2002 Annual Report
Now is the time for...
Administaff
financial highlights
(in thousands, except per share amounts and statistical data)
2002
2001
2000
1999
1998
INCOME STATEMENT DATA:
Revenues(1)
Gross profit
Operating income (loss)
Net income (loss)
Basic net income (loss) per share(2)
Diluted net income (loss) per share(2)
BALANCE SHEET DATA:
Working capital
Total assets
Total debt
Total stockholders’ equity
STATISTICAL DATA:
$ 849,021
$ 720,219
$ 598,291
$ 373,512
$ 283,937
166,390
165,015
138,534
(1,850)
(4,081)
(0.15)
(0.15)
$
$
18,539
10,357
0.38
0.36
$
$
22,234
16,900
0.62
0.58
$
$
89,528
10,559
9,358
0.34
0.34
$
$
68,610
11,201
9,123
0.32
0.31
$
$
$ 41,238
$ 36,609
$ 51,179
$ 35,792
$ 52,475
315,164
44,169
116,349
274,003
13,500
122,935
242,817
147,698
142,799
–
–
–
105,510
80,468
86,857
Average number of worksite employees paid
per month during period
77,334
69,480
62,140
42,479
34,819
Revenues per worksite employee per month(3)
Gross profit per worksite employee per month
Operating income (loss) per worksite employee per month
$
$
$
915
179
(2)
$
$
$
864
198
22
$
$
$
802
186
30
$
$
$
733
176
21
$
$
$
680
164
27
(1) Gross billings of $4.9 billion, $4.4 billion, $3.7 billion, $2.3 billion and $1.7 billion less worksite employee payroll cost of $4.0 billion, $3.7 billion,
$3.1 billion, $1.9 billion and $1.4 billion, respectively. Amounts have been adjusted to reflect the Company’s change in accounting method as described
in the Company’s Annual Report on Form 10-K.
(2) Adjusted to reflect the two-for-one split of the common stock effected on October 16, 2000.
(3) Gross billings of $5,235, $5,245, $4,973, $4,435 and $4,028 per worksite employee per month less payroll cost of $4,320, $4,381, $4,171, $3,702
and $3,348 per worksite employee per month, respectively.
This Annual Report includes forward-looking statements within the meaning of the federal securities laws. You can identify such forward-looking
statements by the words “are confident,” “expects,” “intends,” “plans,” “projects,” “believes,” “estimates,” “likely,” “goal,” “assume” and similar expressions.
For information concerning important factors that could cause actual results to differ materially from those in such statements, see “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s Annual Report on Form 10-K.
Company Profile With 2002 revenues of $849 million, Administaff is the nation's leading Professional Employer Organization (PEO),
serving as an outsourced human resources department for small and medium-sized businesses throughout the United States. At year-end
2002, Administaff had more than 4,900 client companies, 78,000 worksite employees and 1,300 corporate employees. The Company also
had four client service centers and 38 sales offices in 21 major markets.
Administaff's common stock is listed on the New York Stock Exchange and traded under the symbol “ASF”. Headquartered in Houston,
Texas, the Company is accredited by the Employer Services Assurance Corporation and is an active member of the National Association of
Professional Employer Organizations.
Administaff is included on Fortune's list of America's Most Admired Companies and the InformationWeek 500 list of leading information
technology innovators.
Mission Statement Administaff’s mission is to be the recognized leader in the development, sale and delivery of quality Professional Employer
Organization services to our strategically selected market of small to medium-sized businesses. This mission will be accomplished by a highly
motivated team of innovative people dedicated to finding, attracting and satisfying clients in a manner that will produce consistent and superior
productivity among clients, employees and the Company.
fellow
shareholders
The year 2002 was one of daunting challenge, resolute
response and effective recovery for Administaff.
Despite the stalled economy and continued weakness
in the labor market, the Company’s revenues for the
year grew by 17.9 percent to $849 million, driven by an
11.3 percent increase in the average number of worksite
employees paid per month combined with a 5.9 percent
increase in revenues per worksite employee per month.
However, we also incurred an annual net loss of $4.1 mil-
lion and a diluted net loss per share of $0.15. This compares
to a net income of $10.4 million and diluted net earnings
per share of $0.36 for the same period in 2001.
While the Company’s 2002 financials represent
our first annual net loss in more than a decade, we are
entering 2003 in a much stronger position than the
numbers would seem to indicate at first glance. Why?
Because we have taken decisive action to put our most
pressing problems behind us.
During the first half of 2002, Administaff experi-
enced a significant gross profit margin squeeze. This
was primarily the result of a rapid rise in health care
benefits costs, and was compounded by a revenue
shortfall related to a decline in the average payroll
cost of our worksite employees. In response to these
challenges, we completed a realistic assessment of
our situation, made tough decisions and launched
an aggressive turnaround plan in the second half
of 2002. The plan focused on four priorities:
1) Recalibrating pricing for clients that experienced
a decline in average payroll cost per worksite employee.
Pricing recalibration began in June 2002 and was
completed during the third quarter. During the
fourth quarter, we also completed development and
implementation of a new pricing and billing system
that automatically updates client pricing. As new
customers are sold and existing clients renew, this
Paul J. Sarvadi
President and Chief Executive Officer
new system will eliminate the potential for any
short-fall in revenue resulting from changes in the
pay rates or benefit elections of worksite employees.
2) Matching the price and cost for health insurance
on new and renewing client contracts. Over the course of
2002, we renewed client contracts at pricing levels that
incorporated the step-up in health care benefits costs
we were experiencing. In fact, our revenue per worksite
employee per month grew at an accelerating rate during
2002, such that our gross profit per worksite employee
per month improved on a year-over-year basis in the
fourth quarter. This was the first such improvement
in three quarters. As we moved into January 2003, an
additional 20 percent of our clients were new or renew-
ing accounts at higher average pricing than in the fourth
quarter. We also took steps to reduce the cost side of the
equation through benefit plan design changes, including
several scaled-down options. With these improvements,
we are confident that the serious health care benefits
issues we experienced in 2002 are behind us.
3) Reducing operating expenses and capital expenditures.
Anticipating that our emphasis on pricing could affect
growth in the near term, we scaled back corporate head-
count by five percent, eliminated nonessential activities
and limited capital spending. This effort not only produced
short-term results; it also improved our cost structure for
the future.
4) Improving liquidity. As we took steps to restore
our profitability during the third and fourth quarters of
2002, we also moved to improve our liquidity position,
including the acquisition of a $36 million mortgage
secured by real estate located at the Company’s head-
quarters. This long-term financing was used to repay
a $30 million short-term revolving line of credit that
expired in December 2002. We ended the year with
1
$41.2 million in working capital, which compares to
number of sales opportunities. This will allow us to take
$36.6 million of working capital at year-end 2001 and
advantage of the experience of our current sales team,
$3.6 million at June 30, 2002, when the recovery effort
which includes our highest-ever number of sales
began. With an expected return to profitability for 2003
professionals with more than 18 months of experience.
and a capital expenditure budget of just $10 million,
We also will continue refining our health care benefits
we anticipate a return to generating substantial
strategy in 2003 to take advantage of opportunities uncov-
cash flow as in previous years.
ered by the analysis of our plans and the accuracy of our
While the successful execution of our turnaround
new pricing and billing system. Although we expect health
plan laid the foundation for re-establishing our profitabil-
care benefits costs to continue rising, we believe our cost-
ity on an annual basis, we also made significant progress
containment measures will improve our competitiveness.
on other important initiatives, including:
Another major objective for 2003 is to pursue
• Multiple carrier network. We expanded our health care
the opportunity presented to Administaff by last year’s
benefits coverage options and reduced the risk associated
Internal Revenue Service guidance, which allows us to
with having only one carrier. We accomplished this
expand our retirement services offerings to our current
by launching a new health insurance carrier network
clients. We believe this opportunity will strengthen
that includes UnitedHealthcare, Cigna Healthcare,
our relationships with our clients, and possibly even
PacifiCare, Blue Cross and Blue Shield of Georgia,
improve retention, as we provide a more flexible
and Kaiser Permanente.
retirement program.
• Service model enhancements. We completed a compre-
hensive evaluation of the way we serve clients and devel-
In summary, let me say that although 2002 was
a very difficult year for Administaff, it also was a very
oped an even more effective and efficient service model,
good year for improving our processes and services,
an important step for accommodating future growth.
and it helped strengthen our ongoing efforts to serve
• Sales and service expansion. We opened sales offices in
clients, continue growing our business, and remain
two new markets – Minneapolis and Cleveland, increas-
an industry leader.
ing our national presence to a total of 38 sales offices in
We are pleased to welcome Gregory E. Petsch and
21 markets – and we opened our fourth regional service
Austin P. Young to our Board of Directors. Mr. Petsch
center, located in Los Angeles.
served as Senior Vice President of Worldwide Manufac-
• HR PowerHouse.SM We expanded our eBusiness initiative
turing and Quality at Compaq Computer Corporation
with the launch of HR PowerHouse, an online portal
until his retirement in 1999. Mr. Young, a certified
that is accessible on Web sites operated by Administaff,
public accountant, served as Senior Vice President,
IBM, Pitney Bowes and Office Depot. HR PowerHouse
Chief Financial Officer and Treasurer of CellStar
provides a sampling of Administaff’s services along with
Corporation until his retirement in 2001. Both of these
a wide range of human resources information, tools and
new members will strengthen our Board with their
best practices to help generate high-quality sales leads.
know-how, wisdom and vision.
• Web-based services. We continued to increase our service
I also want to convey my heartfelt gratitude to
efficiency through increased usage of the Employee
Service CenterSM, with 69 percent of worksite employees
now being paid via WebPayrollSM and 23 percent of client
companies using WebReportingSM.
While much has been accomplished, we still have
more to do:
Our first objective for 2003 is to regain our sales
momentum and grow our core business. Even though
we are still battling uncertainty in the marketplace, we
are well positioned to concentrate on growth. We are
increasing our marketing efforts to help expand the
2
our clients, our Board, our employees and our suppliers.
Their ongoing commitment and support is what makes
it possible – year after year after year – for us to say,
“Now is the time for Administaff!”
Sincerely,
Paul J. Sarvadi
President and Chief Executive Officer
March 18, 2003
Now is the time for Administaff...
because we are continuing to build our
industry-leading position
and take our Company to the next level
Five-Year Averages
23%
32%
Worksite Employee Growth
Revenue Growth
$0.29
Diluted Earnings Per Share
$181
Gross Profit Per
Worksite Employee Per Month
$20
Operating Income Per
Worksite Employee Per Month
$14
Net Income Per
Worksite Employee Per Month
3
growth
86
87
88
89
90
91
92
93
94
95
96
97
98
99
00
01
02
Administaff’s continuing growth is represented by consistent year-over-year increases in
the number of worksite employees paid – beginning with less than 100 at year-end 1986
and increasing to more than 78,000 at year-end 2002. Key drivers for this trend include
high demand for employee benefits management, a need for administrative relief, increased
worksiteemployeespaid
employer liabilities, and the growing burden of employment regulations.
national sales and service
infrastructure
21
markets
••
•• ••
••
•••
•
•
•
••••
•
•
•
••• •
•• •••• •
4
service
centers
•
••
•
•• ••
•
•
•
38
sales offices
•
4
Administaff’s long-term expansion
program targets a total of 90 offices in
40 major markets. Toward that end, during
2002 the Company opened sales offices
in two new markets – Cleveland and
Minneapolis. The Company also opened
a new service center in Los Angeles.
With these additions, Administaff operates
38 sales offices and four service centers
in 21 major markets. For 2003, the
Company expects to open two new
sales offices in existing markets.
OTHER
TRANSPORTATION
9 %
RETAIL TRADE
2 %
5 %
FINANCE, INSURANCE
AND REAL ESTATE
15 %
ENGINEERING,
ACCOUNTING AND
LEGAL SERVICES
7 %
WHOLESALE
TRADE
8 %
COMPUTER AND
INFORMATION
SERVICES
14 %
diverseclient base
CONSTRUCTION
8 %
13 %
9 %
MANUFACTURING
10 %
MEDICAL
SERVICES
Administaff’s client companies represent a wide range
of industries and professions, thereby helping to lower the
Company’s exposure to downturns or volatility in any particular
industry category. The Company’s typical client places a
high value on the contributions of employees, operates
in a white-collar or skilled blue-collar industry, and has
MANAGEMENT,
ADMINISTRATION AND
CONSULTING SERVICES
a getting-better agenda.
target market
Administaff’s long-term goal is to serve the top 10 percent of the nation’s
approximately 6 million small and medium-sized businesses, defined as those with fewer than 500 employees.
In identifying the “top 10 percent,” the Company looks for successful, growth-minded businesses with relatively
low employment risks. All prospective customers are evaluated individually on the basis of such areas as workers’
compensation risk and unemployment history.
marketopportunity
market penetration
of approximately
5%
The Professional Employer
Organization (PEO) industry serves
an estimated five percent of its
target market – the 56 million people
(representing 50 percent of the U.S.
work force) who are employed at
small and medium-sized businesses.
According to the National Association
of Professional Employer Organizations,
PEOs are now operating in every state,
and industry revenues are continuing
to grow at the rate of more than
20 percent a year.
50% 50%
50% of the
nation’s work
force employed by
small businesses
( < 500 employees )
• Employment at firms > 500 employees • Employment at firms < 500 employees • PEO employment
5
Now is the time for Administaff...
because we deliver a comprehensive
value-added service
to help businesses enhance
their productivity and profitability
2002 Client Survey
87%
90%
89%
90%
87%
Using Administaff has improved my productivity.
Completely or mostly satisfied with Administaff’s ability
to provide payroll and paperwork in a timely manner.
Completely or mostly satisfied with Administaff personnel.
Would recommend Administaff to other businesses.
Administaff meets or exceeds my expectations.
6
personnel management system
PERFORMANCE
MANAGEMENT
Administaff’s eight-point Personnel Management SystemSM
provides a comprehensive human resources solution that
enables business owners to be more systematic and strategic
about the role that people play in the success of a company.
With Administaff managing the “business of employment,”
growth-minded entrepreneurs and employees are free to
focus on the “business of business.”
RECRUITING &
SELECTION
TRAINING &
DEVELOPMENT
EMPLOYMENT
ADMINISTRATION
GOVERNMENT
COMPLIANCE
BENEFITS
MANAGEMENT
EMPLOYER
LIABILITY
MANAGEMENT
OWNER
SUPPORT
RECRUITING & SELECTION
Find and hire the highest-quality employees possible.
•Job Descriptions
•Resume Review & Interviewing
•Salary Planning & Administration
•Classified Advertising Coordination
•Background Checks
•Pre-Employment Testing
•Drug Testing
•Outplacement
PERFORMANCE MANAGEMENT
Increase employee productivity by improving individual and
group performance.
•Performance Measurement & Review
•Compensation & Incentive Plans
•Employee Relations
•Supervisor Training
•Conflict Resolution
•Job Design
TRAINING & DEVELOPMENT
Become more productive and profitable with a professional
development program for employees.
•Needs Analysis
•Curriculum Development
•Training Programs
•Certified Provider of Continuing Education Units
•Online Courses
BENEFITS MANAGEMENT
Gain one of the best benefits values in the marketplace
for employee retention.
•Health Care, Dental & Vision Plans
•Employee Assistance Program
•401(k) Plan
•Basic & Voluntary Disability Coverage
•Basic & Voluntary Life Insurance
•Basic & Voluntary Personal Accident Insurance
•Adoption Assistance
•Credit Union
•Educational Assistance
•Dependent Care Spending Plan
EMPLOYER LIABILITY MANAGEMENT
Manage employer obligations more effectively with lower risk
and reduced liability.
•Workers’ Compensation Coverage & Claims Resolution
•Employment Practices Liability Insurance
•Safety Review & Policy Development
•Unemployment Claims Management
•Conflict Resolution
•Employee Handbooks
•Personnel Guide, Forms & Policies
•Terminations Support
OWNER SUPPORT
Achieve a more secure future through forward-focused resources
that help create value.
•Personnel Consulting
•Employee Communications
•Employee Service CenterSM
•My MarketPlaceSM
•Best2Best®Client Network
Through My MarketPlaceSM, American Express offers:
•Business and/or Personal Financial Planning
•Retirement Planning
•Business Transition and Estate Planning
•Key Person Insurance Coverage
•Tax & Business Services
GOVERNMENT COMPLIANCE
Keep pace with changing regulations to reduce or eliminate
fines and penalties.
•Government Reporting & Agency Interface
•Unemployment Claims Management
•Wage Claims & Audits
•OSHA, EEOC, DOL, ADA, FMLA, FLSA, Title VII & More
EMPLOYMENT ADMINISTRATION
Reduce the burden of employee-related paperwork by
sharing it with Administaff.
•Payroll Processing
•Payroll Tax Filing
•FICA, FUTA, SUTA
•Garnishments
•Quarterly Reports
•Human Resources
Management Reports
•Direct Deposit
•W-2s & W-4s
•Employment Verification
7
instant infrastructure
W hile executives at large companies have always
had a human resources department to support
their personnel management needs, most small and
medium-sized companies cannot justify having a
team of professionals devoted exclusively to human
resources issues. By outsourcing a significant portion
of the employer-related responsibilities to Administaff,
client companies and the worksite employees at those
companies gain the value-added service of a pro-
fessional human resources department at a major
corporation. This instant infrastructure is designed
to provide a competitive advantage that results
from an effective and efficient people strategy.
a team
focused on delivering
value-added service
Company
Client Service
Agreement
Administaff
Client Company
Employment
Relationship
Employment
Relationship
Worksite
Employee
CO-EMPLOYMENT RELATIONSHIP
Employee
TRADITIONAL
EMPLOYMENT
RELATIONSHIP
co-employment
advantage
Administaff delivers its Personnel Management System by entering into
a co-employment relationship with a client company and the client’s
existing employees, including the business owner. This transaction replaces
the traditional two-party employment relationship with a three-party
arrangement. The co-employment relationship enables Administaff to
deliver comprehensive benefits and services not typically available to
employees at small and medium-sized businesses.
eService
1
2
3
4
5
6
7
8
Administaff’s team approach to service delivery is complemented
by an eService platform that provides clients and employees with
Administaff uses a team approach to deliver
information and resources to help maximize the benefit of their
Administaff services. By logging on to the Employee Service Center,
client companies can submit and verify payroll, run reports, complete
and submit forms, and review the Administaff Personnel Guide, all
on a secure Web site. In addition, employees can access online check
stubs and pay history reports, locate in-network medical providers,
manage their 401(k) account, pursue training opportunities, update
their personal employment-related information, and more.
its comprehensive personnel management service.
These teams are comprised of all the functions and
disciplines typically found in a Fortune 500-caliber
human resources department, including:
1
2
3
Team Manager
Client Liaison
Payroll Specialist
4 Human Resources Specialist
5
6
7
8
Recruiting Specialist
Benefits Specialist
Training Specialist
Safety Consultant
8
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
⌧ Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended December 31, 2002.
or
(cid:134) Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
Commission File No. 1-13998
Administaff, Inc.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
19001 Crescent Springs Drive
Kingwood, Texas
(Address of principal executive offices)
76-0479645
(I.R.S. Employer
Identification No.)
77339
(Zip Code)
Registrant's Telephone Number, Including Area Code: (281) 358-8986
Securities Registered Pursuant to Section 12(b) of the Act:
Common Stock, par value $0.01 per share
Rights to Purchase Series A Junior Participating Preferred Stock
(Title of class)
New York Stock Exchange
New York Stock Exchange
(Name of Exchange on Which Registered)
Securities Registered Pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.
Yes (cid:57) No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not
contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).
Yes (cid:57) No
As of March 10, 2003, 26,853,278 shares of the registrant’s common stock, par value $0.01 per share, were
outstanding. As of the end of the registrant’s most recently completed second quarter, the aggregate market value of the
common stock held by non-affiliates (based upon the June 28, 2002 closing price of the common stock as reported by
the New York Stock Exchange) was approximately $231 million.
Part III information is incorporated by reference from the proxy statement for the annual meeting of
stockholders to be held May 8, 2003 which the registrant intends to file within 120 days of the end of the fiscal year.
TABLE OF CONTENTS
Part I
Item 1.
Item 2.
Item 3.
Item 4.
Business ......................................................................................................................... 2
Properties ....................................................................................................................... 16
Legal Proceedings.......................................................................................................... 17
Submission of Matters to a Vote of Security Holders.................................................... 17
Item S-K 401(b).
Executive Officers of the Registrant .............................................................................. 18
Part II
Item 5.
Item 6.
Item 7.
Market for the Registrant’s Common Equity and
Related Stockholder Matters ...................................................................................... 20
Selected Financial Data ................................................................................................. 21
Management’s Discussion and Analysis of Financial Condition
and Results of Operations .......................................................................................... 22
Item 7A.
Qualitative and Quantitative Disclosures About Market Risk ....................................... 44
Item 8.
Item 9.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Financial Statements and Supplementary Data .............................................................. 45
Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure ............................................................................................ 45
Part III
Directors and Executive Officers of the Registrant........................................................ 46
Executive Compensation ............................................................................................... 46
Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters................................................................................ 46
Certain Relationships and Related Transactions............................................................ 47
Controls and Procedures ................................................................................................ 47
Item 15.
Exhibits, Financial Statement Schedules and Reports on Form 8-K.............................. 48
Part IV
PART I
This document contains forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. You can identify such forward-looking
statements by the words “expects”, “intends,” “plans,” “projects,” “believes,” “estimates,” “likely,” “goal,”
“assume” and similar expressions. In the normal course of business, Administaff, Inc. (“Administaff” or the
“Company”), in an effort to help keep its stockholders and the public informed about the Company’s operations may,
from time to time, issue such forward-looking statements, either orally or in writing. Generally, these statements
relate to business plans or strategies, projected or anticipated benefits or other consequences of such plans or
strategies, or projections involving anticipated revenues, earnings or other aspects of operating results. Administaff
bases the forward-looking statements on its current expectations, estimates and projections. Administaff cautions
you that these statements are not guarantees of future performance and involve risks, uncertainties and assumptions
that Administaff cannot predict. In addition, Administaff has based many of these forward-looking statements on
assumptions about future events that may prove to be inaccurate. Therefore, the actual results of the future events
described in such forward-looking statements in this Annual Report, or elsewhere, could differ materially from those
stated in such forward-looking statements. Among the factors that could cause actual results to differ materially are
the risks and uncertainties discussed in this Annual Report, including, without limitation, factors discussed in Item 1,
“Business” and Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,”
including the factors discussed under the caption “Factors That May Affect Future Results and the Market Price of
Common Stock,” beginning on page 22.
ITEM 1. BUSINESS.
General
Administaff is a professional employer organization (“PEO”) that provides a comprehensive Personnel
Management SystemSM encompassing a broad range of services, including benefits and payroll administration, health
and workers’ compensation insurance programs, personnel records management, employer liability management,
employee recruiting and selection, employee performance management and employee training and development
services to small and medium-sized businesses in strategically selected markets. The Company was organized as a
corporation in 1986 and has provided PEO services since inception.
The Company’s principal executive offices are located at 19001 Crescent Springs Drive, Kingwood, Texas
77339. The Company’s telephone number at that address is (281) 358-8986 and the Company’s website address is
http://www.administaff.com. The Company’s stock is traded on the New York Stock Exchange under the symbol
“ASF.” Periodic SEC filings, including the Company’s annual reports on Form 10-K, quarterly reports on Form
10-Q, current reports on Form 8-K, and if applicable, amendments to those reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available through the Company’s web site free of
charge as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC.
The Company’s Personnel Management System is designed to improve the productivity and profitability of
small and medium-sized businesses. It relieves business owners and key executives of many employer-related
administrative and regulatory burdens, which enables them to focus on the core competencies of their businesses. It
also promotes employee performance through human resource management techniques that improve employee
satisfaction. The Company provides the Personnel Management System by entering into a Client Service Agreement
(“CSA”), which establishes a three-party relationship whereby the Company and client act as co-employers of the
employees who work at the client’s location (“worksite employees”). Under the CSA, Administaff assumes
responsibility for personnel administration and compliance with most employment-related governmental regulations,
while the client company retains the employees’ services in its business and remains the employer for various other
purposes. The Company charges a comprehensive service fee (“comprehensive service fee” or “gross billing”),
which is invoiced concurrently with the processing of payroll for the worksite employees of the client. The
comprehensive service fee consists of the payroll of its worksite employees and a markup computed as a percentage
of the payroll cost of the worksite employees.
- 2 -
The Company accomplishes the objectives of the Personnel Management System through a High
Touch/High Tech approach to service delivery. In advisory areas, such as recruiting, employee performance
management and employee training, the Company employs a high touch approach designed to ensure that its clients
receive the personal attention and expertise needed to create a customized human resources solution. For
transactional processing, the Company employs a high tech approach that provides secure, convenient information
exchange among the Company, its clients and its worksite employees, creating efficiencies for all parties. The
primary component of the high tech portion of the Company’s strategy is the Employee Service Center (“ESC”).
The ESC is the Company’s web-based interactive PEO service delivery platform, which is designed to provide
automated, personalized PEO services to the Company’s clients and worksite employees.
Administaff is a leading provider of PEO services, both in terms of the number of worksite employees and
in terms of revenues. The Company, which serves client companies with worksite employees located throughout the
United States, is currently executing a long-term national expansion strategy targeting approximately 90 sales offices
located in 40 strategically selected markets. In an effort to improve profitability, the Company scaled back its
expansion efforts from five new sales office openings during 2001 to two new sales offices in two new markets
during 2002. As of December 31, 2002, the Company had 38 sales offices located in 21 markets. The Company
expects to open two additional sales offices in existing markets during 2003.
The Company’s national expansion strategy also includes regionalized data processing for payroll and
benefits transactions and localized face-to-face human resources service capacity. During 2002, the Company
continued to place human resources and client service personnel in its sales markets. As of December 31, 2002, the
Company had four service centers, which when fully staffed will provide the capacity to serve approximately
160,000 worksite employees. In addition, the Company has human resources and client service personnel located in
a majority of its 21 sales markets.
PEO Industry
The PEO industry began to evolve in the early 1980’s largely in response to the burdens placed on small
and medium-sized employers by an increasingly complex legal and regulatory environment. While various service
providers were available to assist these businesses with specific tasks, PEOs emerged as providers of a more
comprehensive range of services relating to the employer/employee relationship. In a PEO arrangement, the PEO
assumes broad aspects of the employer/employee relationship. Because PEOs provide employer-related services to a
large number of employees, they can achieve economies of scale that allow them to perform employment-related
functions more efficiently, provide a greater variety of employee benefits and devote more attention to human
resources management.
The Company believes that the key factors driving demand for PEO services include (i) trends relating to
the growth and productivity of the small and medium-sized business community in the United States, such as
outsourcing and a focus on core competencies; (ii) the need to provide competitive health care and related benefits to
attract and retain employees; (iii) the increasing costs associated with health and workers’ compensation insurance
coverage, workplace safety programs, employee-related complaints and litigation; and (iv) complex regulation of
labor and employment issues and the related costs of compliance, including the allocation of time and effort to such
functions by owners and key executives.
A significant factor in the development of the PEO industry has been increasing recognition and acceptance
of PEOs and the co-employer relationship by federal and state governmental authorities. The Company and other
industry leaders, in concert with the National Association of Professional Employer Organizations (“NAPEO”), have
worked with the relevant governmental entities for the establishment of a regulatory framework that protects clients
and employees, discourages unscrupulous and financially unsound companies, and promotes further development of
the industry. Currently, 24 states have legislation containing licensing, registration, or certification requirements
and several others are considering such regulation. Such laws vary from state to state but generally provide for
monitoring the fiscal responsibility of PEOs. State regulation assists in screening insufficiently capitalized PEO
operations and helps to resolve interpretive issues concerning employee status for specific purposes under applicable
state law. The Company has actively supported such regulatory efforts and is currently licensed or registered in 21
of these states, and is applying for registration in New York, North Carolina and Oklahoma, all of which enacted
- 3 -
PEO registration statutes in 2002. The cost of compliance with these regulations is not material to the Company’s
financial position or results of operations.
PEO Services
The Company serves small and medium-sized business by providing its Personnel Management System,
which encompasses a broad range of services, including benefits and payroll administration, health and workers’
compensation insurance programs, personnel records management, employer liability management, employee
recruiting and selection, employee performance management and training and development services. The Personnel
Management System is designed to attract and retain high-quality employees, while relieving client owners and key
executives of many employer-related administrative and regulatory burdens. Among the employment-related laws
and regulations that may affect a client company are the following:
Internal Revenue Code (the “Code”)
•
• Federal Income Contribution Act (FICA)
• Federal Unemployment Tax Act (FUTA)
• Fair Labor Standards Act (FLSA)
• Employee Retirement Income Security Act,
as amended (ERISA)
• The Family and Medical Leave Act (FMLA)
• Health Insurance Portability and
Accountability Act (HIPAA)
• Drug-Free Workplace Act
• Occupational Safety and Health Act
(OSHA)
• Consolidated Omnibus Budget Reconcilia-
• Worker Adjustment and Retraining
•
tion Act of 1987 (COBRA)
Immigration Reform and Control Act
(IRCA)
• Title VII (Civil Rights Act of 1964)
• Americans with Disabilities Act (ADA)
• Age Discrimination in Employment Act
(ADEA)
Notification Act (WARN)
• Uniform Services Employment and
Reemployment Rights Act (USERRA)
• State unemployment and employment
security laws
• State workers’ compensation laws
While these regulations are complex, and in some instances overlapping, Administaff assists its client
companies in achieving compliance with these regulations by providing services in four primary categories:
administrative functions, benefit plans administration, personnel management and employer liability management.
All of the following services are included in the Personnel Management System and are available to all client
companies.
Administrative Functions. Administrative functions encompass a wide variety of processing and record
keeping tasks, mostly related to payroll administration and government compliance. Specific examples include
payroll processing, payroll tax deposits, quarterly payroll tax reporting, employee file maintenance, unemployment
claims processing and workers’ compensation claims reporting.
Benefit Plans Administration. The Company maintains several benefit plans including the following types
of coverage: group health coverage, a dependent care spending account plan, an educational assistance program, an
adoption assistance program, group term life insurance coverage, accidental death and dismemberment insurance
coverage, short-term and long-term disability insurance coverage and a 401(k) plan. The group health plan includes
medical, dental, vision, a worklife program and a prescription drug program. All eligible employees may participate
in the 401(k) plan, while various components of the welfare and fringe benefit plans are provided to applicable
employees based on eligibility provisions specific to those plans. The Company is responsible for the costs and
premiums associated with these plans, acts as plan sponsor and administrator of the plans, negotiates the terms and
costs of the plans, maintains the plans in accordance with applicable federal and state regulations and serves as
liaison for the delivery of such benefits to worksite employees. The Company believes that this variety and quality
of benefit plans are generally not available to employees in its small and medium-sized business target market and
are usually offered only by larger companies that can spread program costs over a much larger group of employees.
As a result, the Company believes that the availability of these benefit plans provides its clients with a competitive
advantage that small and medium-sized businesses are typically unable to attain.
Personnel Management. The Company provides a wide variety of personnel management services that
- 4 -
give its client companies access to resources normally found only in the human resources departments of large
companies. All client companies have access to the Company’s comprehensive personnel guide, which sets forth a
systematic approach to administering personnel policies and practices, including recruiting, discipline and
termination procedures. Other human resources services provided by the Company include drafting and reviewing
personnel policies and employee handbooks, designing job descriptions, performing prospective employee screening
and background investigations, designing performance appraisal processes and forms, and providing professional
development and issues-oriented training, employee counseling, substance abuse awareness training, drug testing,
outplacement services and compensation guidance.
Employer Liability Management. Under the CSA, the Company assumes many of the employment-related
responsibilities associated with its administrative functions, benefit plans administration and personnel management
services. For those employment-related responsibilities that are the responsibility of the client or that Administaff
shares with its clients, the Company can assist its clients in managing and limiting exposure. This includes first time
and ongoing safety-related risk management reviews, as well as the implementation of safety programs designed to
reduce workers’ compensation claims. Administaff also provides guidance to clients for avoiding liability for claims
for discrimination, sexual harassment and civil rights violations, and participates in termination decisions to attempt
to minimize liability on those grounds. When a claim arises, the Company often assists in the client’s defense
regardless of whether the Company has been named directly. The Company employs in-house and external counsel
specializing in several areas of employment law who have broad experience in disputes concerning the
employer/employee relationship and who provide support to the Company’s human resources service specialists. As
part of its comprehensive service, the Company also maintains employment practice liability insurance coverage for
its clients, monitors changing government regulations and notifies clients of the potential effect of such changes on
employer liability.
Employee Service Center. The Employee Service Center (“ESC”) is the Company’s web-based interactive
PEO service delivery platform, which is designed to provide automated, personalized PEO services to the
Company’s clients and worksite employees. The ESC provides a wide range of functionality, including:
• WebPayrollSM for the submission and approval of payroll data;
• Online new employee enrollment;
• Client-specific payroll information and reports;
• Employee information, including online check stubs and pay history reports;
• Online human resources forms;
• Best practices human resource management process maps and process overviews;
• An online personnel guide;
•
• Links to benefits providers and other key vendors; and
• Frequently asked questions.
eUniversitySM web-based training;
The ESC also contains My MarketPlaceSM, an eCommerce portal that brings a wide range of product and
service offerings from best-of-class providers to Administaff clients, worksite employees and their families. The
Company’s My Marketplace offerings include financial services, technology solutions, communications services,
travel services, leisure and entertainment services, retail services, gifts and rewards, insurance services, real estate
services, research and consulting services and other business and consumer products and services. My MarketPlace
also features the unique Best2Best® client network, where Administaff clients can offer their products and services
to one another.
Client Service Agreement
All clients enter into Administaff’s Client Service Agreement (“CSA”). The CSA generally provides for an
on-going relationship, subject to termination by the Company or the client upon 60 to 180 days written notice.
- 5 -
The CSA establishes the Company’s comprehensive service fee, which is subject to periodic adjustments to
account for changes in the composition of the client’s workforce, employee benefit election changes and statutory
changes that affect the Company’s costs. Prior to January 1, 2003, the Company’s comprehensive service fees were
typically determined at the outset of the CSA, and remained relatively static throughout the contract year. If
significant changes occurred during a contract year, the CSA specifically allowed the Company to initiate a manual
process to review that specific client’s pricing and adjust it accordingly, based on the rates that had been in effect at
the date of the original contract. During 2002, the Company undertook a large-scale effort to review the pricing of
its entire client base, as the result of an overall decline in the average payroll cost of its worksite employees. This
effort resulted in adjustments for approximately 20% of the Company’s clients.
In 2002 the Company undertook an additional project to significantly revise its pricing and billing system.
The new pricing and billing system uses a dynamic pricing methodology that automatically adjusts client pricing at
each billing date based on the most recent data about that client’s worksite employees, including pay rates, benefits
elections and payroll taxes, among others. The Company is implementing the new system for all new clients
enrolling after January 1, 2003 and all existing clients renewing after January 1, 2003. All clients are expected to be
using the new pricing and billing system by the end of 2003.
The CSA also establishes the division of responsibilities between the Company and the client as co-
employers. Pursuant to the CSA, the Company is responsible for personnel administration and is liable for certain
employment-related government regulation. In addition, the Company assumes liability for payment of salaries and
wages (as well as related payroll taxes) of its worksite employees and responsibility for providing employee benefits
to such persons. These liabilities are not contingent on the prepayment by the client of the associated comprehensive
service fee and, as a result of the Company’s employment relationship with each of its worksite employees, the
Company is liable for payment of salary and wages of the worksite employees and is responsible for providing
employee benefits to such persons, regardless of whether the client company pays the associated comprehensive
service fee. The client retains the employees’ services and remains liable for the purposes of certain government
regulations, compliance with which requires control of the worksite or daily supervisory responsibility or is
otherwise beyond the Company’s ability to assume. A third group of responsibilities and liabilities are shared by the
Company and the client where such joint responsibility is appropriate. The specific division of applicable
responsibilities under the CSA is as follows:
Administaff
• Payment of wages and related tax reporting and remittance (local, state and federal withholding, FICA, FUTA, state
unemployment);
• Workers’ compensation compliance, procurement, management and reporting;
• Compliance with COBRA, HIPAA and ERISA (for employee benefit plans sponsored by Administaff only), as well
as monitoring changes in other governmental regulations governing the employer/employee relationship and
updating the client when necessary; and
• Employee benefits administration.
Client
• Payment, through Administaff, of commissions, bonuses, paid leaves of absence and severance payments;
• Payment and related tax reporting and remittance of non-qualified deferred compensation and equity-based
compensation;
• Assignment to, and ownership of, all intellectual property rights;
• Compliance with OSHA regulations, EPA regulations, FLSA, WARN, USERRA and state and local equivalents and
compliance with government contracting provisions;
• Compliance with the National Labor Relations Act (“NLRA”), including all organizing efforts and expenses related
to a collective bargaining agreement and related benefits;
• Professional licensing requirements, fidelity bonding and professional liability insurance;
• Products produced and/or services provided; and
• HIPAA and ERISA compliance for client-sponsored benefit plans.
- 6 -
Joint
Implementation of policies and practices relating to the employee/employer relationship; and
•
• Compliance with all federal, state and local employment laws, including, but not limited to Title VII of the Civil
Rights Act of 1964, ADEA, Title I of ADA, FMLA, the Consumer Credit Protection Act, and immigration laws and
regulations.
Because the Company is a co-employer with the client company for some purposes, it is possible that the
Company could incur liability for violations of such laws even if it is not responsible for the conduct giving rise to
such liability. The CSA addresses this issue by providing that the client will indemnify the Company for liability
incurred to the extent the liability is attributable to conduct by the client. Notwithstanding this contractual right to
indemnification, it is possible that the Company could be unable to collect on a claim for indemnification and may
therefore be ultimately responsible for satisfying the liability in question. The Company maintains certain general
insurance coverages (including coverages for its clients) to manage its exposure for these types of claims, and as a
result, the costs in excess of insurance premiums incurred by the Company with respect to this exposure have
historically been insignificant to the Company’s operating results.
Clients are required to remit their comprehensive service fees no later than one day prior to the applicable
payroll date by wire transfer or automated clearinghouse transaction. Although the Company is ultimately liable, as
the employer for payroll purposes, to pay employees for work previously performed, it retains the ability to terminate
the CSA and associated worksite employees or to require prepayment, letters of credit or other collateral upon
deterioration in a client’s financial condition or upon non-payment by a client. These rights, the periodic nature of
payroll and the overall quality of the Company’s client base have resulted in an excellent overall collections history.
Customers
Administaff provides a value-added, full-service human resources solution that it believes is most suitable
to a specific segment of the small and medium-sized business community. The Company has set a long-term goal to
serve approximately 10% of the overall small and medium-sized business community.
Administaff serves client companies and worksite employees located throughout the United States. For the
year ended December 31, 2002, Houston, the Company’s original market, accounted for approximately 24% of the
Company’s revenues with other Texas markets contributing an additional 19%. By region, the Company’s revenue
growth over 2001 and revenue distribution for the year ended December 31, 2002 were as follows:
Northeast .......................................................
Southeast .......................................................
Central ...........................................................
Southwest ......................................................
West ..............................................................
Other revenue ................................................
% Of
Total
Revenues
11.9%
10.9%
14.6%
42.5%
19.3%
0.8%
Revenue
Growth
35.0%
26.2%
28.4%
6.8%
25.4%
(2.1)%
- 7 -
As part of its client selection strategy, the Company does not offer its services to businesses falling within
certain specified NAICS (North American Industry Classification System) codes, formerly known as Standard
Industrial Classification codes, essentially eliminating certain industries that it believes present a higher risk of
employee injury (such as roofing, logging and oil and gas exploration). All prospective clients are evaluated
individually on the basis of workers’ compensation risk, group medical history (where permitted by law),
unemployment history and operating stability. The Company’s client base is broadly distributed throughout a wide
variety of industries including:
• Finance, insurance and real estate – 15%;
• Computer and information services – 14%;
• Management, administration and consulting services – 13%;
• Medical services – 10%;
• Manufacturing – 9%;
• Construction – 8%;
• Wholesale trade – 8%;
• Engineering, accounting and legal services – 7%;
• Retail trade – 5%;
• Transportation – 2%; and
• Other – 9%.
This diverse client base lowers the Company’s exposure to downturns or volatility in any particular
industry. However, the Company’s performance could be affected by a downturn in one of these industries or by
general economic conditions within the small and medium-sized business community. Weakness in U.S. economic
conditions in 2002 had a negative effect on the Company’s revenues and contributed to its net loss for 2002. See
“Management’s Discussion and Analysis of Financial Condition and Results of Operations – Results of Operations –
Year Ended December 31, 2002 Compared to Year Ended December 31, 2001,” beginning on page 29 for a
discussion of the effect of economic conditions on the Company’s results.
The Company focuses heavily on client retention. Administaff’s client retention record over the last five
years reflects that approximately 70% of Administaff’s clients remain for more than one year, and that the retention
rate improves for clients who remain with Administaff for longer periods, up to approximately 80% for clients in
their fifth year with Administaff. The resulting overall retention rate for 2002 was approximately 75%. Client
attrition is attributable to a variety of factors, including (i) client non-renewal due to price factors; (ii) termination of
the CSA by Administaff resulting from the client’s non-compliance or inability to make timely payments; (iii) client
business failure, sale, merger, or disposition; and (iv) competition from other PEOs or business services firms.
- 8 -
Marketing and Sales
As of December 31, 2002, the Company had 38 sales offices located in 21 markets. The Company is
currently executing a long-term national expansion strategy, which targets approximately 90 sales offices in 40
strategically selected markets. The Company’s sales offices typically consist of six to ten sales representatives, a
district sales manager and an office administrator. To take advantage of economic efficiencies, multiple sales offices
may share a physical location. The Company’s markets and their respective year of entry are as follows:
Market
Sales Offices
Initial
Entry Date
Houston
San Antonio
Austin
Orlando
Dallas
Atlanta
Phoenix
Chicago
Washington D.C.
Denver
Los Angeles
Charlotte
St. Louis
San Francisco
New York
Baltimore
New Jersey
San Diego
Boston
Minneapolis
Cleveland
4
1
1
1
3
3
1
3
2
1
3
1
1
4
2
1
1
1
2
1
1
1986
1989
1989
1989
1993
1994
1995
1995
1995
1996
1997
1997
1998
1998
1999
2000
2000
2001
2001
2002
2002
The 40 markets included in the national expansion plan were identified using a systematic market
evaluation and selection process. The Company continues to evaluate a broad range of factors in the selection
process, using a market selection model that weights various criteria that the Company believes are reliable
predictors of successful penetration based on its experience. Among the factors considered are (i) market size, in
terms of small and medium-sized businesses engaged in selected industries that meet the Company’s risk profile; (ii)
market receptivity to PEO services, including the regulatory environment and relevant history with other PEO
providers; (iii) existing relationships within a given market, such as vendor or client relationships; (iv) expansion
cost issues, such as advertising and overhead costs; (v) direct cost issues that bear on the Company’s effectiveness in
controlling and managing the cost of its services, such as workers’ compensation and health insurance costs,
unemployment risks and various legal and other factors; (vi) a comparison of the services offered by Administaff to
alternatives available to small and medium-sized businesses in the relevant market, such as the cost to the target
clients of procuring services directly or through other PEOs; and (vii) long-term strategy issues, such as the general
perception of markets and the Company’s estimate of the long-term revenue growth potential of the market. Each of
the Company’s expansion markets, beginning with Dallas in 1993, was selected in this manner. The Company
expects to open two additional sales offices in existing markets during 2003.
The Company’s marketing strategy is based on the application of techniques that have produced consistent
and predictable results in the past. The Company develops a mix of advertising media and a placement strategy
tailored to each individual market. After selecting a market and developing its marketing mix, but prior to entering
the market, the Company engages in an organized media and public relations campaign to prepare the market for the
Company’s entry and to begin the process of generating sales leads. The Company markets its services through a
broad range of media outlets, including radio, newspapers, periodicals, direct mail and the Internet. The Company
- 9 -
employs a public relations firm in most of its markets as well as advertising consultants to coordinate and implement
its marketing campaigns. The Company has developed an inventory of proven, successful radio and newsprint
advertisements, which are utilized in this effort.
The Company’s organic growth model generates sales leads from five primary sources: direct sales efforts,
advertising, referrals, the American Express marketing alliance and the Internet. These leads result in initial
presentations to prospective clients, and, ultimately, a predictable number of client census reports. A prospective
client’s census report reflects information gathered by the sales representative about the prospect’s employees,
including job classification, state of employment, workers’ compensation claims history, group medical information
(where permitted by law), salary and desired level of benefits. This information is entered into the Company’s
customized bid system, which applies Administaff’s proprietary pricing model to the census data, leading to the
preparation of a bid. Concurrent with this process, the prospective client’s workers’ compensation, health insurance,
employer practices and financial stability are evaluated from a risk management perspective. Upon completion of a
favorable risk evaluation, the sales representative presents the Company’s bid and attempts to enroll the prospect.
The Company’s selling process typically takes approximately 90 days.
The Company has entered into a Marketing Agreement with American Express, under which American
Express is utilizing its resources and working jointly with the Company to generate appointments with prospects for
the Company’s services from the American Express customer base in certain markets. In addition, certain American
Express services are included in the Company’s My MarketPlace offerings. The Company pays a commission to
American Express based upon the number of worksite employees paid after being referred to the Company pursuant
to the Marketing Agreement and the total number of worksite employees paid by the Company. In 2002, the
Marketing Agreement produced 17.4% of the Company’s sales leads and 16.6% of new worksite employees sold.
The Marketing Agreement expires at the end of 2005 for existing markets, but was recently extended until the end of
2006 for new markets opened after 2002 through 2005.
Competition
Administaff provides a value-added, full-service human resources solution that it believes is most suitable
to a specific segment of the small and medium-sized business community. This full-service approach is exemplified
by the Company’s commitment to service and technology personnel and tools, which has produced a ratio of
corporate staff to worksite employees (the “staff support ratio”) that is higher than average for the PEO industry.
Based on an analysis of the 1999 through 2001 annual NAPEO surveys of the PEO industry, the Company has
successfully leveraged its full-service approach into significantly higher returns for the Company on a per worksite
employee per month basis. During the three year period from 1999 through 2001, the Company’s staff support ratio
averaged 42% higher than the PEO industry average, while gross profit per worksite employee and operating income
per worksite employee exceeded industry averages by 127% and 249%, respectively.
Competition in the PEO industry revolves primarily around quality of services, scope of services, choice
and quality of benefits packages, reputation and price. The Company believes that reputation, national presence,
regulatory expertise, financial resources, risk management and information technology capabilities distinguish
leading PEOs from the rest of the industry. The Company also believes that it competes favorably in these areas.
Due to the differing geographic regions and market segments in which most PEOs operate, and the
relatively low level of market penetration by the industry, the Company considers its primary competition to be the
traditional in-house provision of human resource services. The PEO industry is highly fragmented, and the
Company believes that it is one of the largest PEOs in the United States. The Company’s largest national
competitors include Gevity HR and PEO divisions of large business services companies such as Automatic Data
Processing, Inc. and Paychex, Inc. In addition, the Company competes to some extent with fee-for-service providers
such as payroll processors and human resource consultants and faces competition from large regional PEOs in
certain areas of the country. As the Company and other large PEOs expand nationally, the Company expects that
competition may intensify among larger PEOs.
- 10 -
Vendor Relationships
Administaff provides benefits to its worksite employees under arrangements with a variety of vendors.
Although the Company believes that any of its benefit contracts could be replaced if necessary, the Company
considers two such contracts to be the most significant elements of the package of benefits provided to employees.
The Company provides health insurance coverage to its worksite employees through a national network of
carriers including UnitedHealthcare (“United”), Cigna Healthcare, PacifiCare, Kaiser Permanente and Blue Cross
and Blue Shield of Georgia, all of which provide fully-insured policies. The policy with United provides the
majority of the Company’s health insurance coverage and automatically renews on January 1 of each year,
subsequent to the annual expiration of each policy year, subject to cancellation by either party upon 180 days notice.
For a discussion of the Company’s contract with United, see Item 7. “Critical Accounting Policies and Estimates –
Benefits Costs” on page 25.
The Company’s workers’ compensation policy is currently provided by Lumbermens Mutual Casualty
Company, a unit of Kemper Insurance Companies. Since November 1994, the Company has been covered under a
guaranteed cost plan whereby premiums are paid for complete coverage of all claims under the policy. The current
policy expires on September 30, 2003. The Company is currently in discussions with workers’ compensation
insurance carriers regarding the replacement of its current workers’ compensation policy. There can be no
assurances that the Company will be able to obtain a replacement contract with terms similar to the current policy,
and the new contract will likely involve increased costs and significant collateral requirements.
Information Technology
The Company has developed customized information technology capable of meeting the demands of
payroll and related processing for the Company’s worksite employees, satisfying the Company’s administrative and
management information needs, providing productivity enhancement tools to the Company’s corporate staff and
providing web-based access to certain tools and data. While the Company utilizes commercially available software
for standard business functions such as finance and accounting, it has developed a proprietary professional employer
information system for the delivery of its primary services.
Administaff Information Management System (“AIMS”), is the Company’s proprietary PEO information
system and is in its fifth generation. This system manages data relating to worksite employee enrollment, human
resource management, benefits administration, payroll processing, management information, and sales bid
calculations that are unique to the PEO industry and to Administaff. Central to the system is a payroll processing
system that allows the Company to process a high volume of payroll transactions that meet the specific needs of its
client companies.
The Employee Service Center is the Company’s web-based PEO service delivery platform. With its
integration into AIMS, the ESC is designed to provide automated, personalized PEO services to the Company’s
clients and worksite employees. For a description of the functionality provided through the ESC, see “PEO Services
– Employee Service Center” on page 5.
The Company’s primary information processing facility is located at the Company’s corporate headquarters
in Kingwood, Texas (a suburb of Houston) with secondary processing facilities located at the Company’s service
centers in Atlanta, Dallas, Houston and Los Angeles. The Dallas facility acts as a disaster recovery facility for the
Company, capable of handling all of the Company’s operations for short periods of time.
The Company has invested substantially in its technology and network infrastructure. Service centers,
district sales offices and corporate offices are connected to the corporate data center by high-speed frame-relay and
point-to-point network services provided by AT&T utilizing Nortel Networks’ gigabit technology.
- 11 -
Industry Regulation
The Company’s operations are affected by numerous federal and state laws relating to tax and employment
matters. By entering into a co-employer relationship with its worksite employees, the Company assumes certain
obligations and responsibilities of an employer under these federal and state laws. Because many of these federal
and state laws were enacted prior to the development of nontraditional employment relationships, such as PEOs,
temporary employment and outsourcing arrangements, many of these laws do not specifically address the obligations
and responsibilities of nontraditional employers. Currently, 24 states have passed laws that have licensing,
registration or certification requirements for PEOs, and several others are considering such regulation.
Certain federal and state statutes and regulations use the terms “employee leasing” or “staff leasing” to
describe the arrangement among a PEO and its clients and worksite employees. The terms “employee leasing,”
“staff leasing” and “professional employer arrangements” are generally synonymous in such contexts and describe
the arrangements entered into by the Company, its clients and worksite employees.
As an employer, the Company is subject to all federal statutes and regulations governing the
employer/employee relationship. Subject to the issues discussed below, the Company believes that its operations are
in compliance in all material respects with all applicable federal statutes and regulations.
Employee Benefit Plans
The Company offers various employee benefits plans to eligible employees, including its worksite
employees. The Company maintains these employee benefit plans as “single-employer” plans rather than “multiple-
employer” plans. These plans include the 401(k) Plan (a profit-sharing plan with a cash or deferred arrangement
(“CODA”) under Code Section 401(k) and an employer matching contribution feature under Code Section 401(m));
a cafeteria plan under Code Section 125; a group welfare benefits plan which includes medical, dental, vision, life
insurance, disability and worklife programs; a dependent care spending plan; an educational assistance program; and
an adoption assistance program. Generally, employee benefit plans are subject to provisions of both the Code and
ERISA.
Employer Status. In order to qualify for favorable tax treatment under the Code, the plans must be
established and maintained by an employer for the exclusive benefit of its employees. Generally, an entity is an
“employer” of individuals for federal employment tax purposes if an employment relationship exists between the
entity and the individuals under the common law test of employment. In addition, the officers of a corporation are
deemed to be employees of that corporation for federal employment tax purposes. The common law test of
employment, as applied by the IRS, involves an examination of approximately 20 factors to ascertain whether an
employment relationship exists between a worker and a purported employer. Generally, the test is applied to
determine whether an individual is an independent contractor or an employee for federal employment tax purposes
and not to determine whether each of two or more companies is a “co-employer.” Substantial weight is typically
given to the question of whether the purported employer has the right to direct and control the details of an
individual’s work. Among the factors which appear to have been considered more important by the IRS are (i) the
employer’s degree of behavioral control (the extent of instructions, training and the nature of the work); (ii) the
financial control or the economic aspects of the relationship; and (iii) the intended relationship of the parties
(whether employee benefits are provided, whether any contracts exist, whether services are ongoing or for a project,
whether there are any penalties for discharge/termination, and the frequency of the business activity).
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 with respect to worksite employees for ERISA purposes,
its plans would not comply with ERISA. Further, as a result of such finding the Company and its plans would not
- 12 -
enjoy, with respect to worksite employees, the preemption of state laws provided by ERISA and could be subject to
varying state laws and regulations, as well as to claims based upon state common laws. Even if such a finding were
made, the Company believes it would not be materially adversely affected because it could continue to make
available similar benefits at comparable costs.
In addition to ERISA and the Code provisions discussed herein, issues related to the relationship between
the Company and its worksite employees may also arise under other federal laws, including other federal income tax
laws.
401(k) Plan. On April 24, 2002, the Internal Revenue Service (“IRS”) issued Revenue Procedure 2002-21,
which provided guidance for the operation of defined contribution plans maintained by PEOs which benefit worksite
employees. The guidance applies to plans in existence on May 12, 2002 and their operation in plan years beginning
after December 31, 2003.
On May 21, 2002, Administaff entered into a Closing Agreement with the IRS related to an audit of the
Administaff 401(k) Plan for the year ended December 31, 1993. The agreement recognizes and preserves
Administaff’s ability to maintain its current single employer plan structure through December 31, 2003. As a result
of the agreement, the IRS has closed its audit of the plan and granted full relief from retroactive disqualification on
the exclusive benefit rule issue raised during the audit. For periods after December 31, 2003, the Company intends
to comply with IRS Revenue Procedure 2002-21, and expects that the required changes to the plan will not have a
material adverse effect on its financial condition or results of operations. For a discussion of the required changes to
the Company’s 401(k) Plan, see “Factors That May Affect Future Results and the Market Price of Common Stock –
Compliance with IRS Revenue Procedure 2002-21” on page 41.
In addition, on September 6, 2002, the IRS issued a favorable determination letter as to the tax qualification
status of the Administaff 401(k) Plan which includes all amendments and restatements of the plan and trust
documents adopted between April 30, 1992 and October 1, 2002. While this determination letter issued by the IRS
reflects the tax qualified status of the form of the application documents, it would not preclude a subsequent
disqualification based on the plan’s operation.
Possible Multiple Employer Welfare Arrangement Treatment. On February 11, 2000, the U.S. Department
of Labor (“DOL”) issued regulations requiring that multiple employer welfare arrangements (“MEWAs”) file an
annual return disclosing certain information (the “Form M-1”). In general, a MEWA is defined broadly to include
any employee welfare benefit plan or other arrangement that is established or maintained for the purpose of offering
or providing medical benefits to the employees of two or more employers (including one or more self-employed
individuals). The DOL’s definition of what constitutes a MEWA can be construed so broadly that it was necessary
for the regulations to expressly exempt insurance companies and specified collectively bargained plans from the
filing requirements. Without the exemption, these entities believed that they could be categorized as MEWAs and
be required to file the Form M-1.
The Company’s position is that it has established itself, by agreement with its clients, as the employer for
purposes of sponsoring its group health plan. Consistent with this position, the Company’s group health plan is
structured as a single-employer plan. The Company, however, is concerned that given the breadth of the DOL’s
MEWA definition, the DOL could take the position that its group health plan is a MEWA. Given the breadth of the
M-1 filing requirement, Administaff chose to make a protective filing on Company letterhead of the information
requested in the Form M-1 to the DOL for the 1999, 2000, 2001 and 2002 plan years, while explicitly maintaining
the position that its group health plan was not a MEWA.
Federal Employment Taxes
As a co-employer, the Company assumes responsibility and liability for the payment of federal and state
employment taxes with respect to wages and salaries paid to worksite employees. There are essentially three types
of federal employment tax obligations: (i) withholding of income tax requirements governed by Code Section 3401,
et seq.; (ii) obligations under FICA, governed by Code Section 3101, et seq.; and (iii) obligations under FUTA,
- 13 -
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.
Code Section 3401, which applies to federal income tax withholding requirements, contains an exception to
the general common law test applied to determine whether an entity is an “employer” for purposes of federal income
tax withholding. Section 3401(d)(1) states that if the person for whom services are rendered does not have control of
the payment of wages, the “employer” for this purpose is the person having control of the payment of wages. The
Treasury regulations issued under Section 3401(d)(1) state that a third party can be deemed to be the employer of
workers under this section for income tax withholding purposes where the person for whom services are rendered
does not have legal control of the payment of wages. While Section 3401(d)(1) has been examined by several
courts, its ultimate scope has not been delineated. Moreover, the IRS has to date relied extensively on the common
law test of employment in determining liability for failure to comply with federal income tax withholding
requirements.
Accordingly, while the Company believes that it can assume the withholding obligations for worksite
employees, in the event the Company fails to meet these obligations the client company may be held jointly and
severally liable therefor. While this interpretive issue has not to the Company’s knowledge discouraged clients from
enrolling with the Company, there can be no assurance that a definitive adverse resolution of this issue would not do
so in the future. These interpretive uncertainties may also impact the Company’s ability to report employment taxes
on its own account rather than for the accounts of its clients.
State Unemployment Taxes
The Company records its state unemployment tax expense based on taxable wages and tax rates assigned by
each state. State unemployment tax rates vary by state and are determined, in part, based on prior years’
compensation experience in each state. The Company must estimate its expected tax rate in those states for which
tax rate notices have not yet been received. In January 2002, as a result of a corporate restructuring, the Company
filed for a partial transfer of compensation experience with the state of Texas.
In June 2002, the Company received an initial determination from the Texas Workforce Commission
(“TWC”) that its partial transfer application was denied. The Company filed an appeal of this ruling with the TWC.
On October 30, 2002, the TWC issued its decision approving Administaff’s application for a partial transfer of
compensation experience.
Since filing its partial transfer application in Texas, Administaff has paid its unemployment taxes to the
state of Texas at the higher new employer rate as required by state law. However, the Company has recorded Texas
unemployment taxes at its best estimate of the ultimate rate, resulting in a prepaid asset of approximately $6 million
at December 31, 2002, included as a component of other current assets. Administaff will not know the definitive
amount of its expected refund until the transfer of compensation experience is completed by the TWC and the TWC
notifies Administaff of its final official tax rate for the 2002 calendar year. If the TWC’s final official tax rate is
higher or lower than the estimated rate currently used by the Company, the Company would be required to recognize
a corresponding reduction or increase in the estimated prepaid asset as additional payroll tax expense or benefit in
the period of such determination to the extent the Company’s estimate differs from the TWC’s final official tax rate.
State Regulation
While many states do not explicitly regulate PEOs, 24 states have regulations containing licensing,
registration or certification requirements for PEOs, and several others are considering such regulation. Such laws
vary from state to state but generally provide for monitoring the fiscal responsibility of PEOs, and in some cases
codify and clarify the co-employment relationship for unemployment, workers’ compensation and other purposes
under state law. The Company holds licenses in Arkansas, Florida, Montana, New Hampshire, New Mexico,
Oregon, South Carolina, Tennessee, Texas, Utah and Vermont. The Company is registered or certified in Colorado,
Illinois, Kentucky, Louisiana, Maine, Minnesota, Nevada, New Jersey, Rhode Island and Virginia. The Company is
applying for registration pursuant to the recently-enacted registration statutes in New York, North Carolina and
Oklahoma. Regardless of whether a state has licensing, registration or certification requirements, the Company faces
- 14 -
a number of other state and local regulations that could impact its operations. In 1993, the Company was
instrumental in obtaining enactment of PEO legislation in Texas, where it faced a number of challenges under state
law, and believes that its prior experience with Texas regulatory authorities will be valuable in surmounting
regulatory obstacles or challenges it may face in the future.
Corporate Office Employees
The Company had approximately 1,325 corporate office and sales employees as of December 31, 2002.
The Company believes that its relations with its corporate office and sales employees are good. None of the
Company’s corporate office and sales employees is covered by a collective bargaining agreement.
Intellectual Property
The Company currently has registered trademarks and pending applications for registration. Although the
Administaff mark is the most material trademark to the Company’s business, the Company’s trademarks as a whole
are also of considerable importance to the Company. Additionally, the Company has a pending patent application
for its WebPayroll software application.
- 15 -
ITEM 2. PROPERTIES.
The Company believes that its current facilities are adequate for the purposes for which they are intended
and that they provide sufficient capacity to accommodate the Company’s expansion plan. The Company will
continue to evaluate the need for additional facilities based on the rate of growth in worksite employees, the
geographic distribution of the worksite employee base and the Company’s long-term service delivery requirements.
Corporate Headquarters
The Company’s corporate headquarters is located in Kingwood, Texas, in a 327,000 square foot office
campus-style facility. This 28-acre Company-owned office campus includes approximately nine acres of
undeveloped land for future expansion. All development and support operations are located in the Kingwood
facility, along with the Company’s record retention center and primary data processing center. During the third
quarter of 2002, the Company completed the expansion of its corporate headquarters with the construction of a
183,000 square foot office building and parking garage.
Service Centers
The Company currently has four service centers located in Atlanta, Dallas, Houston, and Los Angeles.
The Atlanta service center, which currently services approximately 25% of the Company’s worksite
employee base, is located in a 40,000 square foot leased facility. This facility, which is under lease until 2009, is
designed to service approximately 40,000 worksite employees at full capacity.
The Dallas service center, which currently services approximately 37% of the Company’s worksite
employee base, is located in a 40,000 square foot leased facility, which also serves as the Company’s backup data
processing center and disaster recovery center. This facility, which is under lease until 2008, is designed to service
approximately 40,000 worksite employees at full capacity.
The Houston service center, which services approximately 30% of the Company’s worksite employee base,
is located in a 40,000 square foot leased facility. This facility, which is under lease until 2010, is designed to service
approximately 40,000 worksite employees at full capacity.
The Los Angeles service center, which currently services approximately 8% of the Company’s worksite
employee base, is located in a 45,000 square foot leased facility. This facility, which is under lease until 2012, is
designed to service approximately 40,000 worksite employees at full capacity.
Sales Offices
As of December 31, 2002, the Company had sales and service personnel in 29 facilities located in its 21
sales markets throughout the United States. All of the facilities are leased facilities, and some of these facilities are
shared by multiple sales offices and/or client service personnel. As of December 31, 2002, the Company had 38
sales offices in these 21 markets. To take advantage of economic efficiencies, multiple sales offices may share a
physical location. Each sales office is typically staffed by six to 10 sales representatives, a district sales manager
and an office administrator. In addition, the Company has placed certain client service personnel in a majority of its
sales markets to provide high-quality, localized service to its clients in those major markets. The Company expects
to continue placing various client service personnel in its sales markets as a critical mass of clients is attained in each
market.
- 16 -
ITEM 3. LEGAL PROCEEDINGS.
Other than as set forth below, 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.
On November 5, 2001, the Company filed a lawsuit against Aetna US Healthcare (“Aetna”), its former
health insurance carrier. The Company has asserted claims against Aetna for breach of contract, economic duress,
negligent misrepresentation, breach of good faith and fair dealing, and violations of the Texas Insurance Code. The
Company has alleged that during the third quarter of 2001, Aetna placed the Company under economic duress by
threatening, without any legal right, to terminate the Company’s health insurance plan if Administaff did not pay
immediate and retroactive rate increases, even though Aetna had not provided at least two quarters advance notice as
required under the contract. In addition, the Company has alleged that Aetna failed to properly administer the health
plan and to produce timely and accurate reports regarding the health plan’s claims data and financial condition. The
Company is seeking damages in excess of $42 million, including amounts related to the increased health insurance
costs in the third and fourth quarters of 2001.
On January 28, 2002, Aetna filed its answer denying the claims asserted by the Company and, as
anticipated by the Company, filed a counterclaim. In the counterclaim, Aetna has alleged that the Company has
violated ERISA, breached its contractual obligations by failing to pay premiums owed to Aetna, and made material
misrepresentations during its negotiations of rates with Aetna for the purpose of delaying rate increases while the
Company sought a replacement health insurance carrier. Aetna is alleging damages of approximately $35 million.
Both the Company and Aetna have filed motions for summary judgement, which could result in the court
dismissing some or all of the Company’s claims and/or Aetna’s counterclaim. While the Company cannot predict
the ultimate outcome or the timing of a resolution of this dispute or the related lawsuit and counterclaim, the
Company plans to vigorously pursue its case. In addition, the Company believes that Aetna’s allegations in the
counterclaim are without merit and intends to defend itself vigorously. However, an adverse outcome in this dispute
could have a material adverse effect on the Company’s results of operations or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders of the Company, through solicitation of proxies or
otherwise, during the quarter ended December 31, 2002.
- 17 -
ITEM S-K 401 (b). EXECUTIVE OFFICERS OF THE REGISTRANT.
The following table sets forth the names, ages (as of March 10, 2003) and positions of the Company’s
executive officers:
Name
Age
Position
Paul J. Sarvadi ....................................... 46
Richard G. Rawson................................ 54
President and Chief Executive Officer
Executive Vice President, Administration, Chief Financial Officer
and Treasurer
Executive Vice President, Client Services
Executive Vice President, Sales and Marketing
A. Steve Arizpe...................................... 45
Jay E. Mincks ........................................ 49
Howard G. Buff ..................................... 42 Vice President, Benefits and Corporate Human Resources
Samuel G. Larson .................................. 41 Vice President, Enterprise Project Management
Douglas S. Sharp ................................... 41 Vice President, Finance and Controller
John H. Spurgin, II ................................ 56 Vice President, Legal, General Counsel and Secretary
Paul J. Sarvadi has served as President and Chief Executive Officer since 1989. Mr. Sarvadi co-founded
Administaff in 1986 and served as Vice President and Treasurer of the Company from its inception in 1986 through
April 1987 and then as Vice President from April 1987 through 1989. Prior to founding Administaff, Mr. Sarvadi
started and operated several small businesses. Mr. Sarvadi has served as President of NAPEO and was a member of
its Board of Directors for five years. He also served as President of the Texas Chapter of NAPEO for three of the
first four years of its existence. Mr. Sarvadi was selected as the 2001 National Ernst & Young Entrepreneur of the
Year® for service industries.
Richard G. Rawson has served as Executive Vice President, Administration, Chief Financial Officer and
Treasurer since February 1997. He joined Administaff in 1989 as Senior Vice President, Chief Financial Officer,
and Treasurer. He previously served as a Senior Financial Officer and Controller for several companies in the
manufacturing and seismic data processing industries. Mr. Rawson has served as President, First Vice President,
Second Vice President and Treasurer of NAPEO as well as Chairman of the NAPEO Accounting Practices
Committee. Mr. Rawson is also a member of the Financial Executives Institute.
A. Steve Arizpe has served as Executive Vice President, Client Services since February 1997. He joined
Administaff in 1989 and has served in a variety of roles, including Houston Sales Manager, Regional Sales Manager,
and Vice President of Sales. Prior to joining Administaff, Mr. Arizpe served in sales and sales management roles for
two large corporations.
Jay E. Mincks has served as Executive Vice President, Sales and Marketing since January 1999. Mr.
Mincks served as Vice President, Sales and Marketing from February 1997 through January 1999. He joined
Administaff in 1990 and has served in a variety of other roles, including Houston Sales Manager and Regional Sales
Manager for the Western United States. Prior to joining Administaff, Mr. Mincks served in a variety of positions,
including management positions, in the sales and sales training fields with various large companies.
Howard G. Buff has served as Vice President, Benefits and Corporate Human Resources since joining
Administaff in July 2001. Prior to joining Administaff, Mr. Buff spent 15 years at Paychex, Inc., most recently
serving concurrently as president of Paychex Agency, Inc. and director of product management and operations for
the Human Resource Services and PEO division from 1997 to October 2000.
Samuel G. Larson has served as Vice President, Enterprise Project Management since January 2000. From
February 1997 to January 2000, he served as Vice President of Finance. He joined Administaff in August 1994 as
Controller. Prior to joining Administaff, Mr. Larson served as Controller for a small publicly-held company; as
Financial Reporting Manager for NL Industries, Inc.; and as an Audit Manager with Ernst & Young LLP.
- 18 -
Douglas S. Sharp has served as Vice President, Finance and Controller since joining Administaff in January
2000. From July 1994 until he joined Administaff, Mr. Sharp served as Chief Financial Officer for Rimkus
Consulting Group, Inc. Prior to that, he served as Controller for a small publicly-held company; as Controller for a
large software company; and as an Audit Manager for Ernst & Young LLP. Mr. Sharp has served as a member of
the Accounting Practices Committee of NAPEO since January 2002.
John H. Spurgin, II has served as Vice President, Legal, General Counsel and Secretary since joining
Administaff in January 1997. Prior to joining Administaff, Mr. Spurgin was a partner with the Austin office of
McGinnis, Lochridge & Kilgore, L.L.P., where he served as Administaff’s outside counsel for nine years.
- 19 -
PART II
ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
Price Range of Common Stock
The Company’s common stock is traded on the New York Stock Exchange under the symbol “ASF”. As of
March 10, 2003, there were 195 holders of record of the common stock. This number does not include stockholders
for whom shares were held in “nominee” or “street name.” The following table sets forth the high and low sales
prices for the common stock as reported on the New York Stock Exchange composite transactional tape.
High
Low
2002
First Quarter ................................................................
Second Quarter ............................................................
Third Quarter...............................................................
Fourth Quarter .............................................................
2001
First Quarter ................................................................
Second Quarter ............................................................
Third Quarter...............................................................
Fourth Quarter .............................................................
$ 28.40
28.15
10.51
7.90
$ 32.90
28.20
33.90
36.48
$ 20.40
8.30
1.99
3.85
$ 17.42
15.40
22.30
19.80
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.
- 20 -
ITEM 6. SELECTED FINANCIAL DATA.
The selected consolidated financial data set forth below should be read in conjunction with the
Consolidated Financial Statements and accompanying Notes and Item 7, “Management’s Discussion and Analysis
of Financial Condition and Results of Operations.” The information provided below has been adjusted to present the
Company’s revenues net of worksite employee payroll cost, and as a result, differs from the Company’s previous
Form 10-K filings. For a discussion of the Company’s change in accounting method, see Item 7. “Management’s
Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and
Estimates” on page 24.
2002
Year ended December 31,
2000
(in thousands, except per share and statistical data)
1999
2001
1998
Income Statement Data:
Revenues(1) .............................................
Gross profit ............................................
Operating income (loss) .........................
Net income (loss) ...................................
Basic net income (loss) per share(2) ........
Diluted net income (loss) per share(2).....
Balance Sheet Data:
$ 849,021
166,390
(1,850)
(4,081)
(0.15)
(0.15)
$
$
$ 720,219
165,015
18,539
10,357
0.38
0.36
$
$
$ 598,291
138,534
22,234
16,900
0.62
0.58
$
$
$ 373,512
89,528
10,559
9,358
0.34
0.34
$
$
$ 283,937
68,610
11,201
9,123
0.32
0.31
$
$
Working capital......................................
Total assets.............................................
Total debt ..............................................
Total stockholders’ equity......................
$ 41,238
315,164
44,169
116,349
$ 36,609
274,003
13,500
122,935
$ 51,179
242,817
—
105,510
$ 35,792
147,698
—
80,468
$ 52,475
142,799
—
86,857
Statistical Data:
Average number of worksite employees
paid per month during period .............
Revenues per worksite
employee per month (3) .......................
Gross profit per worksite
employee per month ...........................
Operating income (loss) per worksite
employee per month ...........................
_________________
77,334
69,480
62,140
42,479
34,819
$
$
$
915
179
(2)
$
$
$
864
198
22
$
$
$
802
186
30
$
$
$
733
176
21
$
$
$
680
164
27
(1)
(2)
(3)
Gross billings of $4.9 billion, $4.4 billion, $3.7 billion, $2.3 billion and $1.7 billion less worksite employee
payroll cost of $4.0 billion, $3.7 billion, $3.1 billion, $1.9 billion and $1.4 billion, respectively.
Adjusted to reflect the two-for-one split of the common stock effected on October 16, 2000.
Gross billings of $5,235, $5,245, $4,973, $4,435 and $4,028 per worksite employee per month less payroll
cost of $4,320, $4,381, $4,171, $3,702 and $3,348 per worksite employee per month, respectively.
- 21 -
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion should be read in conjunction with, and is qualified in its entirety by, the
Company’s Consolidated Financial Statements and Notes thereto included elsewhere in this Annual Report.
Historical results are not necessarily indicative of trends in operating results for any future period.
The statements contained in this Annual Report that are not historical facts are forward-looking statements
that involve a number of risks and uncertainties. The actual results of the future events described in such forward-
looking statements in this Annual Report could differ materially from those stated in such forward-looking
statements. Among the factors that could cause actual results to differ materially are the risks and uncertainties
discussed in this Item 7 under “Factors that May Affect Future Results and the Market Price of Common Stock” on
page 39 and the uncertainties set forth from time to time in the Company’s other public reports and filings and public
statements.
Overview
Administaff provides a comprehensive Personnel Management SystemSM that encompasses a broad range of
services, including benefits and payroll administration, health and workers’ compensation insurance programs,
personnel records management, employer liability management, employee recruiting and selection, employee
performance management, and employee training and development services. The Company’s overall operating
results are largely dependent on the number of worksite employees paid, and can be measured in terms of revenues,
payroll costs, or gross profit per worksite employee per month. As a result, the Company often uses this unit of
measurement in analyzing and discussing its results of operations.
Revenues
The Company accounts for its revenues in accordance with EITF 99-19, Reporting Revenues Gross as a
Principal Versus Net as an Agent (“EITF 99-19”). The Company’s revenues are derived from its gross billings,
which are based on (i) the payroll cost of its worksite employees; and (ii) a markup computed as a percentage of the
payroll cost. In determining the pricing of the markup component of the gross billings, the Company takes into
consideration its estimates of the costs directly associated with its worksite employees, including payroll taxes,
benefits and workers’ compensation costs, plus an acceptable gross profit margin. The gross billings are invoiced
concurrently with each periodic payroll of its worksite employees. Revenues are recognized ratably over the payroll
period as worksite employees perform their service at the client worksite. Revenues that have been recognized but
not invoiced are included in unbilled accounts receivable on the Company’s Consolidated Balance Sheets.
The Company’s revenues are primarily dependent on the number of clients enrolled, the resulting number
of worksite employees paid each period and the number of worksite employees enrolled in the Company’s benefit
plans. Because the Company’s markup is computed as a percentage of payroll cost, revenues are also affected by the
payroll cost of worksite employees, which can fluctuate based on the composition of the worksite employee base,
inflationary effects on wage levels and differences in the local economies of the Company’s markets.
Historically, the Company has included both components of its gross billings in revenues (gross method)
due primarily to the assumption of significant contractual rights and obligations associated with being an employer,
including the obligation for the payment of the payroll costs of its worksite employees. The Company assumes its
employer obligations regardless of whether the Company collects its gross billings. After discussions with the
Securities and Exchange Commission staff, the Company has changed its presentation of revenues from the gross
method to an approach that presents its revenues net of worksite employee payroll costs primarily because the
Company is not generally responsible for the output and quality of work performed by the worksite employees. This
change in accounting method reduced revenue for the years ended December 31, 2002, 2001 and 2000 by $4.0
billion, $3.7 billion and $3.1 billion, respectively, but had no effect on gross profit, operating income or net income
(loss).
- 22 -
Direct Costs
The Company’s primary direct costs associated with its revenue generating activities are (i) employment-
related taxes (“payroll taxes”); (ii) costs of employee benefit plans; and (iii) workers’ compensation insurance
premiums.
Payroll taxes consist of the employer’s portion of Social Security and Medicare taxes under FICA, federal
unemployment taxes and state unemployment taxes. Payroll taxes are generally paid as a percentage of payroll cost.
The federal tax rates are defined by federal regulations. State unemployment tax rates are subject to claims histories
and vary from state to state.
Employee benefits costs are comprised primarily of health insurance costs (including dental and pharmacy
costs), but also include costs of other employee benefits such as life insurance, vision care, disability insurance,
education assistance, adoption assistance, a dependent care spending account and a worklife program.
The Company experienced a 20.8% increase in benefits costs per covered employee during 2002 and
expects a 15% to 18% increase in 2003. While the Company’s results of operations will be impacted to some degree
in 2003 by the expected increase and its contractual pricing constraints, the Company does not expect this situation
to have a material adverse effect on its financial position.
The Company’s gross profit per worksite employee is determined in part by its ability to accurately estimate
and control direct costs and its ability to incorporate changes in these costs into the gross billings charged to clients,
which are subject to contractual arrangements that are typically renewed annually. Gross profit, measured as a
percentage of revenues, is also affected by the markup portion of its gross billings, which is calculated based on a
percentage of worksite employee payroll cost, and the Company’s direct cost structure. The Company uses gross
profit per worksite employee per month as its principal measurement of relative performance at the gross profit level.
Operating Expenses
• Salaries, wages and payroll taxes–- Salaries, wages and payroll taxes are primarily a function of the number of
corporate employees and their associated average pay. The Company’s corporate employees primarily include
sales and marketing, client services, benefits, legal, finance, technology development and administrative support
personnel.
• General and administrative expenses – The Company’s general and administrative expenses primarily include (i)
rent expenses related to the Company’s service centers and sales offices; (ii) outside professional service fees
related to legal, consulting and accounting services; (iii) administrative costs, such as postage and supplies; (iv)
employee travel expenses; and (v) repairs and maintenance costs associated with the Company’s facilities and
technology infrastructure.
• Commissions – Commission expense primarily consists of amounts paid to sales personnel and to American
Express. Commissions for sales personnel are based on a percentage of revenue generated by such personnel,
while commissions are paid to American Express in accordance with its Marketing Agreement with the
Company.
• Advertising – Advertising expense primarily consists of media advertising and other business promotions in the
Company’s current and anticipated sales markets. This expense is impacted to some degree by the number of
new markets included in each year’s expansion plan.
• Depreciation and amortization–- Depreciation and amortization expense is primarily a function of the
Company’s capital investments in corporate facilities, service centers, sales offices and technology infrastructure.
The Company’s long-term national expansion strategy has impacted operating expenses significantly in the
past few years, primarily through (i) the addition of sales, service, technology and administrative support personnel;
(ii) capital expenditures associated with new facilities, technology infrastructure and eBusiness initiatives; (iii) the
- 23 -
restructuring of the sales representative compensation plan; and (iv) incremental general and administrative costs to
support the expansion.
Income Taxes
The Company’s provision for income taxes typically differs from the U.S. statutory rate of 35% due
primarily to state income taxes. During 2002 and 2001, the Company also experienced an increase in its effective
tax rate due to the write-offs associated with its investments in other companies. See “Other Matters – Investments
in Other Companies” on page 37. Deferred income taxes reflect the net tax effects of temporary differences between
the carrying amounts of assets and liabilities used for financial reporting purposes and the amounts used for income
tax purposes. Significant items resulting in deferred income taxes include depreciation and amortization, software
development costs and the Company’s estimated workers’ compensation dividend receivable. Changes in these
items are reflected in the Company’s financial statements through the Company’s deferred income tax provision.
Critical Accounting Policies and Estimates
The Company’s discussion and analysis of its financial condition and results of operations are based upon
its consolidated financial statements, which have been prepared in accordance with accounting principles generally
accepted in the United States. The preparation of these financial statements requires the Company to make estimates
and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities. On an ongoing basis, the Company evaluates its estimates, including those related
to benefits, workers’ compensation, payroll taxes, client bad debts, investments, income taxes, and contingencies and
litigation. The Company bases its estimates on historical experience and on various other assumptions that are
believed to be reasonable under the circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ
from these estimates.
The Company believes the following critical accounting policies reflect the more significant judgments and
estimates used in the preparation of its consolidated financial statements:
• Revenue and Direct Cost Recognition – The Company accounts for its revenues in accordance with EITF 99-
19. The Company’s revenues are derived from its gross billings, which are based on (i) the payroll cost of its
worksite employees; and (ii) a markup computed as a percentage of the payroll cost. The gross billings are
invoiced concurrently with each periodic payroll of its worksite employees. Revenues are recognized ratably
over the payroll period as worksite employees perform their service at the client worksite. Revenues that have
been recognized but not invoiced are included in unbilled accounts receivable on the Company’s Consolidated
Balance Sheets.
Historically, the Company has included both components of its gross billings in revenues (gross method) due
primarily to the assumption of significant contractual rights and obligations associated with being an employer,
including the obligation for the payment of the payroll costs of its worksite employees. The Company assumes
its employer obligations regardless of whether the Company collects its gross billings. After discussions with
the Securities and Exchange Commission staff, the Company has changed its presentation of revenues from the
gross method to an approach that presents its revenues net of worksite employee payroll costs (net method)
primarily because the Company is not generally responsible for the output and quality of work performed by the
worksite employees.
In determining the pricing of the markup component of the gross billings, the Company takes into consideration
its estimates of the costs directly associated with its worksite employees, including payroll taxes, benefits and
workers’ compensation costs, plus an acceptable gross profit margin. As a result, the Company’s operating
results are significantly impacted by the Company’s ability to accurately estimate, control and manage its direct
costs relative to the revenues derived from the markup component of the Company’s gross billings.
- 24 -
To conform to the net method, the Company reclassified worksite employee payroll costs of $4.0 billion, $3.7
billion and $3.1 billion for the years ended December 31, 2002, 2001 and 2000, respectively, from direct costs
to revenues. This reclassification had no effect on gross profit, operating income (loss), or net income (loss).
Consistent with its revenue recognition policy, the Company’s direct costs do not include the payroll cost of its
worksite employees. The Company’s direct costs associated with its revenue generating activities are comprised of
all other costs related to its worksite employees, such as the employer portion of payroll-related taxes, employee
benefit plan premiums and workers’ compensation insurance premiums.
• Benefits Costs – The Company provides health insurance coverage to its worksite employees through a national
network of carriers including UnitedHealthcare (“United”), Cigna Healthcare, PacifiCare, Kaiser Permanente
and Blue Cross and Blue Shield of Georgia, all of which provide fully-insured policies. The policy with United
provides the majority of the Company’s health insurance coverage. Pursuant to the terms of the Company’s
annual contract with United, within 195 days after contract termination, a final accounting of the plan will be
performed and the Company will receive a refund for any accumulated surplus or will be liable for any
accumulated deficit in the plan, up to the amount of the Company’s then-outstanding security deposit with
United. As of December 31, 2002, the Company’s security deposit totaled $25 million. Beginning January 1,
2004 and each year thereafter, the security deposit will be adjusted to the greater of $22.5 million or 7.5% of the
estimated annual premiums for that contact year. As a result, the Company accounts for this plan using a
partially self-funded insurance accounting model, under which the Company must estimate its incurred but not
reported (“IBNR”) claims at the end of each accounting period. If the estimated IBNR claims, paid claims,
taxes and administrative fees are collectively greater than the premiums paid to United, an accumulated deficit
in the plan would be incurred and the Company would accrue a current liability on its balance sheet up to the
amount of the security deposit, which would increase benefits expense and decrease net income in the period
that such determination was made. On the other hand, if the estimated IBNR claims, paid claims, taxes and
administrative fees are collectively less than the premiums paid to United, an accumulated surplus in the plan
would be incurred and the Company would record this surplus as a current asset, which would reduce benefits
expense and increase net income in the period that such a determination was made. As of December 31, 2002,
the Company has estimated an IBNR component at approximately $37.2 million and recorded an estimated
accumulated deficit of approximately $2.3 million. For the year ended December 31, 2002, the Company’s total
United Plan costs were approximately $290.1 million.
•
State Unemployment Taxes – The Company records its state unemployment (“SUI”) tax expense based on
taxable wages and tax rates assigned by each state. State unemployment tax rates vary by state and are
determined, in part, based on prior years’ compensation experience in each state. The Company must estimate
its expected SUI tax rate in those states for which tax rate notices have not yet been received.
In January 2002, as a result of a corporate restructuring plan, the Company filed for a partial transfer of
compensation experience with the state of Texas. In June 2002, the Company received an initial determination
from the Texas Workforce Commission (“TWC”) that its partial transfer application was denied. The Company
filed an appeal of this ruling with the TWC. On October 30, 2002, the TWC issued its decision approving
Administaff’s application for a partial transfer of compensation experience.
Since filing its application in Texas, Administaff has paid its unemployment taxes to the state of Texas at the
higher new employer rate as required by state law. However, the Company has recorded Texas unemployment
taxes at its best estimate of the ultimate rate, resulting in a prepaid asset of approximately $6.0 million at
December 31, 2002, included as a component of other current assets. Administaff will not know the definitive
amount of its expected refund until the transfer of compensation experience is completed by the TWC and the
TWC notifies Administaff of its final official tax rate for the 2002 calendar year. If the TWC’s final official tax
rate is higher or lower than the estimated rate currently used by the Company, the Company would be required
to recognize a corresponding reduction or increase in the estimated prepaid asset as additional payroll tax
expense or benefit in the period of such determination, to the extent the Company’s estimate differs from the
TWC’s final official tax rate.
- 25 -
• Workers’ compensation costs – The Company’s workers’ compensation insurance policy for the two-year period
ending September 30, 2003 is a guaranteed-cost policy under which premiums are paid for full-insurance
coverage of all claims incurred during the policy. This policy also contains a dividend feature for each policy
year, under which the Company is entitled to a refund of a portion of its premiums if, four years after the end of
the policy year, claims paid by the insurance carrier for the policy year are less than an amount set forth in the
policy. In accordance with EITF Topic D-35, FASB Staff Views on EITF No. 93-6, “Accounting for Multiple-
Year Retrospectively Rated Contracts by Ceding and Assuming Enterprises,” the Company estimates the
amount of refund, if any, that has been earned under the dividend feature, based on the actual claims incurred to
date and a factor used to develop those claims to an estimate of the ultimate cost of the incurred claims during
that policy year. If the Company’s estimates were to indicate that an additional dividend had been earned, the
Company would record a receivable for the amount of that dividend and decrease its workers’ compensation
insurance expense, which would increase net income in the period that such determination was made. On the
other hand, if the Company’s estimates were to indicate that the amount of any recorded dividend receivable had
been reduced due to greater than anticipated claim developments, the Company would reduce its receivable and
increase its workers’ compensation insurance expense, which would reduce net income in the period that such
determination was made. During 2002, the Company recorded an estimated dividend receivable totaling
approximately $2.5 million as a long-term asset.
• Contingent liabilities – The Company accrues and discloses contingent liabilities in its consolidated financial
statements in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 5, Accounting for
Contingencies. SFAS No. 5 requires accrual of contingent liabilities that are considered probable to occur and
that can be reasonably estimated. For contingent liabilities that are considered reasonably possible to occur,
financial statement disclosure is required, including the range of possible loss if it can be reasonably determined.
The Company has disclosed in its audited financial statements several issues that it believes are reasonably
possible to occur, although it cannot determine the range of possible loss in all cases. As these issues develop,
the Company will continue to evaluate the probability of future loss and the potential range of such losses. If
such evaluation were to determine that a loss was probable and the loss could be reasonably estimated, the
Company would be required to accrue its estimated loss, which would reduce net income in the period that such
determination was made. For a more detailed discussion of the contingent losses that the Company believes are
reasonably possible, see Note 10 to the Consolidated Financial Statements. For a discussion of potential
contingent liabilities, see Item 3. Legal Proceedings on page 17; “Factors That May Affect Future Results and
the Market Price of Common Stock - Increases in Health Insurance Premiums and Workers’ Compensation
Costs” on page 39, and “Increases in Unemployment Tax Rates” on page 40.
•
Investment valuation – The Company has an equity investment in a privately-held development stage company
whose operations fit within the Company’s strategic focus. This investment is recorded using the cost method.
Under the cost method, the Company periodically evaluates the realizability of this investment based on its
review of the investee’s financial condition, financial results, financial projections and availability of additional
financing sources. If, based on its review, the Company was to determine that the investment’s estimated fair
market value had declined below its carrying value for a reason that was other than temporary, the Company
would write down the value of the investment to its estimated fair market value, which would reduce net income
in the period of such determination. In December 2002, the Company determined that the fair value of its
investment in eProsper had declined below its carrying value, for reasons that were other than temporary,
resulting in the write-off of its entire investment of approximately $3.1 million.
• Deferred taxes – The Company has recorded a valuation allowance to reduce its deferred tax assets to the
amount that is more likely than not to be realized. While the Company has considered future taxable income
and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, the
Company’s ability to realize its deferred tax assets could change from its current estimates. If the Company
determines that it would be able to realize its deferred tax assets in the future in excess of its net recorded
amount, an adjustment to reduce the valuation allowance would increase net income in the period that such
determination is made. Likewise, should the Company determine that it will not be able to realize all or part of
its net deferred tax assets in the future, an adjustment to increase the valuation allowance would reduce net
income in the period such determination is made.
• Allowance for doubtful accounts – The Company maintains an allowance for doubtful accounts for estimated
- 26 -
losses resulting from the inability of its customers to pay its comprehensive service fees. The Company believes
that the success of its business is heavily dependent on its ability to collect these comprehensive service fees for
several reasons, including (i) the large volume and dollar amount of transactions processed by the Company; (ii)
the periodic and recurring nature of payroll, upon which the comprehensive service fees are based; and (iii) the
fact that the Company is at risk for the payment of its direct costs and worksite employee payroll costs
regardless of whether its clients pay their comprehensive service fees. To mitigate this risk, the Company has
established very tight credit policies. The Company generally requires its clients to pay their comprehensive
service fees no later than one day prior to the applicable payroll date. In addition, the Company maintains the
right to terminate its CSA and associated worksite employees or to require prepayment, letters of credit or other
collateral upon deterioration in a client’s financial position or upon nonpayment by a client. As a result of these
efforts, the outstanding balance of accounts receivable and subsequent losses related to customer nonpayment
has historically been very low as a percentage of revenues. However, if the financial condition of the
Company’s customers were to deteriorate rapidly, resulting in nonpayment, the Company’s accounts receivable
balances could grow and the Company could be required to provide for additional allowances, which would
decrease net income in the period that such determination was made.
• Property and equipment – The Company’s property and equipment relate primarily to its facilities and related
improvements, furniture and fixtures, computer hardware and software and capitalized software development
costs. These costs are depreciated or amortized over the estimated useful lives of the assets. If the useful lives
of these assets were determined to be shorter than their current estimates, the Company’s depreciation and
amortization expense could be accelerated, which would decrease net income in the periods following such a
determination. In addition, the Company periodically evaluates these costs for impairment in accordance with
SFAS No. 144, Accounting for Impairment or Disposal of Long-Lived Assets. If events or circumstances were
to indicate that any of the Company’s long-lived assets might be impaired, the Company would analyze the
estimated undiscounted future cash flows to be generated from the applicable asset. In addition, the Company
would record an impairment loss, which would reduce net income, to the extent that the carrying value of the
asset exceeded the fair value of the asset. Fair value is generally determined using an estimate of discounted
future net cash flows from operating activities or upon disposal of the asset. In January 2003, the Company
committed to a plan to sell Administaff Financial Management Services, Inc. (“FMS”) and initiated a program
to market the division and locate a buyer. As a result, FMS will be reported as a discontinued operation in 2003
in accordance with SFAS No. 144. As of December 31, 2002, the net book value of FMS was approximately
$1.2 million. Failure to sell FMS at an amount at least equal to the net book value would result in the Company
incurring and recording a loss on the disposal of FMS.
Recent Accounting Pronouncements
On January 1, 2002, the Company adopted SFAS No. 144. SFAS No. 144 amends existing accounting
guidance on asset impairments and provides a single accounting model for long-lived assets to be disposed of.
SFAS No. 144 changes the criteria for classifying an asset as held-for-sale, broadens the scope of businesses to be
disposed of that qualify for reporting as discontinued operations, and changes the timing of recognizing losses on
such operations. The adoption of SFAS No. 144 did not have an impact on the Company’s consolidated statements
of operations or consolidated balances sheets. The Company will apply the provisions of SFAS No. 144 in
connection with the planned sale of FMS, which was initiated in January 2003. FMS is a subsidiary that provides
outsourced accounting and bookkeeping services.
In April 2002, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 145, Rescission of
FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Correction. SFAS No.
145 requires that gains and losses from extinguishment of debt be classified as extraordinary items only if they meet
the criteria in Accounting Principles Board Opinion No. 30 (“Opinion No. 30”). Applying the provisions of Opinion
No. 30 will distinguish transactions that are part of an entity’s recurring operations from those that are unusual and
infrequent and meet the criteria for classification as an extraordinary item. SFAS No. 145, which is to be applied to
all periods presented, is effective for the Company beginning January 1, 2003. The adoption of SFAS No. 145 did
not have an impact on the Company’s Consolidated Statements of Operations or Consolidated Balance Sheets.
- 27 -
In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal
Activities. SFAS No. 146 addresses accounting and reporting for costs associated with exit or disposal activities,
such as restructurings, involuntarily terminating employees, and consolidating facilities initiated after December 31,
2002. SFAS No. 146, which requires that costs related to exiting an activity or to a restructuring not be recognized
until the liability is incurred, is effective for the Company beginning January 1, 2003 and is to be applied on a
prospective basis.
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation, Transition
and Disclosure. SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value
based method of accounting for stock-based employee compensation and requires fair value method pro forma
disclosures to be displayed more prominently and in a tabular format. Additionally, SFAS No. 148 requires similar
disclosures in interim financial statements. The transition and disclosure requirements of SFAS No. 148 were
adopted by the Company in 2002.
Transactions with Related and Other Certain Parties
The Company does not have any transactions with related parties that are considered material to the
Company’s results of operations and/or financial condition.
During 2001 and 2002, American Express exercised common stock purchase warrants for 1,073,729 shares
and 526,271 shares, respectively, of the Company’s common stock at exercise prices ranging from $20 to $25 per
share. As of December 31, 2002 the Company has repurchased 1,326,271 shares from American Express in private
transactions at prices ranging from $24.46 to $27.02 per share.
Subsequent to December 31, 2002, the Company repurchased 1,286,252 additional shares from American
Express in a private transaction for $7.7 million, or $6.00 per share.
- 28 -
Results of Operations
Year Ended December 31, 2002 Compared to Year Ended December 31, 2001.
The following table presents certain information related to the Company’s results of operations for the years
ended December 31, 2002 and 2001.
Year ended December 31,
2001
% change
2002
(in thousands, except per share and statistical data)
Revenues (gross billings of $4.9 billion and
$4.4 billion less worksite employee payroll cost of
$4.0 billion and $3.7 billion, respectively)......................
Gross profit .........................................................................
Operating expenses.............................................................
Operating income (loss)......................................................
Other income (expense) ......................................................
Net income (loss)................................................................
Diluted net income (loss) per share of common stock ........
Statistical Data:
Average number of worksite employees paid per month....
Revenues per worksite employee per month (1) ..................
Gross profit per worksite employee per month...................
Operating expenses per worksite employee per month.......
Operating income (loss) per worksite employee per month
Net income (loss) per worksite employee per month..........
_______________
$ 849,021
166,390
168,240
(1,850)
(1,747)
(4,081)
(0.15)
$
77,334
915
179
181
(2)
(4)
$ 720,219
165,015
146,476
18,539
848
10,357
0.36
$
69,480
864
198
176
22
12
17.9%
0.8%
14.9%
(110.0)%
(306.0)%
(139.4)%
(141.7)%
11.3%
5.9%
(9.6)%
2.8%
(109.1)%
(133.3)%
(1) Gross billings of $5,235 and $5,245 per worksite employee per month less payroll cost of $4,320 and $4,381 per
worksite employee per month, respectively.
Revenues
The Company’s revenues, which represent gross billings net of worksite employee payroll cost, increased
17.9% over 2001 due to a 11.3% increase in the average number of worksite employees paid per month combined
with a 5.9% increase in revenues per worksite employee per month.
The 11.3% increase in the average number of worksite employees paid per month during 2002 was directly
related to improvements in all three of the Company’s sources of paid worksite employees as compared to 2001-
new client sales, client retention, and net change in existing clients through new hires and terminations. New client
sales improved over 2001 as the average number of trained sales representatives increased during 2002. While client
retention percentages remained relatively constant during 2001 and 2002, there were fewer worksite employees
associated with terminated clients during 2002 as compared to 2001. The net change in existing clients was
impacted as terminations in the existing client base exceeded new hires during 2002; however, at levels lower than
those experienced during 2001.
The 5.9% increase in revenues per worksite employee per month was primarily due to pricing increases in
the markup portion of the Company’s gross billings, partially offset by a 1.4% decrease in the average worksite
employee payroll cost per month. In 2002, worksite employee payroll cost per month decreased as compared to the
increase experienced in 2001. This decrease was primarily due to weakness in U.S. economic conditions which
resulted in lower compensation increases and a reduction in the payroll cost for new and replacement worksite
employees within the Company’s existing client base.
- 29 -
The following table presents certain information related to the Company’s revenues by region for the years
ended December 31, 2002 and 2001.
Year ended December 31,
2002
2001 % change
(in thousands)
Year ended December 31,
2001
2002
(% of total revenue)
Northeast......................................
Southeast......................................
Central .........................................
Southwest ....................................
West.............................................
Other revenues.............................
Total revenues.....................
$ 101,097
92,480
123,901
360,622
164,221
6,700
$ 849,021
$
74,900
73,267
96,528
337,725
130,958
6,841
$ 720,219
35.0%
26.2%
28.4%
6.8%
25.4%
(2.1)%
17.9%
11.9%
10.9%
14.6%
42.5%
19.3%
0.8%
100.0%
10.4%
10.2%
13.4%
46.9%
18.2%
0.9%
100.0%
Gross Profit
Gross profit increased 0.8% to $166.4 million compared to 2001. Gross profit per worksite employee
decreased 9.6% to $179 per month in 2002 versus $198 in 2001. This decline was primarily the result of an increase
of $67 in benefits cost per worksite employee per month, partially offset by a $51 increase in revenue per worksite
employee per month. The Company’s pricing objectives attempt to maintain or improve the gross profit per worksite
employee by increasing revenue per worksite employee to match or exceed changes in its primary direct costs and its
operating costs. The Company has implemented pricing increases designed to match the anticipated health insurance
costs increases. However, the Company was unable to immediately pass these increases through to most of its
clients due to annual contract commitments.
While the Company’s revenues per worksite employee per month increased 5.9%, the Company’s primary
direct costs, which include payroll taxes, benefits and workers’ compensation expenses, increased 10.5% to $724 per
worksite employee per month in 2002 versus $655 in 2001. The primary components changed as follows:
• Payroll tax costs – Payroll taxes decreased $3 per worksite employee per month, primarily due to the decreased
average payroll cost per worksite employee. Payroll taxes as a percentage of payroll cost increased to 7.25% in
2002 from 7.20% in 2001. The Company has estimated and recorded its state unemployment tax expense
during 2002 using tax rates in certain states, including Texas, that were based on its expectation that its
application for a partial transfer of compensation experience resulting from its restructuring would be approved.
While the Company has received a determination from the TWC that its partial transfer application was
approved, the Company has continued to estimate its state unemployment tax expense in Texas until its final
official tax rate is determined by the TWC . See “Critical Accounting Policies and Estimates – State
Unemployment Taxes” on page 25 for a detailed discussion of this matter.
• Benefits costs – The cost of health insurance and related employee benefits increased $67 per worksite employee
per month over 2001, due to a 20.8% increase in the cost per covered employee and a slight increase in the
percentage of worksite employees covered under the Company’s health insurance plan to 73.0% in 2002 versus
72.0% in 2001. The Company’s 2002 benefits expense includes the effect of an accumulated deficit of
approximately $2.3 million related to the Company’s health insurance contract with United. See “Critical
Accounting Policies and Estimates – Benefits Costs” on page 25 for a discussion of the Company’s accounting
for health insurance costs. The 2001 benefits expense includes the impact of the disputed health insurance rate
increases by Aetna of approximately $12.7 million. See Item 3. Legal Proceedings on page 17 for a discussion
of the health insurance rate increase dispute.
• Workers’ compensation costs – Workers’ compensation costs increased $6 per worksite employee per month,
and increased to 1.12% of payroll cost in 2002 from 0.98% in 2001. The Company’s 2001 workers’
compensation costs included the receipt of a $6.6 million credit related to the policy ended September 30, 2001.
During 2002, the Company recorded an estimated dividend receivable of $2.5 million under the current policy’s
dividend feature. See “Critical Accounting Policies and Estimates – Workers’ Compensation Costs” on page 26
- 30 -
for a discussion of the Company’s accounting for workers’ compensation costs.
Gross profit, measured as a percentage of revenues, decreased to 19.6% in 2002 from 22.9% in 2001.
Operating Expenses
The following table presents certain information related to the Company’s operating expenses for the years
ended December 31, 2002 and 2001.
Year ended December 31,
2002
2001 % change
(in thousands)
Year ended December 31,
2002
2001 % change
(per worksite employee per month)
Salaries, wages and payroll taxes
General and administrative expenses
Commissions
Advertising
Depreciation and amortization
Total operating expenses
$ 76,747
50,591
12,127
7,138
21,637
$ 168,240
$ 67,761
44,569
11,173
6,092
16,881
$ 146,476
13.3%
13.5%
8.5%
17.2%
28.2%
14.9%
$ 83
55
13
7
23
$ 181
$ 81
54
14
7
20
$ 176
2.5%
1.9%
(7.1)%
—
15.0%
2.8%
Operating expenses increased 14.9% to $168.2 million. Operating expenses per worksite employee per
month increased 2.8% to $181 in 2002 versus $176 in 2001. The components of operating expenses changed as
follows:
• Salaries, wages and payroll taxes of corporate and sales staff increased 13.3%, or $2 per worksite employee per
month, primarily due to a 8.3% increase in corporate personnel and a 4.3% increase in the average base pay per
corporate employee. The increase in corporate personnel was primarily composed of a 7.9% increase in sales
personnel, a 2.8% increase in service personnel, a 36.2% increase in benefits personnel, a 6.7% increase in other
corporate personnel and the initial staffing of Administaff Financial Management Services, the Company’s
wholly-owned subsidiary providing web-based financial accounting services.
• General and administrative expenses increased 13.5%, or $1 per worksite employee per month compared to
2001. The increase resulted primarily from the increased legal expenses associated with the Company’s on-
going litigation with Aetna.
• Commissions expense increased 8.5%, but decreased $1 per worksite employee per month compared to 2001.
• Advertising costs increased 17.2% and remained constant on a per worksite employee basis versus 2001.
• Depreciation and amortization expense increased 28.2%, or $3 per worksite employee per month, over 2001 as a
result of the increased capital assets placed into service in late 2001 and 2002. These capital assets included (i)
the new corporate headquarters facilities, the Los Angeles Service Center and new sales offices; (ii) software
development costs related to online enrollment, AIMS, the Company’s proprietary PEO information system, and
the Employee Service Center, the Company’s web-based service delivery platform; (iii) computer software for
various corporate needs; (iv) computer hardware to expand the Company’s existing information technology
infrastructure; (v) an aircraft; and (vi) the purchase of assets from Virtual Growth, Inc. (“VGI”) through
bankruptcy proceedings.
Other Income (Expense)
Other income (expense) decreased from income of $848,000 in 2001 to a net expense of $1.7 million in
2002. This decrease was primarily due to a decline in interest income from the lower levels of cash and marketable
securities, which resulted primarily from the Company’s capital expenditures and reduced operating income in 2002.
During 2002 and 2001, the Company wrote-off investments in other companies totaling $3.1 million and $3.8
million, respectively.
- 31 -
Income Tax Expense
During 2002, the Company incurred federal and state income tax expense of $484,000 on a pre-tax loss of
$3.6 million. The Company’s effective income tax provision differed from US statutory rate of 35% primarily due to
the valuation allowance for deferred tax assets related to the write-off of its investment in eProsper, Inc., the
realizability of which is uncertain, state income tax expense incurred by certain of the Company’s subsidiaries, and
non-deductible expenses.
Net Income (Loss)
Net loss for 2002 was $4.1 million, or $0.15 per diluted share, compared to net income of $10.4 million, or
$0.36 per diluted share in 2001. On a per worksite employee per month basis, net income decreased 133.3% to a net
loss of $4 in 2002 versus net income of $12 in 2001.
Year Ended December 31, 2001 Compared to Year Ended December 31, 2000.
The following table presents certain information related to the Company’s results of operations for the years
ended December 31, 2001 and 2000.
Year ended December 31,
2000
% change
2001
(in thousands, except per share and statistical data)
Revenues (gross billings of $4.4 billion and
$3.7 billion less worksite employee payroll cost of
$3.7 billion and $3.1 billion, respectively)......................
Gross profit .........................................................................
Operating expenses.............................................................
Operating income................................................................
Other income ......................................................................
Net income..........................................................................
Diluted net income per share of common stock..................
Statistical Data:
Average number of worksite employees paid per month....
Revenues per worksite employee per month (1) ..................
Gross profit per worksite employee per month...................
Operating expenses per worksite employee per month.......
Operating income per worksite employee per month .........
Net income per worksite employee per month....................
_______________
$ 720,219
165,015
146,476
18,539
848
10,357
0.36
$
69,480
864
198
176
22
12
$ 598,291
138,534
116,300
22,234
4,380
16,900
0.58
$
62,140
802
186
156
30
23
20.4%
19.1%
25.9%
(16.6)%
(80.6)%
(38.7)%
(37.9)%
11.8%
7.7%
6.5%
12.8%
(26.7)%
(47.8)%
(1) Gross billings of $5,245 and $4,973 per worksite employee per month less payroll cost of $4,381 and $4,171 per
worksite employee per month, respectively.
Revenues
The Company’s revenues increased 20.4% over 2000 due to an 11.8% increase in the average number of
worksite employees paid per month accompanied by a 7.7% increase in revenues per worksite employee per month.
The Company’s continued expansion of its sales force through new market and sales office openings was
the primary factor contributing to the increase in the average number of worksite employees paid. In 2001, the
Company’s unit growth rate was lower than in 2000 due primarily to softness in the U.S. economic conditions. In
the first half of 2001, all three of the Company’s sources of paid worksite employees - new client sales, client
retention, and net change in existing clients through new hires and terminations - were negatively impacted. The net
change in existing clients was impacted as terminations in the existing client base exceeded new hires throughout the
- 32 -
year, compared to strong gains in this area during 2000. Client retention declined primarily as a result of an increase
in the number of clients experiencing financial difficulties and/or seeking lower cost alternatives. New client sales
were impacted by uncertainty in the direction of the economy, which impacted the Company’s ability to close sales.
During the latter half of the year, new client sales and client terminations gradually returned to historical levels, with
new client sales increasing proportionately with the increase in trained sales representatives and client terminations
decreasing to a level consistent with the average number of paid worksite employees. However, improvements in
these two sources of paid worksite employees were offset by further net layoffs within the existing client base.
Revenues per worksite employee per month increased 7.7%, from $802 in 2000 to $864 in 2001.
Approximately 24.1% of the $62 increase in revenues per worksite employee was the result of increased gross
billings designed to match the increased payroll tax expense associated with the higher average payroll cost per
worksite employee. Worksite employee payroll cost per month increased 5.0%, reflecting (i) compensation
increases within the Company’s existing worksite employee base; and (ii) further penetration of markets with
generally higher wage levels, such as San Francisco, New York and Washington, D.C. In 2001, the growth in
worksite employee payroll cost per month was lower than the growth rates experienced in 2000, as weakness in U.S.
economic conditions resulted in lower compensation increases and a reduction in the payroll cost for new and
replacement worksite employees within the Company’s existing client base. The remaining increase in revenues per
worksite employee was the result of other increases in the Company’s gross billings, which were designed to meet
the Company’s pricing objectives.
The following table presents certain information related to the Company’s revenues by region for the years
ended December 31, 2001 and 2000.
Year ended December 31,
2001
2000 % change
(in thousands)
Year ended December 31,
2001
2000
(% of total revenue)
Northeast......................................
Southeast......................................
Central .........................................
Southwest ....................................
West.............................................
Other revenues.............................
Total revenues.....................
$
74,900
73,267
96,528
337,725
130,958
6,841
$ 720,219
$
45,369
59,155
75,688
307,587
103,533
6,959
$ 598,291
65.1%
23.9%
27.5%
9.8%
26.5%
(1.7)%
20.4%
10.4%
10.2%
13.4%
46.9%
18.2%
0.9%
100.0%
7.6%
9.9%
12.7%
51.4%
17.3%
1.1%
100.0%
Gross Profit
Gross profit increased 19.1% over 2000 due primarily to the 11.8% increase in the average number of
worksite employees paid per month accompanied by a 6.5% increase in gross profit per worksite employee per
month. Gross profit per worksite employee increased to $198 per month in 2001 versus $186 in 2000. Gross profit
in 2001 was affected by the following items: (i) a $6.6 million credit related to the workers’ compensation policy
ended September 30, 2001; and (ii) disputed health insurance rate increases by Aetna totaling approximately $12.7
million in the third and fourth quarters of 2001. The Company’s pricing objectives attempt to maintain or improve
the gross profit per worksite employee by increasing revenue per worksite employee to match or exceed changes in
(i) its primary direct costs; and (ii) its operating costs associated with enhancements in the Company’s
comprehensive service offering.
The disputed health insurance premium increase had a negative effect on gross profit in the third and fourth
quarters of 2001 primarily because the Company was required to pay such increases immediately, but was unable to
immediately pass those similar increases through to most of its clients due to contractual limitations. The
Company’s CSA generally allows the Company to change its pricing upon renewal, which typically occurs annually.
See Item 3. Legal Proceedings on page 17 and “Factors That May Affect Future Results and the Market Price of
Common Stock - Increases in Health Insurance Premiums, Unemployment Taxes and Workers’ Compensation
Costs” on page 39.
- 33 -
While the Company’s revenue increased 20.4% per worksite employee per month, the Company’s primary
direct costs, which include payroll taxes, benefits and workers’ compensation expenses, increased 8.2% to $655 per
worksite employee per month in 2001 versus $605 in 2000. The primary components changed as follows:
• Payroll tax costs – Payroll taxes increased $10 per worksite employee per month, primarily due to the increased
average payroll cost per worksite employee. The overall cost of payroll taxes as a percentage of payroll cost
was 7.20% in 2001 versus 7.34% in 2000. This decrease was primarily the result of an increase in bonus payroll
cost per worksite employee and the company’s lower growth rate, which caused a smaller portion of the total
compensation of worksite employees to be subject to state unemployment taxes in 2001 compared to the 2000
period.
• Benefits costs – The cost of health insurance and related employee benefits increased $44 per worksite employee
per month over 2000, due to a 13.7% increase in the cost per covered employee and an increase in the
percentage of worksite employees covered under the Company’s health insurance plan to 72.0% in 2001 versus
69.7% in 2000. The increase in cost per covered employee includes the impact of the disputed health insurance
rate increases of approximately $12.7 million by Aetna. See Item 3. Legal Proceedings on page 17 for a
discussion of the health insurance rate increase dispute.
• Workers’ compensation costs – Workers’ compensation costs decreased $4 per worksite employee per month,
and decreased to 0.98% of payroll cost in 2001 from 1.12% in 2000. During negotiations of its workers’
compensation insurance policy for the period beginning October 1, 2001, the Company negotiated a $6.6
million credit related to the policy period ended September 30, 2001 based on the Company’s claims history
during that policy period.
Gross profit, measured as a percentage of revenues, decreased slightly to 22.9% in 2001 from 23.2% in
2000.
Operating Expenses
The following table presents certain information related to the Company’s operating expenses for the years
ended December 31, 2001 and 2000.
Year ended December 31,
2001
2000 % change
(in thousands)
Year ended December 31,
2001
2000 % change
(per worksite employee per month)
Salaries, wages and payroll taxes
General and administrative expenses
Commissions
Advertising
Depreciation and amortization
Total operating expenses
$ 67,761
44,569
11,173
6,092
16,881
$ 146,476
$ 54,477
35,426
9,278
5,117
12,002
$ 116,300
24.4%
25.8%
20.4%
19.1%
40.7%
25.9%
$ 81
54
14
7
20
$ 176
$ 73
48
12
7
16
$ 156
11.0%
12.5%
16.7%
—
25.0%
12.8%
Operating expenses increased 25.9% to $146.5 million. Operating expenses per worksite employee per
month increased 12.8% to $176 in 2001 versus $156 in 2000. The components of operating expenses changed as
follows:
• Salaries, wages and payroll taxes of corporate and sales staff increased 24.4%, or $8 per worksite employee per
month, primarily due to a 23.5% increase in corporate personnel, a 9.7% increase in the average base pay per
corporate employee and a decrease in incentive compensation as a percentage of base pay from 11.2% in 2000
to 0.1% in 2001. The increase in corporate personnel was primarily due to a 30% increase in sales personnel, a
33% increase in service personnel and a 12% increase in other corporate personnel.
• General and administrative expenses increased 25.8%, or $6 per worksite employee per month, over 2000. This
increase primarily resulted from expenses such as rent, repairs and maintenance, data communication,
telecommunications, equipment leases and utilities expenses associated with the Company’s expansion
initiatives, including new service centers in Houston and Los Angeles and five new sales offices. In addition,
- 34 -
legal expenses increased due to (i) PEO litigation matters; (ii) trademark, intellectual property and other
corporate litigation; (iii) the disputed health insurance rate increases; and (iv) legal issues pertaining to the
purchase of assets from Virtual Growth, Inc. out of bankruptcy.
• Commissions expense increased 20.4%, or $2 per worksite employee per month, over 2000 due to a
restructuring of the sales representative compensation plan effective January 1, 2001.
• Advertising costs increased 19.1% and remained constant on a per worksite employee basis versus 2000.
• Depreciation and amortization expense increased 40.7%, or $4 per worksite employee per month, as a result of
the capital projects placed into service in late 2000 and 2001. Late in 2000, the Company implemented its fifth
generation proprietary PEO information system (AIMS) and relocated and expanded its Houston service center.
During 2001, the Company’s capital expenditures primarily included computer hardware, software and software
development costs.
Other Income
Other income decreased 80.6% to $848,000 in 2001, primarily due to the write-off of the Company’s $3.8
million investment in VGI. See “Other Matters – Investments in Other Companies” on page 37.
Income Tax Expense
The Company’s provision for income taxes differed from the U.S. statutory rate of 35% primarily due to the
valuation allowance for deferred tax assets, state income taxes and non-deductible expenses. The effective income
tax rate for the 2001 period increased to 46.6% versus an effective rate of 36.5% during the 2000 period. This
increase was primarily a result of (i) a deferred tax asset valuation allowance related to the capital loss carryforward
that resulted from the VGI investment write-off, the realizability of which is uncertain; (ii) a 1% increase in the
federal income tax rate to 35%; and (iii) a reduction in tax-exempt interest income.
Net Income
Net income for 2001 was $10.4 million, or $0.36 per diluted share compared to $16.9 million, or $0.58 per
diluted share in 2000. On a per worksite employee per month basis, net income decreased 47.8% to $12 in 2001
versus $23 in 2000.
Liquidity and Capital Resources
The Company periodically evaluates its liquidity requirements, capital needs and availability of resources in
view of, among other things, expansion plans, debt service requirements and other operating cash needs. As a result
of this process, the Company has in the past sought, and may in the future seek, to raise additional capital or take
other steps to increase or manage its liquidity and capital resources. The Company currently believes that its cash on
hand, marketable securities and cash flows from operations and will be adequate to meet its liquidity requirements
for the remainder of 2003. The Company will rely on these same sources, as well as public and private debt or
equity financing, to meet its longer-term liquidity and capital needs.
On December 20, 2002, the Company entered into a $36 million mortgage agreement (“Mortgage”) that
matures in January 2008. The proceeds were used to repay the Company’s outstanding balance under its revolving
credit agreement, which expired in December 2002. The Mortgage bears interest at a variable rate equal to the
greater of (a) 4.5%; or (b) the 30-day LIBOR rate (1.3% at December 31, 2002) plus 2.9%. The Mortgage is secured
by the Company’s real estate and related fixtures located at Administaff’s headquarters in Kingwood, Texas.
Monthly principal and interest payments are approximately $230,000, with the remaining balance due upon maturity.
The Mortgage provides for prepayment penalties, as a percentage of the outstanding principal balance, ranging from
5% down to 1% during the first four years of the term. There is no prepayment premium during the final year of the
Mortgage.
- 35 -
In October 2002, the Company entered into a $3.8 million capital lease arrangement to finance the purchase
of office furniture. The assets under capital lease were capitalized using an effective interest rate of 7.5%. The
current monthly lease payments are $58,000 per month over the seven-year lease term.
In October 2002, the Company obtained a $4.5 million term loan that matures in October 2012 and bears
interest at the one-month commercial paper rate plus 3.1% (4.4% at December 31, 2002). The loan is secured by the
Company’s aircraft and is payable in monthly installments of $36,000, with the remaining outstanding principal
balance due at maturity.
The Company has experienced significant increases in health insurance costs and expects to continue to
experience significant increases in future periods. The Company’s pricing objectives attempt to maintain or improve
gross profit per worksite employee per month by matching or exceeding changes in its primary direct costs with
increases in its revenue per worksite employee. The Company has implemented pricing increases designed to match
the anticipated health insurance cost increases. However, due to annual contract commitments, pricing for current
customers can only be increased upon contract renewal. Changes in health insurance claim trends that underlie the
Company’s direct costs could enhance or hinder the Company’s ability to meet its pricing objectives during 2003.
Failure to achieve its pricing objectives could have a material adverse effect on the Company’s financial position.
The Company’s current workers’ compensation contract expires on September 30, 2003. The Company’s
inability to secure a replacement contract on competitive terms could cause significant disruption to the Company’s
business. The Company is currently in discussions with workers’ compensation carriers regarding the replacement
of its current workers’ compensation policy. There can be no assurance that the Company will be able to obtain a
replacement contract with terms similar to the current policy and the new contract will likely involve increased costs
and significant collateral requirements.
The Company had $86.5 million in cash and cash equivalents and marketable securities at December 31,
2002, of which approximately $49.7 million was payable in early January 2003 for withheld federal and state
income taxes, employment taxes and other payroll deductions. At December 31, 2002, the Company had working
capital of $41.2 million compared to $36.6 million at December 31, 2001.
Cash Flows From Operating Activities
The Company’s cash flows from operating activities in 2002 decreased $7.4 million to $3.1 million,
primarily due to a $14.4 million decrease in net income during 2002 as compared to 2001, of which $5.4 million
related to net increases in noncash expenses. Offsetting the decrease in net income were $1.6 million in net
increases in the Company’s operating asset and liability accounts.
Cash Flows From Investing Activities
Capital expenditures totaled $38.4 million in 2002 as follows (in millions):
Buildings and improvements
Computer hardware and software
Vehicles and aircraft
Furniture and fixtures
Software development costs
Total
$ 21.3
7.9
4.5
3.0
1.7
$ 38.4
- 36 -
Capital expenditures for buildings and improvements primarily related to the Company’s expansion of its
corporate facilities in Kingwood, Texas.
Capital expenditures for computer hardware and software included costs associated with (i) purchasing and
renewing software licenses; (ii) the acquisition of VGI assets through bankruptcy proceedings; (iii) technology
infrastructure and equipment for the new corporate facility; and (iv) computer hardware to enhance the performance
and stability of the Company’s technology infrastructure.
Capital expenditures for vehicles and aircraft primarily related to the purchase of a corporate aircraft in
January 2002.
During 2002, the Company also acquired $3.8 million in office furniture for its new corporate facility
through a capital lease arrangement.
The Company expects a reduced level of capital expenditures in 2003 and has budgeted approximately $10
million, primarily for computer hardware and software.
Cash Flows From Financing Activities
Cash flows from financing activities were $24.3 million during 2003. These cash flows were primarily
related to proceeds of $40.5 million from long-term debt borrowings, partially offset by the repayment of $13.5
million of its revolving line of credit agreement. In addition, the Company repurchased $17.1 million in treasury
stock, which was partially offset by $13.2 million in proceeds received from the exercise of 526,271 common stock
purchase warrants by American Express.
Contractual Obligations and Commercial Commitments
The following table summarizes the Company’s contractual obligations and commercial commitments as of
December 31, 2002 and the effect they are expected to have on its liquidity and capital resources (in thousands):
Total
Less than
1 Year
1-3 Years
After
3 Years
Contractual obligations:
Mortgage
Term loan
Capital lease obligations
Non-cancelable operating leases
Total contractual cash obligations
$ 36,000
4,465
3,704
53,020
97,189 $
$ 1,025
217
434
9,388
11,064 $
$ 2,279
467
970
17,021
20,737 $
$ 32,696
3,781
2,300
26,611
65,388
$
Other Matters
Investments in Other Companies
During 2000, the Company purchased 500,000 shares of convertible preferred stock of eProsper, Inc.
(“eProsper”) for $2.5 million. In April 2002, the Company made an additional $500,000 investment in convertible
preferred stock. The eProsper preferred stock is convertible into an equal number of shares of eProsper common
stock, subject to antidilutive provisions. The Company has accounted for this investment using the cost method.
Under the cost method, the Company periodically evaluates the realizability of this investment based on its review of
the investee’s financial condition, financial results, financial projections and availability of additional financing
sources. In December 2002, the Company determined that the fair value of its investment in eProsper had declined
below its carrying value, for reasons that were other than temporary, resulting in the Company writing-off its entire
investment totaling approximately $3.1 million ($3.1 million net of tax). The Company has recorded a valuation
- 37 -
allowance against the related deferred tax asset as it is uncertain that it will be able to utilize the capital loss
carryforward in future years.
During 2000, the Company purchased convertible preferred stock of VGI for a total cost of approximately
$3.2 million. During 2001, the Company purchased an additional $319,000 of convertible preferred stock and made
loans to VGI totaling $224,000. In December 2001, VGI filed for bankruptcy protection. As a result of the filing,
the Company incurred a write-off for all investments in VGI as of that date totaling $3.8 million ($3.7 million net of
tax).
In January 2002, the Company purchased substantially all of the assets of VGI through bankruptcy
proceedings for a total cost of approximately $1.6 million. The Company has established a new subsidiary, known
as FMS, to provide outsourced accounting and bookkeeping services using the assets acquired from VGI. In January
2003, the Company committed to a plan to sell FMS and initiated a program to market the division and locate a
buyer during 2003. As a result, FMS will be reported as a discontinued operation in 2003. As of December 31,
2002, the net book value of FMS was approximately $1.2 million. The Company expects the sales proceeds to
exceed the net book value of FMS at December 31, 2002.
Health Insurance Costs
The Company provides health insurance coverage to its worksite employees through a national network of
providers including United, Cigna Healthcare, PacifiCare, Kaiser Permanente and Blue Cross and Blue Shield, all of
which are fully-insured policies. The policy with United provides the majority of the Company’s health insurance
coverage. As of December 31, 2002, the Company has made cash security deposits totaling $25.0 million with
United. Beginning January 1, 2004 and each year thereafter, the security deposit will be adjusted to the greater of
$22.5 million or 7.5% of the estimated annual premiums for that contract year.
Pursuant to the terms of the Company’s annual contract with United, within 195 days following the
termination of the contract, a final accounting of the plan will be performed. The final accounting will assess the
premiums paid to United and the total administrative fees, taxes and claims incurred during the policy term. The
incurred claims will include those paid plus an estimate of claims incurred but not processed within 180 days after
the contract termination date. In the event that the incurred claims, administrative fees and taxes are collectively less
than the premiums paid, the Company will receive a refund equal to the amount of such accumulated surplus. In the
event that the incurred claims, administrative fees and taxes are collectively greater than the premiums paid, the
Company will be liable for such accumulated deficit up to the amount of its security deposit.
In the event of a default or termination of the Company’s contract with United or the reduction of the
Company’s current ratio below 0.60, United may draw against the security deposit to collect any unpaid health
insurance premiums or any accumulated deficit in the plan.
Because the Company has a contractual right to collect an accumulated surplus and is liable for an
accumulated deficit up to the amount of its security deposit with United, the Company accounts for the United plan
using a partially self-funded insurance accounting model. Under this approach, the Company must estimate its
incurred but not reported (“IBNR”) claims at the end of each accounting period. If the estimated IBNR claims, paid
claims, taxes and administrative fees, collectively, exceed the premiums paid to United, an accumulated deficit in the
plan would be incurred and the Company would be required to accrue the estimated accumulated deficit on its
balance sheet, which would increase benefits expense and decrease net income in the period that such determination
is made. On the other hand, if the estimated IBNR claims, paid claims, taxes and administrative fees, collectively,
are less than the premiums paid to United, an accumulated surplus in the plan would exist and the Company would
record this surplus as a current asset, which would reduce benefits expense and increase net income in the period that
such determination is made. As of December 31, 2002, the Company has recorded an estimated accumulated deficit
of approximately $2.3 million.
- 38 -
Seasonality, Inflation and Quarterly Fluctuations
Historically, the Company’s earnings pattern has included losses in the first quarter followed by improved
profitability in subsequent quarters throughout the year. This pattern is due to the effects of employment-related
taxes, which are based on each employee’s cumulative earnings up to specified wage levels, causing employment-
related taxes to be highest in the first quarter and then decline over the course of the year. Because the Company’s
revenues related to each employee are generally earned and collected at a relatively constant rate throughout each
year, payment of such tax obligations has a substantial impact on the Company’s financial condition and results of
operations during the first six months of each year. Other factors that affect direct costs could mitigate or enhance
this trend.
The Company believes the effects of inflation have not had a significant impact on its results of operations
or financial condition.
Factors That May Affect Future Results and the Market Price of Common Stock
Liability for Worksite Employee Payroll and Benefits Costs
Under the CSA, the Company becomes a co-employer of worksite employees and assumes the obligations
to pay the salaries, wages and related benefits costs and payroll taxes of such worksite employees. The Company
assumes such obligations as a principal, not merely as an agent of the client company. The Company’s obligations
include responsibility for (i) payment of the salaries and wages for work performed by worksite employees,
regardless of whether the client company makes timely payment to the Company of the associated service fee; and
(ii) providing benefits to worksite employees even if the costs incurred by Administaff to provide such benefits
exceed the fees paid by the client company. If a client company does not pay the Company or if the costs of benefits
provided to worksite employees exceed the fees paid by a client company, the Company’s ultimate liability for
worksite employee payroll and benefits costs could have a material adverse effect on its financial condition or results
of operations.
Increases in Health Insurance Premiums and Workers’ Compensation Costs
The maintenance of health and workers’ compensation insurance plans that cover worksite employees is a
significant part of the Company’s business. The Company’s primary health insurance contract expires on December
31, 2003, and automatically renews each year, subject to cancellation by either party upon 180 days notice. The
current workers’ compensation contract expires on September 30, 2003. The Company’s inability to secure
replacement contracts on competitive terms could cause significant disruption to the Company’s business. The
Company is currently in discussions with workers’ compensation carriers regarding the replacement of its current
workers’ compensation policy. There can be no assurance that the Company will be able to obtain a replacement
contract with terms similar to the current policy and the new contract will likely involve increased costs and
significant collateral requirements.
In December 2002, the Company’s workers’ compensation carrier’s rating was downgraded by A.M. Best
Co. (“Best”) from an “A” or “excellent” rating to a “B+” or “very good” rating. In March 2003, Best further
downgraded the carrier to a “B” or “fair” rating (“downgrade”). Best’s rating represents an opinion on the insurer’s
financial strength and ability to meet its ongoing obligations to its policyholders. A small number of the Company’s
clients require an “A” or better rating in order to comply with various contractual commitments. In certain instances
the Company has obtained supplemental insurance coverage in order to assist its clients to comply with their
contractual obligations, and the Company may be required to obtain additional coverage for other clients as well. In
addition, the Company’s ability to attract and retain clients could be adversely impacted by the downgrade, which
may result in the Company electing to obtain a new replacement policy prior to the expiration of its current policy on
September 30, 2003. Furthermore, in the event the Company’s workers’ compensation carrier’s financial strength
experiences further deterioration, the Company’s ability to realize its dividend receivable could be adversely
impacted.
- 39 -
Health insurance premiums and workers’ compensation costs are in part determined by the Company’s
claims experience and comprise a significant portion of the Company’s direct costs. The Company employs
extensive risk management procedures in an attempt to control its claims incidence and structures its benefits
contracts to provide as much cost stability as possible. However, should the Company experience a large increase in
claim activity, its health insurance premiums or workers’ compensation insurance rates could increase. The
Company’s ability to incorporate such increases into service fees to clients is constrained by contractual
arrangements with clients, which could result in a delay before such increases could be reflected in service fees. As
a result, such increases could have a material adverse effect on the Company’s financial condition or results of
operations.
• Health Insurance Premiums – The Company experienced a 20.8% increase in benefits costs per covered
employee during 2002 and expects a 15% to 18% increase in 2003. While the Company’s results of operations will
be impacted to some degree in 2003 by the expected increase and its contractual pricing constraints, the Company
does not expect this situation to have a material adverse effect on its financial position.
The Company is currently in a dispute with Aetna, its former health insurance carrier, relating to health insurance
costs increases during 2001 and Aetna’s administration of its health plan prior to 2002. For a discussion of the
Company’s dispute with Aetna, see Item 3. Legal Proceedings on page 17. An unfavorable outcome in this dispute
could have a material adverse effect on the Company’s financial position or results of operations.
• Workers’ Compensation Costs – In October 2001, the Company’s former workers’ compensation insurance
carrier, Reliance National Indemnity Co., was forced into bankruptcy liquidation. At December 31, 2002, the
estimated outstanding claims under the Company’s Reliance policies totaled approximately $7.2 million. State laws
regarding the handling of the open claims of liquidated insurance carriers vary. Most states have established funds
to pay such remaining claims. However, several states have provisions that could be construed to return the liability
for open claims to the companies that had policies with the liquidated insurance carrier, typically based on the net
worth of the Company. In anticipation of this situation, the Company secured insurance coverage from its current
workers’ compensation carrier to cover potential claims returned to the Company related to its Reliance policies. As
of December 31, 2002, the Company had $1.4 million in insurance coverage remaining. While the Company
believes, based on its analysis of applicable state provisions, that its insurance coverage will be adequate to cover
any probable losses, it is possible that such losses could exceed the Company’s insurance coverage limit.
Increases in Unemployment Tax Rates
The Company records its state unemployment tax expense based on taxable wages and tax rates assigned by
each state. State unemployment tax rates vary by state and are determined, in part, based on prior years’
compensation experience in each state. Should the Company’s claim experience increase, its unemployment tax
rates could increase. The Company’s ability to incorporate such increases into service fees to clients is constrained
by contractual arrangements with clients, which could result in a delay before such increases could be reflected in
service fees. As a result, such increases could have a material adverse effect on the Company’s financial condition
or results of operations.
The Company must estimate its expected tax rate in those states for which tax rate notices have not yet been
received. In January 2002, as part of a corporate restructuring, the Company filed for a partial transfer of
compensation experience with the state of Texas.
In June 2002, the Company received an initial determination from the TWC that its partial transfer
application was denied. The Company filed an appeal of this ruling with the TWC. On October 30, 2002, the TWC
issued its decision approving the Company’s application for a partial transfer of compensation experience.
Since filing its partial transfer application in Texas, the Company has paid its unemployment taxes to the
state of Texas at the higher new employer rate as required by state law. However, the Company has recorded Texas
unemployment taxes at its best estimate of the ultimate rate, resulting in a prepaid asset of approximately $6.0
million at December 31, 2002, included as a component of other current assets. The Company will not know the
definitive amount of its expected refund until the transfer of compensation experience is completed by the TWC and
- 40 -
the TWC notifies the Company of its final official tax rate for the 2002 calendar year. If the TWC’s final official tax
rate is higher or lower than the estimated rate currently used by the Company, the Company would be required to
recognize a corresponding reduction or increase in the estimated prepaid asset as additional payroll tax expense or
benefit in the period of such determination to the extent the Company’s estimate differs from the TWC’s final
official tax rate.
Need to Renew or Replace Client Companies
The Company’s standard CSA is subject to cancellation on 60 to 180 days notice by either the Company or
the client. Accordingly, the short-term nature of the CSA makes the Company vulnerable to potential cancellations
by existing clients, which could materially and adversely affect the Company’s financial condition and results of
operations. In addition, the Company’s results of operations are dependent in part upon the Company’s ability to
retain or replace its client companies upon the termination or cancellation of the CSA. Prior to 2001, the Company’s
average client attrition rate had been approximately 20%. During 2002 and 2001, the Company’s client attrition
ratio was approximately 25% due to softness in U.S. economic conditions. There can be no assurance that the
number of contract cancellations will not continue at these levels or increase in the future.
Competition and New Market Entrants
The PEO industry is highly fragmented. Many PEOs have limited operations and fewer than 1,000
worksite employees, but there are several industry participants that are comparable in size to the Company. The
Company also encounters competition from “fee for service” companies such as payroll processing firms, insurance
companies and human resource consultants. Several of the Company’s competitors are PEO divisions of large
business services companies, such as Automatic Data Processing, Inc. and Paychex, Inc. Such companies have
substantially greater resources and provide a broader range of services than the Company. Accordingly, the PEO
divisions of such companies may be able to provide their PEO services at more competitive prices than may be
offered by the Company. Moreover, the Company expects that as the PEO industry grows and its regulatory
framework becomes better established, well-organized competition with greater resources than the Company may
enter the PEO market, possibly including large “fee for service” companies currently providing a more limited range
of services.
Liabilities for Client and Employee Actions
A number of legal issues remain unresolved with respect to the co-employment arrangement between a
PEO and its worksite employees, including questions concerning the ultimate liability for violations of employment
and discrimination laws. The Administaff CSA establishes the contractual division of responsibilities between the
Company and its clients for various personnel management matters, including compliance with and liability under
various governmental regulations. However, because the Company acts as a co-employer, the Company may be
subject to liability for violations of these or other laws despite these contractual provisions, even if it does not
participate in such violations. Although the CSA provides that the client is to indemnify the Company for any
liability attributable to the conduct of the client, the Company may not be able to collect on such a contractual
indemnification claim and thus may be responsible for satisfying such liabilities. In addition, worksite employees
may be deemed to be agents of the Company, subjecting the Company to liability for the actions of such worksite
employees.
Compliance with IRS Revenue Procedure 2002-21
On April 24, 2003, the IRS issued Revenue Procedure 2002-21 (“Rev Proc”), which requires defined
contribution plans maintained by PEOs to satisfy the requirements of Internal Revenue Code 413(c) (“IRC 413(c)”)
or terminate such plans. IRC 413(c) stipulates the qualification requirements for plans maintained by more than one
employer, which includes, but is not limited to, compliance and testing of non-discrimination requirements at the
client level. The Rev Proc applies to plans in existence on May 12, 2002 such as the Administaff 401(k) Plan
(“Plan”) and their operation in plan years beginning after December 31, 2003. Accordingly, the Company has
- 41 -
chosen to amend the terms of the Plan and certain aspects of its operation for all periods beginning after December
31, 2003 in accordance with IRC 413(c). Should the Plan, as amended, be unable to operate in a manner that
satisfies the requirements of IRC 413(c), the IRS could disqualify the Plan causing significant disruption to the
Company’s business. If the IRS disqualifies the Plan, employees vested account balances under the Plan would
become taxable, the 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 related to certain contributions and trust earnings. In such a
scenario, the Company would also face the risk of client dissatisfaction and potential litigation, which could have a
material adverse effect on the Company’s financial position and results of operations.
Federal, State and Local Regulation
As a major employer, the Company’s operations are affected by numerous federal, state and local laws and
regulations relating to labor, tax and employment matters. By entering into a co-employer relationship with
employees assigned to work at client company locations, the Company assumes certain obligations and
responsibilities of an employer under these laws. However, many of these laws (such as ERISA and federal and
state employment tax laws) do not specifically address the obligations and responsibilities of non-traditional
employers such as PEOs, and the definition of “employer” under these laws is not uniform. In addition, many of the
states in which the Company operates have not addressed the PEO relationship for purposes of compliance with
applicable state laws governing the employer/employee relationship. If these other federal or state laws are
ultimately applied to the Company’s PEO relationship with its worksite employees in a manner adverse to the
Company, such an application could have a material adverse effect on the Company’s results of operations or
financial condition.
While many states do not explicitly regulate PEOs, 24 states have passed laws that have licensing or
registration requirements for PEOs, and several other states are considering such regulation. Such laws vary from
state to state, but generally provide for monitoring the fiscal responsibility of PEOs, and in some cases codify and
clarify the co-employment relationship for unemployment, workers’ compensation and other purposes under state
law. While 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 for all states. In addition, there can be no assurance that the Company will be able to renew its licenses
in all states.
401(k) Recordkeeping Services
In February 2003, the Company announced its plans to begin performing recordkeeping services for the
Plan and to offer such services to certain other defined contribution plans, which are sponsored and maintained by
PEO and non-PEO clients (“Other Plans”). Historically, the Company has contracted with a third party
administrator to provide a majority of the recordkeeping functions associated with the Plan and has not offered any
significant services with respect to Other Plans. The Company expects to begin performing these services for the
Plan in the third quarter of 2003 and offer such services to Other Plans in 2004.
The Company expects that the initial start-up costs and ongoing operation of recordkeeping services will
not have a material adverse effect on its financial condition or results of operations. However, there can be no
assurance that the Company’s cost to perform these services will be as estimated. In addition, the Company’s
expansion into this new service offering may place a significant strain on the Company’s management, operating and
technical resources. Failure to manage this new service effectively could have a material adverse effect on the
Company’s financial condition and results of operations.
Estimated Costs and Effectiveness of Capital Projects and Investments in Infrastructure
The Company currently has several strategic initiatives in progress, which have significantly increased the
level of capital expenditures and related depreciation expense incurred over the past several years. These capital
expenditures have been, and will continue to be, primarily associated with the expansion and upgrade of the
Company’s technology and telecommunications infrastructure, Internet service delivery capabilities, and corporate
headquarters, sales and service facilities. There can be no assurance that the Company’s cost to complete these
- 42 -
projects will be as estimated or that the ultimate effectiveness of such projects will provide the necessary operating
efficiencies required to offset the resulting increases in depreciation and amortization expense which accompany
these expenditures. In addition, the Company may require additional capital resources to fund these and future
capital expenditure requirements.
Marketing Agreement with American Express
The Company has entered into a Marketing Agreement with American Express to jointly market the
Company’s services to American Express’ substantial small and medium-sized business customer base across the
country. Under the terms of the Marketing Agreement, American Express is utilizing its resources and working
jointly with the Company to generate appointments with prospects for the Company’s services from the American
Express customer base. The Company believes that the agreement will enhance its ability to increase its base of
worksite employees and clients; however, there can be no assurances to that effect. Among the factors that could
cause the effectiveness of the Marketing Agreement to be less than anticipated are the ability of American Express to
provide qualified prospects, the Company’s ability to make timely presentations to all of the American Express
prospects and the Company’s ability to convert those prospects into clients.
Geographic Market Concentration
While the Company has sales offices in 21 markets, the Company’s Houston and Texas (including
Houston) markets accounted for approximately 24% and 43%, respectively, of the Company’s revenues for the year
ended December 31, 2002. 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). 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.
Failure to Sell Administaff Financial Management Services, Inc.
In January 2002, the Company purchased substantially all of the assets of VGI through bankruptcy
proceedings for a total cost of approximately $1.6 million. The Company established a subsidiary, known as FMS,
to provide outsourced accounting and bookkeeping services using the assets acquired from VGI. In January 2003,
the Company committed to a plan to sell FMS and initiated a program to market the division and locate a buyer. As
a result, FMS will be reported as a discontinued operation in 2003. As of December 31, 2002, the net book value of
FMS was approximately $1.2 million. Failure to sell FMS at an amount at least equal to the net book value would
result in the Company incurring and recording a loss on the disposal of FMS.
Potential Client Liability for Employment Taxes
Pursuant to the CSA, the Company assumes sole responsibility and liability for the payment of federal
employment taxes imposed under the Code with respect to wages and salaries paid to its worksite employees. There
are essentially three types of federal employment tax obligations: (i) income tax withholding requirements; (ii)
obligations under the Federal Income Contribution Act (“FICA”); and (iii) obligations under the Federal
Unemployment Tax Act (“FUTA”). Under the Code, employers have the obligation to withhold and remit the
employer portion and, where applicable, the employee portion of these taxes. Most states impose similar
employment tax obligations on the employer. While the CSA provides that the Company has sole legal
responsibility for making these tax contributions, the IRS or applicable state taxing authority could conclude that
such liability cannot be completely transferred to the Company. Accordingly, in the event the Company fails to meet
its tax withholding and payment obligations, the client company may be held jointly and severally liable therefor.
While this interpretive issue has not, to the Company’s knowledge, discouraged clients from enrolling with the
Company, there can be no assurance that a definitive adverse resolution of this issue would not do so in the future.
- 43 -
ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company is primarily exposed to market risks from fluctuations in interest rates and the effects of those
fluctuations on the market values of its cash equivalent short-term investments, its available-for-sale marketable
securities, and its credit facilities. The cash equivalent short-term investments consist primarily of overnight
investments, which are not significantly exposed to interest rate risk, except to the extent that changes in interest
rates will ultimately affect the amount of interest income earned on these investments. The available-for-sale
marketable securities are subject to interest rate risk because these securities generally include a fixed interest rate.
As a result, the market values of these securities are affected by changes in prevailing interest rates.
The Company attempts to limit its exposure to interest rate risk primarily through diversification and low
investment turnover. The Company’s marketable securities are currently managed by three professional investment
management companies, each of which is guided by the Company’s investment policy. The Company’s investment
policy is designed to maximize after-tax interest income while preserving its principal investment. As a result, the
Company’s marketable securities consist primarily of short and intermediate-term debt securities.
The following table presents information about the Company’s available-for-sale marketable securities as of
December 31, 2002 (dollars in thousands):
Principal
Maturities
Average
Interest Rate
2003
2004
2005
2006
2007
Total
Fair Market Value
$
$
$
7,390
5,772
1,015
—
230
14,407
14,714
4.8%
3.4%
3.1%
—
3.5%
4.1%
The Company’s mortgage and term loan include variable interest rates, and as a result, the Company’s total
cost of borrowing under these agreements is also subject to interest rate risk. As of December 31, 2002 the
Company had borrowed $40.5 million under these agreements with a weighted average interest rate of 4.5%. At
December 31, 2002, the fair market value of the Company’s variable rate borrowings approximated their carrying
value. The following table presents information about the Company’s variable interest rate borrowings as of
December 31, 2002 (dollars in thousands):
2003
2004
2005
2006
2007
Thereafter
Principal
Maturities
$
$
1,243
1,360
1,385
1,408
1,430
33,639
40,465
- 44 -
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information required by this Item 8 is contained in a separate section of this Annual Report. See
“Index to Consolidated Financial Statements” on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
- 45 -
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this item is incorporated by reference to the information set forth under the
captions “Proposal Number 1: Election of Directors – Nominees – Class II Directors (For Terms Expiring at the
2006 Annual Meeting),” “– Directors Remaining in Office,” and “– Section 16(a) Beneficial Ownership Reporting
Compliance” in the Company’s definitive Proxy Statement to be filed with the Securities and Exchange Commission
pursuant to Regulation 14A within 120 days after the end of the fiscal year covered by this report (the “Administaff
Proxy Statement”).
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item is incorporated by reference to the information set forth under the
captions “Proposal Number 1: Election of Directors – Director Compensation” and “—Executive Compensation” in
the Administaff Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
Equity Compensation Plan Information
The following table sets forth information about Administaff's common stock that may be issued under all
of the Company’s existing equity compensation plans as of December 31, 2002 (in thousands, except price per share
amounts):
Plan category
Equity compensation plans approved by
security holders (1)
Equity compensation plan not approved by
security holders (3)
Total
Number of securities
to be issued upon
exercise of
outstanding options,
warrants and rights
Weighted average
exercise price of
outstanding
options, warrants
and rights
Number of securities
remaining available
for future issuance
2,204
$
18.60
2,782
4,986
$
$
20.70
19.77
1,184(2)
543(4)
1,727
(1) The 1997 Incentive Plan and the 2001 Incentive Plan have been approved by the Company’s stockholders.
(2) The securities remaining available for issuance may be issued in the form of stock options, performance awards,
stock awards, stock appreciation rights, bonus stock and other stock-based awards.
(3) The Administaff Nonqualified Stock Option Plan was not approved by stockholders. For a description of the
material features of the Nonqualified Stock Option Plan, see the Employee Incentive Plan footnote in Note 10 in
the Notes to Consolidated Financial Statements included in this report.
(4) Shares of common stock may be issued pursuant to the 1997 Employee Stock Purchase Plan (“ESPP”), which
enables employees of the Company to purchase Administaff common stock through payroll deductions each
calendar month. After the end of each calendar month, shares of common stock are purchased by the ESPP.
Participants may enroll, change or discontinue payroll deductions at any time. The Company pays all expenses
of the ESPP other than brokerage commissions for sales. The ESPP was not approved by stockholders, and does
not include a limitation on the number of shares that may be issued thereunder.
- 46 -
Additional information required by this item is incorporated by reference to the information set forth under
the caption “Security Ownership of Certain Beneficial Owners and Management” in the Administaff Proxy
Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item is incorporated by reference to the information set forth under the
caption “Proposal Number 1: Election of Directors – Certain Relationships and Related Transactions” in the
Administaff Proxy Statement. See also Note 5 to the Consolidated Financial Statements and “Transactions with
Related and Other Certain Parties” on page 28.
ITEM 14. CONTROLS AND PROCEDURES.
Within 90 days prior to the date of this report, the Company carried out an evaluation, under the supervision
and with the participation of the Company’s management, including the Company’s President and Chief Executive
Officer and its Executive Vice President of Administration, Chief Financial Officer and Treasurer, of the
effectiveness of the Company’s disclosure controls and procedures pursuant to Rule 13a-14 under the Securities
Exchange Act of 1934, as amended. Based upon that evaluation, the Company’s President and Chief Executive
Officer and its Executive Vice President of Administration, Chief Financial Officer and Treasurer concluded that the
Company’s disclosure controls and procedures are effective, in all material respects, with respect to the recording,
processing, summarizing and reporting, within the time periods specified in the Securities and Exchange
Commission’s rules and forms, of information required to be disclosed by the issuer in the reports that it files or
submits under the Exchange Act.
There were no significant changes in the Company’s internal controls or in other factors that could
significantly affect internal controls subsequent to the date of the evaluation referred to above.
- 47 -
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a)
1.
Financial Statements of the Company
The Consolidated Financial Statements listed by the Registrant on the accompanying Index to
Consolidated Financial Statements (see page F-1) are filed as part of this Annual Report.
(a)
2.
Financial Statement Schedules
The required information is included in the Consolidated Financial Statements or Notes thereto.
(a)
3.
List of Exhibits
3.1 Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Registrant’s
Registration Statement on Form S-1 (No. 33-96952)).
3.2 Bylaws, as amended on March 7, 2001 (incorporated by reference to Exhibit 3.2 to the
Registrant’s Form 10-K filed for the year ended December 31, 2000).
3.3 Certificate of Designations of Series A Junior Participating Preferred Stock of
Administaff, Inc. Dated February 4, 1998 (incorporated by reference to Exhibit 2 to the
Registrant’s Form 8-A filed on February 4, 1998).
Specimen Common Stock Certificate (incorporated by reference to Exhibit 4.1 to the
Registrant’s Registration Statement on Form S-1 (No. 33-96952)).
4.1
4.2 Rights Agreement dated as of February 4, 1998, between Administaff, Inc. and Harris
Trust and Savings Bank, as Rights Agent (incorporated by reference to Exhibit 1 to the
Registrant’s Form 8-A filed on February 4, 1998).
4.3 Amendment No. 1 to Rights Agreement dated as of March 9, 1998 between Administaff,
Inc. and Harris Trust and Savings Bank, as Rights Agent (incorporated by reference to
Exhibit 4.3 to the Registrant’s Form 10-K for the year ended December 31, 1999).
4.4 Amendment No. 2 to Rights Agreement dated as of May 14, 1999 between Administaff,
Inc. and Harris Trust and Savings Bank, as Rights Agent (incorporated by reference to
Exhibit 2 to the Registrant’s Form 8-A/A filed on May 19, 1999).
4.5 Amendment No. 3 to Rights Agreement dated as of July 22, 1999 between Administaff,
Inc. and Harris Trust and Savings Bank, as Rights Agent (incorporated by reference to
Exhibit 1 to the Registrant’s Form 8-A/A filed on August 9, 1999).
4.6 Amendment No. 4 to Rights Agreement dated as of August 2, 1999 between Administaff,
4.7
4.8
Inc. and Harris Trust and Savings Bank, as Rights Agent (incorporated by reference to
Exhibit 2 to the Registrant’s form 8-A/A filed on August 9, 1999).
Form of Rights Certificate (incorporated by reference to Exhibit 3 to the Registrant’s
Form 8-A filed on February 4, 1998).
Securities Purchase Agreement between Administaff, Inc. and American Express Travel
Related Services Company, Inc., dated January 27, 1998 and the Letter Agreement
between Administaff, Inc. and American Express Travel Related Services Company, Inc.,
dated March 10, 1998 amending the Securities Purchase Agreement (incorporated by
reference to Exhibit 4.2 to the Registrant’s Form 10-Q for the quarter ended March 31,
1998).
4.9 Registration Rights Agreement between Administaff, Inc. and American Express Travel
Related Services Company, Inc., dated March 10, 1998 (incorporated by reference to
Exhibit 4.3 to the Registrant’s Form 10-Q for the quarter ended March 31, 1998).
4.10 Warrant Agreement between Administaff, Inc. and American Express Travel Related
Services Company, Inc., dated March 10, 1998 (incorporated by reference to Exhibit 4.4
to the Registrant’s Form 10-Q for the quarter ended March 31, 1998).
- 48 -
4.11 Warrant Certificate No. 4 for American Express Travel Related Services Company, Inc.
(incorporated by reference to Exhibit 4.8 to the Registrant’s Form 10-Q for the quarter
ended March 31, 1998).
4.12 Warrant Certificate No. 5 for American Express Travel Related Services Company, Inc.
(incorporated by reference to Exhibit 4.9 to the Registrant’s Form 10-Q filed for the
quarter ended March 31, 1998).
10.1** Administaff, Inc. 1997 Incentive Plan (incorporated by reference to Exhibit 99.1 to the
Registrant’s Registration Statement on Form S-8 (No. 333-85151)).
10.2** First Amendment to the Administaff, Inc. 1997 Incentive Plan (incorporated by reference
to Exhibit 99.2 to the Registrant’s Registration Statement on Form S-8 (No. 333-85151)).
10.3** Second Amendment to the Administaff, Inc. 1997 Incentive Plan (incorporated by
reference to Exhibit 99.3 to the Registrant’s Registration Statement on Form S-8 (No.
333-85151)).
10.4** Third Amendment to the Administaff, Inc. 1997 Incentive Plan (incorporated by reference
to Exhibit 99.4 to the Registrant’s Registration Statement on Form S-8 (No. 333-85151)).
10.5** Fourth Amendment to the Administaff, Inc. 1997 Incentive Plan (incorporated by
reference to Exhibit 99.5 to the Registrant’s Registration Statement on Form S-8 (No.
333-85151)).
10.6** Administaff, Inc. 2001 Incentive Plan (incorporated by reference to Exhibit 10.1 to the
Registrant’s Form 10-Q filed for the quarter ended March 31, 2001).
10.7 Administaff, Inc. Nonqualified Stock Option Plan (incorporated by reference to Exhibit
99.6 to the Registrant’s Registration Statement on Form S-8 (No. 333-85151)).
10.8* First Amendment to Administaff, Inc. Nonqualified Stock Option Plan, effective August
7, 2001.
10.9* Second Amendment to Administaff, Inc. Nonqualified Stock Option Plan, effective
January 28, 2003.
10.10* Administaff, Inc. Amended and Restated Employee Stock Purchase Plan effective April
1, 2002.
10.11* First Amendment to Administaff, Inc. Amended and Restated Employee Stock Purchase
Plan, effective July 31, 2002.
10.12 Marketing Agreement between American Express Travel Related Services Company,
Inc., Administaff, Inc., Administaff Companies, Inc. and Administaff of Texas, Inc. dated
March 10, 1998 (incorporated by reference to Exhibit 10.1 to the Registrant’s Form 10-Q
for the quarter ended March 31, 1998).
10.13 First Amendment to the Marketing Agreement between American Express Travel Related
Services Company, Inc., Administaff, Inc., Administaff Companies, Inc. and Administaff
of Texas, Inc., dated November 17, 1998 (incorporated by reference to Exhibit 10.12 to
the Registrant’s Form 10-K for the year ended December 31, 1998)).
10.14 Second Amendment to the Marketing Agreement between American Express Travel
Related Services Company, Inc. and Administaff, Inc., Administaff Companies, Inc. and
Administaff of Texas, Inc., dated April 11, 2000 (incorporated by reference to Exhibit
10.1 to the Registrant’s Form 10-Q for the quarter ended June 30, 2000).
10.15 Letter Agreement between Administaff, Inc. and American Express Travel Related
Services Company, Inc., dated February 16, 2001 (incorporated by reference to Exhibit
10.1 to the Registrant’s form 10-Q for the quarter ended March 31, 2001).
10.16 Letter Agreement between Administaff, Inc. and American Express Foundation, dated
February 16, 2001 (incorporated by reference to Exhibit 10.2 to the Registrant’s Form 10-
Q for the quarter ended March 31, 2001).
10.17 Third Amendment to the Marketing Agreement between American Express Travel
Related Services Company, Inc., Administaff, Inc., Administaff Companies, Inc. and
Administaff of Texas, Inc., dated June 21, 2002 (incorporated by reference to Exhibit
10.2 to the Registrant’s Form 10-Q for the quarter ended June 30, 2002).
- 49 -
10.18* Promissory Note dated December 20, 2002 executed by Administaff Services, L.P,
payable to General Electric Capital Business Asset Funding Corporation.
10.19* Guaranty dated December 20, 2002 by Administaff, Inc. in favor of General Electric
Capital Business Asset Funding Corporation.
10.20* Commercial Deed of Trust, Security Agreement, Assignment of Leases and Rents, and
Fixture Filing, dated December 20, 2002, executed by Administaff Services, L.P. in favor
of General Electric Capital Business Asset Funding Corporation.
10.21 Minimum Premium Financial Agreement by and between Administaff of Texas, Inc. and
United Healthcare Insurance Company, Hartford, Connecticut (incorporated by reference
to Exhibit 10.3 to the Registrant’s Form 10-Q for the quarter ended June 30, 2002).
10.22 Minimum Premium Administrative Services Agreement by and between Administaff of
Texas, Inc. and United Healthcare Insurance Company, Hartford, Connecticut
(incorporated by reference to Exhibit 10.4 to the Registrant’s Form 10-Q for the quarter
ended June 30, 2002).
10.23 Amended and Restated Security Deposit Agreement by and between Administaff of
Texas, Inc. and UnitedHealthcare Insurance Company, Hartford, Connecticut
(incorporated by reference to Exhibit 10.5 to the Registrant’s Form 10-Q for the quarter
ended June 30, 2002).
21.1* Subsidiaries of Administaff, Inc.
23.1* Consent of Independent Auditors.
24.1* Powers of Attorney.
_____________________
*
**
Filed herewith.
Management contract or compensatory plan or arrangement required to be filed as an
exhibit to this Form 10-K.
(b)
Reports on Form 8-K
None.
- 50 -
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Administaff, Inc.
has duly caused this report to be signed in its behalf by the undersigned, thereunto duly authorized, on March 19,
2003.
ADMINISTAFF, INC.
By: /s/ RICHARD G. RAWSON
Richard G. Rawson
Executive Vice President of Administration,
Chief Financial Officer and Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the
following persons on behalf of the registrant in the capacities indicated on March 19, 2003:
Title
President, Chief Executive Officer and
Director
(Principal Executive Officer)
Executive Vice President of Administration,
Chief Financial Officer, Treasurer and Director
(Principal Financial Officer)
Vice President, Finance and Controller
(Principal Accounting Officer)
Director
Director
Director
Director
Director
Signature
/s/ Paul J. Sarvadi
Paul J. Sarvadi
/s/ Richard G. Rawson
Richard G. Rawson
/s/ Douglas S. Sharp
Douglas S. Sharp
*
Michael W. Brown
*
Jack M. Fields, Jr.
*
Paul S. Lattanzio
*
Gregory E. Petsch
*
Austin P. Young
* By John H. Spurgin, II, attorney-in-fact
- 51 -
I, Paul J. Sarvadi, certify that:
CERTIFICATIONS
1.
2.
3.
4.
I have reviewed this annual report on Form 10-K of Administaff, Inc.;
Based on my knowledge, this annual report does not contain any untrue statement of a material fact or
omit to state a material fact necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period covered by this annual
report;
Based on my knowledge, the financial statements, and other financial information included in this
annual report, fairly present in all material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in this annual report;
The registrant’s other certifying officers and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the
registrant and have:
a. designed such disclosure controls and procedures to ensure that material information
relating to the registrant, including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the period in which this annual
report is being prepared;
b. evaluated the effectiveness of the registrant’s disclosure controls and procedures as
of a date within 90 days prior to the filing date of this annual report (the “Evaluation
Date”); and
c. presented in this annual report our conclusions about the effectiveness of the
disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5.
The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to
the registrant’s auditors and the audit committee of registrant’s board of directors (or persons
performing the equivalent function):
a. all significant deficiencies in the design or operation of internal controls which could
adversely affect the registrant’s ability to record, process, summarize and report
financial data and have identified for the registrant’s auditors any material
weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or other employees
who have a significant role in the registrant’s internal controls; and
6.
The registrant’s other certifying officers and I have indicated in this annual report whether or not there
were significant changes in internal controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 19, 2003
/s/ Paul J. Sarvadi
Paul J. Sarvadi
President and Chief Executive Officer
I, Richard G. Rawson, certify that:
- 52 -
1.
I have reviewed this annual report on Form 10-K of Administaff, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or
omit to state a material fact necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial information included in this
annual report, fairly present in all material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrant’s other certifying officers and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the
registrant and have:
a. designed such disclosure controls and procedures to ensure that material information
relating to the registrant, including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the period in which this annual
report is being prepared;
b. evaluated the effectiveness of the registrant’s disclosure controls and procedures as
of a date within 90 days prior to the filing date of this annual report (the “Evaluation
Date”); and
c. presented in this annual report our conclusions about the effectiveness of the
disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to
the registrant’s auditors and the audit committee of registrant’s board of directors (or persons
performing the equivalent function):
a. all significant deficiencies in the design or operation of internal controls which could
adversely affect the registrant’s ability to record, process, summarize and report
financial data and have identified for the registrant’s auditors any material
weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or other employees
who have a significant role in the registrant’s internal controls; and
6. The registrant’s other certifying officers and I have indicated in this annual report whether or not there
were significant changes in internal controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 19, 2003
/s/ Richard G. Rawson
Richard G. Rawson
Executive Vice President of Administration,
Chief Financial Officer and Treasurer
- 53 -
ADMINISTAFF, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Auditors................................................................................................................................. F-2
Consolidated Balance Sheets as of December 31, 2002 and 2001............................................................................. F-3
Consolidated Statements of Operations for the years ended
December 31, 2002, 2001 and 2000....................................................................................................................... F-5
Consolidated Statements of Stockholders’ Equity for the years ended
December 31, 2002, 2001 and 2000....................................................................................................................... F-6
Consolidated Statements of Cash Flows for the years ended
December 31, 2002, 2001 and 2000....................................................................................................................... F-7
Notes to Consolidated Financial Statements.............................................................................................................. F-9
F-1
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Administaff, Inc.
We have audited the accompanying consolidated balance sheets of Administaff, Inc. as of December 31, 2002
and 2001, and the related consolidated statements of operations, stockholders’ equity and cash flows for each of the three
years in the period ended December 31, 2002. These financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the
consolidated financial position of Administaff, Inc. at December 31, 2002 and 2001, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended December 31, 2002, in conformity with
accounting principles generally accepted in the United States.
ERNST & YOUNG LLP
Houston, Texas
February 5, 2003
F-2
ADMINISTAFF, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
ASSETS
December 31,
2002
2001
Current assets:
Cash and cash equivalents........................................................................................ $ 71,799
Marketable securities. ..............................................................................................
14,714
Accounts receivable:
Trade...................................................................................................................
Unbilled ..............................................................................................................
Other ...................................................................................................................
Prepaid insurance .....................................................................................................
Other current assets ..................................................................................................
Notes receivable from employees ............................................................................
Deferred income taxes..............................................................................................
Total current assets .............................................................................................
5,161
74,358
2,956
10,409
12,126
—
641
192,164
Property and equipment:
Land .........................................................................................................................
Buildings and improvements....................................................................................
Computer hardware and software.............................................................................
Software development costs.....................................................................................
Furniture and fixtures...............................................................................................
Vehicles and aircraft ................................................................................................
Accumulated depreciation........................................................................................
Total property and equipment .............................................................................
Other assets:
2,920
53,899
46,972
16,820
27,491
6,692
154,794
(62,417)
92,377
26,552
Deposits....................................................................................................................
4,071
Other assets ..............................................................................................................
Total other assets ................................................................................................
30,623
Total assets ......................................................................................................... $ 315,164
$ 53,000
47,961
4,314
70,206
1,440
244
3,495
694
767
182,121
2,920
32,546
39,723
15,072
20,666
2,372
113,299
(41,405)
71,894
15,627
4,361
19,988
$ 274,003
F-3
ADMINISTAFF, INC.
CONSOLIDATED BALANCE SHEETS (Continued)
(in thousands)
LIABILITIES AND STOCKHOLDERS’ EQUITY
December 31,
2002
2001
Current liabilities:
Accounts payable ..................................................................................................... $
Payroll taxes and other payroll deductions payable .................................................
Accrued worksite employee payroll cost .................................................................
Accrued health insurance costs ................................................................................
Other accrued liabilities ...........................................................................................
Income taxes payable ...............................................................................................
Current portion of long-term debt ............................................................................
Revolving line of credit............................................................................................
Total current liabilities ..................................................................................
3,069
57,228
69,676
5,815
13,114
348
1,676
—
150,926
$
4,332
49,808
62,850
1,326
13,161
535
—
13,500
145,512
Noncurrent liabilities:
Long-term debt.........................................................................................................
Deferred income taxes..............................................................................................
Total noncurrent liabilities ............................................................................
42,493
5,396
47,889
—
5,556
5,556
Commitments and contingencies
Stockholders’ equity:
Preferred stock, par value $0.01 per share:
Shares authorized – 20,000
Shares issued and outstanding - none .................................................................
—
—
Common stock, par value $0.01 per share:
Shares authorized – 60,000
Shares issued – 30,839 and 30,776
at December 31, 2002 and 2001, respectively ...............................................
Additional paid-in capital.........................................................................................
Treasury stock, at cost – 2,946 and 2,839 shares
309
102,315
(43,003)
at December 31, 2002 and 2001, respectively ...............................................
153
Accumulated other comprehensive income (net of tax) ...........................................
56,575
Retained earnings.....................................................................................................
116,349
Total stockholders’ equity .............................................................................
Total liabilities and stockholders’ equity....................................................... $ 315,164
308
95,114
(33,467)
324
60,656
122,935
$ 274,003
See accompanying notes.
F-4
ADMINISTAFF, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
Year ended December 31,
2001
2000
2002
Revenues (gross billings of $4.9 billion, $4.4 billion and
$3.7 billion less worksite employee payroll cost of
$4.0 billion, $3.7 billion, and $3.1 billion, respectively)..........
$ 849,021
$ 720,219
$ 598,291
Direct costs:
Payroll taxes, benefits and workers’ compensation costs.......
682,631
555,204
459,757
Gross profit ..................................................................................
166,390
165,015
138,534
Operating expenses:
Salaries, wages and payroll taxes ...........................................
General and administrative expenses .....................................
Commissions ..........................................................................
Advertising .............................................................................
Depreciation and amortization................................................
76,747
50,591
12,127
7,138
21,637
67,761
44,569
11,173
6,092
16,881
54,477
35,426
9,278
5,117
12,002
168,240
146,476
116,300
Operating income (loss)...............................................................
(1,850)
18,539
22,234
Other income (expense):
Interest income .......................................................................
Interest expense ......................................................................
Write-off of investments.........................................................
Other, net................................................................................
Income (loss) before income tax expense ....................................
Income tax expense......................................................................
Net income (loss).........................................................................
Basic net income (loss) per share of common stock ....................
Diluted net income (loss) per share of common stock .................
1,772
(437)
(3,354)
272
(1,747)
(3,597)
484
(4,081)
(0.15)
(0.15)
$
$
$
4,128
—
(3,786)
506
4,430
—
—
(50)
848
4,380
19,387
9,030
10,357
0.38
0.36
$
$
$
26,614
9,714
16,900
0.62
0.58
$
$
$
See accompanying notes.
F-5
ADMINISTAFF, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands)
Common Stock
Issued
Shares Amount
Additional
Accumulated
Other
Paid-In Treasury Comprehensive Retained
Income (Loss) Earnings
Capital
Stock
Total
29,817
—
—
618
$ 298
—
—
6
$ 65,061
—
125
5,689
$ (18,072)
(2,581)
—
—
$ (218)
—
—
—
$33,399
—
—
—
$ 80,468
(2,581)
125
5,695
Balance at December 31, 1999
Purchase of treasury stock, at cost
Sale of common stock put warrant
Exercise of stock options
Income tax benefit from
exercise of stock options
Other
Change in unrealized gain (loss)
on marketable securities:
Realized gain
Realized loss
Net income
Comprehensive income
Balance at December 31, 2000
Purchase of treasury stock, at cost
Exercise of common stock
purchase warrant
Exercise of stock options
Income tax benefit from
exercise of stock options
Other
Change in unrealized gain on
marketable securities:
Unrealized gain (net of tax)
Realized gain (net of tax)
Net income
Comprehensive income
Balance at December 31, 2001
Purchase of treasury stock, at cost
Exercise of common stock
purchase warrant
Sale of common stock to Administaff
Employee Stock Purchase Plan
Sale of treasury stock to Administaff
Employee Stock Purchase Plan
Exercise of stock options
Income tax benefit from
exercise of stock options
Other
Change in unrealized gain on
marketable securities:
Unrealized gain (net of tax)
Realized gain (net of tax)
Net loss
Comprehensive loss
30,776
—
—
341
—
—
—
—
—
—
4
—
59
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
4,437
66
—
—
—
—
10
—
—
—
—
—
421
(31)
—
30,435
—
304
—
75,378
—
(20,643)
(21,566)
172
—
—
—
—
—
121
31
—
324
—
—
—
—
—
—
—
—
4
—
—
—
—
—
14,136
3,620
1,957
23
—
—
—
8,707
—
—
35
—
—
—
308
—
95,114
—
(33,467)
(17,088)
—
—
—
1
—
—
—
—
—
6,952
6,205
109
—
(724)
742
203
(81)
—
—
—
1,185
—
—
162
—
—
—
Balance at December 31, 2002
30,839
$ 309
$102,315 $ (43,003)
$ 153
$56,575
See accompanying notes.
F-6
23
(194)
—
—
—
(4,081)
—
—
4,437
76
—
—
16,900
50,299
—
421
(31)
16,900
17,290
105,510
(21,566)
—
—
—
—
22,843
3,624
1,957
58
—
—
10,357
60,656
—
—
—
—
—
—
—
121
31
10,357
10,509
122,935
(17,088)
13,157
109
461
743
203
81
23
(194)
(4,081)
(4,252)
$116,349
ADMINISTAFF, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year ended December 31,
2001
2000
2002
Cash flows from operating activities:
Net income (loss) .....................................................................
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization ............................................
Write-off of investments .....................................................
Deferred income taxes ........................................................
Bad debt expense ................................................................
Loss (gain) on disposition of assets ....................................
Changes in operating assets and liabilities:
Accounts receivable ......................................................
Prepaid insurance ..........................................................
Other current assets .......................................................
Other assets ...................................................................
Accounts payable ..........................................................
Payroll taxes and other payroll deductions payable.......
Accrued worksite employee payroll expense ................
Accrued health insurance costs .....................................
Other accrued liabilities.................................................
Income taxes payable/receivable ..................................
Total adjustments .......................................................
Net cash provided by operating activities...................
Cash flows from investing activities:
Marketable securities:
Purchases ............................................................................
Proceeds from maturities ....................................................
Proceeds from dispositions .................................................
Cash exchanged for note receivable ...................................
Property and equipment:
Purchases ............................................................................
Investment in software development costs .........................
Proceeds from dispositions .................................................
Investments in other companies ...............................................
Net cash used in investing activities ..........................
$ (4,081)
$ 10,357
$ 16,900
21,857
3,354
77
1,139
(268)
(7,654)
(10,165)
(5,948)
(12,623)
(1,263)
7,420
6,826
4,489
(47)
16
7,210
3,129
(15,499)
23,436
25,130
(2,983)
(36,677)
(1,748)
148
(500)
(8,693)
17,075
3,786
(1,834)
1,783
(82)
(12,528)
3,509
(463)
(14,833)
2,836
(14,225)
11,610
1,326
2,342
(121)
181
10,538
(56,604)
39,005
8,817
—
(33,232)
(3,516)
431
(931)
(46,030)
11,969
—
1,955
1,475
81
(32,484)
2,277
(729)
1,282
(1,291)
36,400
25,987
—
5,082
5,686
57,690
74,590
(27,310)
15,954
3,512
—
(15,445)
(4,769)
224
(5,789)
(33,623)
F-7
ADMINISTAFF, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(in thousands)
Cash flows from financing activities:
Purchase of treasury stock........................................................
Proceeds from the sale of common stock put warrants ............
Proceeds from the exercise of common
stock purchase warrants ........................................................
Proceeds from sale of common stock to the
employee stock purchase plan ..............................................
Proceeds from the exercise of stock options ............................
Long-term debt and short-term borrowings:
Borrowings under long-term debt agreements......................
Net borrowings under revolving line of credit......................
Deferred financing costs.......................................................
Principal repayments on long-term debt
and capital lease obligations .............................................
Loans to employees..................................................................
Other ........................................................................................
Net cash provided by financing activities......................
Year ended December 31,
2001
2000
2002
$ (17,088)
—
$ (21,566)
—
$
(2,581)
125
13,157
22,843
570
743
40,500
(13,500)
(689)
(105)
694
81
24,363
—
3,624
—
13,500
—
—
300
58
18,759
—
—
5,695
—
—
—
—
—
76
3,315
Net increase (decrease) in cash and cash equivalents ..................
Cash and cash equivalents at beginning of year ..........................
Cash and cash equivalents at end of year.....................................
18,799
53,000
$ 71,799
(16,733)
69,733
$ 53,000
44,282
25,451
$ 69,733
Supplemental disclosures:
Cash paid for income taxes ......................................................
Cash paid for interest ...............................................................
$
$
663
209
$ 11,259
—
$
$
$
2,073
—
Noncash Investing and Financing Activities:
During 2002, the Company entered into a long-term capital lease agreement to finance the purchase of office
furniture with a purchase price of $3.8 million.
See accompanying notes.
F-8
ADMINISTAFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002
1. Accounting Policies
Description of Business
Administaff, Inc. (“the Company”) is a professional employer organization (“PEO”). As a PEO, the
Company provides a bundled comprehensive service for its clients in the area of personnel management. The
Company provides its comprehensive service through its Personnel Management System, which encompasses a
broad range of human resource functions, including payroll and benefits administration, health and workers’
compensation insurance programs, personnel records management, employer liability management, employee
recruiting and selection, employee performance management, and employee training and development.
The Company provides its comprehensive service by entering into a co-employment relationship with its
clients, under which the Company and its clients each take responsibility for certain portions of the employer-
employee relationship. The Company and its clients designate each party’s responsibilities through its Client
Services Agreement (“CSA”), under which the Company becomes the employer of its worksite employees for most
administrative and regulatory purposes.
As a co-employer of its worksite employees, the Company assumes most of the rights and obligations
associated with being an employer. The Company enters into an employment agreement with each worksite
employee, thereby maintaining a variety of employer rights, including the right to hire or terminate employees, the
right to evaluate employee qualifications or performance, and the right to establish employee compensation levels.
Typically, the Company only exercises these rights in consultation with its clients or when necessary to ensure
regulatory compliance. The responsibilities associated with the Company’s role as employer include the following
obligations with regard to its worksite employees: (i) to compensate its worksite employees through wages and
salaries; (ii) to pay the employer portion of payroll-related taxes; (iii) to withhold and remit (where applicable) the
employee portion of payroll-related taxes; (iv) to provide employee benefit programs; and (v) to provide workers’
compensation insurance coverage.
In addition to its assumption of employer status for its worksite employees, the Company’s comprehensive
service also includes other human resource functions for its clients to support the effective and efficient use of
personnel in their business operations. To provide these functions, the Company maintains a significant staff of
professionals trained in a wide variety of human resource functions, including employee training, employee
recruiting, employee performance management, employee compensation, and employer liability management. These
professionals interact and consult with clients on a daily basis to help identify each client’s service requirements and
to ensure that the Company is providing appropriate and timely personnel management services.
The Company provides its comprehensive service to small and medium-sized business in strategically
selected markets throughout the United States. During 2002, 2001 and 2000, revenues from the Company’s Texas
markets represented 43%, 47% and 51% of the Company’s total revenues, respectively.
Revenue and Direct Cost Recognition
The Company accounts for its revenues in accordance with EITF 99-19, Reporting Revenues Gross as a
Principal Versus Net as an Agent. The Company’s revenues are derived from its gross billings, which are based on
(i) the payroll cost of its worksite employees; and (ii) a markup computed as a percentage of the payroll cost. The
gross billings are invoiced concurrently with each periodic payroll of its worksite employees. Revenues are
F-9
ADMINISTAFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
recognized ratably over the payroll period as worksite employees perform their service at the client worksite.
Revenues that have been recognized but not invoiced are included in unbilled accounts receivable on the Company’s
Consolidated Balance Sheets.
Historically, the Company has included both components of its gross billings in revenues (gross method)
due primarily to the assumption of significant contractual rights and obligations associated with being an employer,
including the obligation for the payment of the payroll costs of its worksite employees. The Company assumes its
employer obligations regardless of whether the Company collects its gross billings. After discussions with the
Securities and Exchange Commission staff, the Company has changed its presentation of revenues from the gross
method to an approach that presents its revenues net of worksite employee payroll costs (net method) primarily
because the Company is not generally responsible for the output and quality of work performed by the worksite
employees.
In determining the pricing of the markup component of the gross billings, the Company takes into
consideration its estimates of the costs directly associated with its worksite employees, including payroll taxes,
benefits and workers’ compensation costs, plus an acceptable gross profit margin. As a result, the Company’s
operating results are significantly impacted by the Company’s ability to accurately estimate, control and manage its
direct costs relative to the revenues derived from the markup component of the Company’s gross billings.
To conform to the net method, the Company reclassified worksite employee payroll costs of $4.0 billion,
$3.7 billion and $3.1 billion for the years ended December 31, 2002, 2001 and 2000, respectively, from direct costs
to revenues. This reclassification had no effect on gross profit, operating income (loss), or net income (loss).
Consistent with its revenue recognition policy, the Company’s direct costs do not include the payroll cost of its
worksite employees. The Company’s direct costs associated with its revenue generating activities are comprised of all
other costs related to its worksite employees, such as the employer portion of payroll-related taxes, employee benefit plan
premiums and workers’ compensation insurance premiums.
Segment Reporting
The Company operates in one reportable segment under the Statement of Financial Accounting Standards
(“SFAS”) No. 131, Disclosures about Segments of an Enterprise and Related Information due to its centralized
structure.
Principles of Consolidation
The consolidated financial statements include the accounts of Administaff, Inc. and its wholly-owned
subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the amounts reported in the financial statements
and accompanying notes. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents include bank deposits and short-term investments with original maturities of
three months or less at the date of purchase.
Concentrations of Credit Risk
F-10
ADMINISTAFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Financial instruments that could potentially subject the Company to concentration of credit risk include
accounts receivable.
Marketable Securities
The Company accounts for marketable securities in accordance with SFAS No. 115, Accounting for Certain
Investments in Debt and Equity Securities. The Company determines the appropriate classification of all marketable
securities as held-to-maturity, available-for-sale or trading at the time of purchase, and re-evaluates such
classification as of each balance sheet date. At December 31, 2002 and 2001, all of the Company’s investments in
marketable securities were classified as available-for-sale, and as a result, were reported at fair value. Unrealized
gains and losses are reported as a component of accumulated other comprehensive income (loss) in stockholders’
equity. The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts
from the date of purchase to maturity. Such amortization is included in interest income as an addition to or
deduction from the coupon interest earned on the investments. The Company follows its investment managers’
methods of determining the cost basis in computing realized gains and losses on the sale of its available-for-sale
securities, which includes both the specific identification and average cost methods. Realized gains and losses are
included in other income (expense).
Property and Equipment
Property and equipment is recorded at cost and is depreciated over the estimated useful lives of the related
assets using the straight-line method. The estimated useful lives of property and equipment for purposes of
computing depreciation are as follows:
Buildings and improvements ..................................................................................... 5-30 years
Computer hardware and software .............................................................................. 2-5 years
Software development costs....................................................................................... 3-5 years
Furniture and fixtures................................................................................................. 5-7 years
Aircraft....................................................................................................................... 10 years
5 years
Vehicles .....................................................................................................................
Software development costs relate primarily to the Company’s proprietary professional employer
information system and its Internet-based service delivery platform, the Employee Service Center, and are accounted
for in accordance with Statement of Position (“SOP”) 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use.
The Company periodically evaluates its long-lived assets for impairment in accordance with SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS No. 144 requires that an impairment loss be
recognized for assets to be disposed of or held-for-use when the carrying amount of an asset is deemed to not be
recoverable. If events or circumstances were to indicate that any of the Company’s long-lived assets might be
impaired, the Company would analyze the estimated undiscounted future cash flows to be generated from the
applicable asset. In addition, the Company would record an impairment loss to the extent that the carrying value of
the asset exceeded the fair value of the asset. Fair value is generally determined using an estimate of discounted
future net cash flows from operating activities or upon disposal of the asset.
F-11
ADMINISTAFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Health Insurance Costs
The Company provides health insurance coverage to its worksite employees through a national network of
carriers including UnitedHealthcare (“United”), Cigna Healthcare, PacifiCare, Kaiser Permanente and Blue Cross
and Blue Shield of Georgia, all of which provide fully-insured policies. The policy with United provides the
majority of the Company’s health insurance coverage. Pursuant to the terms of the Company’s annual contract with
United, within 195 days after contract termination, a final accounting of the plan will be performed and the Company
will receive a refund for any accumulated surplus or will be liable for any accumulated deficit in the plan, up to the
amount of the Company’s security deposit with United. Accordingly, the Company accounts for this plan using a
partially self-funded insurance accounting model, under which the Company must estimate its incurred but not
reported (“IBNR”) claims at the end of each accounting period to determine the existence of any accumulated deficit
or surplus. Any resulting accumulated deficit or surplus is recorded as a liability or asset, respectively, on its
balance sheet. As of December 31, 2002, the Company has recorded an estimated accumulated deficit of
approximately $2.3 million.
Workers’ Compensation Costs
The Company’s workers’ compensation insurance policy for the two-year period ending September 30,
2003 is a guaranteed-cost policy under which premiums are paid for full-insurance coverage of all claims incurred
during the policy period. This policy also contains a dividend feature for each policy year, under which the
Company is entitled to a refund of a portion of its premiums if, four years after the end of the policy year, claims
paid by the insurance carrier for any policy year are less than an amount set forth in the policy. In accordance with
EITF Topic D-35, FASB Staff Views on EITF No. 93-6, “Accounting for Multiple-Year Retrospectively Rated
Contracts by Ceding and Assuming Enterprises,” the Company estimates the amount of refund, if any, that has been
earned under the dividend feature, based on the actual claims incurred to date and a factor used to develop those
claims to an estimate of the ultimate cost of the incurred claims during that policy year. As of December 31, 2002,
the Company has recorded an estimated dividend receivable of approximately $2.5 million as a long-term asset.
Fair Value of Financial Instruments
The carrying amounts of cash, cash equivalents, accounts receivable and accounts payable approximate
their fair values due to the short-term maturities of these instruments. The carrying amount of the Company’s long-
term debt approximates its fair value due to the stated interest rates approximating market rates.
F-12
ADMINISTAFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Stock-Based Compensation
At December 31, 2002, the Company has three stock-based employee compensation plans, which are
described more fully in Note 10. The Company accounts for these plans under the recognition and measurement
principles of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related
interpretations. No stock-based compensation cost is reflected in net income, as all options granted under those
plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The
following table illustrates the effect of net income and earnings per share if the Company had applied the fair value
recognition provisions of SFAS No. 123, Accounting for Stock-Based Compensation, to stock-based employee
compensation.
Net income (loss), as reported .................................................................
Deduct: Total stock-based employee compensation expense
determined under fair value based methods for all awards,
net of related tax effects....................................................................
Pro forma net income (loss).....................................................................
Net income (loss) per share:
Basic – as reported............................................................................
Basic – pro forma .............................................................................
Diluted – as reported ........................................................................
Diluted – pro forma ..........................................................................
Year ended December 31,
2000
2001
2002
(in thousands)
$ (4,081)
$ 10,357 $ 16,900
(9,253)
$ (13,334)
(9,610)
(3,352)
747 $ 13,548
$
$
$
$
$
(0.15)
(0.48)
(0.15)
(0.48)
$
$
$
$
0.38 $
0.03 $
0.62
0.50
0.36 $
0.03 $
0.58
0.47
The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing
model with the following assumptions:
Risk-free interest rate...............................................................................
Expected dividend yield ..........................................................................
Expected volatility ...................................................................................
Weighted average expected life (in years)...............................................
Year ended December 31,
2000
2001
2002
3.8%
0.0%
0.86
5.0
4.6%
0.0%
0.69
5.0
6.2%
0.0%
0.68
5.0
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded
options, which have no vesting restrictions and are fully transferable. In addition, option valuation models require
the input of highly subjective assumptions, including the expected stock price volatility. Because the Company’s
employee stock options have characteristics significantly different from those of traded options, and because changes
in the subjective input assumptions can materially affect the fair value estimate, in the Company’s opinion, the
existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.
Employee Savings Plan
Effective January 1, 1999, the Company amended the employer matching contribution and vesting features
of its 401(k) plan. The Company matches 50% of an eligible worksite employee’s contributions and 100% of an
eligible corporate employee’s contributions, both up to 6% of the employee’s eligible compensation. In addition, for
active employees on or after January 1, 1999, the vesting schedule for employer matching contributions was changed
from five-year graded vesting to immediate vesting. During 2002, 2001 and 2000, the Company made employer-
matching contributions of $11,434,000, $8,847,000 and $7,433,000, respectively. Of these contributions,
F-13
ADMINISTAFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
$9,244,000, $6,831,000 and $6,019,000 were made on behalf of worksite employees. The remainder represents
employer contributions made on behalf of corporate employees.
Advertising
The Company expenses all advertising costs as incurred.
Income Taxes
The Company uses the liability method in accounting for income taxes. Under this method, deferred tax
assets and liabilities are determined based on differences between financial reporting and income tax carrying
amounts of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse.
Reclassifications
Certain prior year amounts have been reclassified to conform to the 2002 presentation.
New Accounting Pronouncements
On January 1, 2002, the Company adopted SFAS No. 144. SFAS No. 144 amends existing accounting
guidance on asset impairments and provides a single accounting model for long-lived assets to be disposed of.
SFAS No. 144 changes the criteria for classifying an asset as held-for-sale, broadens the scope of businesses to be
disposed of that qualify for reporting as discontinued operations, and changes the timing of recognizing losses on
such operations. The adoption of SFAS No. 144 did not have an impact on the Company’s consolidated statements
of operations or consolidated balance sheets. The Company will apply the provisions of SFAS No. 144 in
connection with the planned sale of Administaff Financial Management Services, Inc. (“FMS”), which was initiated
in January 2003. FMS is a subsidiary that provides outsourced accounting and bookkeeping services.
In April 2002, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 145, Rescission of
FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. SFAS No.
145 requires that gains and losses from extinguishment of debt be classified as extraordinary items only if they meet
the criteria in Accounting Principles Board Opinion No. 30 (“Opinion No. 30”). Applying the provisions of Opinion
No. 30 will distinguish transactions that are part of an entity’s recurring operations from those that are unusual and
infrequent and meet the criteria for classification as an extraordinary item. SFAS No. 145, which is to be applied to
all periods presented, is effective for the Company beginning January 1, 2003. The adoption of SFAS No. 145 did
not have an impact on the Company’s consolidated statements of operations or consolidated balance sheets.
In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal
Activities. SFAS No. 146 addresses accounting and reporting for costs associated with exit or disposal activities,
such as restructurings, involuntarily terminating employees, and consolidating facilities initiated after December 31,
2002. SFAS No. 146, which requires that costs related to exiting an activity or to a restructuring not be recognized
until the liability is incurred, is effective for the Company beginning January 1, 2003 and is to be applied on a
prospective basis.
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation, Transition
and Disclosure. SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value
based method of accounting for stock-based employee compensation and requires fair value method pro forma
disclosures to be displayed more prominently and in a tabular format. Additionally, SFAS No. 148 requires similar
disclosures in interim financial statements. The transition and disclosure requirements of SFAS No. 148 were
adopted by the Company in 2002.
2. Accounts Receivable
F-14
ADMINISTAFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company’s accounts receivable is primarily composed of trade receivables and unbilled receivables.
The Company’s trade receivables, which represent outstanding gross billings to clients, are reported net of allowance
for doubtful accounts of $734,000 and $2,128,000 as of December 31, 2002 and 2001, respectively.
The Company makes an accrual at the end of each accounting period for its obligations associated with the
earned but unpaid wages of its worksite employees and for the accrued gross billings associated with such wages.
These accruals are included in accrued worksite employee payroll cost and unbilled accounts receivable; however,
these amounts are presented net in the consolidated statements of operations. The Company generally requires that
clients pay invoices for service fees no later than one day prior to the applicable payroll date. As such, the Company
generally does not require collateral. Customer prepayments directly attributable to unbilled accounts receivable
have been netted against such receivables as the gross billings have been earned and the payroll cost has been
incurred, thus the Company has the legal right of offset for these amounts. As of December 31, 2002 and 2001,
unbilled accounts receivable consisted of the following:
2002
2001
(in thousands)
Accrued worksite employee payroll cost..............
Unbilled revenues.................................................
Customer prepayments .........................................
Unbilled accounts receivable................................
$ 69,676
17,710
(13,028)
$ 74,358
$ 62,850
13,481
(6,125)
$ 70,206
3. Marketable Securities
The following is a summary of the Company’s available-for-sale marketable securities as of December 31,
2002 and 2001:
Gross
Gross
Amortized Unrealized Unrealized Estimated
Cost
Fair Value
Losses
Gains
December 31, 2002:
U.S. Treasury securities and obligations
of U.S. government agencies.......................
Foreign corporate debt securities ......................
U.S. corporate debt securities ...........................
Fixed income mutual funds...............................
December 31, 2001:
U.S. corporate debt securities ...........................
U.S. Treasury securities and obligations
of U.S. government agencies.......................
Fixed income mutual funds...............................
Obligations of state and local
government agencies ...................................
Foreign corporate debt securities ......................
Commercial paper.............................................
(in thousands)
$ 11,095
2,009
1,352
4
$ 14,460
$ 228
7
19
—
$ 254
$ —
—
—
—
$ —
$ 11,323
2,016
1,371
4
$ 14,714
$ 16,350
$ 267
$
(1)
$ 16,616
13,367
10,068
4,909
1,634
1,098
$ 47,426
111
126
47
28
1
$ 580
(44)
—
13,434
10,194
—
—
—
(45)
$
4,956
1,662
1,099
$ 47,961
For the years ended December 31, 2002, 2001 and 2000, the Company’s realized gains and losses
recognized on sales of available-for-sales marketable securities are as follows:
F-15
ADMINISTAFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Net
Realized
Realized
Gains
Realized Gains
(Losses)
Losses
(in thousands)
2002....................................................
2001....................................................
2000....................................................
$ 354
56
—
$ (33)
—
(31)
$ 321
56
(31)
As of December 31, 2002, the contractual maturities of the Company’s marketable securities were as
follows:
Amortized
Cost
Estimated
Fair Value
(in thousands)
Less than one year ...........................
One to five years .............................
Total ................................................
$
7,427
7,033
$ 14,460
$ 7,497
7,217
$ 14,714
4. Deposits
In December 2001, the Company made a cash security deposit of $15.0 million with its primary health
insurance carrier, UnitedHealthcare. During 2002, the Company made two additional deposits of $5.0 million each
in April and October. If the Company’s current ratio drops below 0.60, United may draw against the security
deposit to collect any unpaid health insurance premiums or any accumulated deficit in the healthcare plan.
5. Notes Receivable From Employees
In June 1995, an officer and director of the Company exercised options to purchase 897,334 shares of
common stock at a price of $0.375 per share. The purchase price was paid in cash by the officer. In connection with
the exercise, the Company entered into a loan agreement with the officer, whereby the Company paid certain federal
income tax withholding requirements related to the stock option exercise on behalf of the officer in the amount of
$694,000. The loan agreement called for an additional amount to be advanced to the officer in the event the ultimate
tax liability resulting from the exercise exceeded the statutory withholding requirements. In April 1996, the
Company loaned the officer an additional $300,000 relating to this transaction. In 2001, the $300,000 note was
repaid, and the remaining loan balance was repaid in June 2002.
6. Other Assets
During 2000, the Company purchased convertible preferred stock of Virtual Growth, Inc. (“VGI”) for a
total cost of approximately $3.2 million. During 2001, the Company purchased an additional $319,000 of
convertible preferred stock and made loans to VGI totaling $224,000. In December 2001, VGI filed for bankruptcy
protection. As a result of the filing, the Company wrote-off its investments in VGI as of that date totaling $3.8
million.
F-16
ADMINISTAFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Subsequent to December 2001, the Company purchased substantially all of the assets of VGI through
bankruptcy proceedings for a total cost of $1.6 million. The Company established a subsidiary, FMS, to provide
outsourcing accounting and bookkeeping services using the assets acquired from VGI. In January 2003, the
Company committed to a plan to sell FMS and initiated a program to market the division and locate a buyer. As a
result, FMS will be reported as a discontinued operation in 2003. As of December 31, 2002, the net book value of
FMS was approximately $1.2 million. The Company expects the sales proceeds to exceed the net book value of
FMS at December 31, 2002.
During 2000, the Company purchased 500,000 shares of convertible preferred stock of eProsper, Inc.
(“eProsper”) for $2.5 million. In April 2002, the Company made an additional $500,000 investment in convertible
preferred stock of eProsper. The eProsper preferred stock is convertible into an equal number of shares of eProsper
common stock, subject to anti-dilution provisions. The Company has accounted for this investment using the cost
method. Under the cost method, the Company periodically evaluates the realizability of this investment based on its
review of the investee’s financial condition, financial results, financial projections and availability of additional
financing sources. In December 2002, the Company determined that the fair value of its investment in eProsper had
declined below its carrying value, for reasons that were other than temporary, resulting in the Company writing-off
its entire investment totaling approximately $3.1 million.
7. Debt Obligations
The Company’s debt obligations consist of the following:
December 31,
2002
2001
(in thousands)
Mortgage loan .............................................................
Term loan ....................................................................
Capital lease obligations .............................................
Revolving line of credit...............................................
Total debt .............................................................
Less current maturities ................................................
Long-term debt, net of current maturities ................
$ 36,000
4,465
3,704
—
$ 44,169
1,676
$ 42,493
$ —
—
—
13,500
$ 13,500
13,500
$ —
Mortgage Loan
On December 20, 2002, the Company entered into a $36 million mortgage agreement (“Mortgage”) that
matures in January 2008. The proceeds were used to repay the Company’s outstanding balance under its revolving
credit agreement. The Mortgage bears interest at a variable rate equal to the greater of (a) 4.5%; or (b) the 30-day
LIBOR rate (1.3% at December 31, 2002) plus 2.9%. The Mortgage is secured by the Company’s real estate and
related fixtures located at Administaff’s headquarters in Kingwood, Texas, which has a net book value of $44.1
million at December 31, 2002. Monthly principal and interest payments are approximately $230,000, with the
remaining balance due upon maturity. The Mortgage provides for prepayment penalties, as a percentage of the
outstanding principal balance, ranging from 5% down to 1% during the first four years of the term. There is no
prepayment premium during the final year of the Mortgage.
Term Loan
In October 2002, the Company entered into a $4.5 million term loan agreement that matures in October
2012 and bears interest at the one-month commercial paper rate plus 3.1% (4.4% at December 31, 2002). The loan
is secured by the Company’s aircraft, which has a net book value of $3.9 million at December 31, 2002. The loan is
payable in monthly installments of $36,000, with the remaining balance due upon maturity.
F-17
ADMINISTAFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Capital Lease Obligations
In October 2002, the Company entered into a capital lease arrangement to finance the purchase of office
furniture. The assets under capital lease were capitalized using an effective interest rate of 7.5%. The current
monthly lease payments are $58,000 per month over the seven-year lease term. As of December 31, 2002, the
capitalized cost and accumulated depreciation under the capital lease arrangement were $3.8 million and $120,000,
respectively. Depreciation of the capitalized lease costs is included in depreciation and amortization in the
consolidated statements of operations.
Revolving Line of Credit
On June 25, 2002, the Company entered into a six-month, $30 million revolving credit agreement, replacing
its former $21 million line of credit (collectively, “the Credit Agreements”) which expired in December 2002. The
proceeds of the Credit Agreements were used to finance the construction of the Company’s new corporate
headquarters facility. In December 2002, the Company repaid the outstanding balance of the revolving line of credit
with the proceeds from the Mortgage. During 2002 and 2001, the Company capitalized interest expense of $371,000
and $84,000, respectively, incurred under the Credit Agreements.
Maturities of long-term debt at December 31, 2002 are summarized as follows (in thousands):
2003 ............................................................................
2004 ............................................................................
2005 ............................................................................
2006 ............................................................................
2007 ............................................................................
Thereafter....................................................................
$ 1,676
1,827
1,887
1,950
2,014
34,815
$ 44,169
F-18
ADMINISTAFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. 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:
Deferred tax liabilities:
Software development costs.................................................................
Depreciation and amortization .............................................................
Workers’ compensation dividend receivable .......................................
Prepaid commissions............................................................................
Unrealized gains on marketable securities ...........................................
Total deferred tax liabilities ............................................................
Deferred tax assets:
Long-term capital loss carry-forward...................................................
Accrued rent.........................................................................................
Uncollectible accounts receivable ........................................................
State income taxes................................................................................
Other ....................................................................................................
Total deferred tax assets .................................................................
Valuation allowance.............................................................................
Total net deferred tax assets............................................................
December 31,
2002
2001
(in thousands)
$ (2,430)
(1,873)
(1,004)
(417)
(100)
(5,824)
2,480
372
290
244
163
3,549
(2,480)
1,069
$
(3,488)
(1,824)
—
(606)
(211)
(6,129)
1,366
—
842
325
173
2,706
(1,366)
1,340
Net deferred tax liabilities........................................................................
$ (4,755)
$
(4,789)
Net current deferred tax assets.................................................................
Net noncurrent deferred tax liabilities .....................................................
The components of income tax expense are as follows:
$
641
(5,396)
$ (4,755)
$
$
767
(5,556)
(4,789)
Year ended December 31,
2000
2001
2002
(in thousands)
Current income tax expense:
Federal..................................................................................................
State .....................................................................................................
Total current income tax expense ...................................................
$ (117)
524
407
$ 9,422
1,442
10,864
Deferred income tax expense (benefit):
Federal..................................................................................................
State .....................................................................................................
Total deferred income tax expense .................................................
Total income tax expense.....................................................................
59
18
77
$ 484
(1,438)
(396)
(1,834)
$ 9,030
$ 6,584
1,175
7,759
1,627
328
1,955
$ 9,714
In 2002, 2001 and 2000, income tax benefits of $203,000, $1,957,000 and $4,437,000, respectively,
resulting from deductions relating to nonqualified stock option exercises and disqualifying dispositions of certain
employee incentive stock options were recorded as increases in stockholders’ equity.
F-19
ADMINISTAFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The reconciliation of income tax expense computed at U.S. federal statutory tax rates to the reported
income tax expense is as follows:
Year ended December 31,
2001
2002
2000
(in thousands)
Expected income tax expense at 35% (34% for 2000) .........................
State income taxes, net of federal benefit.............................................
Nondeductible expenses.......................................................................
Tax-exempt interest income .................................................................
Valuation allowance against long-term capital loss carry-forward
Other, net..............................................................................................
Reported total income tax expense.......................................................
$ (1,259)
432
262
(20)
1,069
—
$ 484
$ 6,786
924
255
(122)
1,208
(21)
$ 9,030
$ 9,049
985
180
(234)
—
(266)
$ 9,714
As a result of the write-off of the investments in eProsper and VGI, the Company has capital loss
carryforwards totaling $6.3 million that will expire during 2006 and 2007, but can only be used to offset future
capital gains. The Company has recorded a valuation allowance against these related deferred tax assets as it is
uncertain that the Company will be able to utilize the capital loss carryforwards prior to their expiration.
9. Stockholders’ Equity
In 1998, the Company entered into a Securities Purchase Agreement with American Express Travel Related
Services Company, Inc. (“American Express”) whereby the Company issued warrants to purchase 4,131,030 shares
of common stock to American Express with exercise prices ranging from $20 to $40 per share and terms ranging
from three to seven years. In February and November 2001, American Express exercised 800,000 and 273,729
common stock purchase warrants at $20.00 and $25.00 per share, respectively. In March 2002, American Express
exercised 526,271 common stock purchase warrants at $25.00.
The Company’s Board of Directors (the “Board”) has authorized a program to repurchase up to 5,000,000
shares of the Company’s outstanding common stock. The purchases are to be made from time to time in the open
market or directly from stockholders at prevailing market prices based on market conditions or other factors. During
2002, 2001 and 2000, the Company repurchased 726,271, 900,000 and 100,000 shares at a cost of $17.1 million,
$21.6 million and $2.6 million, respectively. As of December 31, 2002, the Company had repurchased 3,968,271
shares under this program at a total cost of approximately $57.4 million, including 1,326,271 shares repurchased
from American Express.
At December 31, 2002, 20 million shares of preferred stock were authorized and were designated as Series
A Junior Participating Preferred Stock that is reserved for issuance on exercise of preferred stock purchase rights
under Administaff’s Share Purchase Rights Plan (the “Rights Plan”). Each issued share of the Company’s common
stock has one-half of a preferred stock purchase right attached to it. No preferred shares have been issued and the
rights are not currently exercisable. The Rights Plan expires on February 9, 2008.
On October 16, 2000, the Company effected a two-for-one stock split in the form of a 100% stock dividend.
All share and per share amounts presented in these financial statements have been retroactively restated to reflect
this change in the Company’s capital structure.
10. Employee Incentive Plans
The Administaff, Inc. 1997 Incentive Plan, as amended, and the 2001 Incentive Plan provide for options
and other stock-based awards that may be granted to eligible employees and non-employee directors of the Company
or its subsidiaries. An aggregate of 4,465,914 shares of common stock of the Company are authorized to be issued
F-20
ADMINISTAFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
under the Incentive Plans. At December 31, 2002, 27,822 and 1,156,500 shares of common stock were available for
future grants under the 1997 and 2001 Incentive Plans, respectively. All awards previously granted to employees
under the Incentive Plan have been stock options, primarily intended to qualify as “incentive stock options” within
the meaning of Section 422 of the Internal Revenue Code (the “Code”). The Incentive Plans also permit stock
awards, phantom stock awards, stock appreciation rights, performance units, other stock-based awards and cash
awards, all of which may or may not be subject to the achievement of one or more performance objectives. The
purposes of the Incentive Plans generally are to retain and attract persons of training, experience and ability to serve
as employees of the Company and its subsidiaries and to serve as non-employee directors of the Company, to
encourage the sense of proprietorship of such persons and to stimulate the active interest of such persons in the
development and financial success of the Company and its subsidiaries. The Incentive Plans are administered by the
Compensation Committee of the Board of Directors (the “Committee”). The Committee has the power to determine
which eligible employees will receive awards, the timing and manner of the grant of such awards, the exercise price
of stock options (which may not be less than market value on the date of grant), the number of shares and all of the
terms of the awards. The Board has granted limited authority to the President of the Company regarding the granting
of stock options to employees who are not officers. The Company may at any time amend or terminate the Incentive
Plans. However, no amendment that would impair the rights of any participant, with respect to outstanding grants,
can be made without the participant’s prior consent. Stockholder approval of amendments to the Incentive Plans is
necessary only when required by applicable law or stock exchange rules.
The Administaff Nonqualified Stock Option Plan (the “Nonqualified Plan”) provides for options to
purchase shares of the Company’s common stock that may be granted to employees who are not officers. An
aggregate of 3,600,000 shares of common stock of the Company are authorized to be issued under the Nonqualified
Plan. At December 31, 2002, 542,960 shares of common stock were available for future grants under the
Nonqualified Plan. The purpose of the Nonqualified Plan is similar to that of the Incentive Plans. The Nonqualified
Plan is administered by the Chief Executive Officer of the Company (the “CEO”). The CEO has the power to
determine which eligible employees will receive stock option rights, the timing and manner of the grant of such
rights, the exercise price (which may not be less than market value on the grant date), the number of shares and all of
the terms of the options. The Committee may at any time terminate or amend the Nonqualified Plan, provided that
no such amendment may adversely affect the rights of optionees with regard to outstanding options.
The following summarizes stock option activity and related information:
2002
Year ended December 31,
2001
Weighted
Average
Exercise
Price
Weighted
Average
Exercise
Price
Shares
2000
Weighted
Average
Exercise
Price
Shares
(in thousands, except per share amounts)
$ 21.99
12.25
12.59
23.15
$ 19.77
$ 20.44
$
8.48
3,433
1,419
(341)
(235)
4,276
1,441
$ 21.58
20.25
10.61
23.37
$ 21.99
$ 18.62
$ 12.25
2,244
1,894
(618)
(87)
3,433
746
$
9.79
31.15
9.23
12.74
$ 21.58
$ 10.38
$ 19.17
Shares
4,276
1,117
(59)
(348)
4,986
2,454
Outstanding – beginning of year
Granted
Exercised
Canceled
Outstanding – end of year
Exercisable – end of year
Weighted average fair value of
options granted during year
The following summarizes information related to stock options outstanding at December 31, 2002:
F-21
ADMINISTAFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Range of Exercise Prices
Options Outstanding
Weighted Average Weighted
Average
Exercise
Price
(share amounts in thousands)
Remaining
Contractual
Life (Years)
Weighted Average Weighted
Average
Exercise
Price
Remaining
Contractual
Shares Life (Years)
Options Exercisable
Shares
$ 4.02 to $15.00
$ 15.00 to $20.00
$ 20.00 to $30.00
$ 30.00 to $43.69
Total
1,853
1,656
751
726
4,986
7.6
7.5
8.5
7.7
7.7
$
9.69
18.65
24.13
43.57
$ 19.77
876
880
220
478
2,454
5.5
7.2
7.9
7.7
6.8
$
8.60
18.70
24.17
43.61
$ 20.44
11. Earnings (Loss) Per Share
The numerator used in the calculations of both basic and diluted net income (loss) per share for all periods
presented was net income (loss). The denominator for each period presented was determined as follows:
Year ended December 31,
2002
2000
2001
(in thousands)
Denominator:
Basic - weighted average shares outstanding .......................................
Effect of dilutive securities:
Common stock purchase warrants - treasury stock method .....
Common stock options - treasury stock method ......................
27,890
27,531
27,188
—
—
—
51
1,239
1,290
379
1,368
1,747
Diluted - weighted average shares outstanding
plus effect of dilutive securities ..............................................
27,890
28,821
28,935
Options and warrants to purchase 7,327,000, 3,333,000 and 2,591,000 shares of common stock were not
included in the diluted net income (loss) per share calculation for 2002, 2001 and 2000, respectively, because their
inclusion would have been anti-dilutive.
F-22
ADMINISTAFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12. Leases
The Company leases various office facilities, furniture, equipment and vehicles under capital and operating
lease arrangements, some of which contain rent escalation clauses. Most of the leases contain purchase and/or renewal
options at fair market and fair rental value, respectively. Rental expense relating to all operating leases was $10,222,000,
$7,295,000 and $4,446,000 in 2002, 2001 and 2000, respectively. At December 31, 2002, future minimum rental
payments under noncancelable operating and capital leases are as follows (in thousands):
2003...........................................................................
2004...........................................................................
2005...........................................................................
2006...........................................................................
2007 and thereafter....................................................
Total minimum lease payments .................................
Less amount representing interest .............................
Total present value of minimum payments................
Less current portion...................................................
Long-term capital lease obligations...........................
Operating
Leases
$ 9,388
8,729
8,292
7,667
18,944
$ 53,020
Capital
Leases
$ 694
694
694
694
1,972
$ 4,748
1,044
3,704
434
$ 3,270
13. 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, except as set forth below, management believes the final outcome of such
litigation will not have a material adverse effect on the Company’s financial position or results of operations.
Aetna Healthcare Litigation
On November 5, 2001, the Company filed a lawsuit against Aetna US Healthcare (“Aetna”). The Company has
asserted claims against Aetna for breach of contract, economic duress, negligent misrepresentation, breach of good faith
and fair dealing, and violations of the Texas Insurance Code. The Company has alleged that during the third quarter of
2001, Aetna placed the Company under economic duress by threatening, without any legal right, to terminate the
Company’s health insurance plan if Administaff did not pay immediate and retroactive rate increases, even though Aetna
had not provided at least two quarters advance notice as required under the contract. In addition, the Company has
alleged that Aetna failed to properly administer the health plan and to produce timely and accurate reports regarding the
health plan’s claims data and financial condition. The Company is seeking damages in excess of $42 million, including
amounts related to increased health insurance costs in the third and fourth quarters of 2001.
On January 28, 2002, Aetna filed its answer denying the claims asserted by the Company and, as anticipated by
the Company, filed a counterclaim. In the counterclaim, Aetna has alleged that the Company has violated the Employee
Retirement Security Act, as amended, breached its contractual obligations by failing to pay premiums owed to Aetna, and
made material misrepresentations during its negotiations of rates with Aetna for the purpose of delaying rate increases
while the Company sought a replacement health insurance carrier. Aetna is alleging damages of approximately $35
million. The Company has a fiduciary liability insurance policy that provides for the reimbursement of defense related
legal fees associated with the Aetna matter. However, the Company has expensed all legal fees related to the Aetna
litigation as incurred and recognizes recoveries under its insurance policy upon receipt of the claim reimbursement.
F-23
ADMINISTAFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Both the Company and Aetna have filed motions for summary judgement which could result in the court
dismissing some or all of the Company’s claims and/or Aetna’s counterclaim. While the Company cannot predict the
ultimate outcome or the timing of a resolution of this dispute or the related lawsuit and counterclaim, the Company plans
to vigorously pursue its case. In addition, the Company believes that Aetna’s allegations in the counterclaim are without
merit and intends to defend itself vigorously. However, an adverse outcome in this dispute could have a material adverse
effect on the Company’s results of operations or financial condition.
Reliance National Indemnity Co. Bankruptcy Liquidation
In October 2001, the Company’s former workers’ compensation insurance carrier, Reliance National Indemnity
Co., was forced into bankruptcy liquidation. At December 31, 2002, the estimated outstanding claims under the
Company’s Reliance policies totaled approximately $7.2 million. State laws regarding the handling of the open claims of
liquidated insurance carriers vary. Most states have established funds through guaranty associations to pay such
remaining claims. However, several states have provisions that could be construed to return the liability for open claims
to the companies that had policies with the liquidated insurance carrier, typically based on the net worth of the company.
In anticipation of this situation, the Company secured insurance coverage from its current workers’ compensation
carrier to cover potential claims returned to the Company related to its Reliance policies. As of December 31, 2002, the
Company had $1.4 million in insurance coverage remaining. While the Company believes, based on its analysis of
applicable state provisions, that its insurance coverage will be adequate to cover any probable losses, it is possible that
such losses could exceed the Company’s insurance coverage limit.
State Unemployment Taxes
In January 2002, as a result of a corporate restructuring plan, Administaff filed for a partial transfer of
compensation experience used to determine unemployment tax rates with the state of Texas. The Company estimated
and recorded its unemployment tax expense during 2002 using an estimated tax rate that was based on its expectation
that the partial transfer application would be approved.
In June 2002, the Company received an initial determination from the Texas Workforce Commission
(“TWC”) that its partial transfer application was denied. The Company filed an appeal of this ruling with the TWC.
On October 30, 2002, the TWC issued its decision approving Administaff’s application for a partial transfer of
compensation experience.
Since filing its partial transfer application in Texas, the Company has paid its unemployment taxes to the state
of Texas at the higher new employer rate as required by state law. However, the Company has recorded its Texas
unemployment taxes at its best estimate of the ultimate rate, resulting in a prepaid asset of approximately $6.0 million
at December 31, 2002, included as a component of other current assets. The Company will not know the definitive
amount of its expected refund until the transfer of compensation experience is completed by the TWC and the TWC
notifies the Company of its final official tax rate for the 2002 calendar year. If the TWC’s final official tax rate is
higher or lower than the estimated rate currently used by the Company, the Company would be required to recognize a
corresponding reduction or increase in the estimated prepaid asset as additional payroll tax expense or benefit in the
period of such determination, to the extent the Company’s estimate differs from the TWC’s final official tax rate.
401(k) Plan
On April 24, 2002, the Internal Revenue Service (“IRS”) issued Revenue Procedure 2002-21, which provided
guidance for the operation of defined contribution plans maintained by Professional Employer Organizations that
benefit worksite employees. The guidance applies to plans in existence on May 12, 2002 and their operation in plan
years beginning after December 31, 2003.
On May 21, 2002, Administaff entered into a Closing Agreement with the IRS related to an audit of the
F-24
ADMINISTAFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Administaff 401(k) Plan for the year ended December 31, 1993. The agreement recognizes and preserves
Administaff’s ability to maintain its current single employer plan structure through December 31, 2003. As a result of
the agreement, the IRS has closed its audit of the plan and granted full relief from retroactive disqualification on the
exclusive benefit rule issue raised during the audit. For periods after December 31, 2003, the Company intends to
comply with IRS Revenue Procedure 2002-21, and expects that the required changes to the plan will not have a
material adverse effect on it financial condition or results of operations.
In addition, on September 6, 2002, the IRS issued a favorable determination letter as to the tax qualification
status of the Administaff 401(k) Plan which includes all amendments and restatements of the plan and trust documents
occurring between April 30, 1992 and October 1, 2002. While this determination letter issued by the IRS reflects the
tax qualified status of the form of the application documents, it would not preclude a subsequent disqualification based
on the plan’s operation.
14. Quarterly Financial Data (Unaudited)
During 2002, the Company changed its method of reporting its revenues under EITF 99-19. Previously, the
Company reported its entire gross billings as revenue and reported the payroll cost of its worksite employees as a
component of direct cost. The Company’s revenues are now reported net of worksite employee payroll cost (net
method).
To conform to the net method, the Company has reclassified worksite employee payroll cost from direct cost
to revenues for each of the quarterly periods as follows:
Quarter ended
March 31
June 30
Sept. 30
Dec. 31
(in thousands, except per share amounts)
Year ended December 31, 2002:
Revenues (as previously reported)..........
Less: worksite employee payroll cost ....
Revenues (as adjusted) ...........................
$ 1,149,343
(953,261)
196,082
$ 1,160,930
(955,786)
205,144
$ 1,216,005
(997,783)
218,222
$ 1,331,419
(1,101,846)
229,573
Year ended December 31, 2001:
Revenues (as previously reported)..........
Less: worksite employee payroll cost ....
Revenues (as adjusted) ...........................
$ 1,043,419
(872,280)
171,139
$ 1,044,776
(869,821)
174,955
$ 1,085,944
(903,136)
182,808
$ 1,199,105
(1,007,788)
191,317
Year ended December 31, 2000:
Revenues (as previously reported)..........
Less: worksite employee payroll cost ....
Revenues (as adjusted) ...........................
$ 755,545
(629,937)
125,608
$ 864,450
(721,984)
142,466
$ 962,039
(804,525)
157,514
$ 1,126,497
(953,794)
172,703
F-25
ADMINISTAFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The information provided below has been adjusted to conform to the net method, and as a result, differs from
the Company’s previous Form 10-Q filings.
Quarter ended
March 31
June 30
Sept. 30
Dec. 31
(in thousands, except per share amounts)
Year ended December 31, 2002:
Revenues ................................................
Gross profit.............................................
Operating income (loss)..........................
Net income (loss)....................................
Basic net income (loss) per share ...........
Diluted net income (loss) per share ........
$ 196,082
30,577
(10,119)
(5,704)
(0.20)
(0.20)
$ 205,144
36,556
(5,973)
(3,164)
(0.11)
(0.11)
$ 218,222
46,894
6,021
3,779
0.14
0.14
$ 229,573
52,363
8,221
1,008
0.04
0.04
Year ended December 31, 2001:
Revenues ................................................
Gross profit.............................................
Operating income (loss)..........................
Net income (loss)....................................
Basic net income (loss) per share ...........
Diluted net income (loss) per share ........
$ 171,139
27,829
(8,503)
(4,337)
(0.16)
(0.16)
$ 174,955
41,539
4,779
3,774
0.14
0.13
$ 182,808
49,321
13,291
8,659
0.32
0.30
$ 191,317
46,326
8,972
2,261
0.08
0.08
Year ended December 31, 2000:
Revenues ................................................
Gross profit.............................................
Operating income (loss)..........................
Net income (loss)....................................
Basic net income (loss) per share ...........
Diluted net income (loss) per share ........
$ 125,608
20,705
(4,699)
(2,471)
(0.09)
(0.09)
$ 142,466
31,342
3,480
2,800
0.10
0.10
$ 157,514
40,067
10,573
7,415
0.27
0.25
$ 172,703
46,420
12,880
9,156
0.33
0.31
15. Subsequent Events (Unaudited)
In February 2003, the Board authorized an additional 1,000,000 shares of the Company’s outstanding
common stock to be available for repurchase under the Company’s share repurchase program, which increased the total
shares authorized under the program to 6,000,000. The Company repurchased 1,286,252 shares from American
Express in February 2003 at $6.00 per share for a total cost of approximately $7.7 million. As of February 28, 2003,
the Company’s remaining repurchase authorization under the program is 745,477 shares.
F-26
officers
Paul J. Sarvadi
President and Chief Executive Officer
Richard G. Rawson
Executive Vice President, Administration,
Chief Financial Officer and Treasurer
A. Steve Arizpe
Executive Vice President, Client Services
Jay E. Mincks
Executive Vice President, Sales and Marketing
Howard G. Buff
Vice President, Benefits and Corporate Human Resources
Gregory R. Clouse
Vice President, Service Center Operations
corporate
information
Corporate Headquarters
19001 Crescent Springs Drive
Kingwood, Texas 77339-3802
281-358-8986
Sales Department
800-465-3800
Stock Transfer Agent
Mellon Investor Services LLC
P.O. Box 3315
South Hackensack, New Jersey 07606
1-800-635-9270
TDD for Hearing Impaired: 800-231-5469
Foreign Shareholders: 201-329-8660
TDD Foreign Shareholders: 201-329-8354
Web site: www.melloninvestor.com
David C. Dickson
Vice President, Technology Solutions and Chief Technology Officer
Common Stock
Administaff, Inc.’s common stock is traded on the New York Stock
Exchange under the symbol “ASF”.
Roger L. Gaskamp
Vice President, Sales Development
Jeff W. Hutcheon
Vice President, Service Development
Samuel G. Larson
Vice President, Enterprise Project Management
Randall H. McCollum
Vice President, Strategic Alliances
Gregory J. Morton
Vice President, Marketing
John F. Orth
Vice President, Sales
Douglas S. Sharp
Vice President, Finance and Controller
John H. Spurgin, II
Vice President, Legal, General Counsel and Secretary
Independent Auditors
Ernst & Young LLP
5 Houston Center
1401 McKinney, Suite 1200
Houston, Texas 77010
Legal Counsel
Baker Botts L.L.P.
One Shell Plaza
910 Louisiana
Houston, Texas 77002-4995
Annual Meeting
Administaff, Inc.’s Annual Meeting of Shareholders will be held
at 10 a.m. on Thursday, May 8, 2003, at the Company’s
corporate headquarters, Centre I in the Auditorium, located at
22900 Highway 59N (Eastex Freeway), Kingwood, Texas 77339.
Investor Relations
Shareholders are encouraged to contact the Company with
questions or requests for information. Copies of the Company’s
Annual Report on Form 10-K as filed with the Securities and
Exchange Commission are available without charge upon
written request.
Inquiries should be directed to:
Investor Relations Administrator
Administaff, Inc.
19001 Crescent Springs Drive
Kingwood, Texas 77339-3802
281-348-3987
Web Site
www.administaff.com
board of directors
Michael W. Brown Mr. Brown joined the
Company as a director in November 1997.
He is the past Chairman of the NASDAQ Stock
Market Board of Directors and a past governor
of the National Association of Securities Dealers.
Mr. Brown joined Microsoft Corporation in 1989
as its Treasurer and became its Chief Financial Officer in 1993.
He served in that capacity until his retirement in 1997. Mr. Brown
also is a director of Wang Laboratories, Inc., 360networks inc. and
is a member of the Thomas Weisel Partners Advisory Board.
Jack M. Fields, Jr. Mr. Fields joined the Com-
pany as a director in January 1997 following
his retirement from the United States House
of Representatives, where he served for
16 years. During 1995 and 1996, he served
as Chairman of the House Telecommunica-
tions and Finance Subcommittee, which has jurisdiction and
oversight of the Federal Communications Commission and the
Securities and Exchange Commission. Mr. Fields is Chief Executive
Officer of Twenty-First Century Group in Washington, D.C., and also
serves on the Board of Directors for AIM Mutual Funds and the
Discovery Channel – Global Education Fund.
Paul S. Lattanzio Mr. Lattanzio has been
a director of the Company since 1995.
He previously served as a Managing Director
for TD Capital Communications Partners
(f/k/a Toronto Dominion Capital), a venture
capital investment firm from 1999 until 2002;
Gregory E. Petsch Mr. Petsch joined the Com-
pany as a director in October 2002. He retired
in 1999 from Compaq Computer Corporation,
where he had held various positions since
1983, most recently as Senior Vice President
of Worldwide Manufacturing and Quality since
1991. Prior to joining Compaq, he worked for 10 years at Texas
Instruments. In 1992, Mr. Petsch was voted Manufacturing Executive
of the Year by Upside Magazine, and in 1993–1995 he was
nominated Who’s Who of Global Business Leaders. He also is
a Board member of Transform Houston and Culture Shapers.
Richard G. Rawson Mr. Rawson is Admin-
istaff’s Executive Vice President, Administration,
Chief Financial Officer and Treasurer. He has
served as a director of the Company since
April 1989. Mr. Rawson has previously served
the National Association of Professional
Employer Organizations (NAPEO) as President (1999–2000),
First Vice President, Second Vice President and Treasurer.
In addition, Mr. Rawson served as Chairman of the Accounting
Practices Committee of NAPEO for five years. He also is a
member of the Financial Executives Institute.
Paul J. Sarvadi Mr. Sarvadi is President,
Chief Executive Officer and a co-founder of
Administaff. He has served on Administaff’s
Board since the Company’s inception in March
1986. Mr. Sarvadi has served as President
of the National Association of Professional
Employer Organizations (NAPEO) and was a member of its
Board of Directors for five years. Mr. Sarvadi serves on the Board
of Directors of the DePelchin Children’s Center in Houston. In 2001,
he was named National Ernst & Young Entrepreneur Of The Year in
the Service category.
and he was a co-founder and Senior Managing Director of NMS Capital
Management, LLC, a private equity fund affiliated with NationsBanc
Montgomery Securities. Mr. Lattanzio also served in several positions
with various affiliates of Bankers Trust New York Corporation, most
recently as a Managing Director of BT Capital Partners, Inc.
Austin P. Young Mr. Young became a director
of the Company in January 2003. He is a
certified public accountant and served as
Senior Vice President, Chief Financial Officer
and Treasurer of CellStar Corporation from
1999 until his retirement at year-end 2001.
From 1996 to 1999, he served as Executive Vice President –
Finance and Administration of Metamor Worldwide, Inc. Mr. Young
also has served as Senior Vice President and Chief Financial Officer
at American General Corporation, and he was a partner in the
Houston and New York offices of KPMG Peat Marwick.
19001 Crescent Springs Drive
Kingwood, Texas 77339-3802
www.administaff.com