<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 21, 1997
REGISTRATION NO. 33-96952
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
AMENDMENT NO. 5
TO
FORM S-1
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
---------------------
ADMINISTAFF, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 7363 76-0479645
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
RICHARD G. RAWSON
19001 CRESCENT SPRINGS DRIVE 19001 CRESCENT SPRINGS DRIVE
KINGWOOD, TEXAS 77339-3802 KINGWOOD, TEXAS 77339-3802
(281) 358-8986 (281) 358-8986
PHONE (NAME, ADDRESS, INCLUDING ZIP CODE, AND
NUMBER, INCLUDING, TELEPHONE NUMBER,
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE INCLUDING AREA CODE, OF AGENT FOR SERVICE)
OFFICES)
</TABLE>
---------------------
Copies to:
<TABLE>
<S> <C>
G. MICHAEL O'LEARY ROBERT F. GRAY, JR.
ANDREWS & KURTH L.L.P. FULBRIGHT & JAWORSKI L.L.P.
4200 TEXAS COMMERCE TOWER 1301 MCKINNEY, SUITE 5100
HOUSTON, TEXAS 77002 HOUSTON, TEXAS 77010-3095
(713) 220-4200 (713) 651-5151
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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*******************************************************************************
* INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A *
* REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED *
* WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT *
* BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE *
* REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT *
* CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR *
* SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH *
* OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR *
* QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. *
*******************************************************************************
PROSPECTUS (Subject to Completion)
Issued January 21, 1997
3,000,000 Shares
[ADMINISTAFF LOGO]
COMMON STOCK
------------------------
THE 3,000,000 SHARES OFFERED HEREBY ARE BEING SOLD BY ADMINISTAFF, INC. (THE
"COMPANY"). PRIOR TO THIS OFFERING, THERE HAS BEEN NO PUBLIC MARKET FOR THE
COMMON STOCK OF THE COMPANY. IT IS CURRENTLY ESTIMATED THAT THE INITIAL PUBLIC
OFFERING PRICE WILL BE BETWEEN $13.00 AND $15.00 PER SHARE. SEE "UNDERWRITERS"
FOR A DISCUSSION OF THE FACTORS TO BE CONSIDERED IN DETERMINING THE INITIAL
PUBLIC OFFERING PRICE. THE COMMON STOCK HAS BEEN APPROVED FOR LISTING ON THE NEW
YORK STOCK EXCHANGE, SUBJECT TO OFFICIAL NOTICE OF ISSUANCE, UNDER THE SYMBOL
"ASF."
------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 10 FOR INFORMATION
THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------
PRICE $ A SHARE
------------------------
<TABLE>
<CAPTION>
UNDERWRITING
PRICE DISCOUNTS AND PROCEEDS TO
TO PUBLIC COMMISSIONS(1) COMPANY (2)
----------------------- ----------------------- -----------------------
<S> <C> <C> <C>
Per Share................ $ $ $
Total (3)................ $ $ $
</TABLE>
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(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933. See
"Underwriters."
(2) Before deducting expenses payable by the Company estimated at
$1,750,000.
(3) The Selling Stockholders have granted to the Underwriters an option,
exercisable within 30 days of the date hereof, to purchase up to an
aggregate of 450,000 additional Shares at the price to public less
underwriting discounts and commissions, for the purpose of covering
over-allotments, if any. See "Principal and Selling Stockholders." The
Company will not receive any of the proceeds from any such sale of
Shares by the Selling Stockholders. If the Underwriters exercise this
option in full, the total price to public, underwriting discounts and
commissions, and proceeds to Selling Stockholders will be $ ,
$ and $ , respectively. See "Underwriters."
The Shares are offered, subject to prior sale, when, as and if accepted by the
Underwriters named herein and subject to the approval of certain legal matters
by Fulbright & Jaworski L.L.P., counsel for the Underwriters. It is expected
that delivery of the Shares will be made on or about , 1997 at the
office of Morgan Stanley & Co. Incorporated, New York, N.Y., against payment
therefor in New York funds.
------------------------
MORGAN STANLEY & CO.
Incorporated
DONALDSON, LUFKIN & JENRETTE
Securities Corporation
January , 1997
<PAGE> 3
[Octagonal chart depicting the Company's Personnel Management System,
including a graphic depiction of the services which the Company provides.]
<PAGE> 4
NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY ANY SECURITIES OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION IN WHICH IT
IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION TO SUCH PERSON.
UNTIL , 1997 ALL DEALERS EFFECTING TRANSACTIONS IN THE
REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE
REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF
DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO
THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Available Information........................... 3
Summary......................................... 4
Risk Factors.................................... 10
The Company..................................... 17
Use of Proceeds................................. 17
Dividend Policy................................. 18
Capitalization.................................. 18
Dilution........................................ 19
Selected Historical Consolidated Financial
Data.......................................... 20
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 22
<CAPTION>
PAGE
----
<S> <C>
Business........................................ 33
Industry Regulation............................. 44
Management...................................... 49
Principal and Selling Stockholders.............. 56
Description of Capital Stock.................... 58
Shares Eligible for Future Sale................. 60
Underwriters.................................... 62
Legal Matters................................... 63
Experts......................................... 63
Index to Consolidated Financial Statements...... F-1
</TABLE>
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The Company intends to furnish its stockholders annual reports containing
consolidated financial statements examined by an independent public accounting
firm.
AVAILABLE INFORMATION
The Company has not previously been subject to the reporting requirements
of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The
Company has filed with the Securities and Exchange Commission (the "Commission")
a Registration Statement (which term shall include any amendments thereto) on
Form S-1 under the Securities Act with respect to the shares of Common Stock
offered hereby. This Prospectus, which constitutes a part of the Registration
Statement, does not contain all of the information set forth in the Registration
Statement, certain portions of which have been omitted as permitted by the rules
and regulations of the Commission. For further information with respect to the
Company and the Common Stock, reference is made to the Registration Statement,
including the exhibits and schedules thereto, copies of which may be examined
without charge at the Commission's principal office at 450 Fifth Street, N.W.,
Washington, D.C. 20549 and the regional offices of the Commission located at 7
World Trade Center, New York, New York 10048 and 500 West Madison Street, 14th
Floor, Chicago, Illinois 60661. Copies of such materials may be obtained from
the Public Reference Section of the Commission, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549 and at its public reference facilities in
New York, New York and Chicago, Illinois, at prescribed rates, or on the
Internet at http://www.sec.gov. Statements contained in this Prospectus as to
the contents of any contract or other document are not necessarily complete, and
in each instance reference is made to the copy of such contract or other
document filed as an exhibit to the Registration Statement, each statement being
qualified in all respects by such reference. Copies of materials filed with the
Commission may also be inspected at the offices of The New York Stock Exchange,
Inc., 20 Broad Street, New York, New York 10005.
------------------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE, IN THE
OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
3
<PAGE> 5
SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements, including the notes thereto, which appear
elsewhere in this Prospectus.
This Prospectus contains certain forward-looking statements with respect to
the business of the Company and the industry in which it operates. These
forward-looking statements are subject to certain risks and uncertainties which
may cause actual results to differ significantly from such forward-looking
statements. See "Risk Factors."
THE COMPANY
Administaff, Inc. ("Administaff" or the "Company") is a leading provider of
professional employer services, both in terms of number of worksite employees
and in terms of revenues, with current operations in 10 markets. The Company
serves over 1,500 client companies with approximately 23,800 worksite employees
as of December 31, 1996 and believes that it currently ranks, in terms of
revenues, as one of the three largest professional employer organizations in the
United States. The Company has grown significantly since it was founded in 1986.
Revenues (which include the payroll of worksite employees) were $4.0 million for
1987, the Company's first full year of operations, and increased to over $716
million for fiscal 1995, with 1995 gross profit and net income of $28.9 million
and $1.1 million, respectively. Houston is the Company's original location and
accounted for approximately 50% of the Company's revenues as of September 30,
1996, with other Texas markets accounting for an additional 30%. In October
1993, the Company opened a sales office in Dallas as the first step in
implementing a long-term internal growth and expansion strategy. Subsequent to
obtaining expansion capital in May 1994, the Company opened sales offices in
Atlanta, Phoenix, Chicago and Washington D.C. during a twelve month period
beginning in October 1994. The Company opened a second office in Dallas in
January 1996 and opened an office in Denver in September 1996. The Company plans
to enter at least one new market or open at least one additional sales office in
an existing market in each quarter of 1997 and 1998.
Administaff's goal is to improve the productivity and profitability of
small businesses (generally, businesses with 100 or fewer employees) by
relieving business owners and key executives of administrative and regulatory
burdens, enabling them to focus on the core competencies of their businesses,
and by promoting employee satisfaction through human resource management
techniques that improve employee performance. The Company provides a
comprehensive personnel management system which encompasses a broad range of
services, including benefits and payroll administration, medical and workers'
compensation insurance programs, payroll tax filings, personnel records
management, liability management and other human resource services. The fees
charged by the Company (which averaged approximately 123.6% of total payroll
costs during the nine-month period ended September 30, 1996) are invoiced along
with each periodic payroll of the client and include the gross payroll of each
client plus the Company's estimated costs of paying employment related taxes,
providing human resource services, performing administrative functions,
providing insurance coverages and benefit plans and performing other services
offered by the Company. Administaff provides these services by entering into a
Client Service Agreement which establishes a three party relationship whereby
the Company and client act as co-employers of the worksite employees.
Responsibilities are allocated between the co-employers pursuant to the Client
Service Agreement, with Administaff assuming responsibility for personnel
administration and compliance with most employment-related governmental
regulations. The client company retains the employee's services in its business
and remains the employer for various other purposes. Companies providing
comprehensive services in this manner have come to be known as professional
employer organizations, or PEOs, as distinguished from "fee for service"
companies, such as payroll processing firms, human resource consultants and
safety consulting firms, that provide a specific service to a client under a
traditional two party contract.
Growth in the PEO industry has been significant. According to the National
Association of Professional Employer Organizations ("NAPEO"), the number of
employees under PEO arrangements in the United States has grown from
approximately 10,000 in 1984 to approximately 2.0 million in 1995. NAPEO
statistics also reflect gross revenues earned by the PEO industry grew from $5.0
billion in 1991 to $13.8 billion in 1995,
4
<PAGE> 6
representing a compounded annual growth rate of approximately 29%. Despite this
industry growth, the Company believes that the target markets for its business
remain relatively untapped. NAPEO estimates that at the end of 1995 the PEO
industry served only approximately 70,000 businesses in the United States. In
contrast, the Small Business Administration (the "SBA") estimates that net
annual growth in the number of small businesses is approximately 75,000.
Administaff believes that growth in the PEO industry is driven by the
increasingly complex legal and regulatory burdens placed on employers as well as
trends relating to the growth and productivity of the small business community
in the United States. The Company believes that the key factors which drive
small businesses to consider PEO services include (i) complex regulation of
labor and employment issues and the related costs of compliance, including the
allocation of time and effort to such functions by owners and key executives,
(ii) the need to provide competitive health care and related benefits to attract
and retain quality employees to small businesses and (iii) the increasing costs
associated with workers' compensation and health insurance coverage, workplace
safety programs and employee related complaints and litigation. Growth in the
PEO industry has also been influenced by growth of the small business sector.
According to reports published by the SBA, at year end 1994 there were more than
5.9 million businesses in the United States with fewer than 100 employees, up
from 3.9 million of such businesses at the end of 1980. In addition, the Company
believes that attempts to achieve higher levels of productivity in the workplace
have supported a movement toward the outsourcing of services such as payroll
administration and consulting on benefits, safety and other employee related
issues. Administaff believes that its specific model for delivery of a
comprehensive package of PEO services directly supports the small business goal
of improving productivity and competitiveness.
STRATEGY
The Company's objective is to become the leading provider of PEO services
in the United States while achieving sustainable revenue and income growth. Key
elements of the Company's strategy were developed by the Company's core
management team which has remained in place since the Company's founding in
1986. Since that time, the Company has concentrated substantial financial and
management resources on developing, defining and optimizing a personnel
management system for small businesses and on building an organizational
infrastructure designed to enable the Company to replicate proven growth
patterns while balancing revenue and income growth objectives. The key elements
of the Company's strategy include:
- Providing the highest quality services to help improve the productivity
and profitability of the Company's clients.
Administaff focuses on providing high quality services that directly
enhance the productivity and profitability of small businesses. Achieving
these efficiencies not only provides an obvious benefit to clients, it also
benefits the Company in three distinct ways. First, to the extent that
enhanced productivity results in client growth, Administaff's revenue base
also grows. Second, clients who experience improved profitability best
understand the value of Administaff's services and prove to be the
Company's most effective referral sources. Finally, client productivity
facilitated by Administaff promotes a long-term client relationship.
Although the Company's client service agreement provides for only a one
year initial term and is terminable on 30-day's notice at any time, in
excess of 80% of Administaff's clients remain for more than one year and
the retention rate increases for clients who remain with Administaff for
longer periods. In accordance with NAPEO standards, retention rates are
calculated by dividing the number of Company clients at December 31 by the
number of clients at January 1 of the same year plus clients added during
such year.
- Continuing to enter and establish a leading position in new markets.
In 1993, the Company identified 36 markets as its most attractive
expansion targets and since that time has opened sales offices in six of
these markets. The Company initially plans to enter at least one new market
or open one additional sales office in an existing market in each quarter
of 1997 and 1998 and believes that the proceeds from this offering will be
sufficient to cover the costs of such expansion. Through the use of a
market selection model which evaluates a broad range of criteria,
Administaff selects new markets where it believes it is most likely to
replicate its historical growth patterns and
5
<PAGE> 7
market penetration. While most of the Company's expansion has been the
result of opening sales offices, the Company has and will continue to
consider expansion through strategic acquisitions. The Company believes
that increasing industry regulatory complexity, including the difficulties
of complying with the applicable state laws and the increasing capital
commitments required of PEOs to provide larger service delivery
infrastructures and management information systems should lead to
significant consolidation opportunities in the PEO industry. The Company's
market development strategy combines intensive direct marketing efforts
with a fully integrated public relations and advertising campaign. While
the expense associated with entering and developing a new market is
significant, the Company views this investment as essential to achieving
desired growth and extending its national leadership position. The Company
generally expects expenses in a new market to be covered by the gross
profit from that market within two years.
- Growing existing markets through additional market penetration and
marketing alliances.
The Company believes that additional market penetration in established
markets offers significant growth potential. Based on information contained
in a database developed by American Business Information, Inc. ("ABI"), the
Company believes that it serves less than 6.0% of the total number of
businesses in Houston meeting its target criteria described below. In
established markets, the Company's ability to achieve its growth objectives
is enhanced by a higher number of referrals, a higher client retention
rate, a more experienced sales force and momentum in its marketing efforts.
The Company is also actively pursuing the formation of certain strategic
alliances with other providers of various administrative and office
services to small businesses as an alternative method for achieving growth
in existing markets. The Company selectively opens additional sales offices
and hires additional sales personnel in established markets to capitalize
on these advantages and to achieve higher penetration.
- Targeting and enrolling clients that are consistent with the Company's
overall strategy and risk profile objectives.
The Company seeks to attract clients whose objectives in utilizing
Administaff's PEO services primarily relate to enhancing productivity
rather than short-term cost cutting. The Company's clients tend to be
established, financially successful and likely to recognize the value of a
broad range of services which enable the client to concentrate on its core
business. Administaff's target client has from five to 100 employees and
must meet certain additional criteria relating to industrial
classification, workers' compensation, health and unemployment claims
history and operating stability. These criteria, which constitute part of
the Company's screening process, are intended to avoid a skewing of the
Company's client base to higher risk clients. Through this process, the
Company seeks to continue to build a solid client base characterized by
high year-to-year retention and client employee growth while maintaining a
predictable and controllable direct cost structure.
- Capitalizing on economies of scale while actively managing and
controlling direct costs.
The Company enjoys economies of scale which allow it to provide small
businesses with a level of human resource management typically found only
in large corporations. The Company aggressively pursues scale advantages in
order to maximize profits and to provide its clients with premium services
at competitive prices. In this regard, Administaff focuses on key
relationships with insurance providers to design coverage and premium
structures that not only provide cost effective and appropriate protection
for clients, but also enable the Company to control major components of its
direct costs. These economies and tailored coverages are achievable both
because of the Company's sophistication as a purchaser of insurance
products and its status as a large customer of such providers. The Company
also employs a variety of proactive personnel management techniques to help
minimize the incidence and magnitude of employee claims, complaints and
related costs. The Company expects that the economies resulting from active
control and management of direct costs will continue to enhance
profitability.
No assurance can be given that the Company will be successful in
implementing its strategy or that, even if successful, such implementation will
have the intended effects on the Company's future revenue, operating expenses or
net income.
6
<PAGE> 8
THE OFFERING
Common Stock offered by the
Company.................. 3,000,000 shares
Common Stock offered by the
Selling Stockholders..... 450,000 shares if the Underwriters' over-allotment
option is exercised in full
Common Stock to be
outstanding after the
offering................. 13,377,329 shares(1)
Use of proceeds to the
Company.................. Of the $37.3 million of estimated net proceeds to
the Company (based on an offering price of $14.00
per share), approximately $12 million will be
reserved to support expansion of the Company's
operations, including the opening of new geographic
markets, further penetration of existing markets by
opening new sales offices and, as opportunities
arise, expansion of the Company's client base in
new or existing markets through an acquisition of
an existing PEO office. Approximately $4.0 million
of the remaining net proceeds will be used to repay
certain outstanding subordinated notes, $2.5
million to exercise certain options to repurchase
Common Stock and Common Stock warrants, and $0.7
million to repay certain mortgage indebtedness. The
balance of the net proceeds will be used for
working capital purposes, which may include
acquisitions of existing PEO operations. The
Company will not receive any of the net proceeds
attributable to the sale of shares of Common Stock
by the Selling Stockholders. See "Use of Proceeds."
Proposed New York Stock
Exchange listing......... The New York Stock Exchange (the "NYSE") has
approved the Common Stock for listing, subject to
official notice of issuance, under the symbol
"ASF."
- ---------------
(1) The number of shares to be outstanding after the offering as of January 3,
1997 gives effect to the repurchase of Common Stock and Common Stock
warrants as described under "Use of Proceeds," and excludes the 1,027,613
shares of Common Stock issuable upon the exercise of options and warrants
(at a weighted average exercise price of $5.82 per share as of January 3,
1997) which will remain outstanding after consummation of the offering.
RISK FACTORS
See "Risk Factors" beginning on page 10 for information that should be
considered by prospective investors. Such risk factors include an ongoing audit
by the Internal Revenue Service (the "IRS") of the Company's 401(k) plan (the
"401(k) Plan") and a related employee leasing market segment group study being
conducted by the IRS; certain 401(k) Plan compliance costs incurred by the
Company; state and local regulations; risks of increases in health insurance,
unemployment taxes and workers' compensation rates; liabilities for client and
employee actions; liability for worksite employee payroll; possible loss of
benefit plans; possible adverse application of other federal and state laws;
geographic market concentration; competition and new market entrants; adequacy
of accrued workers' compensation claims; quarterly fluctuations in earnings and
impact of employment related taxes; potential client liability for employment
taxes; dependence on key personnel; expenses associated with expansion; failure
to manage growth; need to renew or replace client companies; anti-takeover
effects of certain provisions of the Company's charter and bylaws and Delaware
Law; control by existing stockholders; broad discretion over use of the net
proceeds of this offering; absence of prior trading market and potential
volatility of stock price; shares eligible for future sale; dilution; and the
lack of dividends.
7
<PAGE> 9
SUMMARY FINANCIAL DATA
The following summary financial data should be read in conjunction with the
Consolidated Financial Statements, including the Notes thereto, and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." The statement of operations data set forth below with respect to
the years ended December 31, 1993, 1994 and 1995 are derived from, and are
qualified by reference to, the audited consolidated financial statements
included elsewhere in this Prospectus. The statement of operations data for the
years ended December 31, 1991 and 1992 are derived from audited consolidated
financial statements not included herein. The statement of operations data for
the nine months ended September 30, 1995 and 1996 and the balance sheet data as
of September 30, 1996 are unaudited. The unaudited results of operations for the
nine months ended September 30, 1996 are not necessarily indicative of results
expected for the full year. (See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Quarterly Operating Results").
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30,
YEAR ENDED DECEMBER 31, (UNAUDITED)
-------------------------------------------------------- --------------------
1991 1992 1993 1994 1995 1995 1996
-------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT FOR PER SHARE AND STATISTICAL DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues(1)............................. $300,051 $409,046 $496,058 $564,459 $716,210 $505,619 $635,252
Direct costs(1):
Salaries and wages of worksite
employees........................... 241,471 328,223 397,662 453,750 582,893 408,379 517,820
Benefits and payroll taxes............ 49,542 67,272 78,614 85,513 104,444 76,964 91,307
-------- -------- -------- -------- -------- -------- --------
Gross profit............................ 9,038 13,551 19,782 25,196 28,873 20,276 26,125
Operating expenses:
Salaries, wages and payroll taxes..... 3,090 5,077 6,136 8,094 10,951 8,055 10,475
General and administrative expenses... 3,008 4,788 5,571 5,648 7,597 5,497 5,937
Commissions........................... 1,787 2,569 2,975 3,231 3,942 2,908 2,939
Advertising........................... 849 888 1,612 1,797 3,268 2,125 2,488
Depreciation and amortization......... 260 282 361 567 894 627 1,063
-------- -------- -------- -------- -------- -------- --------
Total operating expenses.............. 8,994 13,604 16,655 19,337 26,652 19,212 22,902
-------- -------- -------- -------- -------- -------- --------
Operating income (loss)(2).............. $ 44 $ (53) $ 3,127 $ 5,859 $ 2,221 $ 1,064 $ 3,223
Net income(2)........................... $ 70 $ 33 $ 1,949 $ 3,766 $ 1,116 $ 617 $ 614(3)
Net income per share(4)................. $ 0.01 $ 0.00 $ 0.22 $ 0.37 $ 0.10 $ 0.06 $ 0.06(3)
Weighted average shares
outstanding(4)........................ 6,439 8,591 8,848 10,347 10,817 10,767 10,873
Supplemental net income per share(5).... $ 0.16 $ 0.10
STATISTICAL DATA:
Worksite employees at period end(6)..... 11,380 13,490 15,165 15,780 20,502 20,124 22,993
Client companies at period end.......... 501 598 687 809 1,130 1,085 1,441
Gross payroll per employee per
month(7).............................. $ 1,823 $ 1,919 $ 2,117 $ 2,268 $ 2,331 $ 2,297 $ 2,522
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
(UNAUDITED)
------------------------
ACTUAL ADJUSTED(8)
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CONSOLIDATED BALANCE SHEET DATA:
Working capital........................................................................... $ 3,303 $ 33,502
Total assets.............................................................................. 45,134 75,259
Total debt................................................................................ 4,648 --
Total stockholders' equity................................................................ 11,303 46,076
</TABLE>
- ---------------
(1) Revenues consist of service fees paid by the Company's clients under its
Client Service Agreements. In consideration for payment of such service
fees, the Company agrees to pay the following direct costs associated with
the worksite employees: (i) salaries and wages, (ii) employment related
taxes, (iii) employee benefit plan premiums, (iv) workers' compensation
insurance premiums and (v) administrative costs and related expenses.
(2) Operating income (loss) and net income include the effects of expenses
associated with the Company's expansion plan which began in 1993. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
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(3) For the nine months ended September 30, 1996, net income and net income per
share were $1,791,000 and $0.16, respectively, excluding the impact of a
non-recurring charge relating to certain issues involving the failure of the
Company's 401(k) Plan to comply with certain nondiscrimination tests
required by the Internal Revenue Code of 1986, as amended, which impact has
been adjusted for income taxes and is net of amounts recoverable from the
401(k) Plan record keeper. See "Risk Factors -- Costs of 401(k) Plan
Compliance," "Industry Regulation -- Employee Benefit Plans" and Note 4 of
Notes to Consolidated Financial Statements (unaudited) for the nine months
ended September 30, 1996.
(4) Computed as described in Note 1 of Notes to Consolidated Financial
Statements.
(5) Computed as described in Note 11 of Notes to Consolidated Financial
Statements.
(6) Reflects the number of employees paid during the last month of the period
shown.
(7) Excludes bonus payroll of worksite employees, which is not subject to the
Company's normal service fee.
(8) Adjusted to reflect the sale of 3,000,000 shares of Common Stock by the
Company pursuant to the offering made hereby (assuming an offering price of
$14.00 per share) and the application of the net proceeds therefrom as
described in "Use of Proceeds."
RECENT DEVELOPMENTS
The Company expects to report the following results for the three months
and year ended December 31, 1996:
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
-------------------------------- --------------------------------
1995 1996 CHANGE 1995 1996 CHANGE
-------- -------- ------ -------- -------- ------
(OPERATING RESULTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Revenues............ $210,591 $264,344 25.5% $716,210 $899,596 25.6%
Gross profit........ 8,597 11,731 36.4% 28,873 37,856 31.1%
Gross profit
margin............ 4.1% 4.4% 4.0% 4.2%
Operating income.... 1,157 3,254 181.2% 2,221 6,477 191.6%
Net income.......... 500 1,989 297.8% 1,116 2,603 133.2%
Net income per
share(1).......... $ 0.05 $ 0.17 240.0% $ 0.10 0.24 140.0%
</TABLE>
- ---------------
(1) Net income per share has been computed as described in Note 1 of Notes to
Consolidated Financial Statements.
The increase in revenues for the fourth quarter and full year is
attributable to an increase in worksite employees paid over the prior periods of
approximately 16% and 15%, respectively, accompanied by an increase in revenue
per employee over the prior periods of approximately 10% and 9%, respectively.
The growth in worksite employees paid is due principally to the continuing
effects of the Company's expansion plan. The increase in revenue per employee
reflects the continued net addition of worksite employees with higher average
base pay to the existing client base. The improvement in gross profit margin for
the quarterly and full year periods resulted primarily from declines in
unemployment taxes and workers compensation costs as a percent of payroll cost.
The increases in operating income are the result of the factors noted above
combined with a decline in operating expenses as a percent of revenue compared
to the prior periods. For the full year period, operating expenses decreased
from 3.7% of revenues in 1995 to 3.5% in 1996.
The increase in net income for the year ended December 31, 1996 versus
December 31, 1995 of $1.5 million, or 133.2%, is due to the factors which
resulted in increased operating income, partially offset by the effects of a
non-recurring charge in the third quarter for certain 401(k) Plan issues, net of
amount recoverable from the 401(k) Plan record keeper. See "Risk
Factors -- Costs of 401(k) Plan Compliance", Industry Regulation -- Employee
Benefit Plans" and Note 4 of Notes to Consolidated Financial Statements
(unaudited) for the nine months ended September 30, 1996. Excluding the
non-recurring third quarter charge and the related income tax effects of such
charge, net income would have been $3.8 million (or $0.35 per share) in 1996 as
compared to $1.1 million (or $0.10 per share) in 1995.
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<PAGE> 11
RISK FACTORS
An investment in the Company involves a significant degree of risk.
Prospective purchasers should carefully consider the factors set forth below, as
well as the other information provided elsewhere in this Prospectus, before
making an investment in the Common Stock.
When used in this Prospectus, the words "anticipate," "estimate," "project"
and similar expressions are intended to identify forward-looking statements.
Such statements are subject to certain risks, uncertainties and assumptions.
Should one or more of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect, actual results may vary materially from
those anticipated, estimated or projected. Among the key factors that have a
direct bearing on the Company's results of operations and the PEO industry in
which it operates are the effects of various governmental regulations, the
fluctuation of the Company's direct costs and the costs and effectiveness of the
Company's expansion strategy. These and other factors are discussed below and
elsewhere in this Prospectus.
IRS AUDIT OF THE COMPANY'S 401(K) PLAN; IRS EMPLOYEE LEASING MARKET SEGMENT
GROUP
The Company's 401(k) Plan is currently under audit by the Internal Revenue
Service ("IRS") for the year ended December 31, 1993. Although the audit is for
the 1993 plan year, certain conclusions of the IRS would be applicable to 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
"Industry Regulation -- Employee Benefit Plans" and "-- Federal Employment
Taxes." With respect to the 401(k) Plan audit, the Company understands that the
IRS Houston District intends to seek technical advice (the "Technical Advice
Request") from the IRS National Office about (1) 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 and (2) whether the 401(k) Plan's failure to satisfy a
nondiscrimination test relating to contributions should result in
disqualification of the 401(k) Plan because the Company has failed to provide
evidence that it satisfies an alternative discrimination test. A draft copy of
the Technical Advice Request has been sent to the Company for its comments
before the IRS Houston District submits it to the IRS National Office. The draft
of 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 (1) covers worksite employees who are not employees of
the Company and (2) failed a nondiscrimination test applicable to contributions
and the Company has not furnished evidence that the 401(k) Plan satisfies an
alternative test. The Company also understands that, with respect to the Market
Segment 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") is being referred to the IRS National Office.
Whether the National Office will address the Technical Advice Request
independently of the Industry Issue is unclear. The Company is not able to
predict either the timing or the nature of any 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 conclusion were applied
retroactively to disqualify the 401(k) Plan for 1993 and
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<PAGE> 12
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 resulting in disqualification of the 401(k)
Plan would have a material adverse effect on the Company's financial position
and results of operations.
COSTS OF 401(K) PLAN COMPLIANCE
In 1991 the Company engaged a third party vendor to be the 401(k) Plan's
record keeper and to perform certain required annual nondiscrimination tests for
the 401(k) Plan. Each year such record keeper reported to the Company that such
nondiscrimination tests had been satisfied. However, in August 1996 the 401(k)
Plan's record keeper advised the Company that certain of these tests had been
performed incorrectly for prior years and, in fact, that the 401(k) Plan had
failed certain tests for the 1993, 1994 and 1995 plan years. The Company has
subsequently determined that the 401(k) Plan also failed a nondiscrimination
test for 1991 and 1992, closed years for tax purposes. At the time the Company
received such notice, the period in which the Company could voluntarily "cure"
this operational defect had lapsed for all such years, except 1995. With respect
to the 1995 year, the Company has caused the 401(k) Plan to refund the required
excess contributions and earnings thereon to affected highly compensated
participants, and the Company will pay an excise tax of approximately $51,000.
Because the 401(k) Plan is under a current IRS audit, the IRS voluntary
correction program for this type of operational defect is not available to the
Company for years prior to 1995. Accordingly, the Company informed the IRS of
the prior testing errors for each of 1991, 1992, 1993 and 1994 and proposed a
correction that consists of corrective contributions by the Company to the
401(k) Plan with respect to these years (including the closed years) and the
payment by the Company of the minimum penalty ($1,000) that the IRS is
authorized to accept to resolve this issue. The IRS Houston District has
indicated that resolution of the nondiscrimination test failures is premature
until the National Office resolves the issues presented in the Technical Advice
Request. No assurance can be given that the IRS will permit the Company to
administratively "cure" this operational defect instead of proposing a
disqualification of the 401(k) Plan. The Company recorded a reserve during the
third quarter of 1996 with respect to these 401(k) Plan issues. The amount of
such reserve is the Company's estimate of the cost of corrective measures and
penalties, although no assurance can be given that the actual amount that the
Company may ultimately be required to pay will not substantially exceed the
amount so reserved. In addition, the Company has recorded an asset for an amount
recoverable from the 401(k) Plan's record keeper should the Company ultimately
be required to pay the amount accrued for such corrective measures and
penalties. Based on its understanding of the settlement experience of other
companies, the Company does not believe that the ultimate resolution of the
nondiscrimination test issue will have a material adverse effect on the
Company's financial condition or results of operations, although no assurance
can be given by the Company that such will be the case because the ultimate
resolution of this issue will be determined in a negotiation process with the
IRS or in litigation. See Note 4 of Notes to the Company's Consolidated
Financial Statements (unaudited) for the nine months ended September 30, 1996
included elsewhere in this Prospectus.
STATE AND LOCAL REGULATION
The Company employs worksite employees in over 40 states and is, therefore,
subject to regulation by various local and state agencies pertaining to a wide
variety of labor related laws. As is the case with the provisions of the Code
discussed above, many of these regulations were developed prior to the emergence
of the PEO industry and do not specifically address non-traditional employers.
Prior to 1993, the State Board of Insurance of Texas and the Texas Employment
Commission challenged the ability of a PEO to provide workers' compensation
insurance and health benefits and to pay unemployment taxes as an employer of
worksite employees. These challenges were ultimately addressed through the
passage of specific professional employer licensing legislation in Texas. There
can be no assurance that additional challenges will not be faced
11
<PAGE> 13
in Texas or that similar challenges will not be encountered in other
jurisdictions in which the Company may choose to do business. See "Industry
Regulation -- State Regulation."
While many states do not explicitly regulate PEOs, 16 states (including
Texas) have passed laws that have licensing or registration requirements for
PEOs and at least four states are considering such regulation. Such laws vary
from state to state but generally provide for monitoring the fiscal
responsibility of PEOs. While the Company generally supports licensing
regulation because it serves to validate the PEO relationship, there can be no
assurance that the Company will be able to satisfy licensing requirements or
other applicable regulations of any particular state in which it is not
currently operating but later commences operations. In addition, there can be no
assurance that the Company will be able to renew its licenses in the states in
which it currently operates upon expiration of such licenses. For a more
complete description of these regulations, see "Industry Regulation -- State
Regulation."
INCREASES IN HEALTH INSURANCE PREMIUMS, UNEMPLOYMENT TAXES AND WORKERS'
COMPENSATION RATES
Health insurance premiums, state unemployment taxes and workers'
compensation rates are in part determined by the Company's claims experience and
comprise a significant portion of the Company's direct costs. The Company
employs extensive risk management procedures in an attempt to control its claims
incidence. However, should the Company experience a large increase in claim
activity, its unemployment taxes, health insurance premiums or workers'
compensation insurance rates may increase. The Company's ability to incorporate
such increases into service fees to clients is constrained by contractual
arrangements with clients, which may result in a delay before such increases can
be reflected in service fees. As a result, such increases could have a material
adverse effect on the Company's financial condition or results of operations.
LIABILITIES FOR CLIENT AND EMPLOYEE ACTIONS
A number of legal issues remain unresolved with respect to the
co-employment arrangement between a PEO and its worksite employees, including
questions concerning the ultimate liability for violations of employment and
discrimination laws. The Administaff Client Service Agreement establishes the
contractual division of responsibilities between the Company and its clients for
various personnel management matters, including compliance with and liability
under various governmental regulations. However, because the Company acts as a
co-employer, the Company may be subject to liability for violations of these or
other laws despite these contractual provisions, even if it does not participate
in such violations. Although the Client Service Agreement provides that the
client is to indemnify the Company for any liability attributable to the conduct
of the client, the Company may not be able to collect on such a contractual
indemnification claim and thus may be responsible for satisfying such
liabilities. In addition, worksite employees may be deemed to be agents of the
Company, subjecting the Company to liability for the actions of such worksite
employees. See "Business -- Customers" and "Industry Regulation."
LIABILITY FOR WORKSITE EMPLOYEE PAYROLL
Under the Administaff Client Service Agreement, the Company becomes a
co-employer of worksite employees and assumes the obligations to pay the
salaries, wages and related benefit costs and payroll taxes of such worksite
employees. As such a co-employer, the Company assumes such obligations as a
principal, not merely as an agent of the client company. The Company's
obligations include responsibility for (i) payment of the salaries and wages for
work performed by worksite employees, regardless of whether the client company
makes timely payment to the Company of the associated service fee, and (ii)
providing benefits to worksite employees even if the costs incurred by
Administaff to provide such benefits exceed the fees paid by the client company.
During the period from January 1, 1987 through September 30, 1996, the Company
has recorded a total of $419,000 in bad debt expense on approximately $3.4
billion of total revenues. There can be no assurance that the Company's ultimate
liability for worksite employee payroll and benefits costs will not have a
material adverse effect on its financial condition or results of operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Direct Costs."
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<PAGE> 14
LOSS OF BENEFIT PLANS
The maintenance of health and workers' compensation insurance plans that
cover worksite employees is a significant part of the Company's business. The
current health and workers' compensation contracts are provided by vendors with
whom the Company has an established relationship, and on terms that the Company
believes to be favorable. While the Company believes that replacement contracts
could be secured on competitive terms without causing significant disruption to
the Company's business, there can be no assurance in this regard.
POSSIBLE ADVERSE APPLICATION OF OTHER FEDERAL AND STATE LAWS
As a major employer, the Company's operations are affected by numerous
federal and state laws relating to labor, tax (in addition to the provisions of
the Code discussed above) and employment matters. By entering into a co-employer
relationship with employees assigned to work at client company locations, the
Company assumes certain obligations and responsibilities of an employer under
these laws. However, many of these laws (such as 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. See "Industry Regulation."
GEOGRAPHIC MARKET CONCENTRATION
While the Company has operations in 10 markets, six of these represent
recent expansions. The Company's Houston and Texas (including Houston) markets
accounted for approximately 50% and 80%, respectively, of the Company's revenue
base as of September 30, 1996. Accordingly, while a primary aspect of the
Company's strategy is expansion in its current and future markets outside of
Texas, for the foreseeable future a significant portion of the Company's
revenues may be subject to economic factors specific to Texas (including
Houston). In addition, while the Company believes that its market expansion
plans will eventually lessen or eliminate this risk in addition to generating
significant revenue growth, there can be no assurance that the Company will be
able to duplicate in other markets the revenue growth and operating results
experienced in its Texas (including Houston) markets. See
"Business -- Strategy."
COMPETITION AND NEW MARKET ENTRANTS
The PEO industry is highly fragmented, with approximately 2,000 companies
performing PEO services to some extent. Many of these companies have limited
operations and fewer than 1,000 worksite employees, but there are several
industry participants which are comparable in size to the Company. These
companies include Staff Leasing, Inc, headquartered in Bradenton, Florida,
Employee Solutions, Inc., headquartered in Phoenix, Arizona and The Vincam
Group, Inc., headquartered in Coral Gables, Florida. The Company also encounters
competition from "fee for service" companies such as payroll processing firms,
insurance companies and human resource consultants. Moreover, the Company
expects that as the PEO industry grows and its regulatory framework becomes
better established, well organized competition with greater resources than the
Company may enter the PEO market, possibly including large "fee for service"
companies currently providing a more limited range of services.
ADEQUACY OF ACCRUED WORKERS' COMPENSATION CLAIMS
Prior to November 1994, when the Company purchased a guaranteed cost
workers' compensation insurance policy, the Company maintained loss-sensitive
policies, effectively leaving primary liability for workers' compensation claims
with the Company. The Company maintains an accrual for workers' compensation
claims for the periods such policies were in place and bases the amount of such
accruals on periodic
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<PAGE> 15
reviews of open claims. While the Company believes all such open claims are
covered through an existing insurance contract, the Company cannot predict with
certainty whether the ultimate liability associated with these open claims will
exceed the limits of the insurance contract. Accordingly, future changes in
estimated amounts of the ultimate liability with respect to these claims could
have a material adverse effect on the Company's financial condition or results
of operations. See Note 1 of Notes to Consolidated Financial Statements.
QUARTERLY FLUCTUATIONS IN EARNINGS AND IMPACT OF EMPLOYMENT RELATED TAXES
The Company's operating results have historically fluctuated from quarter
to quarter. In addition, due to the timing of the assessment of employment
related taxes, the Company's gross profit margin typically improves from quarter
to quarter within each year with the first quarter generally the least
favorable. Employment related taxes are based on the cumulative earnings of
individual employees up to specified wage levels. Since the Company's revenues
related to worksite employees are earned and collected at a relatively constant
rate throughout each year, payment of such unemployment tax obligations has a
substantial impact on the Company's financial condition and results of
operations during the first six months of each year.
POTENTIAL CLIENT LIABILITY FOR EMPLOYMENT TAXES
Pursuant to the Company's Client Service Agreement with its clients, the
Company assumes sole responsibility and liability for the payment of federal
employment taxes imposed under the Code with respect to wages and salaries paid
to its worksite employees. There are essentially three types of federal
employment tax obligations: (i) income tax withholding requirements; (ii)
obligations under the Federal Income Contribution Act ("FICA"); and (iii)
obligations under the Federal Unemployment Tax Act ("FUTA"). Under the Code,
employers have the obligation to withhold and remit the employer portion and,
where applicable, the employee portion of these taxes. Most states impose
similar employment tax obligations on the employer. While the Client Service
Agreement provides that the Company has sole legal responsibility for making
these tax contributions, the IRS or applicable state taxing authority could
conclude that such liability cannot be completely transferred to the Company.
Accordingly, in the event the Company fails to meet its tax withholding and
payment obligations, the client company may be held jointly and severally liable
therefor. While this interpretive issue has not, to the Company's knowledge,
discouraged clients from enrolling with the Company, there can be no assurance
that a definitive adverse resolution of this issue would not do so in the
future.
DEPENDENCE ON KEY PERSONNEL
The Company's success is dependent upon the continued contributions of its
key management personnel, some of whom were founders of the Company. Many of the
Company's key personnel would be difficult to replace. The Company's executives
are not subject to noncompetition agreements.
EXPENSES ASSOCIATED WITH EXPANSION
Past and future operating results are impacted by the Company's market
expansion activities, including establishing and maintaining sales office
facilities, compensating newly hired sales associates and expanding advertising
efforts. The Company's operating results for 1993, 1994 and 1995 have included
$0.2 million, $1.0 million and $4.3 million, respectively, of operating expenses
incurred in new markets. For the nine months ended September 30, 1996, these
costs have totaled $4.5 million. The Company expects that investments in new
markets will continue at levels comparable to or greater than 1995 and 1996
through at least 1998, and that expenses in a new market will not be covered by
the gross profit from that market's revenues for approximately two years. While
the Company believes that its expansion program will ultimately lead to
increased profitability, there can be no assurance that losses or diminished
profitability will not be incurred in future periods as a result of the
Company's planned expansion or that such losses or diminished profitability will
not have a material adverse effect on the Company's results of operations or
financial condition.
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<PAGE> 16
FAILURE TO MANAGE GROWTH
The Company has experienced significant growth and expects such growth to
continue for the foreseeable future. The Company plans to enter at least one new
market or open at least one additional sales office in an existing market in
each quarter of 1997 and 1998. As described under the caption "-- Expenses
Associated with Expansion," expenses incurred in connection with the initial
expansion into new markets are significant. In addition, because each market
entry is affected by circumstances unique to its particular locale, there are
uncertainties associated with each new market entry. Accordingly, the Company's
expansion plan may place a significant strain on the Company's management,
financial, operating and technical resources. Failure to manage this growth
effectively could have a material adverse effect on the Company's financial
condition or results of operations.
NEED TO RENEW OR REPLACE CLIENT COMPANIES
The Company's standard Client Service Agreement has an initial one-year
term and is subject to cancellation on 30 days' notice by either the Company or
the client. Accordingly, the short-term nature of the Client Service Agreement
makes the Company vulnerable to potential cancellations by existing clients
which could materially and adversely 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 Client Service Agreement.
Historically, between 15% and 20% of the Company's clients have remained clients
for less than one year and there can be no assurance that the number of contract
cancellations will not increase in the future.
ANTI-TAKEOVER EFFECTS OF CERTAIN CHARTER AND BYLAW PROVISIONS AND DELAWARE LAW
The Company's Certificate of Incorporation and Bylaws include provisions
that may have the effect of discouraging proposals by third parties to acquire a
controlling interest in the Company, which could deprive stockholders of the
opportunity to consider an offer that would be beneficial to them. These
provisions include (i) a classified Board of Directors, (ii) the ability of the
Board of Directors to establish a rights plan, establish a sinking fund for the
purchase or redemption of shares, fix the number of directors and fill vacancies
on the Board of Directors, and (iii) restrictions on the ability of stockholders
to call special meetings, act by written consent or amend the foregoing
provisions. In addition, under certain conditions Section 203 of the General
Corporation Law of the State of Delaware (the "DGCL") would impose a three-year
moratorium on certain business combinations between the Company and an
"interested stockholder" (in general, a stockholder owning 15 percent or more of
a corporation's outstanding voting stock). The existence of such provisions may
have a depressive effect on the market price of the Common Stock in certain
situations. See "Description of Capital Stock -- Provisions Having Possible
Anti-takeover Effect."
CONTROL BY EXISTING STOCKHOLDERS
Immediately following this offering and the application of the proceeds
therefrom, the Company's officers, directors and principal stockholders will
beneficially own an aggregate of 9,661,551 shares of Common Stock of the
Company, constituting approximately 69.4% of the outstanding shares of Common
Stock (or such persons will beneficially own 9,251,380 shares, representing
approximately 66.6% of the outstanding shares, if the Underwriters'
over-allotment option is exercised in full). Accordingly, such persons will be
in a position to control actions that require the consent of a majority of the
Company's outstanding voting stock, including the election of directors. A
person beneficially owning more than one-fifth of the Company's outstanding
voting stock will be able to prevent certain actions that require the
affirmative vote of at least four-fifths of the Company's outstanding voting
stock. See "Principal and Selling Stockholders."
BROAD DISCRETION OVER USE OF PROCEEDS
Approximately $19.2 million, or 51.5%, of the estimated net proceeds from
the sale of the Common Stock offered hereby has been allocated to implement the
Company's expansion plan, to repay certain indebtedness and to repurchase Common
Stock and Common Stock warrants held by one of the Company's existing
15
<PAGE> 17
stockholders. The balance of the net proceeds (estimated to be approximately
$18.1 million) will be used for working capital purposes, which may include
acquisitions of existing PEO operations should favorable opportunities arise.
Accordingly, the Company will have broad discretion to allocate a significant
portion of the net proceeds from this offering without any action or approval of
the Company's stockholders. Therefore, investors in the Common Stock will not
have the opportunity to evaluate the economic, financial and other relevant
information that will be considered by the Company in determining the
application of such net proceeds. See "Use of Proceeds."
ABSENCE OF PRIOR TRADING MARKET; POTENTIAL VOLATILITY OF STOCK PRICE
Prior to this offering, there has been no public market for the Common
Stock. Although the Common Stock has been approved for listing on the NYSE,
there can be no assurance that an active trading market will develop for the
Common Stock or, if one does develop, that it will be maintained. The public
offering price of the Common Stock will be negotiated between the Company and
the representatives of the underwriters. See "Underwriters" for information
relating to the factors considered in determining the initial public offering
price. The market price of the shares of Common Stock could be highly volatile,
fluctuating in response to factors such as variations in the Company's operating
results, announcements of new services or market expansions by the Company or
its competitors, or developments relating to regulatory or other issues
affecting the PEO industry.
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of the Common Stock in the public market
following this offering could have an adverse effect on prevailing market prices
of the Common Stock. All of the shares of the Company's currently outstanding
Common Stock are eligible for sale pursuant to the exemption from registration
pursuant to Rule 144 under the Securities Act ("Rule 144"), subject to
applicable holding periods, volume and other limitations. In addition, after
giving effect to the use of proceeds described herein, certain holders of Common
Stock will have registration rights for an aggregate of up to 2,464,082 shares
of Common Stock. However, the officers, directors and certain other stockholders
of the Company have agreed with the underwriters not to sell any of their shares
for a period of 180 days from the date of this Prospectus without the prior
written consent of the representatives of the underwriters. Such stockholders
will beneficially own an aggregate of approximately 9,507,506 shares of Common
Stock upon the completion of this offering and after giving effect to the use of
proceeds described herein. Immediately after completion of this offering and the
application of the proceeds as described in "Use of Proceeds", a total of
3,000,000 shares of Common Stock (3,450,000 shares if the Underwriters'
over-allotment option is exercised in full) will be eligible for resale in the
public market without restriction. In addition, 90 days after the date of this
Prospectus approximately 869,823 of the currently outstanding shares of Common
Stock will be eligible for resale in accordance with Rule 144, and 180 days
after the date of this Prospectus an additional 9,507,506 of the currently
outstanding shares of Common Stock will be eligible for resale in accordance
with Rule 144. See "Shares Eligible for Future Sale."
DILUTION
Purchasers of the Common Stock offered hereby will experience immediate and
significant dilution (approximately $10.63 per share assuming an initial public
offering price of $14.00 per share of Common Stock) in the net tangible book
value of their shares. See "Dilution."
NO DIVIDENDS
The Company intends to retain all of its earnings to finance the expansion
of its business and for general corporate purposes and does not anticipate
paying any cash dividends on its Common Stock for the foreseeable future. In
addition, the Company's credit facility includes certain restrictions on the
ability of the Company to pay dividends. See "Dividend Policy" and "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
16
<PAGE> 18
THE COMPANY
The Company was originally organized in 1986 as a Texas corporation. Prior
to the consummation of this offering, the Company reorganized into Delaware by
completing a merger with a subsidiary of a Delaware corporation established by
the Company for this purpose. In conjunction with such merger, each of the
Company's stockholders exchanged their shares in the Texas corporation for
Common Stock of the Company on the basis of two shares of Common Stock for every
three shares of common stock of the Texas corporation. The Company's resulting
structure is that of a Delaware holding company whose only asset is the capital
stock of its operating subsidiary. All information in this Prospectus gives
effect to this reorganization.
The Company's corporate headquarters are located at 19001 Crescent Springs
Drive, Kingwood, Texas 77339-3802, and its telephone number is (281) 358-8986.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 3,000,000 shares of
Common Stock being offered by the Company hereby (assuming an offering price of
$14.00 per share, the midpoint of the price range set forth on the cover of this
Prospectus, and after deducting estimated underwriting discounts and commissions
and estimated expenses of $1.75 million) are estimated to be $37.3 million. Of
these proceeds, the Company currently expects to allocate approximately $12.0
million to support expansion of the Company's operations, including the opening
of sales offices in new geographic markets as well as in established markets
and, as favorable opportunities arise, expansion of the Company's client base in
new or existing markets through an acquisition of an existing PEO office. The
Company believes that this allocation will be sufficient to fund the Company's
expansion plans through 1997 and 1998. In addition, the Company intends to
utilize approximately $7.2 million of such proceeds as follows: (i) $4.0 million
to repay all of its 13% Subordinated Notes (the "Notes") held by the Board of
Trustees of the Texas Growth Fund, as Trustee for the Texas Growth Fund-1991
Trust ("TGF"), (ii) approximately $2.5 million to exercise its option to
repurchase 348,945 shares of Common Stock from Pyramid Ventures, Inc. ("PVI")
and its option to repurchase 173,609 warrants to purchase shares of Common Stock
from TGF, and (iii) approximately $0.7 million to retire the current balances of
certain secured loans (the "Secured Loans") incurred in connection with the
purchase of real estate for the Company's headquarters. The balance of the
proceeds (estimated to be approximately $18.1 million), will be used for working
capital purposes, which may include acquisitions of existing PEO operations
should favorable acquisition opportunities arise. The Company does not have any
agreement, arrangement or understanding regarding acquisitions of existing PEO
operations or any amounts budgeted for such acquisitions, and any funds expended
on such acquisitions would be in addition to funds expended in conjunction with
the Company's expansion plans. Pending the application of such funds, the
Company intends to invest the net proceeds of this offering in diversified,
highly-liquid, investment grade, interest-bearing instruments.
The Notes, which are to be redeemed pursuant to optional prepayment
provisions, mature in May 1999 and accrue interest at an annual rate of 13%
payable quarterly. The Secured Loans consist of three separate notes ranging
from $73,000 to $462,000 in outstanding principal amount, with payments
aggregating from approximately $11,000 to $84,000 annually, and with interest
rates ranging from approximately 8.4% to 9.25% as of September 30, 1996. See
Note 3 of Notes to Consolidated Financial Statements (unaudited) for the Interim
Period Ended September 30, 1996.
In the event that the Underwriters' over-allotment option is exercised, the
Company will not receive any proceeds from the sale of shares of Common Stock by
the Selling Stockholders.
17
<PAGE> 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. In addition, the Company's $10 million revolving
credit agreement prohibits the payment of dividends or other distributions on
the Common Stock, except that, so long as no default exists thereunder and,
after giving effect to such dividend or distribution, will exist thereunder, the
Company may pay dividends on its Common Stock. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
September 30, 1996, and the capitalization as of such date as adjusted to give
effect to (i) the sale of the 3,000,000 shares of Common Stock offered by the
Company hereby (assuming an offering price of $14.00 per share) and (ii) the
application of the net proceeds therefrom as described in "Use of Proceeds."
This table should be read in conjunction with the Consolidated Financial
Statements of the Company and the Notes thereto included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30,
1996
---------------------
AS
ACTUAL ADJUSTED
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Total debt(1)......................................................... $ 4,648 $ --
Stockholders' equity:
Preferred stock, par value $0.01 per share
Shares authorized -- 20,000,000
Shares issued and outstanding -- none............................ -- --
Common stock, par value $0.01 per share
Shares authorized -- 60,000,000
Shares issued and outstanding -- 10,726,274 and 13,377,329,
respectively(2)................................................. 107 137
Additional paid-in capital(3)....................................... 5,706 42,449
Retained earnings................................................... 5,490 5,490
Less treasury stock, at cost (348,945 shares of common stock, as
adjusted)........................................................ -- (2,000)
-------- --------
Total stockholders' equity....................................... 11,303 46,076
-------- --------
Total capitalization.................................................. $ 15,951 $ 46,076
======== ========
</TABLE>
- ---------------
(1) Includes current maturities of $74,000. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources" and Note 3 of Notes to Consolidated Financial Statements
for information regarding the Company's long term debt.
(2) The number of shares to be outstanding after the offering gives effect to
the repurchase of Common Stock and Common Stock warrants as described under
"Use of Proceeds," and excludes the 1,027,613 shares of Common Stock
issuable upon the exercise of options and warrants which will remain
outstanding after consummation of the offering.
(3) Additional paid-in capital, as adjusted, includes a reduction of $0.5
million to reflect the repurchase of 173,609 Common Stock warrants from TGF.
18
<PAGE> 20
DILUTION
The net tangible book value of the Company's Common Stock as of September
30, 1996 was $10.3 million, or $0.96 per share. Net tangible book value per
share represents the amount of total tangible assets less total liabilities,
divided by the number of shares of Common Stock outstanding. After giving effect
to the sale of shares of Common Stock offered by the Company hereby at an
assumed initial public offering price of $14.00 per share and receipt of the
estimated net proceeds therefrom, the net tangible book value of the Company as
of September 30, 1996 would have been $45.0 million, or $3.37 per share,
representing an immediate increase in net tangible book value of $2.41 per share
to existing stockholders and an immediate dilution of $10.63 per share to new
investors purchasing shares at the assumed initial public offering price. The
following table illustrates the resulting per share dilution with respect to the
shares of Common Stock offered hereby:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.................. $14.00
Net tangible book value per share before offering.............. $0.96
Increase per share attributable to new investors............... 2.41
-----
Net tangible book value per share after offering................. 3.37
------
Dilution per share to new investors.............................. $10.63
======
</TABLE>
The following table summarizes the differences, on a pro forma basis as of
September 30, 1996, between the existing stockholders and the new investors with
respect to the number of shares purchased from the Company, the total
consideration paid and the average price per share paid (based upon an assumed
initial public offering price of $14.00 per share for new investors):
<TABLE>
<CAPTION>
AVERAGE
SHARES PURCHASED TOTAL CONSIDERATION PRICE
--------------------- ---------------------- PER
NUMBER PERCENT AMOUNT PERCENT SHARE
---------- ------- ----------- ------- -------
<S> <C> <C> <C> <C> <C>
Existing stockholders............... 10,377,329 78% $ 5,663,000 12% $ 0.55
New investors....................... 3,000,000 22% 42,000,000 88% 14.00
---------- ---- ----------- ---- -------
Total..................... 13,377,329 100% $47,663,000 100% $ 3.56
========== ==== =========== ==== =======
</TABLE>
The tables assume no exercise of any outstanding options or warrants to
purchase Common Stock. To the extent such options or warrants are exercised,
there will be further dilution to new investors.
19
<PAGE> 21
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The following selected historical consolidated financial data should be
read in conjunction with the Consolidated Financial Statements, including the
Notes thereto, and "Management's Discussion and Analysis of Financial Condition
and Results of Operations." The statement of operations data set forth below
with respect to the years ended December 31, 1993, 1994 and 1995 and the balance
sheet data as of December 31, 1994 and 1995 are derived from, and are qualified
by reference to, the audited consolidated financial statements included
elsewhere in this Prospectus. The statement of operations data for the years
ended December 31, 1991 and 1992 and the balance sheet data as of December 31,
1991, 1992 and 1993 are derived from audited consolidated financial statements
not included herein. The statement of operations data for the nine months ended
September 30, 1995 and 1996 and the balance sheet data as of September 30, 1996
are unaudited. The unaudited results of operations for the nine months ended
September 30, 1996 are not necessarily indicative of results expected for the
full year. (See "Management's Discussion and Analysis of Financial Condition and
Results of Operation -- Nine Months Ended September 30, 1996 Compared to Nine
Months Ended September 30, 1995.")
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30,
YEAR ENDED DECEMBER 31, (UNAUDITED)
-------------------------------------------------------- --------------------
1991 1992 1993 1994 1995 1995 1996
-------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT FOR PER SHARE AND STATISTICAL DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues(1).............................. $300,051 $409,046 $496,058 $564,459 $716,210 $505,619 $635,252
Direct costs(1):
Salaries and wages of worksite
employees............................ 241,471 328,223 397,662 453,750 582,893 408,379 517,820
Benefits and payroll taxes............. 49,542 67,272 78,614 85,513 104,444 76,964 91,307
-------- -------- -------- -------- -------- -------- --------
Gross profit............................. 9,038 13,551 19,782 25,196 28,873 20,276 26,125
Operating expenses:
Salaries, wages and payroll taxes...... 3,090 5,077 6,136 8,094 10,951 8,055 10,475
General and administrative expenses.... 3,008 4,788 5,571 5,648 7,597 5,497 5,937
Commissions............................ 1,787 2,569 2,975 3,231 3,942 2,908 2,939
Advertising............................ 849 888 1,612 1,797 3,268 2,125 2,488
Depreciation and amortization.......... 260 282 361 567 894 627 1,063
-------- -------- -------- -------- -------- -------- --------
Total operating expenses............... 8,994 13,604 16,655 19,337 26,652 19,212 22,902
-------- -------- -------- -------- -------- -------- --------
Operating income (loss)(2)............... $ 44 $ (53) $ 3,127 $ 5,859 $ 2,221 $ 1,064 $ 3,223
Net income(2)............................ $ 70 $ 33 $ 1,949 $ 3,766 $ 1,116 $ 617 $ 614(3)
Net income per share(4).................. $ 0.01 $ 0.00 $ 0.22 $ 0.37 $ 0.10 $ 0.06 $ 0.06(3)
Weighted average shares outstanding(4)... 6,439 8,591 8,848 10,347 10,817 10,767 10,873
Supplemental net income per share(5)..... $ 0.16 $ 0.10
STATISTICAL DATA:
Worksite employees at period end(6)...... 11,380 13,490 15,165 15,780 20,502 20,124 22,993
Client companies at period end........... 501 598 687 809 1,130 1,085 1,441
Gross payroll per employee per
month(7)............................... $ 1,823 $ 1,919 $ 2,117 $ 2,268 $ 2,331 $ 2,297 $ 2,522
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------------------------------------- 1996
1991 1992 1993 1994 1995 (UNAUDITED)
-------- -------- -------- -------- -------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET:
Working capital................................ $ (4,049) $ (2,431) $ (2,340) $ 8,797 $ 4,737 $ 3,303
Total assets................................... 18,096 19,929 19,401 41,081 39,474 45,134
Total debt..................................... 5,077 1,502 1,196 5,007 4,679 4,648
Total stockholders' equity (deficit)........... (1,834) (1,371) 569 8,056 10,689 11,303
</TABLE>
- ---------------
(1) Revenues consist of service fees paid by the Company's clients under its
Client Service Agreements. In consideration for payment of such service
fees, the Company agrees to pay the following direct costs associated with
the worksite employees: (i) salaries and wages, (ii) employment related
taxes, (iii) employee benefit plan premiums, (iv) workers' compensation
insurance premiums and (v) administrative costs and related expenses.
20
<PAGE> 22
(2) Operating income (loss) and net income include the effects of expenses
associated with the Company's expansion plan which began in 1993. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
(3) For the nine months ended September 30, 1996, net income and net income per
share were $1,791,000 and $0.16, respectively, excluding the impact of a
non-recurring charge relating to certain issues involving the failure of the
Company's 401(k) Plan to comply with certain nondiscrimination tests
required by the Code, which impact has been adjusted for income taxes and is
net of amounts recoverable from the 401(k) Plan record keeper. See "Risk
Factors -- Costs of 401(k) Plan Compliance," "Industry
Regulation -- Employee Benefit Plans" and Note 4 of Notes to Consolidated
Financial Statements (unaudited) for the nine months ended September 30,
1996.
(4) Computed as described in Note 1 of Notes to Consolidated Financial
Statements.
(5) Computed as described in Note 11 of Notes to Consolidated Financial
Statements.
(6) Reflects the number of employees paid during the last month of the period
shown.
(7) Excludes bonus payroll of worksite employees, which is not subject to the
Company's normal service fee.
21
<PAGE> 23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with, and is
qualified in its entirety by, the Company's Consolidated Financial Statements
and Notes thereto included elsewhere in this Prospectus. Historical results are
not necessarily indicative of trends in operating results for any future period.
OVERVIEW
Administaff provides a comprehensive personnel management system
encompassing a broad range of services, including personnel management, benefits
and payroll administration, medical and workers' compensation insurance
programs, tax filings, personnel records management, liability management and
related human resource service. The Company has current operations in 10
markets, including Houston, San Antonio, Austin, Orlando, Dallas, Atlanta,
Phoenix, Chicago, Baltimore/Washington, D.C. and Denver. Prior to October 1993,
the Company's revenues were primarily the result of sales and marketing activity
in the Houston market. In October 1993 the Company opened a sales office in
Dallas as the first step in implementing a long-term internal growth and
expansion strategy. Subsequent to obtaining expansion capital in May 1994, sales
offices were opened in Atlanta and Phoenix in accordance with Administaff's
market expansion plan. In the first half of 1995, the Company established a
presence in Chicago both by entering into a referral agreement with an
unaffiliated PEO organization and by opening a sales office. The Company
completed the scheduled opening of its Baltimore/Washington, D.C. office in
October 1995, opened a second office in Dallas in January 1996, and a new office
in Denver in September 1996. The costs associated with this expansion into new
markets (which for the purposes hereof refers to Dallas and subsequently opened
markets) have been significant and have affected the results of operations for
1994, 1995 and the first nine months of 1996.
REVENUES
Administaff's clients enter into a Client Service Agreement which
establishes a three-party relationship among the Company, the client and the
worksite employees. The agreement provides for an initial one year term, subject
to cancellation on 30 days' notice by either the Company or the client, and sets
forth the service fee payable to the Company. Such service fee, which
constitutes the Company's revenues, is based on the gross payroll of each
employee plus the estimated costs of employment related taxes, providing human
resource services, performing administrative functions, providing insurance
coverages and benefit plans and performing other services offered by the
Company. This structure yields a comprehensive service fee percentage to be
applied to each employee's gross pay. These fees are invoiced along with each
periodic payroll. Pursuant to the Client Service Agreement, the Company has the
obligation to provide the benefits and services enumerated in that agreement as
well as to pay the direct costs associated with such services, regardless of
whether the client company makes timely payment to the Company of the associated
service fee. The most significant direct costs associated with each Client
Service Agreement are the salaries and wages of worksite employees which
generally are disbursed promptly after the applicable client service fee is
received. For a description of additional direct costs, see "-- Direct Costs"
below.
The Company's revenues are dependent on the number of clients enrolled, the
resulting number of employees paid each period, the gross payroll of such
employees and the number of employees enrolled in benefit plans. The Company's
expansion program is designed to broaden the scope of the Company's sales and
marketing efforts into new, strategically selected markets, where the Company's
objective is to duplicate the sales and marketing success experienced in the
Houston market to date. The Company has expanded its sales force from 22 at
December 31, 1993 to 80 at September 30, 1996. In addition to the Denver office
opened in September 1996, the Company expects to open at least one new market or
one additional sales office in existing markets in each quarter during 1997 and
1998. The Company further expects that each new sales office will have a staff
of six to ten sales associates.
22
<PAGE> 24
DIRECT COSTS
The Company's primary direct costs are (i) the salaries and wages of
worksite employees (payroll cost), (ii) employment related taxes, (iii) employee
benefit plan premiums and (iv) workers' compensation insurance premiums.
Salaries and wages of worksite employees are affected by the inflationary
effects on wage levels and by differences in the local economies of the
Company's markets. Changes in payroll costs have a proportionate impact on the
Company's revenues.
Employment related taxes consist of the employer's portion of payroll taxes
required under FICA, which includes Social Security and Medicare, and federal
and state unemployment taxes. The federal tax rates are defined by the
appropriate federal regulations. State unemployment rates are subject to claims
histories and vary from state to state.
Employee benefit costs are comprised primarily of medical insurance costs
but also include costs of other employee benefits such as prescription card,
vision care, disability insurance and an employee assistance plan.
Workers' compensation costs include premiums, administrative costs and
claims related expenses under the Company's workers' compensation program.
Currently, the Company is insured under a guaranteed cost plan whereby monthly
premiums are paid for coverage of all accident claims occurring during the
policy period. Prior to November 1994, the Company had been insured under two
other types of workers' compensation policies: a retrospective rating plan,
whereby monthly premiums were paid to the insurance carrier based on estimated
actual losses plus an administrative fee and a high deductible paid loss plan,
whereby monthly premiums were paid based on a $500,000 deductible per
occurrence. Costs related to these prior plans include estimates of ultimate
claims amounts that are recorded as accrued workers' compensation claims.
Changes in these estimates are reflected as a component of direct costs in the
period of the change.
The Company's gross profit margin is determined in part by its ability to
accurately estimate and control direct costs and its ability to incorporate such
costs into the service fees charged to clients. The Company attempts to reflect
changes in the primary direct costs through adjustments in service fees charged
to clients, subject to contractual arrangements.
OPERATING EXPENSES
The Company's primary operating expenses are salaries, wages and payroll
taxes of both corporate employees and sales associates, general and
administrative expenses and sales and marketing expenses. Prior to October 1993,
all of the Company's operating expenses were incurred through its corporate
offices in Houston. As a result of the Company's market expansion program,
however, operating expenses have increased significantly. The increases include
expenses associated with establishing and maintaining each new sales office
facility, the increased compensation related expenses of newly hired sales
associates and expansion of the Company's advertising efforts. In addition, the
anticipated growth as a result of the sales expansion is also reflected in
increased corporate operating expenses to provide expansion of the Company's
service capacity. The Company expects that the investment in new markets will
continue at a level comparable to or greater than 1995 and 1996 through at least
1998.
INCOME TAXES
The Company's provision for income taxes typically differs from the U.S.
statutory rate of 34% due primarily to state income taxes. Deferred income taxes
reflect the net tax effects of temporary differences between the carrying
amounts of assets and liabilities used for financial reporting purposes and the
amounts used for income tax purposes. Significant items resulting in deferred
income taxes include accrued workers' compensation claims, depreciation and
amortization, state income taxes, client list acquisition costs, allowance for
uncollectible accounts receivable, net operating loss carryforwards and other
accrued liabilities. Changes in these items are reflected in the Company's
financial statements though the Company's deferred income tax provision.
23
<PAGE> 25
QUARTERLY OPERATING RESULTS
The Company's revenues have generally increased on a quarter-to-quarter
basis. Revenues in the fourth quarter of each year include the effects of bonus
payrolls of worksite employees, which are substantially higher in December of
each year. Gross profit margin typically improves from quarter to quarter within
a year, with the first quarter generally the least favorable. Employment related
taxes are based on the cumulative earnings of individual employees up to a
specified wage level. Therefore, these expenses tend to decline over the course
of the year. Since the Company's revenues related to an individual employee are
earned and collected at a relatively constant rate throughout each year, payment
of such unemployment tax obligations has a substantial impact on the Company's
working capital and results of operations during the first six months of each
year. Other factors affecting the primary components of direct cost have
enhanced or mitigated this tendency. Examples of these factors include the
effects of trends in medical and workers' compensation claims, adjustments to
benefit premiums and changes in the types of benefit plans and workers'
compensation programs. In addition, beginning in October 1993, operating income
and net income have been affected by expenses incurred to open new markets and
to increase sales and service capacity and, in the third quarter of 1996, net
income was affected by a non-recurring charge relating to certain issues
involving the failure of the Company's 401(k) Plan to comply with certain
nondiscrimination tests required by the Code. See "Risk Factors -- Costs of
401(k) Plan Compliance," "Industry Regulation -- Employee Benefit Plans" and
Note 4 of Notes to Consolidated Financial Statements (unaudited) for the interim
period ended September 30, 1996.
The following table presents certain unaudited results of operations data
for the interim quarterly periods from 1994 through the third quarter of 1996.
The Company believes that all adjustments, consisting only of normal recurring
adjustments, necessary to present fairly the results of operations in accordance
with generally accepted accounting principles, have been made. The results of
operations for any interim period are not necessarily indicative of the
operating results for a full year or any future period.
<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------------------------------------------------------------------------------------------
1994 1995 1996
----------------------------------------- ----------------------------------------- ------------------------------
MAR. 31 JUNE 30 SEPT. 30 DEC. 31 MAR. 31 JUNE 30 SEPT. 30 DEC. 31 MAR. 31 JUNE 30 SEPT. 30
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
(OPERATING RESULTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues... $128,875 $135,660 $141,929 $157,995 $158,223 $167,064 $180,332 $210,591 $194,336 $209,726 $231,190
Gross
profit... 2,934 7,511 7,602 7,149 4,761 6,704 8,811 8,597 6,189 8,651 11,285
Gross
profit
margin... 2.3% 5.5% 5.4% 4.5% 3.0% 4.0% 4.9% 4.1% 3.2% 4.1% 4.9%
Operating
income
(loss)... (1,094) 3,070 2,744 1,139 (1,675) 67 2,672 1,157 (1,302) 1,049 3,476
Net income
(loss)... (631) 1,887 1,738 772 (1,149) 47 1,718 500 (909) 552 971
</TABLE>
RECENT DEVELOPMENTS
The Company expects to report the following results for the three months
and year ended December 31, 1996:
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
-------------------------------- --------------------------------
1995 1996 CHANGE 1995 1996 CHANGE
-------- -------- ------ -------- -------- ------
(OPERATING RESULTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Revenues............ $210,591 $264,344 25.5% $716,210 $899,596 25.6%
Gross profit........ 8,597 11,731 36.4% 28,873 37,856 31.1%
Gross profit
margin............ 4.1% 4.4% 4.0% 4.2%
Operating income.... 1,157 3,254 181.2% 2,221 6,477 191.6%
Net income.......... 500 1,989 297.8% 1,116 2,603 133.2%
Net income per
share(1).......... $ 0.05 $ 0.17 240.0% $ 0.10 0.24 140.0%
</TABLE>
- ---------------
(1) Net income per share has been computed as described in Note 1 of Notes to
Consolidated Financial Statements.
24
<PAGE> 26
The increase in revenues for the fourth quarter and full year is
attributable to an increase in worksite employees paid over the prior periods of
approximately 16% and 15%, respectively, accompanied by an increase in revenue
per employee over the prior periods of approximately 10% and 9%, respectively.
The growth in worksite employees paid is due principally to the continuing
effects of the Company's expansion plan. The increase in revenue per employee
reflects the continued net addition of worksite employees with higher average
base pay to the existing client base. The improvement in gross profit margin for
the quarterly and full year periods resulted primarily from declines in
unemployment taxes and workers compensation costs as a percent of payroll cost.
The increases in operating income are the result of the factors noted above
combined with a decline in operating expenses as a percent of revenue compared
to the prior periods. For the full year period, operating expenses decreased
from 3.7% of revenues in 1995 to 3.5% in 1996.
The increase in net income for the year ended December 31, 1996 versus
December 31, 1995 of $1.5 million, or 133.2%, is due to the factors which
resulted in increased operating income, partially offset by the effects of a
non-recurring charge in the third quarter for certain 401(k) Plan issues, net of
amount recoverable from the 401(k) Plan record keeper. See "Risk
Factors -- Costs of 401(k) Plan Compliance", Industry Regulation -- Employee
Benefit Plans" and Note 4 of Notes to Consolidated Financial Statements
(unaudited) for the nine months ended September 30, 1996. Excluding the
non-recurring third quarter charge and the related income tax effects of such
charge, net income would have been $3.8 million (or $0.35 per share) in 1996 as
compared to $1.1 million (or $0.10 per share) in 1995.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1995.
The following table presents certain information related to the Company's
results of operations for the interim periods ended September 30, 1996 and 1995.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------
1995 1996 CHANGE
--------- -------- ------
(OPERATING RESULTS IN THOUSANDS)
<S> <C> <C> <C>
OPERATING RESULTS:
Revenues.................................................. $ 505,619 $635,252 25.6%
Gross profit.............................................. 20,276 26,125 28.9%
Gross profit margin....................................... 4.0% 4.1%
Operating income.......................................... 1,064 3,223 202.9%
STATISTICAL DATA:
Monthly revenue per worksite employee..................... $ 2,867 $ 3,117 8.7%
Monthly payroll cost per worksite employee................ 2,297 2,522 9.8%
Monthly gross markup per worksite employee................ 570 595 4.4%
Average number of worksite employees paid per month during
period................................................. 18,849 21,721 15.2%
</TABLE>
Revenues
The Company's revenues increased 25.6% over the comparable nine month
period in 1995 due to an increased number of worksite employees paid during the
period and an increase in the revenue per employee. The Company's continued
expansion of its sales force through new market and sales office openings is the
primary factor contributing to the increased number of worksite employees. The
Company's new markets contributed approximately $151 million of the Company's
total revenues for the first nine months of 1996 versus approximately $72
million for the same period in 1995. In addition, the 1995 period includes
approximately 1,400 new employees enrolled through a referral agreement with an
unaffiliated PEO in Chicago. The Company added to its sales force in the Dallas
market in January 1996 and the Denver market in September 1996 and expects
continued growth in the number of worksite employees throughout the remainder of
1996 due to the continued effect of sales in existing markets and expansion into
new markets.
25
<PAGE> 27
The increase in revenue per employee of 8.7% directly relates to increases
in payroll cost per employee of 9.8%. This increase reflects the continuing
effects of the net addition, through the Company's sales efforts, of worksite
employees with higher average base pay than the existing client base.
Gross Profit Margin
The Company's gross profit margin increased from 4.0% for the first nine
months of 1995 to 4.1% for the first nine months of 1996. The primary factors
contributing to the increased gross profit margin were a decrease in
unemployment taxes relative to payroll cost and a slight decrease in the cost of
providing employee benefits as a percent of revenue. These factors were
partially offset by a decrease in the gross markup per person as a percent of
revenue.
Employment related taxes as a percent of payroll cost declined from 8.5% in
the first nine months of 1995 to 7.6% for the same period in 1996. This
reduction was primarily due to reduced unemployment tax expense in the State of
Texas. The Company's unemployment tax rate in the State of Texas was
substantially lower in 1996 than 1995 due to the effects of a reorganization of
the Company's operating subsidiaries completed on January 1, 1996.
The cost of providing employee benefits was slightly lower in 1996 versus
the same period in 1995 primarily due to decreased workers' compensation costs.
Workers' compensation costs decreased from 2.5% of payroll cost during the first
nine months of 1995 to 2.0% of payroll cost in the same period in 1996. This
reduction was due to the overall rate on the Company's fixed premium policy in
effect during 1996 being lower than the previous policy. The Company has
recently renewed its workers' compensation policy at a slightly lower rate, and
such policy is in effect through October 31, 1997. These rate reductions reflect
a reduced risk sensitivity of the current composition of the Company's client
base. In addition, the 1995 period included adjustments to accrued workers'
compensation claims relating to high deductible paid loss policies in place
prior to November 1994, which adjustments were not present in the 1996 period.
Medical plan premiums increased only slightly as a percent of revenues from 6.0%
in the first nine months of 1995 to 6.1% in the 1996 period.
The markup per employee, while increasing 4.4%, decreased as a percent of
revenue from 19.8% in the 1995 period to 19.1% in the 1996 period. This
reduction was primarily due to the continued addition of higher wage, less risk
sensitive employees on which the Company charges lower overall rates as a
percentage of gross payroll.
Operating Expenses
Operating expenses decreased slightly as a percent of revenue from 3.8% in
the first nine months of 1995 to 3.6% for the comparable period in 1996. Total
operating expenses increased 19.2% while revenues and gross profit increased
25.6% and 28.9%, respectively. The overall increase in operating expenses can be
attributed to the following factors: (1) increased compensation related costs
(salaries, wages and payroll taxes and commissions) which increased in
proportion to revenues; (2) increased advertising expenses; and (3) increased
depreciation and amortization expense. General and administrative expenses were
slightly higher than the 1995 period. The factors noted above include the
effects of continued significant operating expenses in new markets. These costs
totaled $4.5 million for the nine months ended September 30, 1996 versus $2.8
million for the comparable period in 1995. Excluding the impact of expenses
incurred in the new markets, operating expenses as a whole increased only $1.9
million, or 10.0% as compared to the same 1995 period.
Total compensation costs, which include salaries, wages, payroll taxes and
commissions, increased 22.4% compared to the same period in 1995. Salaries and
wages increased at a higher rate while commissions were relatively unchanged due
to a restructuring of the Company's sales compensation plan to a more salary
based system. Overall, corporate staff, including sales personnel, increased
13.9% versus the same period in 1995. This increase is primarily due to
increased sales personnel and continued increases in corporate service capacity
during the second half of 1995. Since December 31, 1995, the corporate staff
level has remained relatively constant and is expected to increase only slightly
through the end of 1996.
26
<PAGE> 28
Advertising expenses increased by 17.1% primarily due to planned increases
relative to overall growth and expansion into new markets.
Depreciation and amortization expense increased 69.5% over the same 1995
period. The Company placed into service a new corporate facility in February
1996 which has resulted in higher depreciation and amortization expense for the
nine month period as compared to 1995. In addition, capital expenditures
incurred during the previous 12 months related to the opening of new sales
offices as part of the Company's market expansion process and increases in
corporate service capacity contributed to the increase.
General and administrative expenses as a percent of revenue declined
slightly versus the comparable 1995 period from 1.1% to 0.9%. This trend is due
to the Company's focused efforts to contain costs in its selling, service and
administrative functions.
Net Income
Interest expense increased $233,000 due to financing charges related to the
payment plan for the Company's annual workers' compensation insurance policy and
short-term borrowings on the Company's revolving line of credit. Interest income
decreased $38,000 versus the first nine months of 1995 due to lower level of
funds available to invest during the period.
Other net includes a non-recurring charge relating to certain issues
involving the failure of the Company's 401(k) Plan to comply with certain
nondiscrimination tests required by the Code, which charge is net of amounts
recoverable from the 401(k) Plan record keeper. See "Risk Factors -- Costs of
401(k) Plan Compliance," "Industry Regulation -- Employee Benefit Plans" and
Note 4 of Notes to Consolidated Financial Statements (unaudited) for the nine
months ended September 30, 1996.
The Company's provision for income taxes, which includes the effects of the
non-recurring charge for 401(k) Plan issues, differs from the U.S. statutory
rate of 34% due primarily to certain portions of the non-recurring charge being
non-deductible for income tax purposes. In addition, the Company's provision for
income taxes differs from the U.S. statutory rate due to state income taxes.
Net income for the first nine months was $0.6 million. Excluding the
non-recurring charge and the related income tax effects of such charge, net
income would have been $1.8 million versus $0.6 million for the same period in
1995. The increased net income, excluding the non-recurring charge, as compared
with the 1995 period is attributable to the increased gross profit resulting
from the Company's overall revenue growth combined with slower growth in overall
operating expenses as discussed above.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
The following table represents certain information related to the Company's
results of operations for the years ended December 31, 1994 and 1995.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1994 1995 CHANGE
-------- -------- ------
(OPERATING RESULTS IN THOUSANDS)
<S> <C> <C> <C>
OPERATING RESULTS:
Revenues............................................... $564,459 $716,210 26.9%
Gross profit........................................... 25,196 28,873 14.6%
Gross profit margin.................................... 4.5% 4.0%
Operating income....................................... 5,859 2,221 (62.1)%
STATISTICAL DATA:
Monthly revenue per worksite employee.................. $ 2,860 $ 2,904 1.5%
Monthly payroll cost per worksite employee............. 2,268 2,331 2.8%
Monthly gross markup per worksite employee............. 592 573 (3.2)%
Average number of worksite employees paid per month.... 15,500 19,255 24.2%
</TABLE>
27
<PAGE> 29
Revenues
The Company's revenues increased 26.9% over 1994 due primarily to an
increased number of worksite employees paid during the period. The Company
continued to expand its sales force in late 1994 and throughout 1995 by opening
sales offices in Atlanta (October 1994), Phoenix (January 1995), Chicago (April
1995) and Washington, D.C. (October 1995). These sales offices, along with the
continued maturation of the Dallas sales office (opened in the fourth quarter of
1993) were the primary factors contributing to the increased number of worksite
employees. The Company's new markets contributed $109.8 million of the Company's
1995 total revenues. In addition, in January 1995, the Company enrolled, through
a referral agreement with an unaffiliated professional employer organization in
Chicago, approximately 1,400 worksite employees which also contributed to the
increase over 1994. Revenue per employee increased only slightly versus 1994.
Gross Profit Margin
Gross profit margin decreased from 4.5% in 1994 to 4.0% in 1995. The
factors that caused this decline were a decline in the gross markup per worksite
employee (the net of revenue per worksite employee and payroll cost per worksite
employee) partially offset by a reduction, as a percent of revenue, in the costs
of providing employee benefits.
The monthly revenue per worksite employee increased slightly during 1995
compared to 1994. The monthly payroll cost per worksite employee increased at a
greater rate than the increased revenue per worksite employee in the same period
resulting in a 3.2% reduction in the gross markup per worksite employee. This
reduction reflects the effects of a shift in the relative mix of worksite
employees paid by the Company to higher wage, less risk sensitive employees on
which the Company charges lower overall rates as a percentage of gross payroll.
The reduction in employee benefits costs relative to revenues was primarily
due to a reduction in workers' compensation costs partially offset by increased
medical plan premiums. Workers' compensation costs declined primarily due to the
Company's conversion to a guaranteed cost policy in the fourth quarter of 1994
from the previous high deductible paid loss policy. The high deductible paid
loss policy resulted in increases to accrued workers' compensation claims which
were significantly higher during 1994 than during 1995. In addition, during the
third quarter of 1995, the Company settled the remaining outstanding claims
under certain retrospective rating policies in effect in prior years resulting
in a $1 million reduction in overall workers' compensation costs during 1995.
Medical plan premiums increased compared to 1994 as favorable medical claims
experience during 1993 and early 1994 resulted in reduced health insurance
premiums during much of 1994.
Employment related taxes relative to payroll costs increased slightly due
to state unemployment tax rate increases.
Operating Expenses
The Company's operating income decreased from $5.9 million in 1994 to $2.2
million in 1995. In addition to the decline in gross profit margin discussed
above, operating expenses increased from 3.4% of revenue in 1994 to 3.7% of
revenue in 1995. The increase in operating expenses relative to revenues can be
attributed primarily to increased salaries, wages and payroll taxes and the
selling, advertising and other general and administrative expenses incurred in
connection with the Company's market expansion plan.
The operating expenses associated with the Company's market expansion plan
consist of those incurred in the new markets and those necessary for expansion
of sales and service capacity to meet expected growth. Expenses incurred in new
markets generally commence 90 days prior to the opening of a new sales office.
The Company generally expects the expenses in a new market to be covered by the
gross profit from that market's revenues within approximately two years. The
expenses in each new market are comprised of salaries, payroll taxes, benefits,
recruiting and training costs of newly hired sales associates, advertising and
public relations
28
<PAGE> 30
costs and general office expenses. These expenses for 1995 totaled approximately
$4.3 million versus $987,000 in 1994.
Costs associated with the expansion of sales and service capacity primarily
relate to the addition of corporate employees and other general and
administrative expenses. Excluding expenses directly incurred in new markets,
salaries, wages and payroll taxes increased $2.1 million during 1995 over those
incurred in 1994. The Company's average staff increased from 221 for 1994 to 320
for 1995. These increases reflected both an increase in the size of the
Company's sales force, from 22 at January 1, 1994 to 84 at December 31, 1995,
and an increase in the corporate infrastructure to manage the overall growth of
the Company.
Advertising expenses in the Company's expansion markets were $1.8 million
in 1995 versus $516,000 during 1994. The Company's total advertising expenses
increased by $1.5 million, or 82%, over 1994.
The higher level of revenues during 1995 also contributed to an increase of
approximately $711,000 for sales commissions. Such increase did not represent a
significant change from costs incurred during 1994 when considered as a percent
of payroll costs of worksite employees.
Depreciation and amortization expense increased $327,000 in 1995 as
compared to 1994 due to capital expenditures incurred in connection with the
establishment of a disaster recovery computer and operations center and the
opening of new sales offices as part of the Company's market expansion plan.
Net Income
Interest expense increased $289,000 over 1994 due to a full year of
interest on the $4,000,000 subordinated debt borrowings compared to only seven
months in 1994. Interest income increased $219,000 over 1994 due to higher level
of funds available for investment during the period.
The Company's provision for income taxes differs from the U.S. statutory
rate of 34% primarily due to state income taxes.
Net income for 1995 was $1.1 million versus $3.8 million in 1994. The
decline in net income is attributable primarily to a decline in the overall
gross profit margin combined with increases in operating expenses associated
with the Company's market expansion plan as discussed above.
YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993
The following table represents certain information related to the Company's
results of operations for the years ended December 31, 1993 and 1994.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1993 1994 CHANGE
-------- -------- ------
(OPERATING RESULTS IN THOUSANDS)
<S> <C> <C> <C>
OPERATING RESULTS:
Revenues................................................. $496,058 $564,459 13.8%
Gross profit............................................. 19,782 25,196 27.4%
Gross profit margin...................................... 4.0% 4.5%
Operating income......................................... 3,127 5,859 87.4%
STATISTICAL DATA:
Monthly revenue per worksite employee.................... $ 2,676 $ 2,860 6.9%
Monthly payroll cost per worksite employee............... 2,117 2,268 7.1%
Monthly gross markup per worksite employee............... 559 592 5.9%
Average number of worksite employees paid per month...... 14,590 15,500 6.2%
</TABLE>
Revenues
The Company's revenues increased 13.8% over 1993 due to a 6.2% increase in
the number of worksite employees paid during the year combined with a 6.9%
increase in the revenue per employee. The increased number of worksite employees
paid primarily resulted from the ongoing sales effort in existing markets. The
29
<PAGE> 31
increase in revenue per worksite employee is directly related to the increase in
payroll cost per worksite employee discussed below.
Gross Profit Margin
Gross profit margin increased from 4.0% in 1993 to 4.5% in 1994. The key
factor that caused this increase was an overall reduction, as a percent of
revenue, in the costs of providing employee benefits, partially offset by a
slight increase in employment related taxes.
The reduction in employee benefits costs relative to revenues was primarily
due to a reduction in health insurance premiums, which were lowered from 1993
levels as a result of the Company's favorable medical claims experience during
1993 and early 1994. However, workers' compensation costs increased in 1994
versus 1993 partially offsetting the effect of reduced health insurance costs.
Prior to November 1994 the Company was insured under a high deductible paid loss
workers' compensation policy. This type of policy resulted in the Company
recording significant additions to its accrued workers' compensation claims
during 1994 resulting from revised ultimate loss estimates that relate to
accidents covered under this policy. In order to achieve more predictable costs
for its workers' compensation program, the Company purchased a guaranteed cost
policy in the fourth quarter of 1994. This policy provides "first dollar"
coverage on all claims arising under the policy with a fixed monthly premium for
one year.
The monthly revenue per worksite employee increased 6.9% over 1993, an
increase proportionate with the 7.1% increase in monthly payroll cost per
worksite employee. These factors combined for a 5.9% increase in gross markup
per employee, which reflects the Company's continuing efforts to attract higher
wage earners through its strategic target customer selection criteria. Increases
in wage levels throughout the Company's worksite employee population are also
reflected in the increases in monthly revenue and payroll cost per worksite
employee. These increases contributed to the overall 27.4% increase in gross
profit versus 1993.
Operating Expenses
The Company's operating income increased 87.4% from $3.1 million in 1993 to
$5.9 million in 1994. This increase resulted primarily from the increase in
gross profit discussed above. Operating expenses remained essentially unchanged
as a percentage of revenues.
The operating expenses directly associated with the Company's market
expansion plan were $987,000 in 1994 versus $249,000 in 1993. Excluding expenses
directly incurred in the new markets, salaries, wages and payroll taxes of
corporate employees increased $1.7 million compared to 1993. The Company's
average corporate staff increased from 170 in 1993 to 221 in 1994 and the
Company had 192 corporate employees at December 31, 1993 versus 271 at December
31, 1994. These increases reflected both an increase in the size of the
Company's sales force from 22 at December 31, 1993 to 51 at December 31, 1994
and an increase in the corporate infrastructure required to process current and
future expansion. Included in this increase was the Company's formation of an
internal Information Technology department in July 1993 to assume
responsibilities previously outsourced by the Company.
Higher revenues contributed to an increase of $256,000 in sales commissions
which are based on the gross payroll of worksite employees. These costs did not
change significantly from 1993 as a percent of payroll costs of worksite
employees. Advertising expenses increased by $185,000, or 11%, a movement
consistent with increasing revenues. The second half of 1994 reflected a further
acceleration in advertising expenditures.
Depreciation and amortization expense increased $206,000 over 1993 due to
capital expenditures incurred during the year related to the establishment of a
disaster recovery computer and operations center in Las Colinas (a suburb of
Dallas, Texas). Capital expenditures related to the opening of new sales offices
as part of the Company's market expansion plan also contributed to the increase.
30
<PAGE> 32
Net Income
Interest expense increased $307,000 in 1994 due to the $4.0 million
subordinated debt incurred in May 1994. Interest income increased $129,000 over
1993 due to higher levels of funds available for investment following the
capital investment and subordinated debt proceeds received in May 1994.
The Company's provision for income taxes differs from the U.S. statutory
rate of 34% due to state income taxes.
All of the factors noted above, particularly the revenue growth and
resulting effect on gross profit, partially offset by the impact of the initial
stages of the Company's market expansion program, resulted in net income
increasing from $1.9 million in 1993 to $3.8 million in 1994.
LIQUIDITY AND CAPITAL RESOURCES
The Company periodically evaluates its liquidity requirements, capital
needs and availability of resources in view of, among other things, expansion
plans, accrued workers' compensation insurance claims liabilities, debt service
requirements and other operating cash needs. As a result of this process, the
Company has, in the past, 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 the proceeds of this
offering, its cash on hand, cash flows from operations and available borrowing
capacity under its Credit Agreement will be adequate to meet its liquidity
requirements through at least 1997. The Company will rely on these same sources,
as well as public and private debt and equity financing, to meet its long-term
liquidity needs.
The Company has $9.6 million in cash and cash equivalents at September 30,
1996 which is available to the Company for general corporate purposes,
including, but not limited to, current working capital requirements,
expenditures related to the continued expansion of the Company's sales force
through the opening of new sales offices, capital expenditures and repayments of
existing indebtedness. The Company has no significant long-term debt repayment
requirements during 1997.
At September 30, 1996 the Company had positive working capital of $3.3
million which is a slight decline from $4.7 million at December 31, 1995. This
decline was due primarily to capital expenditures incurred during the period
offset partially by the net income for the period.
Cash Flows From Operating Activities
The Company's cash flows from operating activities in the nine months ended
September 30, 1996 increased substantially from the comparable period in 1995.
This increase resulted from federal and state income tax payments relating to
1994 totaling $2.0 million paid in the 1995 period versus federal income tax
refunds received totaling $3.5 million during the nine months ended September
30, 1996; higher payments in the 1995 period for previously accrued workers'
compensation claims; and the timing of accounts receivable collection at the end
of the respective periods.
Cash Flows From Investing Activities
Capital expenditures during the nine months ended September 30, 1996
totaled $3.4 million and were incurred primarily in the first quarter to
complete, furnish and equip a Company-owned facility to accommodate continued
growth in corporate employees. This facility was opened in February 1996.
Net dispositions of marketable securities of $4.0 million in the nine
months ended September 30, 1995, resulted primarily from marketable securities
with a carrying value of $3.8 million reaching maturity and being converted to
cash equivalents.
In January 1995, the Company acquired a client base in its Chicago market
through a referral agreement calling for a referral fee which totaled $420,000
payable to the referring organization based on the number of worksite employees
enrolled by Administaff. The remainder of the increase in intangible assets in
both years relates to costs incurred for the rewrite of the Company's
computerized payroll software system in both periods.
31
<PAGE> 33
Cash Flows From Financing Activities
Cash flows from financing activities in the nine months ended September 30,
1996 and 1995 include loans to employees related to the federal income tax
impact of the exercise of stock options and, in the 1995 period, from the
proceeds received from the exercise of such options. In the 1996 period, the
Company borrowed, on two occasions, amounts against its $10 million revolving
credit agreement totaling $2.5 million. Both borrowings were repaid during the
third quarter of 1996.
Credit Agreement
In October 1995 the Company's wholly-owned subsidiary, Administaff of
Texas, Inc. ("Administaff of Texas"), entered into a $10 million revolving
credit agreement (the "Credit Agreement") with a bank. Such Credit Agreement
includes an agreement to issue standby letters of credit (in an amount not to
exceed a sublimit of $5,000,000). The Company is a guarantor under the Credit
Agreement. The Credit Agreement includes, among other covenants, a limitation on
the declaration and payment of dividends, a change of control provision and
other covenants customary in lending transactions of this type. At September 30,
1996 no borrowings were outstanding under the Credit Agreement and the Company
expects that no borrowings will be outstanding at the time the offering is
consummated. Borrowings under the Credit Agreement bear interest at rates based
on the bank's Corporate Base Rate of LIBOR plus an applicable margin at the time
of the borrowing.
Expansion Plan
The Company currently intends to allocate approximately $12 million of the
estimated $37.3 million it will receive in net proceeds from this offering to
its expansion plan. The Company's expansion plan currently calls for it to enter
at least one new market or open at least one additional sales office in an
existing market in each quarter of 1997 and 1998. While costs associated with
opening additional sales offices vary from market to market due to a number of
factors, including costs of advertising, the Company believes, based on
historical experience, that its expansion plan will require investments of
approximately $6 million in each of 1997 and 1998. The Company believes that the
portion of the offering proceeds allocated to expansion will be sufficient to
fund this expansion plan for the next two years. The balance of the proceeds of
the offering will be used for general corporate purposes and for acquisitions of
existing PEO operations should favorable acquisition opportunities arise.
Pending the application of the proceeds, the Company will invest such funds in
diversified, highly-liquid, investment grade, interest bearing instruments. The
Company anticipates that such investments will generally consist of U.S.
government obligations, certificates of deposit issued by large commercial
banks, investment grade commercial paper, Eurodollar time deposits and
investment grade municipal bonds. See "Use of Proceeds."
OTHER MATTERS
The Company's net deferred income tax assets and liabilities have
fluctuated significantly from December 31, 1994 to September 30, 1996. At
December 31, 1994, the Company had net deferred tax assets of $2.2 million,
relating primarily to accrued workers' compensation claims for which tax
deductions were not available until the claims were paid. During 1995, a
significant portion of these claims were paid resulting in substantial
deductions for income tax purposes. Therefore, as of December 31, 1995, net
deferred tax assets were reduced to near zero. The Company had net deferred tax
liabilities of $1.1 million at September 30, 1996 due primarily to the phase in
of a change in accounting method for income tax purposes. In January and May
1996, the IRS approved the Company's request for a change in the method of
accounting for PEO service fees and worksite employee payroll costs to the
accrual method. These changes were adopted for financial reporting purposes
effective January 1, 1994. For PEO service fees the change was approved
effective January 1, 1995 with a three year phase in period for the cumulative
effect of the change. For worksite employee payroll costs, the change was
approved effective January 1, 1995 with a one year phase in period for the
cumulative effect of the change. As a result, the Company amended its 1995
consolidated federal income tax return to account for these changes. The Company
received $3.5 million in federal income tax refunds in May and July 1996 related
to the original and amended tax returns. Deferred income taxes at September 30,
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<PAGE> 34
1996 reflected the effect of the three year phase in for the cumulative effect
of the change in accounting for PEO service fees as a component of net current
and noncurrent deferred tax liabilities. See Note 3 of Notes to Consolidated
Financial Statements (unaudited) for the nine months ended September 30, 1996.
During the third quarter of 1996, the Company recorded an accrual for its
estimate of the cost of corrective measures and penalties relating to the 401(k)
Plan's failure to comply with certain nondiscrimination tests required by the
Code. See "Risk Factors -- Costs of 401(k) Plan Compliance," "Industry
Regulation -- Employee Benefit Plans" and Note 4 of Notes to Consolidated
Financial Statements (unaudited) for the nine months ended September 30, 1996.
In addition, during the third quarter of 1996, the Company recorded an asset for
an amount recoverable from the 401(k) Plan's record keeper should the Company
ultimately be required to pay the amount accrued for such corrective measures
and penalties. The income tax effects of these items are reflected in the
Company's net deferred tax liabilities as of September 30, 1996. Based on its
understanding of the settlement experience of other companies in similar
situations, the Company does not believe the ultimate resolution of this 401(k)
Plan matter will have a material adverse effect on the Company's financial
condition, results of operations or liquidity.
SEASONALITY, INFLATION AND QUARTERLY FLUCTUATIONS
The timing of the assessment of employment related taxes has a seasonal
effect on the Company's cash flows, with the Company generally having lower cash
flow from operations during the first six months of each year. As individual
worksite employees meet applicable wage limits for such taxes, the Company's
employment tax obligation declines which increases cash flows from operations
during the balance of the year.
The Company believes the effects of inflation have not had a significant
impact on its results of operations or financial condition.
The Company's operating results have historically fluctuated from quarter
to quarter. In addition, due to the timing of the assessment of employment
related taxes, the Company's gross profit margin typically improves from quarter
to quarter within each year with the first quarter generally being the least
favorable. Employment related taxes are based on the cumulative earnings of
individual employees up to a specified wage level. Since the Company's revenues
related to an individual employee are generally earned and collected at a
relatively constant rate throughout each year, payment of such unemployment tax
obligations has a substantial impact on the Company's financial condition or
results of operations during the first six months of each year.
33
<PAGE> 35
BUSINESS
Administaff is a leading provider of professional employer services, both
in terms of number of worksite employees and in terms of revenues, with current
operations in 10 markets, including Houston, San Antonio, Austin, Orlando,
Dallas, Atlanta, Phoenix, Chicago, Baltimore/Washington, D.C. and Denver. The
Company serves over 1,500 client companies with approximately 23,800 worksite
employees as of December 31, 1996 and believes that it currently ranks, in terms
of revenues and worksite employee base, as one of the three largest professional
employer organizations in the United States. The Company has grown significantly
since it was founded in 1986. Revenues (which include the payroll of worksite
employees) were $4.0 million for 1987, the Company's first full year of
operations, and increased to over $716 million for fiscal 1995, with
corresponding gross profit and net income of $28.9 million and $1.1 million,
respectively. Houston is the Company's original location and accounted for
approximately 50% of the Company's current revenues as of September 30, 1996,
with other Texas markets accounting for an additional 30%. In October 1993 the
Company opened a sales office in Dallas as the first step in implementing a
long-term internal growth and expansion strategy. Subsequent to obtaining
expansion capital in May 1994, the Company opened sales offices in Atlanta and
Phoenix in accordance with its market expansion plan. During 1995, the Company
established a presence in Chicago, both by entering into a referral agreement
with an unaffiliated PEO organization and by opening a sales office, and opened
an additional sales office in the Baltimore/Washington, D.C. area. The Company
opened a second office in Dallas in January 1996 and opened an office in Denver
in September 1996. The Company plans to enter at least one new market or open at
least one additional sales office in an existing market in each quarter of 1997
and 1998.
Administaff's goal is to improve the productivity and profitability of
small businesses (generally, businesses with 100 or fewer employees) by
relieving business owners and key executives of administrative and regulatory
burdens, enabling them to focus on the core competencies of their businesses,
and by promoting employee satisfaction through human resource management
techniques that improve employee performance. The Company provides a
comprehensive personnel management system which encompasses a broad range of
services, including benefits and payroll administration, medical and workers'
compensation insurance programs, payroll tax filings, personnel records
management, liability management and other human resource services. Administaff
delivers these services by becoming an employer for substantially all personnel
management matters. The fees charged by the Company (which averaged
approximately 123.6% of total payroll costs during the nine-month period ended
September 30, 1996) are invoiced along with each periodic payroll of the client
and include the gross payroll of each client plus the Company's estimated costs
of paying employment related taxes, providing human resource services,
performing administrative functions, providing insurance coverages and benefit
plans and performing other services offered by the Company. Administaff provides
these services by entering into a Client Service Agreement which establishes a
three party relationship whereby the Company and client act as co-employers of
the worksite employees. Responsibilities are allocated between the co-employers
pursuant to the Client Service Agreement, with Administaff assuming
responsibility for personnel administration and compliance with most
employment-related governmental regulations. The client company retains the
employee's services in its business and remains the employer for various other
purposes. Companies providing comprehensive services in this manner have come to
be known as professional employer organizations, or PEOs, as distinguished from
"fee for service" companies, such as payroll processing firms, human resource
consultants and safety consulting firms, that provide a specific service to a
client under a traditional two party contract.
PEO INDUSTRY
The PEO industry began to evolve in the early 1980's largely in response to
the burdens placed on small to medium sized employers by an increasingly complex
legal and regulatory environment. While various service providers, such as
payroll processing firms, benefits and safety consultants and temporary services
firms were available to assist these businesses with specific tasks, PEOs began
to emerge as providers of a more comprehensive range of services relating to the
employer/employee relationship. As initially conceived, these services involved
the concept of staff leasing, whereby a service provider would become an
employer of the client company's employees, and would lease these employees to
the client to perform their intended functions
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<PAGE> 36
at the worksite. As the industry has evolved the term "professional employer
organization" has come to describe an entity that enters into a three-party
relationship among the PEO, the client business and the employee.
Administaff establishes such three-party relationships through the Client
Service Agreement entered between the Company and the client business. The
Client Service Agreement provides for an initial one year term (subject to
cancellation on 30 days notice), sets forth the service fee payable to the
Company and establishes the division of responsibilities between Administaff and
the client as co-employers. In consideration for payment of the service fee
(which vary based upon relative employment tax rates, benefits participation,
workers' compensation risk profile, and level of pay of worksite employees, and
averaged approximately 123.6% of total payroll costs incurred during the
nine-month period ended September 30, 1996), the Company has the obligation to
pay the direct costs associated with the agreement, which generally consist of
(i) the salaries and wages of the worksite employees, (ii) employment related
taxes, (iii) employee benefit plan premiums, and (iv) workers' compensation
insurance premiums and (v) administrative costs and related expenses, in each
case regardless of whether the client company pays Administaff the associated
service fee. For a further description of the Client Service Agreement and the
responsibilities of Administaff and the client company thereunder, see "--
Customers."
PEO arrangements (including the Client Service Agreement) generally
transfer broad aspects of the employer/employee relationship to the PEO. Because
the business of the PEO is to enter into these relationships and provide
employee related services to a large number of employees, the PEO can achieve
economies of scale as a professional employer and perform the employment related
functions at a level typically available only to large corporations with
substantial resources to devote to human resources management.
Growth in the PEO industry has been significant. According to NAPEO, the
number of employees under PEO arrangements in the United States has grown from
approximately 10,000 in 1984 to approximately 2.0 million in 1995. Administaff
believes that the key factors driving demand for PEO services include (i)
complex regulation of labor and employment issues and the related costs of
compliance, including the allocation of time and effort to such functions by
owners and key executives, (ii) the need to provide competitive health care and
related benefits to employees of small businesses, (iii) the increasing costs
associated with workers' compensation and health insurance coverage, workplace
safety programs, employee related complaints and litigation and (iv) trends
relating to the growth and productivity of the small business community in the
United States.
A critical aspect of the growth of the PEO industry has been increasing
recognition and acceptance by federal and state governmental authorities of PEOs
and the employer/employee relationship created by PEOs. As the concept of PEO
services became understood by regulatory authorities, the regulatory environment
began to shift from one of hostility and skepticism to one of regulatory
cooperation with the industry. During the mid to late 1980's, legitimate
industry participants were challenged to overcome well publicized failures of
financially unsound and in some cases unscrupulous operators. Given this
environment, Administaff and other industry leaders, in concert with NAPEO, have
worked with the relevant government entities for the establishment of a
regulatory framework that would protect clients and employees and discourage
unscrupulous and financially unsound operators, and thereby promote the
legitimacy and further development of the industry. For a description of the
states in which the Company operates that require licensing or registration, see
"Industry Regulation -- State Regulation -- Other State Regulation."
While many states do not explicitly regulate PEOs, 16 states (including
Texas) have enacted legislation containing licensing or registration
requirements and at least four states are considering such regulation. Such laws
vary from state to state but generally provide for monitoring the fiscal
responsibility of PEOs. State regulation assists in screening insufficiently
capitalized PEO operations and, in the Company's view, has the effect of
legitimizing the PEO industry generally by resolving interpretive issues
concerning employee status for specific purposes under applicable state law. The
Company has actively supported such regulatory efforts. As an active member of
NAPEO, the Company participated in the development of regulations affecting all
member organizations, and believes that these regulations further enhance the
credibility of the PEO industry.
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<PAGE> 37
The Company does not view the burdens of compliance with these regulations as
material to its business operations.
As the PEO industry has developed, the more established PEOs are
experiencing an increasing level of support from vendors who have a stake in the
success of the industry. For example, increased cooperation and flexibility from
insurance carriers have proved invaluable to Administaff in designing policies
that meet the needs of a large PEO.
STRATEGY
The Company's objective is to become the leading provider of PEO services
in the United States while achieving sustainable revenue and income growth. Key
elements of the Company's strategy were developed by the Company's core
management team which has remained in place since the Company's founding in
1986. Since that time, the Company has concentrated substantial financial and
management resources on developing, defining and optimizing a personnel
management system for small businesses and on building an organizational
infrastructure designed to enable the Company to replicate proven growth
patterns while balancing revenue and income growth objectives. The key elements
of the Company's strategy include:
- Providing the highest quality services to help improve the productivity
and profitability of the Company's clients.
Administaff focuses on providing high quality services that directly
enhance the productivity and profitability of small businesses. Achieving
these efficiencies not only provides an obvious benefit to clients, it also
benefits the Company in three distinct ways. First, to the extent that
enhanced productivity results in client growth, Administaff's revenue base
also grows. Second, clients who experience improved profitability best
understand the value of Administaff's services and prove to be the
Company's most effective referral sources. Finally, client productivity
facilitated by Administaff promotes a long-term client relationship.
Although the Company's client services contracts provide for only a one
year initial term and are terminable on 30-days' notice at any time, in
excess of 80% of Administaff's clients remain for more than one year and
the retention rate increases for clients who remain with Administaff for
longer periods. In accordance with NAPEO standards, retention rates are
calculated by dividing the number of Company clients at December 31 by the
number of clients at January 1 of the same year plus clients added during
such year.
- Continuing to enter and establish a leading position in new markets.
In 1993, the Company identified 36 markets as its most attractive
expansion targets and has opened sales offices in six of these markets. The
Company plans to enter at least one new market or open one additional sales
office in an existing market in each quarter of 1997 and 1998 and believes
that the proceeds from this offering will be sufficient to cover such
expansion. Through the use of a market selection model which evaluates a
broad range of criteria, Administaff selects new markets where it believes
it is most likely to replicate its historical growth patterns and market
penetration. While most of the Company's expansion has been the result of
opening sales offices, the Company has and will continue to consider
expansion through strategic acquisitions. The Company believes that
increasing industry regulatory complexity, including the difficulties of
complying with the applicable state laws, and the increasing capital
commitments required of PEOs to provide larger service delivery
infrastructures and management information systems should lead to
significant consolidation opportunities in the PEO industry. The Company's
market development strategy combines intensive direct marketing efforts
with a fully integrated public relations and advertising campaign. While
the expense associated with entering and developing a new market is
significant, the Company views this investment as essential to achieving
desired growth and extending its national leadership position. The Company
generally expects expenses in a new market to be covered by the gross
profit from that market within two years.
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<PAGE> 38
- Growing existing markets through additional market penetration and
marketing alliances.
The Company believes that additional market penetration in established
markets offers significant growth potential. Based on information contained
in a database developed by ABI, the Company believes that it serves less
than 6.0% of the total number of businesses in Houston meeting its target
criteria described below. In established markets, the Company's ability to
achieve its growth objectives is enhanced by a higher number of referrals,
a higher client retention rate, a more experienced sales force and momentum
in its marketing efforts. The Company is also actively pursuing the
formation of certain strategic alliances with other providers of various
administrative and office services to small businesses as an alternative
method for achieving growth in existing markets. The Company selectively
opens additional sales offices and hires additional sales personnel in
established markets to capitalize on these advantages and to achieve higher
penetration.
- Targeting and enrolling clients that are consistent with the Company's
overall strategy and risk profile objectives.
The Company seeks to attract clients whose objectives in utilizing
Administaff's PEO services primarily relate to enhancing productivity
rather than short-term cost cutting. The Company's clients tend to be
established, financially successful and likely to recognize the value of a
broad range of services which enable the client to concentrate on its core
business. Administaff's target client has from five to 100 employees and
must meet certain additional criteria relating to industrial
classification, workers' compensation, health and unemployment claims
history and operating stability. These criteria, which constitute part of
the Company's screening process, are intended to avoid a skewing of the
Company's client base to higher risk clients. Through this process, the
Company seeks to continue to build a solid client base characterized by
high year-to-year retention and client employee growth while maintaining a
predictable and controllable direct cost structure.
- Capitalizing on economies of scale while actively managing and
controlling direct costs.
The Company enjoys economies of scale which allow it to provide small
businesses with a level of human resource management typically found only
in large corporations. The Company aggressively pursues scale advantages in
order to maximize profits and to provide its clients with premium services
at competitive prices. In this regard, Administaff focuses on key
relationships with insurance providers to design coverage and premium
structures that not only provide cost effective and appropriate protection
for clients, but also enable the Company to control major components of its
direct costs. These economies and tailored coverages are achievable both
because of the Company's sophistication as a purchaser of insurance
products and its status as a large customer of such providers. The Company
also employs a variety of proactive personnel management techniques to help
minimize the incidence and magnitude of employee claims, complaints and
related costs. The Company expects that the economies resulting from active
control and management of direct costs will continue to enhance
profitability.
No assurance can be given that the Company will be successful in
implementing its strategy or that, even if successful, such implementation will
have the intended effects on the Company's future revenue, operating expenses or
net income.
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CLIENT SERVICES
Administaff provides a comprehensive Personnel Management System
encompassing a broad range of services, including personnel management, benefits
and payroll administration, medical and workers' compensation insurance
programs, tax filings, personnel records management, liability management and
related human resource services. Among the laws and regulations that may affect
a small business are the following:
- Internal Revenue Code (IRC)
- Federal Income Contribution Act (FICA)
- Employee Retirement Income Security Act (ERISA)
- Occupational Safety and Health Act (OSHA)
- Federal Unemployment Tax Act (FUTA)
- Fair Labor Standards Act (FLSA)
- Consolidated Omnibus Budget Reconciliation Act of 1987 (COBRA)
- Immigration Reform and Control Act (IRCA)
- Title VII (Civil Rights Act of 1964)
- - Civil Rights Act of 1991
- - Americans with Disabilities Act (ADA)
- - Tax Equalization and Fiscal Responsibility Act (TEFRA)
- - Age Discrimination in Employment Act (ADEA)
- - Drug-Free Workplace Act
- - Consumer Credit Protection Act
- - The Family and Medical Leave Act of 1993
- - State unemployment and employment securities laws
- - State workers' compensation laws
While these regulations are complex and in some instances overlapping,
Administaff assists in achieving client companies' compliance by providing
services in four primary categories: administrative functions, benefit plans and
administration, personnel management and liability management. Once a client
company has executed a Client Service Agreement, the Client Services Department
serves as the client's principal point of contact with Administaff and
coordinates the delivery of all of the services described below. For a more
detailed description of responsibility for compliance with each of the laws set
forth above, see "-- Customers."
Administrative Functions. Administrative functions encompass a wide variety
of processing and record keeping tasks, mostly related to payroll
administration, government compliance and employee benefit plan filing. Specific
examples include payroll processing, payroll tax deposits, quarterly tax
reporting, employee file maintenance, unemployment claims, workers' compensation
reporting, and monitoring and responding to changing regulatory requirements.
Benefit Plans and Administration. Administaff currently offers the
following plans that the client may elect to provide worksite employees:
comprehensive health, dental, vision, prenatal care, prescription card,
counseling, education assistance and adoption assistance. Insurance coverages
also include group term life, universal life, accidental death and dismemberment
and long-term disability. Each client company can select from among several
different packages of these plans in accordance with its needs. Administaff also
offers a retirement savings (401(k)) plan to its eligible employees. As part of
its service package, the Company administers these benefit plans and is
responsible for negotiating the benefits and costs of such plans. The Company's
Benefits Administration Department serves as liaison for the delivery of such
services to the worksite employee and monitors and reviews claims for loss
control purposes. The Company believes that this type of intensive benefit
management is usually found only in larger companies that can spread program
costs across many employees. Moreover, the Company believes that the
availability and administration of these benefits tends to mitigate the
competitive disadvantage small businesses normally face in the areas of cost
control and employee recruiting and retention.
Personnel Management. The wide variety of personnel management services
provided by Administaff allow its client companies access to resources normally
found only in the human resources departments of large companies. On-site
supervisors are provided with a detailed personnel guide, which sets forth a
systematic approach to administering personnel policies and practices including
recruiting, discipline and termination procedures. Personnel policies and
employee handbooks are reviewed and revised, if necessary, or
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customized handbooks can be created. The Company assists clients with the
development of refined job descriptions as well as a systematic performance
appraisal process. A variety of employee assistance programs can be implemented
where needed, including orientation, training, counseling, substance abuse
awareness and outplacement services. In addition, clients' management are
provided with detailed information, compiled from the Company's experience,
regarding competitive salaries for a wide range of positions across the country.
Liability Management. Liability management services consist of several
functions. First, pursuant to the Company's Client Service Agreement and basic
to the Administaff client relationship, the Company assumes many of the
liabilities associated with being an employer. These include liability for
compliance with payroll tax reporting and payment obligations, workers'
compensation regulations, COBRA, the Immigration Reform and Control Act and the
Consumer Credit Protection Act. For those potential liabilities that Administaff
does not assume, the Company assists its clients in managing and limiting
exposure. This management for many clients includes first time and ongoing
safety inspections as well as the implementation of safety programs designed to
reduce workers' compensation claims. Administaff also advises clients on
avoiding liability for discrimination, sexual harassment and civil rights
violations and participates in termination decisions to attempt to secure
protection from liability on those grounds. When a claim arises, the Company
often assists in the client's defense regardless of whether the Company has been
named directly. The Company's Legal Department employs attorneys specializing in
several areas of employment law and has broad experience in disputes concerning
the employer/employee relationship. This expertise allows Administaff's clients
to contest many claims which they might otherwise have been inclined to settle.
The Company also monitors changing government regulations and notifies clients
of their effect on potential employer liability.
Additional Services. All of Administaff's clients receive the foregoing
services as part of the Company's basic package in consideration for payment by
the clients of a comprehensive service fee. Administaff also provides
supplemental services to its clients for additional fees, with the actual fee
determined on the basis of the particular supplemental service to be rendered.
These services include prospective employee screening and background
investigations, drug testing, and pre-employment testing, scoring and reporting.
The Company will also stage a wide variety of seminars for both employees and
management, on subjects such as communication, leadership, motivation and time
and stress management skills. While these services constitute an immaterial
source of additional revenue to Administaff, they afford the Company an
opportunity to solidify its relationships with existing clients. Moreover, to
the extent these services tend to reduce liability these services serve as an
additional element of the Company's liability and risk management process.
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CUSTOMERS
Administaff's customer base consists of over 1,500 client companies,
representing approximately 23,800 worksite employees as of December 31, 1996.
The Company's clients have an average of 16 employees, with approximately 72%
having between five and 49 employees. The Company's client base is broadly
distributed throughout a wide variety of industries. As of September 30, 1996
the Company had customers representing approximately 430 Standard Industrial
Classification ("SIC") codes, and no more than 7% of the Company's customers
were classified in any one SIC code. Administaff's approximate client company
distribution by major SIC code industry grouping as of September 30, 1996 is set
forth below:
<TABLE>
<S> <C>
Services................................................................ 26%
Construction............................................................ 14%
Manufacturing........................................................... 13%
Wholesale Trade......................................................... 12%
Finance, Insurance and Real Estate...................................... 10%
Medical................................................................. 7%
Retail Trade............................................................ 6%
Transportation, Communications and Utilities............................ 5%
Agriculture (Landscaping)............................................... 1%
Legal................................................................... 1%
Mining.................................................................. 1%
Other................................................................... 4%
</TABLE>
The Company attempts to maintain diversity within its client base to lower
its exposure to downturns or volatility in any particular industry and help
insulate the Company to some extent from general economic cyclicality. As part
of its client selection strategy, the Company offers its services to businesses
falling within specified SIC codes, essentially eliminating certain industries
that it believes present a higher risk of employee injury (such as roofing,
logging and oil and gas exploration). Businesses falling within other SIC codes
are not accepted by Administaff. All prospective customers are also evaluated
individually on the basis of workers' compensation risk, group medical history,
unemployment history and operating stability. On average, Administaff's clients
have been in business approximately 14 years.
All clients enter into Administaff's Client Service Agreement. The Client
Service Agreement provides for an initial one year term, subject to termination
by the Company or the client at any time upon 30 days' prior written notice.
After the initial term the contract may be renewed, terminated or continued on a
month-to-month basis, although the Company's standard practice is to contact its
clients prior to expiration of the initial term and attempt to renew the
relationship for another one year term.
The Company's service fee is set forth in the Client Service Agreement, and
is based on a pricing model that takes into account the gross payroll of each
employee plus the estimated costs of paying employment related taxes, providing
human resource services, performing administrative functions and providing
insurance coverages and benefit plans and other services offered by the Company.
These items are combined to yield a service fee which is stated as a percentage
of gross pay. Fees are invoiced along with each periodic payroll. Client
specific information used to determine service fees is taken from a client
census which reflects information on each employee of the client, including
gross pay, workers' compensation classification, payroll frequency, whether
medical benefits are provided, and various other data. Fees for a particular
client are also influenced by that client's claims histories and other client
specific factors. Payroll data on an employee by employee basis is entered into
the Company's payroll database so that changes in the client's employee base
will be automatically reflected in client invoices and in payroll disbursements
made by Administaff.
The Client Service Agreement also establishes the division of
responsibilities between Administaff and the client as joint employers. Pursuant
to the Client Service Agreement, Administaff is solely responsible for all
personnel administration and is liable for purposes of certain government
regulation. In addition, Administaff assumes liability for payment of salaries
and wages of its worksite employees and responsibility for providing employee
benefits to such persons, regardless of whether the client company makes timely
payment
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of the associated service fee. The client retains the employee's services and
remains liable for the purposes of certain government regulations, compliance
with which requires control of the worksite or daily supervisorial
responsibility or is otherwise beyond Administaff's ability to assume. A third
group of responsibilities and liabilities are shared by Administaff and the
client where such joint responsibility is appropriate. The specific division of
applicable responsibilities under the Client Service Agreement is as follows:
<TABLE>
<CAPTION>
ADMINISTAFF CLIENT JOINT
- --------------------------------- --------------------------------- ---------------------------------
<S> <C> <C>
- - Tax reporting and payment - Assignment to, and ownership - Implementation of policies and
(state and federal withholding, of, all intellectual property practices relating to the
FICA, FUTA, state unemployment) rights employer/employee relationship
- - Workers' compensation - Section 414(o) of the Code - Selection of fringe benefits,
compliance, procurement, regarding benefit including employee leave
management, reporting discrimination policies
- - Employee benefit procurement - Professional liability or - Employer liability under
malpractice workers' compensation laws
- - Compliance with COBRA, - Compliance with OSHA - Compliance with Title VII of
Immigration Reform and Control regulations, EPA regulations the Civil Rights Act of 1964, the
Act, and Consumer Credit and any state or legal Age Discrimination in
Protection Act, Title III, as equivalent government Employment Act, the Employment
well as monitoring changes in contracting provisions, the Retirement Income Security Act,
other governmental regulations Fair Labor Standards Act, the the Polygraph Protection Act,
governing the employer/employee Worker Adjustment and Retaining the Federal Drug Free Workplace
relationship and updating the Notification Act, professional Act (and any state or local
client when necessary licensing requirements, equivalent), state employment
fidelity bonding requirements discrimination laws
</TABLE>
Because Administaff is a co-employer with the client company, it is
possible that Administaff could incur liability for violations of such laws even
if it is not responsible for the conduct giving rise to such liability. The
Client Service Agreement addresses this issue by providing that the Company or
the client will indemnify the other party for liability incurred to the extent
the liability is attributable to conduct by the indemnifying party.
Notwithstanding this contractual right to indemnification, it is possible that
Administaff could be unable to collect on a claim for indemnification and may
therefore be ultimately responsible for satisfying the liability in question.
The Company's total expense incurred with respect to such exposure was
approximately $117,000 for the year ended December 31, 1995 and $49,000 for the
nine months ended September 30, 1996.
Administaff's client retention record reflects that a high percentage of
its clients remain with the Company from year to year. Historical retention
patterns indicate that in excess of 80% of Administaff's clients remain for over
one year and that the attrition rate declines for clients who remain with
Administaff for longer periods. Client attrition experienced by Administaff is
attributable to a variety of factors, including (i) termination by Administaff
resulting from the client's inability to make timely payments, (ii) client's
non-renewal due to price, (iii) client business failure or downsizing and (iv)
sale or disposition of the client company. The Company believes that only a
small percentage of nonrenewing clients withdrew due to dissatisfaction with
service or to retain the services of a competitor.
Clients are required to pay Administaff no later than one day prior to the
applicable payroll date by wire transfer or automatic clearinghouse transaction,
and receipt of funds is verified prior to release of payroll. Although the
Company is ultimately liable as employer to pay employees for work previously
performed, it retains the ability to terminate the Client Service Agreement as
well as the employees upon non-payment by a client. This right and the periodic
nature of payroll, combined with client credit checks and the natural screening
effect of the Company's client selection process, has resulted in an excellent
collections history. During the period from January 1, 1987 to September 30,
1996, the Company has recorded a total of $419,000 in bad debt expense on
approximately $3.4 billion of total revenues.
MARKETING AND SALES
Administaff's marketing strategy is based on the application of techniques
that have produced predictable results for the Company in the past. The Company
develops a mix of advertising media and a placement
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<PAGE> 43
strategy tailored to each individual market. After selecting a market and
developing its marketing mix, but prior to entering the market, Administaff
engages in an organized media and public relations campaign to prepare the
market for the Company's entry, and to begin the process of generating sales
leads. Administaff markets its services through a broad range of media outlets,
including radio, newspapers, periodicals and direct mail. The Company employs a
local public relations firm in each of its markets as well as an advertising
firm to coordinate and implement its marketing campaigns, and has developed an
inventory of proven, successful radio and newsprint advertisements which are
utilized in this effort.
In order to identify the most promising potential markets, the Company
employs a systematic market evaluation and selection process. The Company
evaluates a broad range of factors in the selection process, using a market
selection model that weights various criteria that the Company believes are
reliable predictors of successful penetration based on its experience. Among the
factors considered are (i) market size, in terms of small businesses engaged in
selected industries that meet the Company's risk profile, (ii) market
receptivity to PEO services, including considerations such as regulatory
environment, and relevant history with other PEO providers, (iii) existing
relationships within a given market, such as vendor or client relationships,
(iv) expansion cost issues, such as advertising and overhead costs, (v)
potential direct cost issues that bear on the Company's effectiveness in
controlling and managing the cost of its services, such as workers' compensation
and health insurance costs, unemployment risks and various legal and other
factors, (vi) a comparison of the services offered by Administaff to
alternatives available to small businesses in the relevant market, such as the
cost to the target clients of procuring services directly or through other PEOs
and (vii) long-term strategy issues, such as general perception of markets and
long-term revenue growth potential. Each of the Company's six newly opened
markets, beginning with Dallas in October 1993, was selected in this manner.
Administaff generates sales leads from three primary sources: direct sales
efforts, advertising and referrals. These leads result in initial presentations
to prospective clients, and, ultimately, a predictable number of client census
reports. The client's census report reflects information gathered by the sales
associate about the prospect's employees, including job classification, state of
employment, workers' compensation claims history, health insurance claims
history, salary, and similar information for each employee, and a desired level
of benefits for the prospective client. This information is entered into the
Company's data processing system, which applies the prospect's employee
characteristics to Administaff's pricing model, leading to preparation of a bid.
Concurrently with this process, the prospective client's workers' compensation
and health insurance histories are forwarded to Company headquarters, where they
are evaluated from a risk management perspective. Unfavorable aspects of either
of these histories will result in termination of the sales effort and rejection
of the prospect. This prospective client screening process plays a vital role in
controlling the Company's benefits costs and limiting its exposure to liability.
Upon completion of a favorable risk evaluation, the sales associate then
presents the prospective client with the Company's bid and attempts to enroll
the prospect. Each bid includes detailed information as to the rate (as a
percentage of gross payroll) that will be charged for each employee by category
(state of employment and job classification) and level of benefits. If a
prospect accepts Administaff's proposal, the new client is quickly incorporated
into the Company's system. The client executes the Client Service Agreement, and
an orientation team initiates the process of transferring employee related
functions to Administaff. See "-- Customers." The client's database is
transferred to the Client Services Department, where Account Executives assume
responsibility for administering the client's personnel and benefits, coordinate
the Company's response to the client's needs for administrative support and
respond to any questions or problems encountered by the client. See "-- Client
Services."
VENDOR RELATIONSHIPS
Administaff provides benefits to its worksite employees under arrangements
with a variety of vendors. Although the Company believes that any of its benefit
contracts could be replaced if necessary with minimal disruption to its
operations, the Company considers four of such contracts to be significant
elements of the package of benefits provided to employees.
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The Company's group health insurance plan is a fully insured plan provided
by Aetna Life & Casualty Insurance Co. ("Aetna"). Each client company selects
from a range of health plan coverages available under the plan and Administaff's
fees to that client reflect the coverage options selected. The Company initiated
insurance coverage with Aetna in 1989, became fully insured in 1992 and has
maintained a fully-insured policy with Aetna since that time. The current policy
expires December 31, 1997. The policy requires the Company to fund claims and
premiums up to a specified monthly cap amount. Aetna is required to fund all
claims and premiums, if any, in excess of the monthly cap amount. Monthly cap
amounts are in place for quarterly periods and such cap amounts are adjustable,
based on claims experience, with six months' notice by Aetna. While Aetna bears
ultimate legal responsibility for all claims, because the Company bears the
burden of higher costs as claims experience increases, the Company seeks to
minimize health care claims through its benefits administration management
practices.
The Company's workers' compensation policy, a guaranteed cost plan whereby
monthly premiums are paid for complete coverage of all claims under the policy,
was originally put in place with Reliance National Indemnity Co. ("Reliance") in
November 1994, and the current policy will continue in effect until October 31,
1997. Reliance has provided the Company's workers' compensation policies since
1990.
In addition to its health and workers' compensation insurance policies,
significant benefits contracts include the Company's long and short term
disability policies with Fortis Benefits Insurance Co., which were put in place
in January 1993 and August 1995, respectively, and continue until they are
replaced or canceled.
INFORMATION TECHNOLOGY
The Company has developed state-of-the-art information technology capable
of meeting the demands of payroll and related processing for the Company's
worksite employees, satisfying the Company's administrative and management
information needs, and providing productivity enhancement tools to the Company's
corporate staff. While the Company utilizes commercially available software for
standard business functions such as finance and accounting, it has developed a
proprietary professional employer information system for the delivery of its
primary services. This system manages data relating to worksite employee
enrollment, human resource management, benefits administration, payroll
processing, management information, and sales proposal bid calculation
capabilities that are unique to the PEO industry and to Administaff. At the
heart of the system is a high volume payroll processing system that allows the
Company to produce and deliver hundreds of payrolls per day, each customized to
the needs of the client companies.
Administaff's proprietary PEO information system is now in its third
generation, with the fourth generation nearing completion. The software has been
developed using Informix, a relational database and program development
language, and PowerBuilder, a state-of-the-art, object oriented client/server
development system. The software is designed to provide high volume professional
employer services utilizing a combination of on-line and batch processing
facilities and can be readily expanded to handle additional processing needs.
The system is accessed through a graphical user interface engineered to maximize
both the quality of Administaff's services and the efficiency with which they
are delivered.
Administaff's primary information processing facility is located at the
Company's corporate headquarters in Kingwood, Texas (near Houston). A second
processing facility is located in Las Colinas, Texas (near Dallas). The Kingwood
facility handles approximately two-thirds of the Company's daily client service
load as well as administrative and management information processing. The Las
Colinas facility handles approximately one-third of the daily client service
load as well as acting as a disaster recovery facility for the Company capable
of handling all of the Company's operations for a short period of time.
Administaff's principal computing platform is the IBM RISC/6000. The
Company utilizes six IBM RISC/6000s at its Kingwood facility and two at its Las
Colinas facility. These processing facilities are linked by a high speed wide
area network utilizing dedicated telecommunications facilities. The IBM
RISC/6000 computers are also connected by local area networks to more than 300
IBM PC workstations running Microsoft Windows(C) software. The Company's
district sales offices are equipped with Microsoft NT Advanced Server(C)
networks and are linked to the Kingwood and Las Colinas facilities through
public telecommunications facilities.
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COMPETITION
The PEO industry consists of approximately 2,000 companies, most of which
serve a single market or region. The Company believes that it is one of three
PEOs with annual revenue exceeding $500 million. The Company considers its
primary competition to be the traditional in-house provision of employee
services. In addition, the Company competes to some extent with fee-for-service
providers such as payroll processors and human resource consultants.
Competition in the PEO industry revolves primarily around breadth and
quality of services, reputation, choice and quality of benefits and price. The
Company believes that reputation, national presence, regulatory expertise,
financial resources, risk management and data processing capability distinguish
leading PEOs from the rest of the industry. The Company believes that it
competes favorably in these areas.
CORPORATE OFFICE EMPLOYEES
The Company had over 360 corporate office and sales employees as of
September 30, 1996. These employees are divided among the Company's 10
functional departments, with 25 employees in Corporate Services, 27 in Finance,
29 in Benefits Administration, 13 in Legal, 10 in Marketing, 28 in Information
Technology, 70 in Client Services, 125 in Sales (including 80 sales associates),
31 in Human Resources and three in Emerging Business Services, each as of
September 30, 1996. Approximately 240 employees are located at the Kingwood
headquarters, 26 are based at the Las Colinas facility, and the remainder
(principally the sales associates) are based at the Company's sales offices.
FACILITIES
Administaff maintains two primary facilities. The corporate headquarters
are located in Kingwood, Texas (20 miles north of Houston), on approximately 17
acres owned by the Company. This location includes a 66,000 square foot campus
style facility and a recently renovated 76,000 square foot facility that serves
as the Company's operations and records retention facility. Together these
facilities house the Company's executive offices, corporate staff,
data-processing center, training facilities and all other corporate functions.
The Company's other primary facility is located in Las Colinas, near
Dallas, Texas. This 15,300 square foot leased facility, which became operational
in October 1994, currently handles approximately one-third of the Company's data
processing needs and serves as a backup data processing facility.
The Company also leases eight other facilities in Houston, Orlando,
Atlanta, Phoenix, Chicago, Washington, D.C./Baltimore and Denver that serve as
sales offices. These offices are typically staffed by six to eight sales
associates and a district sales manager.
The Company believes that its facilities (certain portions of which have
recently been completed) are adequate for the purposes for which they are
intended and that its headquarters have sufficient additional capacity to
accommodate the Company's foreseeable expansion plan.
LEGAL PROCEEDINGS
The Company is not a party to any material pending legal proceedings other
than ordinary routine litigation incidental to its business that the Company
believes would not have a material adverse effect on its financial condition or
results of operations.
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INDUSTRY REGULATION
INTRODUCTION
The Company's operations are affected by numerous federal and state laws
relating to labor, tax and employment matters. By entering into a co-employer
relationship with employees who are assigned to work at client company locations
(sometimes referred to as "worksite employees"), the Company assumes certain
obligations and responsibilities of an employer under these federal and state
laws. Because many of these federal and state laws were enacted prior to the
development of nontraditional employment relationships, such as professional
employer, temporary employment and outsourcing arrangements, many of these laws
do not specifically address the obligations and responsibilities of
non-traditional employers. In addition, the definition of "employer" under these
laws is not uniform.
Some governmental agencies that regulate employment and labor laws have
developed rules that specifically address labor and employment issues raised by
the relationship among PEOs, in general, and the Company, in particular, client
companies and worksite employees. This is particularly true in Texas where
management has worked with numerous regulatory agencies and was instrumental in
the ultimate passage of the Staff Leasing Services Licensing Act (the "Texas
Staff Leasing Act"), an act which formally recognized the PEO industry in Texas
and resolved prior interpretive disputes as to the status of PEOs. Existing
regulations are relatively new and, therefore, their interpretation and
application by administrative agencies and federal and state courts is limited
or non-existent. The development of additional regulations and interpretation of
existing regulations can be expected to evolve over time. While the Company
cannot predict with certainty the nature or direction of the development of
federal, state and local regulations, management will continue to pursue a
proactive strategy of educating administrative authorities as to the advantages
of PEOs and achieving regulation which appropriately accommodates their
legitimate business function.
Certain federal and state statutes and regulations use the terms "employee
leasing" or "staff leasing" to describe the arrangement among a PEO, such as the
Company, and its clients and worksite employees. The terms "employee leasing,"
"staff leasing" and "professional employer arrangements" are generally
synonymous in such contexts and describe the arrangements entered into by the
Company, its clients and worksite employees.
As an employer, the Company is subject to all federal statutes and
regulations governing its employer-employee relationships. Subject to the issues
discussed below, the Company believes that its operations are in compliance in
all material respects with all applicable federal statutes and regulations.
EMPLOYEE BENEFIT PLANS
The Company offers various employee benefit plans to its employees,
including its worksite employees. These employee benefit plans are treated by
the Company as constituting "single-employer" plans of the Company rather than
multiple employer plans. These plans include the 401(k) Plan (a profit-sharing
plan with a cash or deferred arrangement ("CODA") under Code Section 401(k) and
a matching contributions feature under Code Section 401(m)), a cafeteria plan
under Code Section 125, a group health plan, a group life insurance plan, a
group disability insurance plan, an educational assistance plan, an adoption
assistance program and an employee assistance plan. Generally, employee benefit
plans are subject to provisions of both the Code and the Employee Retirement
Income Security Act of 1974, as amended ("ERISA").
Employer Status. In order to qualify for favorable tax treatment under the
Code, the plans must be established and maintained by an employer for the
exclusive benefit of its employees. Generally, an entity is an "employer" of
certain workers for federal employment tax purposes if an employment
relationship exists between the entity and the workers under the common law test
of employment. In addition, the officers of a corporation are deemed to be
employees of that corporation for federal employment tax purposes. The common
law test of employment, as applied by the IRS, involves an examination of
approximately 20 factors to ascertain whether an employment relationship exists
between a worker and a purported employer. That test is generally applied to
determine whether an individual is an independent contractor or an employee for
federal employment tax purposes and not to determine whether each of two or more
companies is a "co-employer."
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<PAGE> 47
Substantial weight is typically given to the question of whether the purported
employer has the right to direct and control the details of an individual's
work. Among the various categories of factors which appear to be considered more
important by the IRS are (1) the employer's degree of behavioral control (the
extent of instructions, training and the nature of the work), (2) the financial
control or the economic aspects of the relationship and (3) the intended
relationship of the parties (are employee benefits provided, intent as evidenced
by any contracts, permanency (that is, are services ongoing or for a project),
any penalties for discharge/termination, and the frequency of the business
activity).
In 1992, the Company applied for and received a favorable determination
from the IRS regarding the qualified status of the 401(k) Plan. In that
application, the Company disclosed to the IRS that the Company is involved in
the business of leasing employees to recipient companies and that the 401(k)
Plan covered worksite employees who satisfied the plan's eligibility
requirements. However, the statement that the 401(k) Plan covered worksite
employees does not necessarily resolve the issue of who is the employer of those
employees for purposes of the 401(k) Plan.
The Company amended and restated the 401(k) Plan on December 15, 1994.
Among other amendments, the Company added the matching contributions feature
under Code Section 401(m) to the plan. In March 1995, the Company submitted the
amended and restated 401(k) Plan to the IRS for a determination on its continued
tax qualified status. The amended and restated 401(k) Plan is currently under
review by the IRS. An IRS finding that the plan document merits tax qualified
status is a determination as to the plan's form only and would not preclude a
subsequent disqualification based on the plan's operation, including a finding
that certain worksite employees are not employees of the Company for 401(k) Plan
purposes.
Separate from the IRS' review of the pending determination request, the
Company's 401(k) Plan for the 1993 plan year is currently under audit. Although
the audit is for the 1993 plan year, certain conclusions of the IRS would 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 the Industry Issue (whether a PEO can be a co-employer of worksite
employees, including officers and owners of client companies, for various
purposes under the Code, including participation in the PEO's 401(k) plan).
NAPEO and the Company are cooperating with the IRS in this study of the PEO
industry. With respect to the 401(k) Plan audit, the Company understands that
the IRS Houston District intends to submit the Technical Advice Request to the
IRS National Office. A draft copy of the Technical Advice Request has been
provided to the Company for its comments before the IRS Houston District submits
it to the IRS National Office. The draft of 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 (1) covers
worksite employees who are not employees of the Company and (2) failed a
nondiscrimination test applicable to contributions and the Company has not
furnished evidence that the 401(k) Plan satisfies an alternative test. The
Company understands that the Industry Issue identified by the Market Segment
Group study also will be referred to the National Office. If the Company and the
IRS Houston District do not agree on the facts and the issues to be presented in
the Technical Advice Request, the Company may submit its own statement of the
facts and issues and explanation of its position. If, after review, the IRS
National Office concludes that its response to the Technical Advice Request will
be adverse to Administaff, Administaff will be granted a conference with the
National office to discuss the proposed results. 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.
Whether the National Office will address the Technical Advice Request
independently of the Industry Issue is unclear. The Company is not able to
predict either the timing or the nature of any 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
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<PAGE> 48
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, the
policy and legislative efforts, and, if necessary, legal action. If, however,
any of these processes were to conclude that a PEO is not a co-employer of its
worksite employees and such conclusion were to ultimately prevail, worksite
employees could not continue to make salary deferral contributions to the 401(k)
Plan or pursuant to the Company's cafeteria plan or continue to participate in
certain other employee benefit plans of the Company. The Company believes that,
although unfavorable to the Company, a prospective application by the IRS of
such an adverse conclusion (that is, one applicable only to periods after 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 client companies at comparable
costs to the Company. However, if the IRS National Office adopts the conclusions
of the IRS Houston District and any such conclusion were applied retroactively
to disqualify the 401(k) Plan for 1993 and subsequent years, employees' vested
account balances under the 401(k) Plan would become taxable, the Company would
lose its tax deductions to the extent its matching contributions were not
vested, the 401(k) Plan's trust would become a taxable trust and the Company
would be subject to liability with respect to its failure to withhold applicable
taxes with respect to certain contributions and trust earnings. Further, the
Company would be subject to liability, including penalties, with respect to its
cafeteria plan for the failure to withhold and pay taxes applicable to salary
deferral contributions by employees, including worksite employees. In such a
scenario, the Company also would face the risk of client dissatisfaction and
potential litigation. A retroactive application by the IRS of an adverse
conclusion would have a material adverse effect on the Company's financial
position and results of operations. While the Company believes that a
retroactive disqualification is unlikely, there can be no assurance as to the
ultimate resolution of these issues by the IRS.
401(k) Plan Nondiscrimination Testing Issues. In 1991 the Company engaged a
third party vendor to be the 401(k) Plan's record keeper and to perform the
required annual nondiscrimination tests for the plan. Each year such record
keeper reported to the Company that such nondiscrimination tests had been
satisfied. However, in August 1996 the 401(k) Plan's record keeper advised the
Company that certain of these tests had been performed incorrectly for prior
years and, in fact, that the 401(k) Plan had failed certain tests for the 1993,
1994 and 1995 plan years. The Company has subsequently determined that the
401(k) Plan also failed a nondiscrimination test for 1991 and 1992, closed years
for tax purposes. At the time the Company received such notice, the period in
which the Company could voluntarily "cure" this operational defect had lapsed
for all such years, except 1995. With respect to the 1995 year, the Company has
caused the 401(k) Plan to refund the required excess contributions and earnings
thereon to affected highly compensated participants, and the Company will pay an
excise tax of approximately $51,000. Because the 401(k) Plan is under a current
IRS audit, the IRS voluntary correction program for this type of operational
defect is not available to the Company for years prior to 1995. Accordingly, the
Company informed the IRS of the prior testing errors for each of 1991, 1992,
1993 and 1994 and proposed a correction that consists of corrective
contributions by the Company to the 401(k) Plan with respect to these years
(including the closed years) and the payment by the Company of the minimum
penalty ($1,000) that the IRS is authorized to accept to resolve this issue. The
IRS Houston District indicated that resolution of the nondiscrimination test
failures is premature until the National Office resolves the issues presented in
the Technical Advice Request. No assurance can be given that the IRS will permit
the Company to administratively "cure" this operational defect. The Company has
recorded a reserve during the third quarter of 1996 for amounts it may
ultimately be required to pay in connection with corrective action with respect
to the 401(k) Plan. The amount of such reserve is the Company's estimate of the
cost of corrective measures and penalties, although no assurance can be given
that the actual amount that the Company may ultimately be required to pay will
not substantially exceed the amount so reserved. In addition, the Company has
recorded an asset for an amount recoverable from the 401(k) Plan's record keeper
should the Company ultimately be required to pay the amount accrued for such
corrective measures and penalties. Based on its understanding of the settlement
experience of other companies with respect to similar issues, the Company does
not believe that the ultimate resolution of the nondiscrimination test issue
will have a material adverse effect on the Company's financial condition or
results of operations, although no assurance can be given by the Company because
the ultimate resolution of this issue will be determined in a negotiation
process
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with the IRS or in litigation. See footnote 4 of the Notes to the Company's
consolidated financial statements included elsewhere in this Prospectus.
ERISA Requirements. Employee pension and welfare benefit plans are also
governed by ERISA. ERISA defines "employer" as "any person acting directly as an
employer, or indirectly in the interest of an employer, in relation to an
employee benefit plan." ERISA defines the term "employee" as "any individual
employed by an employer." The United States Supreme Court has held that the
common law test of employment must be applied to determine whether an individual
is an employee or an independent contractor under ERISA. A definitive judicial
interpretation of "employer" in the context of a PEO or employee leasing
arrangement has not been established.
If the Company were found not to be an employer for ERISA purposes, its
plans would not comply with ERISA. Further, as a result of such finding the
Company and its plans would not enjoy, with respect to worksite employees, the
preemption of state laws provided by ERISA and could be subject to varying state
laws and regulations, as well as to claims based upon state common laws. Even if
such a finding were made, however, the Company 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.
Possible Multiple Employer Plan Treatment. The U.S. Department of Labor
("DOL") issued an Advisory Opinion in December 1995 to a staff leasing company
advising that particular company that its health plan, which covered worksite
employees, was a multiple employer plan, rather than a single employer plan.
Because the Company believes it is a co-employer of worksite employees, the
Company views its group health plan, which also covers worksite employees, to be
a single employer plan. However, if this DOL opinion were applied to the
Company, it is possible, although the Company believes it is unlikely, that the
DOL would assert penalties against the Company for having incorrectly filed
annual reports treating its plan as a single employer plan. Such a conclusion,
if applied to the other employee benefit plans that cover worksite employees,
could result in additional liabilities of the Company. The Company does not
believe that any such penalties will, individually or in the aggregate, be
material to the Company's financial condition or results of operation. Further,
even if such a conclusion is reached, however, the Company believes that it
would continue to be able to make available comparable benefit programs to
client companies.
FEDERAL EMPLOYMENT TAXES
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 the FUTA, governed by Code
Section 3301, et seq. Under these Code sections, employers have the obligation
to withhold and remit the employer portion and, where applicable, the employee
portion of these taxes.
The Market Segment 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. However, the IRS Houston District has concluded that the
Company is not the employer of worksite employees for this purpose and has
requested National Office guidance on this issue in the Technical Advice Request
described above.
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
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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
TEXAS
As an employer, the Company is subject to all Texas statutes and
regulations governing the employer-employee relationship. Subject to the
discussion below, the Company believes that its operations are in compliance in
all material respects with all applicable Texas statutes and regulations.
Prior to 1993, the PEO industry was not regulated as an industry in Texas.
Various state agencies attempted to apply their statutory schemes to PEOs on a
case-by-case basis and the Company faced various challenges from both the Texas
Employment Commission and the State Board of Insurance of Texas. Each of these
challenges was resolved with the passage of Texas' PEO licensing act described
below.
Staff Leasing Services Licensing Act. The Company was instrumental in
obtaining enactment of the Texas Staff Leasing Act, which now regulates and
establishes a legal framework for PEOs in Texas. The Texas Staff Leasing Act,
which became effective on September 1, 1993, established a mandatory licensing
scheme for PEOs and expressly recognizes a licensee as the employer of the
assigned employee for purposes of the Texas Unemployment Compensation Act. The
Texas Staff Leasing Act also provides, to the extent governed by Texas law, that
a licensee may sponsor and maintain employee benefit plans for the benefit of
assigned employees. In addition, the Texas Staff Leasing Act not only provides
that a licensee may elect to obtain workers' compensation insurance coverage for
its assigned employees but also provides that, for workers' compensation
insurance purposes, a licensee and its client company are treated as
co-employers. After February 28, 1994, it became a class A misdemeanor to engage
in PEO activities in Texas without a license issued pursuant to the Texas Staff
Licensing Act. In order to obtain a license, applicants must undergo a
background check, demonstrate a history of good standing with tax authorities
and meet certain capitalization requirements that increase with the number of
worksite employees employed. The Texas Staff Leasing Act specifies that the
Texas Department of Licensing and Regulation ("TDLR") is responsible for
enforcement of the Texas Staff Leasing Act and TDLR has adopted regulations
under the Texas Staff Leasing Act. The Company believes that it is in compliance
with such regulations in all material respects.
OTHER STATE REGULATION
While many states do not explicitly regulate PEOs, 16 states have passed
laws that have licensing or registration requirements for PEOs and at least four
states are considering such regulation. Such laws vary from state to state but
generally provide for monitoring the fiscal responsibility of PEOs. In addition
to holding a license in Texas, Administaff holds licenses in Arkansas, Florida
and New Hampshire, has been registered or certified in Massachusetts, Minnesota,
New Mexico and Nevada, and has applied for licenses in Montana, Oregon, South
Carolina, Tennessee and Utah. Whether or not a state has licensing, registration
or certification requirements, the Company faces a number of other state and
local regulations that could impact its operations. The Company believes that
its prior experience with Texas regulatory authorities will be valuable in
surmounting regulatory obstacles or challenges it may face in the future.
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MANAGEMENT
The Company's Board of Directors currently has nine members. In accordance
with the Certificate of Incorporation of the Company, the members of the Board
of Directors are divided into three classes and are elected for a term of office
expiring at the third succeeding annual stockholders' meeting following their
election to office or until a successor is duly elected and qualified. The
Certificate of Incorporation also provides that such classes shall be as nearly
equal in number as possible. The terms of office of the Class I, Class II and
Class III directors expire at the annual meeting of stockholders in 1999, 1997
and 1998, respectively.
The following table sets forth certain information on the directors and
executive officers of the Company as of January 3, 1997:
<TABLE>
<CAPTION>
DIRECTOR
NAME AGE POSITION CLASS
- ------------------------------------------ --- ----------------------------------------- --------
<S> <C> <C> <C>
Paul J. Sarvadi(1)........................ 39 President and Chief Executive Officer and II
Director
Gerald M. McIntosh........................ 55 Senior Vice President, Emerging Business II
Services and Director
James W. Hammond.......................... 58 Senior Vice President, Corporate Services I
and Director
Scott C. Hensel........................... 50 Senior Vice President, Benefits I
Administration and Director
John H. Spurgin, II....................... 50 Vice President, Legal, General Counsel
and Secretary
Richard G. Rawson......................... 48 Senior Vice President, Finance, Chief III
Financial Officer, Treasurer and Director
Linda Fayne Levinson(1)(2)(3)............. 54 Director I
Paul S. Lattanzio(1)(2)(3)................ 32 Director III
Stephen M. Soileau(1)(2)(3)............... 38 Director II
Jack M. Fields Jr......................... 44 Director III
</TABLE>
- ---------------
(1) Member of the Nominating Committee
(2) Member of the Compensation Committee
(3) Member of the Audit Committee
Paul J. Sarvadi. Mr. Sarvadi is President, CEO and co-founder of the
Company. He attended Rice University and the University of Houston prior to
starting and operating several small companies. Mr. Sarvadi has served as
President of NAPEO and has been on its Board of Directors for five years. Mr.
Sarvadi has also served as President of the Texas Chapter of the National Staff
Leasing Association ("NSLA") for three years of the first four years of its
existence. He was recently selected as Houston's Entrepreneur of the Year for
service industries.
Gerald M. McIntosh. Mr. McIntosh is a co-founder of the Company and serves
as Senior Vice President of Emerging Business Services. Prior to founding
Administaff, he was founder and President of Kingwood Trails, Inc., a planned
community maintenance company and ISSCO Trading Company, an import/export firm.
He also founded and sold three other private businesses. Mr. McIntosh has a
Bachelor of Science degree from LaSierra University and a Master of Science
degree in Public Administration from the University of Southern California.
James W. Hammond. Mr. Hammond is Senior Vice President, Corporate Services.
Prior to joining Administaff in 1987, Mr. Hammond was President of Technology
and Business Consultants, Inc., a computer consulting firm. Mr. Hammond spent 23
years with Exxon U.S.A. designing a variety of automated systems related to
operations and corporate planning. Mr. Hammond has a Bachelor of Science degree
in Chemical Engineering from Virginia Polytechnic Institute.
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Scott C. Hensel. Mr. Hensel, who serves as Senior Vice President, Benefits
Administration, joined Administaff in 1987. Prior to joining Administaff, he
spent 14 years with Exxon U.S.A., and subsequently became Vice President of
Technology and Business Consultants, Inc., a computer consulting firm. Mr.
Hensel has a Bachelor of Science degree in Engineering and a Bachelor of Arts
degree with a minor in Political Science from Brown University and a Master of
Business Administration degree in Management from Fairleigh-Dickinson
University.
John H. Spurgin, II. Mr. Spurgin has served as the Company's Vice
President, General Counsel and Secretary of Administaff since January 2, 1997.
Prior to joining the Company, Mr. Spurgin engaged in the private practice of law
as a partner with a law firm headquartered in Austin, Texas. Such law firm has
represented Administaff as outside counsel since 1988. Mr. Spurgin earned a J.D.
(with honors) from the University of Texas School of Law in 1984.
Richard G. Rawson. Mr. Rawson, who serves as Chief Financial Officer,
Treasurer and Senior Vice President, Finance, joined Administaff in 1989. From
1983 to 1989 he was founder and owner of Texas Business Consultants, a financial
consulting firm serving small-to-medium-sized businesses. Prior to that time,
Mr. Rawson served as a senior financial officer and comptroller for several
companies in the manufacturing and seismic data processing industries. Mr.
Rawson served as Chairman of the Accounting Practices Committee of NAPEO for
five years and currently serves as Treasurer of NAPEO and a member of its Board
of Directors. Mr. Rawson has a Bachelor of Business Administration Degree in
Finance and Accounting from the University of Houston.
Linda Fayne Levinson. Ms. Levinson, a director of the Company since April
of 1996, has served as President of Fayne Levinson Associates, an independent
consulting firm located in Santa Monica, California that advises both major
corporations and start-up entrepreneurial ventures, since 1994. Prior to
starting Fayne Levinson Associates, Ms. Levinson served as an executive with
Creative Artists Agency, Inc. in 1993, a partner of Wings Partners, Inc., a
merchant banking firm, from 1989 to 1992, Senior Vice President for American
Express Travel Related Services Co., Inc. from 1984 to 1987, and as a partner at
the consulting firm of McKinsey & Co. from 1979 to 1981. Ms. Levinson holds a
Bachelor of Arts degree in Russian Studies from Barnard College, a Master of
Business Administration degree from New York University School of Business and a
Master of Arts degree in Russian Literature from Harvard University. Ms.
Levinson also currently serves as a Director for Genentech, Inc., Egghead
Software, Inc. and Jacobs Engineering Group Inc.
Paul S. Lattanzio. Mr. Lattanzio, a director of the Company since 1995, is
a Managing Director with BT Capital Partners, Inc., an affiliate of Bankers
Trust New York Corporation. Mr. Lattanzio joined Bankers Trust in 1984 and has
experience in a variety of investment banking disciplines including mergers and
acquisitions, private placements and restructuring advisory areas. Since 1987
his primary focus has been on the structuring, execution and monitoring of
private equity investments for BT Capital Partners, Inc. Mr. Lattanzio received
his Bachelor of Science degree in Economics with Honors from the University of
Pennsylvania's Wharton School of Business in 1984.
Stephen M. Soileau. Mr. Soileau joined the Company as a director in October
1996. He has been Executive Vice President of TGF Management Corp., an
investment management firm, since August 1992. From July 1989 to August 1992,
Mr. Soileau was Executive Vice President of Creekwood Capital Corporation, an
asset financing company. He was Investment Manager of Houston Industries, Inc.,
a utility holding company, from December 1986 to July 1989. He has a Bachelor of
Arts degree in Economics from Rice University and a Master of International
Management from the American Graduate School of International Management. Mr.
Soileau also currently serves as a director for Calspan/SRL Corporation,
Independent Gas Company Holdings, Inc., Sovereign Business Forms Inc. and Total
Safety, Inc.
Jack M. Fields Jr. Mr. Fields joined the Company as a director on January
3, 1997 following his retirement from the United States House of
Representatives, where he served for 16 years. During 1995 and 1996, Mr. Fields
served as Chairman of the House Telecommunications and Finance Subcommittee
which has jurisdiction and oversight of the Federal Communication Commission and
the Securities and Exchange Commission. Mr. Fields earned a Bachelor of Arts
Degree in 1974 from Baylor University, and graduated from Baylor Law School in
1977. He has also served as a Trustee of Baylor University.
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<PAGE> 53
Mr. Lattanzio and Mr. Soileau were elected to the Board of Directors
pursuant to a voting agreement executed in connection with a financing completed
in May of 1994. See "-- Related Party Transactions." Following this offering, an
affiliate of BT Capital Partners, Inc. will retain the ability to hold a seat on
the Board of Directors until its ownership of Common Stock represents less than
4% of the outstanding Common Stock or has a market value of less than $10
million. All directors hold office until their successors have been elected and
qualified. Officers serve at the discretion of the Board of Directors. The
Company's Bylaws provide that directors and officers be indemnified against
liabilities arising from their service as directors or officers to the fullest
extent permitted by law, which generally requires that the individual act in
good faith and in a manner he or she reasonably believes to be in or not opposed
to the Company's best interests. See "Description of Capital Stock -- Limitation
on Directors and Officers Liability."
BOARD COMMITTEES
The Board of Directors has appointed an Audit Committee, a Compensation
Committee and a Nominating Committee. The membership of such committees is
indicated by the footnotes to the table above. The Audit Committee reviews the
scope and results of the annual audit of the Company's consolidated financial
statements conducted by the Company's independent accountants, the scope of
other services provided by the Company's independent accountants, proposed
changes in the Company's financial and accounting standards and principles, and
the Company's policies and procedures with respect to its internal accounting,
auditing and financial controls, and makes recommendations to the Board of
Directors on the engagement of the independent accountants, as well as other
matters which may come before it or as directed by the Board of Directors. The
Compensation Committee administers the Company's compensation programs,
including the Stock Option Plan, and performs such other duties as may from time
to time be determined by the Board of Directors. The Nominating Committee
considers and makes recommendations to the Board of Directors regarding persons
to be nominated by the Board of Directors for election as directors.
BOARD COMPENSATION
Non-employee directors of the Company receive compensation consisting of
(i) $10,000 annually, (ii) a fee of $2,500 for each quarterly meeting of the
Board attended, (iii) an annual fee of $1,000 payable for each committee of the
Board (if any) of which such person is the chairman and (iv) reimbursement of
reasonable expenses incurred in serving as a director. The annual compensation
can be taken in cash or Common Stock, at the Director's option. In addition,
pursuant to the Company's stock option plan each director of the Company who is
neither an employee of the Company or an employee, director, officer, partner,
principal or affiliate of Texas Growth Fund, Pyramid Ventures, Inc. or any of
their respective control persons automatically receives on the date such person
first becomes a director a grant of non-qualified options to purchase 7,500
shares of Common Stock, which will vest one-third on each anniversary of the
date of grant. In addition, following each annual meeting of the Company's
stockholders, each such outside director will receive an annual grant of options
to purchase an additional 2,500 shares of Common Stock, all of which are fully
vested on the date of grant. The exercise price of all such options is the fair
market value at the time the options are granted. Options to purchase a total of
7,500 shares of Common Stock have been granted under such arrangement to each of
Ms. Levinson and Mr. Fields. Directors who are employees of the Company or
affiliates of Texas Growth Fund or Pyramid Ventures, Inc. receive no
compensation for their services as directors.
EMPLOYMENT AND CONSULTING AGREEMENTS
The Company and John H. Spurgin, II have entered into an employment
agreement pursuant to which the Company has agreed to employ Mr. Spurgin as the
Company's Vice President, Legal and General Counsel for an initial term ending
December 31, 1999. Pursuant to such agreement, Mr. Spurgin (a) will (i) be paid
a base annual salary of $157,500 during 1997, $180,000 during 1998 and no less
than $180,000 during 1999; (ii) participate in the Company's bonus plan,
consistent with the other members of the Company's management team; and (iii) be
entitled to an allowance of up to approximately $20,000 toward the purchase of
an automobile; (b) received an option to purchase 10,000 shares of Common Stock
exercisable for $13.50
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<PAGE> 54
per share, which option was issued under the Company's Stock Option Plan
(described below); (c) will participate in the Company's employee benefit plans;
and (d) agrees not to compete with the Company for a period of 24 months
following termination of his employment.
None of the Company's other executive officers have employment or
consulting agreements with the Company.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Board of Directors was formed in February
of 1995, and currently consists of Linda Fayne Levinson, Paul S. Lattanzio and
Stephen M. Soileau. Prior to the formation of the Compensation Committee,
compensation decisions were made and approved by the Company's Board of
Directors.
EXECUTIVE COMPENSATION
The following table sets forth in summary form all compensation paid by the
Company to the Chief Executive Officer and its other five most highly
compensated executive officers (collectively, the "Named Executive Officers")
for services rendered in all capacities to the Company for the year ended
December 31, 1996:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
NAME AND ----------------------------- ALL OTHER
PRINCIPAL POSITION YEAR SALARY($) BONUS($) COMPENSATION(1)
------------------------------------------ ---- --------- -------- ---------------
<S> <C> <C> <C> <C>
Paul J. Sarvadi, President and Chief
Executive Officer....................... 1996 $ 206,674 $ -- $ 660
1995 198,600 36,000 922
Gerald M. McIntosh, Senior Vice
President............................... 1996 206,804 -- 4,500
1995 198,200 36,000 4,032
William E. Lange, Senior Vice
President(2)............................ 1996 206,654 -- 2,880
1995 198,600 36,000 2,163
James W. Hammond, Senior Vice President... 1996 206,654 -- 4,500
1995 198,400 36,000 2,326
Scott C. Hensel, Senior Vice President.... 1996 206,754 -- 2,880
1995 198,600 36,000 1,157
Richard G. Rawson, Senior Vice President
and Chief Financial Officer............. 1996 206,753 88,351 1,740
1995 198,600 71,000 2,139
</TABLE>
- ---------------
(1) Represents the Company's payments with respect to life insurance policies
benefitting the named executive. Excludes perquisites and other personal
benefits, because such compensation did not exceed the lesser of $50,000 or
10% of the total annual salary reported for each executive officer.
(2) Mr. Lange resigned as an officer, director and employee of the Company
effective December 31, 1996.
STOCK OPTION PLAN
In April 1995, the Company established the 1995 Administaff Employee Stock
Option Plan. At the annual meeting of the Company's stockholders held in April
1996, the Company's stockholders approved an amendment and restatement of such
plan to provide for automatic grants of options to non-employee directors (the
plan, as so amended and restated is referred to as the "Stock Option Plan").
Pursuant to the Stock Option Plan options may be granted to eligible employees
and non-employee directors of the Company or its subsidiaries for the purchase
of an aggregate of 357,957 shares of Common Stock of the Company. As of January
3, 1997, options to purchase 4,401 shares remain eligible for issuance pursuant
to the Stock Option Plan. Stock options granted to employees under the Stock
Option Plan are intended to qualify as "incentive stock options" within the
meaning of Section 422 of the Code. The purpose of the Stock Option Plan is to
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<PAGE> 55
further the growth and development of the Company and its subsidiaries by
providing, through ownership of stock of the Company, an incentive to employees
of the Company and its subsidiaries to increase such persons' interests in the
Company's welfare and to encourage them to continue their services to the
Company and its subsidiaries.
In addition, the Stock Option Plan authorizes grants of nonqualified
options to directors of the Company, other than any director who is also an
employee of the Company or an affiliate or an employee, director, officer or
principal of The Texas Growth Fund, Pyramid Ventures, Inc. or any of their
respective controlling persons. Each qualifying non-employee director will
receive options to purchase 7,500 shares of Common Stock on the date first
elected or appointed to the Board and an additional grant of options to purchase
2,500 shares of Common Stock as of each annual meeting of stockholders on which
the director continues to serve on the Board. On April 23, 1996 (the date the
Company's stockholders approved the amendment and restatement referred to
above), Ms. Levinson received options to purchase a total of 7,500 shares of
Common Stock, and on January 3, 1997 Mr. Fields received options to purchase a
total of 7,500 shares of Common Stock. The exercise price for these director
options will be the fair market value of the stock on the date of grant and each
option will have a term of 10 years. The 7,500 share option grants will vest as
to one-third of the shares on each anniversary of the option's grant date, while
the 2,500 share option grants will be fully vested when granted. In addition,
the options cannot be exercised after the third anniversary of the date the
director ceases to be a member of the Board. The purpose of such grants to
non-employee directors is to provide a means whereby such persons may develop a
source of proprietorship and personal involvement in the Company, to encourage
them to devote their best efforts to the Company's success and to enhance the
Company's ability to attract and retain the services of highly capable
individuals to serve as directors.
The Stock Option Plan is administered by the Board of Directors. The Board
of Directors has the power to determine which eligible employees will receive
stock option rights, the timing and manner of the grant of such rights, the
exercise price, and the number of shares to be covered by and all of the terms
of the options. The Board of Directors may delegate any or all of its
administrative duties pertaining to the Stock Option Plan to a committee (the
"Committee") of not less than three individuals, at least two of whom shall be
members of the Board of Directors.
Eligible employees under the Stock Option Plan are all employees, including
any officer who is an employee, of the Company or any of its subsidiaries.
Except for the automatic grants to non-employee directors described above, no
director of the Company is eligible to receive options under the Stock Option
Plan unless the granting of such options is approved by a majority of
disinterested directors which comprise a majority of the Board of Directors, or
by the Committee, all of whom must be disinterested directors. The term of any
option granted under the Stock Option Plan shall be determined by the Board of
Directors or the Committee; provided, however, that the term of any stock option
cannot exceed 10 years from the date of the grant, and any stock option granted
to an employee who possesses more than 10% of the total combined voting power of
all classes of stock of the Company or of its subsidiaries within the meaning of
Section 422(b)(6)of the Code must not be exercisable after the expiration of
five years from the date of grant. The exercise price per share of Common Stock
of options granted under the Stock Option Plan will be the fair market value of
a share of Common Stock on the date the option is granted, determined in good
faith by the Board of Directors or the Committee. Further, the exercise price of
any stock option granted to an employee who possesses more than 10% of the total
combined voting power of all classes of stock of the Company or of its
subsidiaries within the meaning of Section 422(b)(6) of the Code must be at
least 110% of the fair market value of the share at the time such option is
granted. The exercise price of any shares purchased pursuant to an option
granted under the Stock Option Plan shall be paid in full upon exercise of such
option in cash, or by check, or at the discretion of the Board of Directors or
the Committee.
Unless sooner terminated by action of the Board of Directors in its
discretion, the Stock Option Plan will terminate on the tenth anniversary of its
effective date. The Stock Option Plan was originally approved by the Board of
Directors on April 24, 1995, and by the shareholders of the Company on April 25,
1995, and the amendment and restatement thereof was approved by the Board of
Directors and by the Company's shareholders in April 1996. Options granted under
the Stock Option Plan are not transferable except in the event of death and must
be exercised by the optionee within 10 years after the date the option is
granted or
54
<PAGE> 56
within three months following the date the optionee's employment with the
Company terminates for any reason. The Board of Directors or the Committee, in
its discretion, may set the term for any option granted under the Stock Option
Plan; provided, however, that the term of the option cannot extend for a period
longer than that permitted for the option to qualify as an "Incentive Stock
Option" under Section 422 of the Code. The Board of Directors and the Committee
have the authority to prescribe, upon the granting of options, the vesting
schedule under which such options will become exercisable by each optionee and
the conditions of any such exercise, including the events or circumstances
resulting in the acceleration of any vesting schedule applicable to the purchase
of shares pursuant to any grant under the Stock Option Plan.
The Board of Directors may at any time terminate or amend the Stock Option
Plan; provided that no such amendment may adversely affect the rights of
optionees with regard to outstanding options. Further, no material amendment to
the Stock Option Plan, such as an increase in the total number of shares covered
by the Stock Option Plan, a change in the class of persons eligible to receive
options, a reduction in the exercise price of options, and extension of the
latest date upon which options may be exercised, shall be effective without
stockholder approval.
In April 1995 the Company granted options to purchase 96,791 shares of
Common Stock to certain non-executive officer employees with an exercise price
of $6.00 per share, which have all vested, and in August 1995 the Company
granted options to purchase 241,431 shares of Common Stock to certain non-
executive employees at $13.50 per share, 20% of which vest each year for the
ensuing five year period. At January 3, 1997, options to purchase 353,556 shares
of Common Stock were outstanding pursuant to these grants, of which options to
purchase 142,197 shares were exercisable. No options have been exercised
pursuant to these grants through January 3, 1997.
RELATED PARTY TRANSACTIONS
On May 13, 1994, the Company completed a financing (the "Financing")
whereby, in exchange for an aggregate investment of $4 million, the Company
issued to TGF (i) $4 million principal amount of subordinated notes maturing
five years from the date of issue carrying interest of 13% per annum, and (ii)
warrants to purchase 694,436 shares of Common Stock (the "TGF Investment"). In
connection with the TGF Investment, a representative of TGF became a member of
the Board of Directors. Mr. Soileau is currently TGF's representative on the
Company's Board of Directors.
The Financing also involved the issuance by the Company of 1,532,303 shares
of Common Stock to PVI at a purchase price of $2.61 per share, or an aggregate
of $4 million (the "PVI Investment"). In connection with the PVI Investment,
Paul S. Lattanzio, a representative of PVI, became a member of the Board of
Directors of the Company. Also in connection with the PVI Investment, PVI
acquired 606,667 shares of Common Stock of the Company from the following
existing stockholders in the respective amounts: McIntosh Charitable Remainder
Trust, 13,333 shares; the Reed Foundation, 10,000 shares; Gary F. Reed, 523,333
shares; Hammond Family Foundation, 20,000 shares; James W. Hammond, 20,000
shares; and Scott C. Hensel, 20,000 shares. James W. Hammond and Scott C. Hensel
are members of the Board of Directors and the McIntosh Charitable Remainder Unit
Trust and the Hammond Family Foundation are affiliates of members of the Board
of Directors. At the time of the PVI Investment, Gary F. Reed was a member of
the Board of Directors and the Reed Foundation was an affiliate of Mr. Reed.
In connection with the PVI Investment and the TGF Investment, the Company,
TGF, PVI and certain holders of Common Stock entered into an Investor Agreement
(the "Investor Agreement") and a Voting Agreement (the "Voting Agreement"), each
dated May 13, 1994. Pursuant to the Investor Agreement, PVI has a right of first
refusal to purchase any equity securities issued by the Company other than those
issued pursuant to a registered public offering, employee compensation plan or
certain warrants held by TGF and Rauscher Pierce Refsnes, Inc. ("Rauscher"), or,
in certain instances, those issued after repurchase by the Company. In addition,
pursuant to the Voting Agreement, PVI has the right to elect at least one member
of the Company's Board of Directors. Both the right of first refusal and the
board seat provisions contained in the Investor Agreement and Voting Agreement,
respectively, terminate if and when PVI ceases to own either (i) four percent or
more of the outstanding Common Stock, on a fully diluted basis, or (ii) $10
million or
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<PAGE> 57
more of Common Stock based on the average closing price of the Common Stock for
the 30 previous trading days.
In June 1995, Richard G. Rawson, Chief Financial Officer and a director of
the Company, exercised options to purchase 448,667 shares of Common Stock at a
price of $0.75 per share. The purchase price was paid in cash by Mr. Rawson. In
connection with the exercise of the options, the Company entered into a loan
agreement with Mr. Rawson in the amount of $694,000, whereby the Company paid
certain federal income tax withholding requirements related to the stock option
exercise. The loan agreement called for an additional amount to be advanced to
Mr. Rawson in the event the ultimate tax liability resulting from the exercise
exceeds the statutory withholding requirements. In April 1996, an additional
$300,000 was loaned to Mr. Rawson pursuant to this provision of the agreement.
Mr. Rawson, his wife and a family limited partnership of which Mr. Rawson is the
general partner (collectively, the "Obligors") are obligors of such loans. The
loans are repayable in five years, accrue interest at 6.83% and are secured by
414,252 shares of Common Stock owned by the Obligors. See "Principal and Selling
Stockholders."
Mr. Rawson, James W. Hammond and Scott C. Hensel, each of whom is a
director, stockholder and officer of the Company, are the stockholders of
Technology and Business Consultants, Inc. ("TBC"), which has in the past
provided various equipment, supplies, and services to the Company. The Company
paid $40,000 in 1994 for such services and equipment from TBC.
In April 1996, the Company entered into a settlement agreement relating to
litigation in which the Company and TBC were co-defendants. In accordance with
the settlement agreement, $285,000 was paid to the plaintiff. The Company paid
the entire amount of the settlement; however, TBC has agreed to reimburse the
Company for the entire amount of the settlement not recovered through the
Company's general liability insurance. In August 1996, the Company received
$113,000 pursuant to such coverage. The remaining $172,000 was reimbursed by TBC
prior to the end of 1996.
In October 1996, the Company purchased various computer equipment from TBC
at a total cost of $209,000.
In January 1997 the Company entered into an employment agreement with John
H. Spurgin, II, pursuant to which the Company agreed to employ Mr. Spurgin on
the terms set forth therein as the Company's Vice President, Legal and General
Counsel. For a description of such employment agreement, see
"Management -- Employment and Consulting Agreements." During 1996, the Company
paid $575,000 in legal fees to McGinnis, Lochridge & Kilgore, L.L.P. ("McGinnis
Lochridge"), a law firm in which Mr. Spurgin served as a partner. Mr. Spurgin
has resigned from McGinnis Lochridge effective January 31, 1997.
BT Securities Inc., an affiliate of PVI, will participate in the
underwriting syndicate for this offering and will receive customary compensation
in connection with such participation. In addition, 177,585 of the shares of
Common Stock owned by PVI are subject to purchase by the Underwriters to cover
over-allotments.
Utilizing a portion of the proceeds from the offering, the Company intends
to exercise its options to repurchase (i) 348,945 shares of Common Stock from
PVI for an aggregate exercise price of approximately $2.0 million, and (ii)
173,609 warrants to purchase shares of Common Stock shares of Common Stock from
TGF for an aggregate exercise price of approximately $540,000. See "Use of
Proceeds."
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<PAGE> 58
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock as of January 3, 1997 and as
adjusted to reflect the sale of the shares of Common Stock offered hereby, by:
(i) each of the Named Executive Officers, (ii) each of the Company's directors,
(iii) all executive officers and directors of the Company as a group, (iv) each
other person (or group of affiliated persons) who is known by the Company to own
beneficially 5% or more of the Company's Common Stock and (v) each Selling
Stockholder as if the Underwriters' over-allotment option is exercised in full.
The shares of Common Stock to be offered by the Selling Stockholders will be
offered only as part of the Underwriters' over-allotment option, and the number
of shares of Common Stock being offered in, and beneficially owned after, this
offering assumes that the Underwriters exercise in full such option to purchase
450,000 shares of Common Stock from the Selling Stockholders.
<TABLE>
<CAPTION>
NUMBER OF SHARES BENEFICIALLY
SHARES BEING OWNED AFTER OFFERING
SHARES BENEFICIALLY OFFERED FOR AND AFTER EXERCISE OF
OWNED PURCHASE OVER- ALLOTMENT
PRIOR TO OFFERING(2) UNDER OVER- OPTION(2)
NAME AND ADDRESS ------------------------ ALLOTMENT ----------------------
OF BENEFICIAL OWNERS(1) NUMBER PERCENT OPTION NUMBER PERCENT
- ------------------------------------------------ ------- ------------ --------- -------
<S> <C> <C> <C> <C> <C>
Executive Officers, Directors and 5%
Stockholders:
Paul J. Sarvadi..................... 2,179,167(3) 20.3% -- 2,179,167 16.3%
Gerald M. McIntosh.................. 1,853,240(4) 17.3 68,946 1,784,294 13.3
James W. Hammond.................... 783,952(5) 7.3 57,985 725,967 5.4
Scott C. Hensel..................... 822,250(6) 7.7 30,000 792,250 5.9
Richard G. Rawson................... 841,185(7) 7.8 -- 841,185 6.3
John H. Spurgin, II................. -- -- -- -- --
Jack M. Fields Jr................... 2,000(8) * -- 2,000 *
Paul S. Lattanzio................... 2,138,970(9) 19.9 177,585 1,612,440(10) 12.1
Stephen M. Soileau.................. 694,436(11) 6.1 57,655 463,172(12) 3.3
Linda F. Levinson................... -- -- -- -- --
Pyramid Ventures Inc................ 2,138,970(9) 19.9 177,585 1,612,440(10) 12.1
William E. Lange.................... 850,905(13) 7.9 -- 850,905 6.4
Texas Growth Fund -- 1991 Trust..... 694,436(14) 6.1 57,655 463,172(12) 3.3
Executive Officers and Directors as
a group (10 persons)............. 10,166,105 89.0 392,171 9,251,380 66.6
Other Selling Stockholders:
Pasquale Antonacci.................. 2,334 * 194 2,140 *
Vincent W. Beale, Sr. .............. 13,334 * 1,107 12,227 *
William Cutshall.................... 49,322(15) * 1,797 47,525 *
David Dickson....................... 2,667 * 221 2,446 *
Mary Ellen Feldman.................. 16,784 * 1,393 15,391 *
Fleck/Sarkisian Partnership......... 16,426 * 1,364 15,062 *
Carl M. Fleck Trust................. 10,000 * 830 9,170 *
Rosa N. Fleck Trust................. 6,390 * 531 5,859 *
Garner W. and R. Coece Menn......... 78,229 * 6,495 71,734 *
Gary and Nancy Reed Foundation...... 49,948 * 2,500 47,448 *
Harold L. Hailey.................... 68,129 * 5,656 62,473 *
Gertrude Hazelwood and Harold
Miller........................... 46,496 * 3,860 42,636 *
Ironwood Investments Partnership.... 4,400 * 365 4,035 *
Kenneth L. Kramer and F. B. Lacy.... 22,667 * 1,882 20,785 *
William F. and Mary L. Maggert...... 7,667(16) * 554 7,113 *
Rauscher Pierce Refsnes, Inc. ...... 153,230 1.4 12,722 140,508 1.0
Marvin L. and Sandra B. Roberts..... 84,944 * 7,052 77,892 *
ROMSAR DB Retirement Trust.......... 99,599 * 8,269 91,330 *
Thelma Slater....................... 12,483 * 1,036 11,447 *
</TABLE>
57
<PAGE> 59
- ---------------
* Percentage of shares beneficially owned is less than 1.0%.
(1) The address of all executive officers and directors is in care of the
Company, 19001 Crescent Springs Drive, Kingwood, Texas 77339-3802.
(2) The number of shares of Common Stock deemed outstanding prior to this
offering consists of 10,726,274 shares outstanding as of January 3, 1997.
This number excludes 989,863 shares issuable upon exercise of options and
warrants to purchase Common Stock outstanding and exercisable as of January
3, 1997. The number of shares of Common Stock deemed outstanding after this
offering includes an additional 3,000,000 shares of Common Stock being
offered for sale by the Company in this offering and excludes 348,945
shares of Common Stock to be repurchased by the Company with a portion of
the proceeds of this offering. Shares not outstanding but deemed
beneficially owned by virtue of the right of a person or group to acquire
them within 60 days are treated as outstanding only for purposes of
determining the number of and percent owned by such person or group.
(3) Includes 1,155,200 shares owned by Our Ship Limited Partnership, LTD.,
589,000 shares owned by the Sarvadi Children Limited Partnership LTD. and
214,967 shares owned by the Sarvadi Family Foundation.
(4) Includes 1,022,798 shares held in trust by David W. Russell, Trustee of the
McIntosh Charitable Remainder Unit Trust, none of which will be sold in the
Offering.
(5) Includes 542,285 shares owned by the Hammond 1994 Family L.P., 41,667
shares owned by the Hammond Family Foundation and 120,000 shares owned by
Solar Vineyard Ltd. of which 45,022 shares, 3,000 shares and 9,963 shares
are subject to purchase upon exercise of the underwriters over-allotment
option, respectively.
(6) Represents shares owned by the Hensel Family L.P.
(7) Includes 369,051 shares owned by R&D Rawson LP and 369,049 shares owned by
RDKB Rawson LP. A portion of such shares are pledged as collateral to
secure certain loans made by the Company to Mr. Rawson. See
"Management -- Related Party Transactions."
(8) Represents shares held as custodian for Jordan Fields under the Uniform
Gifts to Minors Act.
(9) Represents shares owned by Pyramid Ventures, Inc. The address of Pyramid
Ventures, Inc. is c/o BT Capital Partners, Inc., 130 Liberty Street, 25th
Floor, New York, New York 1006.
(10) Reflects the repurchase of 348,945 shares of Common Stock by the Company
with a portion of the proceeds of this offering.
(11) Represents shares subject to warrants that are currently exercisable by the
Texas Growth Fund -- 1991 Trust. Mr. Soileau disclaims beneficial ownership
of the shares.
(12) Reflects the repurchase of 173,609 warrants to purchase Common Stock by the
Company with a portion of the proceeds of this offering.
(13) Includes 442,112 shares owned of record by Jennifer W. Lange, Mr. Lange's
wife.
(14) Represents shares subject to warrants that are currently exercisable. If
the Underwriters' over-allotment option is exercised, warrants for the
requisite number of shares will be exercised to satisfy the obligation
thereunder. The address of the Texas Growth Fund -- 1991 Trust is c/o TGF
Management Corp., 100 Congress Avenue, Suite 980, Austin, Texas 78701.
(15) Includes 27,679 shares that are owned jointly with Carol P. Cutshall, Mr.
Cutshall's wife, none of which will be sold in the Offering.
(16) Includes 1,000 shares owned individually by Mary L. Maggert, none of which
will be sold in the Offering.
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<PAGE> 60
DESCRIPTION OF CAPITAL STOCK
AUTHORIZED AND OUTSTANDING CAPITAL STOCK
At the date hereof, the authorized capital stock of the Company is
80,000,000 shares, consisting of 60,000,000 shares of Common Stock of the
Company, par value $0.01 per share ("Common Stock"), and 20,000,000 shares of
Preferred Stock of the Company, par value $0.01 per share ("Preferred Stock").
The following summary is qualified in its entirety by reference to the Company's
Certificate of Incorporation (the "Charter") and Bylaws (the "Bylaws"), copies
of which are included as exhibits to the Registration Statement of which this
Prospectus is a part. All outstanding shares of Common Stock and Preferred Stock
are fully paid and non-assessable.
Common Stock. The holders of Common Stock are entitled to dividends in such
amounts and at such times as may be declared by the Board of Directors out of
funds legally available therefor. See "Dividend Policy." Holders of the Common
Stock are entitled to one vote per share for the election of directors and other
corporate matters. In the event of liquidation, dissolution or winding up of the
Company, holders of Common Stock would be entitled to share ratably in all
assets of the Company available for distribution to the holders of Common Stock.
The Common Stock carries no preemptive rights. All outstanding shares of Common
Stock are, and the shares of Common Stock to be sold by the Company in this
offering when issued will be, duly authorized, validly issued, fully paid and
nonassessable.
Preferred Stock. The Board of Directors is authorized to issue from time to
time, without stockholder authorization, in one or more designated series,
shares of preferred stock with such dividend, redemption, conversion and
exchange provisions as are provided in the particular series. Prior to the date
hereof, none of such shares have been issued. Except as by law expressly
provided, or except as may be provided by resolution of the Board of Directors,
the Preferred Stock shall have no right or power to vote on any question or in
any proceeding or to be represented at, or to receive notice of, any meeting of
stockholders of Administaff. The issuance of the Preferred Stock could have the
effect of delaying or preventing a change in control of the Company. The Board
of Directors has no present plans to issue any of the Preferred Stock.
PROVISIONS HAVING POSSIBLE ANTI-TAKEOVER EFFECT
Statutory Provisions. Section 203 ("Section 203") of the General
Corporation Law of the State of Delaware (the "Delaware Act") restricts certain
transactions between a corporation organized under Delaware law (or its
majority-owned subsidiaries) and any person holding 15% or more of the
corporation's outstanding voting stock, together with the affiliates or
associates of such person (an "Interested Stockholder"). Section 203 generally
prohibits a publicly held Delaware corporation from engaging in the following
transactions with an Interested Stockholder, for a period of three years from
the date the stockholder becomes an Interested Stockholder (unless certain
conditions, described below, are met): (a) all mergers or consolidations, (b)
sales, leases, exchanges or other transfers of 10% or more of the aggregate
assets of the corporation, (c) issuances or transfers by the corporation of any
stock of the corporation which would have the effect of increasing the
Interested Stockholder's proportionate share of the stock of any class or series
of the corporation, (d) any other transaction which has the effect of increasing
the proportionate share of the stock of any class or series of the corporation
which is owned by the Interested Stockholder, and (e) receipt by the Interested
Stockholder of the benefit (except proportionately as a stockholder) of loans,
advances, guarantees, pledges or other financial benefits provided by the
corporation.
The three-year ban does not apply if either the proposed transaction or the
transaction by which the Interested Stockholder became an Interested Stockholder
is approved by the board of directors of the corporation prior to the date such
stockholder becomes an Interested Stockholder. Additionally, an Interested
Stockholder may avoid the statutory restriction if, upon the consummation of the
transaction whereby such stockholder becomes an Interested Stockholder, the
stockholder owns at least 85% of the outstanding voting stock of the corporation
without regard to those shares owned by the corporation's officers and directors
or certain employee stock plans. Business combinations are also permitted within
the three-year period if approved by the board of directors and authorized at an
annual or special meeting of stockholders, by the
59
<PAGE> 61
holders of at least 66 2/3% of the outstanding voting stock not owned by the
Interested Stockholder. In addition, any transaction is exempt from the
statutory ban if it is proposed at a time when the corporation has proposed, and
a majority of certain continuing directors of the corporation have approved, a
transaction with a party which is not an Interested Stockholder of the
corporation (or who becomes such with board approval) if the proposed
transaction involves (a) certain mergers or consolidations involving the
corporation, (b) a sale or other transfer of over 50% of the aggregate assets of
the corporation, or (c) a tender or exchange offer for 50% or more of the
outstanding voting stock of the corporation.
Prior to the effective date of Section 203, a corporation, by action of its
board of directors, had the option of electing to exclude itself from the
coverage of Section 203. Since the effective date of such section, a corporation
may, at its option, exclude itself from the coverage of Section 203 by amending
its Certificate of Incorporation or Bylaws by action of its stockholders to
exempt itself from coverage, provided that such charter or bylaw amendment shall
not become effective until 12 months after the date it is adopted. The Company
has not adopted such a charter or bylaw amendment.
Charter and Bylaw Provisions. The Board of Directors is divided into three
classes, designated Class I, Class II and Class III. Each class of directors
consists, as nearly as possible, of one-third of the total number of directors
constituting the entire Board of Directors. The Charter provides that the number
of directors will be fixed by, or in the manner provided in, the Bylaws. The
Bylaws provide that the number of directors may be fixed from time to time by
resolution of the Board of Directors, but will consist of not less than three
nor more than 15 members. The term for directors in Class I expires at the
annual meeting of stockholders to be held in 1999; the initial term for
directors in Class II expires at the annual meeting of stockholders to be held
in 1997; and the initial term for directors in Class III expires at the annual
meeting of stockholders to be held in 1998. A director of the Company may be
removed only for cause and only upon the affirmative vote of the holders of a
majority of the outstanding capital stock entitled to vote at an election of
directors.
The Charter provides that the Company may, by action of its Board of
Directors, adopt a rights plan. The Company does not currently have a rights
plan in effect.
The Charter provides that the Company may, by action of its Board of
Directors, provide for a sinking fund for the purchase or redemption of shares
of any series and specify the terms and conditions governing the operations of
any such fund. The Company does not currently have any such fund.
The Bylaws provide that the Board of Directors shall fix the number of
directors and that a stockholder may nominate directors only if written notice
is delivered to the Company by such stockholder not less than 30 days nor more
than 60 days prior to the meeting or no later than ten days after the date of
notice by the Company of such meeting if such notice is given less than 40 days
in advance of the meeting. The Charter and the Bylaws also provide that any
newly created directorship resulting from an increase in the number of directors
or a vacancy on the Board of Directors shall be filled by vote of a majority of
the remaining directors then in office, even though less than a quorum. The
Bylaws also provide that special meetings of the stockholders may only be called
by the Board of Directors and the holders of not less than 25% of the Company's
voting stock and that the stockholders may not act by written consent. The
Charter provides that these provisions of the Charter and the Bylaws may not be
amended without the approval of at least 66 2/3% of the voting power of all
shares of the Company entitled to vote generally in the election of directors,
voting together as a single class.
The foregoing provisions of the Charter and the Bylaws and of Section 203,
together with the ability of the Board of Directors to issue Preferred Stock
without further stockholder action, could delay or frustrate the removal of
incumbent directors or the assumption of control by the holder of a large block
of Common Stock even if such removal or assumption would be beneficial, in the
short term, to stockholders of the Company. The provisions could also discourage
or make more difficult a merger, tender offer or proxy contest even if such
event would be favorable to the interests of stockholders.
60
<PAGE> 62
LIMITATION ON DIRECTORS AND OFFICERS LIABILITY
The Delaware Act authorizes corporations to limit or eliminate the personal
liability of directors to corporations and their stockholders for monetary
damages for breach of directors fiduciary duty of care. The duty of care
requires that, when acting on behalf of the corporation, directors must exercise
an informed business judgment based on all material information reasonably
available to them. Absent the limitations authorized by such legislation,
directors are accountable to corporations and their stockholders for monetary
damages for conduct constituting gross negligence in the exercise of their duty
of care. Although the Delaware Act does not change directors' duty of care, it
enables corporations to limit available relief to equitable remedies such as
injunction or rescission. The Charter limits the liability of the Company's
directors to the Company or its stockholders (in their capacity as directors but
not in their capacity as officers) to the fullest extent permitted by the
Delaware Act. Specifically, directors of the Company will not be personally
liable for monetary damages for breach of a director's fiduciary duty as a
director, except for liability (i) for any breach of the director's duty of
loyalty to the Company or its stockholders, (ii) for acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of
law, (iii) under Section 174 of the Delaware Act or (iv) for any transaction
from which the director derived an improper personal benefit.
The inclusion of this provision in the Charter may have the effect of
reducing the likelihood of derivative litigation against directors and may
discourage or deter stockholders or management from bringing a lawsuit against
directors for breach of their duty of care, even though such an action, if
successful, might otherwise have benefited the Company and its stockholders.
TRANSFER AGENT
The Transfer Agent for the Common Stock is KeyCorp Shareholder Services,
Inc.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, there will be 13,377,329 shares of Common
Stock outstanding. All of the 3,000,000 shares purchased in this offering
(3,450,000 shares of the Underwriters' over-allotment option is exercised if
full) will be freely tradeable without registration or other restriction under
the Securities Act of 1933, as amended (the "Securities Act"), except for any
shares purchased by an affiliate of the Company. All of the remaining shares of
Common Stock outstanding (the "Restricted Shares") may be sold only pursuant to
an effective registration statement filed by the Company or pursuant to an
applicable exemption, including an exemption under Rule 144 under the Securities
Act. In this regard, after giving effect to the application of the proceeds from
this offering as described under "Use of Proceeds," approximately 869,823 of the
currently outstanding shares of Common Stock will be eligible for resale
pursuant to Rule 144 after 90 days from the date of this Prospectus and the
remaining 9,507,506 shares of the currently outstanding shares of Common Stock
will be eligible for resale pursuant to Rule 144 after 180 days from the date of
this Prospectus.
In general, Rule 144 provides that if a person (including an affiliate)
holds Restricted Shares (regardless of whether such person is the initial holder
or a subsequent holder of such shares), and if at least two years have elapsed
since the later of the date on which the Restricted Shares were issued or the
date that they were acquired from an affiliate, then such person is entitled to
sell within any three-month period a number of shares that does not exceed the
greater of 1% of the then outstanding shares of Common Stock or the average
weekly trading volume of such stock during the four calendar weeks preceding the
sale. After Restricted Shares are held for three years, a person who is not
deemed an "affiliate" of the Company would be entitled to sell such shares under
Rule 144 without regard to the volume limitations described above.
PVI, the holder of 2,138,970 shares of Common Stock (the "PVI Shares"),
TGF, the holder of warrants to purchase 694,436 shares of Common Stock (the "TGF
Warrants"), and Rauscher, the holder of warrants to purchase 153,230 shares of
Common Stock, have certain rights to require the Company to register sales of
such shares, or shares acquired pursuant to such warrants, under the Securities
Act, subject to certain restrictions. If, subsequent to the consummation of this
offering, the Company proposes to register any of its securities under the
Securities Act, such holders are entitled to notice of such registration and to
include their
61
<PAGE> 63
shares in such registration with their expenses borne by the Company, subject to
the right of an underwriter participating in the offering to limit the number of
shares included in such registration. In addition, PVI and TGF have the right to
demand, on five occasions, that the Company file a registration statement
covering sales of their respective shares, and the Company is obligated to pay
the expenses of the first two of such registrations. Upon completion of the
offering, the Company plans to use a portion of the proceeds of the offering to
exercise its option to repurchase 348,945 of the PVI Shares and its option to
repurchase 173,609 of the TGF Warrants (or shares acquired upon exercise
thereof).
The effect, if any, that future market sales of shares or the availability
of shares for sale will have on the prevailing market prices for the Common
Stock cannot be predicted. Nevertheless, sales of a substantial number of shares
in the public market could adversely affect prevailing market prices for the
Common Stock.
In addition, the Company has agreed that it will not, without the prior
written consent of the representatives of the underwriters, agree to sell,
contract to sell or otherwise dispose of any shares of Common Stock or other
securities of the Company for a period of 180 days after the date of this
Prospectus, except for the grant of stock options, or the issuance of shares
upon the exercise of options granted, under the Stock Option Plan.
62
<PAGE> 64
UNDERWRITERS
Under the terms and subject to the conditions contained in an Underwriting
Agreement dated the date hereof (the "Underwriting Agreement"), each of the
Underwriters named below, for whom Morgan Stanley & Co. Incorporated and
Donaldson, Lufkin & Jenrette Securities Corporation are serving as Managers, has
severally agreed to purchase, and the Company has agreed to sell to each of the
Underwriters, the respective number of shares of Common Stock set forth opposite
the names of such Underwriters below:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
-------------------------------------------------------------------------- ---------
<S> <C>
Morgan Stanley & Co. Incorporated
Donaldson, Lufkin & Jenrette Securities Corporation
---------
Total........................................................... 3,000,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the shares of Common Stock
offered hereby are subject to the approval of certain legal matters by their
counsel and to certain other conditions. The Underwriters are committed to take
and pay for all of the shares of Common Stock offered hereby (other than those
shares covered by the over-allotment option described below) if any such shares
are taken.
The Underwriters initially propose to offer part of the Common Stock
directly to the public at the public offering price set forth on the cover page
hereof and to certain dealers at a price that represents a concession not in
excess of $ per share under the public offering price. Any Underwriter
may allow, and such dealers may reallow, a concession not in excess of
$ a share to other Underwriters or to certain dealers. After the
initial offering of the shares of Common Stock, the offering price and other
selling terms may from time to time be varied by the Underwriters.
The Selling Stockholders have granted the Underwriters an option,
exercisable for 30 days from the date of this Prospectus, to purchase up to an
additional 450,000 shares of Common Stock at the public offering price set forth
on the cover page hereof, less underwriting discounts and commissions. The
Underwriters may exercise such option to purchase solely for the purpose of
covering over-allotments, if any, incurred in the sale of the shares of Common
Stock offered hereby. To the extent such option is exercised, each Underwriter
will become obligated, subject to certain conditions, to purchase approximately
the same percentage of such additional shares as the number set forth next to
such Underwriter's name in the preceding table bears to the total number of
shares of Common Stock offered by the Underwriters hereby.
The Underwriters have informed the Company that they do not intend sales to
discretionary accounts to exceed five percent of the total number of shares of
Common Stock offered by them.
The Company and the executive officers and directors of the Company and
certain other stockholders have agreed that, without the prior written consent
of Morgan Stanley & Co. Incorporated, they will not offer, sell, contract to
sell or otherwise dispose of any shares of Common Stock or any securities
convertible into or
63
<PAGE> 65
exercisable or exchangeable for Common Stock, for a period of 180 days after the
date of this Prospectus, other than the shares of Common Stock offered hereby.
See "Shares Eligible for Future Sale."
Prior to the offering of Common Stock hereby, there has been no public
market for the Common Stock. The initial public offering price has been
determined by negotiations between the Company and the Underwriters. Among the
factors considered in determining the initial public offering price were the
future prospects of the Company and its industry in general, sales, earnings and
certain other financial and operating information of the Company in recent
periods, and the price-earnings ratios, price-sales ratios, market prices of
securities and certain financial and operating information of companies engaged
in activities similar to those of the Company.
The NYSE has approved the Common Stock for listing, subject to official
notice of issuance, under the symbol "ASF." In order to meet one of the
requirements for listing the Common Stock on the NYSE, the Underwriters have
undertaken to sell lots of 100 or more shares to a minimum of 2,000 beneficial
holders.
The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including civil liabilities under the
Securities Act.
BT Securities Inc., an affiliate of PVI, will participate in the
underwriting syndicate for this offering and will receive customary compensation
in connection with such participation. PVI beneficially owns more than 10% of
the Company's Common Stock. Under the provisions of Rule 2720 of the Conduct
Rules of the National Association of Securities Dealers ("Rule 2720"), when an
NASD member such as BT Securities Inc. distributes securities of a company in
which it and its affiliates own more than 10% of such company's common stock,
the public offering price of the common stock can be no higher than that
recommended by a "qualified independent underwriter," as such term is defined in
Rule 2720. In accordance with such requirements, Morgan Stanley & Co.
Incorporated has agreed to serve as a "qualified independent underwriter" and
has conducted due diligence and will recommend a maximum price for the shares of
Common Stock to be sold in this offering.
LEGAL MATTERS
Certain legal matters in connection with the Common Stock being offered
hereby will be passed upon for the Company by Andrews & Kurth L.L.P., Houston,
Texas and for the Underwriters by Fulbright & Jaworski L.L.P., Houston, Texas.
EXPERTS
The consolidated financial statements of Administaff, Inc. at December 31,
1994 and 1995, and for each of the three years in the period ended December 31,
1995, appearing in this Prospectus and Registration Statement have been audited
by Ernst & Young LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein and in the Registration Statement, and are included
in reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
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<PAGE> 66
ADMINISTAFF, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Auditors......................................................... F-2
Consolidated Balance Sheets as of December 31, 1994 and 1995........................... F-3
Consolidated Statements of Operations for the years ended December 31, 1993, 1994 and
1995................................................................................. F-4
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1993,
1994 and 1995........................................................................ F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1993, 1994 and
1995................................................................................. F-6
Notes to Consolidated Financial Statements............................................. F-7
Consolidated Balance Sheets as of December 31, 1995 and September 30, 1996
(unaudited).......................................................................... F-18
Consolidated Statements of Operations for the nine months ended September 30, 1995 and
1996 (unaudited)..................................................................... F-19
Consolidated Statement of Stockholders' Equity for the nine months ended September 30,
1996 (unaudited)..................................................................... F-20
Consolidated Statements of Cash Flows for the nine months ended September 30, 1995 and
1996 (unaudited)..................................................................... F-21
Notes to Consolidated Financial Statements (unaudited)................................. F-22
</TABLE>
F-1
<PAGE> 67
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Administaff, Inc.
We have audited the accompanying consolidated balance sheets of
Administaff, Inc., as of December 31, 1994 and 1995, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Administaff, Inc., at December 31, 1994 and 1995, and the consolidated results
of its operations and its cash flows for each of the three years in the period
ended December 31, 1995 in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
Houston, Texas
March 1, 1996
F-2
<PAGE> 68
ADMINISTAFF, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1994 1995
------- -------
<S> <C> <C>
Current assets:
Cash and cash equivalents........................................................ $11,535 $ 6,460
Cash and cash equivalents -- restricted.......................................... 697 --
Marketable securities............................................................ 4,753 728
Accounts receivable:
Trade.......................................................................... 2,482 2,908
Unbilled receivables........................................................... 7,647 10,763
Related parties................................................................ 249 720
Other.......................................................................... 1,126 379
Workers' compensation deposits................................................... 3,814 1,038
Prepaid expenses................................................................. 518 2,980
Refundable income taxes.......................................................... -- 2,204
Deferred income taxes............................................................ 855 58
------- -------
Total current assets...................................................... 33,676 28,238
Property and equipment:
Land............................................................................. 786 817
Buildings and improvements....................................................... 2,850 2,915
Computer equipment............................................................... 1,322 2,163
Furniture and fixtures........................................................... 1,100 2,093
Vehicles......................................................................... 514 705
Construction in progress......................................................... 48 2,444
------- -------
6,620 11,137
Accumulated depreciation......................................................... (1,262) (2,008)
------- -------
Total property and equipment.............................................. 5,358 9,129
Other assets:
Notes receivable from employees.................................................. -- 835
Deferred financing costs, net of accumulated amortization of $67 and $176 at
December 31, 1994 and 1995..................................................... 440 430
Intangible assets, net of accumulated amortization of $172 and $319 at December
31, 1994 and 1995.............................................................. 137 599
Other assets..................................................................... 134 243
Deferred income taxes............................................................ 1,336 --
------- -------
Total other assets........................................................ 2,047 2,107
------- -------
Total assets.............................................................. $41,081 $39,474
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................................. $ 749 $ 1,487
Payroll taxes and other payroll deductions payable............................... 10,202 9,829
Accrued worksite employee payroll expense........................................ 7,692 10,094
Accrued workers' compensation claims............................................. 2,338 404
Other accrued liabilities........................................................ 1,631 1,613
Income taxes payable............................................................. 1,939 --
Current maturities of long-term debt............................................. 328 74
------- -------
Total current liabilities................................................. 24,879 23,501
Noncurrent liabilities:
Accrued workers' compensation claims............................................. 3,467 621
Long-term debt................................................................... 4,679 4,605
Deferred income taxes............................................................ -- 58
------- -------
Total noncurrent liabilities.............................................. 8,146 5,284
Commitments and contingencies Stockholders' equity:
Preferred stock, par value $0.01 per share
Shares authorized -- 20,000
Shares issued and outstanding -- none.......................................... -- --
Common stock, $0.01 par value
Shares authorized -- 60,000
Shares issued and outstanding -- 10,238 and 10,726 at December 31, 1994 and
1995........................................................................... 102 107
Additional paid-in capital....................................................... 4,194 5,706
Retained earnings................................................................ 3,760 4,876
------- -------
Total stockholders' equity................................................ 8,056 10,689
------- -------
Total liabilities and stockholders' equity................................ $41,081 $39,474
======== ========
</TABLE>
See accompanying notes.
F-3
<PAGE> 69
ADMINISTAFF, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1993 1994 1995
-------- -------- --------
<S> <C> <C> <C>
Revenues.................................................... $496,058 $564,459 $716,210
Direct costs:
Salaries and wages of worksite employees.................. 397,662 453,750 582,893
Benefits and payroll taxes................................ 78,614 85,513 104,444
-------- -------- --------
Gross profit................................................ 19,782 25,196 28,873
Operating expenses:
Salaries, wages and payroll taxes......................... 6,136 8,094 10,951
General and administrative expenses....................... 5,571 5,648 7,597
Commissions............................................... 2,975 3,231 3,942
Advertising............................................... 1,612 1,797 3,268
Depreciation and amortization............................. 361 567 894
-------- -------- --------
16,655 19,337 26,652
-------- -------- --------
Operating income............................................ 3,127 5,859 2,221
Other income (expense):
Interest income........................................... 320 449 668
Interest expense.......................................... (117) (424) (713)
Other, net................................................ (27) 33 9
-------- -------- --------
176 58 (36)
-------- -------- --------
Income before income tax expense............................ 3,303 5,917 2,185
Income tax expense.......................................... 1,354 2,151 1,069
-------- -------- --------
Net income.................................................. $ 1,949 $ 3,766 $ 1,116
======== ======== ========
Net income per share of common stock........................ $ 0.22 $ 0.37 $ 0.10
======== ======== ========
Weighted average common shares outstanding.................. 8,848 10,347 10,817
======== ======== ========
</TABLE>
See accompanying notes.
F-4
<PAGE> 70
ADMINISTAFF, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
OUTSTANDING OUTSTANDING ADDITIONAL RETAINED
---------------- ---------------- PAID-IN EARNINGS
SHARES AMOUNT SHARES AMOUNT CAPITAL (DEFICIT) TOTAL
------ ------ ------ ------ ---------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1992........................ 1 $ 98 8,668 $ 87 $ 390 $ (1,945) $(1,370)
Sale of common stock........ -- -- 27 -- 40 -- 40
Redemption and repurchase of
preferred stock.......... (1) (98) 11 -- 58 (10) (50)
Net income............... -- -- -- -- -- 1,949 1,949
------ ---- ------ ---- ------ ------- -------
Balance at December 31,
1993........................ -- -- 8,706 87 488 (6) 569
Sale of common stock, net of
issuance costs of $429... -- -- 1,532 15 3,556 -- 3,571
Issuance of common stock
purchase warrants in
connection with
subordinated debt........ -- -- -- -- 150 -- 150
Net income............... -- -- -- -- -- 3,766 3,766
------ ---- ------ ---- ------ ------- -------
Balance at December 31,
1994........................ -- -- 10,238 102 4,194 3,760 8,056
Exercise of stock options... -- -- 488 5 392 -- 397
Income tax benefit from
exercise of stock
options.................. -- -- -- -- 1,120 -- 1,120
Net income............... -- -- -- -- -- 1,116 1,116
------ ---- ------ ---- ------ ------- -------
Balance at December 31,
1995........................ -- $ -- 10,726 $107 $5,706 $ 4,876 $10,689
====== ==== ====== ==== ====== ======= =======
</TABLE>
See accompanying notes.
F-5
<PAGE> 71
ADMINISTAFF, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1993 1994 1995
------- ------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income.................................................... $ 1,949 $ 3,766 $ 1,116
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization................................. 361 567 1,104
Deferred income taxes......................................... 908 (1,344) 2,191
Loss on disposal of assets.................................... 30 9 2
Changes in operating assets and liabilities:
Cash and cash equivalents -- restricted.................... (698) 1 697
Accounts receivable and unbilled revenues.................. (1,052) (5,054) (3,266)
Workers' compensation deposits............................. (1,769) (1,986) 2,776
Prepaid expenses........................................... (225) (143) (2,462)
Other assets............................................... 32 (40) (109)
Accounts payable........................................... 408 (650) 738
Payroll taxes and other payroll deductions payable......... (1,887) 7,589 (373)
Accrued workers' compensation claims....................... (2,116) 3,007 (4,780)
Other accrued liabilities.................................. 1,530 (1,107) 2,384
Income taxes payable....................................... (99) 1,543 (3,023)
------- ------- -------
Total adjustments..................................... (4,577) 2,392 (4,121)
------- ------- -------
Net cash provided by (used in) operating activities... (2,628) 6,158 (3,005)
------- ------- -------
Cash flows from investing activities:
Marketable securities:
Purchases.................................................. (240) (7,333) (2,521)
Dispositions............................................... -- 2,845 6,530
Purchases of property and equipment........................... (1,535) (1,768) (4,619)
Increase in intangible assets................................. -- (63) (610)
Proceeds from the sale of assets.............................. 116 10 15
------- ------- -------
Net cash used in investing activities................. (1,659) (6,309) (1,205)
------- ------- -------
Cash flows from financing activities:
Long-term debt:
Proceeds................................................... -- 4,000 --
Repayments................................................. (465) (189) (328)
Deferred financing costs................................... -- (357) (99)
Loans to employees............................................ -- -- (835)
Sale of common stock.......................................... 40 3,571 --
Proceeds from the exercise of stock options................... -- -- 397
Repurchase of preferred stock................................. (50) -- --
------- ------- -------
Net cash provided by (used in) financing activities............. (475) 7,025 (865)
------- ------- -------
Net increase (decrease) in cash and cash equivalents............ (4,762) 6,874 (5,075)
Cash and cash equivalents at beginning of year.................. 9,423 4,661 11,535
------- ------- -------
Cash and cash equivalents at end of year........................ $ 4,661 $11,535 $ 6,460
======= ======= =======
Supplemental disclosures:
Cash paid for interest........................................ $ 117 $ 424 $ 787
Cash paid for income taxes.................................... $ 520 $ 1,953 $ 1,900
Noncash financing activity -- issuance of common stock
purchase warrants in connection with subordinated debt
borrowings................................................. $ -- $ 150 $ --
</TABLE>
See accompanying notes.
F-6
<PAGE> 72
ADMINISTAFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
1. ACCOUNTING POLICIES
Description of Business
Administaff, Inc. (the Company) is a professional employer organization
(PEO) that provides a comprehensive personnel management system which
encompasses a broad range of services, including benefits and payroll
administration, medical and workers' compensation programs, tax filings,
personnel records management, liability management, and other human resource
services to small to medium sized businesses in several strategically selected
markets. The Company operates primarily in the State of Texas.
Principles of Consolidation
The consolidated financial statements include the accounts of Administaff,
Inc., and its wholly owned subsidiaries. Intercompany accounts and transactions
have been eliminated in consolidation.
During 1995, the Company completed a reorganization by which it formed
Administaff of Delaware, Inc., (the Holding Company) as a wholly-owned
subsidiary of the Company. At the same time, the Holding Company formed a
wholly-owned subsidiary, Administaff of Texas, Inc. into which the Company
merged. The stockholders of the Company exchanged shares of Common Stock of the
Company for shares of Common Stock of the Holding Company at a ratio of 3 for 2.
All outstanding warrants and stock options of the Company were exchanged for
warrants and stock options of the Holding Company at the same exchange ratio.
The Holding Company then changed its name to Administaff, Inc. The
reorganization had no effect on net income. Share amounts in the consolidated
financial statements and accompanying notes have been restated to reflect the
reorganization into the Holding Company (herein referred to as the Company) and
the 3-for-2 exchange.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Impairment of Long-Lived Assets
In March 1995, Statement of Financial Accounting Standards (SFAS) No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of, was issued. This Statement requires impairment losses to be
recorded on long-lived assets used in operations when indicators of impairment
are present and the undiscounted cash flows estimated to be generated by those
assets are less than the assets' carrying amount. SFAS No. 121 also addresses
the accounting for long-lived assets that are expected to be disposed of. The
Company will adopt SFAS No. 121 in the first quarter of 1996 and, based on
current circumstances, believes there will be no effect on the consolidated
financial statements from such adoption.
Cash and Cash Equivalents
Cash and cash equivalents include bank deposits and short-term investments
with original maturities of three months or less when purchased.
Cash and Cash Equivalents -- Restricted
Prior to October 1995, the Company had cash equivalents which were
restricted from withdrawal under the terms of a security agreement with a bank
whereby the Company agreed to maintain a deposit account
F-7
<PAGE> 73
ADMINISTAFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
securing the bank's exposure to the return of client payments due to
insufficient funds. At December 31, 1995, no such restrictions are in place.
Marketable Securities
The Company's marketable securities are classified as available-for-sale
and are carried at amortized cost which approximates fair value. Unrealized
gains and losses, if any, are accumulated as a separate component of
stockholders' equity. Realized gains and losses are computed based on specific
identification of the securities sold.
Property and Equipment
Property and equipment is recorded at cost. Maintenance and repairs are
charged to expense as incurred; renewals and betterments are capitalized. The
cost of property and equipment sold or otherwise retired and the accumulated
depreciation applicable thereto are eliminated from the accounts, and the
resulting profit or loss is reflected in operations.
The cost of property and equipment is depreciated over the estimated useful
lives of the related assets using the straight-line method. The estimated useful
lives of property and equipment for purposes of computing depreciation are as
follows:
<TABLE>
<S> <C>
Buildings and improvements............................................... 7-30 years
Computer equipment....................................................... 5-10 years
Furniture and fixtures................................................... 3-10 years
Vehicles................................................................. 5 years
</TABLE>
Construction in progress at December 31, 1995 includes costs incurred in
connection with the construction of an additional corporate facility which was
completed in February 1996. Interest capitalized in connection with this project
was $74,000 in 1995.
PEO Service Fees and Worksite Employee Payroll Costs
The Company's revenues consist of service fees paid by its clients under
its Client Service Agreements. In consideration for payment of such service
fees, the Company agrees to pay the following direct costs associated with the
worksite employees: (i) salaries and wages, (ii) employment related taxes, (iii)
employee benefit plan premiums and (iv) workers' compensation insurance
premiums. The Company accounts for PEO service fees and the related direct
payroll costs using the accrual method. Under the accrual method, PEO service
fees relating to worksite employees with earned but unpaid wages at the end of
each period are recognized as unbilled revenues and the related direct payroll
costs for such wages are accrued as a liability during the period in which wages
are earned by the worksite employee. Subsequent to the end of each period, such
wages are paid and the related PEO service fees are billed. Unbilled receivables
at December 31, 1994 and 1995 are net of prepayments received prior to year end
of $1,252,000 and $661,000, respectively.
Intangible Assets
Intangible assets include software development costs, referral fee costs
paid for the enrollment of certain clients previously with an unrelated PEO, and
organizational costs. Software development costs include costs related to
designing and installing the Company's computerized payroll system and are being
amortized using the straight-line over a period of five years.
The referral fee costs are being amortized over a period of five years,
which is the expected retention period for the related clients.
F-8
<PAGE> 74
ADMINISTAFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Certain costs incurred in the initial formation of the Company were
capitalized. As of December 31, 1995, such costs were fully amortized.
Accrued Workers' Compensation Claims
The Company has, from time to time, been insured under various types of
workers' compensation policies. These have included a retrospective rating plan,
whereby monthly premiums were paid to the insurance carrier based on estimated
actual losses plus an administrative fee; a high deductible paid loss plan,
whereby monthly premiums were paid based on a $500,000 deductible per
occurrence; and a guaranteed cost plan whereby monthly premiums are paid for
complete coverage of all claims under the policy.
Accrued workers' compensation claims relate to policies in place prior to
November 1, 1994 and are based on an estimate of reported and unreported losses,
net of amounts covered under the applicable insurance policy, for injuries
occurring on or before the balance sheet date. The loss estimates are based on
several factors including the Company's current experience, relative health care
costs, regional influences and other factors. While estimated losses may not be
paid for several years, an accrual for outstanding claims on the retrospective
rating plan and high deductible paid loss plan is maintained using the estimated
net present value of such claims calculated at an interest rate of 6.25%, with
changes in the accrual reflected as a component of direct costs in the period of
the change. These estimates are continually reviewed and any adjustments are
reflected in operations as they become known.
In September 1995, the Company settled the remaining outstanding claims
under certain retrospective rating workers' compensation policies in effect in
prior years resulting in a reduction in workers' compensation costs of $1
million in 1995. This amount is included as a reduction in Direct costs:
Benefits and payroll taxes on the Consolidated Statements of Operations. In
exchange for transferring the responsibility for all remaining claims under such
policies, the Company paid the insurer $232,000. Prior to the settlement, the
Company had accrued workers' compensation claims of approximately $1.2 million
related to the settled policies.
Beginning November 1, 1994, the Company has been insured under a guaranteed
cost workers' compensation policy which is currently in effect through October
31, 1996.
Stock Based Compensation
The Company accounts for stock based compensation arrangements under the
provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees," and intends to continue to do so.
Advertising
The Company expenses all advertising costs as incurred.
Income Taxes
The Company uses the liability method in accounting for income taxes. Under
this method, deferred tax assets and liabilities are determined based on
differences between financial reporting and income tax carrying amounts of
assets and liabilities and are measured using the enacted tax rates and laws
that will be in effect when the differences are expected to reverse.
Per Share Information
Per share amounts have been computed based on the weighted average number
of common shares and common stock equivalents outstanding during the respective
periods. Common stock equivalent shares consist of the incremental shares
issuable upon the exercise of stock options and warrants (using the treasury
stock or
F-9
<PAGE> 75
ADMINISTAFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
if-converted method where applicable). Shares for which stock options were
granted within a twelve month period prior to an initial public offering are
treated as outstanding for all periods presented. Therefore, shares for which
options were granted subsequent to September 1994 have been considered as having
been outstanding for purposes of the calculation (using the treasury stock
method with the offering price used for fair market value) for all periods
presented. Common stock equivalent shares from stock options and warrants
granted prior to the twelve months preceding the initial public offering are
excluded from computations if their effect is antidilutive.
Reclassifications
Certain prior year amounts have been reclassified to conform to the 1995
presentation.
2. MARKETABLE SECURITIES
At December 31, 1994 and 1995, the Company's marketable securities
consisted of debt securities issued by U.S. government entities and local
municipalities. The balance at December 31, 1994 consisted of securities with
contractual maturities of less than one year from the date of purchase. The
balance at December 31, 1995 consisted of securities with contractual maturities
ranging from ten years to 15 years from the date of purchase. All of the
Company's marketable securities are classified as available-for-sale and are
carried at amortized cost which approximates fair value. There are no unrealized
holding gains or losses at December 31, 1994 and 1995.
At December 31, 1994, marketable securities with a carrying value of
$3,737,000 were pledged as collateral under outstanding letter of credit
agreements with a bank (none at December 31, 1995).
3. LONG-TERM DEBT
Following is a summary of long-term debt:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1994 1995
------ ------
(IN THOUSANDS)
<S> <C> <C>
Subordinated notes to a related party............................ $4,000 $4,000
$610,000 note payable to bank.................................... 526 492
$350,000 note payable to bank.................................... 261 --
Mortgage note payable to developers.............................. 105 73
Mortgage note payable to bank.................................... 115 114
------ ------
Total long-term debt............................................. 5,007 4,679
Less current maturities.......................................... (328) (74)
------ ------
Noncurrent portion............................................... $4,679 $4,605
====== ======
</TABLE>
In May 1994, the Company issued $4,000,000 in subordinated notes to a
private investor pursuant to a Securities Purchase Agreement. The subordinated
notes mature in May 1999 and contain certain optional prepayment clauses.
Interest accrues at the annual rate of 13% and is payable quarterly. The
subordinated notes are subordinate to the $610,000 note payable to bank. The
Securities Purchase Agreement provides the Company with the right of first
refusal to repurchase the subordinated notes in the event of a proposed transfer
of the subordinated notes by the investor. In connection with the subordinated
notes, the Company issued the investor warrants to purchase 694,436 shares of
common stock. In connection with this transaction, a representative of the
investor became a member of the Board of Directors of the Company. Interest
expense includes $325,000 and $520,000 in 1994 and 1995, respectively, related
to the subordinated notes. See Note 5.
F-10
<PAGE> 76
ADMINISTAFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The $610,000 note is payable to the bank in monthly installments of $7,000,
including interest, with a final balloon payment of all remaining principal due
on December 31, 1997. Interest accrues at the bank's prime rate plus 1% (9.5% at
December 31, 1995). The note is secured by land, buildings and improvements.
The $350,000 note payable to bank related to land, buildings and
improvements and was repaid in 1995.
The mortgage note payable to developers is payable in annual installments
of $41,327, including interest at 8.5%, through December 31, 1997. The note is
secured by land with a cost of $218,000.
The mortgage note payable to bank is payable in monthly installments of
$884, including interest at 8.375%, with a final balloon payment of all
remaining principal due on July 1, 2008. The note is secured by land with a cost
of $160,000.
The subordinated notes and the $610,000 note payable require the Company to
maintain certain specified financial ratios and contain other restrictions
customary in lending transactions of this type.
In October 1995, the Company's wholly-owned subsidiary, Administaff of
Texas, Inc. (AT), entered into a revolving credit agreement with The First
National Bank of Chicago, as agent, pursuant to which the lenders that are
parties thereto have agreed to advance funds to AT on a revolving basis in an
amount not to exceed $10 million for general corporate purposes. Such agreement
includes an agreement to issue standby letters of credit in an amount not to
exceed a sublimit of $5 million. Borrowings under the agreement will bear
interest at rates based on the bank's Corporate Base Rate or LIBOR plus an
applicable margin at the time of borrowing. The Company is a guarantor under the
agreement. The agreement requires the Company to maintain certain specified
financial ratios and contains other restrictions customary in lending
transactions of this type. This agreement also prohibits the declaration and
payment of dividends if a default exists or, after giving effect to such
dividend, would exist under such agreement. As of December 31, 1995 there is no
amount outstanding under the agreement and AT has $10 million available for
borrowings under the agreement.
Maturities of long-term debt at December 31, 1995 are summarized as follows
(in thousands):
<TABLE>
<S> <C>
1996................................................................. $ 74
1997................................................................. 492
1998................................................................. 2
1999................................................................. 4,002
2000................................................................. 2
Thereafter........................................................... 107
------
$4,679
======
</TABLE>
F-11
<PAGE> 77
ADMINISTAFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. INCOME TAXES
Deferred taxes reflect the net tax effects of temporary differences between
the carrying amounts of assets and liabilities used for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the net deferred tax assets and net deferred tax liabilities as reflected on the
balance sheet are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1994 1995
------ -----
(IN THOUSANDS)
<S> <C> <C>
Deferred tax liabilities:
Accrual of PEO service fees and costs..................................... $ (477) $ --
Client list acquisition costs............................................. -- (133)
State income taxes........................................................ -- (117)
Depreciation and amortization............................................. (68) (203)
------ -----
Total deferred tax liabilities.................................... (545) (453)
Deferred tax assets:
Accrued workers' compensation claims...................................... 2,293 404
Other accrued liabilities................................................. 221 16
State income taxes........................................................ 188 --
Property and equipment.................................................... 34 33
------ -----
Total deferred tax assets......................................... 2,736 453
------ -----
Net deferred tax assets..................................................... $2,191 $ --
====== =====
Net noncurrent deferred tax liabilities..................................... $ -- $ (58)
Net current deferred tax assets............................................. 855 58
Net noncurrent deferred tax assets.......................................... 1,336 --
------ -----
$2,191 $ --
====== =====
</TABLE>
At December 31, 1994 and 1995, the Company had no valuation allowance
related to the deferred tax assets, primarily accrued workers' compensation
claims, as these deferred tax assets relate to tax deductions available to the
Company as incurred in the future for which sufficient income taxes have been
paid in prior years to ensure recoverability.
The components of income tax expense are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1993 1994 1995
------ ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Current income tax expense (benefit):
Federal............................................... $ 364 $ 3,013 $ (948)
State................................................. 82 482 (174)
------ ------- -------
Total current income tax expense (benefit).... 446 3,495 (1,122)
------ ------- -------
Deferred income tax expense (benefit):
Federal............................................... 778 (1,160) 1,902
State................................................. 130 (184) 289
------ ------- -------
Total deferred income tax expense (benefit)... 908 (1,344) 2,191
------ ------- -------
Total income tax expense...................... $1,354 $ 2,151 $ 1,069
====== ======= =======
</TABLE>
In 1995, a tax benefit of $1.1 million resulting from deductions relating
to the exercise of certain non-qualified employee stock option was recorded as
an increase in stockholders' equity.
F-12
<PAGE> 78
ADMINISTAFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The reconciliation of income tax expense computed at U. S. federal
statutory tax rates to the reported income tax expense is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1993 1994 1995
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Expected income tax expense at 34%........................ $1,123 $2,012 $ 743
State income taxes, net of federal benefit................ 187 135 218
Other, net................................................ 44 4 108
------ ------ ------
Reported total income tax expense......................... $1,354 $2,151 $1,069
====== ====== ======
</TABLE>
5. STOCKHOLDERS' EQUITY
In May 1994, the Company entered into a Stock Purchase Agreement with a
private investor whereby the investor purchased 1,532,303 shares of common stock
from the Company at a price of $2.61 per share. The Company realized net
proceeds of $3,571,000. The Stock Purchase Agreement contains various
restrictive covenants and provides the investor with certain antidilution
privileges. An Investor Agreement provides the Company with the right of first
refusal to repurchase the shares in the event of a proposed transfer of the
shares by the investor. In addition, the Investor Agreement provides the Company
with an option to repurchase up to 348,945 of the shares through June 1999 at
prices beginning at $5.73 per share through June 1997 and escalating annually
thereafter. See Note 11.
In connection with the issuance of $4,000,000 in subordinated notes, the
Company issued warrants to purchase 694,436 shares of common stock at a price of
$2.61 per share to the noteholder. The Investor Agreement provides the Company
with an option to repurchase 173,609 of the warrants or related shares through
June 1999 at a price of $5.73 per warrant or related share less $2.61 per
warrant if not yet exercised, through June 1997 and escalating annually
thereafter. The holder of the subordinated notes may elect to exercise a portion
or all of the warrants at the exercise price as a reduction of the outstanding
balance of the subordinated notes. The warrants are exercisable through May 13,
2001 and contain certain antidilution provisions. See Note 11.
The Investor Agreement also provides the holders of the shares of common
stock sold pursuant to the Stock Purchase Agreement and the common stock
purchase warrants issued in connection with the subordinated notes with the
right, subject to certain conditions, to require the Company to repurchase all
or any portion of the shares and warrants at a price to be calculated in
accordance with the Investor Agreement. This right becomes partially exercisable
in November 1998 and fully exercisable in November 2002 and terminates upon a
qualified public offering as defined in the Stock Purchase Agreement.
In connection with the Stock Purchase Agreement and the subordinated notes,
the Company issued warrants to purchase 153,230 shares of common stock to a
third party as partial payment of fees related to the transactions. The warrants
are exercisable through June 1999 at prices commencing at $2.61 per share with
annual escalations to $5.42 per share for the final year. The warrants contain
certain antidilution provisions.
During 1992, the Company granted options to an officer/director to purchase
an additional 448,667 shares of common stock at a price of $.75 per share. These
options were exercised in 1995. During 1993, the Company granted options to an
employee to purchase 40,000 shares of common stock at a price of $1.50 per
share. These options were exercised in 1995.
There have been no outstanding warrants or options cancelled through
December 31, 1995.
During 1993, the Company retired all of its outstanding 10% nonvoting,
convertible preferred stock. The Company paid $49,500 for 450 of the preferred
shares and issued 10,600 shares of its common stock in exchange for 530
preferred shares.
F-13
<PAGE> 79
ADMINISTAFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. OPERATING LEASES
The Company leases various furniture, equipment, and office facilities
under operating leases. Most of the leases contain purchase and/or renewal
options at fair market and fair rental value, respectively. Rental expense
relating to all operating leases was $638,000, $905,000 and $1,126,000 in 1993,
1994 and 1995, respectively. At December 31, 1995, future minimum rental
payments under noncancelable operating leases are as follows (in thousands):
<TABLE>
<S> <C>
1996.............................................................. $1,023
1997.............................................................. 835
1998.............................................................. 584
1999.............................................................. 332
2000.............................................................. 151
------
$2,925
======
</TABLE>
7. EMPLOYEE SAVINGS PLAN
The Company has adopted a 401(k) profit sharing plan (the Plan) for the
benefit of all eligible employees as defined in the plan agreement. The Plan is
a defined-contribution plan to which eligible employees may make contributions,
on a before-tax basis, of from 1% to 20% of their compensation during each year
while they are a plan participant. Under the Plan, employee salary deferral
contributions are limited to amounts established by tax laws. Participants are
at all times fully vested in their salary deferral contributions to the Plan and
the earnings thereon. All amounts contributed pursuant to the Plan are held in a
trust and invested, pursuant to the participant's election, in one or more
investment funds offered by a third party record keeper.
Employees are eligible to participate in the plan on the entry date
coincident with or next following age 21 and upon completion of at least 1,000
hours of service in a consecutive 12-month period. Highly compensated employees
assigned to clients which have less than 100% of their workforce employed by the
Company are not eligible to participate. Entry dates are the first day of each
calendar month. Service with a client company is credited for eligibility and
vesting purposes under the plan.
Effective June 1, 1994 the plan was amended to add the option of offering
matching contributions to certain worksite employees under Section 401(m) of the
Internal Revenue Code (the "Code"). The Company does not make matching
contributions to the plan for its corporate employees. Under this option, client
companies may elect to participate in the matching program, pursuant to which
the client companies contribute 50% of an employee's contributions up to 6% of
the employee's compensation each pay period. Participants vest in these matching
contributions on a graduated basis over five years with 20% vesting after one
year of service and 100% vesting after five years of service. For employees
participating in the matching program, the maximum salary deferral contribution
is 17% rather than 20%. In addition, participants shall be fully vested in these
matching contributions upon normal retirement (i.e., attainment of age 65) or
death. Total matching contributions related to worksite employees for the year
ended December 31, 1994 and 1995 were $41,000 and $420,000, respectively (none
in 1993), all of which were reimbursed to the Company by the client companies.
8. RELATED PARTY TRANSACTIONS
Accounts receivable from related parties at December 31, 1994 and 1995
includes $93,000 from a company in which three of the directors of the Company
own a minority interest. Accounts receivable from related parties also includes
$156,000 and $627,000 from employees of the Company at December 31, 1994 and
1995, respectively.
F-14
<PAGE> 80
ADMINISTAFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Three of the Company's stockholders and officers are the stockholders of
Technology and Business Consultants, Inc. ("TBC"), an entity which has provided
various equipment, supplies, and services to the Company. The Company paid
$754,000 and $40,000 in 1993 and 1994, respectively for such services and
equipment from TBC (none in 1995). Such costs are included primarily as a
component of general and administrative expenses.
In June 1995, an officer of the Company exercised options to purchase
448,667 shares of common stock at a price of $0.75 per share. The purchase price
was paid in cash by the officer. In connection with the exercise of the options,
the Company entered into a loan agreement with the officer, whereby the Company
paid certain federal income tax withholding requirements related to the stock
option exercise on behalf of the officer in the amount of $694,000. The loan
agreement calls for an additional amount to be advanced to the officer in the
event the ultimate tax liability resulting from the exercise exceeds the
statutory withholding requirements. The loan is repayable in five years, accrues
interest at 6.83%, and is secured by 448,667 shares of the Company's common
stock.
In September 1995, an employee of the Company exercised options to purchase
40,000 shares of common stock at a price of $1.50 per share. The purchase price
was paid in cash by the employee. In connection with the exercise of the
options, the Company entered into a loan agreement with the employee, whereby
the Company paid certain federal income tax withholding requirements related to
the stock option exercise on behalf of the employee in the amount of $141,000.
The loan agreements calls for an additional amount to be advanced to the
employee in the event the ultimate tax liability resulting from the exercise
exceeds the statutory withholding requirements. The loan is repayable in five
years, accrues interest at 6.83%, and is secured by 40,000 shares of the
Company's common stock.
9. COMMITMENTS AND CONTINGENCIES
The Company's 401(k) Plan for the year ended December 31, 1993 is currently
under audit by the Internal Revenue Service ("IRS"). The Company understands
that one of the issues under review is the relationship of the Company to
certain worksite employees and the Company's status as their employer for 401(k)
Plan purposes. If the IRS concludes that the Company is not the "employer" of
certain worksite employees for purposes of the Code, worksite employees could
not continue to make salary deferral contributions to the 401(k) Plan or
continue to participate in certain other employee benefit plans of the Company,
including the Company's cafeteria plan. The Company believes that, although
unfavorable to the Company, a prospective application of such a conclusion would
not have a material adverse effect on its financial position or results of
operations. If such conclusion were applied retroactively, however, employees'
vested account balances would become taxable, the Company would lose its tax
deduction to the extent its matching contributions were not vested, the plan's
trust would become a taxable trust, and the Company could be subject to
liability with respect to its failure to withhold income and payroll taxes in
respect of such contributions and trust earnings thereon. In addition, the
Company could be subject to liability for failure to withhold applicable taxes
under certain other employee benefit plans in which worksite employees
participate. In such a scenario, the Company would also face the risk of client
dissatisfaction as well as potential litigation. While the ultimate outcome of
the audit is unknown, the Company believes that a retroactive application is
unlikely. The Company also believes that a prospective application of an
unfavorable outcome will not have a material adverse effect on the Company's
consolidated financial position or results of operations.
The Company is a defendant in various lawsuits and claims arising in the
normal course of business. Management believes it has valid defenses in these
cases and is defending them vigorously. While the results of litigation cannot
be predicted with certainty, management believes the final outcome of such
litigation will not have a material adverse effect on the Company's consolidated
financial position or results of operations.
The Company had outstanding letters of credit aggregating $4,666,000 at
December 31, 1994 (none at December 31, 1995).
F-15
<PAGE> 81
ADMINISTAFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. EMPLOYEE STOCK OPTION PLAN
In April 1995, the Company established the 1995 Administaff Employee Stock
Option Plan (the "Stock Option Plan"), pursuant to which options may be granted
to eligible employees of the Company or its subsidiaries for the purchase of an
aggregate of 357,957 shares of Common Stock of the Company. Stock options
granted under the Stock Option Plan are intended generally to qualify as
"incentive stock options" within the meaning of Section 422 of the Code. The
purpose of the Stock Option Plan is to further the growth and development of the
Company and its subsidiaries by providing, through ownership of stock of the
Company, an incentive to employees of the Company and its subsidiaries to
increase such persons' interests in the Company's welfare and to encourage them
to continue their services to the Company and its subsidiaries.
The Stock Option Plan is administered by the Board of Directors (the
"Board"). The Board has the power to determine which eligible employees will
receive stock option rights, the timing and manner of the grant of such rights,
the exercise price, and the number of shares to be covered by and all of the
terms of the options. The Board may at any time terminate or amend the Stock
Option Plan; provided that no such amendment may adversely affect the rights of
optionees with regard to outstanding options. Further, no material amendment to
the Stock Option Plan, such as an increase in the total number of shares covered
by the Stock Option Plan, a change in the class of persons eligible to receive
options, a reduction in the exercise price of options, and extension of the
latest date upon which options may be exercised, shall be effective without
stockholder approval.
In April 1995, the Board granted options to purchase 96,791 shares of
common stock at a price of $6.00 per share to certain non-management employees.
In August 1995, the Board granted options to purchase 241,431 shares of common
stock at a price of $13.50 per share to certain non-management employees. The
April grants are primarily fully vested, except for 9,013 shares which vest in
1996. The August grants vest at 20% per year over a five year period from the
date of grant. At December 31, 1995, 87,778 shares are exercisable pursuant to
the April grants. Through December 31, 1995, no options have been exercised
pursuant to these grants.
11. INITIAL PUBLIC OFFERING
The Company filed a registration statement with the Securities and Exchange
Commission ("SEC") in September 1995 to register the sale of up to 3,000,000
shares of its common stock. The Company intends to use the net proceeds of the
sale to support expansion of the Company's operations including the opening of
new geographic markets, further penetration of existing markets by opening new
sales offices and, as opportunities arise, expansion of the Company's client
base in new or existing markets through acquisitions. A portion of the proceeds
will also be used to repay certain outstanding indebtedness, including the
subordinated notes, and to exercise certain options to repurchase 348,945 shares
of common stock and 173,609 warrants to purchase common stock. See Note 5.
In connection with the preparation of consolidated financial statements to
be filed with the SEC, the Company elected to restate its financial statements
for certain previously reported accounting changes made in 1994 and 1993.
Accordingly, the accompanying consolidated financial statements and related
notes reflect this restatement. See Note 12.
As of December 31, 1995, the Company remains in registration with the SEC
and the timetable for completion of the proposed offering is uncertain. The
Company has incurred costs totaling $745,000 through December 31, 1995 related
to the offering which are included in prepaid expenses on the consolidated
balance sheet. Upon consummation of the offering, such costs will be reflected
as a reduction to stockholders' equity.
Supplemental net income per share is $0.16 for the year ended December 31,
1995 and is determined by adding back the interest expense, net of income taxes,
associated with the debt which will be retired by the proceeds of the offering
to net income. The number of shares outstanding used in calculating supplemental
net
F-16
<PAGE> 82
ADMINISTAFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
income per share was the weighted average common shares outstanding after giving
effect to the estimated number of shares that would be required to be sold in
the offering to repay the debt and to repurchase the common stock and warrants.
12. ACCOUNTING CHANGES
As reflected in its previously issued financial statements for 1994, the
Company changed its method of accounting for client enrollment costs and changed
its method of accounting for PEO service fees and worksite employee payroll
costs and in 1993 the Company changed its method of accounting for income taxes
in accordance with Statement of Financial Accounting Standards ("SFAS") No. 109.
In connection with the proposed initial public offering of the Company's common
stock, the Company elected to retroactively restate its financial statements for
these changes effective at the date of its inception.
Deferred Client Enrollment Costs
The Company changed its method of accounting for certain costs related to
acquiring new business, including advertising, review, quotation, and enrollment
expenses that vary with and are primarily related to the enrollment of new
clients, from the deferral method to the expense method. Under the expense
method, all such costs, including all advertising costs, are charged to expense
as incurred. Previously, under the deferral method, all such costs were deferred
and amortized using the straight-line method over a period of five years. The
new method of accounting was adopted partially to comply with the requirements
of Statement of Position 93-7 which requires all nondirect advertising costs to
be expensed when incurred. Such expenses were a significant portion of the costs
which were previously deferred. In addition, as the Company has grown, other
enrollment costs have become less material as a component of operating expenses.
As a result, the Company believes that expensing all enrollment costs will
result in a more accurate matching of costs and revenues.
Accrual of PEO Service Fees and Worksite Employee Payroll Costs
The Company changed its method of accounting for PEO service fees and the
related direct payroll costs to the accrual method. Under the accrual method,
PEO service fees are recognized as unbilled revenue and the related direct
payroll costs are accrued as a liability during the period in which wages are
earned by the worksite employee. Previously, the Company recorded the PEO
service fees and direct payroll costs in the period in which the payroll was
disbursed. The new method of accounting for these fees and expenses was adopted
to comply with the accrual method of accounting for revenues and expenses
required by generally accepted accounting principles, for which the difference
was not previously material to the financial position or results of operations
of the Company.
Income Taxes
Effective January 1, 1993, the Company adopted SFAS No. 109, "Accounting
for Income Taxes." As permitted, prior years financial statements have been
restated.
F-17
<PAGE> 83
ADMINISTAFF, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents........................................ $ 6,460 $ 9,594
Marketable securities............................................ 728 --
Accounts receivable:
Trade......................................................... 2,908 1,336
Unbilled receivables.......................................... 10,763 15,845
Related parties............................................... 720 614
Other......................................................... 379 270
Prepaid expenses................................................. 2,980 2,343
Workers' compensation deposits................................... 1,038 --
Refundable income taxes.......................................... 2,204 --
Deferred income taxes............................................ 58 --
------- -------
Total current assets..................................... 28,238 30,002
Property and equipment:
Land............................................................. 817 1,081
Buildings and improvements....................................... 2,915 6,262
Computer equipment............................................... 2,163 2,696
Furniture and fixtures........................................... 2,093 3,634
Vehicles......................................................... 705 723
Construction in progress......................................... 2,444 --
------- -------
11,137 14,396
Accumulated depreciation......................................... (2,008) (2,950)
------- -------
Total property and equipment............................. 9,129 11,446
Other assets:
Notes receivable from employees.................................. 835 1,188
Deferred financing costs......................................... 430 321
Intangible assets................................................ 599 710
Other assets..................................................... 243 1,467
------- -------
Total other assets....................................... 2,107 3,686
------- -------
Total assets............................................. $ 39,474 $45,134
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................. $ 1,487 $ 1,562
Payroll taxes and other payroll deductions payable............... 9,829 5,718
Accrued worksite employee payroll expense........................ 10,094 15,644
Accrued workers' compensation claims............................. 404 43
Other accrued liabilities........................................ 1,613 1,775
Current maturities of long-term debt............................. 74 74
Income taxes payable............................................. -- 788
Deferred income taxes............................................ -- 1,095
------- -------
Total current liabilities................................ 23,501 26,699
Noncurrent liabilities:
Accrued workers' compensation claims............................. 621 --
Other accrued liabilities........................................ -- 2,558
Deferred income taxes............................................ 58 --
Long-term debt................................................... 4,605 4,574
------- -------
Total noncurrent liabilities............................. 5,284 7,132
Commitments and contingencies Stockholders' equity:
Preferred stock.................................................. -- --
Common stock..................................................... 107 107
Additional paid-in capital....................................... 5,706 5,706
Retained earnings................................................ 4,876 5,490
------- -------
Total stockholders' equity............................... 10,689 11,303
------- -------
Total liabilities and stockholders' equity............... $ 39,474 $45,134
======= =======
</TABLE>
See accompanying notes.
F-18
<PAGE> 84
ADMINISTAFF, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
1995 1996
-------- --------
<S> <C> <C>
Revenues............................................................... $505,619 $635,252
Direct costs:
Salaries and wages of worksite employees............................. 408,379 517,820
Benefits and payroll taxes........................................... 76,964 91,307
-------- --------
Gross profit........................................................... 20,276 26,125
Operating expenses:
Salaries, wages and payroll taxes.................................... 8,055 10,475
General and administrative expenses.................................. 5,497 5,937
Commissions.......................................................... 2,908 2,939
Advertising.......................................................... 2,125 2,488
Depreciation and amortization........................................ 627 1,063
-------- --------
19,212 22,902
-------- --------
Operating income....................................................... 1,064 3,223
Other income (expense):
Interest income...................................................... 487 449
Interest expense..................................................... (514) (747)
Other, net........................................................... 27 (1,398)
-------- --------
-- (1,696)
-------- --------
Income before income taxes............................................. 1,064 1,527
Income taxes........................................................... 447 913
-------- --------
Net income............................................................. $ 617 $ 614
======== ========
Net income per share of common stock................................... $ 0.06 $ 0.06
Weighted average common shares outstanding............................. 10,767 10,873
</TABLE>
See accompanying notes.
F-19
<PAGE> 85
ADMINISTAFF, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 1996
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCK
OUTSTANDING ADDITIONAL
---------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
------ ------ ---------- -------- -------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995................... 10,726 $107 $5,706 $4,876 $10,689
Net income..................................... -- -- -- 614 614
------ ---- ------ ------ -------
Balance at September 30, 1996.................. 10,726 $107 $5,706 $5,490 $11,303
====== ==== ====== ====== =======
</TABLE>
See accompanying notes.
F-20
<PAGE> 86
ADMINISTAFF, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
1995 1996
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net income............................................................... $ 617 $ 614
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization.......................................... 778 1,231
Deferred income taxes.................................................. 2,015 1,096
Loss (gain) on disposal of assets...................................... 3 (9)
Changes in operating assets and liabilities:
Cash and cash equivalents -- restricted............................. 697 --
Accounts receivable and unbilled revenues........................... (1,527) (3,295)
Workers' compensation deposits...................................... 2,060 1,038
Prepaid expenses.................................................... (170) 637
Other assets........................................................ (27) (1,224)
Accounts payable.................................................... 488 75
Payroll taxes and other payroll deductions payable.................. (3,451) (4,111)
Accrued workers' compensation claims................................ (4,132) (982)
Other accrued liabilities........................................... 1,736 8,269
Income taxes payable (refundable)................................... (3,569) 2,992
------- -------
Total adjustments.............................................. (5,099) 5,717
------- -------
Net cash provided by (used in) operating activities............ (4,482) 6,331
------- -------
Cash flows from investing activities:
Marketable securities:
Purchases.............................................................. (2,521) --
Dispositions........................................................... 6,540 728
Purchases of property and equipment...................................... (2,349) (3,372)
Increase in intangible assets............................................ (579) (185)
Proceeds from the sale of assets......................................... 22 19
------- -------
Net cash provided by (used in) investing activities............ 1,113 (2,810)
------- -------
Cash flows from financing activities:
Long term debt and short-term borrowings:
Proceeds............................................................... -- 2,500
Repayments............................................................. (99) (2,531)
Deferred financing costs............................................... -- (3)
Loans to employees....................................................... (848) (353)
Proceeds from the exercise of stock options.............................. 397 --
------- -------
Net cash used in financing activities.......................... (550) (387)
------- -------
Net increase (decrease) in cash and cash equivalents..................... (3,919) 3,134
Cash and cash equivalents at beginning of period......................... 11,535 6,460
------- -------
Cash and cash equivalents at end of period............................... $ 7,616 $ 9,594
======= =======
Supplemental disclosures:
Cash paid for interest................................................. 514 807
Cash paid (refunds received) for income taxes.......................... 2,001 (3,175)
</TABLE>
See accompanying notes.
F-21
<PAGE> 87
ADMINISTAFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
Administaff, Inc. (the Company) is a professional employer organization
(PEO) that provides a comprehensive personnel management system which
encompasses a broad range of services, including benefits and payroll
administration, medical and workers' compensation programs, tax filings,
personnel records management, liability management, and other human resource
services to small to medium sized businesses in several strategically selected
markets.
The consolidated financial statements include the accounts of Administaff,
Inc. and its wholly owned subsidiaries. Intercompany accounts and transactions
have been eliminated.
During 1995, the Company completed a reorganization by which it formed
Administaff of Delaware, Inc. (the Holding Company) as a wholly-owned subsidiary
of the Company. At the same time, the Holding Company formed a wholly-owned
subsidiary, Administaff of Texas, Inc. into which the Company merged. The
stockholders of the Company exchanged shares of common stock of the Company for
shares of common stock of the Holding Company at a ratio of 3-for-2. All
outstanding warrants and stock options of the Company were exchanged for
warrants and stock options of the Holding Company at the same exchange ratio.
The Holding Company then changed its name to Administaff, Inc. The
reorganization had no effect on net income. Share amounts in the consolidated
financial statements and accompanying notes have been restated to reflect the
3-for-2 exchange.
The Company's consolidated balance sheet at September 30, 1996 and the
consolidated statements of operations, cash flows and stockholders' equity for
the interim periods ended September 30, 1996 and September 30, 1995 have been
prepared by the Company without audit. In the opinion of management, all
adjustments, consisting only of normal recurring adjustments, necessary to
present fairly the consolidated financial position, results of operations and
cash flows have been made. The results of operations for the interim periods are
not necessarily indicative of the operating results for a full year or of future
operations.
Per share amounts have been computed based on the weighted average number
of common shares and common stock equivalents outstanding during the respective
periods. Common stock equivalent shares consist of the incremental shares
issuable upon the exercise of stock options and warrants (using the treasury
stock or the if-converted method where applicable). Shares for which stock
options were granted within a twelve month period prior to an initial public
offering are treated as outstanding for all periods presented. Therefore, shares
for which options were granted subsequent to September 1994 have been considered
as having been outstanding for purposes of the calculation (using the treasury
stock method with the offering price used for fair market value) for all periods
presented. Common stock equivalent shares from stock options and warrants
granted prior to twelve months preceding the initial public offering are
excluded from computations if their effect is antidilutive.
Supplemental net income per share is $0.10 for the nine months ended
September 30, 1996 and is determined by adding back the interest expense, net of
income taxes, associated with the debt which will be retired by the proceeds of
the offering, to the net income. The number of shares outstanding used in
calculating supplemental net income per share was the weighted average common
shares outstanding after giving effect to the estimated number of shares that
would be required to be sold in the offering to repay the debt and to repurchase
the common stock and warrants.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. The accompanying
F-22
<PAGE> 88
ADMINISTAFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
consolidated financial statements should be read in conjunction with the
Company's audited consolidated financial statements for the year ended December
31, 1995.
2. LONG-TERM DEBT
Following is a summary of long-term debt:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ -------------
(IN THOUSANDS)
<S> <C> <C>
Subordinated notes to related party........................ $4,000 $ 4,000
$610,000 note payable to bank.............................. 492 462
Mortgage note payable to developers........................ 73 73
Mortgage note payable to bank.............................. 114 113
------ ------
Total long-term debt....................................... 4,679 4,648
Less current maturities.................................... (74) (74)
------ ------
Noncurrent portion......................................... $4,605 $ 4,574
====== ======
</TABLE>
The subordinated notes and the $610,000 note payable require the Company to
maintain certain specified financial requirements and contain other restrictions
customary in lending transactions of this type. The Company has obtained a
waiver of the quick ratio covenant in both agreements (a requirement covering
two consecutive quarters) for the two quarters ended September 30, 1996. This
waiver cures any noncompliance with the covenant as of September 30, 1996.
In October 1995 the Company's wholly-owned subsidiary, Administaff of
Texas, Inc. (Administaff of Texas), entered into a $10 million revolving credit
agreement (Credit Agreement) with a bank. Such Credit Agreement includes an
agreement to issue standby letters of credit in an amount not to exceed a
sublimit of $5 million. The Company is a guarantor under the Credit Agreement.
The Credit Agreement requires the Company to maintain certain specified
financial ratios and contains other restrictions customary in lending
transactions of this type. The Credit Agreement also prohibits the declaration
and payment of dividends if a default exists or, after giving effect to such
dividend, would exist under such agreement. As of September 30, 1996 the Company
has no borrowings outstanding under the agreement and has $10 million available
for borrowings under the agreement.
3. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities used for financial
reporting purposes and the amounts used for income tax purposes. The items
resulting in deferred tax assets and liabilities include accrued workers'
compensation claims, depreciation and amortization, state income taxes, client
list acquisition costs, allowance for uncollectible accounts receivable, net
operating loss carryforwards and other accrued liabilities.
In January and May 1996, the Internal Revenue Service approved the
Company's request for a change in the method of accounting for PEO service fees
and worksite employee payroll costs to the accrual method for income tax
purposes. These changes were adopted for financial reporting purposes effective
January 1, 1994. For PEO service fees the change was approved effective January
1, 1995 with a three year phase in period for the cumulative effect of the
change. For worksite employee payroll costs, the change was approved effective
January 1, 1995 with a one year phase in period for the cumulative effect of the
change. As a result, the Company amended its 1995 consolidated federal income
tax return to account for these changes. The Company received refunds totaling
$3.5 million in May and July 1996 resulting from the original and amended
federal income tax returns. Deferred income taxes at September 30, 1996 includes
the effect of the three year
F-23
<PAGE> 89
ADMINISTAFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
phase in for the cumulative effect of the change in accounting for PEO service
fees as a component of net current and noncurrent deferred income taxes.
The Company's provision for income taxes, which includes the effects of the
non-recurring charge for 401(k) Plan issues, differs from the U.S. statutory
rate of 34% due primarily to certain portions of such non-recurring charge being
non-deductible for income tax purposes. In addition, the Company's provision for
income taxes differs from the U.S. statutory rate due to state income taxes.
4. COMMITMENTS AND CONTINGENCIES
The Company is a defendant in various lawsuits and claims arising in the
normal course of business. Management believes it has valid defenses in these
cases and is defending them vigorously. While the results of litigation cannot
be predicted with certainty, management believes the final outcome of such
litigation will not have a material adverse effect on the Company's consolidated
financial position.
The Company's 401(k) plan is currently under audit by the Internal Revenue
Service (the "IRS") for the year ended December 31, 1993. Although the audit is
for the 1993 plan year, certain conclusions of the IRS would be applicable to
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. With
respect to the 401(k) Plan audit, the Company understands that the IRS Houston
District intends to seek technical advice (the "Technical Advice Request") from
the IRS National Office about (1) 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, and (2) whether the 401(k) Plan's failure to satisfy a
nondiscrimination test relating to contributions should result in
disqualification of the 401(k) Plan because the Company has failed to provide
evidence that it satisfies an alternative discrimination test. A draft copy of
the Technical Advice Request has been sent to the Company for its comments
before the IRS Houston District submits it to the IRS National Office. The draft
of 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 (1) covers worksite employees who are not employees of
the Company, and (2) failed a nondiscrimination test applicable to contributions
and the Company has not furnished evidence that the 401(k) Plan satisfies an
alternative test. The Company also understands that, with respect to the Market
Segment 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") is being referred to the IRS National Office.
Whether the National Office will address the Technical Advice Request
independently of the Industry Issue is unclear. Should the IRS conclude that the
Company is not a "co-employer" of worksite employees for purposes of the Code,
worksite employees could not continue to make salary deferral contributions to
the 401(k) Plan or pursuant to the Company's cafeteria plan or continue to
participate in certain other employee benefit plans of the Company. The Company
believes that, although unfavorable to the Company, a prospective application of
such a conclusion (that is, one applicable only to periods after 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 conclusion were applied retroactively to disqualify the 401(k) Plan for
1993 and subsequent years, employees' vested account balances under the 401(k)
Plan would become taxable, the Company would lose its tax deductions to the
extent its matching
F-24
<PAGE> 90
ADMINISTAFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
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 will not have a material
adverse effect on the Company's consolidated financial position or results of
operations.
In addition to the 401(k) Plan audit and Market Segment Study, the Company
notified the IRS of certain operational issues concerning nondiscrimination test
results for certain prior plan years. In 1991 the Company engaged a third party
vendor to be the 401(k) Plan's record keeper and to perform certain required
annual nondiscrimination tests for the 401(k) Plan. Each year such record keeper
reported to the Company that such nondiscrimination tests had been satisfied.
However, in August 1996 the 401(k) Plan's record keeper advised the Company that
certain of these tests had been performed incorrectly for prior years and, in
fact, that the 401(k) Plan had failed certain tests for the 1993, 1994 and 1995
plan years. The Company has subsequently determined that the 401(k) Plan also
failed a nondiscrimination test for 1991 and 1992, closed years for tax
purposes. At the time the Company received such notice, the period in which the
Company could voluntarily "cure" this operational defect had lapsed for all such
years, except 1995.
With respect to the 1995 plan year, the Company has caused the 401(k) Plan
to refund the required excess contributions and earnings thereon to the affected
employees. In connection with this correction, the Company has accrued
approximately $51,000 for an excise tax applicable to this plan year. With
respect to all other plan years, the Company has proposed a corrective action to
the IRS under which the Company would make additional contributions to certain
plan participants which bring the plan into compliance with the discrimination
tests.
The Company has recorded an accrual for its estimate of the cost of
corrective measures and penalties for all of the affected plan years, which
accrual is reflected in Other accrued liabilities -- noncurrent on the
Consolidated Balance Sheet. The Company calculated its estimates based on its
understanding of the resolution of similar issues with the IRS. Separate
calculations were made to determine the Company's estimate of both the cost of
corrective measures and penalties for each plan year. In addition, the Company
has recorded an asset for an amount recoverable from the 401(k) Plan's record
keeper should the Company ultimately be required to pay the amount accrued for
such corrective measures and penalties, which amount is reflected in Other
assets on the Consolidated Balance Sheet. The amount of the accrual is the
Company's estimate of the cost of corrective measures and practices, although no
assurance can be given that the actual amount that the Company may be ultimately
required to pay will not substantially exceed the amount accrued. The net of
these amounts is reflected on the Company's Consolidated Statement of Operations
as a component of other income (expense), net, and their tax effect is included
in the provision for income taxes. Based on its understanding of the settlement
experience of other companies with the IRS, the Company does not believe the
ultimate resolution of this 401(k) Plan matter will have a material adverse
effect on the Company's financial condition or results of operations.
5. RELATED PARTY TRANSACTIONS
In connection with an exercise of stock options in 1995, the Company
entered into a loan agreement with an officer, whereby the Company paid certain
federal income tax withholding requirements related to the stock option exercise
on behalf of the officer in the amount of $694,000. The loan agreement called
for an additional amount to be advanced to the officer in the event the ultimate
tax liability resulting from the exercise exceeded the statutory withholding
requirements. In April 1996, the Company loaned the officer an
F-25
<PAGE> 91
ADMINISTAFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
additional $300,000 relating to this transaction. The loans are repayable in
five years, accrue interest at 6.83%, and are secured by 448,667 shares of the
Company's common stock.
In April 1996, the Company entered into a settlement agreement relating to
litigation in which the Company and Technology and Business Consultants, Inc.
("TBC") were co-defendants. TBC is a company whose stockholders are three
directors/officers of the Company. In accordance with the settlement agreement,
$285,000 was paid to the plaintiff. The Company paid the entire amount of the
settlement; however, TBC has agreed to reimburse the Company for the entire
amount of the settlement not recovered through the Company's general liability
insurance. In August 1996, the Company received $113,000 pursuant to such
coverage. The remaining $172,000 is expected to be reimbursed by TBC prior to
the end of 1996.
In October 1996 the Company purchased various computer equipment from TBC
at a total cost of $209,000.
6. INITIAL PUBLIC OFFERING
The Company remains in registration with the Securities and Exchange
Commission for the offering of up to 3,450,000 shares of its common stock. The
timetable of the proposed offering is uncertain; however, the Company filed an
amendment to its registration statement in October 1996, responding to comments
from its initial filing and updating all information to September 30, 1996. The
Company has incurred costs totaling $1.1 million through September 30, 1996
related to the offering which are included in prepaid expenses on the
consolidated balance sheet. Upon consummation of the offering, such costs will
be reflected as a reduction to stockholders' equity.
F-26
<PAGE> 92
[Graphic depiction of traditional small business/employee relationship which
presents each of the responsibilities of the employer. A second graphic depicts
the three party relationship between a small business, the employee and the
Company as well as the division of responsibilities between the Company and the
small business owner.]
<PAGE> 93
[ADMINISTAFF LOGO]
<PAGE> 94
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION(1)
<TABLE>
<S> <C>
SEC Registration Fee............................................. $ 15,518
NASD Filing Fee.................................................. 5,000
NYSE Listing Fee................................................. 25,000
Accounting Fees and Expenses..................................... 625,000
Legal Fees and Expenses.......................................... 660,000
Printing Expenses................................................ 280,000
Blue Sky Qualification Fees and Expenses......................... 5,000
Transfer Agent's Fees............................................ 30,000
Miscellaneous.................................................... 104,482
----------
TOTAL.................................................. $1,750,000
=========
</TABLE>
- ---------------
(1) The amounts set forth above, except for the SEC, NASD and NYSE fees, are in
each case estimated.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Subsection (a) of section 145 of the General Corporation Law of the State
of Delaware empowers a corporation to indemnify any person who was or is a party
or is threatened to be made a party to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation) by
reason of the fact that he is or was a director, officer, employee or agent of
the corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful.
Subsection (b) of Section 145 empowers a corporation to indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that such
person acted in any of the capacities set forth above, against expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection with the defense or settlement of such action or suit if he acted in
good faith and in a manner he reasonably believed to be in or not opposed to the
best interests of the corporation, except that no indemnification may be made in
respect of any claim, issue or matter as to which such person shall have been
made to be liable to the corporation unless and only to the extent that the
Court of Chancery or the court in which such action or suit was brought shall
determine upon application that, despite the adjudication of liability but in
view of all the circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such expenses which the Court of Chancery or such
other court shall deem proper.
Section 145 further provides that to the extent a director or officer of a
corporation has been successful on the merits or otherwise in the defense of any
action, suit or proceeding referred to in subsections (a) and (b) of Section 145
in the defense of any claim, issue or matter therein, he shall be indemnified
against expenses (including attorneys' fees) actually and reasonably incurred by
him in connection therewith; that indemnification provided for by Section 145
shall not be deemed exclusive of any other rights to which the indemnified party
may be entitled; that indemnification provided for by Section 145 shall, unless
otherwise provided when authorized or ratified, continue as to a person who has
ceased to be a director, officer, employee or agent and shall inure to the
benefit of such person's heirs, executors and administrators; and empowers the
corporation to purchase and maintain insurance on behalf of a director or
officer of the corporation against any
II-1
<PAGE> 95
liability asserted against him and incurred by him in any such capacity, or
arising out of his status as such whether or not the corporation would have the
power to indemnify him against such liabilities under Section 145.
Section 102(b)(7) of the General Corporation Law of the State of Delaware
provides that a certificate of incorporation may contain a provision eliminating
or limiting the personal liability of a director to the corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director
provided that such provision shall not eliminate or limit the liability of a
director (i) for any breach of the director's duty of loyalty to the corporation
or its stockholders, (ii) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, (iii) under
Section 174 of the Delaware General Corporation Law, or (iv) for any transaction
from which the director derived an improper personal benefit.
Article Eleventh of the Company's Certificate of Incorporation states that:
No director of the Corporation shall be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty by such director as a director; provided, however, that this Article
Eleventh shall not eliminate or limit the liability of a director to the extent
provided by applicable law (i) for any breach of the director's duty of loyalty
to the Corporation or its stockholders, (ii) for acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law,
(iii) under Section 174 of the General Corporation Law of the State of Delaware
or (iv) for any transaction from which the director derived an improper personal
benefit. No amendment to or repeal of this Article Eleventh shall apply to, or
have any effect on, the liability or alleged liability of any director of the
Corporation for or with respect to any facts or omissions of such director
occurring prior to such amendment or repeal. If the General Corporation Law of
the State of Delaware is amended to authorize corporate action further
eliminating or limiting the personal liability of directors, then the liability
of a director of the Corporation shall be eliminated or limited to the fullest
extent permitted by the General Corporation Law of the State of Delaware, as so
amended.
In addition, Article VI of the Company's Bylaws further provides that the
Company shall indemnify its officers, directors and employees to the fullest
extent permitted by law.
Pursuant to the Underwriting Agreement filed as Exhibit 1.1 to this
Registration Statement, the Underwriters have agreed to indemnify, under certain
conditions, the Company, its officers and directors, and persons who control the
Company within the meaning of the Securities Act of 1933, as amended, against
certain liabilities.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Set forth below is certain information concerning all sales of securities
by the Company during the past three years that were not registered under the
Securities Act of 1933. The description presented below gives effect to the
Company's recent reorganization and accompanying two for three share exchange.
(a) On May 13, 1994, the Company issued $4 million principal amount of
subordinated notes and stock purchase warrants representing the right to
purchase 694,436 shares of Common Stock of the Company to the Texas Growth
Fund, in exchange for an aggregate purchase price of $4 million.
(b) On May 13, 1994, the Company issued 1,532,303 shares of its Common
Stock at a price of $2.61 per share to Pyramid Ventures, Inc., in exchange
for an aggregate purchase price of $4 million.
(c) On May 13, 1994, the Company issued a stock purchase warrant
entitling the holder to purchase up to 153,230 shares of the Company's
Common Stock to Rauscher Pierce Refsnes, Inc. ("Rauscher"), in exchange for
$100.00 and Rauscher's services in securing the TGF and Pyramid investments
described in paragraphs (a) and (b) of this item.
(d) On June 12, 1995, Mr. Rawson exercised options to purchase 448,667
shares of Common Stock at a price of $0.75 per share. The aggregate
exercise price of $336,500 was paid in cash by Mr. Rawson.
II-2
<PAGE> 96
(e) On September 15, 1995, Mr. Broussard exercised options to purchase
40,000 shares of Common Stock at a price of $1.50 per share. The aggregate
exercise price of $60,000 was paid in cash by Mr. Broussard.
These transactions were completed without registration under the Securities
Act of 1933 in reliance on the exemption provided by Section 4(2) of the
Securities Act of 1933.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- -------------------- ------------------------------------------------------------------------
<C> <S>
*1.1 -- Form of Underwriting Agreement.
*3.1 -- Certificate of Incorporation.
*3.2 -- Bylaws.
*4.1 -- Specimen Common Stock Certificate.
*4.2 -- Registration Rights Agreement, as amended, dated May 13, 1994, by and
among Administaff, Inc., Pyramid Ventures, Inc. and the Board of
Trustees of the Texas Growth Fund as Trustee for the Texas Growth
Fund-1991 Trust.
*4.3 -- Investor Agreement, as amended, dated May 13, 1994, by and among
Administaff, Inc., Pyramid Ventures, Inc. and the Board of Trustees
of the Texas Growth Fund as Trustee for the Texas Growth Fund-1991
Trust.
*4.4 -- Common Stock Warrant, as amended, issued to the Texas Growth
Fund-1991 Trust on May 13, 1994.
*4.5 -- Warrant Agreement, as amended, dated May 13, 1994, between Rauscher
Pierce Refsnes, Inc. and Administaff, Inc.
*4.6 -- Voting Agreement, as amended, dated May 13, 1994, by and among
Administaff, Inc., Pyramid Ventures, Inc., the Board of Trustees of
the Texas Growth Fund as Trustee for the Texas Growth Fund-1991 Trust
and certain stockholders of Administaff, Inc.
*4.7 -- Subordinated Note of Administaff, Inc. in favor of The Board of
Trustees of the Texas Growth Fund, as Trustee.
*5.1 -- Opinion of Andrews & Kurth L.L.P. as to the legality of the
securities being registered.
*10.1 -- Amended and Restated Promissory Note among Administaff, Inc., Richard
G. Rawson, Dawn Rawson, and RDKB Rawson LP, dated as of December 16,
1996, amending and restating a Promissory Note dated June 22, 1995.
*10.2 -- Amended and Restated Promissory Note among Administaff, Inc., Jerald
L. Broussard and Mary Catherine Broussard, dated as of December 30,
1996, amending and restating a Promissory Note dated September 4,
1995.
*10.3 -- Credit agreement between Administaff, Inc. and First National Bank of
Chicago, dated as of October 16, 1995.
*10.4 -- Amendment No. 1 and Waiver to Credit Agreement, dated as of March 12,
1996.
*10.5 -- Amended and Restated Promissory Note, dated as of December 16, 1996,
among Administaff, Inc., Richard G. Rawson, Dawn Rawson, and RDKB
Rawson LP, amending and restating a Promissory Note dated April 11,
1996.
*10.6 -- Amended and Restated Security Agreement-Pledge among Administaff,
Inc., Richard G. Rawson, Dawn Rawson, and RDKB Rawson LP, dated as of
December 16, 1996, pursuant to which the collateral securing the
promissory notes included as Exhibits 10.1 and 10.5 is pledged.
</TABLE>
II-3
<PAGE> 97
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- -------------------- ------------------------------------------------------------------------
<C> <S>
*10.7 -- Amended and Restated Security Agreement-Pledge among Administaff,
Inc., Jerald L. Broussard and Mary Catherine Broussard, dated as of
December 30, 1996, pursuant to which the collateral securing the
promissory note included as Exhibit 10.2 is pledged.
*10.8 -- 1995 Administaff Stock Option Plan (as amended and restated).
**10.9 -- Form of Second Amended and Restated Promissory Note.
**10.10 -- Form of Second Amended and Restated Security Agreement -- Pledge.
*11.1 -- Statement re: Computation of Per Share Earnings.
*21.1 -- Subsidiaries of Administaff, Inc.
23.1 -- Consent of Andrews & Kurth L.L.P. (included in Exhibit 5.1).
**23.2 -- Consent of Ernst & Young LLP.
*24.1 -- Powers of Attorney.
*24.2 -- Power of Attorney of Paul S. Lattanzio.
*24.3 -- Power of Attorney of Linda Fayne Levinson.
*24.4 -- Power of Attorney of Stephen M. Soileau.
*24.5 -- Power of Attorney of Jack Fields.
*27.1 -- Financial Data Schedule
</TABLE>
- ---------------
* Previously filed as an Exhibit to this Registration Statement.
** filed with this amendment.
Pursuant to Item 601(b)(4)(iii) of Regulation S-K, the Company has not
filed any instrument with respect to long-term debt not being registered if the
total amount of securities authorized thereunder does not exceed 10 percent of
the total assets of the Company and agrees to file a copy of such instruments
with the Commission upon request.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act, and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II-4
<PAGE> 98
The undersigned registrant hereby undertakes:
(1) That for purposes of determining any liability under the
Securities Act of 1933, the information omitted from the form of prospectus
filed as part of this Registration Statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be
part of this Registration Statement as of the time it was declared
effective.
(2) That for the purpose of determining any liability under the
Securities Act of 1933, each posteffective amendment that contains a form
of prospectus shall be deemed to be a new registration statement relating
to the securities offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering thereof.
(3) To provide to the underwriters at the closing specified in the
underwriting agreement certificates in such denominations and registered in
such names as required by the underwriters to permit prompt delivery to
each purchaser.
II-5
<PAGE> 99
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 5 to Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized in the City of Houston,
State of Texas, on January 21, 1997.
ADMINISTAFF, INC.
By: /s/ RICHARD G. RAWSON
------------------------------------
Richard G. Rawson
Senior Vice President, Chief
Financial
Officer and Treasurer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on January 21, 1997.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- -------------------------------------------- --------------------------------------------
<C> <S>
/s/ PAUL J. SARVADI* President, Chief Executive Officer and
- -------------------------------------------- Director (Principal Executive Officer)
Paul J. Sarvadi
/s/ RICHARD G. RAWSON Senior Vice President, Chief Financial
- -------------------------------------------- Officer, Treasurer and Director (Principal
Richard G. Rawson Financial Officer and Principal Accounting
Officer)
/s/ GERALD M. McINTOSH* Senior Vice President and Director
- --------------------------------------------
Gerald M. McIntosh
/s/ JAMES W. HAMMOND* Senior Vice President and Director
- --------------------------------------------
James W. Hammond
/s/ SCOTT C. HENSEL* Senior Vice President and Director
- --------------------------------------------
Scott C. Hensel
/s/ LINDA FAYNE LEVINSON* Director
- --------------------------------------------
Linda Fayne Levinson
/s/ PAUL S. LATTANZIO* Director
- --------------------------------------------
Paul S. Lattanzio
/s/ STEPHEN M. SOILEAU* Director
- --------------------------------------------
Stephen M. Soileau
/s/ JACK FIELDS* Director
- --------------------------------------------
Jack Fields
*By: /s/ RICHARD G. RAWSON
- --------------------------------------------
Richard G. Rawson
(Attorney-in-fact for persons indicated)
</TABLE>
II-6
<PAGE> 100
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- -------------------- ------------------------------------------------------------------------
<C> <S>
*1.1 -- Form of Underwriting Agreement.
*3.1 -- Certificate of Incorporation.
*3.2 -- Bylaws.
*4.1 -- Specimen Common Stock Certificate.
*4.2 -- Registration Rights Agreement, as amended, dated May 13, 1994, by and
among Administaff, Inc., Pyramid Ventures, Inc. and the Board of
Trustees of the Texas Growth Fund as Trustee for the Texas Growth
Fund-1991 Trust.
*4.3 -- Investor Agreement, as amended, dated May 13, 1994, by and among
Administaff, Inc., Pyramid Ventures, Inc. and the Board of Trustees
of the Texas Growth Fund as Trustee for the Texas Growth Fund-1991
Trust.
*4.4 -- Common Stock Warrant, as amended, issued to the Texas Growth
Fund-1991 Trust on May 13, 1994.
*4.5 -- Warrant Agreement, as amended, dated May 13, 1994, between Rauscher
Pierce Refsnes, Inc. and Administaff, Inc.
*4.6 -- Voting Agreement, as amended, dated May 13, 1994, by and among
Administaff, Inc., Pyramid Ventures, Inc., the Board of Trustees of
the Texas Growth Fund as Trustee for the Texas Growth Fund-1991 Trust
and certain stockholders of Administaff, Inc.
*4.7 -- Subordinated Note of Administaff, Inc. in favor of The Board of
Trustees of the Texas Growth Fund, as Trustee.
*5.1 -- Opinion of Andrews & Kurth L.L.P. as to the legality of the
securities being registered.
*10.1 -- Amended and Restated Promissory Note among Administaff, Inc., Richard
G. Rawson, Dawn Rawson, and RDKB Rawson LP, dated as of December 16,
1996, amending and restating a Promissory Note dated June 22, 1995.
*10.2 -- Amended and Restated Promissory Note among Administaff, Inc., Jerald
L. Broussard and Mary Catherine Broussard, dated as of December 30,
1996, amending and restating a Promissory Note dated September 4,
1995.
*10.3 -- Credit agreement between Administaff, Inc. and First National Bank of
Chicago, dated as of October 16, 1995.
*10.4 -- Amendment No. 1 and Waiver to Credit Agreement, dated as of March 12,
1996.
*10.5 -- Amended and Restated Promissory Note, dated as of December 16, 1996,
among Administaff, Inc., Richard G. Rawson, Dawn Rawson, and RDKB
Rawson LP, amending and restating a Promissory Note dated April 11,
1996.
*10.6 -- Amended and Restated Security Agreement-Pledge among Administaff,
Inc., Richard G. Rawson, Dawn Rawson, and RDKB Rawson LP, dated as of
December 16, 1996, pursuant to which the collateral securing the
promissory notes included as Exhibits 10.1 and 10.5 is pledged.
*10.7 -- Amended and Restated Security Agreement-Pledge among Administaff,
Inc., Jerald L. Broussard and Mary Catherine Broussard, dated as of
December 30, 1996, pursuant to which the collateral securing the
promissory note included as Exhibit 10.2 is pledged.
*10.8 -- 1995 Administaff Stock Option Plan (as amended and restated).
**10.9 -- Form of Second Amended and Restated Promissory Note.
**10.10 -- Form of Second Amended and Restated Security Agreement -- Pledge.
</TABLE>
<PAGE> 101
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- -------------------- ------------------------------------------------------------------------
<C> <S>
*11.1 -- Statement re: Computation of Per Share Earnings.
*21.1 -- Subsidiaries of Administaff, Inc.
23.1 -- Consent of Andrews & Kurth L.L.P. (included in Exhibit 5.1).
**23.2 -- Consent of Ernst & Young LLP.
*24.1 -- Powers of Attorney.
*24.2 -- Power of Attorney of Paul S. Lattanzio.
*24.3 -- Power of Attorney of Linda Fayne Levinson.
*24.4 -- Power of Attorney of Stephen M. Soileau.
*24.5 -- Power of Attorney of Jack Fields.
*27.1 -- Financial Data Schedule
</TABLE>
- ---------------
* Previously filed as an Exhibit to this Registration Statement.
** filed with this amendment.
<PAGE> 1
EXHIBIT 10.9
SECOND AMENDED AND RESTATED PROMISSORY NOTE (THIS "NOTE")
(SECURED BY SECURITY AGREEMENT)
<TABLE>
<S> <C>
Effective Date: . . . . . . . . . . . . . . . . June 22, 1995
Makers: . . . . . . . . . . . . . . . . . . . . Richard G. Rawson and wife, Dawn Rawson
2902 Valley Manor Drive
Kingwood, Harris County, Texas 77339; and
RDKB Rawson, L.P., a Texas Family Limited Partnership
2902 Valley Manor Drive
Kingwood, Harris County, Texas 77339
(collectively, the "Makers," and individually, a "Maker")
Payee: . . . . . . . . . . . . . . . . . . . . . Administaff, Inc., a Delaware corporation
(the "Payee")
Place for Payment: . . . . . . . . . . . . . . . 19001 Crescent Springs Drive
(including county) Kingwood, Montgomery County, Texas or any other place that Payee
may designate in writing
Principal Amount: . . . . . . . . . . . . . . . . Six Hundred Ninety-Three Thousand Six Hundred Ninety-Four and
75/100 Dollars ($693,694.75)
Annual Interest Rate on
Unpaid Principal from Date: . . . . . . . . . Six and 83/100 Percent (6.83%)
Annual Interest Rate on
Matured Unpaid Amounts: . . . . . . . . . . . Six and 83/100 Percent (6.83%)
</TABLE>
Terms of Payment (principal and interest):
The principal of this Note shall be due and payable in full on
June 22, 2000.
Interest shall be due and payable annually as interest accrues,
beginning on June 22, 1996, and continuing regularly and annually
thereafter on the 22nd day of June of each year thereafter until June
22, 2000, when, as stated above, the entire principal balance of this
Note, and all accrued unpaid interest thereon shall be due and payable
Page 1 of 5
<PAGE> 2
in full. Interest installments shall be calculated on the unpaid
principal balance from time to time outstanding hereunder, from the
date following the last interest payment date through the date of
payment.
Security for Payment:
A security interest created and granted in the following Second
Amended and Restated Security Agreement (the "Security Agreement"):
<TABLE>
<S> <C>
Date: . . . . . . . . . . . . . . . . . January ___, 1997
Debtors: . . . . . . . . . . . . . . . Richard G. Rawson and wife, Dawn Rawson
2902 Valley Manor Drive
Kingwood, Harris County, Texas 77339; and
RDKB Rawson, L.P., a Texas Family Limited Partnership
2902 Valley Manor Drive
Kingwood, Harris County, Texas 77339
Secured Party: . . . . . . . . . . . . Administaff, Inc.
19001 Crescent Springs Drive
Kingwood, Montgomery County, Texas 77339
Collateral Location: . . . . . . . . . Secretary of Administaff, Inc.
(including County) 19001 Crescent Springs Drive
Kingwood, Montgomery County, Texas 77339
Collateral Description: . . . . . . . . Stock Certificate No. T 0013 (29,616 shares), No. T 0019 (220,500
shares), T 0025 (118,933 shares), T 0104 (25,769 shares) and No.
T 0145 (19,434 shares) representing shares of common stock issued
by Administaff, Inc., a Delaware corporation, and any and all
stock certificate(s) issued in replacement, substitution, or
redemption thereof or in substitution therefor, or as a result of
any share split or reverse share split, together with all proceeds
thereof, all as more fully described in the Security Agreement.
</TABLE>
Page 2 of 5
<PAGE> 3
Each Maker jointly and severally promises to pay to the order of Payee
the principal balance of this Note and accrued interest thereon, at the place
for payment and according to the terms of payment and at the rates stated
above. Makers shall have the right to prepay all or any portion of the
outstanding principal balance of this Note.
The holder of this Note may accelerate the maturity of a portion of
the then outstanding principal balance of this Note if any part of the
collateral securing payment of this Note is included in the initial public
offering of securities of the issuer thereof. The portion of the outstanding
principal balance hereof which may be accelerated is the portion which equals
the actual sales price of the collateral sold in an arm's length transaction.
This paragraph shall not limit the rights of the secured party under the
Security Agreement or any other agreement or instrument executed as security
for or otherwise in connection with this Note, whether now existing or
hereafter executed (collectively, the "Other Documents").
If Makers default in the payment of this Note or under any term of the
Security Agreement, or in the performance of any obligation under any of the
Other Documents, and such default continues after the holder of this Note gives
Makers notice of such default and the time within which it must be cured, as
may be required by law or by written agreement, then the holder of this Note
may, at its option, declare the unpaid principal balance hereof and accrued,
unpaid interest thereon immediately due and payable in full without notice of
any kind. Makers and each surety, endorser, and guarantor waive all demands
for payment, presentations for payment, notices of intention to accelerate
maturity, notices of acceleration of maturity, protests, and notices of
protests and all other notices of whatever kind, to the extent permitted by
law.
If any one or more of this Note, the Security Agreement or any one or
more of the Other Documents are given to an attorney for collection or
enforcement, or if suit is brought for collection or enforcement, or if this
Note is collected through probate, bankruptcy, or other judicial proceeding,
then Makers shall pay the holder of this Note all costs of collection and
enforcement, including reasonable attorney's fees and court costs, of not less
than 10% of the amount due under this Note, in addition to other amounts due.
It is the intention of Makers and Payee to comply strictly with all
applicable usury laws. Interest on the debt evidenced by this Note, however
denominated, shall not exceed the maximum amount of nonusurious interest that
may be contracted for, taken, reserved, charged, collected or received under
applicable law; any interest collected or received in excess of such maximum
nonusurious amount shall be deemed a mistake and credited against the unpaid
principal balance hereof then outstanding or, if the principal hereof has been
repaid, refunded to Makers, and the effective interest rate and amount
applicable to this Note shall automatically be reduced to the maximum
nonusurious contract rate and amount of interest allowed for this Note under
applicable law. The foregoing provision shall override all demands and
charges, the effect of all prepayments, and all contrary provisions, if any, in
this Note, the Security Agreement and the Other Documents.
Page 3 of 5
<PAGE> 4
Each Maker is responsible for all obligations represented by this
Note.
It is the express understanding of the Makers and Payee that any
judgment for the repayment of the indebtedness evidenced hereby or interest
thereon will be enforced first against the collateral furnished pursuant to the
Security Agreement (the "Collateral") and, second, only to the extent that the
indebtedness evidenced hereby or any interest thereon is not satisfied by the
Collateral, against Richard G. Rawson and Dawn Rawson, or either of them
personally or any property of Richard G. Rawson and Dawn Rawson or either of
them to the full extent of such deficiency, but not against RDKB Rawson, L.P.
or except for the Collateral, any of its property; in any action to collect any
amount payable hereunder or to enforce performance of any of the other
provisions of the Security Agreement or any of the Other Documents; provided,
however:
(a) Nothing herein contained shall be construed as
limiting or impairing enforcement against the Collateral or otherwise
prohibiting Payee from exercising any and all remedies which this
Note, the Security Agreement or the Other Documents permit, so long as
the exercise of any remedy shall only extend to execution against or
recovery out of any property of Richard G. Rawson and Dawn Rawson, or
either of them in addition to the Collateral in any action to
foreclose or to collect any amounts payable hereunder at such time as
the Collateral is fully exhausted and then only to the extent any
deficiency was not satisfied by the Collateral;
(b) Makers shall be fully and personally liable, jointly
and severally, for any and all costs, expenses and other sums payable
to third parties (including, without limitation, attorney's fees and
court costs) paid or incurred by Payee to enforce this Note, to
protect or enforce Payee's security interest in the Collateral or
otherwise to enforce the Security Agreement, or to enforce the Other
Documents, together with interest thereon at the rate of ten percent
per annum.
This Note is executed to amend and restate in its entirety that
certain Amended and Restated Promissory Note (Secured by Security Agreement)
dated as of June 22, 1995 in the original principal amount of $693,694.75
executed by Richard G. Rawson, wife, Dawn Rawson and RDKB Rawson L.P. payable
to the order of Payee (the "Amended Note"), the purpose of such amendment and
restatement being, generally, to evidence the Makers' and the Payee's agreement
to provide that the indebtedness evidenced hereby shall be recourse to the
extent provided herein and in the Security Agreement and make this Note
consistent with the original intention of the Payee's Board of Directors and
the Makers. In order to induce Payee to amend and restate the Amended Note
according to the terms hereof, Makers hereby acknowledge and agree that the
principal amount of $693,694.75, together with accrued interest thereon from
and after June 22, 1996 is fully due and owing under the Amended Note, and that
such amounts (both principal and accrued, unpaid interest thereon) are fully
valid and subsisting as of the date of execution hereof and are not subject to
set-off, deduction, defense or counterclaim of any kind whatsoever.
Page 4 of 5
<PAGE> 5
When the context requires, singular nouns and pronouns include the
plural, and vice versa.
EXECUTED the ______ day of JANUARY, 1997 to be effective as of
June 22, 1995.
- ---------------------------------------- ------------------------------------
Richard G. Rawson Dawn Rawson
RDKB RAWSON L.P., a Texas Family Limited Partnership
By:
------------------------------------------------
Richard G. Rawson, General Partner
Page 5 of 5
<PAGE> 1
EXHIBIT 10.10
SECOND AMENDED AND RESTATED
SECURITY AGREEMENT - PLEDGE
(AS THE SAME MAY BE AMENDED, MODIFIED OR
SUPPLEMENTED FROM TIME TO TIME, THIS "AGREEMENT")
Administaff, Inc., a Delaware corporation, whose address is 19001
Crescent Springs Drive, Kingwood, Montgomery County, Texas 77339 (herein
referred to as "Secured Party"); and Richard G. Rawson and wife, Dawn Rawson
(herein referred to collectively as the "Rawsons"), whose address is 2902
Valley Manor Drive, Kingwood, Harris County, Texas 77339, and RDKB Rawson L.P.,
a Texas Family Limited Partnership (herein referred to as the "Partnership,"
and together with the Rawson herein referred to collectively as "Debtors"),
agree as follows:
Section I. Creation of Security Interest.
The Rawsons hereby jointly and severally grant a security interest in,
and pledge, to Secured Party the "Rawson Collateral"(hereinafter defined) to
secure the performance and payment by Debtors of any and all indebtedness and
obligations now or hereafter owing by Debtors or any of them to Secured Party,
including, without limitation, pursuant to or under (i) that certain Second
Amended and Restated Promissory Note with effective date of June 22, 1995 in
the original principal amount of $693,694.75 executed by Debtors payable to the
order of Secured Party; (ii) that certain Second Amended and Restated
Promissory Note with effective date of April 11, 1996 in the original principal
amount of $300,000.00, also executed by Debtors payable to the order of Secured
Party (the Second Amended and Restated Promissory Notes described in the
foregoing clauses (i) and (ii) shall be herein referred to collectively as the
"Promissory Notes"); (iii) this Agreement; and (iv) any and all "Other
Documents" (hereinafter defined).
The Partnership hereby grants a security interest in, and pledges, to
Secured Party the "Partnership Collateral"(hereinafter defined) to secure the
performance and payment by Debtors of any and all indebtedness and obligations
now or hereafter owing by Debtors or any of them to Secured Party, including,
without limitation, pursuant to or under (i) each of the Promissory Notes; (ii)
this Agreement; and (iii) any and all Other Documents.
The indebtedness and obligations of Debtors (or any of them) to Secured
Party secured by this Agreement are referred to herein as the "secured
indebtedness" or the "indebtedness secured hereby." The secured indebtedness
includes, without limitation, any and all attorney's fees now or hereafter
owing by Debtors to Secured Party.
Section II. Collateral.
2.1 The collateral pledged by the Rawsons to Secured Party pursuant
to the foregoing Section I hereof (herein collectively referred to as the
"Rawson Collateral") consists of all shares of the common stock issued by
Secured Party described in Exhibit "A" attached hereto (collectively, the
"Rawson Shares"), together with any and all shares and other rights received by
the Rawsons or
Page 1 of 14
<PAGE> 2
either of them from the issuer of the Rawson Shares in replacement,
substitution, or redemption of the Rawson Shares or as a result of any share
split or reverse share split, together with any and all proceeds thereof, as
the term "proceeds" is defined by Article 9 of the Texas Business and Commerce
Code.
2.2 The collateral pledged by the Partnership to Secured Party
pursuant to the foregoing Section I hereof (herein collectively referred to as
the "Partnership Collateral") consists of all shares of the common stock issued
by Secured Party described in Exhibit "B" attached hereto (collectively, the
"Partnership Shares"), together with any and all shares and other rights
received by the Partnership from the issuer of the Partnership Shares in
replacement, substitution, or redemption of the Rawson Shares or as a result of
any share split or reverse share split, together with any and all proceeds
thereof, as the term "proceeds" is defined by Article 9 of the Texas Business
and Commerce Code.
2.3 The Rawson Collateral and the Partnership Collateral shall be
herein collectively referred to as the "Collateral."
2.4 Each of the Debtors shall deliver all certificates or other
instruments representing the Collateral to Secured Party, together with
appropriate instruments of transfer executed in blank, to be held by Secured
Party during the period that such items constitute Collateral under this
Agreement.
Section III. Payment Obligations of Debtors.
Debtors hereby jointly and severally obligate themselves to pay to
Secured Party on written demand delivered by Secured Party to Debtors all
reasonable costs and expenses, including attorney's fees and other legal
expenses incurred or paid by Secured Party in exercising or protecting its
interests, rights and remedies under this Agreement, plus interest thereon from
date of demand until paid at the rate of ten percent (10%) per annum.
Section IV. Representations and Warranties.
Debtors represent and warrant that:
4.1 The Collateral is free from all liens, claims, demands, equities
or other security interests created or suffered by Debtors other than the
interest created by this Agreement.
4.2 Debtors own the Collateral and have the right to pledge the same
and to transfer any interest therein; all consents required for the pledge of
the Collateral have been obtained; and Debtors warrant and will forever defend
their title to the Collateral against the claims and demands of all persons
whomsoever claiming or to claim the same or any part thereof.
Page 2 of 14
<PAGE> 3
4.3 The execution, delivery and performance by Debtors of this
Agreement does not and will not contravene or violate any provision of any law,
rule, regulation, order, writ, judgment, injunction, decree, determination or
award presently in effect and applicable to Debtors or result in a breach of or
constitute a default (with or without the giving of notice or the lapse of time
or both) under any indenture or loan, credit or other agreement to which
Debtors or any of them are or is a party or by which Debtors or any of Debtors'
property may be bound or affected.
4.4 This Agreement constitutes the legal, valid and binding
obligation of Debtors enforceable against Debtors in accordance with its terms.
4.5 No authorization, consent, approval, license, order or exemption
of, or filing or registration with, any court or governmental department,
commission, board, bureau, agency or instrumentality, domestic or foreign, is
or will be necessary to the valid execution, delivery or performance by Debtors
of this Agreement or to the enforcement hereof by Secured Party.
Section V. Covenants.
5.1 Debtors covenant and agree with Secured Party as follows:
(a) Debtors will furnish to Secured Party such stock powers
and other instruments as may reasonably be required by Secured Party to
facilitate the transfer of the Collateral.
(b) Debtors will cause to be paid prior to delinquency all
taxes and assessments hereafter levied or assessed against the Collateral, or
any part thereof, or against the Secured Party for or on account of the
interest created by this Agreement.
(c) If the validity of this Agreement, any provision hereof,
or the priority of the security interest granted by this Agreement is
challenged or questioned, or if any legal proceedings are instituted with
respect thereto, Debtors will give prompt written notice thereof to Secured
Party and, at Debtors' own cost and expense, will take all necessary and proper
steps for the defense of such legal proceedings.
(d) Debtors will, on request of Secured Party, (i) promptly
correct any defect or error which may be discovered in any instrument or
document executed by Debtors for the purpose of giving effect to this Agreement
or of fulfilling the obligations of Debtors under this Agreement; (ii) execute,
acknowledge, deliver and record or file such further instruments and documents
(including financing statements and continuation statements) and do such
further acts as may reasonably be necessary, desirable or proper to carry out
more effectively the purposes of this Agreement; and (iii) Debtors will pay all
reasonable costs connected with any of the foregoing.
(e) Debtors will not sell, exchange, lend, assign, transfer or
otherwise dispose of all or any part of the Collateral or any interest therein,
or permit any of the foregoing, without the prior written consent of Secured
Party.
Page 3 of 14
<PAGE> 4
(f) Debtors hereby obligate themselves, jointly and severally,
to pay (or reimburse Secured Party) for all reasonable filing fees, taxes,
brokerage fees and commissions, Uniform Commercial Code search fees, escrow
fees, attorney's fees, and all other costs and expense of every character
incurred by Secured Party in connection with this Agreement or the Collateral
and will reimburse Secured Party for all such expenses incurred by it. Debtors
hereby obligate themselves, jointly and severally, to pay (or reimburse Secured
Party) for its reasonable expenses and expenditures, including reasonable
attorney's fees and legal expenses, incurred or expended in connection with
Secured Party's rightful exercise of its rights and remedies hereunder and/or
Secured Party's protection of the Collateral and its security interest therein.
Amounts to be paid hereunder by Debtors to Secured Party will be payable upon
written demand from Secured Party delivered to Debtors and will bear interest
from date of demand until paid at the rate of ten percent (10%) per annum.
(g) Debtors will furnish to Secured Party such information as
Secured Party may reasonably request with respect to the Collateral.
5.2 If Debtors fail to perform any act (including the payment of
money) which this Agreement requires of Debtors, Secured Party, in Debtors'
names or in its own name, may but is not obligated to perform or cause to be
performed such act, and any expenses so incurred by Secured Party will be
payable by Debtors upon written demand from Secured Party delivered to Debtors
and will bear interest from date of demand until paid at the rate of ten
percent (10%) per annum.
Section VI. Voting Rights.
Unless and until an "Event of Default" (hereinafter defined) occurs,
Debtors are entitled to exercise all voting and consensual powers and rights
relating to the Collateral or any part thereof for all purposes not
inconsistent with the terms of this Agreement.
Section VII. Event of Default.
It will be an Event of Default under this Agreement if there occurs any
default in Debtors' performance of their obligations under this Agreement or in
the payment of any of the secured indebtedness when due or declared due which
default is not cured within fifteen (15) days following Debtors' receipt of
notice from Secured Party of such default (herein referred to as an "Event of
Default").
Section VIII. Remedies in Event of Default.
8.1 Upon the occurrence of an Event of Default, and at any time
thereafter if such Event of Default has not been cured, Secured Party may,
after giving all notices required by law or this Agreement, sell the Collateral
or any part thereof in accordance with all applicable laws and regulations at
public or private sale or by sale at a broker's board or on a securities
exchange. If (i) the Collateral is sold at public sale, or (ii) the Collateral
is sold at a private sale and is of a type
Page 4 of 14
<PAGE> 5
customarily sold in a recognized market or is of a type which is the subject of
widely distributed standard price quotations, Secured Party may be the
purchaser of the Collateral and may apply the purchase price therefor against
the indebtedness secured hereby. Ten (10) days prior to any public sale of the
Collateral or ten (10) days prior to the date after which the Collateral may be
sold at private sale, Secured Party shall give to Debtors at the address set
forth herein notice of Secured Party's intention to make such public or private
sale. Such notice, in case of public sale, must state the time and place fixed
for the sale, and in case of sale at a broker's board or on a securities
exchange, must state the board or exchange at which such sale is to be made and
the day on which the Collateral or that portion thereof so being sold will
first be offered for sale at such board or exchange. Any such public sale will
be held at such time or times, during ordinary business hours and at such place
or places, as Secured Party may fix in the notice of such sale. At any sale
the Collateral may be sold in one lot as an entirety or in separate parcels as
Secured Party may determine. Secured Party will not be obligated to make any
sale pursuant to any such notice. If any part of the Collateral is sold on
credit or for future delivery, Secured Party will retain the Collateral so sold
until the full purchase price is paid by the purchaser thereof. If such
purchaser fails to pay for Collateral so sold, Secured Party may again act to
sell the Collateral in compliance with this Agreement and applicable law. Each
of the methods of disposition described in this Section are deemed to
constitute disposition in a commercially reasonable manner. Notwithstanding
anything to the contrary contained herein, the Federal Securities Act of 1933,
as amended, other applicable federal and state laws and regulations, and
conditions or limitations stated on the face or back of the certificates
representing the Collateral may impose restrictions or limitations on Secured
Party's ability to dispose of all or part of the Collateral in the enforcement
of its rights and remedies hereunder. Therefore, upon the occurrence of an
Event of Default, Secured Party is authorized to sell the Collateral or any
part thereof at one or more private sales at which the prospective bidders and
purchasers are restricted to persons who represent and warrant that they will
purchase the Collateral or a portion thereof for investment for their own
accounts and not with a view to distributing or reselling same, in a manner
which will not require that the Collateral, or any part thereof, be registered
in accordance with the Securities Act of 1933, as amended, or the rules and
regulations promulgated thereunder, or any other law of regulations, at the
best price reasonably obtainable by Secured Party at any such private sale or
other disposition in the manner mentioned above. Debtors agree (i) that if the
Secured Party sells the Collateral, or any portion thereof, at a private sale
or sales under this Section, Secured Party will have the right to rely upon the
advice and opinion of any member firm of a national securities exchange as to
the best price reasonably obtainable therefor upon such a private sale, and
(ii) that in the absence of fraud, sale of the Collateral or portion thereof at
such price will be conclusive evidence that Secured Party obtained the
reasonable fair market value.
8.2 Upon the occurrence of an Event of Default, and at any time
thereafter, Secured Party shall have the rights of a secured party after
default under the Texas Business and Commerce Code, as modified by this
Agreement. In connection with the exercise of those rights or of any other
rights of Secured Party granted by this Agreement:
Page 5 of 14
<PAGE> 6
(a) written notice given to Debtors as provided herein ten
(10) days prior to the date of public sale of the Collateral or prior to the
date after which private sale of the Collateral will be made constitutes
reasonable notice;
(b) so long as any portion of the secured indebtedness remains
outstanding, sale by Secured Party of less than the whole of the Collateral
will not exhaust the rights of Secured Party hereunder, and Secured Party may
make successive sales hereunder until the whole of the Collateral shall be
sold; and
(c) Secured Party may appoint or delegate any one or more
persons as its agent to perform any act or acts necessary or incident to any
sale held by Secured party, including the sending of notices and the conduct of
sale, but in the name and on behalf of Secured Party.
8.3 The remedies provided for in this Agreement are cumulative of all
remedies provided for in any other agreement securing payment of the secured
indebtedness and all other applicable remedies existing at law or in equity,
and resort to any remedy provided for in this Agreement or under any other
agreement or by law will not prevent the concurrent or subsequent employment of
any other appropriate remedy or remedies.
8.4 Secured Party may resort to any security given by this Agreement
or to any other security now existing or hereafter given to secure the payment
of the secured indebtedness, in whole or in part, and in such portions and in
such order as may seem best to Secured Party, and no such action will in any
manner be considered as a waiver of any of the rights, benefits or security
interest evidenced by this Agreement.
Section IX. Additional Agreements.
9.1 Upon the payment and performance in full of the secured
indebtedness, all of Secured Party's rights under this Agreement will
terminate, the Collateral will automatically be released from the security
interest evidenced hereby, and all documents and instruments filed in any
public office for the perfection of such security interest will be released,
canceled and terminated by Secured Party in due form at Debtors' cost.
9.2 Secured Party may waive any default without waiving any other
prior or subsequent default. Secured Party may remedy any default without
waiving the default remedied. Failure alone by Secured Party to exercise any
right, power or remedy upon any default may not be construed as a waiver of
such default or as a waiver of the right to exercise any such right, power or
remedy at a later date. No single or partial exercise by Secured Party of any
right, power or remedy hereunder will, without more, exhaust the same or will
preclude any other or further exercise thereof. No modification or waiver of
any provision hereof nor consent to any departure by Debtors therefrom will be
effective unless the same is in writing and signed by Secured Party and then
such waiver or consent will be effective only in the specific instances, for
the purpose for which given and to the extent therein specified. Acceptance by
Secured Party of any payment in an amount less than the
Page 6 of 14
<PAGE> 7
amount then due on any secured indebtedness will be deemed an acceptance on
account only and will not in any way affect the existence of a default
hereunder.
9.3 Secured Party may at any time and from time to time in writing
(i) waive compliance by Debtors with any covenant herein made by Debtors to the
extent and in the manner specified in such writing; (ii) release any part of
the Collateral, or any interest therein, from the security interest of this
Agreement; or (iii) release any party liable, either directly or indirectly,
for the secured indebtedness or for any covenant herein or in any other
instrument now or hereafter securing the payment of the secured indebtedness
without impairing or releasing the liability of any other party. No such act
will in any way impair the rights of Secured Party hereunder or impair or
release the liability of any party except to the extent specifically agreed by
Secured Party in such writing.
9.4 The security interest and other rights of Secured Party hereunder
will not be impaired by any indulgence, moratorium or release granted by
Secured Party, including but not limited to (i) any renewal, extension or
modification which Secured Party may grant with respect to any secured
indebtedness; (ii) any surrender, compromise, release, renewal, extension,
exchange or substitution which Secured Party may grant in respect of any item
of the Collateral, or any part thereof or any interest therein, or (iii) any
release or indulgence granted to any endorser, guarantor or surety of any
secured indebtedness.
9.5 A carbon, photographic or other reproduction of this Agreement or
of any financing statement relating to this Agreement will be sufficient as a
financing statement.
9.6 If ownership of the Collateral or any part thereof becomes vested
in a person other than Debtors, Secured Party may, without notice to Debtors,
deal with such successor or successors in interest with reference to this
Agreement and to the indebtedness secured hereby in the same manner as with
Debtors; provided, however, that the foregoing shall not limit, diminish, alter
or otherwise affect Debtors' covenants set forth in Section 5.1(e) hereinabove.
No sale of the Collateral, no forbearance on the part of Secured Party and no
extension of the time for the payment of the indebtedness secured hereby given
by Secured Party will operate to release, discharge, modify, change or affect,
in whole or in part, the liability of Debtors or any other person for the
payment of the indebtedness secured hereby, except as set forth in Section X
hereinbelow.
9.7 Any notices, offers, approvals and other communications hereunder
must be in writing and, except when receipt is required to start the running of
a period of time, will be deemed given the second day after its mailing by one
party by certified or registered United States mail, postage prepaid and return
receipt requested, to the other party addressed as set forth in the first
paragraph of this Agreement. Any writing which may be mailed pursuant to the
foregoing may also be delivered by hand or transmitted by telegraph, telex or
telecopier and will be effective when received by the addressee. Either party
may, from time to time, specify as its address for purposes of this Agreement
any other address by giving ten (10) days' prior written notice thereof to the
other party.
Page 7 of 14
<PAGE> 8
9.8 This Agreement is binding upon and inures to the benefit of
Secured Party, Debtors, their respective successors, heirs and assigns.
9.9 If any term or provision of this Agreement or the application
hereof to any person or circumstance is invalid or unenforceable to any extent,
the remainder of this Agreement will not be affected thereby, and each term and
provision of this Agreement will be valid and in force to the fullest extent
permitted by law.
9.10 Secured Party may, at any time after the occurrence of an Event
of Default, personally or by an agent designated by it, execute, sign, endorse,
transfer or deliver in the name of Debtors, notes, checks, drafts or other
instruments for the payment of money and receipts or any other documents
necessary to evidence, perfect and realize upon the security interests and
obligations of this Agreement. Any third party acting in good faith may rely
on the affidavit of Secured Party that an Event of Default has occurred for all
purposes under this Agreement and is released by Debtors from and against any
claim by Debtors for any action undertaken in such reliance.
9.11 Secured Party's duty with respect to the care and custody of the
Collateral is solely to use reasonable care in this custody and preservation of
the Collateral in Secured Party's possession. Secured Party will not be
responsible in any way for any depreciation in the value of the Collateral, nor
does any duty or responsibility whatsoever rest upon Secured Party to act to
preserve rights against prior parties or to enforce collection of the
Collateral by legal proceedings or otherwise, the duty of the Secured Party
being solely to receive collections, remittances and payments on such
Collateral as and when made to Secured Party. If Debtors instruct Secured
Party, in writing or orally, to deliver any or all of the Collateral to a
broker or other third person, and Secured Party agrees to do so, the following
conditions are deemed conclusively to be a part of Secured Party's agreement,
whether or not they are specifically mentioned to Debtors at the time of such
agreement: (i) Secured Party assumes no responsibility for verifying the
genuineness or authenticity of the authority of any person purporting to be a
messenger, employee or representative of the broker or other third person to
whom Debtors have directed Secured Party to deliver the Collateral, or the
genuineness or authenticity of any document of instructions delivered by any
such person; (ii) by requesting any such delivery, Debtors will be considered
to have assumed all risk of loss as to the Collateral; (iii) Secured Party's
sole responsibility will be to deliver the Collateral to the person purporting
to be the broker or other third person described by Debtors, or a messenger,
employee or representative thereof, and (iv) Secured Party and Debtors
expressly agree that compliance with the foregoing by Secured Party constitutes
reasonable care.
9.12 The headings of the various subdivisions of this Agreement are
for convenience of reference only and do not define or limit any of the terms
or provisions hereof. All pronouns are deemed to refer to the masculine,
feminine, neuter, singular or plural as the identity of the person or persons
referred to may require. Terms used in this Agreement which are defined in the
Texas Business and Commerce Code are used with the meanings as therein defined.
9.13 All obligations of Debtors hereunder shall be joint and several.
Page 8 of 14
<PAGE> 9
9.14 This Agreement is governed by and will be construed in accordance
with the laws of the State of Texas and when and where applicable, the laws of
the United States of America.
9.15 It is the intention of Debtors and Secured Party to comply
strictly with all applicable usury laws. Interest on the indebtedness secured
hereby, however denominated, shall not exceed the maximum amount of nonusurious
interest that may be contracted for, taken, reserved, charged, collected, or
received under applicable law; any interest collected or received in excess of
such maximum nonusurious amount shall be deemed a mistake and credited against
the unpaid principal balance then outstanding of the indebtedness secured
hereby or, if such indebtedness has been repaid in full, refunded to Debtors,
and the effective interest rate shall automatically be reduced to the maximum
nonusurious contract rate and amount allowed for such indebtedness under
applicable law. This provision shall override all demands and charges, the
effect of all prepayments, and all contrary provisions in this Agreement, the
instruments which evidence the indebtedness secured hereby, and any and all
other instruments, documents, or other agreements executed as security for such
indebtedness or otherwise in connection therewith, whether now existing or
hereafter executed.
Section X. Recourse Obligation.
It is the express understanding of the Debtors and Secured Party that,
any judgment for the repayment of the indebtedness secured hereby or interest
thereon will be enforced first against the Collateral and, second only to the
extent that the indebtedness evidenced by the Promissory Notes or interest
thereon is not satisfied by the Collateral, against the Rawsons or either of
them personally or any property of the Rawsons or either of them to the full
extent of such deficiency, but not against the Partnership or except for the
Collateral, any of its property; in any action to collect any amount payable
hereunder or to enforce performance of any of the other provisions of this
Agreement; provided, however:
(a) Nothing herein contained shall be construed as limiting or
impairing the enforcement against the Collateral or otherwise
prohibiting Secured Party from exercising any and all remedies which
this Agreement or any other document, instrument or other agreement
executed as security for or otherwise in connection with the
indebtedness secured hereby (herein referred to collectively as the
"Other Documents") permit, so long as the exercise of any remedy shall
only extend to execution against or recovery out of any property of the
Rawsons or either of them in addition to the Collateral in any action to
foreclose the security interest and pledge hereof or to collect any
secured hereunder at such time as the Collateral is fully exhausted and
then only to the extent any deficiency was not satisfied by the
Collateral;
(b) Debtors shall be fully and personally liable, jointly and
severally, for any and all costs, expenses and other sums payable to
third parties (including, without limitation, attorney's fees and court
costs) paid or incurred by Secured to enforce the indebtedness secured
hereby, to protect or enforce Secured Party's security interest in the
Collateral or
Page 9 of 14
<PAGE> 10
otherwise to enforce its rights under or pursuant to this Agreement, or
to enforce its rights under or pursuant to any one or more of the Other
Documents.
Section XI. Amendment and Restatement.
Without any in anyway limiting the grant set forth in Section I
hereinabove, this Agreement is executed, in part, to amend and restate in its
entirety that certain Amended and Restated Security Agreement-Pledge effective
June 22, 1995, (the "Amended Security Agreement"). In order to induce Secured
Party to amend and restate the Amended Security Agreement according to the
terms hereof, Debtors hereby acknowledge and agree (i) that as of the date
hereof the liens, pledge and security interests (collectively, the "Security
Interests") granted in the Amended Security Agreement are fully valid and
subsisting as first priority Security Interests securing the indebtedness
secured hereby, including, without limitation, the Promissory Notes, and hereby
ratify and confirm the same, (ii) that the Security Interests are not released
or extinguished hereby or are subject to any defense or counterclaim of any
kind whatsoever, and (iii) that the Security Interests are continued and
carried forward by this Agreement and shall remain in full force and effect as
security for the indebtedness secured hereby, including, without limitation,
the Promissory Notes, pursuant to the terms and provisions of this Agreement.
EXECUTED on the dates of the acknowledgments below, to be effective as
of December 16, 1996.
SECURED PARTY:
ADMINISTAFF, INC.
By:
-----------------------------------------
Paul J. Sarvadi,
President and Chief Executive Officer
DEBTOR:
--------------------------------------------
Richard G. Rawson
DEBTOR:
--------------------------------------------
Dawn Rawson
Page 10 of 14
<PAGE> 11
DEBTOR:
RDKB RAWSON L.P., a Texas Family Limited
Partnership
By:
-----------------------------------------
Richard G. Rawson, General Partner
STATE OF TEXAS )
)
COUNTY OF MONTGOMERY )
This instrument was acknowledged before me on the _____ day of
__________________, 1997, by Paul J. Sarvadi, President and Chief Executive
Officer of Administaff, Inc., a Texas corporation, on behalf of said
corporation.
--------------------------------------------
Notary Public, State of Texas
--------------------------------------------
(Stamped or Printed Name of Notary)
My Commission Expires:
---------------------
STATE OF TEXAS )
)
COUNTY OF MONTGOMERY )
This instrument was acknowledged before me on the _____ day of
__________________, 1997, by Richard G. Rawson.
--------------------------------------------
Notary Public, State of Texas
--------------------------------------------
(Stamped or Printed Name of Notary)
My Commission Expires:
---------------------
Page 11 of 14
<PAGE> 12
STATE OF TEXAS )
)
COUNTY OF MONTGOMERY )
This instrument was acknowledged before me on the _____ day of
__________________, 1997, by Dawn Rawson.
--------------------------------------------
Notary Public, State of Texas
--------------------------------------------
(Stamped or Printed Name of Notary)
My Commission Expires:
---------------------
STATE OF TEXAS )
)
COUNTY OF MONTGOMERY )
This instrument was acknowledged before me on the _____ day of
__________________, 1997, by Richard G. Rawson, General Partner of RDKB Rawson
L.P., a Texas Family Limited Partnership, on behalf of said partnership.
--------------------------------------------
Notary Public, State of Texas
--------------------------------------------
(Stamped or Printed Name of Notary)
My Commission Expires:
---------------------
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<PAGE> 13
EXHIBIT A
TO AMENDED AND RESTATED SECURITY AGREEMENT - PLEDGE
DATED AS OF JANUARY ___, 1997
EXECUTED BY RICHARD G. RAWSON, DAWN RAWSON
AND RDKB RAWSON L.P., AS DEBTORS,
AND ADMINISTAFF, INC. AS SECURED PARTY
RAWSON COLLATERAL
Certificate No. T 0104 for Twenty-Five Thousand Seven Hundred
Sixty-Nine (25,769) shares of the common stock issued by
Administaff, Inc., a Delaware corporation ("Administaff") and
Certificate No. T 0145 for Nineteen Thousand Four Hundred
Thirty-Four (19,434) shares of the common stock issued by
Administaff, each of said certificates being registered in
the name of Richard G. Rawson.
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EXHIBIT B
TO AMENDED AND RESTATED SECURITY AGREEMENT - PLEDGE
DATED AS OF JANUARY ___, 1997
EXECUTED BY RICHARD G. RAWSON, DAWN RAWSON AND
RDKB RAWSON L.P., AS DEBTORS,
AND ADMINISTAFF, INC. AS SECURED PARTY
PARTNERSHIP COLLATERAL
Certificate No. T 0013 for Twenty-Nine Thousand Six Hundred
Sixteen (29,616) shares of the common stock issued by
Administaff, Inc., a Delaware corporation ("Administaff"),
Certificate No. T 0019 for Two Hundred Twenty Thousand
Five Hundred (220,500) shares of the common stock issued by
Administaff, and Certificate No. T 0025 for One Hundred
Eighteen Thousand Nine Hundred Thirty-Three (118,933) shares
of the common stock issued by Administaff, each of said
certificates being registered in the name of RDKB Rawson L.P.
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EXHIBIT 23.2
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated March 1, 1996, in Amendment No. 5 to the
Registration Statement (Form S-1 No. 33-96952) and related Prospectus of
Administaff, Inc. for the registration of 3,000,000 shares of its common stock.
/s/ ERNST & YOUNG LLP
ERNST & YOUNG LLP
Houston, Texas
January 21, 1997
