixed for any regularly-scheduled payment of principal of, or interest or fees on, any such Loan, Facility Letter of Credit or Commitment, releases any guarantor of any such Loan or Facility Letter of Credit or releases any substantial portion of collateral, if any, securing any such Loan or Facility Letter of Credit.
13.2.3. Benefit of Setoff. The Borrower agrees that each
Participant shall be deemed to have the right of setoff provided in
Section 12.1 in respect of its participating interest in amounts owing
under the Loan Documents to the same extent as if the amount of its
participating interest were owing directly to it as a Lender under the
Loan Documents, provided that each Lender shall retain the right of
setoff provided in Section 12.1 with respect to the amount of
participating interests sold to each Participant. The Lenders agree
to share with each Participant, and each Participant, by exercising
the right of setoff provided in Section 12.1, agrees to share with
each Lender, any amount received pursuant to the exercise of its right
of setoff, such amounts to be shared in accordance with Section 12.2
as if each Participant were a Lender.
13.3. Assignments.
13.3.1. Permitted Assignments. Any Lender may, in the ordinary course of its business and in accordance with applicable law, at any time assign to one or more banks or similar lending institutions ("Purchasers") all or any part of its rights and obligations under the Loan Documents pursuant to an assignment agreement substantially in the form of Exhibit "D" hereto or in such other form as may be agreed to by the parties thereto (the "Assignment Agreement"). The consent of the Borrower and the Agent shall be required prior to an assignment becoming effective with respect to a Purchaser which is not a Lender or an Affiliate thereof. Such consent shall not be unreasonably withheld or delayed.
13.3.2. Effect; Effective Date. Upon (i) delivery to the Agent of a notice of assignment, substantially in the form attached as Annex "I" to Exhibit "D" hereto (a "Notice of Assignment"), together with any consents required by Section 13.3.1, and (ii) payment of a $2,500 fee to the Agent for processing such assignment, such assignment shall become effective on the effective date specified in such Notice of Assignment. The Notice of Assignment shall contain a representation by the Purchaser to the effect that none of the consideration used to make the purchase of the Commitment, Facility Letters of Credit and Loans under the applicable assignment agreement are "plan assets" as defined under ERISA and that the rights and interests of the Purchaser in and under the Loan Documents will not be "plan assets" under ERISA. On and after the effective date of such assignment, such Purchaser shall for all purposes be a Lender party to this Agreement and any other Loan Document executed by the Lenders and shall have all the rights and obligations of a Lender under the Loan Documents, to the same extent as if it were an original party hereto, and no further consent or action by the Borrower, the Lenders or the Agent shall be required to release the transferor Lender with respect to the Percentage of the Aggregate Commitment, Facility Letters of Credit and Loans assigned to such Purchaser. Upon the consummation of any assignment to a Purchaser pursuant to this Section 13.3.2, the transferor Lender, the Agent and the Borrower shall make appropriate arrangements so that replacement Notes are issued to such transferor Lender and new Notes or, as appropriate, replacement Notes, are issued to such Purchaser, in each case in principal amounts reflecting their Commitment, as adjusted pursuant to such assignment. In addition, within a reasonable time after the effective date of any assignment, the Agent shall, and is hereby authorized and directed to, revise Schedule "1" reflecting the revised Percentages of each of the Lenders and shall distribute such revised Schedule "1" to each of the Lenders and the Borrower and such revised Schedule "1" shall replace the old Schedule "1" and become part of this Agreement.
13.4. Dissemination of Information. The Borrower authorizes each Lender to disclose to any Participant or Purchaser or any other Person acquiring an interest in the Loan Documents by operation of law (each a "Transferee") and any prospective Transferee any and all information in such Lender's possession concerning the creditworthiness of the Borrower and its Subsidiaries; provided that each Transferee and prospective Transferee agrees to be bound by Section 10.16.
13.5. Tax Treatment. If any interest in any Loan Document is transferred to any Transferee which is organized under the laws of any jurisdiction other than the United States or any State thereof, the transferor Lender shall cause such Transferee, concurrently with the effectiveness of such transfer, to comply with the provisions of Section 2.18.
ARTICLE XIV
NOTICES
14.1. Giving Notice. Except as otherwise permitted by Section 2.13 with respect to borrowing notices, all notices and other communications provided to any party hereto under this Agreement or any other Loan Document shall be in writing or by telex or by facsimile and addressed or delivered to such party at its address set forth below its signature hereto or at such other address as may be designated by such party in a notice to the other parties. Any notice, if mailed and properly addressed with postage
prepaid, shall be deemed given when received; any notice, if transmitted by telex or facsimile, shall be deemed given when transmitted (answerback confirmed in the case of telexes).
14.2. Change of Address. The Borrower, the Agent and any Lender may each change the address for service of notice upon it by a notice in writing to the other parties hereto.
ARTICLE XV
COUNTERPARTS
This Agreement may be executed in any number of counterparts, all of which taken together shall constitute one agreement, and any of the parties hereto may execute this Agreement by signing any such counterpart. This Agreement shall be effective when it has been executed by the Borrower, the Agent and the Lenders and each party has notified the Agent by telex or telephone, that it has taken such action.
IN WITNESS WHEREOF, the Borrower, the Lenders and the Agent have executed this Agreement as of the date first above written.
ADMINISTAFF, INC.
By:____________________________________
Print Name:____________________________
Title:_________________________________
19001 Crescent Springs Drive
Kingwood, Texas 77339-3802
Phone: (713) 359-9425
Fax: (713) 359-0377
Attention: Richard G. Rawson,
Chief Financial Officer
THE FIRST NATIONAL BANK OF CHICAGO,
Individually and as Agent
By:____________________________________
Print Name:____________________________
Title:_________________________________
One First National Plaza
Mail Suite 0088
Chicago, Illinois 60670
Phone: (312) 732-6066
Fax: (312) 732-5161
Attention: Jeanette Ganousis, Vice President
EXHIBIT "A"
NOTE
$________________ October 16, 1995
Administaff, Inc., a Texas corporation (the "Borrower"), promises to pay to the order of ________________________________ (the "Lender") the lesser of the principal sum of __________________ Dollars or the aggregate unpaid principal amount of all Loans made by the Lender to the Borrower pursuant to Article II of the Credit Agreement (as the same may be amended or modified, the "Agreement") hereinafter referred to, in immediately available funds at the main office of The First National Bank of Chicago in Chicago, Illinois, as Agent, together with interest on the unpaid principal amount hereof at the rates and on the dates set forth in the Agreement. The Borrower shall pay the principal of and accrued and unpaid interest on the Loans in full on the Termination Date.
The Lender shall, and is hereby authorized to, record on the schedule attached hereto, or to otherwise record in accordance with its usual practice, the date and amount of each Loan and the date and amount of each principal payment hereunder.
This Note is one of the Notes issued pursuant to, and is entitled to the benefits of, the Credit Agreement, dated as of October 16, 1995 among the Borrower, The First National Bank of Chicago, individually and as Agent, and the lenders named therein, including the Lender, to which Agreement, as it may be amended from time to time, reference is hereby made for a statement of the terms and conditions governing this Note, including the terms and conditions under which this Note may be prepaid or its maturity date accelerated. Capitalized terms used herein and not otherwise defined herein are used with the meanings attributed to them in the Agreement.
ADMINISTAFF, INC.
By:____________________________________
Print Name:____________________________
Title:_________________________________
SCHEDULE OF LOANS AND PAYMENTS OF PRINCIPAL
TO
NOTE OF ADMINISTAFF, INC.,
DATED OCTOBER 16, 1995
Maturity
Principal Maturity Principal
Amount of of Interest Amount Unpaid
Date Loan Period Paid Balance
- ---- ---------- ----------- ------------ -------
|
EXHIBIT "B-1"
FORM OF OPINION
_________________, 1995
To: The First National Bank of Chicago, as Agent And the Lenders Identified in Schedule 1 Attached Hereto
Re: Credit Agreement dated as of October 16, 1995 among Administaff, Inc., a Texas corporation, the Lenders Party Thereto and The First National Bank of Chicago, as Agent
Ladies and Gentlemen:
Reference is made to the Credit Agreement (the "Credit Agreement") dated as of October 16, 1995 among Administaff, Inc., a Texas corporation (the "Borrower"), the Lenders party thereto and The First National Bank of Chicago, as Agent, which Credit Agreement provides, among other things, for Advances in an aggregate principal amount not to exceed US$10,000,000 at any one time outstanding. Capitalized terms used herein and not defined herein, if any, shall have the meanings specified in the Credit Agreement.
We have acted as special counsel to the Borrower in connection with the execution and delivery of the Credit Agreement and the "Note" (hereinafter defined). This opinion is being delivered to you pursuant to Section 5.1(v) of the Credit Agreement.
For purposes of this opinion, we have examined:
(a) the Credit Agreement;
(b) that certain Note (the "Note"), dated October 16, 1995 in the face amount of $10,000,000, executed by the Borrower and payable to The First National Bank of Chicago.
(c) originals, or copies certified or otherwise identified to our satisfaction, of such other documents, records, instruments and certificates (collectively, the "Certificates") of officers of the Borrower, public officials and others as we have deemed necessary or appropriate to enable us to render this opinion.
and have conducted such examination of law as we have deemed necessary or appropriate to enable us to render this opinion. (The documents referred to in the foregoing clauses (a)-(b) shall be hereinafter collectively referred to as the "Credit Documents.")
In rendering our opinions set forth herein, we have assumed (i) the genuineness of all signatures and of all documents submitted to us as originals, (ii) that all copies submitted to us conform to the authentic originals thereof, (iii) the legal capacity of all natural persons, (iv) that each party to the Credit Documents (other than the Borrower) (w) is duly organized, validly existing and in good standing under the laws of its jurisdiction of organization, (x) has full power, authority and legal right (corporate and
other) to execute, deliver and perform its respective obligations under the Credit Documents and any other documents executed and delivered by it in connection with the transactions contemplated by the Credit Agreement, (y) has duly authorized by all requisite action, the execution, delivery and performance of each of the Credit Documents and such other documents to which it is a party, and (z) pursuant to such authority, has duly executed and delivered the Credit Documents and such other documents by its duly authorized officer, representative or agent and (v) that each of said documents (including, without limitation, the Credit Documents) is valid, binding and enforceable against each party thereto (other than the Borrower).
In rendering our opinion, we have relied on (but have not independently verified) the accuracy and completeness of (i) the representations and warranties of the Borrower and Holdings contained in the Credit Documents and (ii) the Certificates.
Based on and subject to the foregoing, and further subject to the other assumptions, qualifications and limitations hereinafter set forth, it is our opinion that:
1. Each of the Borrower, [Specify Subsidiaries] is a corporation and is validly existing and in good standing under the laws of its state of incorporation. Borrower is duly qualified to do business and is in good standing as a foreign corporation in each of the jurisdictions of the United States listed in Schedule 2 hereto, which jurisdictions, the Borrower has advised us, are the only jurisdictions of the United States wherein Borrower owns or leases any property or conducts any business and where the failure so to so qualify could reasonably be expected to have a Material Adverse Effect.
2. The execution, delivery and performance by Borrower of each of the Credit Documents have been duly authorized by all necessary corporate action on the part of Borrower and do not (i) breach Borrwer's articles of incorporation or bylaws or (ii) violate those laws of the State of Texas or federal law which, based upon our experience, are applicable to transactions of the character provided for in the Credit Agreement.
3. Each of the Credit Documents is the legal, valid and binding obligation of Borrower, enforceable against it in accordance with its terms.
4. No material consent, approval or authorization of, or declaration or filing with, any Texas State or United States of America federal governmental authority is required to be obtained for the execution, delivery, and performance by the Borrower of the Credit Documents.
5. The courts of the State of Texas and a Federal court sitting
in the State of Texas and applying the laws of the State of Texas in respect of
Section 10.14 of the Credit Agreement, in a properly argued and presented case,
should give effect to the choice of Illinois law set forth therein.
Our opinions set forth hereinabove are qualified as follows:
(a) The opinions set forth in paragraph no. 1 above are based solely on our review of certificates as of a recent date by public officials of the applicable jurisdictions.
(b) Our opinion set forth in paragraph no. 3 above is limited by each of the following:
(i) applicable bankruptcy, reorganization, fraudulent conveyance, rearrangement, insolvency, moratorium and similar laws affecting the enforcement of creditors' rights generally as at the time in effect;
(ii) general principles of equity, including, without limitation, concepts of materiality, reasonableness, good faith and fair dealing (regardless of whether considered in a proceeding in equity or at law); and
(iii) the availability of equitable remedies' (regardless of whether considered in a proceeding at equity or at law), including, without limitation, specific enforcement and injunctive relief, being subject to the discretion of the court before which any proceedings therefor may be brought.
Further in regard to clause (ii) immediately above, we call to your attention that we express no opinion as to the enforceability of the Credit Documents in the event the Agent or any of the Lenders fail to act in good faith and in a commercially reasonable manner. Further, the interpretation and enforceability of the Credit Documents or any provisions thereof are also subject to the course of dealings between the parties and the applicable usage of trade. In this regard and without limiting the generality of the foregoing, you are advised that pursuant to Section 1.205 of the Texas Business and Commerce Code (the "Texas UCC") terms of an agreement covered thereby are to be interpreted in consideration of commercial practices and other surrounding circumstances, including a course of dealing between parties and usage of trade.
Further, for purposes of rendering our opinion set forth in paragraph no. 3 hereinabove, we have assumed that Texas law is the same as Illinois law with respect to all matters affecting such opinion.
(c) In rendering our opinion set forth in paragraph no. 5
hereinabove, we are relying solely upon or reading of Section 35.51 of the
Texas UCC. In this regard, we call your attention to the fact that said
Section 35.51 of the Texas UCC is new, and that we are not aware of any
interpretive case rulings in regard thereto. Further, for purposes of
rendering such opinion, we have assumed that The First National Bank of Chicago
has its place of business (or if such party has more than one place of
business, its chief executive office or an office from which it conducted a
substantial part of the negotiations relating to the transaction contemplated
by the Credit Agreement), in the State of Illinois and that the Borrower is,
and during the term of the Credit Agreement will continue to be, required to
deliver payment of the Obligations in the State of Illinois and have relied on
such assumption.
Further in regard to our opinion set forth in paragraph no. 5 hereinabove, we express no opinion with respect to choice of law in any action, suit or proceeding in any forum other than the courts of the State of Texas or the courts of the United States sitting in Texas.
(d) We express no opinion herein as to usury and matters affecting usury.
(e) We express no opinion herein as to Section 13.2.3 of the Credit Agreement or any similar provisions of any other of the Credit Documents which purport to establish privity of contract.
(f) We express no opinion as to certain provisions of the Credit Documents (including, without limitation Section 3.7 of the Credit Agreement), to the extent such provisions purport to impose liability on the Credit Parties, and to relieve the Agent and the Lenders from liability, in respect of payments made,
or the failure to make payments, under the Facility Letters of Credit in violation or otherwise in conflict with the applicable provisions of the Texas UCC. In this regard, you are advised that Section 5.109 of the Texas UCC requires the issuer of a letter of credit to examine documents with care so as to ascertain that on their face they appear to comply with the terms of a letter of credit, and Section 5.114 of the Texas UCC requires that an issuer honor a draft which complies with the terms of the relevant letter of credit.
(g) We express no opinion herein with respect to any environmental laws or regulation or any other environmental matters.
(h) We express no opinion herein with respect to the
enforceability of provisions of the Credit Documents which (i) purport to
restrict access to legal or equitable remedies or which relate to submission to
jurisdiction or venue of courts (including, without limitation, waivers of
forum non conveniens), (ii) any waivers of remedies, defenses, trial by jury or
other benefits bestowed by law or rights to notice, (iii) purport to establish
evidentiary standards for suits or proceedings to enforce any of the Credit
Documents or otherwise such as, for example, Sections 2.13 and 4.5 of the
Credit Agreement or which constitute consent judgments, (iv) relate to
severability, subrogation rights (or the waiver thereof), liquidated damages,
penalties, set-offs, whether or not in respect of obligations which have not
matured (or the waiver thereof), marshaling of assets, rights of third parties,
or ratifications of future acts, (v) relate to indemnification or exculpation
provisions, (vi) purport to limit the liability of any Person or which relate
to the delay or omission of enforcement of rights or remedies, (vii) purport to
preserve and maintain the validity of any obligation arising under any of the
Credit Documents despite such obligations' being unenforceable, invalid or
avoidable such as, for example, Section 3.7(a)(1) of the Credit Agreement,
(viii) contain any agreement to agree, (ix) purport to irrevocably appoint
attorneys-in-fact or other agents, (x) purport to require that all amendments
and waivers be in writing, (xi) purport to confer subject matter jurisdiction
in respect of bringing suit, enforcement of judgments or otherwise on any
court, or (xii) purport to require payments to be made without set-off,
deduction or counterclaim.
The opinions expressed herein are as of the date hereof only, and we
assume no obligation, and expressly disclaim any obligation, to update or
supplement such opinions to reflect any fact or circumstance that may hereafter
come to our attention or any change in law that may hereafter occur or become
effective. This opinion is limited to (i) the laws of the State of Texas and
(ii) to the extent applicable, the federal laws of the United States of
America, and we express no opinion as to the laws of any other jurisdiction.
Without limiting the generality of the foregoing, we are not authorized to
practice law in Illinois, have made no examination of Illinois law and express
no opinion in respect of the laws of Illinois or any matter governed by such
laws. In this regard, we note that the Credit Documents provide that they are
to be governed by the laws of the State of Illinois. This opinion is furnished
as of its date solely for the addressees hereof, the other Lenders, if any,
from time to time party to the Credit Agreement and any Participants pursuant
to Section 13.2.1 of the Credit Agreement and may not be relied upon by any
other Person, or by the Agent, such Lenders, or such Participants in any other
context without our express prior written consent. Neither may this opinion be
quoted or in any way published or provided to any Person, in whole or in part,
without our express prior written consent. This opinion is limited to the
matters expressed herein, and no opinions are intended to be implied, or may be
inferred, beyond those expressly stated herein.
Very truly yours,
EXHIBIT "B-2"
FORM OF OPINION
Administaff, Inc. Letterhead
October __, 1995
To: The First National Bank of Chicago, as Agent And the Lenders Identified in Schedule 1 Attached Hereto
Re: Credit Agreement dated as of October 16, 1995 among Administaff, Inc., a Texas corporation, the Lenders Party Thereto and The First National Bank of Chicago, as Agent
Ladies and Gentlemen:
Reference is made to the Credit Agreement (the "Credit Agreement") dated as of October 16, 1995 among Administaff, Inc., a Texas corporation (the "Borrower"), the Lenders party thereto and The First National Bank of Chicago, as Agent, which Credit Agreement provides, among other things, for Advances in an aggregate principal amount not to exceed US$10,000,000 at any one time outstanding. Capitalized terms used herein and not defined herein, if any, shall have the meanings specified int he Credit Agreement.
I am the [Vice President and General Counsel] of the Borrower and am rendering this opinion to you in such capacity and pursuant to Section 5.1(v) of the Credit Agreement.
For purposes of this opinion, I have reviewed:
(a) the Credit Agreement;
(b) that certain Note (the "Note"), dated October 16, 1995 in the original face amount of $10,000,000 and each executed by the Borrower payable to the order of The First National Bank of Chicago; and
(c) originals, or copies certified or otherwise identified to our satisfaction, of such other documents, records, instruments and certificates (collectively, the "Certificates") of officers of the Borrower, public officials and others as I have deemed necessary or appropriate to enable us to render this opinion
and have conducted such examination of law as I have deemed necessary or appropriate to enable me to render this opinion. (The documents referred to in the foregoing clauses (a)-(b) shall be hereinafter collectively referred to as the "Credit Documents.")
In rendering my opinions set forth herein, I have assumed (i) the genuineness of all signatures and of all documents submitted to me as originals, (ii) that all copies submitted to me conform to the authentic originals thereof and (iii) the authenticity of the originals of such latter documents and have relied on, but have not independently verified, the accuracy and completeness of the information contained in the documents examined by me.
Based on and subject to the foregoing, and further subject to the other assumptions, qualifications and limitations hereinafter set forth, it is my opinion that:
1. The execution, delivery and performance by the Borrower of
each of the Credit Documents (i) do not violate any order, writ, judgment,
injunction decree or award binding on it or an of its Subsidiaries and or any
indenture, instrument or agreement binding upon it or any of its Subsidiaries,
(ii) will not result in, or require, the creation or imposition of any Lien
pursuant to the provisions of any indenture, instrument or agreement binding
upon it or any of its Subsidiaries, which violations or defaults or imposition
of Liens, singly or in the aggregate, could reasonably be expected to have a
Material Adverse Effect and (iii) will not require any consent of the
Borrower's shareholders.
2. The Credit Documents have been duly executed and delivered by the Borrower.
3. Except as set forth in Schedule I hereto, there is no litigation or proceeding pending against the Borrower or any of its Subsidiaries which, if adversely determined, could reasonably be expected to have a Material Adverse Effect.
The opinions expressed herein are as of the date hereof only, and I assume no obligation, and expressly disclaim any obligation, to update or supplement such opinions to reflect any fact or circumstance that may hereafter come to my attention or any change in law that may hereafter occur or become effective. This opinion is limited to the laws of the State of Texas and to the extent applicable, the federal laws of the United States of America, and I express no opinion as to the laws of any other jurisdiction. Without limiting the generality of the foregoing, I am not authorized to practice law in Illinois, have made no examination of Illinois law and express no opinion in respect of the laws of Illinois or any matter governed by such laws. In this regard, I note that the Credit Documents provide that they are to be governed by the laws of the State of Illinois. This opinion is furnished as of its date solely for the addressees hereof, the other Lenders, if any, from time to time party to the Credit Agreement and any Participants pursuant to Section 13.2.1 of the Credit Agreement and may not be relied upon by any other Person or by the Agent, such Lenders or such Participants in any other context without my express prior written consent. Neither may this opinion be quoted or in any way published or provided to any Person, in whole or in part, without my express prior written consent. This opinion is limited to the matters expressed herein, and no opinions are intended to be implied, or may be inferred, beyond those expressly stated herein.
Sincerely,
EXHIBIT "C"
COMPLIANCE CERTIFICATE
To: The Lenders parties to the
Credit Agreement Described Below
This Compliance Certificate is furnished pursuant to that certain Credit Agreement dated as of October 16, 1995 (as amended, modified, renewed or extended from time to time, the "Agreement") among the Borrower, the lenders party thereto and The First National Bank of Chicago, as Agent for the Lenders. Unless otherwise defined herein, capitalized terms used in this Compliance Certificate have the meanings ascribed thereto in the Agreement.
THE UNDERSIGNED HEREBY CERTIFIES THAT:
1. I am the duly elected ____________________ of the Borrower;
2. I have reviewed the terms of the Agreement and I have made, or have caused to be made under my supervision, a detailed review of the transactions and conditions of the Borrower and its Subsidiaries during the accounting period covered by the attached financial statements;
3. The examinations described in paragraph 2 did not disclose, and I have no knowledge of, the existence of any condition or event which constitutes a Default or Unmatured Default during or at the end of the accounting period covered by the attached financial statements or as of the date of this Certificate, except as set forth below; and
4. Schedule I attached hereto sets forth financial data and computations evidencing the Borrower's compliance with certain covenants of the Agreement, all of which data and computations are true, complete and correct.
Described below are the exceptions, if any, to paragraph 3 by listing, in detail, the nature of the condition or event, the period during which it has existed and the action which the Borrower has taken, is taking, or proposes to take with respect to each such condition or event:
The foregoing certifications, together with the computations set forth in Schedule I hereto and the financial statements delivered with this Certificate in support hereof, are made and delivered this ____ day of ______________, 19_ _.
[SAMPLE]
SCHEDULE I TO COMPLIANCE CERTIFICATE
Schedule of Compliance as of with Provisions of ______ and ________ of the Agreement
7.22 Financial Covenants
7.22.1 Leverage Ratio1
Total Liabilities
-------------------------
Minus: cash and cash equivalents in excess of $5,000,000
-------------------------
(a) Sum
-------------------------
Outstanding Indebtedness
-------------------------
Minus: Outstandings under this Agreement
-------------------------
Plus: Net Worth
-------------------------
(b) Total Capital
-------------------------
Leverage Ratio (a) divided by (b)
--------------
Maximum Leverage Ratio 3.00:1.0
----------------
7.22.2 Fixed Coverage Ratio
Computed based upon current quarter and prior three quarters results
Net income
-------------------------
Plus:
Income taxes
-------------------------
Interest expense
-------------------------
Extraordinary items
-------------------------
Rental expense
-------------------------
(a) Adjusted Earnings
-------------------------
Interest expense
-------------------------
Plus: Rental expense
-------------------------
(b) Sum
-------------------------
Fixed Charge Coverage Ratio (a) divided by (b)
---------------
Minimum Fixed Charge Coverage Ratio [2.25] [3.00]:1.0
---------------
|
(1)Also used to determine the Applicable Margin
7.22.3 Tangible Net Worth
Net Worth
-------------------------
Plus: Existing Subordinated Debt and Holdings
Subordinated Debt
-------------------------
Minus: Intangible Assets
-------------------------
(a) Tangible Net Worth
-------------------------
Base $7,750,000
-------------------------
Plus: 50% of quarterly net income, if positive, from the quarter
ending September 30, 1995 through the current quarter
-------------------------
(b) Minimum Tangible Net Worth
-------------------------
Excess (deficient) Tangible Net Worth (a) minus (b)
-------------------------
|
EXHIBIT "D"
ASSIGNMENT AGREEMENT
This Assignment Agreement (this "Assignment Agreement") between __________________________ (the "Assignor") and _________________ (the "Assignee") is dated as of _________________, 19__. The parties hereto agree as follows:
1. PRELIMINARY STATEMENT. The Assignor is a party to a Credit Agreement (which, as it may be amended, modified, renewed or extended from time to time is herein called the "Credit Agreement") described in Item 1 of Schedule 1 attached hereto ("Schedule 1"). Capitalized terms used herein and not otherwise defined herein shall have the meanings attributed to them in the Credit Agreement.
2. ASSIGNMENT AND ASSUMPTION. The Assignor hereby sells and assigns to the Assignee, and the Assignee hereby purchases and assumes from the Assignor, an interest in and to the Assignor's rights and obligations under the Credit Agreement such that after giving effect to such assignment the Assignee shall have purchased pursuant to this Assignment Agreement the percentage interest specified in Item 3 of Schedule 1 of all outstanding rights and obligations under the Credit Agreement relating to the facilities listed in Item 3 of Schedule 1 and the other Loan Documents. The aggregate Commitment (or Loans and participation interests in Facility Letters of Credit, if the applicable Commitment has been terminated) purchased by the Assignee hereunder is set forth in Item 4 of Schedule 1.
3. EFFECTIVE DATE. The effective date of this Assignment Agreement (the "Effective Date") shall be the later of the date specified in Item 5 of Schedule 1 or two Business Days (or such shorter period agreed to by the Agent) after a Notice of Assignment substantially in the form of Annex "I" attached hereto has been delivered to the Agent; provided, however that in no event will the Effective Date occur if the payments required to be made by the Assignee to the Assignor on the Effective Date under Sections 4 and 5 hereof are not made on the proposed Effective Date. Such Notice of Assignment must include any consents required to be delivered to the Agent by Section 13.3.1 of the Credit Agreement. The Assignor will notify the Assignee of the proposed Effective Date no later than the Business Day prior to the Effective Date. As of the Effective Date, (i) the Assignee shall have the rights and obligations of a Lender under the Loan Documents with respect to the rights and obligations assigned to the Assignee hereunder and (ii) the Assignor shall relinquish its rights and be released from its corresponding obligations under the Loan Documents with respect to the rights and obligations assigned to the Assignee hereunder.
4. PAYMENTS OBLIGATIONS. On and after the Effective Date, the Assignee shall be entitled to receive from the Agent all payments of principal, interest and fees with respect to the interest assigned hereby. The Assignee shall advance funds directly to the Agent with respect to all Loans and reimbursement payments made on or after the Effective Date with respect to the interest assigned hereby. [In consideration for the sale and assignment of Loans hereunder, (i) the Assignee shall pay the Assignor, on the Effective Date, an amount equal to the principal amount of the portion of all Alternate Base Rate Loans assigned to the Assignee hereunder and (ii) with respect to each Eurodollar Loan made by the
Assignor and assigned to the Assignee hereunder which is outstanding on the
Effective Date, (a) on the last day of the Interest Period therefor or (b) on
such earlier date agreed to by the Assignor and the Assignee or (c) on the date
on which any such Eurodollar Loan either becomes due (by acceleration or
otherwise) or is prepaid (the date as described in the foregoing clauses (a),
(b) or (c) being hereinafter referred to as the "Payment Date"), the Assignee
shall pay the Assignor an amount equal to the principal amount of the portion
of such Eurodollar Loan assigned to the Assignee which is outstanding on the
Payment Date. If the Assignor and the Assignee agree that the Payment Date for
such Eurodollar Loan shall be the Effective Date, they shall agree to the
interest rate applicable to the portion of such Loan assigned hereunder for the
period from the Effective Date to the end of the existing Interest Period
applicable to such Eurodollar Loan (the "Agreed Interest Rate") and any
interest received by the Assignee in excess of the Agreed Interest Rate shall
be remitted to the Assignor. In the event interest for the period from the
Effective Date to but not including the Payment Date is not paid by the
Borrower with respect to any Eurodollar Loan sold by the Assignor to the
Assignee hereunder, the Assignee shall pay to the Assignor interest for such
period on the portion of such Eurodollar Loan sold by the Assignor to the
Assignee hereunder at the applicable rate provided by the Credit Agreement. In
the event a prepayment of any Eurodollar Loan which is existing on the Payment
Date and assigned by the Assignor to the Assignee hereunder occurs after the
Payment Date but before the end of the Interest Period applicable to such
Eurodollar Loan, the Assignee shall remit to the Assignor the excess of the
prepayment penalty paid with respect to the portion of such Eurodollar Loan
assigned to the Assignee hereunder over the amount which would have been paid
if such prepayment penalty was calculated based on the Agreed Interest Rate.
The Assignee will also promptly remit to the Assignor (i) any principal
payments received from the Agent with respect to Eurodollar Loans prior to the
Payment Date and (ii) any amounts of interest on Loans and fees received from
the Agent which relate to the portion of the Loans assigned to the Assignee
hereunder for periods prior to the Effective Date, in the case of Alternate
Base Rate Loans or fees, or the Payment Date, in the case of Eurodollar Loans,
and not previously paid by the Assignee to the Assignor.]* In the event that
either party hereto receives any payment to which the other party hereto is
entitled under this Assignment Agreement, then the party receiving such amount
shall promptly remit it to the other party hereto.
*Each Assignor may insert its standard payment provisions in lieu of the payment terms included in this Exhibit.
5. FEES PAYABLE BY THE ASSIGNEE. The Assignee shall pay to the Assignor a fee on each day on which a payment of interest or fees is made under the Credit Agreement with respect to the amounts assigned to the Assignee hereunder (other than a payment of interest or fees for the period prior to the Effective Date or, in the case of Eurodollar Loans, the Payment Date, which the Assignee is obligated to deliver to the Assignor pursuant to Section 4 hereof). The amount of such fee shall be the difference between (i) the interest or fee, as applicable, paid with respect to the amounts assigned to the Assignee hereunder and (ii) the interest or fee, as applicable, which would have been paid with respect to the amounts assigned to the Assignee hereunder if each interest rate was ___ of 1% less than the interest rate paid by the Borrower or if the fee was ___ of 1% less than the fee paid by the Borrower, as applicable. In addition, the Assignee agrees to pay ___% of the recordation fee required to be paid to the Agent in connection with this Assignment Agreement.
6. REPRESENTATIONS OF THE ASSIGNOR; LIMITATIONS ON THE ASSIGNOR'S LIABILITY. The Assignor represents and warrants that it is the legal and beneficial owner of the interest being assigned by it hereunder and that such interest is free and clear of any adverse claim created by the
Assignor. It is understood and agreed that the assignment and assumption
hereunder are made without recourse to the Assignor and that the Assignor makes
no other representation or warranty of any kind to the Assignee. Neither the
Assignor nor any of its officers, directors, employees, agents or attorneys
shall be responsible for (i) the due execution, legality, validity,
enforceability, genuineness, sufficiency or collectability of any Loan
Document, including without limitation, documents granting the Assignor and the
other Lenders a security interest in assets of the Borrower or any guarantor,
(ii) any representation, warranty or statement made in or in connection with
any of the Loan Documents, (iii) the financial condition or creditworthiness of
the Borrower or any guarantor, (iv) the performance of or compliance with any
of the terms or provisions of any of the Loan Documents, (v) inspecting any of
the Property, books or records of the Borrower, (vi) the validity,
enforceability, perfection, priority, condition, value or sufficiency of any
collateral securing or purporting to secure the Loans or the Facility Letters
of Credit or (vii) any mistake, error of judgment, or action taken or omitted
to be taken in connection with the Loans, the Facility Letters of Credit or the
other Loan Documents.
7. REPRESENTATIONS OF THE ASSIGNEE. The Assignee (i) confirms that it has received a copy of the Credit Agreement, together with copies of the financial statements requested by the Assignee and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into this Assignment Agreement, (ii) agrees that it will, independently and without reliance upon the Agent, the Assignor or any other Lender and based on such documents and information at it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under the Loan Documents, (iii) appoints and authorizes the Agent to take such action as agent on its behalf and to exercise such powers under the Loan Documents as are delegated to the Agent by the terms thereof, together with such powers as are reasonably incidental thereto, (iv) agrees that it will perform in accordance with their terms all of the obligations which by the terms of the Loan Documents are required to be performed by it as a Lender, (v) agrees that its payment instructions and notice instructions are as set forth in the attachment to Schedule 1 and (vi) confirms that none of the funds, monies, assets or other consideration being used to make the purchase and assumption hereunder are "plan assets" as defined under ERISA and that its rights, benefits and interests in and under the Loan Documents will not be "plan assets" under ERISA, [and (vii) attaches the forms prescribed by the Internal Revenue Service of the United States certifying that the Assignee is entitled to receive payments under the Loan Documents without deduction or withholding of any United States federal income taxes].*
*to be inserted if the Assignee or its Lending Installation through which it is booking the Loans is not organized under the laws of the United States, or a state thereof.
8. INDEMNITY. The Assignee agrees to indemnify and hold the Assignor harmless against any and all losses, costs and expenses (including, without limitation, reasonable attorneys' fees) and liabilities incurred by the Assignor in connection with or arising in any manner from the Assignee's non-performance of the obligations assumed under this Assignment Agreement.
9. SUBSEQUENT ASSIGNMENTS. After the Effective Date, the Assignee shall have the right pursuant to Section 13.3.1 of the Credit Agreement to assign the rights which are assigned to the Assignee hereunder to any entity or person, provided that (i) any such subsequent assignment does not violate any of the terms and conditions of the Loan Documents or any law, rule, regulation, order, writ, judgment,
injunction or decree and that any consent required under the terms of the Loan Documents has been obtained and (ii) unless the prior written consent of the Assignor is obtained, the Assignee is not thereby released from its obligations to the Assignor hereunder, if any remain unsatisfied, including, without limitation, its obligations under [Sections 4, 5 and 8] hereof.
10. REDUCTIONS OF AGGREGATE COMMITMENT. If any reduction in the Aggregate Commitment occurs between the date of this Assignment Agreement and the Effective Date, the percentage interest specified in Item 3 of Schedule 1 shall remain the same, but the dollar amount purchased shall be recalculated based on the reduced Aggregate Commitment.
11. ENTIRE AGREEMENT. This Assignment Agreement and the attached Notice of Assignment embody the entire agreement and understanding between the parties hereto and supersede all prior agreements and understandings between the parties hereto relating to the subject matter hereof.
12. GOVERNING LAW. This Assignment Agreement shall be governed by the internal law, and not the law of conflicts, of the State of Illinois.
13. NOTICES. Notices shall be given under this Assignment Agreement in the manner set forth in the Credit Agreement. For the purpose hereof, the addresses of the parties hereto (until notice of a change is delivered) shall be the address set forth in the attachment to Schedule 1.
IN WITNESS WHEREOF, the parties hereto have executed this Assignment Agreement by their duly authorized officers as of the date first above written.
[NAME OF ASSIGNOR]
[NAME OF ASSIGNEE]
By: ________________________________
Title: ________________________________
SCHEDULE 1
to Assignment Agreement
1. Description and Date of Credit Agreement:
2. Date of Assignment Agreement: _____________, 19__
3. Amounts (As of Date of Item 2 above):
Facility
--------
a. Total of Commitments
(Loans)* under
Credit Agreement $
--------
b. Assignee's Percentage
of the Facility purchased
under the Assignment
Agreement** %
--------
c. Amount of Assigned Share in
the Facility purchased under
the Assignment
Agreement $
--------
4. Assignee's aggregate (Loan
Amount)* Commitment amount
purchased hereunder: $
---------
5. Proposed Effective Date:
---------
|
Accepted and Agreed:
[NAME OF ASSIGNOR] [NAME OF ASSIGNEE]
By: By:
---------------------------- ------------------------------
Title: Title:
-------------------------- ---------------------------
|
* If a Commitment has been terminated, insert outstanding Loans and Facility Letter of Credit Obligations in place of Commitment ** Percentage taken to 10 decimal places
Attachment to SCHEDULE 1 to ASSIGNMENT AGREEMENT
Attach Assignor's Administrative Information Sheet, which must include notice address for the Assignor and the Assignee
ANNEX "I"
to Assignment Agreement
NOTICE
OF ASSIGNMENT
____________________, 19__
To: ADMINISTAFF, INC.
______________________________
______________________________
[NAME OF AGENT]
______________________________
______________________________
From: [NAME OF ASSIGNOR] (the "Assignor")
[NAME OF ASSIGNEE] (the "Assignee")
|
1. We refer to that Credit Agreement (the "Credit Agreement") described in Item 1 of Schedule 1 to the Assignment Agreement, a copy of which is attached hereto ("Schedule 1"). Capitalized terms used herein and not otherwise defined herein shall have the meanings attributed to them in the Credit Agreement.
2. This Notice of Assignment (this "Notice") is given and delivered to the Borrower and the Agent pursuant to Section 13.3.2 of the Credit Agreement.
3. The Assignor and the Assignee have entered into an Assignment Agreement, dated as of _____, 199_ (the "Assignment"), pursuant to which, among other things, the Assignor has sold, assigned, delegated and transferred to the Assignee, and the Assignee has purchased, accepted and assumed from the Assignor the percentage interest specified in Item 3 of Schedule 1 of all outstandings, rights and obligations under the Credit Agreement relating to the facilities listed in Item 3 of Schedule 1. The Effective Date of the Assignment shall be the later of the date specified in Item 5 of Schedule 1 or two Business Days (or such shorter period as agreed to by the Agent) after this Notice of Assignment and any consents and fees required by Sections 13.3.1 and 13.3.2 of the Credit Agreement have been delivered to the Agent, provided that the Effective Date shall not occur if any condition precedent agreed to by the Assignor and the Assignee has not been satisfied.
4. The Assignor and the Assignee hereby give to the Borrower and the Agent notice of the assignment and delegation referred to herein. The Assignor will confer with the Agent before the date specified in Item 5 of Schedule 1 to determine if the Assignment Agreement will become effective on such date pursuant to Section 3 hereof, and will confer with the Agent to determine the Effective Date pursuant
to Section 3 hereof if it occurs thereafter. The Assignor shall notify the Agent if the Assignment Agreement does not become effective on any proposed Effective Date as a result of the failure to satisfy the conditions precedent agreed to by the Assignor and the Assignee. At the request of the Agent, the Assignor will give the Agent written confirmation of the satisfaction of the conditions precedent.
5. The Assignor or the Assignee shall pay to the Agent on or before the Effective Date the processing fee of $2,500 required by Section 13.3.2 of the Credit Agreement.
6. If Notes are outstanding on the Effective Date, the Assignor and the Assignee request and direct that the Agent prepare and cause the Borrower to execute and deliver new Notes or, as appropriate, replacements notes, to the Assignor and the Assignee. The Assignor and, if applicable, the Assignee each agree to deliver to the Agent the original Note received by it from the Borrower upon its receipt of a new Note in the appropriate amount.
7. The Assignee advises the Agent that notice and payment instructions are set forth in the attachment to Schedule 1.
8. The Assignee hereby represents and warrants that none of the funds, monies, assets or other consideration being used to make the purchase pursuant to the Assignment are "plan assets" as defined under ERISA and that its rights, benefits, and interests in and under the Loan Documents will not be "plan assets" under ERISA.
9. The Assignee authorizes the Agent to act as its agent under the Loan Documents in accordance with the terms thereof. The Assignee acknowledges that the Agent has no duty to supply information with respect to the Borrower or the Loan Documents to the Assignee until the Assignee becomes a party to the Credit Agreement.*
*May be eliminated if Assignee is a party to the Credit Agreement prior to the Effective Date.
NAME OF ASSIGNOR NAME OF ASSIGNEE
By: By:
-------------------------------- ---------------------------------
Title: Title:
---------------------------- ------------------------------
ACKNOWLEDGED [AND CONSENTED TO] ACKNOWLEDGED [AND CONSENTED TO]
BY [NAME OF AGENT] BY [NAME OF BORROWER]
By: By:
------------------------------- ---------------------------------
Title: Title:
---------------------------- ------------------------------
|
[Attach photocopy of Schedule 1 to Assignment]
EXHIBIT "E"
LOAN/CREDIT RELATED MONEY TRANSFER INSTRUCTION
The First National Bank of Chicago,
as Agent (the "Agent") under the Credit Agreement
Described Below.
Re: Credit Agreement, dated October 16, 1995 (as the same may be amended or modified, the "Credit Agreement"), among Administaff, Inc. (the "Borrower"), the Agent, and the Lenders named therein. Terms used herein and not otherwise defined shall have the meanings assigned thereto in the Credit Agreement.
The Agent is specifically authorized and directed to act upon the
following standing money transfer instructions with respect to the proceeds of
Advances or other extensions of credit from time to time until receipt by the
Agent of a specific written revocation of such instructions by the Borrower,
provided, however, that the Agent may otherwise transfer funds as hereafter
directed in writing by the Borrower in accordance with Section 14.1 of the
Credit Agreement or based on any telephonic notice made in accordance with
Section 2.13 of the Credit Agreement.
Authorized Officer (Customer Representative) Date___________________ ____________________________________ _______________________ (Please Print) Signature |
Bank Officer Name Date __________________ ____________________________________ _______________________ (Please Print) Signature |
(Deliver Completed Form to Credit Support Staff For Immediate Processing)
EXHIBIT "F"
GUARANTY
The undersigned hereby requests the Lenders, under and as defined in that certain Credit Agreement, dated as of October 16, 1995 (as amended or modified and in effect from time to time, the "Credit Agreement"), by and among such Lenders, The First National Bank of Chicago, as agent for the Lenders (the "Agent") and Administaff, Inc., a Texas corporation (the "Borrower"), through any of their branches, offices, subsidiaries or affiliates as permitted by the Credit Agreement, to extend credit or to permit credit to remain outstanding to the Borrower under and pursuant to the Credit Agreement, and, in consideration of any credit so granted or continued, the undersigned hereby absolutely and unconditionally guarantees prompt payment when due, whether at stated maturity, upon acceleration or otherwise, and at all times thereafter, of any and all existing and future indebtedness and liability of every kind, nature and character, direct or indirect, absolute or contingent (including all renewals, extensions and modifications thereof and all reasonable attorneys' fees incurred by the Agent and the Lenders in connection with the collection or enforcement thereof), of the Borrower to the Agent and the Lenders under the Credit Agreement howsoever and whensoever created, arising, evidenced or acquired (the "Guaranteed Debt").
The undersigned waives notice of the acceptance of this Guaranty and of the extension or continuation of the Guaranteed Debt or any part thereof. The undersigned further waives presentment, protest, notice, demand or action on delinquency in respect of the Guaranteed Debt or any part thereof, including any right to require the Lenders to sue the Borrower, any other guarantor or any other person obligated with respect to the Guaranteed Debt or any part thereof, or otherwise to enforce payment thereof against any collateral securing the Guaranteed Debt or any part thereof. The undersigned hereby agrees that, if at any time any payment of any portion of the Guaranteed Debt is rescinded or must otherwise be restored or returned upon the insolvency, bankruptcy or reorganization of the Borrower or otherwise, the undersigned's obligations hereunder with respect to such payment shall be reinstated at such time as though such payment had not been made and whether or not the Agent or any of the Lenders are in possession of this Guaranty.
This Guaranty shall continue in effect until receipt by the Agent and the Lenders of written notice of its termination and, notwithstanding such receipt, thereafter as to Guaranteed Debt incurred, arising or committed for prior to receipt by the Agent and the Lenders of such notice of termination, including any extensions, modifications, renewals or indulgences with respect to, or substitutions for, such Guaranteed Debt or any part thereof.
The validity and enforceability of this Guaranty shall not be impaired or affected by any of the following, whether occurring before or after receipt by the Agent and the Lenders of notice of termination of this Guaranty: (a) any extension, modification or renewal of, or indulgence with respect to, or substitutions for, the Guaranteed Debt or any part thereof or any agreement relating thereto at any time; (b) any change in the interest rate payable on, or fees, commissions or other amounts payable with respect to, the Guaranteed Debt; (c) any failure or omission to enforce any right, power or remedy with respect to the Guaranteed Debt or any part thereof or any agreement relating thereto, or any collateral, if any, securing the Guaranteed Debt or any part thereof; (d) any waiver of any right, power or remedy or of any
default with respect to the Guaranteed Debt or any part thereof or any agreement relating thereto or with respect to any collateral, if any, securing the Guaranteed Debt or any part thereof; (e) any release, surrender, compromise, settlement, waiver, subordination or modification, with or without consideration, of any collateral, if any, securing the Guaranteed Debt or any part thereof, any other guaranties with respect to the Guaranteed Debt or any part thereof, or any other obligation of any person or entity with respect to the Guaranteed Debt or any part thereof; (f) the enforceability or validity of the Guaranteed Debt or any part thereof or the genuineness, enforceability or validity of any agreement relating thereto or with respect to any collateral, if any, securing the Guaranteed Debt or any part thereof; (g) the application of payments received from any source to the payment of indebtedness other than the Guaranteed Debt, any part thereof or amounts which are not covered by this Guaranty even though the Lenders might lawfully have elected to apply such payments to any part or all of the Guaranteed Debt or to amounts which are not covered by this Guaranty; (h) any change of ownership of the Borrower or the insolvency, bankruptcy or any other change in the legal status of the Borrower (or the retirement or death of any partner or the introduction of any other partner); (i) the change in or the imposition of any law, decree, regulation or other governmental act which does or might impair, delay or in any way affect the validity, enforceability or the payment when due of the Guaranteed Debt; (j) the failure of the Borrower or the undersigned to maintain in full force, validity or effect or to obtain or renew when required all governmental and other approvals, licenses or consents required in connection with the Guaranteed Debt or this Guaranty, or to take any other action required in connection with the performance of all obligations pursuant to the Guaranteed Debt or this Guaranty; or (k) the existence of any claim, setoff or other rights which the undersigned may have at any time against the Borrower in connection herewith or with any unrelated transaction, all whether or not the undersigned shall have had notice or knowledge of any act or omission referred to in the foregoing clauses (a) through (k) of this paragraph. It is agreed that the undersigned's liability hereunder is several and independent of any other guaranties or other obligations at any time in effect with respect to the Guaranteed Debt or any part thereof and that the undersigned's liability hereunder may be enforced regardless of the existence, validity, enforcement or non-enforcement of any such other guaranties or other obligations.
The undersigned hereby represents and warrants to the Agent and the
Lenders that: (a) the undersigned is duly organized, validly existing, and in
good standing under the laws of the jurisdiction in which the undersigned is
organized and has the power and authority and legal right to execute and
deliver this Guaranty and to perform the undersigned's obligations hereunder;
(b) the execution and delivery by the undersigned of this Guaranty and the
performance of the undersigned's obligations hereunder have been duly
authorized by all required action, and this Guaranty constitutes the legal,
valid and binding obligation of the undersigned, enforceable against the
undersigned in accordance with its terms, except as enforceability may be
limited by bankruptcy, insolvency or similar laws affecting the enforcement of
creditors' rights generally; (c) neither the execution and delivery of this
Guaranty nor the performance of the obligations of the undersigned hereunder
will violate (i) any law, decree, regulation, order or judgment binding on the
undersigned, (ii) the charter documents or by-laws of the undersigned, or (iii)
the provisions of any indenture, instrument or agreement to which the
undersigned is a party or is subject, other than, in the case of clause (iii)
any such violations or defaults that, singly or in the aggregate, could not
reasonably be expected to have a Material Adverse Effect; and (d) all consents,
approvals and authorizations and all filing requirements necessary for the
execution, delivery and performance of this Guaranty by the undersigned have
been obtained or complied with in full.
Credit under the Credit Agreement may be granted or continued from time to time by the Lenders to the Borrower without notice to or authorization from the undersigned regardless of the Borrower's
financial or other condition at the time of any such grant or continuation. Neither the Agent nor any of the Lenders shall have any obligation to disclose or discuss with the undersigned its assessment of the financial condition of the Borrower.
Until the Guaranteed Debt is paid in full, the undersigned shall not exercise any right of subrogation with respect to payments made by the undersigned pursuant to this Guaranty. The undersigned waives any benefit of the collateral, if any, which may from time to time secure the Guaranteed Debt or any part thereof and authorizes the Lenders to take any action or exercise any remedy with respect thereto, which the Lenders in their sole discretion shall determine, without notice to the undersigned.
The undersigned agrees that all payments under this Guaranty shall be made in the same currency and manner as provided for in the Credit Agreement. The undersigned shall pay all sums due under this Guaranty free and clear of and without deduction for, or on account of, any set-off or counterclaim or any and all present or future taxes, levies, imposts, charges, fees, deductions or withholdings. If any sums payable hereunder shall be or become subject to any such deduction or withholding, the amount of such payments shall be increased so that the net amount received by the Lenders shall equal the amount which, but for such deduction or withholding, would have been received by the Lenders hereunder.
Without limiting the rights of the Lenders under applicable law, the undersigned authorizes each Lender to apply or offset any sums standing to the credit of the undersigned with any office, branch, subsidiary or affiliate of any such Lender to the payment when due of any amount owing by the undersigned under this Guaranty.
No provision of this Guaranty may be amended, supplemented or modified, or any of the terms and provisions hereof waived, except by a written instrument executed by the Agent, on behalf of the Lenders, and the undersigned. No failure on the part of the Agent or the Lenders to exercise, and no delay in exercising, any right hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any right hereunder preclude any other or further exercise thereof or the exercise of any other right. The remedies herein provided are cumulative and not exclusive of any remedies provided by law.
The undersigned shall pay all reasonable costs, fees and expenses (including reasonable attorneys' fees) incurred by the Agent and the Lenders in collecting or enforcing the undersigned's obligations under this Guaranty.
The provisions of this Guaranty are severable, and in any action or proceeding involving any state corporate law, or any state or federal bankruptcy, insolvency, reorganization or other law affecting the rights of creditors generally, if the obligations of the undersigned hereunder would otherwise be held or determined to be avoidable, invalid or unenforceable on account of the amount of the undersigned's liability under this Guaranty, then, notwithstanding any other provision of this Guaranty to the contrary, the amount of such liability shall, without any further action by the undersigned, the Agent or the Lenders, be automatically limited and reduced to the highest amount which is valid and enforceable as determined in such action or proceeding.
This Guaranty shall (i) bind the undersigned and the heirs, personal representatives, successors and assigns of the undersigned, (ii) inure to the benefit of the Agent, the Lenders, and their respective successors and assigns and (iii) be governed by the internal laws of the State of Illinois. The undersigned hereby irrevocably submits to the non-exclusive jurisdiction of any United States federal or Illinois state court sitting in Chicago in any action or proceeding arising out of or relating to this Guaranty, and the undersigned hereby irrevocably agrees that all claims in respect of such action or proceeding may be heard and determined in any such court. THE UNDERSIGNED HEREBY WAIVES ANY RIGHT TO A JURY TRIAL IN ANY ACTION ARISING HEREUNDER.
ADMINISTAFF, INC. (F/K/A
ADMINISTAFF OF DELAWARE, INC.)
By: ____________________________
Title:___________________________
Chicago, Illinois
______ __, 199_
EXHIBIT "G"
SUBORDINATED NOTE
$___________________ __________, 199_
FOR VALUE RECEIVED, Administaff of Texas, Inc. (f/k/a Administaff, Inc.), a Texas corporation (the Company"), hereby promises to pay to the order of Administaff, Inc. (f/k/a Administaff of Delaware, Inc.), a Delaware corporation ("Holder"), on the dates and in the manner set forth below, the principal amount of ___________ Dollars ($________) (the "Principal Amount"), with interest from _____________ on the balance thereof remaining unpaid from time to time at the rate per annum equal to __________.
This Note shall be due and payable as follows:
[Describe Payment Schedule for Interest]
[Describe Payment Schedule for Principal]
This Note evidences some or all of the Holdings Subordinated Debt referred to in the Credit Agreement (as defined in Section 1 below), and each holder of this Note, by its acceptance hereof, agrees to the following additional terms and conditions:
1. Definitions. As used in this Note, the following terms shall mean:
1.1. "Credit Agreement" -- The Credit Agreement dated as of October 16, 1995 by and between The First National Bank of Chicago ("First Chicago"), as agent to a group of lenders (such lenders, including First Chicago, are referred to herein, as the "Lenders" or the "holders of Senior Debt") and the Company.
1.2. "Senior Debt" -- The aggregate of (i) the Company's indebtedness to the Lenders incurred in connection with the transactions governed by the Credit Agreement, but in no event to exceed a principal balance of $10,000,000, (ii) any and all refinancings, renewals and extensions thereof and (iii) all interest and other fees, costs, charges and expenses of any and every nature whatsoever (including without limitation legal fees) from time to time payable by the Company pursuant to the terms of the Credit Agreement.
2. Method of Payment. All payments due under this Note shall be paid to Holder at _________________, Attn: _____________ or such other address or in such other manner as Holder designates to the Company.
3. Subordination.
3.1. Agreement to Subordinate. Holder agrees that the indebtedness evidenced by this Note is subordinated in right of payment, to the extent and in the manner provided in this Section 3, to the
prior payment of all Senior Debt and that such subordination is for the benefit of the holders of Senior Debt.
3.2. Liquidation, Dissolution, Bankruptcy. Upon any payment or any distribution of the assets of the Company to creditors upon a total or partial liquidation or a total or partial dissolution of the Company or in a bankruptcy, reorganization, insolvency, receivership or similar proceeding relating to the Company or its property:
(a) the holders of Senior Debt shall be entitled to receive payments in full of the Senior Debt before Holder shall be entitled to receive any payment of Principal of or interest on this Note; and
(b) until the Senior debt is paid in full, any distribution to which Holder would be entitled but for this Section 3 shall be made to holders of Senior Debt as their interests may appear, except that Holder may receive shares of stock and other equity interests and any debt securities that are subordinated to Senior Debt to at least the same extent as this Note.
3.3. Default on Senior Debt. The Company may not pay (or offset or direct Holder to offset) any payment of principal of or interest on this Note and may not repurchase, redeem or otherwise retire this Note (collectively, "pay this Note") if at such time (i) any Senior Debt has not been paid when due or (ii) any other default under the Credit Agreement has occurred with respect to any Senior Debt pursuant to which the maturity thereof may be accelerated immediately without further notice (except such notice as may be required to effect such acceleration) and the expiration of any applicable grace periods unless, in either case, the default has been cured or waived; provided, however, that the Company may pay this Note without regard to the foregoing if the Company receives written notice approving such payment from the holders of Senior Debt; provided, further, that the foregoing notwithstanding Holder may, in any event, receive shares of stock and other equity interests and any debt securities (which are subordinated to Senior Debt to at least the same extent as this Note) in payment of this Note.
3.4. Acceleration of Payment of Note. If the maturity of this Note is accelerated because of an Event of Default (as hereinafter defined), the Company and Holder shall promptly notify the holders of the Senior Debt (if any) of such acceleration. If any Senior Debt is then outstanding, the Company may not pay this Note until ten days after First Chicago, as agent for the holders of Senior Debt, receives such notice and thereafter the Company may pay this Note only if this Section 3 otherwise permits the payment at that time; provided, that the foregoing notwithstanding Holder may, in any event, receive shares of stock and other equity interests and any debt securities (which are subordinated to Senior Debt to at least the same extent as this Note) in payment of this Note.
3.5. When Distribution Must be Paid Over. If a distribution is made to Holder that because of this Section 3 should not have been made to it, Holder shall hold such distribution in trust for the holders of Senior Debt and pay it over to them as instructed by the holders of Senior Debt.
3.6. Subrogation. After all Senior Debt is paid in full and until Holder is paid in full, Holder shall be subrogated to the rights of the holders of Senior debt to receive distributions applicable to Senior Debt. A distribution made under this Section 3 to the holders of Senior Debt that otherwise would have been made to Holder is not, as between the Company and Holder, a payment by the Company on Subordinated Debt.
3.7. Relative Rights. This Section 3 defines the relative rights of Holder and the holders of Senior Debt. Nothing in this Note shall:
(a) impair, as between the Company and Holder, the obligation of the Company, which is absolute and unconditional, to pay all amounts due hereon, including principal and interest in accordance with the terms hereof; or
(b) prevent Holder from exercising its available remedies upon the occurrence of an Event of Default (hereinafter defined), subject to the rights of the holders of Senior Debt to receive in accordance with Section 3.2 hereof distributions otherwise payable to Holder.
3.8. Subordination May Not be Impaired. No right of any holder of Senior Debt to enforce the subordination of the indebtedness evidenced hereby shall be impaired by any act or failure to act by the Company or by its failure to comply with this Note.
3.9. Distribution or Notice to First Chicago. Whenever a distribution is to be made to the Lenders pursuant to Section 3.2 or 3.5 hereof or a notice given to the holders of Senior Debt pursuant to Section 3.4 hereof, the distribution may be made and the notice given to First Chicago as agent for the Lenders.
3.10. Section 3 Not to Prevent Events of Default or Limit Right
to Accelerate. The failure to make a payment pursuant to this Note by reason
of any provision in this Section 3 shall not be construed as preventing the
occurrence of an Event of Default (as defined in Section 4). Nothing in this
Section 3 (except, as between Holder and the holders of Senior Debt only,
Holder's requirement to provide notice pursuant to Section 3.4) shall have any
effect on the right of Holder to accelerate the maturity of this Note.
3.11. Reliance by Holders of Senior Debt on Subordination Provisions. Holder, by accepting this Note, acknowledges and agrees that the foregoing subordination provisions are, and are intended to be, an inducement and a consideration to each holder of any Senior Debt, whether such Senior Debt was created or acquired before or after the issuance hereof, to acquire and continue to hold, or to continue to hold, such Senior Debt and such holder of Senior debt shall be deemed conclusively to have relied on such subordination provisions in acquiring and continuing to hold, or in continuing to hold, such Senior Debt.
4. Events of Default. The occurrence of any of the following
events of default (individually, an "Event of Default" and, collectively, the
"Events of Default") shall at the option of Holder make all sums of Principal
and accrued but unpaid interest then remaining unpaid and all other amounts
payable under this Note immediately due and payable, without demand,
presentment, notice or protest, all of which hereby are expressly waived,
anything herein or in any other agreement, contract, document or instrument
contained to the contrary notwithstanding and, subject to the provisions of
Section 3 hereof, Holder may immediately, and without expiration of any
additional period of grace, enforce payment of all liabilities of the Company
under this Note and exercise any other right available to it, at law or in
equity, all of which rights and powers may be exercised cumulatively and not
alternatively:
4.1. Nonpayment of principal hereunder when due, or nonpayment of interest hereunder or of any fee or other obligations hereunder within five days after the same becomes due.
4.2. The Company or any of its Subsidiaries (as defined in the Credit Agreement) shall (i) have an order for relief entered with respect to it under the Federal bankruptcy laws as now or hereafter in effect, (ii) make an assignment for the benefit of creditors, (iii) apply for, seek, consent to, or acquiesce in, the appointment of a receiver, custodian, trustee, examiner, liquidator or similar official for it or any Substantial Portion (as defined in the Credit Agreement) of its property, (iv) institute any proceeding seeking an order for relief under the Federal bankruptcy laws as now or hereafter in effect or seeking to adjudicate it a bankrupt or insolvent, or seeking dissolution, winding up, liquidation, reorganization, arrangement, adjustment or composition of it or its debts under any law relating to bankruptcy, insolvency or reorganization or relief of debtors or fail to file an answer or other pleading denying the material allegations of any such proceeding filed against it, (v) take any corporate action to authorize or effect any of the foregoing actions set forth in this Section 4.2 or (vi) fail to contest in good faith any appointment or proceeding described in Section 4.3 prior to the last day on which the filing of a response thereto is required to be made under applicable law.
4.3. Without the application, approval or consent of the
Company or any of its Subsidiaries, a receiver, trustee, examiner, liquidator
or similar official shall be appointed for the Company or any of its
Subsidiaries or any part of its property which constitutes a Substantial
Portion (as defined in the Credit Agreement), or a proceeding described in
Section 4.2(iv) shall be instituted against the Company or any of its
Subsidiaries and such appointment continues undischarged or such proceeding
continues undismissed or unstayed for a period of 60 consecutive days.
4.4. The occurrence of any default on the Senior Debt pursuant to which the maturity of the Senior Debt is accelerated in accordance with its terms.
5. Miscellaneous.
5.1. Failure or Indulgency Not Waiver. No failure or delay on the part of Holder in the exercise of any power, right or privilege hereunder shall operate as a waiver thereof, nor shall any one or more of such failures or delays constitute a course of performance or dealing on which the Company is entitled to rely, nor shall any single or partial exercise of any such power, right or privilege preclude other or further exercise thereof or of any other right, power or privilege. All rights and remedies existing hereunder are cumulative to, and not exclusive of, any rights or remedies otherwise available. The Company hereby consents to renewals and extensions of the time of payment hereof, whether prior to or after the maturity hereof, without notice, and hereby waives diligence, presentment, protest, demand and every other notice of every kind.
5.2. Cost of Collection. If any default is made in the payment of Principal or interest under this Note, the Company shall pay Holder hereof all costs incurred by Holder in the enforcement of its rights hereunder, including without limitation costs of collection, reasonable attorneys' and accountants' fees and costs of appeals.
5.3. Governing Law. This Note shall be governed by the laws of the State of Illinois.
5.4. Severability. In case any right of Holder herein shall be held to be invalid, illegal or unenforceable, such invalidity, illegality and/or unenforceability shall not affect any other right granted hereby.
5.5. Further Assurance. At any time or from time to time upon the request of Holder, the Company will execute and deliver such further documents and do such other acts and things as Holder may reasonably request in order fully to effectuate the purposes of this Note and to provide for the payment of the Principal and interest due.
5.6. Replacement of Note. Upon receipt of evidence reasonably satisfactory to the Company of the ownership of and the loss, theft, destruction or mutilation of this Note and (in the case of loss, theft or destruction) upon delivery of an unsecured indemnity agreement reasonably satisfactory to the Company or (in the case of mutilation) upon surrender and cancellation of the mutilated Note, the Company will execute and deliver, in lieu thereof, a new Note of like tenor.
5.7. Successors. All the covenants and agreements contained in this Note shall bind the parties hereto and their respective heirs, executors, administrators, distributees, successors and assigns.
5.8. Headings. The section headings in this Note are inserted for purposes of convenience only and shall have no substantive effect.
5.9. Usury Savings. It is the intent of the Company and the Holder to contract in strict compliance with all applicable usury laws from time to time in effect. In furtherance thereof, the Holder and the Company hereby stipulate and agree that no term or provision contained in this Note or any other document or instrument now or hereafter executed in connection herewith shall ever create (or ever be construed to create) a contract to pay for the use, forbearance or detention of money interest at a rate in excess of the maximum nonusurious rate of interest which Holder is permitted to contract for, charge or receive under applicable law, and as to which the Company could not successfully assert a claim or defense of usury (the "Highest Lawful Rate"), and that for purposes hereof "interest" shall include the aggregate of interest and all charges which constitute interest under applicable law that are contracted for, reserved, taken, charged or received under or in connection with this Note. In the event that the maturity of this Note is accelerated by reason of any election of the Holder resulting from the occurrence of an Event of Default or otherwise, or in the event of any prepayment, then such consideration that constitutes interest may never include more than the maximum nonusurious amount permitted by applicable law, and excess interest, if any, provided for in or in connection with this Note shall be cancelled automatically as of the date of such acceleration or prepayment, and, if theretofore paid, shall be credited on the principal balance hereof and the balance thereof, if any, refunded to the Company. In the event Holder shall collect, charge contract for or receive moneys which are interest (and/or are deemed to constitute interest) at a rate in excess of the Highest Lawful Rate, all such sums in excess of the Highest lawful Rate shall be immediately credited against the outstanding principal balance of this Note, and the balance thereof, if any, returned to the Company upon such determination. All calculations of the rate of interest contracted for, charged or received under this Note or under or in connection herewith or otherwise that are made for the purpose of determining whether such rate exceeds the Highest Lawful Rate shall be made, to the extent permitted by applicable usury laws, by amortizing, prorating and spreading in equal parts during the period of the full stated term of this Note all interest at any time contracted for, charged, collected or received by Holder in connection herewith. The provisions of this paragraph shall control over all provisions of this Note and any other document, instrument or other agreement now or hereafter executed in connection herewith which may be in apparent conflict herewith.
IN WITNESS WHEREOF, the Company has caused this Note to be executed and delivered by its duly authorized officer, as of the ____ day of _________, 199_.
ADMINISTAFF OF TEXAS, INC.
(F/K/A ADMINISTAFRF, INC.)
By:_____________________________________
Title:__________________________________
19001 Crescent Springs Drive
Kingwood, Texas 77339-3802
SCHEDULE "1"
PERCENTAGES
Name Percentage
---- ----------
The First National Bank of Chicago 100%
|
SCHEDULE "2"
SUBSIDIARIES AND OTHER INVESTMENTS
(See Sections 6.8 and 7.16)
SUBSIDIARIES
Investment Owned Amount of Percent Jurisdiction of
In By Investment Ownership Organization
- --------------- --------- ---------- --------- ----------------
Administaff of Borrower 100% Florida
Florida, Inc.
Administaff of Borrower 100% Texas
Texas, Inc. *
Administaff of Borrower 100% Delaware
Delaware, Inc.*
|
INVESTMENTS
Investment Owned Amount of
In By Investment
- ----------- --------- ----------
Note from Richard G. Borrower $694,000
Rawson
Note from Jerald L. Borrower $141,360
Broussard
Fort Worth Independent
School District Bonds, par
value $670,000, maturing
8-15-2005, interest payable
semi-annually @ 7% Borrower $688,255
City of Tucson, Arizona
Bonds, par value $30,000,
maturing 7-1-2010, interest
payable semi-annually @ 7.8% Borrower $ 30,458
|
* Until the Merger.
SCHEDULE "3"
INDEBTEDNESS AND LIENS
(See Sections 6.14, 7.11 and 7.17)
Indebtedness: (1) $4.0 million of 13% Subordinated Notes held
by the Board of Trustees of the Texas Growth
Fund, as Trustee for the Texas Growth
Fund-1991 Trust.
(2) $610,000 note payable to Texas Commerce
Bank, National Association; $509,000
outstanding balance as of June 30, 1995.
(3) $350,000 note payable to Texas Commerce
Bank, National Association; $213,000
outstanding balance as of June 30, 1995.
(4) Mortgage note payable to Friendswood
Development Company; $105,000 outstanding
balance as of June 30, 1995.
(5) Mortgage note payable to Resolution Trust
Corporation, Receiver for Continental
Savings, $115,000 outstanding balance as of
June 30, 1995.
Liens: (1) Deed of Trust dated 12/15/94 from
Administaff, Inc. for the benefit of
Friendswood Development Company.
(2) Deed of Trust with Security Agreement and
Assignment of Rental, dated June 15, 1993,
from Administaff, Inc. for the benefit of
Resolution Trust Corporation, Receiver for
Continental Savings.
(3) Deed of Trust and Security Agreement from
Administaff, Inc. for the benefit of New
First City, Texas - Houston, N.A., effective
12/31/92, as extended and modified by
Extension and Modification Agreements dated
12/31/93 and 6/30/94 between Administaff,
Inc., Texas Commerce Bank National
Association and certain guarantors.
|
SCHEDULE "4"
AFFILIATE TRANSACTIONS
(See Section 7.19)
(1) Transactions with Pyramid Ventures, Inc. ("PVI") or the Board of Trustees of the Texas Growth Fund, as Trustee for the Texas Growth Fund-1991 Trust ("TGF"), pursuant to or in connection with the Securities Purchase Agreement between Borrower and TGF, the Stock Purchase Agreement between Borrower and PVI, the Common Stock Warrant, as amended, between Borrower and TGF, the Investor Agreement, as amended, among Borrower, TGF and PVI, the Stock Option Agreement among Borrower, TGF, PVI and certain shareholders of Borrower, and the Registration Rights Agreement, as amended among Borrower, PVI and TGF, dated May 13, 1994.
(2) $694,000 loan from Borrower to Richard G. Rawson, extended June 22, 1995.
(3) $141,360 loan from Borrower to Jerald L. Broussard, extended September 4, 1995.
[(4) $93,000 account receivable to Borrower from TBC Orthopedics, Inc.]
SCHEDULE "5"
LITIGATION
(See definitions of "IRS Audit" and "Market Segment Study Group" and Sections 6.7 and 6.12)
A. IRS Audit and Market Study. The IRS is currently auditing the Borrower's 401 (k) Plan for the 1993 plan year. The Borrower believes that, among other issues, the IRS is examining the relationship between the Borrower and its worksite employees (including owners of client companies) under the Code provisions applicable to employee benefit plans. In addition, the IRS has established a Market Segment Study Group on Employee Leasing for the stated purpose of examining whether Professional Employer Organizations ("PEOs"), such as the Borrower, are the employers of worksite employees under Code provisions applicable to employee benefit plans and consequently able to offer to worksite employees benefit plans that qualify for favorable tax treatment. The Market Segment Study Group is also examining whether client company owners are employees of PEOs under Code provisions applicable to employee benefit plans. The Borrower is unable to predict the timing of the conclusions to be reached by the IRS in the 1993 audit or of the findings of the Market Segment Study Group and the ultimate outcome of such conclusions or findings. If either process were to conclude that a PEO is not an employer of its worksite employees for plan purposes, however, such conclusions or findings could have a material adverse impact on the Borrower's financial condition or results of operations. If such a conclusion were reached, worksite employees could not continue to make contributions to the 401 (k) Plan or pursuant to the cafeteria plan. The Borrower believes that, although unfavorable to the Borrower, a prospective application by the IRS of an adverse conclusion would not have a material adverse effect on its financial position or results of operations. If such conclusion were applied retroactively, employees' vested account balances would become taxable immediately, the client company would lose its tax deduction to the extent its matching contributions were not vested, and the plan trust would become a taxable trust. In such a scenario, the Borrower would face the risk of client dissatisfaction as well as potential litigation. A retroactive application by the IRS of an adverse conclusion could have a material adverse effect on the Borrower's financial position or results of operations. While Administaff believes that a retroactive disqualification is unlikely, there can be no assurance as to the ultimate resolution of these issues.
A definitive judicial interpretation of "employer" in the context of a PEO or employee leasing arrangement has not been established. If the Borrower were found not to be an employer for ERISA purposes, its plans would not comply with ERISA and the level of services the Borrower could offer may be materially adversely affected. Further, as a result of such finding, the Borrower and its plans would not enjoy the preemption of state laws provided by ERISA and could be subject to varying state laws and regulations, as well as to claims based upon state common laws.
B. Other Matters. The matters set forth in Items 1-3, both inclusive, below (and the attachment referred to in said Item 3) are disclosed without regard to whether the same are reasonably expected to have a Material Adverse Effect and are not intended as an agreement by the Borrower that any of such matters could reasonably be expected to have a Material Adverse Effect if determined adversely to Borrower.
(1) TEXAS SALES TAX. The Texas Tax Code (the "Texas Code") provides that certain enumerated services are subject to state sales tax. There are 15 of such taxable services, but those which are
performed by an employee for his employer are excluded from taxation. Although the Texas Comptroller of Public Accounts (the "Comptroller") has consistently taken the position that where worksite employees of a PEO were performed taxable services, the PEO is providing taxable services and it should collect and remit sales tax for such services, the Comptroller has never levied a sales tax on the Borrower. In addition, the Comptroller has conceded that an invoice sent to a client company would be taxable only if taxable services constitute more than 5% of the total invoice amount, and then only to the extent such invoice relates to the enumerated taxable services.
(2) PROSOFT, INC., V. TECHNOLOGY & BUSINESS CONSULTANTS, INC., &
ADMINISTAFF, INC.; Cause No. 93-14114; In the 261st Judicial District
Court of Travis County, Texas. This lawsuit was filed November 19,
1993 by a joint venture partner of Technology & Business Consultants,
Inc., a client company and a company owned by a part owner of
Administaff, Inc., asserting breach of contract and DTPA actions
against Technology & Business Consultants, Inc., and Administaff, Inc.
Administaff, Inc. filed a counterclaim against Plaintiff and a third-
party action against Grentek, Inc., an alleged third party beneficiary
of the joint venture contract. Administaff, Inc.'s position is that
as it was not a party to the joint venture contract, it had no control
over any action of Technology & Business Consultants, Inc. Trial is
set for October 30, 1995. Administaff is providing a defense to
Technology & Business Consultants, Inc., for this claim. At this
time, Administaff, Inc. is unable to estimate the amount of its
potential liability, if any.
(3) LITIGATION IN THE ORDINARY COURSE OF BUSINESS. As a professional
employer, the Borrower is routinely named and threatened to be named,
along with its client companies, in employment-related actions and
proceedings. The Borrower views such litigation as part of its
ordinary business and maintains insurance for many such potential
liabilities. Attachments I, II and III hereto (collectively, the
"Attachments") describe, respectively, (i) Pending Litigation, (ii)
Discrimination and Other Employment Related Charges and Complaints and
(iii) Threatened Litigation. (Note: The Borrower is referred to as
Administaff, Inc. or Administaff in Attachment I.)
EXHIBIT 10.4
AMENDMENT NO. 1 AND WAIVER
Dated as of March 12, 1996
to
CREDIT AGREEMENT
Dated as of October 16, 1995
This Amendment No. 1 and Waiver (this "Amendment"), dated as of March 12, 1996, is among Administaff, Inc. (the "Borrower"), the Lenders party to the Credit Agreement (defined below) and The First National Bank of Chicago, as Agent.
W I T N E S S E T H:
WHEREA, the Borrower, the Lenders and the Agent are parties to that certain Credit Agreement dated as of October 16, 1995 (as heretofore amended, the "Credit Agreement") and the other Loan Documents referred to therein; and
WHEREA, the Borrower, the Lenders and the Agent desire to amend the Credit Agreement in order to amend certain provisions thereof;
NOW, THEREFORE, in consideration of the premises and the undertakings set forth herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows:
1. Definitions. Capitalized terms used herein and not otherwise defined herein shall have the meanings attributed to them in the Credit Agreement.
2. Amendment. The Credit Agreement is hereby amended as follows:
(a) Section 7.1 (vii) of the Credit Agreement is hereby amended by deleting the phrase "and consolidating" contained therein.
(b) Section 7.21.2 of the Credit Agreement is hereby amended by deleting it in its entirety and inserting in lieu thereof the following:
7.21.2. Fixed Charge Coverage Ratio. The Borrower
shall maintain, on a consolidated basis, (i) as of the end of
each of the fiscal quarters ending September 30, 1995 and
December 31, 1995, a Fixed Charge Coverage Ratio not less than
2.25 to 1.0, (ii) as of the end of each of the fiscal quarters
ending March 31, 1996, June 30, 1996 and September 30, 1996, a
Fixed Charge Coverage Ratio not less than 2.00 to 1.0 and
(iii) as of the end of each fiscal quarter thereafter, a Fixed
Charge Coverage Ratio not less than 2.50 to 1.0.
3. Waiver. The Bank hereby specifically waives any objection it
may have to the violation of (i) Section 7.1 (vii) of the Credit Agreement
caused by the Company's failure to timely provide the Bank with the plan and
forecast for 1996, which plan and forecast was subsequently provided and (ii)
Section 7.12 of the Credit Agreement caused by the Borrower's failure to
timely provide the Bank with the balance sheet referred to therein, which
balance sheet was subsequently provided. This specific waiver applies only to
the specific violation referred to above.
4. Representations and Warranties. In order to induce the Agent and the Lenders to enter into this Amendment, the Borrower hereby represents and warrants to the Agent and the Lenders as of the date of this Amendment that:
(a) There exists no Default or Unmatured Default and the execution of this Amendment shall not create a Default or Unmatured Default.
(b) The representations and warranties contained in Article V of the Credit Agreement are true and correct as of the date of this Amendment.
5. Legal Expenses. The Borrower agrees to reimburse the Agent for reasonable legal fees and expenses incurred by attorneys for the Agent (who may be employees of the Agent) in connection with the preparation, negotiation and consummation of this Amendment and the transactions contemplated herein.
6. Ratification of Credit Agreement. Except as specifically provided herein, all of the terms and conditions of the Credit Agreement shall remain in full force and effect and the Credit Agreement as amended hereby is agreed to, ratified and confirmed by the Borrower, the Agent and the Lenders in all respects.
7. Miscellaneous.
(a) This Amendment may be executed in counterparts and by the different parties hereto on separate counterparts each of which, when so executed and delivered, shall be deemed an original, and all of which taken together shall constitute one and the same agreement.
(b) This Amendment shall be effective as of the date first above written; provided, that, the Agent has received executed counterparts of this Amendment from the Borrower, the Agent and the Lenders.
IN WITNESS WHEREO, the Borrower, the Agent and the Lenders have executed this Amendment as of the date first above written.
ADMINISTAFF, INC.
By:_______________________________________
Title:____________________________________
THE FIRST NATIONAL BANK OF CHICAGO,
individually and as Agent
By:_______________________________________
Title:____________________________________
EXHIBIT 11.1
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS OF ADMINISTAFF, INC.
Nine Months Ended
Year Ended December 31, September 30,
---------------------------------------- -----------------
1991 1992 1993 1994 1995 1995 1996
---------------------------------------- -----------------
(In thousands, except for per share data)
Primary
Average shares outstanding 6,375 8,527 8,685 9,680 10,498 10,420 10,726
Net effect of dilutive stock options -
based on the treasury stock method
using average market price - - 99 130 170 196 54
Net effect of dilutive stock warrants -
based on the treasury stock method
using average market price - - - 32 109 102 82
Net effect of dilutive stock warrants -
based on the if-converted method - - - 441 * * *
Adjustment to give effect to shares optioned
to employees within 12 months of the
initial filing as outstanding as of the
beginning of each period presented
based on the treasury stock method
using estimated market price upon
offering 54 54 54 54 30 39 -
--------------------------------------- ---------------
Total 6,429 8,581 8,838 10,337 10,807 10,757 10,862
======================================= ===============
Net income $70 $33 $1,949 $3,766 $1,116 $617 $1,054
Add interest from subordinated debt, net of taxes - - - 92 * * *
Preferred stock dividends (10) (10) - - - - -
--------------------------------------- ---------------
Net income available for common shareholders $60 $23 $1,949 $3,858 $1,116 $617 $1,054
======================================= ===============
Per share amount $0.01 $0.00 $0.22 $0.37 $0.10 $0.06 $0.10
======================================= ===============
Fully Diluted
Average shares outstanding 6,375 8,527 8,685 9,680 10,498 10,420 10,726
Net effect of dilutive stock options -
based on the treasury stock method
using ending market price - - 216 256 213 269 54
Net effect of dilutive stock warrants -
based on the treasury stock method
using ending market price - - - 55 124 124 82
Net effect of dilutive stock warrants -
based on the if-converted method - - - 441 * * *
Adjustment to give effect to shares optioned
to employees within 12 months of the
initial filing as outstanding as of the
beginning of each period presented
based on the treasury stock method
using estimated market price upon
offering 54 54 54 54 14 18 -
Assumed conversion of convertible
preferred stock 20 20 13 - - - -
--------------------------------------- ---------------
Total 6,449 8,601 8,968 10,486 10,849 10,831 10,862
======================================= ===============
Net income $70 $33 $1,949 $3,766 $1,116 $617 $1,054
Add interest from subordinated debt, net of taxes - - - 92 * * *
--------------------------------------- ---------------
Net income available for common shareholders $70 $33 $1,949 $3,858 $1,116 $617 $1,054
======================================= ===============
Per share amount $0.01 $0.00 $0.22 $0.37 $0.10 $0.06 $0.10
======================================= ===============
|
* Conversion of the stock warrants is not assumed in the computation because
its effect is antidilutive.
EXHIBIT 23.2
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the use of our report dated March 1, 1996, in the Registration Statement (Form S-1 No. 33-96952) and related Prospectus of Administaff, Inc. for the registration of 3,000,000 shares of its common stock.
/s/ ERNST & YOUNG LLP |
ERNST & YOUNG LLP
Houston, Texas
November 27, 1996