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Article by DailyStocks_admin    (01-16-09 09:05 AM)

The Daily Magic Formula Stock for 01/16/2009 is Administaff Inc. According to the Magic Formula Investing Web Site, the ebit yield is 18% and the EBIT ROIC is 75-100%.

Dailystocks.com only deals with facts, not biased journalism. What is a better way than to go to the SEC Filings? It's not exciting reading, but it makes you money. We cut and paste the important information from SEC filings for you to get started on your research on a specific company.


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BUSINESS OVERVIEW

General
Administaff is a professional employer organization (“PEO”) that provides a comprehensive Personnel Management System SM encompassing a broad range of services, including benefits and payroll administration, health and workers’ compensation insurance programs, personnel records management, employer liability management, employee recruiting and selection, employee performance management and employee training and development services to small and medium-sized businesses in strategically selected markets. We were organized as a corporation in 1986 and have provided PEO services since inception. We also perform recordkeeping services for defined contribution plans and offer an online portal for human resource products, services and information, as well as small business software applications.
Our principal executive offices are located at 19001 Crescent Springs Drive, Kingwood, Texas 77339. Our telephone number at that address is (281) 358-8986 and the Company’s Web site address is http://www.administaff.com. Our stock is traded on the New York Stock Exchange under the symbol “ASF.” Periodic SEC filings, including our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and if applicable, amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available through our Web site free of charge as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC.
Our Personnel Management System is designed to improve the productivity and profitability of small and medium-sized businesses. It relieves business owners and key executives of many employer-related administrative and regulatory burdens, which enables them to focus on the core competencies of their businesses. It also promotes employee performance through human resource management techniques that improve employee satisfaction. We provide the Personnel Management System by entering into a Client Service Agreement (“CSA”), which establishes a three-party relationship whereby we and our client act as co-employers of the employees who work at the client’s location (“worksite employees”). Under the CSA, we assume responsibility for personnel administration and compliance with most employment-related governmental regulations, while the client retains the employees’ services in its business and remains the employer for various other purposes. We charge a comprehensive service fee (“comprehensive service fee” or “gross billing”), which is invoiced concurrently with the processing of payroll for the worksite employees of the client. The comprehensive service fee consists of the payroll of our worksite employees and a markup computed as a percentage of the payroll cost of the worksite employees.

Table of Contents

We accomplish the objectives of the Personnel Management System through a High Touch/High Tech approach to service delivery. In advisory areas, such as recruiting, employee performance management and employee training, we employ a high touch approach designed to ensure that our clients receive the personal attention and expertise needed to create a customized human resources solution. For transactional processing, we employ a high tech approach that provides secure, convenient information exchange among Administaff, our clients and our worksite employees, creating efficiencies for all parties. The primary component of the high tech portion of our strategy is the Employee Service Center (“ESC”). The ESC is our Web-based interactive PEO service delivery platform, which is designed to provide automated, personalized PEO services to our clients and worksite employees.
As of December 31, 2007, we had 49 sales offices in 24 markets. Our long-term strategy is to operate approximately 90 sales offices located in 40 strategically selected markets. We opened eight new sales offices and entered two new markets in 2007. We intend to open four new sales offices in 2008.
Our national expansion strategy also includes regionalized data processing for payroll and benefits transactions and localized face-to-face human resource services. As of December 31, 2007, we had four regional service centers, and had human resource and client service personnel located in a majority of our 24 sales markets. We paid an average of 115,451 worksite employees in the fourth quarter of 2007.
PEO Industry
The PEO industry began to evolve in the early 1980s largely in response to the burdens placed on small and medium-sized employers by an increasingly complex legal and regulatory environment. While various service providers were available to assist these businesses with specific tasks, PEOs emerged as providers of a more comprehensive range of services relating to the employer/employee relationship. In a PEO arrangement, the PEO assumes broad aspects of the employer/employee relationship. Because PEOs provide employer-related services to a large number of employees, they can achieve economies of scale that allow them to perform employment-related functions more efficiently, provide a greater variety of employee benefits and devote more attention to human resources management than a client can individually.
We believe the key factors driving demand for PEO services include:
• the focus on growth and productivity of the small and medium-sized business community in the United States, utilizing outsourcing to concentrate on core competencies;

• the need to provide competitive health care and related benefits to attract and retain employees;

• the increasing costs associated with health and workers’ compensation insurance coverage, workplace safety programs, employee-related complaints and litigation; and

• complex regulation of 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. Administaff and other industry leaders, in concert with the National Association of Professional Employer Organizations (“NAPEO”), have worked with the relevant governmental entities for the establishment of a regulatory framework that protects clients and employees, discourages unscrupulous and financially unsound companies, and promotes further development of the industry. Currently, 32 states have enacted legislation either recognizing PEOs or requiring licensing, registration, or certification, and several others are considering such regulation. Such laws vary from state to state but generally provide for monitoring the fiscal responsibility of PEOs. State regulation assists in screening insufficiently capitalized PEO operations and helps to resolve interpretive issues concerning employee status for specific purposes under applicable state law. We have actively supported such regulatory efforts and are currently recognized, licensed, registered, certified or pursuing registration in all 32 of these states. The cost of compliance with these regulations is not material to our financial position or results of operations.

Table of Contents

Service Offerings
PEO Services
We serve small and medium-sized businesses by providing our 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 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);

• Consolidated Omnibus Budget Reconciliation Act of 1987 (COBRA);

• Immigration Reform and Control Act;(IRCA);

• Title VII (Civil Rights Act of 1964)*;

• Americans with Disabilities Act (ADA)*;

• Age Discrimination in Employment Act (ADEA)*;

• The Family and Medical Leave Act (FMLA)*;

• Health Insurance Portability and Accountability Act (HIPAA);

• Drug-Free Workplace Act*;

• Occupational Safety and Health Act (OSHA)*;

• Worker Adjustment and Retraining Notification Act (WARN);

• Uniformed Services Employment and Reemployment Rights Act (USERRA);

• State unemployment and employment security laws; and

• State workers’ compensation laws.


* And similar state laws
While these regulations are complex, and in some instances overlapping, we assist our clients in achieving compliance with these regulations by providing services in four primary categories:
• administrative functions;

• benefit plans administration;

• personnel management; and

• employer liability management.

Table of Contents

All of the following services are included in the Personnel Management System and are available to all clients:
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 . We maintain several benefit plans including the following types of coverage:
• group health coverage;

• a health care flexible spending account plan;

• an educational assistance program;

• an adoption assistance program;

• group term life insurance;

• universal life insurance coverage;

• accidental death and dismemberment insurance coverage;

• short-term and long-term disability insurance coverage; and

• a 401(k) retirement plan.
The group health plan includes medical, dental, vision, a worklife program and a prescription drug program. All benefit plans are provided to eligible employees based on the specific eligibility provisions of each plan. We are the policyholder responsible for the costs and premiums associated with any group insurance policies that provide benefits under these plans and act as plan sponsor and administrator of the plans. We negotiate the terms and costs of the plans, maintain the plans in accordance with applicable federal and state regulations and serve as liaison for the delivery of such benefits to worksite employees. We believe this variety and quality of benefit plans are generally not available to employees in our small and medium-sized business target market and are usually offered only by larger companies that can spread program costs over a much larger group of employees. As a result, we believe the availability of these benefit plans provides our clients with a competitive advantage that small and medium-sized businesses are typically unable to attain on their own.
Personnel Management . We provide a wide variety of personnel management services that give our clients access to resources normally found only in the human resources departments of large companies. All clients have access to our comprehensive personnel guide, which sets forth a systematic approach to administering personnel policies and practices, including recruiting, discipline and termination procedures. Other human resources services we provide include:
• drafting and reviewing personnel policies and employee handbooks;

• designing job descriptions;

• performing prospective employee screening and background investigations;

• designing performance appraisal processes and forms;

• professional development and issues-oriented training;

• employee counseling;

• substance abuse awareness training;

• drug testing;

• outplacement services; and

• compensation guidance.



Client Service Agreement
All PEO clients execute an Administaff Client Service Agreement (“CSA”). The CSA generally provides for an on-going relationship, subject to termination by Administaff or the client upon 30 days written notice or upon shorter notice in the event of default. The CSA establishes our 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 our costs. Under the provisions of the CSA, clients active in January of any year are obligated to pay the estimated payroll tax component of the comprehensive service fee in a manner that reflects the pattern of incurred payroll tax costs. New clients enrolling subsequent to January of any year are invoiced at a relatively constant rate throughout the remaining portion of the year, resulting in improved profitability over the course of the year for those clients because of the typical pattern of incurred payroll tax costs.
The CSA also establishes the division of responsibilities between Administaff and the client as co-employers. Pursuant to the CSA, we are responsible for personnel administration and are liable for compliance with certain employment-related government regulations. In addition, we assume liability for payment of salaries and wages (as well as related payroll taxes) of our worksite employees and responsibility for providing specified employee benefits to such persons. These liabilities are not contingent on the prepayment by the client of the associated comprehensive service fee and, as a result of our employment relationship with each of our worksite employees, we are liable for payment of salary and wages to the worksite employees as reported by the client and are responsible for providing specified employee benefits to such persons, regardless of whether the client pays the associated comprehensive service fee. The client retains the employees’ services and remains liable for complying with certain government regulations, compliance with which requires control of the worksite or daily supervisory responsibility or is otherwise beyond our ability to assume. A third group of responsibilities and liabilities are shared by Administaff and the client where such joint responsibility is appropriate. The specific division of applicable responsibilities under the majority of CSAs are as follows:
Administaff
• Payment of wages and salaries as reported by the client and related tax reporting and remittance (local, state and federal withholding, FICA, FUTA, state unemployment);
• Workers’ compensation compliance, procurement, management and reporting;
• Compliance with COBRA, HIPAA and ERISA (for each employee benefit plan sponsored solely by Administaff ), as well as monitoring changes in other governmental regulations governing the employer/employee relationship and updating the client when necessary; and
• Employee benefits administration of plans sponsored solely by Administaff.
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 client intellectual property rights;
• Compliance with OSHA regulations, EPA regulations, FLSA, WARN, USERRA and state and local equivalents and compliance with government contracting provisions;
• Compliance with the National Labor Relations Act (“NLRA”), including all organizing efforts and expenses related to a collective bargaining agreement and related benefits;
• Professional licensing requirements, fidelity bonding and professional liability insurance;
• Products produced and/or services provided; and
• COBRA, HIPAA and ERISA compliance for client-sponsored benefit plans.


CEO BACKGROUND

Michael W. Brown. Mr. Brown, age 62, joined the Company as a Class I director in November 1997. He is a member of the Company’s Finance, Risk Management and Audit Committee and the Nominating and Corporate Governance Committee. Mr. Brown 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, in which capacity he served until his retirement in July 1997. Prior to joining Microsoft, Mr. Brown spent 18 years with Deloitte & Touche LLP. Mr. Brown is also a director of EMC Corporation, VMware, Inc., 360networks, FatKat, Inc., Pipeline Financial Group, Inc., DayJet Corporation, and Thomas Weisel Partners and serves on the audit committees of EMC Corporation, Thomas Weisel Partners and VMware, Inc. He is a member of the Particle Economics Research Institute. Mr. Brown holds a Bachelor of Science degree in Economics from the University of Washington in Seattle.
Eli Jones. Dr. Jones, age 46, joined the Company as a Class I director in April 2004. He is Chairman of the Company’s Compensation Committee and a member of the Nominating and Corporate Governance Committee. Dr. Jones is a Professor of Marketing and Associate Dean at the C.T. Bauer College of Business at the University of Houston. He was an Associate Professor of Marketing from 2002 to 2007 and was an Assistant Professor from 1997 until 2002. He taught at Texas A&M University for several years before joining the faculty of the University of Houston. He served as the Executive Director of the Program for Excellence in Selling and the Sales Excellence Institute at the University of Houston from 1997 until 2007. Dr. Jones also serves on the editorial review boards of the Journal of the Academy of Marketing Sciences , Journal of Personal Selling and Sales Management, Journal of Business and Industrial Marketing , and Industrial Marketing Management . He has conducted research and published articles on sales and sales management topics in major journals and is the co-author of a sales textbook, Selling ASAP , and a professional book: Strategic Sales Leadership. Dr. Jones is also an ad hoc reviewer for the Journal of Marketing , Journal of Business Research, American Marketing Association, and the National Conference in Sales Management. Before becoming a professor, Dr. Jones worked in sales and sales management for three Fortune 100 companies: Quaker Oats, Nabisco, and Frito-Lay. He received his Bachelor of Science degree in Journalism in 1982, his MBA in 1986, and his Ph.D. in 1997 from Texas A&M University.
Gregory E. Petsch . Mr. Petsch, age 57, joined the Company as a Class I director in October 2002. He is Chairman of the Company’s Nominating and Corporate Governance Committee and a member of the Compensation Committee. Mr. Petsch retired from Compaq Computer Corporation in 1999 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 for 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 is founder and President of Petsch Foundation, Inc. He earned a Bachelor of Business Technology degree from the University of Houston in 1978.

MANAGEMENT DISCUSSION FROM LATEST 10K

General
Administaff is a professional employer organization (“PEO”) that provides a comprehensive Personnel Management System SM encompassing a broad range of services, including benefits and payroll administration, health and workers’ compensation insurance programs, personnel records management, employer liability management, employee recruiting and selection, employee performance management and employee training and development services to small and medium-sized businesses in strategically selected markets. We were organized as a corporation in 1986 and have provided PEO services since inception. We also perform recordkeeping services for defined contribution plans and offer an online portal for human resource products, services and information, as well as small business software applications.
Our principal executive offices are located at 19001 Crescent Springs Drive, Kingwood, Texas 77339. Our telephone number at that address is (281) 358-8986 and the Company’s Web site address is http://www.administaff.com. Our stock is traded on the New York Stock Exchange under the symbol “ASF.” Periodic SEC filings, including our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and if applicable, amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available through our Web site free of charge as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC.
Our Personnel Management System is designed to improve the productivity and profitability of small and medium-sized businesses. It relieves business owners and key executives of many employer-related administrative and regulatory burdens, which enables them to focus on the core competencies of their businesses. It also promotes employee performance through human resource management techniques that improve employee satisfaction. We provide the Personnel Management System by entering into a Client Service Agreement (“CSA”), which establishes a three-party relationship whereby we and our client act as co-employers of the employees who work at the client’s location (“worksite employees”). Under the CSA, we assume responsibility for personnel administration and compliance with most employment-related governmental regulations, while the client retains the employees’ services in its business and remains the employer for various other purposes. We charge a comprehensive service fee (“comprehensive service fee” or “gross billing”), which is invoiced concurrently with the processing of payroll for the worksite employees of the client. The comprehensive service fee consists of the payroll of our worksite employees and a markup computed as a percentage of the payroll cost of the worksite employees.

Table of Contents

We accomplish the objectives of the Personnel Management System through a High Touch/High Tech approach to service delivery. In advisory areas, such as recruiting, employee performance management and employee training, we employ a high touch approach designed to ensure that our clients receive the personal attention and expertise needed to create a customized human resources solution. For transactional processing, we employ a high tech approach that provides secure, convenient information exchange among Administaff, our clients and our worksite employees, creating efficiencies for all parties. The primary component of the high tech portion of our strategy is the Employee Service Center (“ESC”). The ESC is our Web-based interactive PEO service delivery platform, which is designed to provide automated, personalized PEO services to our clients and worksite employees.
As of December 31, 2007, we had 49 sales offices in 24 markets. Our long-term strategy is to operate approximately 90 sales offices located in 40 strategically selected markets. We opened eight new sales offices and entered two new markets in 2007. We intend to open four new sales offices in 2008.
Our national expansion strategy also includes regionalized data processing for payroll and benefits transactions and localized face-to-face human resource services. As of December 31, 2007, we had four regional service centers, and had human resource and client service personnel located in a majority of our 24 sales markets. We paid an average of 115,451 worksite employees in the fourth quarter of 2007.
PEO Industry
The PEO industry began to evolve in the early 1980s largely in response to the burdens placed on small and medium-sized employers by an increasingly complex legal and regulatory environment. While various service providers were available to assist these businesses with specific tasks, PEOs emerged as providers of a more comprehensive range of services relating to the employer/employee relationship. In a PEO arrangement, the PEO assumes broad aspects of the employer/employee relationship. Because PEOs provide employer-related services to a large number of employees, they can achieve economies of scale that allow them to perform employment-related functions more efficiently, provide a greater variety of employee benefits and devote more attention to human resources management than a client can individually.
We believe the key factors driving demand for PEO services include:
• the focus on growth and productivity of the small and medium-sized business community in the United States, utilizing outsourcing to concentrate on core competencies;

• the need to provide competitive health care and related benefits to attract and retain employees;

• the increasing costs associated with health and workers’ compensation insurance coverage, workplace safety programs, employee-related complaints and litigation; and

• complex regulation of 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. Administaff and other industry leaders, in concert with the National Association of Professional Employer Organizations (“NAPEO”), have worked with the relevant governmental entities for the establishment of a regulatory framework that protects clients and employees, discourages unscrupulous and financially unsound companies, and promotes further development of the industry. Currently, 32 states have enacted legislation either recognizing PEOs or requiring licensing, registration, or certification, and several others are considering such regulation. Such laws vary from state to state but generally provide for monitoring the fiscal responsibility of PEOs. State regulation assists in screening insufficiently capitalized PEO operations and helps to resolve interpretive issues concerning employee status for specific purposes under applicable state law. We have actively supported such regulatory efforts and are currently recognized, licensed, registered, certified or pursuing registration in all 32 of these states. The cost of compliance with these regulations is not material to our financial position or results of operations.

Table of Contents

Service Offerings
PEO Services
We serve small and medium-sized businesses by providing our 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 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);

• Consolidated Omnibus Budget Reconciliation Act of 1987 (COBRA);

• Immigration Reform and Control Act;(IRCA);

• Title VII (Civil Rights Act of 1964)*;

• Americans with Disabilities Act (ADA)*;

• Age Discrimination in Employment Act (ADEA)*;

• The Family and Medical Leave Act (FMLA)*;

• Health Insurance Portability and Accountability Act (HIPAA);

• Drug-Free Workplace Act*;

• Occupational Safety and Health Act (OSHA)*;

• Worker Adjustment and Retraining Notification Act (WARN);

• Uniformed Services Employment and Reemployment Rights Act (USERRA);

• State unemployment and employment security laws; and

• State workers’ compensation laws.


* And similar state laws
While these regulations are complex, and in some instances overlapping, we assist our clients in achieving compliance with these regulations by providing services in four primary categories:
• administrative functions;

• benefit plans administration;

• personnel management; and

• employer liability management.

Table of Contents

All of the following services are included in the Personnel Management System and are available to all clients:
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 . We maintain several benefit plans including the following types of coverage:
• group health coverage;

• a health care flexible spending account plan;

• an educational assistance program;

• an adoption assistance program;

• group term life insurance;

• universal life insurance coverage;

• accidental death and dismemberment insurance coverage;

• short-term and long-term disability insurance coverage; and

• a 401(k) retirement plan.
The group health plan includes medical, dental, vision, a worklife program and a prescription drug program. All benefit plans are provided to eligible employees based on the specific eligibility provisions of each plan. We are the policyholder responsible for the costs and premiums associated with any group insurance policies that provide benefits under these plans and act as plan sponsor and administrator of the plans. We negotiate the terms and costs of the plans, maintain the plans in accordance with applicable federal and state regulations and serve as liaison for the delivery of such benefits to worksite employees. We believe this variety and quality of benefit plans are generally not available to employees in our small and medium-sized business target market and are usually offered only by larger companies that can spread program costs over a much larger group of employees. As a result, we believe the availability of these benefit plans provides our clients with a competitive advantage that small and medium-sized businesses are typically unable to attain on their own.
Personnel Management . We provide a wide variety of personnel management services that give our clients access to resources normally found only in the human resources departments of large companies. All clients have access to our comprehensive personnel guide, which sets forth a systematic approach to administering personnel policies and practices, including recruiting, discipline and termination procedures. Other human resources services we provide include:
• drafting and reviewing personnel policies and employee handbooks;

• designing job descriptions;

• performing prospective employee screening and background investigations;

• designing performance appraisal processes and forms;

• professional development and issues-oriented training;

• employee counseling;

• substance abuse awareness training;

• drug testing;

• outplacement services; and

• compensation guidance.

Table of Contents

Employer Liability Management . Under the CSA, we assume many of the employment-related responsibilities associated with the administrative functions, benefit plans administration and personnel management services we provide. For those employment-related responsibilities that are the responsibility of the client or we share with our clients, we can assist our clients in managing and limiting exposure. This includes first time and ongoing safety-related risk management reviews, as well as the implementation of safety programs designed to reduce workers’ compensation claims. We also provide guidance to clients for avoiding liability claims for discrimination, sexual harassment and civil rights violations, and participate in termination decisions to attempt to minimize liability on those grounds. We employ in-house and external counsel, specializing in several areas of employment law, who have broad experience in disputes concerning the employer/employee relationship and provide support to our human resources service specialists. As part of our comprehensive service, we also maintain employment practice liability insurance coverage for ourselves and our clients, monitor changing government regulations and notify clients of the potential effect of such changes on employer liability.
Employee Service Center SM . The Employee Service Center (“ESC”) is our Web-based interactive PEO service delivery platform, which is designed to provide automated, personalized PEO content and services to our clients and worksite employees. The ESC provides a wide range of functionality, including:
• WebPayroll SM for the submission and approval of payroll data;

• client-specific payroll information and reports;

• employee information, including online check stubs and pay history reports;

• employee specific benefits content, including summary plan descriptions and enrollment status;

• access to 401(k) plan information through the Retirement Service Center SM ;

• online human resources forms;

• best practices human resource management process maps and process overviews;

• an online personnel guide;

• e-Learning Web-based training;

• online recruiting services through the Administaff Talent Network;

• links to benefits providers and other key vendors; and

• frequently asked questions.
The ESC also contains MarketPlace SM , an eCommerce portal that brings a wide range of product and service offerings from best-of-class providers to our clients, worksite employees and their families. 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.
MarketPlace also features the Client Network SM , where our clients can offer their products and services to one another.
HR Software Products. In December 2005, we acquired HRTools.com, an online portal for human resources products, services and information from KnowledgePoint, a subsidiary of Recruitmax. The acquisition also included small business software applications related to job descriptions, performance reviews, and personnel policies and procedures. The applications are sold primarily to small business customers through online subscription arrangements, packaged software ordered through the HRTools.com Web site, or through various reseller arrangements.


MANAGEMENT DISCUSSION FOR LATEST QUARTER

The following discussion should be read in conjunction with our 2007 annual report on Form 10-K, as well as with our consolidated financial statements and notes thereto included in this quarterly report on Form 10-Q.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations are based upon our Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to health and workers’ compensation insurance claims experience, state unemployment and payroll taxes, client bad debts, income taxes, property and equipment, goodwill and other intangibles, and contingent liabilities. Management bases these estimates on historical experience and on various other assumptions that management believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.
We believe the following accounting policies are critical and/or require significant judgments and estimates used in the preparation of our Consolidated Financial Statements:
• Benefits costs — We provide group health insurance coverage to our worksite employees through a national network of carriers including UnitedHealthcare (“United”), PacifiCare, Kaiser Permanente, Blue Cross and Blue Shield of Georgia, Blue Shield of California, Hawaii Medical Service Association and Tufts, all of which provide fully insured policies or service contracts.

The policy with United, which was first obtained in January 2002, provides the majority of our health insurance coverage. As a result of certain contractual terms, we have accounted for this plan since its inception using a partially self-funded insurance accounting model. Accordingly, we record the costs of the United Plan, including an estimate of the incurred claims, taxes and administrative fees (collectively the “Plan Costs”), as benefits expense in the Consolidated Statements of Operations. The estimated incurred claims are based upon: (i) the level of claims processed during the quarter; (ii) recent claim development patterns under the plan, to estimate a completion rate; and (iii) the number of participants in the plan. Each reporting period, changes in the estimated ultimate costs resulting from claims trends, plan design and migration, participant demographics and other factors are incorporated into the reported benefits costs.

Additionally, since the plan’s inception in January 2002, under the terms of the contract, United establishes cash funding rates 90 days in advance of the beginning of a reporting quarter. If the Plan Costs for a reporting quarter are greater than the cash funded to United, a deficit in the plan would be incurred and we would accrue a liability for the excess costs on our Consolidated Balance Sheet. On the other hand, if the Plan Costs for the reporting quarter are less than the

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cash funded to United, a surplus in the plan would be incurred and we would record an asset for the excess premiums on our Consolidated Balance Sheet. As of September 30, 2008, Plan Costs were less than the net cash funded to United by $29.3 million. As this amount is in excess of the agreed-upon $9.0 million surplus maintenance level, the $20.3 million balance is included in prepaid insurance, a current asset, in our Consolidated Balance Sheet.

• Workers’ compensation costs — Our workers’ compensation coverage (the “ACE Program”) is currently provided by ACE Group of Companies (“ACE”). Under our arrangement with ACE, we bear the economic burden for the first $1 million layer of claims per occurrence. ACE bears the economic burden for all claims in excess of such first $1 million layer. The ACE Program is a fully insured policy whereby ACE has the responsibility to pay all claims incurred under the policy regardless of whether we satisfy our responsibilities. Prior to October 1, 2007, our coverage (the “AIG Program”) was provided through selected member insurance companies of American International Group, Inc. (“AIG”). The AIG Program structure was consistent with the ACE Program. AIG remains the carrier for all claim activity incurred between September 1, 2003 and September 30, 2007.

Because we bear the economic burden of the first $1 million layer of claims per occurrence, such claims, which are the primary component of our workers’ compensation costs, are recorded in the period incurred. Workers’ compensation insurance includes ongoing healthcare and indemnity coverage, whereby claims are paid over numerous years following the date of injury. Accordingly, the accrual of related incurred costs in each reporting period includes estimates, which take into account the ongoing development of claims and therefore require a significant level of judgment. Our management estimates our workers’ compensation costs by applying an aggregate loss development rate to worksite employee payroll levels.

We employ a third party actuary to estimate our loss development rate, which is primarily based upon the nature of worksite employees’ job responsibilities, the location of worksite employees, the historical frequency and severity of workers’ compensation claims, and an estimate of future cost trends. Each reporting period, changes in the actuarial assumptions resulting from changes in actual claims experience and other trends are incorporated into our workers’ compensation claims cost estimates. During the nine months ended September 30, Administaff reduced workers’ compensation costs by $8.3 million in 2008 and $15.9 million in 2007 for changes in estimated losses related to prior reporting periods. Workers’ compensation cost estimates are discounted to present value at a rate based upon the U.S. Treasury rates that correspond with the weighted average estimated claim payout period (the average discount rate utilized in 2008 and 2007 was 2.8% and 4.8%, respectively) and are accreted over the estimated claim payment period and included as a component of direct costs in our Consolidated Statements of Operations.

• State unemployment taxes — We record our state unemployment (“SUI”) tax expense based on taxable wages and tax rates assigned by each state. State unemployment tax rates vary by state and are determined, in part, based on prior years’ compensation experience in each state. Prior to the receipt of final tax rates notices, we estimate our expected SUI tax rate in those states for which tax rate notices have not yet been received.

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During the second quarter 2008, the State of Colorado Department of Labor and Employment Unemployment Insurance Division (the “Division”) notified Administaff of its identification of discrepancies, originating in 2002, regarding the application of the provisions of the Employment Security Act of Colorado. The Division has indicated that it is reviewing Administaff’s prior corporate reorganizations to determine whether the state unemployment accounts of certain Administaff subsidiaries should be combined into a single account, which could result in higher rates for certain prior and prospective periods. The Division has not issued a formal assessment of any additional taxes owed. We do not believe the Division has any valid basis for assessing additional taxes and we intend to defend ourselves vigorously. As a result of the uncertainty regarding the outcome of this matter, at this time we are unable to determine the ultimate additional tax liability, if any, related to this matter.

• Contingent liabilities — We accrue and disclose contingent liabilities in our Consolidated Financial Statements in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 5, Accounting for Contingencies . SFAS No. 5 requires accrual of contingent liabilities that are considered probable to occur and 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. From time to time we disclose in our financial statements issues that we believe are reasonably possible to occur, although we cannot determine the range of possible loss in all cases. As these issues develop, we 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, we would be required to accrue our estimated loss, which would reduce net income in the period such determination was made.

• Deferred taxes — We have recorded a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. While we have considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, our ability to realize our deferred tax assets could change from our current estimates. If we determine we will be able to realize our deferred tax assets in the future in excess of our net recorded amount, an adjustment to reduce the valuation allowance would increase net income in the period that such determination is made. Likewise, should we determine we will not be able to realize all or part of our net deferred tax assets in the future, an adjustment to increase the valuation allowance would reduce net income in the period such determination is made.

• Allowance for doubtful accounts — We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to pay our comprehensive service fees. We believe that the success of our business is heavily dependent on our ability to collect these comprehensive service fees for several reasons, including:
• the fact that we are at risk for the payment of our direct costs and worksite employee payroll costs regardless of whether our clients pay their comprehensive service fees;

• the large volume and dollar amount of transactions we process; and

• the periodic and recurring nature of payroll, upon which the comprehensive service fees are based.

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To mitigate this risk, we have established very tight credit policies. We generally require our clients to pay their comprehensive service fees no later than one day prior to the applicable payroll date. In addition, we maintain the right to terminate the Client Service Agreement and associated worksite employees or to require prepayment, letters of credit or other collateral if a client’s financial position deteriorates or if the client does not pay the comprehensive service fee. As a result of these efforts, losses related to customer nonpayment have historically been low as a percentage of revenues. However, if our clients’ financial condition were to deteriorate rapidly, resulting in nonpayment, our accounts receivable balances could grow and we could be required to provide for additional allowances, which would decrease net income in the period that such determination was made.

• Property and equipment — Our property and equipment relate primarily to our facilities and related improvements, furniture and fixtures, computer hardware and software and capitalized software development costs. These costs are depreciated or amortized over the estimated useful lives of the assets. If the useful lives of these assets were determined to be shorter than their current estimates, our depreciation and amortization expense could be accelerated, which would decrease net income in the periods of such a determination. In addition, we periodically evaluate these costs for impairment in accordance with SFAS No. 144, Accounting for Impairment or Disposal of Long-Lived Assets . If events or circumstances were to indicate that any of our long-lived assets might be impaired, we would analyze the estimated undiscounted future cash flows to be generated from the applicable asset. In addition, we would record an impairment loss, which would reduce net income, to the extent 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.

• Goodwill and other intangibles — The Company’s goodwill and intangible assets are subject to the provisions of SFAS No. 142, “ Goodwill and Other Intangible Assets ” (“SFAS 142”). In accordance with SFAS 142, goodwill is tested for impairment on an annual basis and between annual tests in certain circumstances, and written down when impaired. Furthermore, SFAS 142 requires purchased intangible assets other than goodwill to be amortized over their useful lives unless these lives are determined to be indefinite. Our purchased intangible assets are carried at cost less accumulated amortization. Amortization is computed over the estimated useful lives of the respective assets, five to ten years.
New Accounting Pronouncements
In September 2006, FASB Statement 157, “ Fair Value Measurements ” (“SFAS 157”) was issued. SFAS 157 establishes a framework for measuring fair value by providing a standard definition of fair value as it applies to assets and liabilities. SFAS 157, which does not require any new fair value measurements, clarifies the application of other accounting pronouncements that require or permit fair value measurements. Our effective date was initially January 1, 2008. However, the FASB has released FASB Staff Position No. FAS 157-b, Effective Date of FASB Statement No. 157, which delayed the effective date of Statement 157 for all non-financial assets and non-financial liabilities until fiscal years beginning after November 15, 2008. Accordingly, we adopted SFAS on January 1, 2008 for our financial assets and liabilities only. The adoption of SFAS 157 for our financial assets and liabilities did not have a material impact on our consolidated

CONF CALL

Douglas S. Sharp

Thank you. We appreciate you joining us this morning. Before we begin, I would like to remind you that any statements made by Mr. Sarvadi, Mr. Rawson, or myself that are not historical facts are considered to be forward-looking statements within the meaning of the Federal Securities Laws. Words such as expects, intends, projects, believes, likely, probably, goal, objective, outlook, guidance, appears, target, and similar expressions are used to identify such forward-looking statements and involve a number of risks and uncertainties that have been described in detail in the company’s filings with the SEC. These risks and uncertainties may cause actual results to differ materially from those stated in such forward-looking statements.

Now, let me take a minute to outline our plan for this morning’s call. First, I’m going to discuss the details of our third quarter financial results. Richard will discuss trends in our direct costs, including benefits, workers’ compensation, and payroll taxes, and the impact of such trends on our pricing. Then Paul will add his comments about the quarter and our outlook for the remainder of the year. I will return to provide financial guidance for the fourth quarter of 2008. We will then end the call with a question-and-answer session.

Now, let me begin today’s call by summarizing the financial highlights from the third quarter. As most of you are aware, we reported preliminary third quarter results on October 17th to provide early commentary on our solid results in current market conditions. Additionally, early reporting allowed us to resume our share repurchase activity at attractive price levels. Today we reported third quarter earnings per share of $0.46, the same as that reported in our preliminary release.

As for the year over year comparison, Q3 EPS of $0.46 increased from $0.45 in the 2007 period. However, bear in mind that lower interest rates negatively impacted investment income, discounting of workers’ compensation reserves and our effective income tax rate by $0.05 per share in the 2008 period when compared to Q3 of 2007.

Our quarterly results were driven by the following key metrics. The average number of paid worksite employees increased just over 6% for the quarter to 119,389, just below our expected range.

Gross profit per worksite employee per month averaged $239 for the quarter, above our forecasted range and more than offsetting the shortfall in paid worksite employees.

Operating expenses were at the high end of our forecast range and interest income fell below our expected range, primarily due to a higher concentration of lower-yielding, more conservative investments in response to market conditions.

We have generated year-to-date EBITDA plus stock-based compensation of $76 million, and ended the quarter with $109 million of working capital.

Now let’s review the details of our third quarter results. As I just mentioned, the average number of paid worksite employees per month increased just over 6% compared to the third quarter of 2007, from 112,496 to 119,389. In a few minutes, Paul will provide the details behind our third quarter unit growth, including sales, client retention and net change within the existing client base, and also comment on our outlook for the remainder of 2008.

Third quarter revenues increased 10% over 2007 to $422 million as a result of the 6% increase in the average paid worksite employees and a 4% increase in revenue per worksite employee per month.

Looking at third quarter revenue contribution and growth by region: the Southeast region, which represents 11% of total revenue, grew by 10%; the Northeast region, which represents 21% of total revenue, grew by 16%; the Central region, which represents 14% of total revenue, grew by 13%; the West region, which represents 20% of total revenue, grew by 10%; and the Southwest region, which represents 33% of total revenue, grew by 5%.

Moving to gross profit, gross profit per worksite employee per month for the quarter was $239, significantly above the $222 reported in the 2007 period. These results were also above the high end of our forecasted range of $233 to $235, with the upside primarily due to lower benefit costs.

As for the specifics, benefit costs per covered employee per month averaged $693 for the quarter. This was sequentially flat from the second quarter and a year-over-year increase of only 1.5%. Richard will discuss the details in a few minutes, including how these results and forecasted trends provide a pricing advantage beneficial in the current market conditions.

Workers’ compensation costs were 0.63% of non-bonus payroll for the quarter. This was just under our forecast of 0.65%, as we continue to successfully manage both the frequency and the severity of claims. Actuarial loss estimates continue to reflect these favorable claims trends and resulted in a $2.8 million reduction in previously reported loss estimates.

Payroll taxes as a percentage of total payroll cost declined from 6.55% in Q3 of 2007 to 6.44% in Q3 of this year as a result of lower state unemployment tax rates and the higher payroll averages and bonuses of worksite employees.

Now let’s move on to operating expenses, which increased 15.8% over Q3 of 2007, just above expected levels. You may recall that an expected 15% increase included investments in our sales expansion, new products and services, such as HR Tools and our mid-market initiative, and the integration of the recently acquired employment screening company.

As for the details, the majority of the operating expense increase was reflected in our salaries and wages, as we continued to successfully grow our sales force. Trained sales reps averaged 307 for the quarter, an increase of 16% over Q3 of 2007. Sales commission costs increased just over 3%. General and administrative costs, which included rent associated with our sales office expansion and development costs related to our HR Tools initiative, increased by approximately 7%. Advertising and depreciation costs remained relatively flat.

Interest income declined by approximately $1.2 million from Q3 of 2007 and came in about $300,000 less than our forecast. As you may recall, at the outset of Q3, the majority of our investments were held in a tax-exempt money market fund. Due to some uncertainty surrounding the liquidity of these funds, we liquidated a large portion of these securities during the quarter and reinvested the monies in lower-yielding government backed funds. We will continue to adjust our investment strategy to the changing market dynamics, with principal preservation a priority.

Now let’s review several key balance sheet and cash flow items. EBITDA plus stock-based compensation totaled $23 million for the third quarter and $76 million year-to-date. Additionally, we were reimbursed approximately $20 million in excess workers’ compensation claim funds during the quarter.

As of today, we have returned $44 million to shareholders through dividends and share repurchases. As for our YTD share repurchase activity, we have now repurchased 1.5 million shares and currently have 614,000 shares remaining for repurchase under our authorization.

So in summary, we are very pleased with our third quarter activity and results, particularly in light of current market conditions.

At this time, I’d like to turn the call over to Richard.

Richard G. Rawson

Thank you, Doug. This morning, I am going to share the details of our strong third quarter gross profit results. Then I will update you on the pricing and direct cost trends we are seeing and how they will affect gross profit per worksite employee for the fourth quarter and into 2009.

Our gross profit comes from the mark-up that we earn on our HR services combined with the surplus that is generated when our direct cost pricing allocations exceed the corresponding direct costs. Doug just reported that our gross profit per work site employee per month was $239 which is above the top end of our forecasted range.

These results came from achieving $197 per worksite employee per month of service fees and generating a surplus of $42 per work site employee per month or 4.3% of our total direct cost allocations.

The pricing on our service fee for new business increased $11 per worksite employee per month over the third quarter of last year, while renewal pricing increased $5. These facts continue to support the value proposition that we bring to prospects and current clients.

This quarter’s better-than-expected surplus of $5 per worksite employee per month came primarily from better than expected results from our payroll tax and benefits direct cost centers. Additionally, our workers’ compensation cost center surplus contributed slightly to the better than expected results.

Let’s begin with payroll taxes. Our better-than-expected surplus in this cost center came as a result of having a spread between our allocation and the actual payroll tax expense applied to a larger amount of taxable payroll than what we had forecasted. This spread is consistent with what we saw in the second quarter’s positive results and continued to contribute almost $2.00 of additional surplus to the gross profit per worksite employee per month for this quarter.

The other primary contributor to the better-than-expected surplus came from our benefits cost center which added $3 of additional surplus to the gross profit per employee per month. As Doug mentioned a few minutes ago our benefits cost per covered employee per month was $693, which was below our estimate of $696.

On the pricing side of this cost center, we achieved our allocation targets; therefore, the additional $3 surplus was the result of better-than-expected costs.

The plan design changes that we made at the beginning of 2008, coupled with the migration of participants to lower cost plans, have caused our trend in healthcare costs to increase only 2% this year over last. This is part of the value proposition that the Administaff PEO model brings to small business. The remainder of this quarter’s additional surplus came from our workers’ compensation program, which continues to produce great results.

The total number of claims reported for the policy year which ended on September 30, 2008, is the same as the 2007 policy year. This incidence rate is very meaningful when you consider that we have had over a 6% growth in the number of worksite employees that incur those claims.

The average cost of these claims is 13% higher than last year’s average claim cost. Considering marketplace medical cost trends of about 10% and wage inflation of about 3% this increase is in line with what we would have expected. These results continue to showcase the great job our safety and claims management professionals do.

In summation, we had another very solid quarter of performance at the gross profit line.

Now let me share with you what we expect gross profit per worksite employee per month to be for the fourth quarter, beginning with pricing. We believe that renewals for the balance of the year will continue to add mark-up dollars to our service fee and we would expect to see an increase in our mark-up on new business sold similar to what we saw this quarter. Therefore, our average mark-up per worksite employee per month for Q4 should be about $198, which would continue to be impressive in the current economic environment.

In addition, we anticipate the surplus component of gross profit to be in the range of $48 to $51 per worksite employee per month for the fourth quarter, which is up a few dollars from our previous forecasts. Let me explain how we get there.

The surplus generated from the payroll tax cost center typically declines each quarter throughout the year. However, when we have slower growth later in the year, our costs are lower and the result is more surplus. Therefore we should add an additional $1 to $2 per worksite employee per month to the surplus in the fourth quarter.

Now let’s discuss the workers’ compensation cost center. We renewed our workers’ compensation policy with ACE Insurance Company beginning on October 1, 2008 and secured a nominal decrease in the administrative fees for this policy year. The claim costs have increased slightly for the reasons that I mentioned a few minutes ago. In addition, the discount factor applied to workers’ compensation reserves continued to decline slightly. Therefore, we now estimate the workers’ compensation costs to increase about one basis point from last quarters estimate to 0.66% of non-bonus payroll for Q4.

When combined with our pricing allocations, we are expecting a surplus similar to the third quarter.

Now the remaining upside to our surplus in Q4 should come from the benefits cost center. We are continuing to increase our allocations on the pricing side to match normalized trend increases and further reduce the deficit in this cost center.

On the cost side, we still see the same 3 factors positively affecting the benefits cost center in Q4. The first factor was the plan design changes that took effect in January of 2008. The second factor was migration of covered worksite employees moving from the UnitedHealthcare ChoicePlus250 Plan to lower cost, higher deductible plans. And the third factor that would reduce our cost was the reduction in administrative fees from UnitedHealthcare that also took effect in January of this year.

All three factors are still contributing to the lower cost of benefits compared to last year. So for the 4th quarter, we believe that the total benefits costs per covered employee should only increase about 3% over Q4 of 2007. This combination of allocation increases and reduced costs should add an additional $4 to $6 per worksite employee per month to our surplus for the fourth quarter.

In summation, we should see gross profit per worksite employee per month increase to a new range of $246 to $249 for the fourth quarter and punctuate another very successful year.

While it is still early to forecast specific line items for 2009, I would like to share with you a few details that we already know about for next year. First of all, we are planning to have a very nominal price increase in the service fee component of our total mark-up for new and renewing customers in 2009.

Second, even though unemployment claims have been increasing, there is a lag of more than a year on the effect of unemployment tax rates. Our client contracts allow for an immediate price increase when a statutory rate change occurs. Therefore, the surplus that we have earned throughout 2008 should continue into 2009.

Third, we will not be implementing any plan design changes for our health plans for 2009. However, we will be getting a reduction in our administrative fees from UnitedHealthcare. Therefore we are forecasting only a 6% to 9% increase in benefits costs for next year and we are continuing to increase our allocations for new and renewing business to match these increases.

And last, our workers’ compensation cost center should continue to produce positive surpluses next year even if our cost trends upward. If interest rates go back up at any time in 2009, the discount factor that we apply to our workers’ compensation reserves will cause us to recoup some of the $2.1 million additional expense that we had to take in 2008. But we are not going to count on that until it happens.

So in summary, we feel good about our capability to effectively manage price and cost at the gross profit line for 2009. At this point, I would like to turn the call over to Paul.

Paul J. Sarvadi

Thank you, Richard. Today I will provide information on our growth drivers and key initiatives in the third quarter. I will also discuss our fall selling campaign and the important year-end transition which becomes the foundation for our 2009 plan. I will wrap up my comments with some detail regarding our target market client base and our expectations as our clients react to the current economic climate.

Our unit growth in the third quarter was driven by strong client retention and sales continuing at the same pace of the first half of the year. This growth was offset by some layoffs experienced in the client base toward the end of the third quarter.

Our average client worksite employee retention percentage for the quarter was excellent at 98.6%. The average number of employees lost per month due to client attrition in the third quarter was 1.4% of the worksite employee base. This is considerably better than the same period last year at 1.7% and lower than the historical average for this period of 1.5%.

As I mentioned earlier in the year, we have a company-wide initiative surrounding improvement in client retention throughout 2008 and into 2009. This includes established retention improvement targets as part of the annual incentive compensation plan for all employees in the company.

Since the initiative began in February of this year, we have experienced a 21% improvement in client retention over the same period last year. Of course the highest concentration of renewing accounts and year end terminations are still ahead of us but if we can extend these results through the next few months, this will contribute substantially to the starting point for paid worksite employees in 2009.

The sales effort throughout 2008 has reflected lower closing rates indicative of uncertainty and a sluggish economy. Sales for the third quarter and year to date on our core business has been approximately 75% of our internal targets. These levels were produced by census to first call rates in line with previous periods just under 50%, combined with closing rates of approximately 16%, down from 20%.

Year to date sales per salesperson per month was 0.70 which is off 25% from historical levels for the first three quarters of the year. Our highest efficiency occurs each year in the fourth quarter in connection with our fall selling campaign. Our range in sales efficiency for this period has been from approximately 1.2 in economic climates similar to today, to 1.7 sales per salesperson per month in a more robust economy.

In anticipation of a difficult sales environment, our plan for this year included a targeted increase in the number of trained sales staff of 15%. As Doug mentioned earlier, we have exceeded this target with an increase in trained sales staff of 16%. This will be very beneficial as we muscle our way through the current economic environment.

Our pricing on new business has remained solid throughout the year and through the third quarter, so as we enter the fall campaign, the impact of the economy on sales has been on the volume sold rather than pricing and margins.

Our annual fall selling campaign had an interesting start this year to say the least. Each year we bring the entire sales staff to the corporate office for a kick-off meeting to introduce our marketing initiatives and goals for the campaign. This year, we had an unexpected visit from Hurricane Ike over the weekend prior to the scheduled kick-off, which of course was then cancelled.

In addition over the same weekend, the economic turbulence became very apparent with the demise of Lehman Brothers, the first bail out of AIG, and the combination of Merrill Lynch into Bank America.

Due to the hurricane, we implemented our disaster recovery plan and operated on back-up power and essential staff in our corporate office in Houston and moved other staff and operations to our Dallas and other regional facilities. I am very pleased to report we continued to meet client and worksite employee needs throughout the storm and the extended power outage and disruption Ike caused.

However, these conditions did provide a rough start for the fall campaign lead production. The first two weeks of the campaign in September reflected the uncertainty in the marketplace and the disruption from the hurricane, which affected our outbound call center operations in Houston. Fortunately, our sales team made adjustments on the spot and when the kick-off was cancelled, sales teams held their own prospecting competition and replaced the lead production deficiency with their own cold calling.

To replace the fall campaign kick-off, our senior sales leadership began a nationwide tour to have regional meetings that included each sales office throughout the country. Our marketing plans were initiated and lead production and first call appointments have improved since the rocky start.

In addition to our successful radio and TV ads featuring Arnold Palmer, this year marketing efforts included direct mail and a “We want you back program” directed toward 2100 targeted former clients.

At this point in the fall campaign, activity and attitudes are where they need to be. What remains to be seen are the closing rates and the reaction of our target client base to the current economic climate.

Our target client base is unique in the marketplace. We serve companies that fit our characterization as the best small to medium size businesses in America. These companies are set apart by both qualitative and quantitative distinctions.

They have been screened through a selection process at Administaff to qualify them from both a demographic and a psychographic assessment to fit our client profile. Our clients have typically been in business more than 7 years before joining Administaff and have a level of profitability that is reflected in pay rates and benefits provided to employees. They care about their people and connect to the role their people play in reaching their company goals.

Most importantly, these businesses have a definitive getting better agenda that is in the form of a written business plan. These client owners are focused on improving, growing, and developing their businesses and taking advantage of opportunities.

They have taken risk before, learned from their failures, and have an intuition about opportunities. Their own experience is a success story of persistence in the face of significant challenges and defying the odds. They have a level of success and a base of experience that makes them uniquely qualified to be opportunistic in the exact conditions we find the marketplace today.

Their level of profitability and agility make them exceptional in responding to changes in the marketplace. There is a distinction between our 10% of the best small businesses in America and the other two other segments, large corporations, and the other 90% of the small business community.

Large corporations respond to major marketplace shifts by lowering revenue estimates and quickly cutting costs by trimming the fat, matching staffing and spending levels to the new revenue targets. The lay-off announcements we have heard over the last several months is the typical corporate response.

For most small businesses outside our target base, their financial limitations and dependency on key customers or vendors make them vulnerable to market shifts. Their reaction is also abrupt and similar to large corporations in cutting costs; however with no fat to cut and no reserves to call on, many of these small businesses fail.

Now our target client base is the only segment of the business community in a position to remain opportunistic and find ways to benefit from difficult economic conditions. Although they do cut back and lay off personnel as required as conditions change, their reaction is typically more measured and less severe than large corporations or typical small businesses. The reason for this is their pipeline for new business is usually more substantial than other small businesses and their staffing levels are usually less bloated than large corporations.

Our experience of our client base reaction to the economic turbulence is layoffs start later than large corporations and weaker small companies. This also occurs after a more prolonged period of sluggish sales. Additionally, our target clients can take advantage of their stronger financial condition to be acquisitive or add new lines of business, or new markets as others fail. This means they are also more likely to see things get better sooner once the economy stabilizes.

Layoffs in the marketplace at large have been increasing throughout the year. We did not see layoffs increase in our client base until September. Although some of this was summer help going away and some was related to Hurricane Ike, there may be some affect from the economy reaching our base at this time. This fact is supported by the compensation data that we track from month to month.

Average compensation increases, bonus compensation, overtime pay, and commissions are all down from the second quarter. The most important number is the commissions paid to worksite employees, which reflects the pipeline for new business for our clients. Commission levels in the third quarter were down 8.3% from the same period last year and down 6.5% from the second quarter.

Still in this environment, our client base is optimistic and opportunistic about 2009. The business confidence survey we released today shows clients are not changing their goals but rather their plans on how to achieve them.

Seventy-five percent of respondents to the survey expect to grow as fast or faster in 2009 versus 2008. Nearly the same percentage expects staffing levels to remain the same or increase next year as well. This is not because they are failing to see the turbulent economy but rather because they respond differently to such challenges.

Eighty-one percent of those surveyed rated the economy as their biggest concern yet 61% expect their capital spending to increase or remain the same next year. This reflects attitudes and intentions to gain a competitive advantage while large corporations and less healthy small businesses shrink, fail, or just stand still.

With the current economic conditions, we have an interesting range of possibilities as we enter our year end sales and renewal cycle. Retention has been strong. Sales have been an uphill battle but with our increase in the number of sales staff and the fall campaign in high gear, we have reason to be optimistic. On the other hand, our target prospects and current client base are reacting to the economic weakness, yet remain optimistic.

As we roll these factors into our starting point for paid worksite employees, we see a wider range than normal for this time of year. We see no advantage to providing specific guidance for next year at a time when the range is this wide and when the actual starting point will be known in a short period. It will have to suffice for today to say we have scenarios for next years’ unit growth that bracket this years’ unit growth rate.

We can see a dower scenario with unemployment rates at 8% to 10% that could slow our unit growth rate by several percentage points from this year. We can also see a scenario where the size of our sales staff, our retention improvements, and our client base resiliency could result in growth acceleration into next year.

We do expect to grow through this period unlike the 2002 and 2003 period which included the jobless recovery following 9/11 and the burst of the technology bubble. In that period, we had our own corporate crisis including a margin squeeze and a 15-month repricing effort on the healthcare component on our entire client base. We had to redirect the sales team to renewing accounts and new sales suffered. Even with all of that difficulty, we declined by only 4% year over year in that period.

We are in a very different situation today. Even though the economy may be the same or even worse, we are poised to continue to demonstrate growth and profitability. The size of our sales staff today, the resiliency of our business model, our financial strength, and our unique client base position Administaff to grow and remain opportunistic in the face of a recession.

At this point, I will pass the call on to Doug to provide specific guidance for Q4 and his thoughts about 2009 profitability.

Douglas S. Sharp

Thanks, Paul. We are essentially reiterating our full year and Q4 implied earnings per share ranges, with some adjustments among the key metrics. As for the details of our fourth quarter guidance: we expect average paid worksite employees per month to be in a range of 120,500 to 121,000. As a reminder, clients sold during the fourth quarter of any year, and in particular during our fall sales campaign, are typically converted to paid worksite employees during the first quarter of the following year.

As for gross profit per worksite employee per month, we expect to be in a range of $246 to $249 for Q4. An expected sequential increase in this metric over Q3 is associated primarily with the benefits area. Benefit plan design changes have positively impacted costs, while we have passed through appropriate price increases over the course of this year.

Fourth quarter operating expenses are expected to be in a range of $74 million to $74.5 million. This is sequentially up from the third quarter operating expenses by approximately $5.3 million, and includes approximately $3.3 million of additional advertising costs focused around our fall sales campaign, $1 million in higher G&A costs primarily associated with fall sales campaign travel and HR Tools development, and $700,000 in compensation expense, primarily associated with additional sales personnel.

We expect Q4 net interest income to be between $1.4 million and $1.6 million and are forecasting an effective income tax rate of 36.2%.

We are also forecasting 25 million average diluted outstanding shares for the fourth quarter and 25.6 million shares for the full year 2008.

In summary, we believe our business model has performed exceptionally well in the face of a weakening economy. In fact, if not for an $0.18 per share negative impact of lower interest rates on our investment income, discounting of workers’ compensation reserves and effective income tax rate, the expected full year 2008 implied earnings per share would be at the high end of the range we set at the beginning of the year.

Now, before we open up the call for questions, I’d like to briefly comment on 2009. We are currently working on next year’s operating plan and financial budget. As you are probably aware, our unit growth is impacted by the number and efficiency of our sales reps; client retention, which can be impacted by financial defaults; and hiring or layoffs within our client base. Our gross profit per worksite employee is impacted by our pricing and direct costs management.

We have maintained some flexibility in our 2009 operating plan to incorporate a range of outcomes in each of these factors. These areas of flexibility include, among other things: staffing levels of our sales and service personnel; the number of sales office openings; advertising and business promotions spending; and G&A spending. We will finalize our plan and budget based upon the results of our 2008 fall sales campaign and our year-end client renewal period, also incorporating the expected impact of the economic climate.

In summary, we expect to budget for earnings growth under either an improving or relatively flat unit growth scenario.

Detailed 2009 guidance will be provided during next quarter’s conference call to be held in early February.

At this time, I would like to open up the call for questions.



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