-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, ChRDGAQlCtLbduJmAvfg4+pfafXyDRyZKGr2Ylsk/Um4Rk2jTwS0oqRDYOI5KhGX 1NyzXu9b8wJGarcKugCjdw== 0000950129-01-001482.txt : 20010319 0000950129-01-001482.hdr.sgml : 20010319 ACCESSION NUMBER: 0000950129-01-001482 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010316 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ADMINISTAFF INC \DE\ CENTRAL INDEX KEY: 0001000753 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-HELP SUPPLY SERVICES [7363] IRS NUMBER: 760479645 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-13998 FILM NUMBER: 1570306 BUSINESS ADDRESS: STREET 1: 19001 CRESCENT SPRINGS DR CITY: KINGWOOD STATE: TX ZIP: 77339 BUSINESS PHONE: 7133588986 MAIL ADDRESS: STREET 1: 19001 CRESCENT SPRINGS DR CITY: KINGWOOD STATE: TX ZIP: 77339 10-K 1 h85055e10-k.txt ADMINISTAFF INC - YEAR ENDED DECEMBER 31, 2000 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 2000. or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 [No Fee required] For the transition period from to ---------- ---------- Commission File No. 1-13998 ADMINISTAFF, INC. (Exact name of registrant as specified in its charter) Delaware 76-0479645 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 19001 Crescent Springs Drive Kingwood, Texas 77339 (Address of principal executive offices) (Zip Code) Registrant's Telephone Number, Including Area Code: (281) 358-8986 Securities Registered Pursuant to Section 12(b) of the Act: Common Stock, par value $0.01 per share New York Stock Exchange Rights to Purchase Series A Junior Participating Preferred Stock New York Stock Exchange (Title of class) (Name of Exchange on Which Registered)
Securities Registered Pursuant to Section 12(g) of the Act: NONE Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ___ As of March 12, 2001, 27,433,699 shares of the registrant's common stock, par value $0.01 per share, were outstanding. The aggregate market value of the common stock held by non-affiliates (based upon the March 12, 2001 closing price of the common stock as reported by the New York Stock Exchange) was approximately $409 million. Part III information is incorporated by reference from the proxy statement for the annual meeting of stockholders to be held May 8, 2001 which the registrant intends to file within 120 days of the end of the fiscal year. ================================================================================ 2 TABLE OF CONTENTS PART I Item 1. Business............................................................ 2 Item 2. Properties.......................................................... 16 Item 3. Legal Proceedings................................................... 16 Item 4. Submission of Matters to a Vote of Security Holders................. 17 PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters....................................... 19 Item 6. Selected Financial Data............................................. 20 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations......................................... 21 Item 7A. Qualitative and Quantitative Disclosures About Market Risk.......... 36 Item 8. Financial Statements and Supplementary Data......................... 37 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.......................................... 37 PART III Item 10. Directors and Executive Officers of the Registrant.................. 38 Item 11. Executive Compensation.............................................. 38 Item 12. Security Ownership of Certain Beneficial Owners and Management ..... 38 Item 13. Certain Relationships and Related Transactions...................... 38 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K..... 39
3 PART I This document contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. You can identify such forward-looking statements by the words "expects", "intends," "plans," "projects," "believes," "estimates," "likely," "goal," "assume" and similar expressions. In the normal course of business, Administaff, Inc. ("Administaff" or the "Company"), in an effort to help keep its stockholders and the public informed about the Company's operations, may from time to time issue such forward-looking statements, either orally or in writing. Generally, these statements relate to business plans or strategies, projected or anticipated benefits or other consequences of such plans or strategies, or projections involving anticipated revenues, earnings or other aspects of operating results. Administaff bases the forward-looking statements on its current expectations, estimates and projections. Administaff cautions you that these statements are not guarantees of future performance and involve risks, uncertainties and assumptions that Administaff cannot predict. In addition, Administaff has based many of these forward-looking statements on assumptions about future events that may prove to be inaccurate. Therefore, the actual results of the future events described in such forward-looking statements in this Annual Report, or elsewhere, could differ materially from those stated in such forward-looking statements. Among the factors that could cause actual results to differ materially are the risks and uncertainties discussed in this Annual Report, including, without limitation, factors discussed in Item 1, "Business" and Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," including the factors discussed under the caption "Factors That May Affect Future Results and the Market Price of Common Stock," beginning on page 32. ITEM 1. BUSINESS. GENERAL Administaff is a professional employer organization ("PEO") that provides a comprehensive Personnel Management System encompassing a broad range of services, including benefits and payroll administration, health and workers' compensation insurance programs, personnel records management, employer liability management, employee recruiting and selection, performance management and training and development services. The Company was organized as a corporation in 1986 and has provided PEO services since inception. The Company's Personnel Management System is designed to improve the productivity and profitability of small and medium-sized businesses. It relieves business owners and key executives of many employer-related administrative and regulatory burdens and enables them to focus on the core competencies of their businesses. It also promotes employee performance through human resource management techniques that improve employee satisfaction. The Company provides the Personnel Management System by entering into a Client Services Agreement ("CSA"), which establishes a three-party relationship whereby the Company and client act as co-employers of the employees who work at the client's location ("worksite employees"). Under the CSA, Administaff assumes responsibility for personnel administration and compliance with most employment-related governmental regulations, while the client company retains the employees' services in its business and remains the employer for various other purposes. The Company charges a comprehensive service fee, which is invoiced concurrently with the processing of payroll for the worksite employees of the client. The fee is based upon the gross payroll of each client and the Company's estimated cost of providing the services included in the Personnel Management System. Administaff is a leading provider of PEO services, both in terms of the number of worksite employees and in terms of revenues. The Company, which serves client companies with worksite employees located throughout the United States, is currently executing a long-term national expansion strategy targeting approximately 90 sales offices located in 40 strategically selected markets. As part of this expansion strategy, the Company opened six new sales offices and entered two new markets during 2000. As of December 31, 2000, the Company had 31 sales offices located in 17 markets. For the year ended December 31, 2000, Houston, the Company's original market, accounted for approximately 27% of the Company's revenues with other Texas markets contributing an additional 23%. During 2000, revenues grew 33% in the Texas markets and 114% in the non-Texas markets. -2- 4 The Company's national expansion strategy also includes regionalized data processing for payroll and benefits transactions and localized face-to-face human resources service capacity. During 2000, the Company relocated and expanded its service center in Houston and continued to place human resources and customer service personnel in its sales markets. As of December 31, 2000, the Company had three service centers, which when fully staffed, will provide the capacity to serve approximately 100,000 worksite employees. In addition, the Company has human resources and customer service personnel located in all of its 17 sales markets. The Company expects to open five new sales offices in 2001. The Company's eBusiness strategy includes three primary initiatives: Administaff Assistant, bizzport and a best practices human resources site. Administaff Assistant, the Company's Internet-based service delivery platform, provides automated, personalized PEO services to clients and worksite employees. Bizzport is an eCommerce portal designed to provide the Company's clients and worksite employees with a wide variety of value-added products and services. The best practices human resources site will seek to extend the Company's brand and presence as the premier human resources department for small and medium-sized business by providing a comprehensive human resources information guide on the web sites of alliance partners. The best practices human resources site is expected to be launched during 2001. PEO INDUSTRY The PEO industry began to evolve in the early 1980's largely in response to the burdens placed on small and medium-sized employers by an increasingly complex legal and regulatory environment. While various service providers were available to assist these businesses with specific tasks, PEOs emerged as providers of a more comprehensive range of services relating to the employer/employee relationship. PEO arrangements generally transfer broad aspects of the employer/employee relationship to the PEO. Because PEOs provide employee-related services to a large number of employees, they can achieve economies of scale that allow them to perform employment-related functions more efficiently, provide employee benefits at a level typically available only to large corporations with substantial resources and devote more attention to human resources management. Growth in the PEO industry has been significant. The Company believes that the key factors driving demand for PEO services include (i) trends relating to the growth and productivity of the small and medium-sized business community in the United States, such as outsourcing and a focus on core competencies, (ii) the need to provide competitive health care and related benefits to attract and retain employees, (iii) the increasing costs associated with health and workers' compensation insurance coverage, workplace safety programs, employee-related complaints and litigation and (iv) complex regulation of labor and employment issues and the related costs of compliance, including the allocation of time and effort to such functions by owners and key executives. A significant factor in the growth of the PEO industry has been increasing recognition and acceptance of PEOs and the co-employer relationship by federal and state governmental authorities. The Company and other industry leaders, in concert with the National Association of Professional Employer Organizations ("NAPEO"), have worked with the relevant governmental entities for the establishment of a regulatory framework that protects clients and employees, discourages unscrupulous and financially unsound companies, and promotes the legitimacy and further development of the industry. While 47 states have recognized PEOs in their employment laws, many states do not explicitly regulate PEOs. However, 21 states (including Texas) have enacted legislation containing licensing, registration, or certification requirements and several others are considering such regulation. Such laws vary from state to state but generally provide for monitoring the fiscal responsibility of PEOs. State regulation assists in screening insufficiently capitalized PEO operations and, in the Company's view, has the effect of legitimizing the PEO industry by resolving interpretive issues concerning employee status for specific purposes under applicable state law. The Company has actively supported such regulatory efforts and is currently licensed or registered in all 21 of these states. The cost of compliance with these regulations is not material to the Company's financial position or results of operations. -3- 5 PEO SERVICES The Company serves small and medium-sized business by providing its Personnel Management System, which encompasses a broad range of services, including benefits and payroll administration, health and workers' compensation insurance programs, personnel records management, employer liability management, employee recruiting and selection, performance management and training and development services. The Personnel Management System is designed to attract and retain high-quality employees, while relieving client owners and key executives of many employer-related administrative and regulatory burdens. Among the employment-related laws and regulations that may affect a client company are the following: o Internal Revenue Code (the "Code") o Age Discrimination in Employment Act (ADEA) o Federal Income Contribution Act (FICA) o The Family and Medical Leave Act (FMLA) o Federal Unemployment Tax Act (FUTA) o Health Insurance Portability and o Fair Labor Standards Act (FLSA) Accountability Act (HIPAA) o Employee Retirement Income Security Act o Drug-Free Workplace Act (ERISA) o Occupational Safety and Health Act o Consolidated Omnibus Budget Reconcilia- (OSHA) tion Act of 1987 (COBRA) o Worker Adjustment and Retraining o Immigration Reform and Control Act Notification Act (WARN) (IRCA) o State unemployment and employment o Title VII (Civil Rights Act of 1964) security laws o Americans with Disabilities Act (ADA) o State workers' compensation laws
While these regulations are complex, and in some instances overlapping, Administaff assists its client companies in achieving compliance with these regulations by providing services in four primary categories: administrative functions, benefit plans administration, personnel management and employer liability management. All of the following services are included in the Personnel Management System and are available to all client companies. Administrative Functions. Administrative functions encompass a wide variety of processing and record keeping tasks, mostly related to payroll administration and government compliance. Specific examples include payroll processing, payroll tax deposits, quarterly payroll tax reporting, employee file maintenance, unemployment claims processing and workers' compensation claims reporting. Benefit Plans Administration. The Company's benefit plans include the following: a group health plan, a dependent care spending account plan, a worklife program, an educational assistance plan, an adoption assistance program, group term life insurance coverage, accidental death and dismemberment insurance coverage, short-term and long-term disability insurance coverage and a 401(k) plan. The group health plan includes medical, dental, vision and prenatal care, and a prescription drug program. All eligible employees may participate in the 401(k) plan, while various components of the welfare and fringe benefit plans are provided to applicable employees based on eligibility provisions specific to those plans. The Company is responsible for the costs and premiums associated with these plans, acts as plan administrator of the plans, negotiates the terms and costs of the plans, maintains the plans in accordance with applicable federal and state regulations and serves as liaison for the delivery of such benefits to worksite employees. The Company believes that this variety and quality of benefit plans are generally not available to employees in its small and medium-sized business target market and are usually offered only by larger companies that can spread program costs over a much larger group of employees. Moreover, the Company believes that the availability of these benefit plans provide our clients with a competitive advantage that small and medium-sized businesses are normally unable to attain in the areas of benefits cost, employee recruiting and employee retention. -4- 6 Personnel Management. The Company provides a wide variety of personnel management services which give its client companies access to resources normally found only in the human resources departments of large companies. All client companies receive the Company's comprehensive personnel guide, which sets forth a systematic approach to administering personnel policies and practices, including recruiting, discipline and termination procedures. Other human resources services provided by the Company include drafting and reviewing personnel policies and employee handbooks, designing job descriptions, performing prospective employee screening and background investigations, designing performance appraisal processes and forms, and providing professional development and issues-oriented training, employee counseling, substance abuse awareness training, drug testing, outplacement services and compensation guidance. Employer Liability Management. Under the CSA, the Company assumes many of the employment-related responsibilities associated with its administrative functions, benefit plans administration and personnel management services. For those employment-related responsibilities that are the responsibility of the client or that Administaff shares with its clients, the Company can assist its clients in managing and limiting exposure. This includes first time and ongoing safety-related risk management reviews, as well as the implementation of safety programs designed to reduce workers' compensation claims. Administaff also provides guidance to clients on avoiding liability for discrimination, sexual harassment and civil rights violations, and participates in termination decisions to attempt to secure protection from liability on those grounds. When a claim arises, the Company often assists in the client's defense regardless of whether the Company has been named directly. The Company employs in-house and external counsel specializing in several areas of employment law who have broad experience in disputes concerning the employer/employee relationship and who provide support to the Company's human resource services specialists. This support allows Administaff's clients to contest many claims that they might otherwise have been inclined to settle. The Company also provides employment practice liability insurance to its clients as part of its comprehensive service. The Company also monitors changing government regulations and notifies clients of their potential effect on employer liability. eBUSINESS SERVICES The Company's comprehensive eBusiness strategy is designed to add new revenue streams and extend the Company's brand as the premier human resources department for small business. The Company also expects its eBusiness services to positively impact its core PEO services by enhancing the Company's attractiveness to prospective clients, increasing client retention and reducing operating costs. The Company expects to continue enhancing each of the following initiatives, with a focus on additional functionality and service offerings. Administaff Assistant is the Company's web-based PEO service delivery platform, which is designed to provide automated, personalized PEO services to the Company's clients and worksite employees. Administaff Assistant provides a wide range of functionality, including: o An online personnel guide; o Best practices human resource management process maps and process overviews; o Printable online human resources forms; o Customer-specific payroll information and reports; o Employee information, including online check stubs and pay history reports; o Online submission and approval of payroll data; o Online training; o Links to benefits providers and other key vendors; and o Frequently asked questions. The Company's second major eBusiness initiative, bizzport, was launched in the second quarter of 2000. bizzport is an eCommerce portal that brings a wide range of product and service offerings from best-of-class providers to Administaff clients, worksite employees and their families. The Company's bizzport offerings include financial services (American Express, Aon, Bank One), technology solutions (Dell, IBM, Lexmark), communications services (AT&T), travel services (Continental Airlines), business services (Virtual Growth, -5- 7 Works.com, Forrester Research, Oxford Capital, CorporateGifts.com), consumer products (FTD.COM, Spiegel, Charitygift.com) and employee services (Best Upon Request, MovingStation). The bizzport site also features the unique Best2Best client network, where Administaff clients can conduct business with each other. The third initiative in the Company's eBusiness strategy is a best practices human resources site that will seek to extend the Company's brand and presence as the premier human resources department for small and medium-sized business by providing a comprehensive human resources information guide on the web sites of alliance partners. This eContent platform will include human resource process maps, human resources management best practices, discussion of current events in human resource management, and tips on avoiding common human resource mistakes. The site is expected to be launched during 2001. CLIENT SERVICE AGREEMENT All clients enter into Administaff's Client Service Agreement. The CSA generally provides for an on-going relationship, subject to termination by the Company or the client upon 60 to 180 days written notice. The CSA establishes the Company's comprehensive service fee, which is subject to periodic adjustments to account for changes in the composition of the client's workforce and statutory changes that affect the Company's costs. The CSA also establishes the division of responsibilities between the Company and the client as co-employers. Pursuant to the CSA, the Company is responsible for all personnel administration and is liable for purposes of certain employment-related government regulation. In addition, the Company assumes liability for payment of salaries and wages of its worksite employees and responsibility for providing employee benefits to such persons, regardless of whether the client company makes timely payment of the associated service fee. The client retains the employees' services and remains liable for the purposes of certain government regulations, compliance with which requires control of the worksite or daily supervisory responsibility or is otherwise beyond the Company's ability to assume. A third group of responsibilities and liabilities are shared by the Company and the client where such joint responsibility is appropriate. The specific division of applicable responsibilities under the CSA is as follows: Administaff o Payment of wages and related tax reporting and remittance (state and federal withholding, FICA, FUTA, state unemployment); o Workers' compensation compliance, procurement, management and reporting; o Compliance with COBRA, IRCA, HIPAA and ERISA (for plans sponsored by Administaff), as well as monitoring changes in other governmental regulations governing the employer/employee relationship and updating the client when necessary; and o Employee benefits administration. Client o Payment and related tax reporting and remittance of non-qualified deferred compensation and equity-based compensation; o Assignment to, and ownership of, all intellectual property rights; o Compliance with Section 414(o) of the Code regarding benefit discrimination; o Compliance with OSHA regulations, EPA regulations, FLSA, WARN and state and local equivalents and compliance with government contracting provisions; o Compliance with NLRA, including all organizing efforts and expenses related to a collective bargaining agreement and related benefits; o Professional licensing requirements, fidelity bonding and professional liability insurance; and o Products produced and/or services provided. -6- 8 Joint o Implementation of policies and practices relating to the employee/employer relationship; and o Compliance with all federal, state and local employment laws, including, but not limited to Title VII of the Civil Rights Act of 1964, ADEA, Title I of ADA, FMLA, the Consumer Credit Protection Act, and immigration laws and regulations. Because the Company is a co-employer with the client company for some purposes, it is possible that the Company could incur liability for violations of such laws even if it is not responsible for the conduct giving rise to such liability. The CSA addresses this issue by providing that the client will indemnify the Company for liability incurred to the extent the liability is attributable to conduct by the client. Notwithstanding this contractual right to indemnification, it is possible that the Company could be unable to collect on a claim for indemnification and may therefore be ultimately responsible for satisfying the liability in question. The Company maintains certain general insurance coverages (including coverages for its clients) to manage its exposure for these types of claims, and as a result, the costs in excess of insurance premiums incurred by the Company with respect to this exposure have historically been insignificant to the Company's operating results. Clients are required to remit their comprehensive service fees no later than one day prior to the applicable payroll date by wire transfer or automated clearinghouse transaction. Although the Company is ultimately liable, as the employer for payroll purposes, to pay employees for work previously performed, it retains the ability to terminate the CSA as well as the employees upon non-payment by a client. This right, the periodic nature of payroll and the overall quality of the Company's client base have resulted in an excellent overall collections history. CUSTOMERS Administaff provides a value-added, full-service human resources solution that it believes is most suitable to a specific segment of the small and medium-sized business community not served by most PEOs. The Company has set a long-term goal to serve approximately 10% of the overall small and medium-sized business community. Administaff serves client companies and worksite employees located throughout the United States. The Company's client base is broadly distributed throughout a wide variety of industries including: o Business services - 25%; o Finance, insurance and real estate - 16%; o Medical services - 9%; o Manufacturing - 8%; o Engineering, accounting and legal services - 8%; o Construction - 7%; o Wholesale trade - 6%; o Retail trade - 6%; o Transportation - 4%; and o Other - 11%. This diverse client base lowers the Company's exposure to downturns or volatility in any particular industry. However, the Company's performance could be affected by general economic conditions within the small and medium-sized business community. For the year ended December 31, 2000, Houston, the Company's original market, accounted for approximately 27% of the Company's revenues with other Texas markets contributing an additional 23%. During 2000, revenues grew 33% in the Texas markets and 114% in the non-Texas markets. As part of its client selection strategy, the Company does not offer its services to businesses falling within certain specified SIC codes, essentially eliminating certain industries that it believes present a higher risk of employee injury (such as roofing, logging and oil and gas exploration). All prospective customers are evaluated -7- 9 individually on the basis of workers' compensation risk, group medical history, unemployment history and operating stability. The Company focuses heavily on client retention. Administaff's client retention record over the last five years reflects that approximately 80% of Administaff's clients remain for more than one year, and that the retention rate improves for clients who remain with Administaff for longer periods. Client attrition is attributable to a variety of factors, including (i) client non-renewal due to price factors, (ii) sale, disposition or merger of the client company, (iii) competition from other PEOs and business services firms, (iv) termination of the CSA by Administaff resulting from the client's inability to make timely payments, and (v) client business failure or downsizing. MARKETING AND SALES As of December 31, 2000, the Company had 31 sales offices located in 17 markets. The Company is currently executing a long-term national expansion strategy, which targets approximately 90 sales offices in 40 strategically selected markets. The Company's sales offices typically consist of six to ten sales representatives, a district sales manager and an office administrator. The Company's markets and their respective year of entry are as follows:
Initial Market Sales Offices Entry Date - ------ ------------- ---------- Houston 4 1986 San Antonio 1 1989 Austin 1 1989 Orlando 1 1989 Dallas 3 1993 Atlanta 3 1994 Phoenix 1 1995 Chicago 2 1995 Washington D.C 2 1995 Denver 1 1996 Los Angeles 3 1997 Charlotte 1 1997 St. Louis 1 1998 San Francisco 3 1998 New York 2 1999 Baltimore 1 2000 New Jersey 1 2000
The 40 markets included in the national expansion plan were identified using a systematic market evaluation and selection process. The Company continues to evaluate a broad range of factors in the selection process, using a market selection model that weights various criteria that the Company believes are reliable predictors of successful penetration based on its experience. Among the factors considered are (i) market size, in terms of small and medium-sized businesses engaged in selected industries that meet the Company's risk profile, (ii) market receptivity to PEO services, including the regulatory environment and relevant history with other PEO providers, (iii) existing relationships within a given market, such as vendor or client relationships, (iv) expansion cost issues, such as advertising and overhead costs, (v) direct cost issues that bear on the Company's effectiveness in controlling and managing the cost of its services, such as workers' compensation and health insurance costs, unemployment risks and various legal and other factors, (vi) a comparison of the services offered by Administaff to alternatives available to small and medium-sized businesses in the relevant market, such as the cost to the target clients of procuring services directly or through other PEOs and (vii) long-term strategy issues, such as the general perception of markets and their long-term revenue growth potential. Each of the Company's expansion markets, beginning with Dallas in 1993, was selected in this manner. -8- 10 The Company's marketing strategy is based on the application of techniques that have produced consistent and predictable results in the past. The Company develops a mix of advertising media and a placement strategy tailored to each individual market. After selecting a market and developing its marketing mix, but prior to entering the market, the Company engages in an organized media and public relations campaign to prepare the market for the Company's entry and to begin the process of generating sales leads. The Company markets its services through a broad range of media outlets, including radio, newspapers, periodicals, direct mail and the Internet. The Company employs a public relations firm in each of its markets as well as advertising consultants to coordinate and implement its marketing campaigns. The Company has developed an inventory of proven, successful radio and newsprint advertisements, which are utilized in this effort. The Company's organic growth model generates sales leads from five primary sources: direct sales efforts, advertising, referrals, the American Express marketing alliance described below and the Internet. These leads result in initial presentations to prospective clients, and, ultimately, a predictable number of client census reports. A prospective client's census report reflects information gathered by the sales representative about the prospect's employees, including job classification, state of employment, workers' compensation claims history, health insurance claims history, salary, and desired level of benefits. This information is entered into the Company's customized bid system, which applies Administaff's proprietary pricing model to the census data, leading to the preparation of a bid. Concurrent with this process, the prospective client's workers' compensation and health insurance histories are evaluated from a risk management perspective. This prospective client screening process plays a vital role in controlling the Company's benefits costs and limiting its exposure to liability. Upon completion of a favorable risk evaluation, the sales representative presents the Company's bid and attempts to enroll the prospect. The Company's selling process typically takes approximately 90 days. In 1998, the Company entered into a Marketing Agreement with American Express, under which American Express is utilizing its resources to generate appointments with prospects for the Company's services in certain markets. In April 2000, the Marketing Agreement was amended to provide for increased marketing efforts by American Express and the embedding of American Express services in the Company's bizzport offerings. In addition, the Company and American Express are working to jointly develop product offerings that enhance the current PEO services offered by the Company. The Company pays a commission to American Express based upon the number of worksite employees paid after being referred to the Company pursuant to the Marketing Agreement and the total number of worksite employees paid by the Company. In 2000, the Marketing Agreement produced 27% of the Company's sales leads and 20% of new worksite employees sold. The Marketing Agreement expires at the end of 2005. COMPETITION Administaff provides a value-added, full service human resources solution that it believes is most suitable to a specific segment of the small and medium-sized business community not served by most PEOs. This full-service approach is exemplified by the Company's commitment to service and technology personnel and tools, which has produced a ratio of corporate staff to worksite employees (the "staff support ratio") that is higher than average for the PEO industry. Based on an analysis of the 1997 - 1999 annual NAPEO surveys of the PEO industry, the Company has successfully leveraged its full-service approach into significantly higher returns for the Company on a per worksite employee per month basis. During the three year period from 1997 to 1999, the Company's staff support ratio averaged 34% higher than the PEO industry average, while gross profit per worksite employee and operating income per worksite employee exceeded industry averages by 112% and 474%. Competition in the PEO industry revolves primarily around quality of services, breadth of services, choice and quality of benefits packages, reputation and price. The Company believes that reputation, national presence, regulatory expertise, financial resources, risk management and information technology capabilities distinguish leading PEOs from the rest of the industry. The Company also believes that it competes favorably in these areas. Due to the differing geographic regions and market segments in which most PEOs operate, and the relatively low level of market penetration by the industry, the Company considers its primary competition to be the traditional in-house provision of employee-related services. The PEO industry is highly fragmented, and the -9- 11 Company believes that it is the largest PEO in the United States in terms of revenues. The Company's largest national competitors include Staff Leasing, Inc. and PEO divisions of large business services companies such as Automatic Data Processing, Inc. and Paychex, Inc. In addition, the Company faces competition from large regional PEOs in certain areas of the country. As the Company and other large PEOs expand nationally, the Company expects that competition may intensify among larger PEOs. In addition, the Company competes to some extent with fee-for-service providers such as payroll processors and human resource consultants. VENDOR RELATIONSHIPS Administaff provides benefits to its worksite employees under arrangements with a variety of vendors. Although the Company believes that any of its benefit contracts could be replaced if necessary, the Company considers two such contracts to be the most significant elements of the package of benefits provided to employees. The Company's primary group health insurance vendor is Aetna U.S. Healthcare, Inc. ("Aetna"). The Company provides a range of health plan coverages under the plan, and Administaff's comprehensive fees to its clients reflect the coverage options provided. The Company initiated insurance coverage with Aetna in 1989, and the current one-year policy expires on December 31, 2001. The Company's coverage options with Aetna primarily include a PPO arrangement and an HMO plan. All Aetna coverages are fully insured and require the Company to fund claims and premiums up to a specified quarterly maximum amount. Aetna is required to fund all claims and premiums, if any, in excess of the quarterly maximum amount. These quarterly maximum amounts are adjustable, based on claims experience, with six months notice by Aetna. While Aetna bears ultimate legal responsibility for all claims, the Company seeks to minimize the costs of providing health care coverages through active assistance in the claims administration and resolution process, because the Company's long-term health care costs could be affected by its claims experience. The Company's workers' compensation policy is currently provided by Lumbermens Mutual Casualty Company, a unit of Kemper Insurance Companies. Since November 1994, the Company has been covered under a guaranteed cost plan whereby premiums are paid for complete coverage of all claims under the policy. The current policy expires on September 30, 2001. INFORMATION TECHNOLOGY The Company has developed state-of-the-art information technology capable of meeting the demands of payroll and related processing for the Company's worksite employees, satisfying the Company's administrative and management information needs, providing productivity enhancement tools to the Company's corporate staff and providing web-based access to certain tools and data. While the Company utilizes commercially available software for standard business functions such as finance and accounting, it has developed a proprietary professional employer information system for the delivery of its primary services. This system manages data relating to worksite employee enrollment, human resource management, benefits administration, payroll processing, management information, and sales bid calculations that are unique to the PEO industry and to Administaff. Central to the system is a payroll processing system that allows the Company to process a high volume of payroll transactions that meet the customized needs of its client companies. AIMS (Administaff Information Management System), the Company's proprietary PEO information system, is in its fifth generation. Deployed during the third quarter of 2000, the new release includes improved processing speed, a comprehensive payroll tax calculation system based on a third-party tax information database, enhanced integration with Administaff Assistant, increased reporting capabilities, and simplified operational user interfaces. The software has been developed using Informix, a relational database and programming language, Power Builder, an object oriented client/server development system, and state-of-the-art web development tools. The software is designed to provide high volume, professional employer services utilizing a combination of on-line and background processing capabilities that can be readily expanded to handle additional processing needs. The system is accessed through a graphical user interface engineered to maximize both the quality of Administaff's services and the efficiency with which they are delivered. -10- 12 Administaff Assistant is the Company's web-based PEO service delivery platform, which is designed to provide automated, personalized PEO services to the Company's clients and worksite employees. Administaff Assistant provides a wide range of functionality, including: o An online personnel guide; o Best practices human resource management process maps and process overviews; o Printable online human resources forms; o Customer-specific payroll information and reports; o Employee information, including online check stubs and pay history reports; o Online submission and approval of payroll data; o Online training; o Links to benefits providers and other key vendors; and o Frequently asked questions. The Company's primary information processing facility is located at the Company's corporate headquarters in Kingwood, Texas (a suburb of Houston) with secondary processing facilities located at the Company's service centers in Houston, Dallas and Atlanta. The Dallas facility acts as a disaster recovery facility for the Company, capable of handling all of the Company's operations for short periods of time. The Company has invested substantially in its technology and network infrastructure. Service centers, district sales offices and corporate offices are connected to the corporate data center by high-speed frame-relay and point-to-point network services utilizing Nortel Networks' gigabit technology. The network backbone is fiber-based and utilizes traffic leveling and advanced diagnostic capabilities for optimal performance. This network infrastructure provides fast, reliable communication throughout the Company's nationwide presence. With the implementation of video conferencing and voice-over-IP during 2000, the Company has further leveraged this infrastructure to converge voice, data and video over a single, integrated, national telecommunications network. The Company's principal computing platforms are Compaq/NT and IBM RISC 6000/AIX servers, and IBM and Dell workstations. The Company utilizes RISC 6000 servers for database services and Compaq/NT servers for file and other services. INDUSTRY REGULATION The Company's operations are affected by numerous federal and state laws relating to tax and employment matters. By entering into a co-employer relationship with its worksite employees, the Company assumes certain obligations and responsibilities of an employer under these federal and state laws. Because many of these federal and state laws were enacted prior to the development of nontraditional employment relationships, such as PEOs, temporary employment and outsourcing arrangements, many of these laws do not specifically address the obligations and responsibilities of nontraditional employers. While 47 states have recognized PEOs in their employment laws, many states do not explicitly regulate PEOs. However, 21 states (including Texas) have passed laws that have licensing, registration or certification requirements for PEOs, and several others are considering such regulation. Certain federal and state statutes and regulations use the terms "employee leasing" or "staff leasing" to describe the arrangement among a PEO and its clients and worksite employees. The terms "employee leasing," "staff leasing" and "professional employer arrangements" are generally synonymous in such contexts and describe the arrangements entered into by the Company, its clients and worksite employees. As an employer, the Company is subject to all federal statutes and regulations governing the employer-employee relationship. Subject to the issues discussed below, the Company believes that its operations are in compliance in all material respects with all applicable federal statutes and regulations. -11- 13 EMPLOYEE BENEFIT PLANS The Company offers various employee benefit plans to its employees, including its worksite employees. The Company maintains these employee benefit plans as "single-employer" plans rather than "multiple-employer" plans. These plans include the 401(k) Plan (a profit-sharing plan with a cash or deferred arrangement ("CODA") under Code Section 401(k) and an employer matching contribution feature under Code Section 401(m)); a cafeteria plan under Code Section 125; a group welfare benefits plan which includes medical, dental, vision, life insurance, disability and worklife programs; a dependent care plan; an educational assistance plan; and an adoption assistance program. Generally, employee benefit plans are subject to provisions of both the Internal Revenue Code and the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). Employer Status. In order to qualify for favorable tax treatment under the Code, the plans must be established and maintained by an employer for the exclusive benefit of its employees. Generally, an entity is an "employer" of individuals for federal employment tax purposes if an employment relationship exists between the entity and the individuals under the common law test of employment. In addition, the officers of a corporation are deemed to be employees of that corporation for federal employment tax purposes. The common law test of employment, as applied by the IRS, involves an examination of approximately 20 factors to ascertain whether an employment relationship exists between a worker and a purported employer. Generally, the test is applied to determine whether an individual is an independent contractor or an employee for federal employment tax purposes and not to determine whether each of two or more companies is a "co-employer." Substantial weight is typically given to the question of whether the purported employer has the right to direct and control the details of an individual's work. Among the factors which appear to be considered more important by the IRS are (1) the employer's degree of behavioral control (the extent of instructions, training and the nature of the work), (2) the financial control or the economic aspects of the relationship, and (3) the intended relationship of the parties (whether employee benefits are provided, whether any contracts exist, whether services are ongoing or for a project, whether there are any penalties for discharge/termination, and the frequency of the business activity). In 1992, the Company applied for and received a favorable determination from the IRS regarding the qualified status of the 401(k) Plan. In that application, the Company disclosed to the IRS that the Company is involved in the business of leasing employees to recipient companies and that the 401(k) Plan covered worksite employees who satisfied the plan's eligibility requirements. However, the statement that the 401(k) Plan covered worksite employees does not necessarily resolve the issue of who is the employer of those employees for purposes of the 401(k) Plan. The Company amended and restated the 401(k) Plan on December 15, 1994. Among other amendments, the Company added the matching contribution feature under Code Section 401(m) to the 401(k) Plan. In March 1995, the Company submitted the amended and restated 401(k) Plan to the IRS for a determination on its continued tax qualified status. The Company supplemented this filing with additional information on October 22, 1996, September 15, 1998, June 25, 1999 and October 9, 2000. The amended and restated 401(k) Plan is currently under review by the IRS. An IRS finding that the 401(k) Plan document merits tax qualified status is a determination as to form only and would not preclude a subsequent disqualification based on the Plan's operation. Separate from the IRS' review of the pending determination request, the Company's 401(k) Plan is currently under audit for the 1993 plan year, although certain conclusions of the IRS could be applicable to other years as well. In addition, the IRS has established an Employee Leasing Market Segment Group (the "Market Segment Group") for the purpose of identifying specific compliance issues prevalent in certain segments of the PEO industry. Approximately 70 PEOs, including the Company, have been randomly selected by the IRS for audit pursuant to this program. One issue that has arisen from these audits is the Industry Issue (whether a PEO can be a co-employer of worksite employees, including officers and owners of client companies, for various purposes under the Code, including participation in the PEO's 401(k) plan). NAPEO and the Company are cooperating with the IRS in this study of the PEO industry. With respect to the 401(k) Plan audit, the IRS Houston District has sought technical advice (the "Technical Advice Request") from the IRS National Office. A copy of the Technical Advice Request and the Company's response has been sent to the IRS National Office for review. The Technical Advice Request contains the conclusions of the IRS Houston District with respect to the 1993 plan year that the 401(k) Plan -12- 14 should be disqualified because it covers worksite employees who are not employees of the Company. The Company's response to the Technical Advice Request refutes the conclusions of the IRS Houston District. The Industry Issue identified by the Market Segment Group study also was referred to the National Office. If the Market Segment Group study were to reach a conclusion that is adverse to the PEO industry, there is an administrative procedure available to appeal that conclusion. In addition to working with the Market Segment Group study, NAPEO is actively engaged in policy discussions with both the Treasury Department and with members of Congress in an effort to reduce the likelihood of unfavorable conclusions and to procure favorable legislation. The Company does not know whether the National Office will address the Technical Advice Request independently of the Industry Issue. The Company is not able to predict either the timing or the nature of any final decision that may be reached by the IRS with respect to the 401(k) Plan audit or with respect to the Technical Advice Request or the Market Segment Group study and the ultimate outcome of such decisions. Further, the Company is unable to predict whether the Treasury Department will issue a policy statement with respect to its position on the issues or, if issued, whether such a statement would be favorable to the Company. The Company intends to vigorously pursue a favorable resolution of the issues through one or more of the following methods: the audit-Technical Advice Request, the Market Segment Group study process, regulatory and legislative efforts, and, if necessary, legal action. If, however, any of these processes were to conclude that a PEO is not a co-employer of its worksite employees and such conclusion were to ultimately prevail, worksite employees could not continue to make salary deferral contributions to the 401(k) Plan or to the Company's cafeteria plan or continue to participate in certain other employee benefit plans of the Company as they currently exist. The Company believes that, although unfavorable to the Company, a prospective application by the IRS of such an adverse conclusion (that is, one applicable only to periods after the conclusion by the IRS is finalized) would not have a material adverse effect on its financial position or results of operations, as the Company could continue to make available similar benefit programs to its worksite employees at comparable costs to the Company. However, if the IRS National Office adopts the conclusions of the IRS Houston District and any such conclusions were applied retroactively to disqualify the 401(k) Plan for 1993 and subsequent years, employees' vested account balances under the 401(k) Plan would become taxable, the Company would lose its tax deductions to the extent its matching contributions were not vested, the 401(k) Plan's trust would become a taxable trust and the Company would be subject to liability with respect to its failure to withhold applicable taxes with respect to certain contributions and trust earnings. Further, the Company would be subject to liability, including penalties, with respect to its cafeteria plan for the failure to withhold and pay taxes applicable to salary deferral contributions by employees, including worksite employees. In such a scenario, the Company also would face the risk of client dissatisfaction and potential litigation. A retroactive application by the IRS of an adverse conclusion could have a material adverse effect on the Company's financial position and results of operations. While the Company believes that a retroactive disqualification is unlikely, there can be no assurance as to the ultimate resolution of these issues by the IRS. ERISA Requirements. Employee pension and welfare benefit plans are also governed by ERISA. ERISA defines "employer" as "any person acting directly as an employer, or indirectly in the interest of an employer, in relation to an employee benefit plan." ERISA defines the term "employee" as "any individual employed by an employer." The United States Supreme Court has held that the common law test of employment must be applied to determine whether an individual is an employee or an independent contractor under ERISA. A definitive judicial interpretation of "employer" in the context of a PEO or employee leasing arrangement has not been established. If the Company were found not to be an employer for ERISA purposes, its plans would not comply with ERISA. Further, as a result of such finding the Company and its plans would not enjoy, with respect to worksite employees, the preemption of state laws provided by ERISA and could be subject to varying state laws and regulations, as well as to claims based upon state common laws. Even if such a finding were made, the Company believes it would not be materially adversely affected because it could continue to make available similar benefits at comparable costs. In addition to ERISA and the Code provisions discussed herein, issues related to the relationship between the Company and its worksite employees may also arise under other federal laws, including other federal income tax laws. -13- 15 Possible Multiple Employer Plan Treatment. On February 11, 2000, the U.S. Department of Labor ("DOL") issued regulations requiring that multiple employer welfare agreements ("MEWAs") file an annual return disclosing certain information (the "Form M-1"). In general, a MEWA is defined broadly to include any employee welfare benefit plan or other arrangement that is established or maintained for the purpose of offering or providing medical benefits to the employees of two or more employers (including one or more self-employed individuals). The DOL's definition of what constitutes a MEWA can be construed so broadly that the regulations had to expressly exempt insurance companies and specified collectively bargained plans from the filing requirements. Without the exemption, these entities were concerned that they might be categorized as MEWAs and be required to file the Form M-1. The Company's philosophy is that it has established itself, by agreement with its clients, as the employer for purposes of sponsoring its group health plan. Consistent with this philosophy, the Company's group health plan is structured as a single employer plan. The Company, however, is concerned that given the breadth of the DOL's MEWA definition, the DOL could take the position that its group health plan is a MEWA. Given the breadth of the M-1 filing requirement, Administaff chose to make a protective filing on Company letterhead of the information requested in the Form M-1 to the DOL for the 1999 plan year, while maintaining the position that its group health plan was not a MEWA. FEDERAL EMPLOYMENT TAXES As a co-employer, the Company assumes responsibility and liability for the payment of federal and state employment taxes with respect to wages and salaries paid to worksite employees. There are essentially three types of federal employment tax obligations: (i) withholding of income tax requirements governed by Code Section 3401, et seq.; (ii) obligations under FICA, governed by Code Section 3101, et seq.; and (iii) obligations under FUTA, governed by Code Section 3301, et seq. Under these Code sections, employers have the obligation to withhold and remit the employer portion and, where applicable, the employee portion of these taxes. The Market Segment Group discussed above is examining, among other issues, whether PEOs, such as the Company, are employers of worksite employees under the Code provisions applicable to federal employment taxes and, consequently, responsible for payment of employment taxes on wages and salaries paid to such worksite employees. Code Section 3401, which applies to federal income tax withholding requirements, contains an exception to the general common law test applied to determine whether an entity is an "employer" for purposes of federal income tax withholding. Section 3401(d)(1) states that if the person for whom services are rendered does not have control of the payment of wages, the "employer" for this purpose is the person having control of the payment of wages. The Treasury regulations issued under Section 3401(d)(1) state that a third party can be deemed to be the employer of workers under this section for income tax withholding purposes where the person for whom services are rendered does not have legal control of the payment of wages. While Section 3401(d)(1) has been examined by several courts, its ultimate scope has not been delineated. Moreover, the IRS has to date relied extensively on the common law test of employment in determining liability for failure to comply with federal income tax withholding requirements. Accordingly, while the Company believes that it can assume the withholding obligations for worksite employees, in the event the Company fails to meet these obligations the client company may be held jointly and severally liable therefor. While this interpretive issue has not to the Company's knowledge discouraged clients from enrolling with the Company, there can be no assurance that a definitive adverse resolution of this issue would not do so in the future. These interpretive uncertainties may also impact the Company's ability to report employment taxes on its own account rather than for the accounts of its clients. STATE REGULATION While many states do not explicitly regulate PEOs, 21 states (including Texas) have passed laws that have licensing, registration or certification requirements for PEOs, and several states are considering such regulation. Such laws vary from state to state but generally provide for monitoring the fiscal responsibility of PEOs, and in some cases codify and clarify the co-employment relationship for unemployment, workers' compensation and other -14- 16 purposes under state law. The Company holds licenses in Arkansas, Florida, Montana, New Hampshire, New Mexico, Oregon, South Carolina, Tennessee, Texas, Utah, Vermont, Virginia and West Virginia. The Company is registered or certified in Colorado, Illinois, Kentucky, Maine, Massachusetts, Minnesota, Nevada, and Rhode Island. Regardless of whether a state has licensing, registration or certification requirements, the Company faces a number of other state and local regulations that could impact its operations. The Company was instrumental in obtaining enactment of PEO legislation in Texas, where it faced a number of challenges under state law, and believes that its prior experience with Texas regulatory authorities will be valuable in surmounting regulatory obstacles or challenges it may face in the future. CORPORATE OFFICE EMPLOYEES The Company had approximately 1,100 corporate office and sales employees as of December 31, 2000. The Company believes that its relations with its corporate office and sales employees are good. None of the Company's corporate office and sales employees are covered by a collective bargaining agreement. INTELLECTUAL PROPERTY The Company currently has registered trademarks and pending applications for registration. Although the Administaff mark is the most material to the Company's business, the Company's trademarks as a whole are also of considerable importance to the Company. -15- 17 ITEM 2. PROPERTIES. The Company believes that its current facilities are adequate for the purposes for which they are intended and that they provide sufficient capacity to accommodate the Company's short-term expansion plan. The Company will continue to evaluate the need for additional facilities based on the rate of growth in worksite employees, the geographic distribution of the worksite employee base and the Company's long-term service delivery requirements. CORPORATE HEADQUARTERS The Company's corporate headquarters are located in Kingwood, Texas, in a 130,000 square foot campus-style facility. This facility, which includes 30 acres of undeveloped land for future expansion, is company-owned. All corporate operations are housed in the Kingwood facility, along with the Company's record retention center and primary data processing center. The Company expects to begin the expansion of its corporate headquarters in 2001 with the construction of a 170,000 square foot office building and parking garage. This expansion is expected to be completed in the fourth quarter of 2002. SERVICE CENTERS The Company currently has three service centers located in Houston, Dallas and Atlanta. The Houston service center, which services approximately 35% of the Company's worksite employee base, was relocated to a 40,000 square foot leased facility during the third quarter of 2000. This facility, which is under lease until 2010, is designed to service approximately 20,000 worksite employees at full capacity. The Dallas service center, which currently services approximately 40% of the Company's worksite employee base, is located in a 40,000 square foot leased facility, which also serves as the Company's backup data processing center and disaster recovery center. This facility, which is under lease until 2008, is designed to service approximately 40,000 worksite employees at full capacity. The Atlanta service center, which currently services approximately 25% of the Company's worksite employee base, is located in a 40,000 square foot leased facility. This facility, which is under lease until 2009, is designed to service approximately 40,000 worksite employees at full capacity. The Company's fourth service center is currently under construction. Located in Los Angeles, this 45,000 square foot leased facility will provide the capacity to service approximately 40,000 worksite employees when fully staffed. The Los Angeles service center is expected to be completed by the end of the third quarter of 2001. SALES OFFICES The Company currently has 31 sales offices located in 17 markets throughout the United States. All sales offices are located in leased facilities, and some of these facilities are shared by multiple sales offices and/or client service personnel. Each sales office is typically staffed by six to 10 sales representatives, a district sales manager and an office administrator. In addition, the Company has placed certain client service personnel in all of its 17 sales markets to provide high-quality, localized service to its clients in those major markets. The Company expects to continue placing various client service personnel in its sales markets as a critical mass of clients is attained in each market. ITEM 3. LEGAL PROCEEDINGS. The Company is not a party to any material pending legal proceedings other than ordinary routine litigation incidental to its business. The Company believes that its pending legal proceedings would not have a material adverse effect on its financial condition or results of operations. -16- 18 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No matters were submitted to a vote of security holders of the Company, through solicitation of proxies or otherwise, during the quarter ended December 31, 2000. ITEM S-K 401 (b). EXECUTIVE OFFICERS OF THE REGISTRANT. The following table sets forth the names, ages (as of February 28, 2001) and positions of the Company's executive officers:
NAME AGE POSITION Paul J. Sarvadi......................... 44 President and Chief Executive Officer Richard G. Rawson....................... 52 Executive Vice President of Administration, Chief Financial Officer and Treasurer A. Steve Arizpe......................... 43 Executive Vice President of Client Services Jay E. Mincks........................... 47 Executive Vice President of Sales and Marketing Randall H. McCollum..................... 56 Vice President of eCommerce Development Samuel G. Larson........................ 39 Vice President of Enterprise Project Management Douglas S. Sharp........................ 39 Vice President of Finance and Controller John H. Spurgin, II..................... 54 Vice President of Legal, General Counsel and Secretary
Paul J. Sarvadi, President, Chief Executive Officer co-founded Administaff in 1986. Mr. Sarvadi attended Rice University and the University of Houston prior to starting and operating several small companies. Mr. Sarvadi has served as President of NAPEO and was a member of its Board of Directors for five years. He also served as President of the Texas Chapter of NAPEO for three of the first four years of its existence. In 1995, Mr. Sarvadi was selected as Houston's Entrepreneur of the Year for service industries. Richard G. Rawson, Executive Vice President of Administration, Chief Financial Officer and Treasurer, joined Administaff in 1989. He previously served as a Senior Financial Officer and Controller for several companies in the manufacturing and seismic data processing industries. Mr. Rawson is Immediate Past President and is on the Executive Committee of the Board of Directors of NAPEO. He has previously served NAPEO as Chairman of the Accounting Practices Committee as well as Treasurer, Second Vice President and First Vice President. Mr. Rawson is also a member of the Financial Executives Institute. He has a Bachelor of Business Administration degree in Finance from the University of Houston. A. Steve Arizpe, Executive Vice President of Client Services, joined Administaff in 1989. Since that time, Mr. Arizpe has served as Houston Sales Manager, Regional Sales Manager, and Vice President of Sales. Prior to joining Administaff, Mr. Arizpe served in sales and sales management roles for two large corporations and has more than 18 years of management and sales experience. Jay E. Mincks, Executive Vice President of Sales and Marketing, joined Administaff in 1990. Since that time, Mr. Mincks has served as Houston Sales Manager, Regional Sales Manager for the Western United States, and Vice President of Sales & Marketing. Prior to joining Administaff, Mr. Mincks served in a variety of positions, including management, in the sales and sales training fields with various large companies. Randall H. McCollum, Vice President of eCommerce Development, joined Administaff in August 1997. Prior to being promoted to his present position in August 1999, he served as director of strategic alliances. Prior to joining Administaff, Mr. McCollum served as vice president and division general manager for Neiman Marcus. He also managed sales operations for Tiffany & Co. and Xerox Corporation, among others. Mr. McCollum has a Bachelor of Science degree and a Master of Education degree from Lamar University. Samuel G. Larson, Vice President of Enterprise Project Management, joined Administaff in August 1994. From May 1997 to January 2000, he served as Vice President of Finance. Prior to joining Administaff, Mr. Larson -17- 19 served as Controller for a small, publicly held company, as Financial Reporting Manager for NL Industries, Inc., and as an Audit Manager with Ernst & Young, LLP. Douglas S. Sharp, Vice President of Finance and Controller, joined Administaff in January 2000. From July 1994 until he joined Administaff, Mr. Sharp served as Chief Financial Officer for Rimkus Consulting Group, Inc. Prior to that, he served as Controller for a small, publicly held company, as Controller for a large software company, and as Audit Manager for Ernst & Young, LLP. John H. Spurgin, II, Vice President of Legal, General Counsel and Secretary, joined Administaff in January 1997. Prior to joining Administaff, Mr. Spurgin was a partner with the Austin office of McGinnis, Lochridge & Kilgore, L.L.P., where he served as Administaff's outside counsel for over nine years. -18- 20 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. PRICE RANGE OF COMMON STOCK The Company's common stock is traded on the New York Stock Exchange under the symbol "ASF". As of February 28, 2001, there were 114 holders of record of the common stock. This number does not include stockholders for whom shares were held in "nominee" or "street name." The following table sets forth the high and low sales prices for the common stock as reported on the New York Stock Exchange composite transactional tape. These amounts have been adjusted to reflect the two-for-one split of the common stock effected on October 16, 2000 in the form of a stock dividend.
HIGH LOW 2000 First Quarter $21.38 $10.38 Second Quarter 33.22 17.06 Third Quarter 44.56 24.81 Fourth Quarter 43.00 22.30 1999 First Quarter $17.25 $ 6.06 Second Quarter 8.94 5.56 Third Quarter 8.66 7.16 Fourth Quarter 15.38 7.19
DIVIDEND POLICY The Company has not paid cash dividends on its common stock since its formation and does not anticipate declaring or paying dividends on its common stock in the foreseeable future. The Company expects that it will retain all available earnings generated by the Company's operations for the development and growth of its business. Any future determination as to the payment of dividends will be made at the discretion of the Board of Directors of the Company and will depend upon the Company's operating results, financial condition, capital requirements, general business conditions and such other factors as the Board of Directors deems relevant. -19- 21 ITEM 6. SELECTED FINANCIAL DATA. The selected consolidated financial data set forth below should be read in conjunction with the Consolidated Financial Statements and accompanying Notes and Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations."
YEARS ENDED DECEMBER 31, ----------------------------------------------------------------------- 2000 1999 1998 1997 1996 ---------- ------------- ---------- ------------- ------------- (IN THOUSANDS, EXCEPT PER SHARE AND STATISTICAL DATA) INCOME STATEMENT DATA: Revenues .................................. $3,708,531 $2,260,743 $1,683,063 $1,213,620 $ 899,596 Gross profit .............................. 138,534 89,528 68,610 51,269 37,856 Operating income .......................... 22,234 10,559(1) 11,201 9,346(2) 6,477 Net income ................................ 16,900 9,358(1) 9,123 7,439(2) 2,603(3) Basic net income per share(4) ............. $ 0.62 $ 0.34(1) $ 0.32 $ 0.28(2) $ 0.12(3) Diluted net income per share(4) ........... $ 0.58 $ 0.34(1) $ 0.31 $ 0.27(2) $ 0.12(3) BALANCE SHEET DATA: Working capital ........................... $ 51,179 $ 35,792 $ 52,475 $ 46,611 $ 4,629 Total assets .............................. 242,817 147,698 142,799 109,455 48,376 Total debt ................................ -- -- -- -- 4,603 Total stockholders' equity ................ 105,510 80,468 86,857 63,763 13,292 STATISTICAL DATA: Average number of worksite employees paid per month during period ........... 62,140 42,479 34,819 26,907 22,234 Gross payroll per worksite employee per month(5) ................... $ 3,830 $ 3,360 $ 3,083 $ 2,855 $ 2,562 Gross profit per worksite employee per month ...................... $ 186 $ 176 $ 164 $ 159 $ 142 Operating income per worksite employee per month(6) ................... $ 30 $ 24 $ 27 $ 33 $ 24
- ---------- (1) For the year ended December 31, 1999, operating income, net income and basic and diluted earnings per share would have been $12.0 million, $9.4 million, $0.34 and $0.34, excluding the impact of two unrelated, non-recurring items. See Notes 1 and 10 of the Notes to Consolidated Financial Statements and Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations." (2) For the year ended December 31, 1997, operating income, net income and basic and diluted net income per share would have been $10.7 million, $8.3 million, $0.31 and $0.30, excluding the impact of a non-recurring bad debt charge. (3) For the year ended December 31, 1996, net income and basic and diluted net income per share would have been $3.8 million, $0.18 and $0.17, excluding the impact of a non-recurring item. See Note 10 of Notes to Consolidated Financial Statements and Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations." (4) Adjusted to reflect the two-for-one split of the common stock effected on October 16, 2000. (5) Excludes bonus payroll of worksite employees not subject to the Company's normal service fee. (6) Results for the years ended December 31, 1999 and 1997 have been adjusted for non-recurring items as noted above. -20- 22 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The following discussion should be read in conjunction with, and is qualified in its entirety by, the Company's Consolidated Financial Statements and Notes thereto included elsewhere in this Annual Report. Historical results are not necessarily indicative of trends in operating results for any future period. The statements contained in this Annual Report that are not historical facts are forward-looking statements that involve a number of risks and uncertainties. The actual results of the future events described in such forward-looking statements in this Annual Report could differ materially from those stated in such forward-looking statements. Among the factors that could cause actual results to differ materially are the risks and uncertainties discussed in this Item 7 and the uncertainties set forth from time to time in the Company's other public reports and filings and public statements. OVERVIEW Administaff provides a comprehensive Personnel Management System that encompasses a broad range of services, including benefits and payroll administration, health and workers' compensation insurance programs, personnel records management, employer liability management, employee recruiting and selection, performance management, and training and development services. The Company's overall operating results are largely dependent on the number of worksite employees paid and can be measured in terms of revenues or costs per worksite employee per month. As a result, the Company often uses this unit of measurement in analyzing and discussing its results of operations. In addition to the ongoing sales of the Company's principal PEO services and the servicing of its client base, the Company currently has several strategic initiatives in progress, which, while supporting the Company's long-term plans, have increased the level of operating expenses for the near term. The Company believes that these initiatives will provide long-term benefits, including worksite employee unit growth, enhanced client retention, new and incremental revenue streams and increased internal operational efficiencies. The initiatives include: o Sales and Service Expansion - The Company is currently executing a long-term national expansion strategy targeting approximately 90 sales offices located in 40 markets. The plan calls for continuous expansion with approximately one new sales office opening each quarter. To support this expansion, the Company plans to open additional service centers as warranted by the growth in the number of clients and worksite employees in different regions of the country. In addition, the Company is expanding its service capacity by placing service personnel in its sales markets as the number of clients and worksite employees grows in each market. As of December 31, 2000, the Company had 31 sales offices located in 17 markets, three service centers located in Houston, Dallas and Atlanta, and 371 service personnel located in 17 markets, including 278 located in the three service centers. o Telecommunications and Network Upgrade - The Company has significantly upgraded and modified its telecommunications and network infrastructure to allow for enhanced communications among its sales offices, service centers and corporate offices. o eBusiness Strategy - The Company has implemented and continues to enhance a comprehensive eBusiness strategy comprised of three primary components: Administaff Assistant, bizzport and a best practices human resources site. Administaff Assistant, the Company's Internet-based service delivery platform, provides automated, personalized PEO services to clients and worksite employees. Bizzport is an eCommerce portal designed to provide the Company's clients and worksite employees with a wide variety of value-added products and services. The best practices human resources site will seek to extend the Company's brand and presence as the premier human resources department for small and medium-sized business by providing a comprehensive -21- 23 human resources information guide on the web sites of alliance partners. The site is expected to be launched during 2001. o Software Development - During 2000, the Company implemented the fifth generation of its proprietary PEO information system. Other software development projects ancillary to this system are expected to continue in 2001. In addition to the expenses associated with these strategic initiatives, the Company continues to be affected by the ongoing IRS audit of the Company's 401(k) plan and IRS Employee Leasing Market Segment Study. For a discussion of these matters, see "Employee Benefit Plans" beginning on page 12. Revenues The Company's revenues are derived from its comprehensive service fees, which are based upon each employee's gross pay and a mark-up computed as a percentage of the gross pay. The comprehensive service fees are invoiced concurrently with each periodic payroll of its worksite employees. The Company's revenues are primarily dependent on the number of clients enrolled, the resulting number of employees paid each period, the gross payroll of these employees and the number of employees enrolled in benefit plans. Direct Costs The Company's primary direct costs are (i) the salaries and wages of worksite employees ("payroll cost"); (ii) employment-related taxes ("payroll taxes"); (iii) employee benefit plan premiums; and (iv) workers' compensation insurance premiums. Payroll costs of worksite employees are affected by the composition of the worksite employee base, inflationary effects on wage levels and differences in the local economies of the Company's markets. Changes in payroll costs generally have a proportionate impact on the Company's revenues. Payroll taxes consist of the employer's portion of Social Security and Medicare taxes under FICA, federal unemployment taxes and state unemployment taxes. Payroll taxes are generally paid as a percentage of payroll. The federal tax rates are defined by the appropriate federal regulations. State unemployment tax rates are subject to claims histories and vary from state to state. Employee benefit costs are comprised primarily of health insurance costs, but also include costs of other employee benefits such as life insurance, vision care, dental insurance, disability insurance, prescription card, education assistance, adoption assistance, a dependent care spending account and a worklife program. Workers' compensation costs include premiums, administrative costs and claims-related expenses under the Company's workers' compensation program. Since November 1994, the Company has been insured under a guaranteed cost program under which premiums are paid for full insurance coverage of all accident claims occurring during the policy period. The current policy expires on September 30, 2001. The Company's gross profit per worksite employee is determined in part by its ability to accurately estimate and control direct costs and its ability to incorporate changes in these costs into the comprehensive service fees charged to clients, which are subject to contractual arrangements. Gross profit, measured as a percentage of revenue, is also affected by the comprehensive service fees and direct cost structure. However, worksite employee payroll cost is the largest component of both revenues and direct costs and, as a result, changes in the level of payroll cost per worksite employee can cause fluctuations in this statistic that are not necessarily indicative of relative performance from period to period. As a result, the Company uses gross profit per worksite employee per month as its principal measurement of the relative performance at the gross profit level. -22- 24 Operating Expenses As a result of the strategic initiatives referred to above, operating expenses have increased significantly during the last several years. The types of operating expenses affected by each of the initiatives are as follows: o Sales and Service Expansion - general and administrative expenses associated with establishing and maintaining sales offices and service centers; - compensation expense for additional sales and service staff; - travel expense associated with maintaining a national sales and service presence; and - depreciation expense associated with capitalized costs of facilities, furniture, equipment and computer hardware and software. o Telecommunications and Infrastructure Upgrade - compensation expense of additional technology staff; - consulting expense associated with design and selection of technology products; - ongoing maintenance costs of network hardware and software; - ongoing data and voice transmission service costs; and - depreciation expense associated with capitalized costs of network hardware and software. o eBusiness Initiatives - compensation expense of service, technology and support staff for Administaff Assistant, bizzport and the best practices human resources site; - consulting expense associated with the planning and development of these initiatives; - travel, legal and compensation expenses associated with obtaining alliance partners to participate in bizzport and the best practices human resources site; - depreciation and amortization expenses associated with computer hardware and software used for, and the development costs of, Administaff Assistant, bizzport and the best practices human resources site; and - ongoing maintenance costs of hardware and software associated with Administaff Assistant, bizzport and the best practices human resources site. o Software Development - Amortization of capitalized software costs, including those related to the Company's proprietary PEO information system. In addition, the Company has incurred travel and legal expenses associated with the IRS 401(k) plan audit and the IRS Employee Leasing Market Study. Income Taxes The Company's provision for income taxes typically differs from the U.S. statutory rate of 34% due primarily to state income taxes and tax-exempt interest income. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities used for financial reporting purposes and the amounts used for income tax purposes. Significant items resulting in deferred income taxes include depreciation and amortization, software development costs, accrued state income taxes, client list acquisition costs and the allowance for uncollectible accounts receivable. Changes in these items are reflected in the Company's financial statements through the Company's deferred income tax provision. -23- 25 RESULTS OF OPERATIONS YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999. The following table presents certain information related to the Company's results of operations for the years ended December 31, 2000 and 1999.
YEAR ENDED DECEMBER 31, ----------------------------------------------------- 2000 1999 % CHANGE ------------ ------------ ---------- (IN THOUSANDS, EXCEPT PER SHARE AND STATISTICAL DATA) Revenues.................................................. $ 3,708,531 $ 2,260,743 64.0% Gross profit.............................................. 138,534 89,528 54.7% Operating expenses........................................ 116,300 78,969 47.3% Operating income.......................................... 22,234 10,559 110.6% Other income.............................................. 4,380 3,653 19.9% Net income................................................ 16,900 9,358 80.6% Diluted net income per share of common stock.............. 0.58 0.34 70.6% STATISTICAL DATA: Average number of worksite employees paid per month....... 62,140 42,479 46.3% Fee revenue per worksite employee per month............... $ 4,623 $ 4,084 13.2% Fee payroll cost per worksite employee per month.......... 3,830 3,360 14.0% Gross mark-up per worksite employee per month............. 793 724 9.5% Gross profit per worksite employee per month.............. 186 176 5.7% Operating expenses per worksite employee per month........ 156 155 0.6% Operating income per worksite employee per month.......... 30 21 42.9% Net income per worksite employee per month................ 23 18 27.8%
REVENUES The Company's revenues increased 64.0% over 1999 due to a 46.3% increase in the average number of worksite employees paid per month accompanied by a 13.2% increase in the fee revenue per worksite employee per month. The Company's continued expansion of its sales force through new market and sales office openings was the primary factor contributing to the increase in the average number of worksite employees paid. The general strength of the U.S. economy during the second half of 1999 and the first three quarters of 2000 was also a contributing factor. Revenues from markets opened prior to 1993 (the commencement of the Company's national expansion plan) increased 30% over 1999, while revenues from markets opened after 1993 increased 98%. Revenues from the state of Texas represented 50% of the Company's total revenues, and Houston, the Company's original market, represented 27% of the total. The 13.2% increase in fee revenue per worksite employee per month directly related to the 14.0% increase in fee payroll cost per worksite employee per month, reflecting (i) compensation increases within the Company's existing worksite employee base; (ii) the addition of clients with worksite employees that had a higher average base pay than the existing client base; (iii) the attrition of clients with worksite employees that had a lower average base pay than the existing client base; and (iv) further penetration of markets with generally higher wage levels, such as San Francisco, New York and Washington, D.C. GROSS PROFIT Gross profit increased 54.7% over 1999 due primarily to the 46.3% increase in the average number of worksite employees paid per month accompanied by a 5.7% increase in gross profit per worksite employee per month. Gross profit per worksite employee increased to $186 per month in 2000 versus $176 in 1999, reflecting effective execution of the Company's pricing strategy. The Company's pricing objectives attempt to maintain or -24- 26 improve the gross profit per worksite employee by increasing gross mark-up per worksite employee to match or exceed changes in (i) its primary direct costs; and (ii) its operating costs associated with enhancements in the Company's comprehensive service offering. Gross mark-up per worksite employee per month increased 9.5% to $793 in 2000 versus $724 in 1999. Approximately 55% of the $69 increase in gross mark-up per employee was the result of increased service fees designed to match the increased payroll tax expense associated with the higher average payroll cost per worksite employee. The remaining increase in gross mark-up per employee was related to other increases in the Company's comprehensive service fees, including approximately $3 per worksite employee related to a mid-1999 change in the method used to calculate service fees for clients who experience turnover within their workforce. Payroll taxes increased $40 per worksite employee per month, primarily due to the increased average payroll cost per worksite employee. The overall cost of payroll taxes as a percentage of payroll cost was 7.34% in 2000 versus 7.19% in 1999. This increase was primarily the result of the Company's accelerating unit growth during the first three quarters of 2000, which caused a larger proportion of the Company's payroll to be subject to payroll taxes later in the year. The cost of health insurance and related employee benefits increased $14 per worksite employee per month over 1999 due to a 3.0% increase in the cost per covered employee and a slight increase in the percentage of worksite employees covered under the Company's health insurance plan to 69.7% in 2000 versus 67.8% in 1999. Workers' compensation costs increased $5 per worksite employee per month, but decreased slightly to 1.22% of fee payroll cost in 2000 from 1.25% in 1999. Gross profit, measured as a percentage of revenue, declined to 3.74% in 2000 from 3.96% in 1999. This decline was due primarily to the increase in average payroll cost per worksite employee. Because payroll cost is the largest single component of both revenues and direct costs, an increase in the average payroll cost per worksite employee creates a mathematical downward pressure on the calculation of gross profit as a percentage of revenue. OPERATING EXPENSES The following table presents certain information related to the Company's operating expenses for the years ended December 31, 2000 and 1999.
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31, ------------------------------ -------------------------------- 2000 1999 % CHANGE 2000 1999 % CHANGE -------- -------- -------- -------- -------- -------- (IN THOUSANDS) (PER WORKSITE EMPLOYEE PER MONTH) Salaries, wages and payroll taxes $ 54,477 $ 36,690 48.5% $ 73 $ 72 1.4% General and administrative expenses 35,426 23,219 52.6% 48 45 6.7% Commissions 9,278 6,429 44.3% 12 13 (7.7)% Advertising 5,117 4,090 25.1% 7 8 (12.5)% Depreciation and amortization 12,002 7,103 69.0% 16 14 14.3% Write-off of software development costs -- 1,438 (100.0)% -- 3 (100.0)% -------- -------- -------- -------- Total operating expenses $116,300 $ 78,969 47.3% $ 156 $ 155 0.6% ======== ======== ======== ========
Operating expenses increased 47.3% over 1999 as a result of the 46.3% growth in the average number of worksite employees paid per month by the Company, combined with the effects of the previously mentioned strategic initiatives, all of which comprise investments in the Company's sales, service and technology infrastructure. Operating expenses per worksite employee per month increased 0.6% to $156 in 2000 versus $155 in 1999. -25- 27 Operating expenses in 1999 included a non-recurring $1.4 million ($920,000 net of tax) write-off of certain capitalized software development costs. This write-off was the result of a periodic evaluation of all software development projects, which included a review of costs incurred, estimated costs to complete, estimated maintenance costs and the availability of alternative software packages. Upon completion of this evaluation, the Company determined that the projects would be terminated and that the costs associated with two projects should be written off. The majority of the costs written off related to efforts to customize an electronic document management system to meet the Company's physical records management needs. Excluding the impact of this charge, operating expenses in 2000 increased 50.0% over 1999, and increased to $156 per worksite employee per month in 2000 from $152 in 1999. Salaries, wages and payroll taxes of corporate and sales staff increased to $73 per worksite employee per month in 2000 versus $72 in 1999. The ratio of worksite employees to corporate employees improved to 65 in 2000 from 58 in 1999. This improvement was partially offset by an average increase in gross pay per corporate employee of 6.3% over 1999. In addition, incentive compensation as a percentage of corporate employee gross pay increased to 11.2% in 2000 versus 3.5% in 1999 due to the Company's strong financial performance. General and administrative expenses increased $3 per worksite employee per month over 1999. The increase resulted from increased travel expenses associated with the Company's expanding national presence, increased outside labor and recruiting costs associated with the Company's accelerated growth rate and increased consulting expenses associated with the development and rollout of new technology projects. Depreciation and amortization expense increased $2 per worksite employee per month as a result of the increased capital expenditures placed in service in 1999 and 2000, including (i) the implementation of the fifth generation of the Company's proprietary PEO information system; (ii) the implementation of certain new components of Administaff Assistant, primarily the web payroll and web reporting capabilities, which included both internal software development costs and externally purchased software; (iii) the opening of new sales offices; (iv) the expansion and relocation of the Houston service center and the opening of the Atlanta service center; and (v) the expansion of corporate headquarters. Commissions expense declined slightly on a per worksite employee per month basis due to lower sales agency commissions. Advertising costs declined slightly per worksite employee per month, as four of the Company's six new offices opened in 2000 were located in existing sales markets, which provided advertising efficiencies. OTHER INCOME Other income increased 19.9% to $4.4 million in 2000. Interest income increased 72.9% to $4.4 million in 2000 from $2.6 million in 1999, due to a higher level of cash and marketable securities resulting from the Company's strong financial performance and an increase in the average interest rate related to interest-bearing investments. This increase was partially offset by the effect of a prior year non-recurring gain from the Company's settlement of a 401(k) plan issue with the Internal Revenue Service. The Company's provision for income taxes differed from the U.S. statutory rate of 34% in 2000 due primarily to state income taxes and tax-exempt interest income. NET INCOME Net income for 2000 was $16.9 million, or $0.58 per diluted share compared to $9.4 million, or $0.34 per diluted share in 1999. These results reflect the two-for-one stock split effected on October 16, 2000. On a per worksite employee per month basis, net income increased 27.8% to $23 in 2000 versus $18 in 1999. -26- 28 YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998. The following table presents certain information related to the Company's results of operations for the years ended December 31, 1999 and 1998.
YEAR ENDED DECEMBER 31, -------------------------------------------------- 1999 1998 % CHANGE ------------ ------------ -------- (IN THOUSANDS, EXCEPT PER SHARE AND STATISTICAL DATA) Revenues.................................................. $ 2,260,743 $ 1,683,063 34.3% Gross profit.............................................. 89,528 68,610 30.5% Operating expenses........................................ 78,969 57,409 37.6% Operating income.......................................... 10,559 11,201 (5.7)% Other income.............................................. 3,653 3,417 6.9% Net income................................................ 9,358 9,123 2.6% Diluted net income per share of common stock.............. 0.34 0.31 9.7% STATISTICAL DATA: Average number of worksite employees paid per month....... 42,479 34,819 22.0% Fee revenue per worksite employee per month............... $ 4,084 $ 3,756 8.7% Fee payroll cost per worksite employee per month.......... 3,360 3,083 9.0% Gross mark-up per worksite employee per month............. 724 673 7.6% Gross profit per worksite employee per month.............. 176 164 7.3% Operating expenses per worksite employee per month........ 155 137 13.1% Operating income per worksite employee per month.......... 21 27 (22.2)% Net income per worksite employee per month................ 18 22 (18.2)%
REVENUES The Company's revenues increased 34.3% over 1998 due to a 22.0% increase in the average number of worksite employees paid per month accompanied by an 8.7% increase in the fee revenue per worksite employee per month. The Company's continued expansion of its sales force through new market and sales office openings was the primary factor contributing to the increase in the average number of worksite employees paid. Revenues from markets opened prior to 1993 (the commencement of the Company's national expansion plan) increased 14% over 1998, while revenues from markets opened after 1993 increased 63%. Revenues from the state of Texas represented 61% of the Company's total revenues, and Houston, the Company's original market, represented 36% of the total. The 8.7% increase in fee revenue per worksite employee per month directly related to the 9.0% increase in fee payroll cost per worksite employee per month, reflecting (i) compensation increases within the Company's existing worksite employee base; (ii) the addition of clients with worksite employees that had a higher average base pay than the existing client base; (iii) the attrition of clients with worksite employees that had a lower average base pay than the existing client base; and (iv) the penetration of markets with generally higher wage levels, such as San Francisco, New York and Washington, D.C. GROSS PROFIT Gross profit increased 30.5% over 1998 due primarily to the 22.0% increase in the average number of worksite employees paid per month accompanied by a 7.3% increase in gross profit per worksite employee per month. Gross profit per worksite employee increased to $176 per month in 1999 from $164 per month in 1998, reflecting effective execution of the Company's pricing strategy. The Company's pricing objectives attempt to maintain or improve the gross profit per worksite employee by matching or exceeding changes in its primary direct costs with changes in the gross mark-up per worksite employee. -27- 29 Gross mark-up per worksite employee per month increased 7.6% to $724 in 1999 from $673 in 1998. Approximately 43% of the $51 increase in gross mark-up per employee was the result of increased service fees designed to match the increased payroll tax expense associated with the higher average payroll cost per worksite employee. The remaining increase in gross mark-up per employee was related to other increases in the Company's comprehensive service fees, which were designed to match or exceed known trends in the Company's primary direct costs, including approximately $4 per worksite employee related to a change in the method used to calculate service fees for clients who experience turnover within their workforce. Payroll taxes increased $23 per worksite employee per month, primarily due to the increased average payroll cost per worksite employee. The overall cost of payroll taxes as a percentage of payroll cost was 7.2% in 1999 versus 7.3% in 1998. The cost of health insurance and related employee benefits increased $12 per worksite employee per month over 1998 due to a 3.1% increase in the cost per covered employee and a slight increase in the percentage of worksite employees covered under the Company's health insurance plan to 67.8% in 1999 from 66.4% in 1998. Workers' compensation costs increased $5 per worksite employee per month, and increased slightly to 1.25% of payroll cost in 1999 from 1.20% in 1998, primarily due to higher bonus and other year-end compensation of worksite employees, some of which is subject to workers' compensation insurance premiums. Gross profit, measured as a percentage of revenue, declined to 3.96% in 1999 from 4.08% in 1998. This decline was due primarily to the increase in average payroll cost per worksite employee. Because payroll cost is the largest single component of both revenues and direct costs, an increase in the average payroll cost per worksite employee creates a mathematical downward pressure on the calculation of gross profit as a percentage of revenue. OPERATING EXPENSES The following table presents certain information related to the Company's operating expenses for the years ended December 31, 1999 and 1998.
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31, ---------------------------- --------------------------------- 1999 1998 % CHANGE 1999 1998 % CHANGE ------- ------- -------- ------- ------- -------- (IN THOUSANDS) (PER WORKSITE EMPLOYEE PER MONTH) Salaries, wages and payroll taxes $36,690 $26,522 38.3% $ 72 $ 63 14.3% General and administrative expenses 23,219 17,474 32.9% 45 42 7.1% Commissions 6,429 5,968 7.7% 13 14 (7.1)% Advertising 4,090 3,740 9.4% 8 9 (11.1)% Depreciation and amortization 7,103 3,705 91.7% 14 9 55.6% Write-off of software development costs 1,438 -- 100.0% 3 -- 100.0% ------- ------- ------- ------- ------- ------ Total operating expenses $78,969 $57,409 37.6% $ 155 $ 137 13.1% ======= ======= ======= ======= ======= ======
Operating expenses increased 37.6% over 1998 as a result of the 22.0% growth in the average number of worksite employees paid per month by the Company, combined with the effects of the previously mentioned strategic initiatives, all of which comprise investments in the Company's sales, service and technology infrastructure. Operating expenses per worksite employee per month increased 13.1% to $155 in 1999 from $137 in 1998. Operating expenses in 1999 included a non-recurring $1.4 million ($920,000 net of tax) write-off of certain capitalized software development costs. This write-off was the result of a periodic evaluation of all software development projects, which included a review of costs incurred to date, estimated costs to complete, estimated maintenance costs, and the availability of alternative software packages. Upon completion of this evaluation, the Company determined that the projects would be terminated and that the costs associated with two projects should be -28- 30 written off. The majority of the costs written off related to efforts to customize an electronic document management system to meet the Company's physical records management needs. Excluding the impact of this charge, operating expenses increased 35.1% over 1998, and increased to $152 per worksite employee per month in 1999 from $137 in 1998. Salaries, wages and payroll taxes of corporate and sales staff increased to $72 per worksite employee per month in 1999 from $63 in 1998. Approximately $6 of this increase was the result of a 25.9% increase in corporate and sales staff, combined with an 8.0% increase in the average salary per employee. The remaining increase was related to higher payroll tax rates and the adoption of an employer matching contribution feature in the Company's 401(k) retirement plan. The 25.9% increase in corporate and sales staff was devoted largely to supporting the Company's strategic initiatives, including a 23% increase in sales and sales support staff in the district sales offices, a 23% increase in service personnel, predominantly located in the Company's service centers and sales markets, a 90% increase in technology staff and newly formed departments devoted to the Company's eBusiness initiatives. General and administrative expenses increased $3 per worksite employee per month over 1998. The increase resulted from (i) hardware and software maintenance fees and communications costs associated with the Company's Internet development, national technology platform and other technology initiatives; (ii) higher legal and accounting fees associated with corporate activities such as the ongoing 401(k) plan audit, corporate entity changes and eBusiness alliance contract negotiations; and (iii) higher rent expense due to recent openings of sales offices in St. Louis, San Francisco and New York, and the new Dallas and Atlanta service centers. Depreciation and amortization expense increased $5 per worksite employee as a result of the increased capital expenditures placed in service in 1998 and 1999, including (i) the implementation of a national technology infrastructure; (ii) the implementation of certain new components of Administaff Assistant, primarily the web payroll and web reporting capabilities, which include both internal software development costs and externally purchased software; (iii) the opening of new sales offices; (iv) the expansion and relocation of the Dallas service center and the opening of the Atlanta service center; and (v) the expansion of corporate headquarters. Commissions expense declined slightly on a per worksite employee per month basis due to lower sales agency commissions. Advertising costs also declined slightly per worksite employee, as the Company was able to increase its advertising coverage while incurring lower rates for much of its radio advertising. In addition, the Company utilized resources available through its marketing agreement with American Express to generate leads and appointments for its sales representatives. OTHER INCOME Interest income decreased 23.3% to $2.6 million in 1999 from $3.3 million in 1998, due to a lower level of cash and marketable securities resulting from the repurchase of shares of the Company's common stock under the repurchase program approved by the Company's Board of Directors in January 1999. In addition, the average interest rate related to interest-bearing investments declined slightly as the Company shifted a higher portion of its marketable securities into tax-exempt securities. During the fourth quarter of 1999, the Company entered into a Closing Agreement on Final Determination Covering Specific Matters with the Internal Revenue Service, settling nondiscrimination testing issues involving the Company's 401(k) plan for certain prior plan years. The actual amount of the settlement was substantially lower than the original estimate and accrual made in 1996, resulting in a non-recurring gain of $932,000 ($852,000 net of income tax effect) in the fourth quarter of 1999. This gain included the impact of an adjusted amount recoverable from the Company's former third-party record keeper pursuant to a 1996 agreement, under which the record keeper agreed to reimburse the Company for a portion of its settlement of the nondiscrimination testing issues. -29- 31 The Company's provision for income taxes, which included the effects of the non-recurring gain from settlement of the 401(k) testing issues, differed from the U.S. statutory rate of 34% in 1999 due primarily to certain portions of the final settlement and original accrual being non-deductible for income tax purposes. In addition, the Company's provision for income taxes differs from the U.S. statutory rate due to state income taxes and tax-exempt interest income in both years. NET INCOME Net income for 1999 was $9.4 million, or $0.34 per diluted share compared to $9.1 million, or $0.31 per diluted share in 1998. The 1999 results included the effects of two unrelated, non-recurring items: (i) a $932,000 gain ($852,000 net of income tax effect) associated with the settlement of nondiscrimination testing issues related to the ongoing audit of the Company's 401(k) plan for amounts less than the amount originally accrued for such issues in 1996; and (ii) a $1.4 million ($920,000 net of income tax effect) write-off of software development costs incurred on projects which are not expected to be completed. Excluding the effects of these items, the 1999 net income and diluted earnings per share were also $9.4 million and $0.34. LIQUIDITY AND CAPITAL RESOURCES The Company periodically evaluates its liquidity requirements, capital needs and availability of resources in view of, among other things, expansion plans, debt service requirements and other operating cash needs. As a result of this process, the Company has in the past sought, and may in the future seek, to raise additional capital or take other steps to increase or manage its liquidity and capital resources. The Company currently believes that its cash on hand, marketable securities and cash flows from operations will be adequate to meet its short-term liquidity requirements. The Company will rely on these same sources, as well as public and private debt and equity financing, to meet its long-term liquidity and capital needs. The Company had $108.7 million in cash and cash equivalents and marketable securities at December 31, 2000, of which approximately $57.9 million was payable in early January 2001 for withheld federal and state income taxes, employment taxes and other payroll deductions. The remainder is available to the Company for general corporate purposes, including, but not limited to, current working capital requirements, expenditures related to the continued expansion of the Company's sales, service and technology infrastructure, capital expenditures and the Company's stock repurchase program. At December 31, 2000, the Company had working capital of $51.2 million compared to $35.8 million at December 31, 1999. The increase in working capital was primarily the result of $32.4 million in net income adjusted for non-cash items and $10.1 million in proceeds, including income tax benefit, related to the exercise of employee stock options. These increases were partially offset by the use of funds for capital expenditures of $20.2 million, and investments in other companies totaling $5.8 million. CASH FLOWS FROM OPERATING ACTIVITIES The Company's cash flows from operating activities in 2000 increased $56.8 million to $74.6 million primarily due to an $11.9 million increase in net income adjusted for non-cash items to $32.4 million in 2000 and a $36.4 million increase in payroll taxes and other payroll deductions payable related to the timing of payroll tax payments surrounding the December 31 payroll periods of each year. The timing and amount of such payments can vary significantly based on various factors, including the day of the week on which a period ends and the existence of holidays on or immediately following a period end. -30- 32 CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures, including software development costs, totaled $ 20.2 million in 2000. The level of capital expenditures incurred in the past three years has been significantly higher than the periods prior to 1998 and has related directly to the Company's strategic initiatives and national expansion. Capital expenditures in 2000 can be summarized as follows (in millions): Computer hardware and software $ 6.6 Software development costs 4.8 Furniture and fixtures 4.9 Buildings and improvements 3.0 Vehicles 0.9 ------- Total $ 20.2 =======
Capital expenditures for computer hardware and software included the costs of application software directly related to the ongoing development of (i) the Company's eBusiness initiatives and proprietary PEO information system; (ii) the costs of network and telecommunications infrastructure required to support the national technology platform; (iii) the costs of desktop workstations for new employees in the corporate offices, sales offices and service centers; and (iv) the cost of software for various corporate needs. Capitalized software development costs primarily included (i) $1.7 million related to the development of the fifth generation of the Company's proprietary PEO information system; (ii) $1.3 million related to functionality enhancements to Administaff Assistant; (iii) $0.5 million related to the development and subsequent enhancement of bizzport; and (iv) $0.5 million related to the development of online client census and sales bid functionality. Capital expenditures for furniture and fixtures, building improvements and vehicles were largely related to equipping and furnishing six new sales offices, a new service center in Houston and expansion to accommodate growth in the number of corporate employees at the Company's corporate offices and in existing markets. The Company expects a comparable level of capital expenditures in 2001 with a budget of approximately $21 million, which is primarily composed of continued software development, computer hardware and software costs and continued expansion of sales offices and service centers to accommodate the ongoing growth of the Company. In addition, the Company will begin an expansion to its corporate headquarters in 2001, with an expected completion date in the fourth quarter of 2002 and a total expected cost of approximately $24 million. Net purchases of marketable securities during 2000 primarily represented the investment of excess funds in longer-term, higher-yielding securities. Investments in other companies during the 2000 period consisted of strategic investments in Virtual Growth, Inc. and eProsper, Inc., which are designed to add complementary functionality to Administaff's core PEO service. CASH FLOWS FROM FINANCING ACTIVITIES Cash flows from financing activities for 2000 primarily included proceeds from the exercise of employee stock options, partially offset by the use of $2.6 million to repurchase 100,000 shares of the Company's common stock. OTHER MATTERS The Company had net deferred tax liabilities of $6.4 million at December 31, 2000, versus $4.5 million at December 31, 1999. This increase is due primarily to differences between the book and tax basis of software development costs, prepaid commissions and depreciation. -31- 33 SEASONALITY, INFLATION AND QUARTERLY FLUCTUATIONS Historically, the Company's earnings pattern has included losses in the first quarter followed by improved profitability in subsequent quarters throughout the year. This pattern is due to the effects of employment-related taxes which are based on each employee's cumulative earnings up to specified wage levels, causing employment-related taxes to be highest in the first quarter and then decline over the course of the year. Since the Company's revenues related to each employee are generally earned and collected at a relatively constant rate throughout each year, payment of such tax obligations has a substantial impact on the Company's financial condition and results of operations during the first six months of each year. Other factors that affect direct costs could mitigate or enhance this trend. The Company believes the effects of inflation have not had a significant impact on its results of operations or financial condition. FACTORS THAT MAY AFFECT FUTURE RESULTS AND THE MARKET PRICE OF COMMON STOCK AUDIT OF THE COMPANY'S 401(k) PLAN; IRS EMPLOYEE LEASING MARKET SEGMENT GROUP The Company's 401(k) plan is currently under audit by the IRS for the year ended December 31, 1993. Although the audit is for the 1993 plan year, certain conclusions of the IRS could be applicable to other years as well. In addition, the IRS has established an Employee Leasing Market Segment Group for the purpose of identifying specific compliance issues prevalent in certain segments of the PEO industry. Approximately 70 PEOs, including the Company, have been randomly selected by the IRS for audit pursuant to this program. One issue that has arisen from these audits is whether a PEO can be a co-employer of worksite employees, including officers and owners of client companies, for various purposes under the Internal Revenue Code of 1986, as amended (the "Code"), including participation in the PEO's 401(k) plan. For a discussion of the issues being considered by the Market Segment Group, see Item 1, "Business - Industry Regulation". With respect to the 401(k) plan audit, the IRS Houston District has sought technical advice (the "Technical Advice Request") from the IRS National Office about whether participation in the 401(k) plan by worksite employees, including officers of client companies, violates the exclusive benefit rule under the Code because they are not employees of the Company. A copy of the Technical Advice Request and the Company's response have been sent to the IRS National Office for review. The Technical Advice Request contains the conclusions of the IRS Houston District with respect to the 1993 plan year that the 401(k) plan should be disqualified because it covers worksite employees who are not employees of the Company. The Company's response refutes the conclusions of the IRS Houston District. With respect to the Market Segment Group study, the issue of whether a PEO and a client company may be treated as co-employers of worksite employees for certain federal tax purposes (the "Industry Issue") has also been referred to the IRS National Office. The Company does not know whether the National Office will address the Technical Advice Request independently of the Industry Issue. The Company is not able to predict either the timing or the nature of any final decision that may be reached with respect to the 401(k) plan audit or with respect to the Technical Advice Request or the Market Segment Group study and the ultimate outcome of such decisions. Should the IRS conclude that the Company is not a "co-employer" of worksite employees for purposes of the Code, worksite employees could not continue to make salary deferral contributions to the 401(k) plan or pursuant to the Company's cafeteria plan or continue to participate in certain other employee benefit plans of the Company. The Company believes that, although unfavorable to the Company, a prospective application of such a conclusion (that is, one applicable only to periods after the conclusion by the IRS is finalized) would not have a material adverse effect on its financial position or results of operations, as the Company could continue to make available comparable benefit programs to its client companies at comparable costs to the Company. However, if the IRS National Office adopts the conclusions of the IRS Houston District set forth in the Technical Advice Request and any such conclusions were applied retroactively to disqualify the 401(k) plan for 1993 and subsequent years, employees' vested account balances under the 401(k) plan would become taxable, the Company would lose its tax deductions to the extent its matching contributions were not vested, the 401(k) plan's trust would become a taxable trust and the Company -32- 34 would be subject to liability with respect to its failure to withhold applicable taxes with respect to certain contributions and trust earnings. Further, the Company would be subject to liability, including penalties, with respect to its cafeteria plan for the failure to withhold and pay taxes applicable to salary deferral contributions by employees, including worksite employees. In such a scenario, the Company also would face the risk of client dissatisfaction and potential litigation. A retroactive application by the IRS of an adverse conclusion resulting in disqualification of the 401(k) plan would have a material adverse effect on the Company's financial position and results of operations. EXPENSES ASSOCIATED WITH EXPANSION The Company's past operating results have been affected by the Company's long-term national sales and service expansion. In many cases, the costs of this expansion have been incurred in advance of the anticipated growth in worksite employees (the primary driver of the Company's revenues). The Company expects to continue to incur substantial additional operating expenses in the foreseeable future as a result of continuing national expansion. See page 23 for a discussion of the types of expenses incurred in this expansion. ESTIMATED COSTS AND EFFECTIVENESS OF CAPITAL PROJECTS AND INVESTMENTS IN INFRASTRUCTURE The Company currently has several strategic initiatives in progress, which have significantly increased the level of capital expenditures and related depreciation expense incurred over the past several years. These capital expenditures have been, and will continue to be, primarily associated with the expansion and upgrade of the Company's technology and telecommunications infrastructure, Internet service delivery capabilities, and corporate headquarters, sales and service facilities. There can be no assurances that the Company's cost to complete these projects will be as estimated or that the ultimate effectiveness of such projects will provide the necessary operating efficiencies required to offset the resulting increases in depreciation and amortization expense which accompany these expenditures. In addition, the Company may require additional capital resources to fund these and future capital expenditure requirements. ESTIMATED COSTS AND EFFECTIVENESS OF eBUSINESS STRATEGY While the Company believes that its comprehensive eBusiness strategy will ultimately lead to increased profitability through new revenue streams, operating expense savings and higher client retention, there can be no assurances that losses or diminished profitability will not be incurred in future periods as a result of these initiatives. Among the factors which could affect the success of the Company's eBusiness strategy are (i) the Internet connectivity and computer literacy of the Company's clients; (ii) the willingness of clients to accept an electronic service delivery platform; (iii) the Company's ability to identify, negotiate and integrate agreements with strategic partners; (iv) the attraction of clients and worksite employees to bizzport; (v) the effective generation of revenues from the eBusiness initiatives, particularly bizzport; (vi) unanticipated development costs related to the eBusiness initiatives; and (vii) the Company's ability to control or reduce operating expenses as a result of the eBusiness initiatives, particularly the development of Administaff Assistant. INCREASES IN HEALTH INSURANCE PREMIUMS, UNEMPLOYMENT TAXES AND WORKERS' COMPENSATION RATES Health insurance premiums, state unemployment taxes and workers' compensation rates are in part determined by the Company's claims experience and comprise a significant portion of the Company's direct costs. The Company employs extensive risk management procedures in an attempt to control its claims incidence and structures its benefits contracts to provide as much cost stability as possible. However, should the Company experience a large increase in claim activity, its unemployment taxes, health insurance premiums or workers' compensation insurance rates could increase. The Company's ability to incorporate such increases into service fees to clients is constrained by contractual arrangements with clients, which could result in a delay before such increases could be reflected in service fees. As a result, such increases could have a material adverse effect on the Company's financial condition or results of operations. -33- 35 FAILURE TO MANAGE GROWTH The Company has experienced significant growth and expects such growth to continue for the foreseeable future. As described under the above caption "Expenses Associated with Expansion," the costs associated with the Company's sales and service expansion have been significant. Accordingly, the Company's expansion plan may place a significant strain on the Company's management, financial, operating and technical resources. Failure to manage this growth effectively could have a material adverse effect on the Company's financial condition or results of operations. POTENTIAL IMPAIRMENT OF INVESTMENTS IN OTHER COMPANIES The Company has made investments totaling $5.8 million in Virtual Growth, Inc. and eProsper, Inc., both of which are in the early stages of development. These companies are likely to require additional capital in the future. If these companies are unable to raise sufficient additional capital to continue as going concerns, or if they raise capital at lower valuation levels than those at the time Administaff made its investments, Administaff's investments in those companies could become impaired. In that event, Administaff would be required to write-off all or a portion of those investments. Although Administaff does not believe that such an impairment would materially affect its consolidated financial position, an impairment would likely reduce Administaff's net income materially in the period in which the impairment occurred. LIABILITY FOR WORKSITE EMPLOYEE PAYROLL AND BENEFITS COSTS Under the Client Service Agreement ("CSA"), the Company becomes a co-employer of worksite employees and assumes the obligations to pay the salaries, wages and related benefit costs and payroll taxes of such worksite employees. The Company assumes such obligations as a principal, not merely as an agent of the client company. The Company's obligations include responsibility for (i) payment of the salaries and wages for work performed by worksite employees, regardless of whether the client company makes timely payment to the Company of the associated service fee; and (ii) providing benefits to worksite employees even if the costs incurred by Administaff to provide such benefits exceed the fees paid by the client company. If a client company does not pay the Company or if the costs of benefits provided to worksite employees exceeds the fees paid by a client company, the Company's ultimate liability for worksite employee payroll and benefits costs could have a material adverse effect on its financial condition or results of operations. FEDERAL, STATE AND LOCAL REGULATION As a major employer, the Company's operations are affected by numerous federal, state and local laws relating to labor, tax and employment matters. By entering into a co-employer relationship with employees assigned to work at client company locations, the Company assumes certain obligations and responsibilities of an employer under these laws. However, many of these laws (such as the Employee Retirement Income Security Act ("ERISA") and federal and state employment tax laws) do not specifically address the obligations and responsibilities of non-traditional employers such as PEOs, and the definition of "employer" under these laws is not uniform. In addition, many of the states in which the Company operates have not addressed the PEO relationship for purposes of compliance with applicable state laws governing the employer/employee relationship. If these other federal or state laws are ultimately applied to the Company's PEO relationship with its worksite employees in a manner adverse to the Company, such an application could have a material adverse effect on the Company's results of operations or financial condition. While many states do not explicitly regulate PEOs, 21 states (including Texas) have passed laws that have licensing or registration requirements for PEOs, and several other states are considering such regulation. Such laws vary from state to state, but generally provide for monitoring the fiscal responsibility of PEOs, and in some cases codify and clarify the co-employment relationship for unemployment, workers' compensation and other purposes under state law. While the Company generally supports licensing regulation because it serves to validate the PEO -34- 36 relationship, there can be no assurance that the Company will be able to satisfy licensing requirements or other applicable regulations for all states. In addition, there can be no assurance that the Company will be able to renew its licenses in all states. LOSS OF BENEFIT PLANS The maintenance of health and workers' compensation insurance plans that cover worksite employees is a significant part of the Company's business. The current health and workers' compensation contracts are provided by vendors with whom the Company has an established relationship, and on terms that the Company believes to be favorable. While the Company believes that replacement contracts could be secured on competitive terms without causing significant disruption to the Company's business, there can be no assurance in this regard. The current health and workers' compensation contracts expire on December 31, 2001 and September 30, 2001, respectively. NEED TO RENEW OR REPLACE CLIENT COMPANIES The Company's standard CSA is subject to cancellation on 60 days notice by either the Company or the client. Accordingly, the short-term nature of the CSA makes the Company vulnerable to potential cancellations by existing clients, which could materially and adversely affect the Company's financial condition and results of operations. In addition, the Company's results of operations are dependent in part upon the Company's ability to retain or replace its client companies upon the termination or cancellation of the CSA. Historically, approximately 20% of the Company's clients have remained clients for less than one year and there can be no assurance that the number of contract cancellations will not increase in the future. MARKETING AGREEMENT WITH AMERICAN EXPRESS The Company has entered into a Marketing Agreement with American Express to jointly market the Company's services to American Express' substantial small and medium-sized business customer base across the country. Under the terms of the Marketing Agreement, American Express is utilizing its resources to generate appointments with prospects for the Company's services. In addition, the Company and American Express are working to jointly develop product offerings that enhance the current PEO services offered by the Company. The Company believes that the agreement will enhance its ability to increase its base of worksite employees and clients; however, there can be no assurances to that effect. Among the factors that could cause the effectiveness of the Marketing Agreement to be less than anticipated are the ability of American Express to set qualified appointments, the Company's ability to make timely presentations to all of the appointments set by American Express and the Company's ability to convert those appointments into sales. LIABILITIES FOR CLIENT AND EMPLOYEE ACTIONS A number of legal issues remain unresolved with respect to the co-employment arrangement between a PEO and its worksite employees, including questions concerning the ultimate liability for violations of employment and discrimination laws. The Administaff CSA establishes the contractual division of responsibilities between the Company and its clients for various personnel management matters, including compliance with and liability under various governmental regulations. However, because the Company acts as a co-employer, the Company may be subject to liability for violations of these or other laws despite these contractual provisions, even if it does not participate in such violations. Although the CSA provides that the client is to indemnify the Company for any liability attributable to the conduct of the client, the Company may not be able to collect on such a contractual indemnification claim and thus may be responsible for satisfying such liabilities. In addition, worksite employees may be deemed to be agents of the Company, subjecting the Company to liability for the actions of such worksite employees. GEOGRAPHIC MARKET CONCENTRATION While the Company has sales offices in 17 markets, 13 of these represent expansion markets pursuant to the Company's national expansion plan. The Company's Houston and Texas (including Houston) markets -35- 37 accounted for approximately 27% and 50%, respectively, of the Company's revenue for the year ended December 31, 2000. Accordingly, while a primary aspect of the Company's strategy is expansion in its current and future markets outside of Texas, for the foreseeable future, a significant portion of the Company's revenues may be subject to economic factors specific to Texas (including Houston). While the Company believes that its market expansion plans will eventually lessen this risk in addition to generating significant revenue growth, there can be no assurance that the Company will be able to duplicate in other markets the revenue growth and operating results experienced in its Texas (including Houston) markets. COMPETITION AND NEW MARKET ENTRANTS The PEO industry is highly fragmented. Many of these PEOs have limited operations and fewer than 1,000 worksite employees, but there are several industry participants that are comparable in size to the Company. The Company also encounters competition from "fee for service" companies such as payroll processing firms, insurance companies and human resource consultants. In addition, several of the Company's PEO competitors have recently been acquired by large business services companies, such as Automatic Data Processing, Inc. Such companies have substantially greater resources and provide a broader range of services than the Company. Accordingly, the PEO divisions of such companies may be able to provide more services at more competitive prices than may be offered by the Company. Moreover, the Company expects that as the PEO industry grows and its regulatory framework becomes better established, well-organized competition with greater resources than the Company may enter the PEO market, possibly including large "fee for service" companies currently providing a more limited range of services. POTENTIAL CLIENT LIABILITY FOR EMPLOYMENT TAXES Pursuant to the CSA, the Company assumes sole responsibility and liability for the payment of federal employment taxes imposed under the Code with respect to wages and salaries paid to its worksite employees. There are essentially three types of federal employment tax obligations: (i) income tax withholding requirements; (ii) obligations under the Federal Income Contribution Act ("FICA"); and (iii) obligations under the Federal Unemployment Tax Act ("FUTA"). Under the Code, employers have the obligation to withhold and remit the employer portion and, where applicable, the employee portion of these taxes. Most states impose similar employment tax obligations on the employer. While the CSA provides that the Company has sole legal responsibility for making these tax contributions, the IRS or applicable state taxing authority could conclude that such liability cannot be completely transferred to the Company. Accordingly, in the event the Company fails to meet its tax withholding and payment obligations, the client company may be held jointly and severally liable therefor. While this interpretive issue has not, to the Company's knowledge, discouraged clients from enrolling with the Company, there can be no assurance that a definitive adverse resolution of this issue would not do so in the future. ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK. The Company is primarily exposed to market risks from fluctuations in interest rates and the effects of those fluctuations on the market values of its cash equivalent short-term investments and its available-for-sale marketable securities. The cash equivalent short-term investments consist primarily of overnight investments, which are not significantly exposed to interest rate risk, except to the extent that changes in interest rates will ultimately affect the amount of interest income earned on these investments. The available-for-sale marketable securities are subject to interest rate risk because these securities generally include a fixed interest rate. As a result, the market values of these securities are affected by changes in prevailing interest rates. The Company attempts to limit its exposure to interest rate risk primarily through diversification and low investment turnover. The Company's marketable securities are currently managed by three professional investment management companies, each of whom is guided by the Company's investment policy. The Company's investment policy is designed to maximize after-tax interest income while preserving its principal investment. As a result, the Company's marketable securities consist primarily of short and intermediate-term debt securities. -36- 38 As of December 31, 2000, the Company's available-for-sale marketable securities include an investment in a mutual fund, which holds corporate debt securities with maturities ranging up to 18 months. The amortized cost basis, fair market value and 30-day yield of this investment was $13.0 million, $13.1 million and 6.3% at December 31, 2000. The following table presents information about the Company's remaining available-for-sale marketable securities as of December 31, 2000 (dollars in thousands):
Principal Average Maturities Interest Rate ---------- ------------- 2001 $17,820 6.3% 2002 5,280 5.3% 2003 645 6.0% 2004 1,632 5.5% 2005 200 7.9% ------- --- Total $25,577 6.1% ======= === Fair Market Value $25,827 =======
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The information required by this Item 8 is contained in a separate section of this Annual Report. See "Index to Consolidated Financial Statements" on page F-1. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. -37- 39 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The information required by this item is incorporated by reference to the information set forth under the captions "Proposal Number 1: Election of Directors - Nominees - Class III Directors (For Terms Expiring at the 2004 Annual Meeting)," "- Directors Remaining in Office," and "- Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's definitive Proxy Statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A within 120 days after the end of the fiscal year covered by this report (the "Administaff Proxy Statement"). ITEM 11. EXECUTIVE COMPENSATION. The information required by this item is incorporated by reference to the information set forth under the captions "Proposal Number 1: Election of Directors - Director Compensation" and "--Executive Compensation" in the Administaff Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information required by this item is incorporated by reference to the information set forth under the caption "Security Ownership of Certain Beneficial Owners and Management" in the Administaff Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information required by this item is incorporated by reference to the information set forth under the caption "Proposal Number 1: Election of Directors - Certain Relationships and Related Transactions" in the Administaff Proxy Statement. See also Note 3 to the Consolidated Financial Statements. -38- 40 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a) 1. Financial Statements of the Company The Consolidated Financial Statements listed by the Registrant on the accompanying Index to Consolidated Financial Statements (see page F-1) are filed as part of this Annual Report. (a) 2. Financial Statement Schedules The required information is included in the Consolidated Financial Statements or Notes thereto. (a) 3. List of Exhibits 3.1 Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Registrant's Registration Statement on Form S-1 (No. 33-96952)). 3.2* Bylaws, as amended on March 7, 2001. 3.3 Certificate of Designations of Series A Junior Participating Preferred Stock of Administaff, Inc. Dated February 4, 1998 (incorporated by reference to Exhibit 2 to the Registrant's Form 8-A filed on February 4, 1998). 4.1 Specimen Common Stock Certificate (incorporated by reference to Exhibit 4.1 to the Registrant's Registration Statement on Form S-1 (No. 33-96952)). 4.2 Rights Agreement dated as of February 4, 1998, between Administaff, Inc. and Harris Trust and Savings Bank, as Rights Agent (incorporated by reference to Exhibit 1 to the Registrant's Form 8-A filed on February 4, 1998). 4.3 Amendment No. 1 to Rights Agreement dated as of March 9, 1998 between Administaff, Inc. and Harris Trust and Savings Bank, as Rights Agent (incorporated by reference to Exhibit 4.3 to the Registrant's Form 10-K for the year ended December 31, 1999). 4.4 Amendment No. 2 to Rights Agreement dated as of May 14, 1999 between Administaff, Inc. and Harris Trust and Savings Bank, as Rights Agent (incorporated by reference to Exhibit 2 to the Registrant's Form 8-A/A filed on May 19, 1999). 4.5 Amendment No. 3 to Rights Agreement dated as of July 22, 1999 between Administaff, Inc. and Harris Trust and Savings Bank, as Rights Agent (incorporated by reference to Exhibit 1 to the Registrant's Form 8-A/A filed on August 9, 1999). 4.6 Amendment No. 4 to Rights Agreement dated as of August 2, 1999 between Administaff, Inc. and Harris Trust and Savings Bank, as Rights Agent (incorporated by reference to Exhibit 2 to the Registrant's form 8-A/A filed on August 9, 1999). 4.7 Form of Rights Certificate (incorporated by reference to Exhibit 3 to the Registrant's Form 8-A filed on February 4, 1998). 4.8 Securities Purchase Agreement between Administaff, Inc. and American Express Travel Related Services Company, Inc., dated January 27, 1998 and the Letter Agreement between Administaff, Inc. and American Express Travel Related Services Company, Inc., dated March 10, 1998 amending the Securities Purchase Agreement (incorporated by reference to Exhibit 4.2 to the Registrant's Form 10-Q for the quarter ended March 31, 1998). 4.9 Registration Rights Agreement between Administaff, Inc. and American Express Travel Related Services Company, Inc., dated March 10, 1998 (incorporated by reference to Exhibit 4.3 to the Registrant's Form 10-Q for the quarter ended March 31, 1998). 4.10 Warrant Agreement between Administaff, Inc. and American Express Travel Related Services Company, Inc., dated March 10, 1998 (incorporated by reference to Exhibit 4.4 to the Registrant's Form 10-Q for the quarter ended March 31, 1998). -39- 41 4.11 Warrant Certificate No. 2 for American Express Travel Related Services Company, Inc. (incorporated by reference to Exhibit 4.6 to the Registrant's Form 10-Q for the quarter ended March 31, 1998). 4.12 Warrant Certificate No. 3 for American Express Travel Related Services Company, Inc. (incorporated by reference to Exhibit 4.7 to the Registrant's Form 10-Q for the quarter ended March 31, 1998). 4.13 Warrant Certificate No. 4 for American Express Travel Related Services Company, Inc. (incorporated by reference to Exhibit 4.8 to the Registrant's Form 10-Q for the quarter ended March 31, 1998). 4.14 Warrant Certificate No. 5 for American Express Travel Related Services Company, Inc. (incorporated by reference to Exhibit 4.9 to the Registrant's Form 10-Q filed for the quarter ended March 31, 1998). 10.1 Third Amended and Restated Promissory Note in the amount of $693,694.75 among Administaff, Inc., Richard G. Rawson, Dawn Rawson, and RDKB Rawson LP, dated as of March 6, 2000, amending and restating a Promissory Note dated June 22, 1995 (incorporated by reference to Exhibit 10.1 to the Registrant's Form 10-K for the year ended December 31, 1999). 10.2 Second Amended and Restated Promissory Note in the amount of $300,000 among Administaff, Inc., Richard G. Rawson, Dawn Rawson, and RDKB Rawson LP, dated as of July 13, 1998, amending and restating a Promissory Note dated April 11, 1996 (incorporated by reference to Exhibit 10.2 to the Registrant's Form 10-K for the year ended December 31, 1998). 10.3 Second Amended and Restated Security Agreement-Pledge among Administaff, Inc., Richard G. Rawson, Dawn Rawson, and RDKB Rawson LP, dated as of July 13, 1998, pursuant to which the collateral securing the promissory notes included in Exhibits 10.1 and 10.2 is pledged (incorporated by reference to Exhibit 10.3 to the Registrant's form 10-K for the year ended December 31, 1998). 10.4** Administaff, Inc. 1997 Incentive Plan (incorporated by reference to Exhibit 99.1 to the Registrant's Registration Statement on Form S-8 (No. 333-85151)). 10.5** First Amendment to the Administaff, Inc. 1997 Incentive Plan (incorporated by reference to Exhibit 99.2 to the Registrant's Registration Statement on Form S-8 (No. 333-85151)). 10.6** Second Amendment to the Administaff, Inc. 1997 Incentive Plan (incorporated by reference to Exhibit 99.3 to the Registrant's Registration Statement on Form S-8 (No. 333-85151)). 10.7** Third Amendment to the Administaff, Inc. 1997 Incentive Plan (incorporated by reference to Exhibit 99.4 to the Registrant's Registration Statement of Form S-8 (No. 333-85151)). 10.8** Fourth Amendment to the Administaff, Inc. 1997 Incentive Plan (incorporated by reference to Exhibit 99.5 to the Registrant's Registration Statement of Form S-8 (No. 333-85151)). 10.9 Administaff, Inc. Nonqualified Stock Option Plan (incorporated by reference to Exhibit 99.6 to the Registrant's Registration Statement on Form S-8 (No. 333-85151)). 10.10 Administaff, Inc. 1997 Employee Stock Purchase Plan (incorporated by reference to Exhibit 99.1 to the Registrant's form S-8 (No. 333-36363)). 10.11 Marketing Agreement between American Express Travel Related Services Company, Inc., Administaff, Inc., Administaff Companies, Inc. and Administaff of Texas, Inc. dated March 10, 1998 (incorporated by reference to Exhibit 10.1 to the Registrant's Form 10-Q for the quarter ended March 31, 1998). 10.12 First Amendment to the Marketing Agreement between American Express Travel Related Services Company, Inc., Administaff, Inc., Administaff Companies, Inc. and Administaff of Texas, Inc., dated November 17, 1998 (incorporated by reference to Exhibit 10.12 to the Registrant's Form 10-K for the year ended December 31, 1998)). 10.13 Second Amendment to the Marketing Agreement between American Express Travel Related Services Company, Inc. and Administaff, Inc., Administaff Companies, Inc. and -40- 42 Administaff of Texas, Inc., dated April 11, 2000 (incorporated by reference to Exhibit 10.1 to the Registrant's Form 10-Q for the quarter ended June 30, 2000). 21.1* Subsidiaries of Administaff, Inc. 23.1* Consent of Independent Auditors. - ---------- * Filed herewith ** Management contract or compensatory plan or arrangement required to be filed as an exhibit to this Form 10-K. (b) Reports on Form 8-K None. -41- 43 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Administaff, Inc. has duly caused this report to be signed in its behalf by the undersigned, thereunto duly authorized, on March 16, 2001. ADMINISTAFF, INC. By: /s/ RICHARD G. RAWSON -------------------------------------- Richard G. Rawson Executive Vice President, Chief Financial Officer and Treasurer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons in the capacities indicated on March 16, 2001:
SIGNATURE TITLE --------- ----- /s/ PAUL J. SARVADI President, Chief Executive Officer and - ------------------------------------- Director Paul J. Sarvadi (Principal Executive Officer) /s/ RICHARD G. RAWSON Executive Vice President, Chief Financial - ------------------------------------- Officer, Treasurer and Director Richard G. Rawson (Principal Financial Officer) /s/ DOUGLAS S. SHARP Vice President, Finance and Controller - ------------------------------------- (Principal Accounting Officer) Douglas S. Sharp * Director - ------------------------------------- Linda Fayne Levinson * Director - ------------------------------------- Paul S. Lattanzio * Director - ------------------------------------- Jack M. Fields, Jr. * Director - ------------------------------------- Michael W. Brown * Director - ------------------------------------- Steven Alesio
* By John H. Spurgin, II, attorney-in-fact -42- 44 ADMINISTAFF, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Auditors..............................................F-2 Consolidated Balance Sheets as of December 31, 2000 and 1999................F-3 Consolidated Statements of Operations for the years ended December 31, 2000, 1999 and 1998.........................................F-5 Consolidated Statements of Stockholders' Equity for the years ended December 31, 2000, 1999 and 1998.........................................F-6 Consolidated Statements of Cash Flows for the years ended December 31, 2000, 1999 and 1998.........................................F-7 Notes to Consolidated Financial Statements..................................F-9
F-1 45 REPORT OF INDEPENDENT AUDITORS Board of Directors and Stockholders Administaff, Inc. We have audited the accompanying consolidated balance sheets of Administaff, Inc. as of December 31, 2000 and 1999, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Administaff, Inc. at December 31, 2000 and 1999, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States. ERNST & YOUNG LLP Houston, Texas February 9, 2001 F-2 46 ADMINISTAFF, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS) ASSETS
DECEMBER 31, ---------------------- 2000 1999 --------- --------- Current assets: Cash and cash equivalents ..................... $ 69,733 $ 25,451 Marketable securities ......................... 38,953 30,717 Accounts receivable: Trade ...................................... 7,311 1,578 Unbilled ................................... 57,084 31,286 Other ...................................... 820 1,342 Prepaid expenses .............................. 6,785 8,332 Deferred income tax benefit ................... 694 -- --------- --------- Total current assets ....................... 181,380 98,706 Property and equipment: Land .......................................... 2,920 2,920 Buildings and improvements .................... 14,242 11,222 Computer hardware and software ................ 28,679 22,232 Software development costs .................... 11,556 7,075 Furniture and fixtures ........................ 18,756 13,886 Vehicles ...................................... 1,863 1,386 --------- --------- 78,016 58,721 Accumulated depreciation ...................... (25,649) (14,347) --------- --------- Total property and equipment ............... 52,367 44,374 Other assets: Notes receivable from employees ............... 994 994 Other assets .................................. 8,076 3,624 --------- --------- Total other assets ......................... 9,070 4,618 --------- --------- Total assets ............................... $ 242,817 $ 147,698 ========= =========
F-3 47 ADMINISTAFF, INC. CONSOLIDATED BALANCE SHEETS (CONTINUED) (IN THOUSANDS) LIABILITIES AND STOCKHOLDERS' EQUITY
DECEMBER 31, ---------------------- 2000 1999 --------- --------- Current liabilities: Accounts payable ....................................... $ 1,496 $ 2,787 Payroll taxes and other payroll deductions payable ..... 57,919 21,518 Accrued worksite employee payroll expense .............. 57,354 31,367 Other accrued liabilities .............................. 10,819 5,737 Deferred income taxes .................................. -- 141 Income taxes payable ................................... 2,613 1,364 --------- --------- Total current liabilities ........................ 130,201 62,914 Noncurrent liabilities: Deferred income taxes .................................. 7,106 4,316 --------- --------- Total noncurrent liabilities ..................... 7,106 4,316 Commitments and contingencies Stockholders' equity: Preferred stock, par value $0.01 per share: Shares authorized - 20,000 Shares issued and outstanding - none ................ -- -- Common stock, par value $0.01 per share: Shares authorized - 120,000 Shares issued - 30,435 and 29,817 at December 31, 2000 and 1999, respectively ...... 304 298 Additional paid-in capital ............................. 75,378 65,061 Treasury stock, at cost - 3,015 and 2,919 shares at December 31, 2000 and 1999, respectively ...... (20,643) (18,072) Accumulated other comprehensive income (loss) .......... 172 (218) Retained earnings ...................................... 50,299 33,399 --------- --------- Total stockholders' equity ....................... 105,510 80,468 --------- --------- Total liabilities and stockholders' equity ....... $ 242,817 $ 147,698 ========= =========
See accompanying notes. F-4 48 ADMINISTAFF, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31, ---------------------------------------- 2000 1999 1998 ----------- ----------- ----------- Revenues ......................................... $ 3,708,531 $ 2,260,743 $ 1,683,063 Direct costs: Salaries and wages of worksite employees ..... 3,110,240 1,887,231 1,399,126 Benefits and payroll taxes ................... 459,757 283,984 215,327 ----------- ----------- ----------- Gross profit ..................................... 138,534 89,528 68,610 Operating expenses: Salaries, wages and payroll taxes ............ 54,477 36,690 26,522 General and administrative expenses .......... 35,426 23,219 17,474 Commissions .................................. 9,278 6,429 5,968 Advertising .................................. 5,117 4,090 3,740 Depreciation and amortization ................ 12,002 7,103 3,705 Write-off of software development costs ...... -- 1,438 -- ----------- ----------- ----------- 116,300 78,969 57,409 ----------- ----------- ----------- Operating income ................................. 22,234 10,559 11,201 Other income: Interest income .............................. 4,430 2,562 3,341 Other, net ................................... (50) 1,091 76 ----------- ----------- ----------- 4,380 3,653 3,417 ----------- ----------- ----------- Income before income tax expense ................. 26,614 14,212 14,618 Income tax expense ............................... 9,714 4,854 5,495 ----------- ----------- ----------- Net income ....................................... $ 16,900 $ 9,358 $ 9,123 =========== =========== =========== Basic net income per share of common stock ....... $ 0.62 $ 0.34 $ 0.32 =========== =========== =========== Diluted net income per share of common stock ..... $ 0.58 $ 0.34 $ 0.31 =========== =========== ===========
See accompanying notes. F-5 49 ADMINISTAFF, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS)
COMMON STOCK ACCUMULATED ISSUED ADDITIONAL OTHER --------------------- PAID-IN TREASURY COMPREHENSIVE RETAINED SHARES AMOUNT CAPITAL STOCK INCOME (LOSS) EARNINGS TOTAL --------- --------- ---------- --------- ------------- --------- --------- Balance at December 31, 1997 28,442 $ 284 $ 50,528 $ (1,998) $ 31 $ 14,918 $ 63,763 Purchase of treasury stock, at cost -- -- -- (6,101) -- -- (6,101) Sale of units consisting of common stock and common stock purchase warrants, net of issuance costs of $146 800 8 11,464 6,116 -- -- 17,588 Exercise of common stock purchase warrants 281 3 632 -- -- -- 635 Exercise of stock options 196 2 865 -- -- -- 867 Income tax benefit from exercise of stock options -- -- 575 -- -- -- 575 Other -- -- 81 15 -- -- 96 Change in unrealized gain on marketable securities -- -- -- -- 311 -- 311 Net income -- -- -- -- -- 9,123 9,123 --------- Comprehensive income 9,434 --------- --------- --------- --------- --------- --------- --------- Balance at December 31, 1998 29,719 297 64,145 (1,968) 342 24,041 86,857 Purchase of treasury stock, at cost -- -- -- (16,132) -- -- (16,132) Sale of common stock put warrant -- -- 119 -- -- -- 119 Exercise of stock options 98 1 643 -- -- -- 644 Income tax benefit from exercise of stock options -- -- 95 -- -- -- 95 Other -- -- 59 28 -- -- 87 Change in unrealized gain (loss) on marketable securities -- -- -- -- (560) -- (560) Net income -- -- -- -- -- 9,358 9,358 --------- Comprehensive income 8,798 --------- --------- --------- --------- --------- --------- --------- Balance at December 31, 1999 29,817 298 65,061 (18,072) (218) 33,399 80,468 Purchase of treasury stock, at cost -- -- -- (2,581) -- -- (2,581) Sale of common stock put warrant -- -- 125 -- -- -- 125 Exercise of stock options 618 6 5,689 -- -- -- 5,695 Income tax benefit from exercise of stock options -- -- 4,437 -- -- -- 4,437 Other -- -- 66 10 -- -- 76 Change in unrealized gain (loss) on marketable securities -- -- -- -- 390 -- 390 Net income -- -- -- -- -- 16,900 16,900 --------- Comprehensive income 17,290 --------- --------- --------- --------- --------- --------- --------- Balance at December 31, 2000 30,435 $ 304 $ 75,378 $ (20,643) $ 172 $ 50,299 $ 105,510 ========= ========= ========= ========= ========= ========= =========
See accompanying notes. F-6 50 ADMINISTAFF, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEAR ENDED DECEMBER 31, -------------------------------- 2000 1999 1998 -------- -------- -------- Cash flows from operating activities: Net income ................................................... $ 16,900 $ 9,358 $ 9,123 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization ............................. 11,969 7,604 4,239 Write-off of software development costs ................... -- 1,438 -- Deferred income taxes ..................................... 1,955 1,586 2,748 Bad debt expense .......................................... 1,475 699 575 Loss (gain) on disposition of assets ...................... 81 (182) (75) Changes in operating assets and liabilities: Accounts receivable .................................... (32,484) (8,855) (5,559) Prepaid expenses ....................................... 1,547 (5,863) (884) Other assets ........................................... 1,282 808 (3,074) Accounts payable ....................................... (1,291) 232 1,134 Payroll taxes and other payroll deductions payable ..... 36,401 (5,089) 7,417 Accrued worksite employee payroll expense .............. 25,987 12,206 1,008 Other accrued liabilities .............................. 5,082 989 (1,129) Income taxes payable/receivable ........................ 5,686 2,885 (1,580) -------- -------- -------- Total adjustments ................................... 57,690 8,458 4,820 -------- -------- -------- Net cash provided by operating activities ........... 74,590 17,816 13,943 Cash flows from investing activities: Marketable securities: Purchases ................................................. (27,310) (13,459) (49,019) Proceeds from dispositions ................................ 19,466 31,517 25,282 Property and equipment: Purchases ................................................. (15,445) (13,848) (17,918) Investment in software development costs .................. (4,769) (5,166) (2,499) Proceeds from dispositions ................................ 224 165 86 Investments in other companies ............................... (5,789) -- -- -------- -------- -------- Net cash used in investing activities ............... (33,623) (791) (44,068)
F-7 51 ADMINISTAFF, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) (IN THOUSANDS)
YEAR ENDED DECEMBER 31, -------------------------------- 2000 1999 1998 -------- -------- -------- Cash flows from financing activities: Proceeds from the sale of units consisting of common stock and common stock purchase warrants ...... $ -- $ -- $ 17,588 Purchase of treasury stock .............................. (2,581) (16,132) (6,101) Proceeds from the sale of common stock put warrants ..... 125 119 -- Proceeds from the exercise of common stock purchase warrants .............................. -- -- 635 Proceeds from the exercise of stock options ............. 5,695 644 867 Loans to employees ...................................... -- 187 -- Other ................................................... 76 87 96 -------- -------- -------- Net cash provided by (used in) financing activities 3,315 (15,095) 13,085 -------- -------- -------- Net increase (decrease) in cash and cash equivalents ....... 44,282 1,930 (17,040) Cash and cash equivalents at beginning of year ............. 25,451 23,521 40,561 -------- -------- -------- Cash and cash equivalents at end of year ................... $ 69,733 $ 25,451 $ 23,521 ======== ======== ======== Supplemental disclosures: Cash paid for income taxes .............................. $ 2,073 $ 383 $ 4,326
See accompanying notes. F-8 52 ADMINISTAFF, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000 1. ACCOUNTING POLICIES Description of Business Administaff, Inc. ("the Company") is a professional employer organization ("PEO") that provides a comprehensive Personnel Management System encompassing a broad range of services, including benefits and payroll administration, medical and workers' compensation insurance programs, personnel records management, employer liability management, employee recruiting and selection, performance management, and training and development services to small and medium-sized businesses in strategically selected markets. During 2000, 1999 and 1998, revenues from the Company's Texas markets represented 50%, 61% and 72% of the Company's total revenues, respectively. Segment Reporting The Company operates in one reportable segment under the Statement of Financial Accounting Standards ("SFAS") No. 131, Disclosures about Segments of an Enterprise and Related Information due to its centralized structure. Principles of Consolidation The consolidated financial statements include the accounts of Administaff, Inc. and its wholly owned subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Cash and Cash Equivalents Cash and cash equivalents include bank deposits and short-term investments with original maturities of three months or less at the date of purchase. Concentrations of Credit Risk Financial instruments that could potentially subject the Company to concentration of credit risk include accounts receivable. The Company generally requires clients to pay invoices for service fees no later than one day prior to the applicable payroll date. As such, the Company generally does not require collateral. F-9 53 ADMINISTAFF, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Marketable Securities The Company accounts for marketable securities in accordance with SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities. The Company determines the appropriate classification of all marketable securities as held-to-maturity, available-for-sale or trading at the time of purchase and re-evaluates such classification as of each balance sheet date. At December 31, 2000 and 1999, all of the Company's investments in marketable securities were classified as available-for-sale, and as a result, were reported at fair value. Unrealized gains and losses are reported as a component of accumulated other comprehensive income (loss) in stockholders' equity. The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts from the date of purchase to maturity. Such amortization is included in interest income as an addition to or deduction from the coupon interest earned on the investments. The cost of investments sold is based on the average cost method, and realized gains and losses are included in other income (expense). Property and Equipment Property and equipment is recorded at cost and is depreciated over the estimated useful lives of the related assets using the straight-line method. The estimated useful lives of property and equipment for purposes of computing depreciation are as follows: Buildings and improvements............................ 5-30 years Computer hardware and software........................ 2-5 years Software development costs............................ 3-5 years Furniture and fixtures................................ 5-7 years Vehicles.............................................. 5 years
Software development costs relate primarily to the Company's proprietary professional employer information system and its Internet-based service delivery platform, Administaff Assistant, and are accounted for in accordance with Statement of Position ("SOP") 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use. The Company periodically evaluates its capitalized software development costs for impairment in accordance with SFAS No. 121, Accounting for Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of. During the fourth quarter of 1999, the Company wrote off $1,438,000 related to two terminated projects after evaluating the costs incurred to date, expected cost of completion, expected maintenance costs and the availability of alternative software packages. PEO Service Fees and Worksite Employee Payroll Costs The Company's revenues consist of service fees paid by its clients under its Client Service Agreements. In consideration for payment of such service fees, the Company agrees to pay the following direct costs associated with the worksite employees: (i) salaries and wages; (ii) employment-related taxes; (iii) employee benefit plan premiums; and (iv) workers' compensation insurance premiums. The Company accounts for PEO service fees and the related direct payroll costs using the accrual method. Under the accrual method, PEO service fees relating to worksite employees with earned but unpaid wages at the end of each period are recognized as unbilled revenues and the related direct payroll costs for such wages are accrued as a liability during the period in which wages are earned by the worksite employee. Subsequent to the end of each period, such wages are paid and the related PEO service fees are billed. Unbilled receivables at December 31, 2000 and 1999 are net of prepayments received prior to year-end of $5,716,000 and $3,338,000, respectively. During 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin ("SAB") No. 101, Revenue Recognition. Additionally, the Emerging Issues Task Force ("EITF") reached a consensus during 2000 on F-10 54 ADMINISTAFF, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) EITF 99-19, Reporting Revenue Gross as a Principal versus Net as an Agent. The Company evaluated its revenue recognition policies, and the effect of adopting SAB 101 and the EITF resulted in no revisions to the Company's previous recognition policies. In accordance with the EITF, the Company is at risk for the payment of its direct costs, whether or not the Company's clients pay the Company on a timely basis or at all, and the Company assumes a significant amount of other risks and liabilities as a co-employer of its worksite employees, and therefore, is deemed to be a principal in its personnel management services. Fair Value of Financial Instruments The carrying amounts of cash, cash equivalents, accounts receivable and accounts payable approximate their fair values due to the short-term maturities of these instruments. Stock-Based Compensation The Company accounts for stock-based compensation arrangements with employees under the provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees. Employee Savings Plan Effective January 1, 1999, the Company amended the employer matching contribution and vesting features of its 401(k) plan. The Company matches 50% of an eligible worksite employee's contributions and 100% of an eligible corporate employee's contributions, both up to 6% of the employee's eligible compensation. In addition, for active employees on or after January 1, 1999, the vesting schedule for employer matching contributions was changed from five-year graded vesting to immediate vesting. During 2000, 1999 and 1998, the Company made employer-matching contributions of $7,433,000, $4,646,000 and $ 2,805,000, respectively. Of these contributions, $6,019,000, $3,761,000 and $2,805,000 were made on behalf of worksite employees. The remainder represents employer contributions made on behalf of corporate employees. Advertising The Company expenses all advertising costs as incurred. Income Taxes The Company uses the liability method in accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and income tax carrying amounts of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Reclassifications Certain prior year amounts have been reclassified to conform to the 2000 presentation. 2. MARKETABLE SECURITIES As of December 31, 2000, the Company's investments in marketable securities consisted of debt securities with maturities ranging from 91 days to five years from the date of purchase. Approximately 34.4% of the marketable securities mature within one year of the balance sheet date. However, all of the Company's marketable securities are available to fund the Company's current operations. F-11 55 ADMINISTAFF, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The following is a summary of the Company's available-for-sale marketable securities as of December 31, 2000 and 1999:
GROSS GROSS AMORTIZED UNREALIZED UNREALIZED ESTIMATED COST GAINS LOSSES FAIR VALUE --------- ---------- ---------- ---------- (IN THOUSANDS) December 31, 2000: Fixed income mutual funds .............. $ 13,025 $ 101 $ -- $ 13,126 Obligations of state and local government agencies ................ 11,873 11 -- 11,884 Commercial paper ....................... 8,277 -- (4) 8,273 U.S. corporate debt securities ......... 3,761 29 -- 3,790 U.S. Treasury securities and obligations of U.S. government agencies ........ 1,845 35 -- 1,880 -------- -------- -------- -------- $ 38,781 $ 176 $ (4) $ 38,953 ======== ======== ======== ======== December 31, 1999: Fixed income mutual funds .............. $ 1,763 $ -- $ (14) $ 1,749 Obligations of state and local government agencies ................ 21,953 -- (125) 21,828 U.S. corporate debt securities ......... 4,487 -- (41) 4,446 U.S. Treasury securities and obligations of U.S. government agencies ........ 2,732 -- (38) 2,694 -------- -------- -------- -------- $ 30,935 $ -- $ (218) $ 30,717 ======== ======== ======== ========
For the years ended December 31, 2000, 1999 and 1998, net realized gains (losses) on sales of available-for-sale marketable securities were $(31,000), $92,000 and $72,000, respectively. 3. NOTES RECEIVABLE FROM EMPLOYEES In June 1995, an officer and director of the Company exercised options to purchase 897,334 shares of common stock at a price of $0.375 per share. The purchase price was paid in cash by the officer. In connection with the exercise, the Company entered into a loan agreement with the officer, whereby the Company paid certain federal income tax withholding requirements related to the stock option exercise on behalf of the officer in the amount of $694,000. The loan agreement called for an additional amount to be advanced to the officer in the event the ultimate tax liability resulting from the exercise exceeded the statutory withholding requirements. In April 1996, the Company loaned the officer an additional $300,000 relating to this transaction. The loans are repayable on June 22, 2002, and April 11, 2001, respectively, accrue interest at 6.83% and are secured by 48,982 shares of the Company's common stock. 4. OTHER ASSETS During 2000, the Company made equity investments in two privately-held development stage companies. The Company purchased 5,864,566 shares of convertible preferred stock of Virtual Growth, Inc. ("VGI"), along with 219,512 detachable preferred stock purchase warrants, for a total cost of $3 million. The VGI preferred stock purchase warrants carry a strike price of $2.05 per share and a term of seven years. The VGI preferred stock is convertible into an equal number of shares of VGI common stock, subject to antidilution provisions. The Company also received 600,000 common stock purchase warrants from VGI with exercise prices ranging from $10 to $45 per share and terms of two to four years. In addition, the Company purchased 500,000 shares of convertible preferred F-12 56 ADMINISTAFF, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) stock of eProsper, Inc. ("eProsper") for $2.5 million. The eProsper preferred stock is convertible into an equal number of shares of eProsper common stock, subject to antidilution provisions. The Company has accounted for each of these investments using the cost method. 5. INCOME TAXES Deferred taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities used for financial reporting purposes and the amounts used for income tax purposes. Significant components of the net deferred tax assets and net deferred tax liabilities as reflected on the balance sheet are as follows:
DECEMBER 31, ------------------ 2000 1999 ------- ------- (IN THOUSANDS) Deferred tax liabilities: Software development costs ...................... $(3,623) $(2,427) Depreciation and amortization ................... (3,026) (1,193) Prepaid commissions ............................. (824) (1,072) ------- ------- Total deferred tax liabilities ............... (7,473) (4,692) Deferred tax assets: Uncollectible accounts receivable ............... 584 57 State income taxes .............................. 326 14 Other ........................................... 151 164 ------- ------- Total deferred tax assets .................... 1,061 235 ------- ------- Net deferred tax liabilities ....................... $(6,412) $(4,457) ======= ======= Net current deferred tax assets (liabilities) ...... $ 694 $ (141) Net noncurrent deferred tax liabilities ............ (7,106) (4,316) ------- ------- $(6,412) $(4,457) ======= =======
The components of income tax expense are as follows:
YEAR ENDED DECEMBER 31, ----------------------------- 2000 1999 1998 ------- ------- ------- (IN THOUSANDS) Current income tax expense: Federal ......................................... $ 6,584 $ 2,776 $ 1,964 State ........................................... 1,175 492 783 ------- ------- ------- Total current income tax expense ............. 7,759 3,268 2,747 Deferred income tax expense: Federal ......................................... 1,627 1,339 2,379 State ........................................... 328 247 369 ------- ------- ------- Total deferred income tax expense ............ 1,955 1,586 2,748 ------- ------- ------- Total income tax expense ........................ $ 9,714 $ 4,854 $ 5,495 ======= ======= =======
In 2000, 1999 and 1998, income tax benefits of $4,437,000, $95,000 and $575,000, respectively, resulting from deductions relating to nonqualified stock option exercises and disqualifying dispositions of certain employee incentive stock options were recorded as increases in stockholders' equity. F-13 57 ADMINISTAFF, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The reconciliation of income tax expense computed at U.S. federal statutory tax rates to the reported income tax expense is as follows:
YEAR ENDED DECEMBER 31, ----------------------------- 2000 1999 1998 ------- ------- ------- (IN THOUSANDS) Expected income tax expense at 34% ........... $ 9,049 $ 4,832 $ 4,970 State income taxes, net of federal benefit ... 985 488 887 Nondeductible expenses ....................... 180 126 91 Tax-exempt interest income ................... (234) (348) (453) Other, net ................................... (266) (244) -- ------- ------- ------- Reported total income tax expense ............ $ 9,714 $ 4,854 $ 5,495 ======= ======= =======
6. STOCKHOLDERS' EQUITY On October 16, 2000, the Company effected a two-for-one stock split in the form of a 100% stock dividend. All share and per share amounts presented in these financial statements have been retroactively restated to reflect this change in the Company's capital structure. In 1999, the Company's Board of Directors (the "Board") authorized a program to repurchase up to four million shares of the Company's outstanding common stock. The purchases are to be made from time to time in the open market or directly from stockholders at prevailing market prices based on market conditions or other factors. As of December 31, 2000, the Company had repurchased 2,342,000 shares at a total cost of approximately $18.7 million, including 289,200 shares purchased from affiliates of Mr. Lang Gerhard, a greater than 10% shareholder, in a private transaction for approximately $2.3 million. In January 1998, the Company entered into a Securities Purchase Agreement with American Express Travel Related Services Company, Inc. ("American Express") whereby the Company sold units consisting of 1,386,252 shares of its common stock (586,252 shares from Treasury Stock) and warrants to purchase an additional 4,131,030 shares of common stock to American Express for a total purchase price of $17.7 million. The warrants have exercise prices ranging from $20 to $40 per share and terms ranging from three to seven years. Subsequent to December 31, 2000, American Express exercised 800,000 common stock purchase warrants at $20.00 per share. In addition, the Company repurchased 800,000 shares of its common stock from American Express at $24.46 per share. In March 1998, the Company repurchased 300,000 shares of common stock from three stockholders, two of whom were officers of the Company and one who was a director of the Company at the time of the purchase, for a total cost of $3.1 million. 7. EMPLOYEE INCENTIVE PLAN The Administaff, Inc. 1997 Incentive Plan, as amended (the "Incentive Plan"), provides for options and other stock-based awards that may be granted to eligible employees and non-employee directors of the Company or its subsidiaries. An aggregate of 2,965,914 shares of common stock of the Company are authorized to be issued under the Incentive Plan. At December 31, 2000, 284,041 shares of common stock were available for future grants under the Incentive Plan. All awards previously granted to employees under the Incentive Plan have been stock options, primarily intended to qualify as "incentive stock options" within the meaning of Section 422 of the Internal Revenue Code (the "Code"). The purpose of the Incentive Plan is to promote the interests of the Company by encouraging employees of the Company and its subsidiaries and the non-employee directors of the Company to acquire or increase their equity interests in the Company and to provide a means whereby such persons may develop a sense of proprietorship and personal involvement in the development and financial success of the Company, and F-14 58 ADMINISTAFF, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) to encourage them to remain with and devote their best efforts to the business of the Company, thereby advancing the interests of the Company and its stockholders. The Incentive Plan is administered by the Compensation Committee of the Board of Directors (the "Committee"). The Committee has the power to determine which eligible employees will receive awards, the timing and manner of the grant of such awards, the exercise price of stock options (which may not be less than market value on the date of grant), the number of shares and all of the terms of the awards. The Committee has granted limited authority to the President of the Company regarding the granting of stock options. The Board of Directors may at any time terminate or amend the Incentive Plan, provided that no such amendment may adversely affect the rights of optionees with regard to outstanding options. Stockholder approval of an amendment to the Incentive Plan is necessary only when required by applicable law or stock exchange rules. Effective July 27, 1999, the Company adopted the Administaff Nonqualified Stock Option Plan (the "Nonqualified Plan"). The Nonqualified Plan provides that options to purchase shares of the Company's common stock may be granted to employees who are not officers. An aggregate of 3,600,000 shares of common stock of the Company are authorized to be issued under the Nonqualified Plan. At December 31, 2000, 1,895,736 shares of common stock were available for future grants under the Nonqualified Plan. The purpose of the Nonqualified Plan is similar to that of the Incentive Plan. The Nonqualified Plan is administered by the Chief Executive Officer of the Company (the "CEO"). The CEO has the power to determine which eligible employees will receive stock option rights, the timing and manner of the grant of such rights, the exercise price (which may not be less than market value on the grant date), the number of shares and all of the terms of the options. The Committee may at any time terminate or amend the Nonqualified Plan, provided that no such amendment may adversely affect the rights of optionees with regard to outstanding options. The following summarizes stock option activity and related information:
YEAR ENDED DECEMBER 31, ------------------------------------------------------- 2000 1999 1998 ----------------- ----------------- ----------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE SHARES PRICE SHARES PRICE SHARES PRICE ------ -------- ------ -------- ------ -------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Outstanding - beginning of year ..... 2,244 $ 9.79 1,440 $10.97 1,310 $ 8.17 Granted ......................... 1,894 31.15 1,040 7.88 396 16.79 Exercised ....................... (618) 9.23 (98) 6.63 (196) 4.41 Canceled ........................ (87) 12.74 (138) 10.04 (70) 9.84 ------ ------ ------ ------ ------ ------ Outstanding - end of year ........... 3,433 $21.58 2,244 $ 9.79 1,440 $10.97 ====== ====== ====== ====== ====== ====== Exercisable - end of year ........... 746 $10.38 570 $ 9.85 396 $ 8.56 ====== ====== ====== ====== ====== ====== Weighted average fair value of options granted during year $19.17 $ 4.67 $ 8.81 ====== ====== ======
F-15 59 ADMINISTAFF, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The following summarizes information related to stock options outstanding at December 31, 2000:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ------------------------------ ----------------------------- WEIGHTED WEIGHTED REMAINING AVERAGE REMAINING AVERAGE LIFE EXERCISE LIFE EXERCISE RANGE OF EXERCISE PRICES SHARES (YEARS) PRICE SHARES (YEARS) PRICE - ------------------------ ------ ---------- -------- ------ --------- -------- (SHARE AMOUNTS IN THOUSANDS) $ 6.75 to $15.00 1,286 7.5 $ 8.60 606 7.1 $ 8.70 $15.00 to $20.00 1,114 8.9 19.05 107 7.8 16.28 $20.00 to $30.00 173 9.2 25.08 33 8.2 22.18 $30.00 to $43.69 860 9.7 43.57 -- -- -- ------ ----- ------- ----- ----- ------- Total 3,433 8.6 $ 21.58 746 7.2 $ 10.38 ====== ===== ======= ===== ===== =======
The Company has elected to follow Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25) and related interpretations in accounting for its stock-based compensation arrangements because, as discussed below, the alternative fair value accounting provided for under SFAS No. 123, Accounting for Stock-Based Compensation, requires use of option valuation models that were not developed for use in valuing employee stock options. Under APB 25, no compensation expense has been recognized because the exercise price of the Company's employee stock options has equaled the market price of the underlying stock on the date of grant. Pro forma information regarding net income and earnings per share is required by SFAS No. 123, which also requires that the information be determined as if the Company had accounted for its employee stock options granted subsequent to December 31, 1994 under the fair value method prescribed by SFAS No. 123. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following assumptions:
YEAR ENDED DECEMBER 31, -------------------------- 2000 1999 1998 ---- ---- ---- Risk-free interest rate......................... 6.2% 5.5% 5.2% Expected dividend yield......................... 0.0% 0.0% 0.0% Expected volatility............................. 0.68 0.65 0.54 Weighted average expected life (in years)....... 5.0 5.0 5.0
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in the Company's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma information, as if the Company had accounted for its employee stock options granted subsequent to December 31, 1994 under the fair value method prescribed by SFAS No. 123, follows: F-16 60 ADMINISTAFF, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, ------------------------------ 2000 1999 1998 -------- -------- -------- Pro forma net income (in thousands) .............. $ 11,360 $ 7,370 $ 8,070 Pro forma diluted earnings per share ............. $ 0.39 $ 0.28 $ 0.28
8. EARNINGS PER SHARE The numerator used in the calculations of both basic and diluted earnings per share for all periods presented was net income. The denominator for each period presented was determined as follows:
YEAR ENDED DECEMBER 31, ------------------------ 2000 1999 1998 ------ ------ ------ (IN THOUSANDS) Denominator: Basic earnings per share - weighted average shares outstanding ...... 27,188 27,462 28,760 Effect of dilutive securities: Common stock purchase warrants - treasury stock method ........... 379 -- 14 Common stock options - treasury stock method ..................... 1,368 128 592 ------ ------ ------ 1,747 128 606 ------ ------ ------ Diluted earnings per share - weighted average shares outstanding plus effect of dilutive securities ................... 28,935 27,590 29,366 ====== ====== ======
9. OPERATING LEASES The Company leases various office facilities, furniture and equipment under operating leases. Most of the leases contain purchase and/or renewal options at fair market and fair rental value, respectively. Rental expense relating to all operating leases was $4,446,000, $2,915,000 and $1,827,000 in 2000, 1999 and 1998, respectively. At December 31, 2000, future minimum rental payments under noncancelable operating leases are as follows (in thousands): 2001............................................... $ 6,426 2002............................................... 6,262 2003............................................... 5,821 2004 .............................................. 5,456 2005 and thereafter................................ 18,080 --------- $ 42,045 =========
10. COMMITMENTS AND CONTINGENCIES The Company is a defendant in various lawsuits and claims arising in the normal course of business. Management believes it has valid defenses in these cases and is defending them vigorously. While the results of litigation cannot be predicted with certainty, management believes the final outcome of such litigation will not have a material adverse effect on the Company's financial position or results of operations. The Company's 401(k) plan is currently under audit by the Internal Revenue Service (the "IRS") for the year ended December 31, 1993. Although the audit is for the 1993 plan year, certain conclusions of the IRS could be applicable to other years as well. In addition, the IRS has established an Employee Leasing Market Segment Group (the "Market Segment Group") for the purpose of identifying specific compliance issues prevalent in certain F-17 61 ADMINISTAFF, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) segments of the PEO industry. Approximately 70 PEOs, including the Company, have been randomly selected by the IRS for audit pursuant to this program. Two primary issues have arisen from these audits. The first issue involves the Company's rights under the Code as a co-employer of its worksite employees, including officers and owners of client companies. In conjunction with the 1993 401(k) plan year audit, the IRS Houston District has sought technical advice (the "Technical Advice Request") from the IRS National Office about whether worksite employee participation in the 401(k) plan violates the exclusive benefit rule under the Code because they are not employees of the Company. The Technical Advice Request contains the conclusions of the IRS Houston District that the 401(k) plan should be disqualified because it covers worksite employees who are not employees of the Company. The Company's response to the Technical Advice Request refutes the conclusions of the IRS Houston District. With respect to the Market Segment Group study, the Company understands that the issue of whether a PEO and a client company may be treated as co-employers for certain federal tax purposes (the "Industry Issue") has been referred to the IRS National Office. The Company does not know whether the IRS National Office will address the Technical Advice Request independently of the Industry Issue. Should the IRS conclude that the Company is not a "co-employer" of worksite employees for purposes of the Code, worksite employees could not continue to make salary deferral contributions to the 401(k) plan or pursuant to the Company's cafeteria plan or continue to participate in certain other employee benefit plans of the Company. The Company believes that, although unfavorable to the Company, a prospective application of such a conclusion (that is, one applicable only to periods after the conclusion by the IRS is finalized) would not have a material adverse effect on its financial position or results of operations, as the Company could continue to make available comparable benefit programs to its client companies at comparable costs to the Company. However, if the IRS National Office adopts the conclusions of the IRS Houston District set forth in the Technical Advice Request and any such conclusions were applied retroactively to disqualify the 401(k) plan for 1993 and subsequent years, employees' vested account balances under the 401(k) plan would become taxable, the Company would lose its tax deductions to the extent its matching contributions were not vested, the 401(k) plan's trust would become a taxable trust and the Company would be subject to liability with respect to its failure to withhold applicable taxes with respect to certain contributions and trust earnings. Further, the Company would be subject to liability, including penalties, with respect to its cafeteria plan for the failure to withhold and pay taxes applicable to salary deferral contributions by employees, including worksite employees. In such a scenario, the Company also would face the risk of client dissatisfaction and potential litigation. While the Company is not able to predict either the timing or the nature of any final decision that may be reached with respect to the 401(k) plan audit or with respect to the Technical Advice Request or the Market Segment Group study and the ultimate outcome of such decisions, the Company believes that a retroactive application of an unfavorable determination is unlikely. The Company also believes that a prospective application of an unfavorable determination would not have a material adverse effect on the Company's consolidated financial position or results of operations. The second issue involved nondiscrimination test results for certain prior plan years. The Technical Advice Request issued during the 1993 401(k) plan year audit concluded that the plan should be disqualified because the plan failed to satisfy a nondiscrimination test related to contributions and failed to provide evidence that it satisfied an alternative nondiscrimination test. Separately, the Company notified the IRS of operational issues related to nondiscrimination test results for the 1991 through 1995 plan years. With respect to the 1995 plan year, the Company caused the 401(k) plan to refund the required excess contributions and earnings thereon to the affected participants, and the Company paid the excise tax associated with this correction during 1996. All remaining nondiscrimination testing issues were settled during 1999, when the Company and the IRS entered into a Closing Agreement on Final Determination Covering Specific Matters (the "Closing Agreement"). Under the terms of the Closing Agreement, the Company agreed to make a contribution to the 401(k) plan on behalf of certain participants in an aggregate amount of approximately $831,000. The settlement amount, which was remitted to the 401(k) plan in January 2000, represented the amount necessary to bring the plan into compliance with the nondiscrimination tests for all years covered, plus F-18 62 ADMINISTAFF, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) calculated earnings on such contributions. The Company also agreed to pay a penalty of $70,000. Further, the IRS agreed and determined that the 401(k) plan will not be treated as disqualified for the 1992, 1993 and 1994 plan years. The amount of the settlement was significantly lower than the amount originally estimated and accrued by the Company in 1996. As a result, the Company recorded a gain of $952,000 during 1999 as a component of other income. This gain includes the impact of the Company's adjusted amount recoverable from its third-party record keeper pursuant to a 1996 agreement, under which the record keeper agreed to reimburse the Company for a portion of its settlement of the nondiscrimination testing issues. 11. QUARTERLY FINANCIAL DATA (UNAUDITED)
QUARTER ENDED -------------------------------------------------- MARCH 31 JUNE 30 SEPT. 30 DEC. 31 ---------- ---------- ---------- ---------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Year ended December 31, 2000: Revenues ............................... $ 755,545 $ 864,450 $ 962,039 $1,126,497 Gross profit ........................... 20,705 31,342 40,067 46,420 Operating income (loss) ................ (4,699) 3,480 10,573 12,880 Net income (loss) ...................... (2,471) 2,800 7,415 9,156 Basic net income (loss) per share ...... (0.09) 0.10 0.27 0.33 Diluted net income (loss) per share .... (0.09) 0.10 0.25 0.31 Year ended December 31, 1999: Revenues ............................... $ 475,853 $ 505,683 $ 562,812 $ 716,395 Gross profit ........................... 13,555 19,919 26,191 29,863 Operating income (loss) ................ (4,062) 1,801 6,389 6,431 Net income (loss) ...................... (2,058) 1,515 4,387 5,514 Basic net income (loss) per share ...... (0.07) 0.06 0.16 0.21 Diluted net income (loss) per share .... (0.07) 0.06 0.16 0.20 Year ended December 31, 1998: Revenues ............................... $ 362,396 $ 393,643 $ 431,511 $ 495,513 Gross profit ........................... 11,173 16,326 20,037 21,074 Operating income (loss) ................ (2,048) 2,613 5,252 5,384 Net income (loss) ...................... (742) 2,163 3,786 3,916 Basic net income (loss) per share ...... (0.03) 0.07 0.13 0.13 Diluted net income (loss) per share .... (0.03) 0.07 0.13 0.13
F-19 63 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 3.1 Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Registrant's Registration Statement on Form S-1 (No. 33-96952)). 3.2* Bylaws, as amended on March 7, 2001. 3.3 Certificate of Designations of Series A Junior Participating Preferred Stock of Administaff, Inc. Dated February 4, 1998 (incorporated by reference to Exhibit 2 to the Registrant's Form 8-A filed on February 4, 1998). 4.1 Specimen Common Stock Certificate (incorporated by reference to Exhibit 4.1 to the Registrant's Registration Statement on Form S-1 (No. 33-96952)). 4.2 Rights Agreement dated as of February 4, 1998, between Administaff, Inc. and Harris Trust and Savings Bank, as Rights Agent (incorporated by reference to Exhibit 1 to the Registrant's Form 8-A filed on February 4, 1998). 4.3 Amendment No. 1 to Rights Agreement dated as of March 9, 1998 between Administaff, Inc. and Harris Trust and Savings Bank, as Rights Agent (incorporated by reference to Exhibit 4.3 to the Registrant's Form 10-K for the year ended December 31, 1999). 4.4 Amendment No. 2 to Rights Agreement dated as of May 14, 1999 between Administaff, Inc. and Harris Trust and Savings Bank, as Rights Agent (incorporated by reference to Exhibit 2 to the Registrant's Form 8-A/A filed on May 19, 1999). 4.5 Amendment No. 3 to Rights Agreement dated as of July 22, 1999 between Administaff, Inc. and Harris Trust and Savings Bank, as Rights Agent (incorporated by reference to Exhibit 1 to the Registrant's Form 8-A/A filed on August 9, 1999). 4.6 Amendment No. 4 to Rights Agreement dated as of August 2, 1999 between Administaff, Inc. and Harris Trust and Savings Bank, as Rights Agent (incorporated by reference to Exhibit 2 to the Registrant's form 8-A/A filed on August 9, 1999). 4.7 Form of Rights Certificate (incorporated by reference to Exhibit 3 to the Registrant's Form 8-A filed on February 4, 1998). 4.8 Securities Purchase Agreement between Administaff, Inc. and American Express Travel Related Services Company, Inc., dated January 27, 1998 and the Letter Agreement between Administaff, Inc. and American Express Travel Related Services Company, Inc., dated March 10, 1998 amending the Securities Purchase Agreement (incorporated by reference to Exhibit 4.2 to the Registrant's Form 10-Q for the quarter ended March 31, 1998). 4.9 Registration Rights Agreement between Administaff, Inc. and American Express Travel Related Services Company, Inc., dated March 10, 1998 (incorporated by reference to Exhibit 4.3 to the Registrant's Form 10-Q for the quarter ended March 31, 1998). 4.10 Warrant Agreement between Administaff, Inc. and American Express Travel Related Services Company, Inc., dated March 10, 1998 (incorporated by reference to Exhibit 4.4 to the Registrant's Form 10-Q for the quarter ended March 31, 1998).
64 4.11 Warrant Certificate No. 2 for American Express Travel Related Services Company, Inc. (incorporated by reference to Exhibit 4.6 to the Registrant's Form 10-Q for the quarter ended March 31, 1998). 4.12 Warrant Certificate No. 3 for American Express Travel Related Services Company, Inc. (incorporated by reference to Exhibit 4.7 to the Registrant's Form 10-Q for the quarter ended March 31, 1998). 4.13 Warrant Certificate No. 4 for American Express Travel Related Services Company, Inc. (incorporated by reference to Exhibit 4.8 to the Registrant's Form 10-Q for the quarter ended March 31, 1998). 4.14 Warrant Certificate No. 5 for American Express Travel Related Services Company, Inc. (incorporated by reference to Exhibit 4.9 to the Registrant's Form 10-Q filed for the quarter ended March 31, 1998). 10.1 Third Amended and Restated Promissory Note in the amount of $693,694.75 among Administaff, Inc., Richard G. Rawson, Dawn Rawson, and RDKB Rawson LP, dated as of March 6, 2000, amending and restating a Promissory Note dated June 22, 1995 (incorporated by reference to Exhibit 10.1 to the Registrant's Form 10-K for the year ended December 31, 1999). 10.2 Second Amended and Restated Promissory Note in the amount of $300,000 among Administaff, Inc., Richard G. Rawson, Dawn Rawson, and RDKB Rawson LP, dated as of July 13, 1998, amending and restating a Promissory Note dated April 11, 1996 (incorporated by reference to Exhibit 10.2 to the Registrant's Form 10-K for the year ended December 31, 1998). 10.3 Second Amended and Restated Security Agreement-Pledge among Administaff, Inc., Richard G. Rawson, Dawn Rawson, and RDKB Rawson LP, dated as of July 13, 1998, pursuant to which the collateral securing the promissory notes included in Exhibits 10.1 and 10.2 is pledged (incorporated by reference to Exhibit 10.3 to the Registrant's form 10-K for the year ended December 31, 1998). 10.4** Administaff, Inc. 1997 Incentive Plan (incorporated by reference to Exhibit 99.1 to the Registrant's Registration Statement on Form S-8 (No. 333-85151)). 10.5** First Amendment to the Administaff, Inc. 1997 Incentive Plan (incorporated by reference to Exhibit 99.2 to the Registrant's Registration Statement on Form S-8 (No. 333-85151)). 10.6** Second Amendment to the Administaff, Inc. 1997 Incentive Plan (incorporated by reference to Exhibit 99.3 to the Registrant's Registration Statement on Form S-8 (No. 333-85151)). 10.7** Third Amendment to the Administaff, Inc. 1997 Incentive Plan (incorporated by reference to Exhibit 99.4 to the Registrant's Registration Statement of Form S-8 (No. 333-85151)). 10.8** Fourth Amendment to the Administaff, Inc. 1997 Incentive Plan (incorporated by reference to Exhibit 99.5 to the Registrant's Registration Statement of Form S-8 (No. 333-85151)). 10.9 Administaff, Inc. Nonqualified Stock Option Plan (incorporated by reference to Exhibit 99.6 to the Registrant's Registration Statement on Form S-8 (No. 333-85151)). 10.10 Administaff, Inc. 1997 Employee Stock Purchase Plan (incorporated by reference to Exhibit 99.1 to the Registrant's form S-8 (No. 333-36363)). 10.11 Marketing Agreement between American Express Travel Related Services Company, Inc., Administaff, Inc., Administaff Companies, Inc. and Administaff of Texas, Inc. dated March 10, 1998 (incorporated by reference to Exhibit 10.1 to the Registrant's Form 10-Q for the quarter ended March 31, 1998). 10.12 First Amendment to the Marketing Agreement between American Express Travel Related Services Company, Inc., Administaff, Inc., Administaff Companies, Inc. and Administaff of Texas, Inc., dated November 17, 1998 (incorporated by reference to Exhibit 10.12 to the Registrant's Form 10-K for the year ended December 31, 1998)). 10.13 Second Amendment to the Marketing Agreement between American Express Travel Related Services Company, Inc. and Administaff, Inc., Administaff Companies, Inc. and
65 Administaff of Texas, Inc., dated April 11, 2000 (incorporated by reference to Exhibit 10.1 to the Registrant's Form 10-Q for the quarter ended June 30, 2000). 21.1* Subsidiaries of Administaff, Inc. 23.1* Consent of Independent Auditors.
- ---------- * Filed herewith ** Management contract or compensatory plan or arrangement required to be filed as an exhibit to this Form 10-K. EX-3.2 2 h85055ex3-2.txt BYLAWS, AS AMENDED 1 EXHIBIT 3.2 AMENDED BYLAWS OF ADMINISTAFF, INC. Dated: March 7, 2001 1 2 INDEX ARTICLE I OFFICES Section 1.1 Principal Office ...........................................-5- Section 1.2 Registered Office ..........................................-5- Section 1.3 Other Offices ..............................................-5- ARTICLE II STOCKHOLDERS ...........................................................-5- Stockholders' Meetings .................................................-5- Section 2.1 Annual Meeting .............................................-5- Section 2.2 Special Meetings ...........................................-5- Section 2.3 Notice of Meetings and Adjourned Meetings ..................-6- Section 2.4 Voting Lists ...............................................-6- Section 2.5 Quorum .....................................................-7- Section 2.6 Adjourned Meetings .........................................-7- Section 2.7 Organization; Agenda .......................................-7- Section 2.8 Voting .....................................................-7- Section 2.9 Shares Held or Controlled by the Corporation ...............-8- Section 2.10 Voting by Certain Persons or Entities .....................-8- Section 2.11 Voting of Shares Subject to Joint Power ...................-8- Section 2.12 Proxies ...................................................-9- Section 2.13 Authorization of Proxies ..................................-9- Section 2.14 Stockholders Entitled to Vote ............................-10- Section 2.15 Order of Business ........................................-10- Section 2.16 Inspectors of Election ...................................-10- Section 2.17 Action by Written Consent ................................-11- Section 2.18 Notice of Stockholder Nominees ...........................-11- Section 2.19 Stockholder Proposals ....................................-12- ARTICLE III DIRECTORS .............................................................-12- Section 3.1 Management ................................................-12- Section 3.2 Number and Term ...........................................-13- Section 3.3 Nominations ...............................................-13- Section 3.4 Quorum and Manner of Action ...............................-13- Section 3.5 Vacancies .................................................-13- Section 3.6 Subject to Rights of Holders of Preferred Stock ...........-14- Section 3.7 Resignations ..............................................-14- Section 3.8 Removals ..................................................-15- Section 3.9 Annual Meetings ...........................................-15-
2 3 Section 3.10 Regular Meetings .........................................-15- Section 3.11 Special Meetings .........................................-15- Section 3.12 Organization of Meetings .................................-15- Section 3.13 Presumption of Assent ....................................-15- Section 3.14 Place of Meetings ........................................-16- Section 3.15 Compensation of Directors ................................-16- Section 3.16 Action by Unanimous Written Consent ......................-16- Section 3.17 Participation in Meetings by Telephone ...................-16- ARTICLE IV COMMITTEES OF THE BOARD ...............................................-16- Section 4.1 Executive Committee .......................................-16- Section 4.2 Other Committees ..........................................-17- Section 4.3 Term.......................................................-17- Section 4.4 Committee Changes; Removal ................................-17- Section 4.5 Alternate Members .........................................-17- Section 4.6 Rules and Procedures ......................................-17- Section 4.7 Presumption of Assent .....................................-18- Section 4.8 Resignations ..............................................-18- Section 4.9 Vacancies .................................................-18- Section 4.10 Telephone Meetings .......................................-18- Section 4.11 Action Without Meeting ...................................-18- Section 4.12 Limitations on Authority .................................-19- ARTICLE V OFFICERS ..............................................................-19- Section 5.1 Number and Title ..........................................-19- Section 5.2 Term of Office; Vacancies .................................-19- Section 5.3 Removal of Elected Officers ...............................-19- Section 5.4 Resignations ..............................................-19- Section 5.5 The Chairman of the Board .................................-20- Section 5.6 Chief Executive Officer ...................................-20- Section 5.7 President .................................................-20- Section 5.8 Vice Presidents ...........................................-21- Section 5.9 Secretary .................................................-21- Section 5.10 Assistant Secretaries ....................................-22- Section 5.11 Treasurer ................................................-22- Section 5.12 Assistant Treasurers .....................................-22- Section 5.13 Controller ...............................................-22- Section 5.14 Subordinate Officers .....................................-23- Section 5.15 Salaries and Compensation ................................-23-
3 4 ARTICLE VI INDEMNIFICATION .......................................................-23- Section 6.1 Indemnification of Directors and Officers .................-23- Section 6.2 Survival ..................................................-25- Section 6.3 Amendment .................................................-25- Section 6.4 Definitions ...............................................-26- ARTICLE VII CAPITAL STOCK .........................................................-26- Section 7.1 Certificates of Stock .....................................-26- Section 7.2 Legends ...................................................-27- Section 7.3 Lost Certificates .........................................-27- Section 7.4 Transfer Regulations ......................................-27- Section 7.5 Fixing Date for Determination of Stockholders of Record for Certain Purposes ...............-27- Section 7.6 Dividends .................................................-28- Section 7.7 Registered Stockholders ...................................-28- Section 7.8 Transfer of Stock .........................................-28- ARTICLE VIII MISCELLANEOUS PROVISIONS ..............................................-28- Section 8.1 Corporate Seal ............................................-28- Section 8.2 Fiscal Year ...............................................-28- Section 8.3 Checks, Drafts, Notes .....................................-29- Section 8.4 Notice and Waiver of Notice ...............................-29- Section 8.5 Examination of Books and Records ..........................-29- Section 8.6 Voting Upon Shares Held by the Corporation ................-29- Section 8.7 Reserves ..................................................-30- Section 8.8 Corporate Contracts and Instruments .......................-30- Section 8.9 Attestation ...............................................-30- Section 8.10 Invalid Provisions .......................................-30- Section 8.11 Headings .................................................-30- Section 8.12 References to Gender/Number ..............................-30- ARTICLE IX AMENDMENTS ............................................................-30- Section 9.1 Amendment .................................................-30-
4 5 ADMINISTAFF, INC. BYLAWS ARTICLE I OFFICES SECTION 1.1 PRINCIPAL OFFICE. The principal office of the Corporation shall be in Kingwood, Montgomery County, Texas. SECTION 1.2 REGISTERED OFFICE. The registered office and registered agent of the Corporation required to be maintained in the State of Delaware by the General Corporation Law of the State of Delaware shall be as designated from time to time by the appropriate filing by the Corporation in the office of the Secretary of State of the State of Delaware. SECTION 1.3 OTHER OFFICES. The Corporation may also have offices at such other places, both within and without the State of Delaware, as the Board of Directors may from time to time determine or as the business of the Corporation may require. ARTICLE II STOCKHOLDERS' MEETINGS SECTION 2.1 ANNUAL MEETING. The annual meeting of the holders of shares of each class or series of stock as are entitled to notice thereof and to vote thereat pursuant to applicable law and the Certificate of Incorporation for the purpose of electing directors and transacting such other proper business as may come before it shall be held each calendar year. Each annual meeting shall be held on such date (no later than 13 months after the date of the last annual meeting of Stockholders) as shall be designated by the Board of Directors and stated in the notice or waivers of notice of such meeting. Furthermore, the annual meeting shall be held at such time and at such place, within or without the State of Delaware, as may be designated by the Board of Directors. SECTION 2.2 SPECIAL MEETINGS. In addition to such special meetings as are provided by law or the Certificate of Incorporation, special meetings of the holders of any class or series or of all classes or series of the Corporation's stock for any purpose or purposes, may be called at any time by the Board of Directors and may be held on such day, at such time and at such place, within or without the State of Delaware, as shall be designated by the Board of Directors. Any person or group of persons who owns, beneficially and of record, not less than 25 percent of the outstanding shares of common stock, par value $0.01 per share, of the Corporation may call a special meeting for any proper purpose, by notice delivered to the Secretary setting forth the action(s) proposed to be taken at such special meeting. Except as provided in the immediately preceding sentence, stockholders of the Corporation may not call a special meeting. 5 6 SECTION 2.3 NOTICE OF MEETINGS AND ADJOURNED MEETINGS. Except as otherwise provided by law, written notice of any meeting of Stockholders shall be given either by personal delivery or by mail to each Stockholder of record entitled to vote thereat. Notice of each meeting shall be in such form as is approved by the Board of Directors and shall state the date, place and hour of the meeting, and, in the case of a special meeting, the purpose or purposes for which the meeting is called. If the Corporation's books or stock transfer records do not contain an address for any Stockholder, notice to such Stockholder shall be deemed to have been given if sent by first-class mail or telecommunication to the Corporation's principal executive office or if published at least once in a newspaper of general circulation in the county where such principal executive office is located. If any notice addressed to a Stockholder at the address of such stockholder appearing on the books or stock transfer records of the Corporation is returned to the Corporation because the postal service is unable to deliver such notice to the address marked thereon, all further notices to such Stockholder at such address shall be deemed to have been duly given without further mailing if the same shall be available to such stockholder upon written demand of such stockholder at the principal executive office of the corporation for a period of one year from the date of the giving of such notice. Unless otherwise provided by law, such written notice shall be given not less than 10 nor more than 60 days before the date of the meeting. Except when a Stockholder attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business on the grounds that the meeting is not lawfully called or convened, presence in person or by proxy of a Stockholder shall constitute a waiver of notice of such meeting. Further, a written waiver of any notice required by law or by these Bylaws, signed by the person entitled to notice, whether before or after the time stated therein, shall be deemed equivalent to notice. Except as otherwise provided by law, the business that may be transacted at any such meeting shall be limited to and consist of the purpose or purposes stated in such notice. If a meeting is adjourned to another time or place, notice need not be given of the adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken; provided, however, that if the adjournment is for more than 30 days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each Stockholder of record entitled to vote at the meeting. SECTION 2.4 VOTING LISTS. The officer or agent having charge of the stock transfer books for shares of the Corporation shall make, at least 10 days before each meeting of the Stockholders, a complete list of Stockholders entitled to vote at such meeting or any adjournment thereof, arranged in alphabetical order, with the address of each and the number of shares held by each, which list, for a period of 10 days prior to such meeting, shall be kept on file either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held, and such list shall be subject to inspection by the Stockholders at any time during usual business hours. Such list shall also be produced and kept open at the time and place of the meeting and shall be subject to the inspection of any Stockholder for the duration of the meeting. The original stock transfer books shall be prima-facie evidence as to who are the Stockholders entitled to examine such list or transfer books or to vote at any meeting of Stockholders. 6 7 SECTION 2.5 QUORUM. Except as otherwise provided by law or by the Certificate of Incorporation, the holders of a majority of the Corporation's stock issued and outstanding and entitled to vote at a meeting, present in person or represented by proxy, without regard to class or series, shall constitute a quorum at all meetings of the Stockholders for the transaction of business. If a quorum is present at any meeting of Stockholders, such quorum shall be deemed continuously present throughout such meeting notwithstanding the withdrawal of Stockholders sufficient to leave less than a quorum and the remaining Stockholders may continue to transact business until adjournment. If, however, such quorum shall not be present or represented at any meeting of the Stockholders, the holders of a majority of such shares of stock, present in person or represented by proxy, may adjourn any meeting from time to time without notice other than announcement at the meeting, except as otherwise required by these Bylaws, until a quorum shall be present or represented or, if no Stockholder entitled to vote is present at such meeting, the chairman of such meeting or any officer of the Corporation may adjourn such meeting from time to time until a quorum shall be present. Notwithstanding anything in these Bylaws to the contrary, the chairman of any meeting of Stockholders shall have the right, acting in his sole discretion, to adjourn such meeting at any time and from time to time. At any such adjourned meeting at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally called. SECTION 2.6 ADJOURNED MEETINGS. When a meeting of Stockholders is adjourned to another time or place, unless otherwise provided by these Bylaws, notice need not be given of the adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken; provided, however, that if an adjournment is for more than 30 days or if, after an adjournment, a new record date is fixed for the adjourned meeting a notice of the adjourned meeting shall be given to each Stockholder entitled to vote thereat. At any adjourned meeting at which a quorum shall be present in person or by proxy, the Stockholders entitled to vote thereat may transact any business which might have been transacted at the meeting as originally noticed. SECTION 2.7 ORGANIZATION; AGENDA. Meetings of the Stockholders shall be presided over by the Chairman of the Board of Directors, if one shall be elected, or in his absence, by the President or by any Vice President, or, in the absence of any of such officers, by a chairman to be chosen by a majority of the Stockholders entitled to vote at the meeting who are present in person or by proxy. The Secretary, or, in his absence, any Assistant Secretary or any person appointed by the individual presiding over the meeting, shall act as secretary at meetings of the Stockholders. SECTION 2.8 VOTING. (a) Each Stockholder of record, as determined pursuant to Section 2.14, who is entitled to vote in accordance with the terms of the Certificate of Incorporation and in accordance with the provisions of these Bylaws, shall, except to the extent specified in the Certificate of Incorporation or any resolution adopted by the Board of Directors to establish any series of Preferred Stock of the Corporation, be entitled to one vote, in person or by proxy, for each share of stock registered in his name on the books of the Corporation. (b) No stockholder shall have any right of cumulative voting. 7 8 (c) A holder of a share shall be treated as being present at a meeting if the holder of such share is (i) present in person at the meeting or (ii) represented at the meeting by a valid proxy, whether the instrument granting such proxy is marked as casting a vote or abstaining, is left blank or does not empower such proxy to vote with respect to some or all matters to be voted upon at the meeting. (d) If a quorum is determined to exist at a meeting, action on a matter (other than the election of directors and except as specified in the final sentence of this Section 2.8(d)) shall be approved if the votes cast in favor of the matter exceed the votes cast opposing the matter. Directors of the Corporation shall be elected by a plurality of the votes cast. In determining the number of votes cast, shares abstaining from voting or not voted on a matter will not be treated as votes cast. The provisions of this paragraph will govern with respect to all votes of stockholders except as otherwise provided for in the General Corporation Law of the State of Delaware (the "DGCL"), the Certificate of Incorporation or these Bylaws. SECTION 2.9 SHARES HELD OR CONTROLLED BY THE CORPORATION. Shares of the Corporation's capital stock that are owned by the Corporation or by another corporation of which a majority of such corporation's shares entitled to vote in the election of directors of such corporation is held, directly or indirectly, by the Corporation shall neither be entitled to vote nor counted for purposes of determining if a quorum is present at a meeting of the Corporation's stockholders. SECTION 2.10 VOTING BY CERTAIN PERSONS OR ENTITIES. Shares of the Corporation's capital stock held in the name of another corporation (whether domestic or foreign) may be voted by such officer, agent or proxy as the bylaws of such other corporation may prescribe or, in the absence of such provision, as the board of directors of such other corporation may determine. Shares held in the name of a deceased person may be voted by the executor or administrator of such deceased person, either in person or by proxy. Shares held in the name of a guardian, conservator or trustee may be voted by such fiduciary, either in person or by proxy, but no fiduciary shall be entitled to vote shares held in such fiduciary capacity without a transfer of such shares into the name of such fiduciary. Shares held in the name of a receiver may be voted by such receiver. A stockholder whose shares are pledged shall be entitled to vote such shares, unless in the transfer by the pledgor on the books of the Corporation he has expressly empowered the pledgee to vote thereon, in which case only the pledgee (or his proxy) may represent the stock and vote thereon. SECTION 2.11 VOTING OF SHARES SUBJECT TO JOINT POWER. If shares of the Corporation's capital stock are held of record in the name of two or more persons (whether fiduciaries, partners, joint tenants, tenants in common, tenants by the entirety or otherwise) or if two or more persons have the same fiduciary relationship respecting the same shares, unless the Secretary is given written notice to the contrary and is furnished with a copy of the instrument or order appointing them or creating the relationship wherein it is so provided, their acts with respect to voting shall have the following effect: (i) if only one such person votes the shares, such person's act binds all persons in whose name such shares are held; 8 9 (ii) if more than one such person votes the shares, the act of the majority so voting binds all persons in whose name such shares are held; and (iii) if more than one such person votes the shares but the vote is evenly split on any particular matter, each faction may vote the securities in question proportionately or any person voting the shares or a beneficiary (if any) may apply to the Delaware Court of Chancery or such other court as may have jurisdiction to appoint an additional person to act with the person so voting the shares, which shall then be voted as determined by a majority of such persons and the person so appointed by the court. SECTION 2.12 PROXIES. Every Stockholder entitled to vote at any Stockholders' meeting may authorize another person or persons to act for him by proxy duly appointed by instrument in writing subscribed by such Stockholder and executed not more than three years prior to the meeting, unless the proxy provides for a longer period. A duly executed proxy shall be irrevocable if it states that it is irrevocable and if, and only so long as, it is coupled with an interest sufficient in law to support an irrevocable power. A Stockholder's attendance at any meeting, when such Stockholder has theretofore given a proxy, shall not have the effect of revoking such proxy unless such Stockholder shall in writing so notify the Secretary of the meeting prior to the voting of the proxy. Unless otherwise provided by law, no vote on the election of directors or any question brought before the meeting need be by ballot unless the chairman of the meeting shall determine that it shall be by ballot or the holders of a majority of the shares of stock present in person or by proxy and entitled to participate in such vote shall so demand. In a vote by ballot, each ballot shall state the number of shares voted and the name of the Stockholder or proxy voting. Except as otherwise provided by law, by the Certificate of Incorporation or these Bylaws, all elections of directors and all other matters before the Stockholders shall be decided by the vote of the holders of a majority of the shares of stock present in person or by proxy at the meeting and entitled to vote in the election or on the question. In the election of directors, votes may not be cumulated. SECTION 2.13 AUTHORIZATION OF PROXIES. Without limiting the manner in which a Stockholder may authorize another person or persons to act for him as proxy, the following are valid means of granting such authority. A Stockholder may execute a writing authorizing another person or persons to act for him as proxy. Execution may be accomplished by the Stockholder or his authorized officer, director, employee or agent signing such writing or causing his or her signature to be affixed to such writing by any reasonable means including, but not limited to, by facsimile signature. A Stockholder may also authorize another person or persons to act for him as proxy by transmitting or authorizing the transmission of a telegram, cablegram or other means of electronic transmission to the person who will be the holder of the proxy or to a proxy solicitation firm, proxy support service organization or like agent duly authorized by the person who will be the holder of the proxy to receive such transmission, provided that any such telegram, cablegram or other means of electronic transmission must either set forth or be submitted with information from which it can be determined that the telegram, cablegram or other electronic transmission was authorized by the Stockholder. If it is determined that such telegrams, cablegrams or other electronic transmissions are valid, the inspectors or, if there are no inspectors, such other persons making that determination shall specify the information upon 9 10 which they relied. Any copy, facsimile telecommunication or other reliable reproduction of the writing or transmission created pursuant to this section may be substituted or used in lieu of the original writing or transmission for any and all purposes for which the writing or transmission could be used, provided that such copy, facsimile telecommunication or other reproduction shall be a complete reproduction of the entire original writing or transmission. SECTION 2.14 STOCKHOLDERS ENTITLED TO VOTE. The Board of Directors may fix a date not more than 60 days nor less than 10 days prior to the date of any meeting of Stockholders as a record date for the determination of the Stockholders entitled to notice of and to vote at such meeting and any adjournment thereof, and in such case such Stockholders and only such Stockholders as shall be Stockholders of record on the date so fixed shall be entitled to notice of and to vote at, such meeting and any adjournment thereof notwithstanding any transfer of any stock on the books of the Corporation after such record date fixed as aforesaid. SECTION 2.15 ORDER OF BUSINESS. The order of business at each meeting of Stockholders shall be as determined by the chairman of the meeting. In addition, subject to the DGCL, the Certificate of Incorporation and these Bylaws, the chairman of the meeting may establish such regulations for the manner of voting and the conduct of discussion at any meetings of the Corporation's Stockholders as such chairman determines to be necessary or appropriate. In advance of any meeting of the Corporation's Stockholders, the Corporation's Board of Directors may adopt an agenda for such meeting, adherence to which the chairman of the meeting may enforce. SECTION 2.16 INSPECTORS OF ELECTION. (a) Before any meeting of Stockholders, the Board of Directors may, and if required by law shall, appoint one or more persons to act as inspectors of election at such meeting or any adjournment thereof. If any person appointed as inspector fails to appear or fails or refuses to act, the chairman of the meeting may, and if required by law or requested by any Stockholder entitled to vote or his proxy shall, appoint a substitute inspector. If no inspectors are appointed by the Board of Directors, the chairman of the meeting may, and if required by law or requested by any Stockholder entitled to vote or his proxy shall, appoint one or more inspectors at the meeting. Notwithstanding the foregoing, inspectors shall be appointed consistent with Section 231 of the DGCL. (b) Inspectors may include individuals who serve the Corporation in other capacities (including as officers, employees, agents or representatives); provided, however, that no director or candidate for the office of director shall act as an inspector. Inspectors need not be Stockholders. (c) The inspectors shall (i) determine the number of shares of capital stock of the Corporation outstanding and the voting power of each, the number of shares represented at the meeting, the existence of a quorum and the validity and effect of proxies and ballots, (ii) certify their determination of the number of shares represented at the meeting and their count of all votes and ballots and (iii) receive votes or ballots, hear and determine all challenges and questions arising in connection with the right to vote, count and tabulate all votes and ballots, determine the results and perform such acts as are proper to conduct the election or vote with fairness to all 10 11 Stockholders. On request of the chairman of the meeting, the inspectors shall make a report in writing of any challenge, request or matter determined by them and shall execute a certificate of any fact found by them. The inspectors shall have such other duties as may be prescribed by Section 231 of the DGCL SECTION 2.17 ACTION BY WRITTEN CONSENT. No action required or permitted to be taken by the Stockholders shall be taken except at an annual or special meeting with prior notice and a vote. No action may be taken by the Stockholders by written consent. SECTION 2.18 NOTICE OF STOCKHOLDER NOMINEES. Only persons who are nominated in accordance with the procedures set forth in this Section 2.18 shall be eligible for election as directors of the Corporation. Nominations of persons for election to the Board of Directors of the Corporation may be made at a meeting of the Corporation's Stockholders (a) by or at the direction of the Board of Directors or (b) by any Stockholder of the Corporation entitled to vote for the election of directors at such meeting who complies with the procedures set forth in this Section 2.18. All nominations by Stockholders shall be made pursuant to timely notice in proper written form submitted to the Secretary of the Corporation. To be timely, a Stockholders' notice shall be delivered to or mailed and received at the principal executive offices of the Corporation not less than 120 days nor more than 150 days in advance of the first anniversary of the date of the Corporation's proxy statement released to Stockholders in connection with the previous year's annual meeting of Stockholders; provided, however, that if no annual meeting was held in the previous year or the date of the annual meeting of Stockholders has been changed by more than 30 calendar days from the date contemplated at the time of mailing of the preceding year's proxy statement, the notice must be received by the Corporation at least 90 days prior to the date the Corporation intends to distribute its proxy statement with respect to such meeting. To be in proper written form, such Stockholder's notice to the Secretary shall set forth in writing (a) as to each person whom such Stockholder proposes to nominate for election or re-election as a director, all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended, including, without limitation, such person's written consent to being named in the proxy statement as a nominee and to serving as a director if elected; and (b) as to such Stockholder (i) the name and address, as they appear on the Corporation's books, of such Stockholder, (ii) the class and number of shares of the Corporation's capital stock that are beneficially owned by such Stockholder and (iii) a description of all agreements, arrangements or understandings between such Stockholder and each such person that such Stockholder proposes to nominate as a director and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by such Stockholder. At the request of the Board of Directors, any person nominated by the Board of Directors for election as a director shall furnish to the Secretary of the Corporation that information required to be set forth in a Stockholder's notice of nomination which pertains to the nominee. No person shall be eligible for election as a director unless nominated in accordance with the procedures set forth in these Bylaws of the Company. The chairman of the Stockholder's meeting shall, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with the procedures prescribed by these Bylaws of the 11 12 Company, and if he shall so determine, he shall announce such determination to the meeting and the defective nomination shall be disregarded. SECTION 2.19 STOCKHOLDER PROPOSALS. At any special meeting of the Corporation's Stockholders, only such business shall be conducted as shall have been brought before the meeting by or at the direction of the Board of Directors, and, in the case of a special meeting of Stockholders called by a Stockholder or Stockholders in accordance with the second sentence of Section 2.2 of these Bylaws, as may be specified in the notice delivered to the Secretary to call such special meeting. At any annual meeting of the stockholders, only such business shall be conducted as shall have been brought before the meeting (a) by or at the direction of the Board of Directors or (b) by any Stockholder who complies with the procedures set forth in this Section 2.19. For business properly to be brought before an annual meeting by a stockholder, the stockholder must have given timely notice thereof in proper written form to the Secretary of the Corporation. To be timely, a Stockholder's notice must be delivered to or mailed and received at the principal executive offices of the Corporation not less than 120 days nor more than 150 days in advance of the first anniversary of the date of the Corporation's proxy statement released to Stockholders in connection with the previous year's annual meeting of Stockholders; provided, however, that if no annual meeting was held in the previous year or the date of the annual meeting of Stockholders has been changed by more than 30 calendar days from the date contemplated at the time of mailing of the preceding year's proxy statement, the notice must be received by the Corporation at least 90 days prior to the date the Corporation intends to distribute its proxy statement with respect to such meeting. To be in proper written form, such Stockholder's notice to the Secretary shall set forth in writing as to each matter such Stockholder proposes to bring before the annual meeting (a) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (b) the name and address, as they appear on the Corporation's books, of such Stockholder, (c) the class and number of shares of the Corporation's stock which are beneficially owned by such Stockholder and (d) any material interest of such Stockholder in such business. Notwithstanding anything in these Bylaws to the contrary, no business shall be conducted at an annual meeting except in accordance with the procedures set forth in this Section 2.19. The chairman of an annual stockholder's meeting shall, if the facts warrant, determine and declare to the meeting that business was not properly brought before the meeting in accordance with the provisions of this Section 2.19, and, if he should so determine, he shall so announce such determination to the meeting and any such business not properly brought before the meeting shall not be transacted. ARTICLE III DIRECTORS SECTION 3.1 MANAGEMENT. The property, affairs and business of the Corporation shall be managed by or under the direction of the Board of Directors which may exercise all powers of the Corporation and do all lawful acts and things as are not by law, by the Certificate of Incorporation or by these Bylaws directed or required to be exercised or done by the Stockholders. 12 13 SECTION 3.2 NUMBER AND TERM. The number of directors may be fixed from time to time by resolution of the Board of Directors adopted by the affirmative vote of a majority of the members of the entire Board of Directors, but shall consist of not less than three nor more than 15 members, one-third of whom shall be elected each year by the Stockholders except as provided in Section 3.5. Directors need not be Stockholders. No decrease in the number of directors shall have the effect of shortening the term of office of any incumbent director. The directors need not be stockholders nor residents of the State of Delaware. Each director must have attained 21 years of age. SECTION 3.3 NOMINATIONS. (a) Notwithstanding anything in these Bylaws to the contrary, only persons who are nominated in accordance with the procedures hereinafter set forth in this Section 3.3 or Sections 2.18 or 3.5 shall be eligible for election as directors of the Corporation. (b) Each notice given by a Stockholder as contemplated by Section 2.18 shall set forth the information required by Section 2.18, in addition to any other information or matters required by the Certificate of Incorporation. The right of a Stockholder to nominate a person for election or reelection to the Board of Directors shall be subject to such conditions, restrictions and limitations as may be imposed by the Certificate of Incorporation. SECTION 3.4 QUORUM AND MANNER OF ACTION. At all meetings of the Board of Directors a majority of the total number of directors holding office shall constitute a quorum for the transaction of business and the act of a majority of the directors present at any meeting at which there is a quorum shall be the act of the Board of Directors, except as may be otherwise specifically provided by law, by the Certificate of Incorporation or by these Bylaws. When the Board of Directors consists of one director, the one director shall constitute a majority and a quorum. A meeting of the Board of Directors at which a quorum is initially present may continue to transact business notwithstanding the withdrawal of directors; provided, however, that no action of the remaining directors shall constitute the act of the Board of Directors unless the action is approved by at least a majority of the required quorum for the meeting or such greater number of directors as shall be required by applicable law, by the Certificate of Incorporation or by these Bylaws. If at any meeting of the Board of Directors there shall be less than a quorum present, a majority of those present may adjourn the meeting from time to time until a quorum is obtained, and no further notice thereof need be given other than by announcement at such adjourned meeting. The act of a majority of the directors present at any meeting of the Board of Directors at which there is a quorum shall be the act of the Board of Directors unless by express provision of law, the Certificate of Incorporation or these Bylaws a different vote is required, in which case such express provision shall govern and control. Attendance by a director at a meeting shall constitute a waiver of notice of such meeting except where a director attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business on the ground that the meeting is not lawfully called or convened. SECTION 3.5 VACANCIES. Except as otherwise provided by law and the Certificate of Incorporation: 13 14 (a) in case any vacancy shall occur on the Board of Directors because of death, resignation or removal, such vacancy may be filled by a majority of the directors remaining in office (though less than a quorum), and the director so appointed shall serve for the unexpired term of his predecessor or until his successor is elected and qualified or until his earlier death, resignation or removal. If there are no directors then in office, an election of directors may be held in the manner provided by applicable law. (b) any newly-created directorship resulting from any increase in the number of directors constituting the whole Board of Directors may be filled by a majority of the directors then in office (though less than a quorum), and the director so appointed shall be assigned to such class of directors as such majority directors shall determine. Each director so appointed shall hold office for the remaining term of the class to which he is assigned and until his successor is elected and qualified or until his earlier death, resignation or removal. (c) except as expressly provided in the DGCL, the Certificate of Incorporation or these Bylaws, Stockholders shall not have any right to fill vacancies on the Board of Directors, including newly-created directorships. (d) if, as a result of a disaster or emergency (as determined in good faith by the then remaining directors), it becomes impossible to ascertain whether or not vacancies exist on the Board of Directors and a person is or persons are elected by the directors, who in good faith believe themselves to be a majority of the remaining directors, to fill a vacancy or vacancies that such remaining directors in good faith believe exists, then the acts of such person or persons who are so elected as directors shall be valid and binding upon the Corporation and the Stockholders, although it may subsequently develop that at the time of the election (i) there was in fact no vacancy or vacancies existing on the Board of Directors or (ii) the directors who so elected such person or persons did not in fact constitute a majority of the remaining directors. SECTION 3.6 SUBJECT TO RIGHTS OF HOLDERS OF PREFERRED STOCK. Notwithstanding the foregoing provisions of this Article III, if the resolutions of the Board of Directors creating any class or series of preferred stock of the Corporation entitle the holders of such preferred stock, voting separately by class or series, to elect additional directors under specified circumstances, then all provisions of such resolutions relating to the nomination, election, term of office, removal, filling of vacancies and other features of such directorships shall, as to such directorships, govern and control over any conflicting provisions of this Article III, and such directors so elected need not be divided into classes pursuant to this Article III unless expressly provided by the provisions of such resolutions. SECTION 3.7 RESIGNATIONS. A director may resign at any time upon written notice of resignation to the Corporation, delivered to the Secretary. Any resignation shall be effective immediately unless a certain effective date is specified therein, in which event it will be effective upon such date and acceptance of any resignation shall not be necessary to make it effective if an effective time is specified therein. 14 15 SECTION 3.8 REMOVALS. Any director or the entire Board of Directors may be removed only by vote of the Stockholders and only for cause, and another person or persons may be elected to serve for the remainder of his or their term, by the holders of a majority of the shares of the Corporation entitled to vote in the election of directors. Stockholders may not remove any director without cause. In case any vacancy so created shall not be filled by the Stockholders at such meeting, such vacancy may be filled by the directors as provided in Section 3.5. SECTION 3.9 ANNUAL MEETINGS. The annual meeting of the Board of Directors shall be held, if a quorum be present, immediately following each annual meeting of the Stockholders at the place such meeting of Stockholders took place, for the purpose of organization and transaction of any other business that might be transacted at a regular meeting thereof, and no notice of such meeting shall be necessary. If a quorum is not present, such annual meeting may be held at any other time or place that may be specified in a notice given in the manner provided in Section 3.11 for special meetings of the Board of Directors or in a waiver of notice thereof. SECTION 3.10 REGULAR MEETINGS. Regular meetings of the Board of Directors may be held without notice at such time and place, within or without the State of Delaware, as shall from time to time be determined by the Board of Directors. Except as otherwise provided by applicable law, any business may be transacted at any regular meeting of the Board of Directors. SECTION 3.11 SPECIAL MEETINGS. Special meetings of the Board of Directors may be called by the President or by the Secretary on the written request of one-third of the members of the whole Board of Directors stating the purpose or purposes of such meeting. Notices of special meetings, if mailed, shall be mailed to each director not later than two days before the day the meeting is to be held or if otherwise given in the manner permitted by the Bylaws, not later than the day before such meeting. Neither the business to be transacted at, nor the purpose of, any special meeting need be specified in any notice or written waiver of notice unless so required by the Certificate of Incorporation or by the Bylaws and unless limited by law, the Certificate of Incorporation or by these Bylaws, any and all business may be transacted at a special meeting. SECTION 3.12 ORGANIZATION OF MEETINGS. At any meeting of the Board of Directors, business shall be transacted in such order and manner as such Board of Directors may from time to time determine, and all matters shall be determined by the vote of a majority of the directors present at any meeting at which there is a quorum, except as otherwise provided by these Bylaws or required by law. The Board of Directors shall cause regular minutes of its proceedings to be kept and shall cause same to be placed in the minute book of the Corporation. SECTION 3.13 PRESUMPTION OF ASSENT. A director who is present at a meeting of the Board of Directors at which action on any matter is taken shall be presumed to have assented to such action unless his dissent shall be entered in the minutes of the meeting or unless he shall file his written dissent to such action with the person acting as secretary of the meeting before the adjournment thereof or shall forward any dissent by certified or registered mail to the Secretary immediately after the adjournment of the meeting. Such right to dissent shall not apply to any director who voted in favor of such action. 15 16 SECTION 3.14 PLACE OF MEETINGS. The Board of Directors may hold their meetings and have one or more offices, and keep the books of the Corporation, within or without the State of Delaware, at any office or offices of the Corporation, or at any other place as they may from time to time by resolution determine. SECTION 3.15 COMPENSATION OF DIRECTORS. The Board of Directors shall have the authority to fix, and from time to time to change, the compensation of directors. Each director shall be entitled to reimbursement from the corporation for his reasonable expenses incurred in attending meetings of the Board of Directors (or any committee thereof) and meetings of the Stockholders. Nothing contained in these Bylaws shall preclude any director from serving the Corporation in any other capacity and receiving compensation therefor. SECTION 3.16 ACTION BY UNANIMOUS WRITTEN CONSENT. Unless otherwise restricted by the DGCL, the Certificate of Incorporation or these Bylaws, any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting if prior to such action all members of the Board of Directors or of such committee, as the case may be, consent thereto in writing and the writing or writings are filed with the minutes of proceedings of the Board of Directors or the committee. SECTION 3.17 PARTICIPATION IN MEETINGS BY TELEPHONE. Unless otherwise restricted by the Certificate of Incorporation or these Bylaws, members of the Board of Directors or of any committee thereof may participate in a meeting of such Board of Directors or committee by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other and participation in a meeting in such manner shall constitute presence in person at such meeting. ARTICLE IV COMMITTEES OF THE BOARD SECTION 4.1 EXECUTIVE COMMITTEE. The Board of Directors may, by resolution or resolutions passed by a majority of the whole Board of Directors, designate one or more Directors to constitute an Executive Committee which during the intervals between meetings of the Board of Directors and subject to Section 4.12, shall have and may exercise, in such manner as it shall deem to be in the best interests of the Corporation, all the powers of the Board of Directors in the management of the business and affairs of the Corporation, except in those cases where the authority of the Board of Directors is specifically denied to the Executive Committee by the DGCL, the Certificate of Incorporation or these Bylaws, or as reserved to the Board of Directors, or as delegated by the Board of Directors to another committee of the Board of Directors, and may authorize the seal of the Corporation to be affixed to all papers that may require it. The Executive Committee shall consist of not less than two directors, the exact number to be determined from time to time by the affirmative vote of a majority of the whole Board of Directors. None of the members of the Executive Committee need be an officer of the Corporation. Meetings of the Executive Committee may be called at any time by the Chairman of the Board on not less than one day's notice to each member given orally or in writing, which 16 17 notice shall specify the time, place and purpose of the meeting. The designation of an Executive Committee or other committee and the delegation thereto of authority shall not operate to relieve the Board of Directors, or any member thereof, of any responsibility imposed upon it or him by law. SECTION 4.2 OTHER COMMITTEES. The Board of Directors may, by resolution adopted by a majority of the whole Board of Directors, establish additional standing or special committees of the Board of Directors, each of which shall consist of one or more directors (the exact number to be determined from time to time by the Board of Directors) and, subject to Section 4.12, shall have such powers and functions as may be delegated to it by the Board of Directors. No member of any additional committee need be an officer of the Corporation. SECTION 4.3 TERM. Each member of a committee of the Board of Directors shall serve as such until the earliest of (i) his death, (ii) the expiration of his term as a director, (iii) his resignation as a member of such committee or as a director and (iv) his removal as a member of such committee or as a director. SECTION 4.4 COMMITTEE CHANGES; REMOVAL. The Board of Directors shall have the power at any time to fill vacancies in, to change the membership of and to abolish any committee of the Board of Directors; provided, however, that no such action shall be taken in respect of the Executive Committee unless approved by a majority of the whole Board of Directors. SECTION 4.5 ALTERNATE MEMBERS. The Board of Directors may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. If no alternate members have been so appointed or each such alternate committee member is absent or disqualified, the committee member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any absent or disqualified member. SECTION 4.6 RULES AND PROCEDURES. (a) The Board of Directors may, by resolution adopted by a majority of the whole Board of Directors, designate one member of each committee as chairman of such committee. If a chairman is not so designated for any committee, the members thereof shall designate a chairman. (b) Each committee may adopt its own rules (not inconsistent with these Bylaws or with any specific direction as to the conduct of its affairs as shall have been given by the Board of Directors) governing the time, place and method of holding its meetings and the conduct of its proceedings and shall meet as provided by such rules. (c) If a committee is comprised of an odd number of members, a quorum shall consist of a majority of that number. If a committee is comprised of an even number of members, a quorum shall consist of one-half of that number. If a committee is comprised of two members, a quorum shall consist of both members. 17 18 (d) Each committee shall keep regular minutes of its meetings and report the same to the Board of Directors when requested. (e) Unless otherwise provided by these Bylaws or by the rules adopted by any committee, notice of the time and place of each meeting of such committee shall be given to each member of such committee as provided in these Bylaws with respect to notices of special meetings of the Board of Directors. SECTION 4.7 PRESUMPTION OF ASSENT. A member of a committee of the Board of Directors who is present at a meeting of such committee at which action on any matter is taken shall be presumed to have assented to such action unless his dissent shall be entered in the minutes of the meeting or unless he shall file his written dissent to such action with the person acting as secretary of the meeting before the adjournment thereof or shall forward any dissent by certified or registered mail to the Secretary of the Corporation immediately after the adjournment of the meeting. Such right to dissent shall not apply to any member who voted in favor of such action. SECTION 4.8 RESIGNATIONS. Any committee member may resign at any time by giving written notice to the Board of Directors or the Secretary. Such resignation shall take effect at the date of receipt of such notice or at any later time specified therein. Acceptance of such resignation shall not be necessary to make it effective if an effective time is specified therein. SECTION 4.9 VACANCIES. The Board of Directors may designate one or more of its members as alternate members of any committee who may replace any absent or disqualified member at any meeting of such committee. If no alternate members have been appointed, the committee member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any absent or disqualified member. The Board of Directors shall have the power at any time to fill vacancies in, to change the membership of, and to dissolve, any committee. SECTION 4.10 TELEPHONE MEETINGS. Members of any committee designated by the Board of Directors may participate in or hold a meeting by use of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other. Participation in a meeting pursuant to this Section 4.10 shall constitute presence in person at such meeting, except where a person participates in the meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business on the ground that the meeting is not lawfully called or convened. SECTION 4.11 ACTION WITHOUT MEETING. Any action required or permitted to be taken at a meeting of any committee designated by the Board of Directors may be taken without a meeting if a consent in writing, setting forth the action so taken, is signed by all the members of the committee and filed with the minutes of the committee proceedings. Such consent shall have the same force and effect as a unanimous vote at a meeting. 18 19 SECTION 4.12 LIMITATIONS ON AUTHORITY. Unless otherwise provided in the DGCL or the Certificate of Incorporation, any committee of the Board of Directors, to the extent provided in the resolution or resolutions establishing such committee, shall have and may exercise all the powers and authority of the Board of Directors in the management of the Corporation's business and affairs, but no such committee shall have the power or authority to (i) approve or adopt, or recommend to the Stockholders, any action or matter expressly required by the DGCL to be submitted to the Stockholders for approval or (ii) adopt, amend or repeal any Bylaws. ARTICLE V OFFICERS SECTION 5.1 NUMBER AND TITLE. (a) The elected officers of the Corporation shall be chosen by the Board of Directors and shall be a President, a Vice President, a Secretary and a Treasurer. The Board of Directors may also choose a Chairman of the Board, who must be a member of the Board of Directors, a Chief Executive Officer, and additional Vice Presidents (including one or more Senior Vice Presidents and one or more Executive Vice Presidents), Assistant Secretaries and/or Assistant Treasurers and a Controller. One person may hold any two or more of these offices, but no officer shall execute any instrument in more than one capacity if such instrument is required by law or any act of the Corporation to be executed or countersigned by two or more officers. None of the officers need be a Stockholder or a resident of the State of Delaware. No officer (other than the Chairman of the Board, if any) need be a director. (b) The Board of Directors may delegate to the Chairman of the Board (if any) and/or the Chief Executive Officer the power to appoint one or more employees of the Corporation as divisional or departmental vice presidents and fix their duties as such appointees. However, no such divisional or departmental vice presidents shall be considered an officer of the Corporation, the officers of the Corporation being limited to those officers elected by the Board of Directors. SECTION 5.2 TERM OF OFFICE; VACANCIES. So far as is practicable, all elected officers shall be elected by the Board of Directors at the annual meeting of the Board of Directors in each year, and except as otherwise provided in this Article V, shall hold office until the next such meeting of the Board of Directors in the subsequent year and until their respective successors are elected and qualified or until their earlier resignation or removal. All appointed officers shall hold office at the pleasure of the Board of Directors. If any vacancy shall occur in any office, the Board of Directors may elect or appoint a successor to fill such vacancy for the remainder of the term. SECTION 5.3 REMOVAL OF ELECTED OFFICERS. Any elected officer may be removed at any time, with or without cause, by affirmative vote of a majority of the whole Board of Directors, at any regular meeting or at any special meeting called for such purpose. SECTION 5.4 RESIGNATIONS. Any officer may resign at any time upon written notice of resignation to the President, Secretary or Board of Directors of the Corporation. Any resignation shall be effective immediately unless a date certain is specified for it to take effect, in which event it shall be effective upon such date, and acceptance of any resignation shall not be 19 20 necessary to make it effective, irrespective of whether the resignation is tendered subject to such acceptance. Any such resignation is without prejudice to the rights, if any, of the Corporation under any contract to which the officer may be a party. SECTION 5.5 THE CHAIRMAN OF THE BOARD. The Chairman of the Board (if any) shall have all powers and shall perform all duties incident to the office of Chairman of the Board and such other powers and duties as may be prescribed by the Board of Directors or these Bylaws. The Chairman of the Board, if present, shall preside at all meetings of the Board of Directors and of the Stockholders. SECTION 5.6 CHIEF EXECUTIVE OFFICER. (a) The Chief Executive Officer shall be the chief executive officer of the Corporation and, subject to the supervision, direction and control of the Board of Directors and the Chairman of the Board (if any), shall have general supervision, direction and control of the business and officers of the Corporation with all such powers as may be reasonably incident to such responsibilities. The Chief Executive Officer shall implement the general directives, plans and policies formulated by the Board of Directors and shall further have such duties, responsibilities and authorities as may be assigned to him by the Board of Directors. The Chief Executive Officer shall have the general powers and duties of management usually vested in the chief executive officer of a corporation. (b) During the time of any vacancy in the office of Chairman of the Board or in the event of the absence or disability of the Chairman of the Board, the Chief Executive Officer shall have the duties and powers of the Chairman of the Board unless otherwise determined by the Board of Directors. In the absence of the Chairman of the Board, if one be elected, the Chief Executive Officer shall preside at meetings of the Stockholders and Board of Directors and shall be ex officio a member of all standing committees. During the time of any vacancy in the office of President or in the event of the absence or disability of the President, the Chief Executive Officer shall have the duties and powers of the President unless otherwise determined by the Board of Directors. In no event shall any third party having any dealings with the Corporation be bound to inquire as to any facts required by the terms of this Section 5.6 for the exercise by the Chief Executive Officer of the powers of the Chairman of the Board or the President. SECTION 5.7 PRESIDENT. (a) The President shall be the chief operating officer of the Corporation and, subject to the supervision, direction and control of the Chief Executive Officer and the Board of Directors, shall manage the day-to-day operations of the Corporation. He shall have the general powers and duties of management usually vested in the chief operating officer of a corporation and such other powers and duties as may be assigned to him by the Board of Directors, the Chief Executive Officer or these Bylaws. The President may sign, with any other proper officer, certificates for shares of the Corporation and any deeds, bonds, mortgages, contracts and other documents which the Board of Directors has authorized to be executed, except where required by law to be otherwise signed and executed and except where the signing and execution thereof shall be expressly delegated by the Board of Directors or these Bylaws, to some other officer or agent of the Corporation. In the absence of the President, his duties shall be performed and his authority may be exercised by the Chief Executive Officer or a Vice 20 21 President of the Corporation as may have been designated by the President with the right reserved to the Board of Directors to designate or supersede any designation so made. (b) During the time of any vacancy in the offices of the Chairman of the Board and Chief Executive Officer or in the event of the absence or disability of the Chairman of the Board and the Chief Executive Officer, the President shall have the duties and powers of the Chief Executive Officer unless otherwise determined by the Board of Directors. In no event shall any third party having any dealings with the Corporation be bound to inquire as to any facts required by the terms of this Section 5.7 for the exercise by the President of the powers of the Chief Executive Officer. SECTION 5.8 VICE PRESIDENTS. The several Vice Presidents (if any), which may include one or more persons designated as Senior Vice Presidents and one or more persons designated as Executive Vice Presidents, shall have such powers and duties as may be assigned to them by these Bylaws and as may from time to time be assigned to them by the Board of Directors, the Chief Executive Officer or President and may sign, with any other proper officer, certificates for shares of the Corporation. In the absence or disability of the President, the Vice Presidents, if any, in order of their rank as fixed by the Board of Directors, or if not ranked, the Vice President designated by the President, shall perform all the duties of the President as chief operating officer of the Corporation, and when so acting shall have all the powers of, and be subject to all the restrictions upon, the President as chief executive officer of the Corporation. In no event shall any third party having dealings with the Corporation be bound to inquire as to any facts required by the terms of this Section 5.7 for the exercise by any Vice President of the powers of the President as chief executive officer of the Corporation. The Vice Presidents shall have such other powers and perform such other duties as from time to time may be assigned to them by the Board of Directors, the Chief Executive Officer or the President. SECTION 5.9 SECRETARY. (a) The Secretary shall keep or cause to be kept, at the principal office of the Corporation or such other place as the Board of Directors may order, a book of minutes of all meetings and actions of the Board of Directors, committees of the Board of Directors and Stockholders, with the time and place of holding, whether regular or special, and, if special, how authorized, the notice thereof given, the names of those present at meetings of the Board of Directors and committees thereof, the number of shares present or represented at Stockholders' meetings and the proceedings thereof. (b) The Secretary shall keep, or cause to be kept, at the principal office of the Corporation or at the office of the Corporation's transfer agent or registrar, a share register, or a duplicate share register, showing the names of all Stockholders and their addresses, the number and classes of shares held by each, the number and date of certificates issued for the same and the number and date of cancellation of every certificate surrendered for cancellation. (c) The Secretary shall give, or cause to be given, notice of all meetings of the Stockholders and of the Board of Directors required by these Bylaws or by law to be given, and he shall keep the seal of the Corporation, if one be adopted, in safe custody, and shall have such 21 22 other powers and perform such other duties as may be prescribed by the Board of Directors, the Chairman of the Board (if any), the Chief Executive Officer, the President or these Bylaws. (d) The Secretary may affix the seal of the Corporation, if one is adopted, to any instrument contracts of the Corporation requiring same. SECTION 5.10 ASSISTANT SECRETARIES. Each Assistant Secretary (if any) shall have such powers and duties as may be assigned to him by the Board of Directors, the Chairman of the Board (if any), the Chief Executive Officer or the President or the Secretary. In the absence or disability of the Secretary, the Assistant Secretary designated by the President (or, in the absence of such designation, the Assistant Secretary designated by the Secretary) shall perform the duties and exercise the powers of the Secretary during the period of such absence or disability. In no event shall any third party having dealings with the Corporation be bound to inquire as to any facts required by the terms of this Section 5.10 for the exercise by any Assistant Secretary of the powers of the Secretary under these Bylaws. SECTION 5.11 TREASURER. The Treasurer shall have the custody of and be responsible for the corporate funds and securities, shall keep full and accurate accounts of receipts and disbursements in the books belonging to the Corporation and shall deposit all moneys and other valuable effects in the name and to the credit of the Corporation in such depositories as may be designated by the Board of Directors. He shall disburse the funds of the Corporation as may be ordered by the Board of Directors, taking proper vouchers for such disbursements, and shall render to the President and the Board of Directors, at its regular meetings, or when the Board of Directors so requires, an account of all his transactions as Treasurer and of the financial condition of the Corporation and he shall perform all other duties incident to the position of Treasurer, or as may be prescribed by the Board of Directors or the President. If required by the Board of Directors, he shall give the Corporation a bond in such sum and with such surety or sureties as shall be satisfactory to the Board of Directors for the faithful performance of the duties of his office and for the restoration to the Corporation, in case of his death, resignation, retirement or removal from office, of all books, papers, vouchers, money and other property of whatever kind in his possession or under his control belonging to the Corporation. SECTION 5.12 ASSISTANT TREASURERS. Each Assistant Treasurer (if any) shall have the usual powers and duties pertaining to his office, together with such other powers and duties as may be assigned to him by the Board of Directors, the Chief Executive Officer, the President or the Treasurer. In case of the absence or disability of the Treasurer, the Assistant Treasurer designated by the President (or, in the absence of such designation, the Assistant Treasurer designated by the Treasurer) shall perform the duties and exercise the powers of the Treasurer during the period of such absence or disability. In no event shall any third party having dealings with the Corporation be bound to inquire as to any facts required by the terms of this Section 5.12 for the exercise by any Assistant Treasurer of the powers of the Treasurer under these Bylaws. SECTION 5.13 CONTROLLER. The Controller (if any) shall be the principal accounting officer of the Corporation. In addition to his duties as the principal accounting officer, the Controller shall 22 23 have such other powers and duties as may be assigned to him by the Board of Directors, the Chief Executive Officer, the President, or the Chief Financial Officer. SECTION 5.14 SUBORDINATE OFFICERS. The Board of Directors may (a) appoint such other subordinate officers and agents as it shall deem necessary who shall hold their offices for such terms, have such authority and perform such duties as the Board of Directors may from time to time determine, or (b) delegate to any committee or officer the power to appoint any such subordinate officers or agents. SECTION 5.15 SALARIES AND COMPENSATION. The salary or other compensation of officers shall be fixed from time to time by the Board of Directors. The Board of Directors may delegate to any committee or officer the power to fix from time to time the salary or other compensation of subordinate officers and agents appointed in accordance with the provisions of Section 5.14. ARTICLE VI INDEMNIFICATION SECTION 6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS. (a) The Corporation, to the maximum extent permitted from time to time under the laws of the State of Delaware (i) shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Corporation) by reason of the fact that such person is or was, at any time prior to or during which this Article VI is in effect, a director or officer of the Corporation, or is or was, at any time prior to or during which this Article VI is in effect, serving at the request of the Corporation as a director or officer of another corporation, partnership, joint venture, trust, other enterprise or employee benefit plan and (ii) upon a determination by the Board of Directors that indemnification is appropriate, the Corporation may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Corporation) by reason of the fact that such person is or was, at any time prior to or during which this Article VI is in effect, an employee or agent of the Corporation or at the request of the Corporation was serving as an employee or agent of another corporation, partnership, joint venture, trust, other enterprise or employee benefit plan, in the case of (i) and (ii) against reasonable expenses (including attorneys' fees), judgments, fines, penalties, amounts paid in settlement and other liabilities actually and reasonably incurred by such person in connection with such action, suit or proceeding if such person acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe that his conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that such person did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the Corporation, and, with 23 24 respect to any criminal action or proceeding, had reasonable cause to believe that his conduct was unlawful. (b) The Corporation, to the maximum extent permitted from time to time under the laws of the State of Delaware (i) shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that such person is or was, at any time prior to or during which this Article VI is in effect, a director or officer of the Corporation, or is or was, at any time prior to or during which this Article VI is in effect, serving at the request of the Corporation as a director or officer of another corporation, partnership, joint venture, trust or other enterprise and (ii) upon a determination by the Board of Directors that indemnification is appropriate, the Corporation may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that such person is or was, at any time prior to or during which this Article VI is in effect, an employee or agent of the Corporation or at the request of the Corporation was serving as an employee or agent of another corporation, partnership, joint venture, trust, other enterprise or employee benefit plan, in the case of (i) and (ii) against expenses (including attorneys' fees), actually and reasonably incurred by such person in connection with the defense or settlement of such action or suit if such person acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Corporation; provided, that no indemnification shall be made under this sub-section (b) in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the Corporation unless and only to the extent that the Delaware Court of Chancery, or other court of appropriate jurisdiction, shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity of such expenses which the Delaware Court of Chancery, or other court of appropriate jurisdiction, shall deem proper. (c) Any indemnification under sub-sections (a) or (b) (unless ordered by the Delaware Court of Chancery or other court of appropriate jurisdiction) shall be made by the Corporation only as authorized in the specific case upon a determination that indemnification of such person is proper in the circumstances because he has met the applicable standard of conduct set forth in sub-sections (a) and (b). Such determination shall be made (1) by the Board of Directors by a majority vote of a quorum consisting of directors not parties to such action, suit or proceeding; or (2) if such a quorum is not obtainable, or, even if obtainable a quorum of disinterested directors so directs, by independent legal counsel, in written opinion, selected by the Board of Directors; or (3) by the Stockholders. In the event a determination is made under this sub-section (c) that the director, officer, employee or agent has met the applicable standard of conduct as to some matters but not as to others, amounts to be indemnified may be reasonably prorated. (d) Expenses incurred by a person who is or was a director or officer of the Corporation in appearing at, participating in or defending any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, shall be paid by the Corporation at reasonable intervals in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of the director or officer to repay such 24 25 amount if it shall ultimately be determined that he is not entitled to be indemnified by the Corporation as authorized by this Article VI. In addition, the Corporation shall pay or reimburse expenses incurred by any person who is or was a director or officer of the Corporation in connection with such person's appearance as a witness or other participant in a proceeding in which such person or the Corporation is not a named party to such proceeding, provided that such appearance or participation is on behalf of the Corporation or by reason of his capacity as a director or officer, or former director or officer of the Corporation. Such expenses incurred by other employees and agents of the Corporation and other persons eligible for indemnification under this Article VI may be paid upon such terms and conditions, if any, as the Board of Directors deems appropriate. (e) If in a suit or proceeding for indemnification required under this Article VI of a director or officer, or former director or officer, of the Corporation or any of its affiliates, a court of competent jurisdiction determines that such person is entitled to indemnification under this Article VI, the court shall award, and the Corporation shall pay, to such person the expenses incurred in securing such judicial determination. (f) It is the intention of the Corporation to indemnify the persons referred to in this Article VI to the fullest extent permitted by law and with respect to any action, suit or proceeding arising from events which occur at any time prior to or during which this Article VI is in effect. The indemnification and advancement of expenses provided by this Article VI shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be or become entitled under any law, the Certificate of Incorporation, these Bylaws, agreement, the vote of Stockholders or disinterested directors or otherwise, or under any policy or policies of insurance purchased and maintained by the Corporation on behalf of any such person, both as to action in his official capacity and as to action in another capacity while holding such office, and shall continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such person. (g) The indemnification provided by this Article VI shall be subject to all valid and applicable laws, and, in the event this Article VI or any of the provisions hereof or the indemnification contemplated hereby are found to be inconsistent with or contrary to any such valid laws, the latter shall be deemed to control and this Article VI shall be regarded as modified accordingly, and, as so modified, to continue in full force and effect. SECTION 6.2 SURVIVAL. The provisions of this Article VI shall continue as to any person who has ceased to be a director, officer, employee or agent of the Corporation and shall inure to the benefit of the estate, executors, administrators, heirs, legatees and devisees of any person entitled to indemnification under this Article VI. SECTION 6.3 AMENDMENT. No amendment, modification or repeal of this Article VI or any provision hereof shall in any manner terminate, reduce or impair the right of any past, present or future director, officer, employee or agent of the Corporation to be indemnified by the Corporation, nor the obligation of the Corporation to indemnify any such director, officer, 25 26 employee or agent, under and in accordance with the provisions of this Article VI as in effect immediately prior to such amendment, modification or repeal with respect to claims arising, in whole or in part, from a state of facts extant on the date of, or relating to matters occurring prior to, such amendment, modification or repeal, regardless of when such claims may arise or be asserted. SECTION 6.4 DEFINITIONS. For purposes of this Article VI, (i) reference to any person shall include the estate, executors, administrators, heirs, legatees and devisees of such person, (ii) "employee benefit plan" and "fiduciary" shall be deemed to include, but not be limited to, the meaning set forth, respectively, in sections 3(3) and 21 (A) of the Employee Retirement Income Security Act of 1974, as amended, (iii) references to the judgments, fines and amounts paid or owed in settlement or rendered or levied shall be deemed to encompass and include excise taxes required to be paid pursuant to applicable law in respect of any transaction involving an employee benefit plan and (iv) references to the Corporation shall be deemed to include any predecessor corporation or entity and any constituent corporation or entity absorbed in a merger, consolidation or other reorganization of or by the Corporation which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, employees, agents and fiduciaries so that any person who was a director, officer, employee, agent or fiduciary of such predecessor or constituent corporation or entity, or served at the request of such predecessor or constituent corporation or entity as a director, officer, employee, agent or fiduciary of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, shall stand in the same position under the provisions of this Article VI with respect to the Corporation as such person would have with respect to such predecessor or constituent corporation or entity if its separate existence had continued. ARTICLE VII CAPITAL STOCK SECTION 7.1 CERTIFICATES OF STOCK. Certificates of stock shall be issued to each Stockholder certifying the number of shares owned by him in the Corporation and shall be in a form not inconsistent with the Certificate of Incorporation and as approved by the Board of Directors. The certificates shall be signed by the Chairman of the Board, the President or a Vice President and by the Secretary or an Assistant Secretary, or the Treasurer or an Assistant Treasurer and may be sealed with the seal of the Corporation or a facsimile thereof. Any or all of the signatures on the certificate may be a facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the Corporation with the same effect as if he were such officer, transfer agent or registrar at the date of issue. If the Corporation shall be authorized to issue more than one (1) class of stock or more than one (1) series of any class, the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights shall be set forth in full or summarized on the face or back of the certificate which the Corporation shall issue to 26 27 represent such class or series of stock, provided that, except as otherwise provided by statute, in lieu of the foregoing requirements, there may be set forth on the face or back of the certificate which the Corporation shall issue to represent such class or series of stock, a statement that the Corporation will furnish without charge to each Stockholder who so requests the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. SECTION 7.2 LEGENDS. The Board of Directors shall have the power and authority to provide that certificates representing shares of stock of the Corporation bear such legends and statements (including, without limitation, statements relating to the powers, designations, preferences and relative, participating, optional or other special rights and qualifications, limitations or restrictions of the shares represented by such certificates) as the Board of Directors deems appropriate in connection with the requirements of federal or state securities laws or other applicable laws. SECTION 7.3 LOST CERTIFICATES. The Board of Directors may direct a new certificate to be issued in place of any certificate theretofore issued by the Corporation alleged to have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the owner of such certificate, or his legal representative. When authorizing the issuance of a new certificate, the Board of Directors may in its discretion, as a condition precedent to the issuance thereof, require the owner, or his legal representative, to give a bond in such form and substance with such surety as it may direct, to indemnify the Corporation against any claim that may be made on account of the alleged loss, theft or destruction of such certificate or the issuance of such new certificate. SECTION 7.4 TRANSFER REGULATIONS. The Board of Directors shall have the power and authority to make all such rules and regulations as they may deem expedient concerning the issue, transfer and registration or the replacement of certificates for shares of stock of the Corporation. The Board of Directors may (i) appoint and remove transfer agents and registrars of transfers and (ii) require all stock certificates to bear the signature of any such transfer agent and/or any such registrar of transfers. SECTION 7.5 FIXING DATE FOR DETERMINATION OF STOCKHOLDERS OF RECORD FOR CERTAIN PURPOSES. (a) In order that the Corporation may determine the Stockholders entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of capital stock or for the purpose of any other lawful action, the Board of Directors may fix, in advance, a record date, which shall not be more than 60 days prior to the date of payment of such dividend or other distribution or allotment of such rights or the date when any such rights in respect of any change, conversion or exchange of stock may be exercised or the date of such other action. In such a case, only Stockholders of record on the date so fixed shall be entitled to receive any such dividend or other distribution or allotment of rights or to exercise such rights or for any other purpose, as the case may be, notwithstanding any transfer of any stock on the books of the Corporation after any such record date fixed as aforesaid. 27 28 (b) If no record date is fixed, the record date for determining Stockholders for any such purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto. SECTION 7.6 DIVIDENDS. Subject to the provisions of the Certificate of Incorporation, if any, and except as otherwise provided by law, the directors may declare dividends upon the capital stock of the Corporation as and when they deem it to be expedient. Such dividends may be paid in cash, in property or in shares of the Corporation's capital stock. Before declaring any dividend the directors may set apart out of the funds of the Corporation available for dividends such sum or sums as the directors from time to time in their discretion think proper for working capital or as a reserve fund to meet contingencies or for equalizing dividends, or for such other purposes as the directors shall determine to be conducive to the interests of the Corporation and the directors may modify or abolish any such reserve in the manner in which it was created. A director shall be fully protected in relying in good faith upon the books of account of the Corporation or statements prepared by any of its officers as to the value and amount of the assets, liabilities or net profits of the Corporation or any other facts pertinent to the existence and amount of surplus or other funds from which dividends might properly be declared. SECTION 7.7 REGISTERED STOCKHOLDERS. Except as expressly provided by law, the Certificate of Incorporation and these Bylaws, the Corporation shall be entitled to treat registered Stockholders as the only holders and owners in fact of the shares standing in their respective names and the Corporation shall not be bound to recognize any equitable or other claim to or interest in such shares on the part of any other person, regardless of whether it shall have express or other notice thereof. SECTION 7.8 TRANSFER OF STOCK. Transfers of shares of the capital stock of the Corporation shall be made only on the books of the Corporation by the registered owners thereof, or by their legal representatives or their duly authorized attorneys. Upon any such transfers the old certificates shall be surrendered to the Corporation by the delivery thereof to the person in charge of the stock transfer books and ledgers, by whom they shall be canceled and new certificates shall thereupon be issued. ARTICLE VIII MISCELLANEOUS PROVISIONS SECTION 8.1 CORPORATE SEAL. If one be adopted, the corporate seal shall have inscribed thereon the name of the Corporation and shall be in such form as may be approved by the Board of Directors. Said seal may be used by causing it or a facsimile thereof to be impressed or affixed or in any manner reproduced. SECTION 8.2 FISCAL YEAR. The fiscal year of the Corporation shall be fixed by resolution of the Board of Directors. 28 29 SECTION 8.3 CHECKS, DRAFTS, NOTES. All checks, drafts or other orders for the payment of money, notes or other evidences of indebtedness issued in the name of the Corporation shall be signed by such officer or officers, agent or agents of the Corporation, and in such manner as shall from time to time be determined by resolution (whether general or special) of the Board of Directors or may be prescribed by any officer or officers, or any officer and agent jointly, thereunto duly authorized by the Board of Directors. SECTION 8.4 NOTICE AND WAIVER OF NOTICE. Whenever notice is required to be given to any director or Stockholder under the provisions of applicable law, the Certificate of Incorporation or of these Bylaws it shall not be construed to only mean personal notice, rather, such notice may also be given (i) in writing, by mail, postage prepaid, addressed to such Stockholder, director or committee member at his address as it appears on the books or (in the case of a stockholder) the stock transfer records of the Corporation or (ii) by any other method permitted by law (including, but not limited to, overnight courier service , telegram, telex or telecopier). Any notice required or permitted to be given by mail shall be deemed to be delivered and given at the time when the same is deposited in the United States mail as aforesaid. Any notice required or permitted to be given by overnight courier service shall be deemed to be delivered and given one business day after delivery to such service with all charges prepaid and addressed as aforesaid. Any notice required or permitted to be given by telegram, telex or telecopy shall be deemed to be delivered and given at the time transmitted with all charges prepaid and addressed as aforesaid. Notice to directors may also be given by telegram, cable or other form of recorded communication, by personal delivery or by telephone. Whenever notice is required to be given under any provision of law, the Certificate of Incorporation or these Bylaws, a waiver thereof in writing, by telegraph, cable or other form of recorded communication, signed by the person or persons entitled to said notice, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting at the beginning of the meeting, to the transaction of any business on the ground that the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the Stockholders, directors, or members of a committee of directors need be specified in any written waiver of notice unless so required by the Certificate of Incorporation or these Bylaws. SECTION 8.5 EXAMINATION OF BOOKS AND RECORDS. The Board of Directors shall determine from time to time whether, and if allowed, when and under what conditions and regulations the accounts and books of the Corporation (except such as may by statute be specifically opened to inspection) or any of them shall be open to inspection by the Stockholders, and the Stockholders' rights in this respect are and shall be restricted and limited accordingly. SECTION 8.6 VOTING UPON SHARES HELD BY THE CORPORATION. Unless otherwise provided by law or by the Board of Directors, the Chairman of the Board of Directors, if one shall be elected, or the President, if a Chairman of the Board of Directors shall not be elected, acting on behalf of the Corporation, shall have full power and authority to attend and to act and to vote at any meeting of Stockholders of any corporation in which the Corporation may hold stock and, at any such meeting, shall possess and may exercise any and all of the rights and powers incident to the 29 30 ownership of such stock which, as the owner thereof, the Corporation might have possessed and exercised, if present. The Board of Directors by resolution from time to time may confer like powers upon any person or persons. SECTION 8.7 RESERVES. There may be created by the Board of Directors, out of funds of the Corporation legally available therefor, such reserve or reserves as the Board of Directors from time to time, in its absolute discretion, considers proper to provide for contingencies, to equalize dividends or to repair or maintain any property of the Corporation, or for such other purpose as the Board of Directors shall consider beneficial to the Corporation, and the Board of Directors may thereafter modify or abolish any such reserve in its absolute discretion. SECTION 8.8 CORPORATE CONTRACTS AND INSTRUMENTS. Subject always to the specific directions of the Board of Directors, the Chairman of the Board (if any), the President, any Vice President, the Secretary or the Treasurer may enter into contracts and execute instruments in the name and on behalf of the Corporation. The Board of Directors and, subject to the specific directions of the Board of Directors, the Chairman of the Board (if any), the Chief Executive Officer or the President may authorize one or more officers, employees or agents of the Corporation to enter into any contract or execute any instrument in the name of and on behalf of the Corporation, and such authority may be general or confined to specific instances. SECTION 8.9 ATTESTATION. With respect to any deed, deed of trust, mortgage or other instrument executed by the Corporation through its duly authorized officer or officers, the attestation to such execution by the Secretary or an Assistant Secretary of the Corporation shall not be necessary to constitute such deed, deed of trust, mortgage or other instrument a valid and binding obligation of the Corporation unless the resolutions, if any, of the Board of Directors authorizing such execution expressly state that such attestation is necessary. SECTION 8.10 INVALID PROVISIONS. If any part of these Bylaws shall be invalid or inoperative for any reason, the remaining parts, so far as is possible and reasonable, shall remain valid and operative. SECTION 8.11 HEADINGS. The headings used in these Bylaws have been inserted for administrative convenience only and shall not limit or otherwise affect any of the provisions of these Bylaws. SECTION 8.12 REFERENCES TO GENDER/NUMBER. Whenever in these Bylaws the singular number is used, the same shall include the plural where appropriate. Words of any gender used in these Bylaws shall include the other gender where appropriate. ARTICLE IX AMENDMENTS SECTION 9.1 AMENDMENT. Except as otherwise expressly provided in the Certificate of Incorporation, the directors, by the affirmative vote of a majority of the entire Board of Directors 30 31 and without the assent or vote of the Stockholders, may at any meeting, provided the substance of the proposed amendment shall have been stated in the notice of the meeting, make, repeal, alter, amend or rescind any of these Bylaws. The Stockholders shall not make, repeal, alter, amend or rescind any of the provisions of these Bylaws except by the holders of not less than 80% of the total voting power of all shares of stock of the Corporation entitled to vote in the election of directors, considered for purposes of this Article IX as one class. 31 EX-21.1 3 h85055ex21-1.txt SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21.1 SUBSIDIARIES OF ADMINISTAFF, INC. - - Administaff of Texas, Inc., a Delaware corporation and wholly owned subsidiary of Administaff, Inc. - - Administaff Companies, Inc., a Delaware corporation and wholly owned subsidiary of Administaff of Texas, Inc. - - Administaff Partnerships Holding, Inc., a Delaware corporation and wholly owned subsidiary of Administaff of Texas, Inc. - - Administaff Enterprises, Inc., a Delaware corporation and wholly owned subsidiary of Administaff of Texas, Inc. - - Administaff Services L.P., a Delaware limited partnership, with Administaff of Texas, Inc. being a 1% general partner and Administaff Partnerships Holding, Inc. being a 99% limited partner. EX-23.1 4 h85055ex23-1.txt CONSENT OF INDEPENDENT AUDITORS 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statements (Forms S-8) pertaining to the Administaff, Inc. Nonqualified Stock Option Plan, Administaff, Inc. 1997 Employee Stock Purchase Plan and the Administaff, Inc. 1997 Incentive Plan of our report dated February 9, 2001, with respect to the consolidated financial statements of Administaff, Inc. included in the Annual Report (Form 10-K) for the year ended December 31, 2000. ERNST & YOUNG LLP Houston, Texas March 16, 2001 -----END PRIVACY-ENHANCED MESSAGE-----