Gevity HR 10-Q 2007
UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
FORM 10-Q
GEVITY HR, INC. (Exact name of registrant as specified in its charter)
(Registrant’s telephone number, including area code): (941) 741-4300
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.
Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
TABLE OF CONTENTS
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GEVITY HR, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS UNAUDITED (in $000’s, except share and per share data)
See notes to condensed consolidated financial statements.
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GEVITY HR, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS UNAUDITED (in $000’s, except share and per share data)
See notes to condensed consolidated financial statements.
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See notes to condensed consolidated financial statements.
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GEVITY HR, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS UNAUDITED (in $000’s)
Supplemental disclosure of non-cash transactions:
Capital expenditures for the nine months ended September 30, 2007 exclude approximately $387 of capital items purchased by the Company in the third quarter of 2007 and not paid for until the fourth quarter of 2007.
Capital expenditures for the nine months ended September 30, 2006 exclude approximately $568 of capital items purchased by the Company in the third quarter of 2006 and not paid for until the fourth quarter of 2006.
The purchase of treasury shares for the nine months ended September 30, 2006 excludes approximately $4,707 of third quarter 2006 common stock purchases that were paid for in the fourth quarter of 2006.
See notes to condensed consolidated financial statements.
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GEVITY HR, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (in $000’s, except share and per share data)
1. GENERAL
The accompanying unaudited condensed consolidated financial statements of Gevity HR, Inc. and subsidiaries (collectively, the “Company” or “Gevity”) have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q. These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006 (the “Form 10-K”), as filed with the Securities and Exchange Commission. These financial statements reflect all adjustments, consisting only of normal recurring accruals, which are, in the opinion of management, necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods presented.
The Company’s significant accounting policies are disclosed in Note 1 of the Company’s consolidated financial statements contained in the Form 10-K. The Company’s critical accounting estimates are disclosed in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, in the Form 10-K. On an ongoing basis, the Company evaluates its policies, estimates and assumptions, including those related to revenue recognition, workers’ compensation receivable/reserves, intangible assets, medical benefit plan liabilities, state unemployment taxes, allowance for doubtful accounts, and deferred taxes. During the first nine months of 2007, there have been no material changes to the Company’s significant accounting policies and critical accounting estimates except as described below.
Certain prior period amounts have been reclassified to conform to current period presentation.
Recent Accounting Pronouncements
The Company adopted the provisions of Financial Accounting Standards Board (“FASB”) Interpretation No. 48, Accounting for Uncertainty in Income Taxes – An Interpretation of FASB Statement No. 109 (“FIN 48”), on January 1, 2007. FIN 48 clarifies the accounting for uncertainty in tax positions and requires companies to determine whether it is “more likely than not” that a tax position will be sustained upon examination by the appropriate taxing authorities before any part of the benefit can be recorded in the financial statements. It also provides guidance on the recognition, measurement and classification of income tax uncertainties, along with any related interest and penalties. The disclosure requirements and cumulative effect of adoption of FIN 48 are presented in Note 10.
In February 2007, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, Including an Amendment of FASB Statement No. 115 (“SFAS 159”). SFAS 159 permits entities to choose to measure many financial assets and financial liabilities at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. SFAS 159 is effective for fiscal years beginning after November 15, 2007. The Company is currently evaluating the potential impact this standard may have on its financial position and results of operations.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS 157”). SFAS 157 establishes a framework for the measurement of assets and liabilities that use fair value and expands disclosures about fair value measurements. SFAS 157 will apply whenever another accounting principle generally accepted in the United States requires (or permits) assets or liabilities to be measured at fair value but does not expand the use of fair value to any new circumstances. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. The Company is currently evaluating the potential impact this standard may have on its financial position and results of operations.
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2. MARKETABLE SECURITIES - RESTRICTED
At September 30, 2007 and December 31, 2006, the Company’s investment portfolio consisted of restricted money market funds classified as available-for-sale.
Restricted money market funds relate to collateral held in connection with the Company’s workers’ compensation programs, collateral held in connection with the Company’s general insurance programs and amounts held in escrow related to purchase price contingencies associated with the Company’s acquisition of HRAmerica, Inc. (“HRA”) on February 16, 2007 (see Note 5). These securities are recorded at fair value, which is equal to cost. The interest earned on these investments is recognized as interest income in the Company’s condensed consolidated statements of operations.
For the three and nine months ended September 30, 2007 and 2006, there were no realized gains or losses from the sale of marketable securities. As of September 30, 2007 and December 31, 2006, there were no unrealized gains or losses on marketable securities.
3. ACCOUNTS RECEIVABLE
At September 30, 2007 and December 31, 2006, accounts receivable from clients consisted of the following:
The Company establishes an allowance for doubtful accounts based upon management’s assessment of the collectibility of specific accounts and other potentially uncollectible amounts. The Company reviews its allowance for doubtful accounts on a quarterly basis. During the quarter ended September 30, 2007, the Company increased its allowance for doubtful accounts by $470 as a result of the termination of a large client in the mortgage industry.
4. WORKERS’ COMPENSATION RECEIVABLE/ RESERVES
The Company has maintained a loss sensitive workers’ compensation insurance program since January 1, 2000. The program is insured by CNA Financial Corporation (“CNA”) for the 2000, 2001 and 2002 program years. The program is currently insured by member insurance companies of American International Group, Inc. (“AIG”) and includes coverage for the 2003 through 2007 policy years. In states where private insurance is not permitted, client employees are covered by state insurance funds.
Under the 2007 workers’ compensation program with AIG, AIG is responsible for paying the claims; the Company is responsible for paying to AIG the first $500 per occurrence of claims and AIG is responsible for amounts in excess of $500 per occurrence. In addition, the AIG policy provides $20,000 of aggregate stop loss coverage once claims in the deductible layer exceed $136,700.
Similar to the prior years’ workers’ compensation programs with AIG, the Company, through its wholly-owned Bermuda-based insurance subsidiary, remits premiums to AIG to cover claims to be paid within the Company’s $500 per occurrence deductible layer. AIG deposits the premiums into an interest bearing loss fund collateral account for reimbursement of paid claims up to the $500 per occurrence amount. Interest on the loss fund collateral account (which will be reduced as claims are paid out over the life of the policy) will accrue to the benefit of the Company at a fixed annual rate. Under the 2007 program, the Company will pay $66,500 of loss fund collateral premium, subject to certain volume adjustments, and is guaranteed to receive a 5.01% per annum fixed return so long as the program and the interest accrued under the program remain with AIG for at least 10 years. If the program is terminated
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early, the interest rate is adjusted downward based upon a sliding scale. The 2007 program provides for an initial loss fund collateral premium true-up 18 months after the policy inception and annually thereafter. The true-up is based upon a pre-determined loss factor times the amount of incurred claims in the deductible layer as of the date of the true-up.
The Company reviews its estimated cost of claims in the deductible layer on a quarterly basis. The determination of the estimated cost of claims is based upon a number of factors, including but not limited to: actuarial calculations, current and historical loss trends, the number of open claims, developments relating to the actual claims incurred, and the impact of acquisitions, if any. The Company uses a certain amount of judgment in this estimation process. During the three months ended September 30, 2007 and 2006, the Company revised its ultimate loss estimates for prior open policy years, which resulted in a net reduction of workers’ compensation expense of approximately $4,063 and $660, respectively. During the nine months ended September 30, 2007 and 2006, the Company revised its ultimate loss estimates for prior open policy years, which resulted in a net reduction of workers’ compensation expense of approximately $12,106 and $2,542, respectively. These revisions were based upon continued favorable claims development that occurred during the periods. Also, during the three months ended September 30, 2007 and 2006, the Company received from AIG the premium expense audits for administrative costs of the prior policy years, which resulted in a reduction of workers’ compensation expense by approximately $955 and $1,378, respectively.
The balance in the loss fund collateral account (including accrued interest) in excess of the net present value of the Company’s liability to AIG with respect to claims payable within the deductible layer is recorded as a workers’ compensation receivable. Returns to the Company of amounts held in the loss fund collateral account are recorded as reductions to the workers’ compensation receivable, net. During the first quarter of 2007, AIG released approximately $5,000 of cash from the 2003 loss fund collateral account in advance of the annual loss provision adjustment. During the third quarter of 2007 the Company received from AIG approximately $40,945, net, relating to the annual loss fund collateral true-up and the finalization of outstanding prior year premium expense audits.
The Company accrues for workers’ compensation costs based upon:
• premiums paid for the layer of claims in excess of the deductible;
• estimated total costs of claims that fall within the Company’s policy deductible calculated on a net present value basis;
• the administrative costs of the programs (including claims administration, state taxes and surcharges); and
• the return on investment for loss fund premium dollars paid to AIG.
At September 30, 2007 and December 31, 2006, the weighted average discount rate used to calculate the net present value of the claim liability was 4.19% and 3.70% respectively. Premium payments made to AIG related to program years 2000 through 2007 are in excess of the net present value of the estimated claim liabilities. This has resulted in a workers’ compensation receivable, net, at September 30, 2007 and December 31, 2006 of $109,429 and $121,226, respectively, of which $13,581 and $35,354 was classified as short-term at September 30, 2007 and December 31, 2006, respectively. This receivable represents a significant concentration of credit risk for the Company.
5. INTANGIBLE ASSETS
On February 16, 2007, the Company acquired certain assets, including the client portfolio of HRA, a human resource outsourcing firm that offers fundamental employee administration solutions including payroll processing to approximately 145 clients (as measured by Federal Employer Identification Number) with approximately 16,000 client employees. Approximately 14,700 non-coemployed client employees were acquired as of the date of the acquisition and approximately 1,300 co-employed client employees (8 clients) were acquired with an effective date of April 1, 2007. The
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acquisition provides the Company with technology and processes to enhance its non co-employment model, Gevity Edge TM Select.
The purchase price for the acquired assets was approximately $10,895 (including direct acquisition costs of approximately $652), which the Company paid in cash from its revolving credit facility. Of this amount, $1,400 is being held in an escrow account and is included in marketable securities - restricted at September 30, 2007. The amounts held in escrow represent purchase price contingencies related to potential earn outs and the achievement of certain client retention percentages up through the first anniversary date of the acquisition. Unearned escrow amounts, if any, will be returned to the Company.
The HRA acquisition was accounted for by the purchase method in accordance with SFAS No. 141, Business Combinations. The results of operations for HRA are included in the Company’s statement of operations for the period February 17, 2007 through September 30, 2007. The effects of the HRA acquisition on the historical financial statements of the Company had it occurred January 1, 2006 are not material and therefore pro forma information is not presented. The purchase price of $9,495 (excluding $1,400 of contingent purchase price included with marketable securities-restricted at September 30, 2007) was preliminarily allocated to assets and liabilities acquired based upon their preliminary fair value on the date of acquisition as follows:
The client service agreements intangible asset is being amortized on a straight-line basis over its estimated life of 5 years.
The Company is currently reviewing the preliminary fair value determinations. The ultimate allocation of the purchase price may differ from the amounts included in these financial statements. Adjustments to the purchase price allocations, if any, are expected to be finalized prior to December 31, 2007 and will be reflected in future filings. Management does not expect these adjustments, if any, to have a material effect on the Company’s financial position or results of operations. Resolution of the purchase price contingency may result in additional amounts allocated to goodwill.
At September 30, 2007 and December 31, 2006, intangible assets consisted of the following:
Amortization expense for the three months ended September 30, 2007 and 2006 was $2,524 and $2,409, respectively. Amortization expense for the nine months ended September 30, 2007 and 2006 was $7,516 and $7,228, respectively. Estimated amortization expense for the remainder of 2007 and for each of the remaining years is $2,525, $9,852, $2,285, $460, $460 and $58, respectively.
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6. HEALTH BENEFITS
Blue Cross Blue Shield of Florida (“BCBSFL”) is the Company’s primary healthcare partner in Florida, delivering medical care benefits to approximately 21,500 Florida-based client employees. The Company’s policy with BCBSFL is a minimum premium policy expiring September 30, 2008. Pursuant to this policy, the Company is obligated to reimburse BCBSFL for the cost of the claims incurred by participants under the plan, plus the cost of plan administration. The administrative costs per covered client employee associated with this policy are specified by year and aggregate loss coverage is provided to the Company at the level of 110% of projected claims. The Company’s obligation to BCBSFL under its current contract may require an irrevocable letter of credit (“LOC”) in favor of BCBSFL if the coverage ratio, as set forth in the BCBSFL agreement, is not maintained. The coverage ratio is calculated quarterly. If the Company’s coverage ratio does not meet the minimum requirement, the Company must provide an LOC valued at up to two months of projected claims (average monthly claims approximated $9,250 for the last twelve months). As of September 30, 2007, the minimum coverage ratio was met and no LOC was required. The Company does not anticipate that the current operating trends will cause the coverage ratios to drop below the minimum requirements in the fourth quarter of 2007.
Aetna Health, Inc. (“Aetna”) is the Company’s largest medical care benefits provider for approximately 16,500 client employees outside the state of Florida. The Company’s 2006/2007 policy with Aetna provides for an HMO and PPO offering to plan participants. The Aetna HMO medical benefit plans are subject to a guaranteed cost contract that caps the Company’s annual liability. The Aetna PPO medical benefit plan is a retrospective funding arrangement. For the 2007 plan year Aetna has agreed to eliminate the callable feature of the PPO plan that previously existed and differences in actual plan experience versus projected plan experience for the year will factor into subsequent year rates.
In 2006, the Company announced the addition of UnitedHealthcare as an additional health plan option. As of September 30, 2007, UnitedHealthcare provides medical care benefits to approximately 5,300 client employees. The UnitedHealthcare plan is a fixed cost contract expiring September 30, 2008, that caps the Company’s annual liability. Under the terms of the current agreement with UnitedHealthcare, this plan will no longer be offered as an option for new co-employed clients after July 1, 2007. Coverage through UnitedHealthcare will continue to be an option for clients covered by UnitedHealthcare as of June 30, 2007.
The Company provides coverage under various regional medical benefit plans to approximately 1,200 client employees in various areas of the country. Included in the list of medical benefit plan providers are Kaiser Foundation Health Plan, Inc. and Harvard Pilgrim Healthcare. These regional medical plans are subject to fixed cost contracts.
The Company’s dental plans, which include both a PPO and HMO offering, are provided by Aetna for all client employees who elect coverage. All dental plans are subject to fixed cost contracts that cap the Company’s annual liability.
In addition to dental coverage, the Company offers various fixed cost insurance programs to client employees such as vision care, life, accidental death and dismemberment, short-term disability and long-term disability. The Company also offers a flexible spending account for healthcare, dependent care and a qualified transportation fringe benefit program.
Part-time employees of clients are eligible to enroll in limited benefit programs from Star HRG. These plans include fixed cost sickness and accident and dental insurance programs, and a vision discount plan.
Included in accrued insurance premiums and health reserves at September 30, 2007 and December 31, 2006 are $8,565 and $13,066, respectively, of short-term liabilities related to the Company’s health benefit plans. Of these amounts $8,341 and $10,609, respectively, represent an accrual for the estimate of claims incurred but not reported at September 30, 2007 and December 31, 2006.
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Health benefit reserves are determined quarterly by the Company and include an estimate of claims incurred but not reported and claims reported but not yet paid. The calculation of these reserves is based upon a number of factors, including but not limited to actuarial calculations, current and historical claims payment patterns and medical trend rates.
There were no changes to the health plan reserves during the three months ended September 30, 2007 that impacted costs of services. During the three months ended September 30, 2006, the Company increased its reserve for incurred but not reported claims by approximately $1,200 due to claims development within the period. For the nine months ended September 30, 2007 and 2006, the Company reduced its reserve for incurred but not reported claims by approximately $2,600 and $2,000, respectively, which decreased its cost of services and resulted in a health plan surplus for each period. These reductions were based upon overall favorable claims development within the period.
7. REVOLVING CREDIT FACILITY
The Company maintains a $100,000 unsecured credit facility with Bank of America, N.A. and Wachovia, N.A. (the “Lenders”). On May 7, 2007, the Company entered into the First Amendment to the Amended and Restated Credit Agreement dated August 30, 2006, which increased the amount of aggregate revolving commitments of the credit facility from $50,000 to $75,000 and allows the Company to repurchase up to $125,000 of its capital stock during the term of the agreement. On June 14, 2007, the Company entered into the Second Amendment to the Amended and Restated Credit Agreement, which increased the amount of aggregate revolving commitments from $75,000 to $100,000. Certain of the Company’s subsidiaries named in the credit agreement have guaranteed the obligations under the credit agreement. The credit facility has a five-year term that expires August 30, 2011. Loan advances bear an interest rate equal to an Applicable Rate (which ranges from 1.25% to 1.75% for Eurodollar Rate Loans, and from 0.00% to 0.25% for Prime Rate Loans, depending upon the Company’s Consolidated Leverage Ratio) plus one of the following indexes: (i) Eurodollar Rate or (ii) the Prime Rate (each as defined in the credit agreement). Up to $10,000 of the loan commitment can be drawn through letters of credit. With respect to outstanding letters of credit, a fee determined by reference to the Applicable Rate plus a fronting fee of 0.125% per annum will be charged on the aggregate stated amount of each outstanding letter of credit. A fee ranging from 0.20% to 0.30% (based upon the Company’s Consolidated Leverage Ratio) is charged on any unused portion of the loan commitment. At September 30, 2007, the Company had outstanding advances of $20,467 at an interest rate of 6.38%. There were no outstanding advances under the credit agreement at December 31, 2006.
The credit agreement includes financial covenants and affirmative and negative covenants, including the maintenance of minimum Consolidated Net Worth, a minimum Consolidated Fixed Charge Coverage Ratio of 1.5:1.0 and a maximum Consolidated Leverage Ratio of 2.0:1.0 (each as defined in the credit agreement). The covenants in the credit agreement also restrict, among other things, the Company’s ability to incur liens, make certain investments, incur additional indebtedness, engage in certain fundamental corporate transactions, dispose of property or make certain restricted payments. The Company was in compliance with all covenants under the credit agreement at September 30, 2007. The ability to draw funds under the credit agreement is dependent upon meeting the aforementioned financial covenants. Additionally, the level of compliance with the financial covenants determines the maximum amount available to be drawn. At September 30, 2007, the maximum facility available to the Company was approximately $90,000.
Pursuant to the terms of the credit agreement, the obligations of the Company may be accelerated upon the occurrence and continuation of an Event of Default. Such events include the following: (i) the failure to make principal, interest or fee payments when due (beyond applicable grace periods); (ii) the failure to observe and perform certain covenants contained in the credit agreement; (iii) any representation or warranty made by the Company in the credit agreement or related documents proves to be incorrect or misleading in any material respect when made or deemed made; and (iv) other customary events of default. If current operating trends continue, the Company will not be able to maintain the minimum Consolidated Fixed Charge Coverage Ratio required and will need to seek covenant modifications to its credit agreement with its Lenders during the fourth quarter of 2007. The Company is currently in discussions with its Lenders regarding this issue. If such modifications are not obtained this may have a material impact on the Company’s cash flow and ability to conduct its operations.
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The Company recorded $1,131 and $120 of interest expense for the three months ended September 30, 2007 and 2006, respectively, related to the amortization of loan costs, unused loan commitment fees and interest on advances. Interest expense for the nine months ended September 30, 2007 and 2006 was approximately $2,094 and $335, respectively.
8. COMMITMENTS AND CONTINGENCIES
Litigation
The Company is a party to certain pending claims that have arisen in the ordinary course of business, none of which, in the opinion of management, is expected to have a material adverse effect on the Company’s consolidated financial position, results of operations, or cash flows if adversely resolved. However, the defense and settlement of these claims may impact the future availability of, and retention amounts and cost to the Company for, applicable insurance coverage.
Regulatory Matters
The Company’s employer and health care operations are subject to numerous federal, state and local laws related to employment, taxes and benefit plan matters. Generally, these rules affect all companies in the United States. However, the rules that govern professional employer organizations constitute an evolving area due to uncertainties resulting from the non-traditional employment relationship among the professional employer organization, the client and the client employees. Many federal and state laws relating to tax and employment matters were enacted before the widespread existence of professional employer organizations and do not specifically address the obligations and responsibilities of these professional employer organization relationships. If the Internal Revenue Service concludes that professional employer organizations are not “employers” of certain client employees for purposes of the Internal Revenue Code of 1986, as amended, the tax qualified status of the Company’s defined contribution retirement plans as in effect prior to April 1, 1997 could be revoked, its cafeteria plan may lose its favorable tax status and the Company may no longer be able to assume the client’s federal employment tax withholding obligations and certain defined employee benefit plans maintained by the Company may be denied the ability to deliver benefits on a tax-favored basis as intended.
California Unemployment Tax Assessment
In May of 2007, the Company received a Notice of Assessment from the State of California Employment Development Department (“EDD”) relative to the Company’s practice of reporting payroll for its subsidiaries under multiple employer account numbers. The notice stated that the EDD was collapsing the accounts of the Company’s subsidiaries into one account number for payroll reporting purposes and retroactively reassessed unemployment taxes due at a higher overall rate for the 2004-2006 tax years resulting in an assessment of $4,684. On May 30, 2007, the Company filed a petition with the Office of the Chief Administrative Law Judge for the California Unemployment Insurance Appeals Board asking that the EDD’s assessment be set aside. The petition contends in part that the EDD has exceeded the scope of its authority in issuing the assessment by failing to comply with its own mandatory procedural requirements and that the statute of limitations for issuing the assessments has expired as the Company’s activities within the state were compliant with California statutes and regulations. The Company believes that it has valid defenses regarding the assessments and intends to vigorously protest these claims. However, the Company cannot estimate at this point in time what amount, if any, will ultimately be due with respect to this matter.
9. EQUITY
Share Repurchase ProgramOn August 15, 2006, the Company announced that the board of directors authorized the repurchase of up to $75,000 of the Company’s common stock under a new share repurchase program. Share repurchases under the new program may be made through open market purchases, block trades or in private transactions at such times and in such amounts as the Company deems appropriate, based on a
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variety of factors including price, regulatory requirements, overall market conditions and other corporate opportunities. As of March 31, 2007, the Company had purchased 1,650,684 shares of its common stock under this new program at a total cost of $36,527. On April 20, 2007, the Company’s board of directors authorized an increase to this share repurchase program bringing the repurchase amount authorized back up to $75,000.
For the three and nine month periods ended September 30, 2007, the Company repurchased 420,000 and 1,543,121 shares, respectively, under this repurchase program at a total cost of $7,472 and $30,290, respectively. As of September 30, 2007, total shares repurchased under this program since its inception in August 2006 were 2,886,884 shares at a total cost of $60,131. The Company has disengaged from its share repurchase program for the time being in order to invest available cash in its business.
All repurchased shares were initially held as treasury shares. During the third quarter of 2007, the Company retired 8,732,527 shares of its common stock, which had been held in treasury. In connection with the retirement of these shares, the Company reclassified $149,606 of the costs associated with these treasury shares to additional paid-in capital.
10. INCOME TAXES
The Company records income tax expense using the asset and liability method of accounting for deferred income taxes. Under such method, deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial statement carrying values and the income tax bases of the Company’s assets and liabilities. The Company’s effective tax rate provides for both federal and state income taxes. For the three months ended September 30, 2007 and 2006, the Company’s effective rate was 30.3% and 37.7%, respectively. The Company’s effective tax rate for the nine months ended September 30, 2007 and 2006 was and 33.6% and 30.7%, respectively. The Company’s effective tax rates differed from the statutory federal tax rates because of state taxes and federal tax credits. Additionally, in connection with the filing of a change in accounting method with the Internal Revenue Service in the second quarter of 2006, the Company reversed a tax reserve of approximately $1,973, which favorably impacted the Company’s effective tax rate for the nine month period ended September 30, 2006.
On January 1, 2007, the Company adopted the provisions of FIN 48, which clarifies the accounting for uncertainty in income tax positions. As a result of the implementation of FIN 48, the Company recognized a net increase in its liability for unrecognized tax benefits of $712, which was accounted for as a decrease to the January 1, 2007 balance of retained earnings. Following the adoption on January 1, 2007, the Company had $1,095 of unrecognized tax benefits, the recognition of which would affect the Company’s effective tax rate. At September 30, 2007, the Company has $1,563 of unrecognized tax benefits.
It is reasonably possible that the gross unrecognized tax benefit, including interest, of $1,563 ($1,095 at the adoption date of January 1, 2007) will decrease in its entirety within twelve months. The Company is pursuing a ruling to clarify an uncertain position with respect to state income recognition.
The Company and its subsidiaries are subject to tax in the U.S. federal and various state and local jurisdictions. The Company is no longer subject to U.S. federal, state and local income tax examinations by tax authorities in material jurisdictions for tax years beginning prior to January 1, 2002. The Internal Revenue Service commenced an examination of the Company’s U.S. income tax returns for 2002 through 2004 in July 2006.
The Company will continue to recognize interest and penalties related to its uncertain tax positions in income tax expense. The Company had $33 of interest and no penalties accrued in the unrecognized tax benefit as of January 1, 2007.
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11. EARNINGS PER SHARE (“EPS”)
The reconciliation of net income attributable to common shareholders and shares outstanding for the purposes of calculating basic and diluted earnings per share for the three and nine months ended September 30, 2007 and 2006 is as follows:
For the three months ended September 30, 2007, 1,133,077 options to purchase common stock, weighted for the portion of the period they were outstanding, were excluded from the diluted earnings per share computation because the exercise price of the options was greater than the average price of the common stock.
For the three months ended September 30, 2006, 677,534 options to purchase common stock, weighted for the portion of the period they were outstanding, were excluded from the diluted earnings per share computation because the exercise price of the options was greater than the average price of the common stock.
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For the nine months ended September 30, 2007, 993,245 options to purchase common stock, weighted for the portion of the period they were outstanding, were excluded from the diluted earnings per share computation because the exercise price of the options was greater than the average price of the common stock.
For the nine months ended September 30, 2006, 443,424 options to purchase common stock, weighted for the portion of the period they were outstanding, were excluded from the diluted earnings per share computation because the exercise price of the options was greater than the average price of the common stock.
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ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion contains forward-looking statements that are subject to known and unknown risks, uncertainties (some of which are beyond the Company’s control), other factors and other assumptions that may cause actual results or performance to be materially different from those expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include those discussed below, elsewhere in this Form 10-Q and in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006 (the “Form 10-K”), as filed with the Securities and Exchange Commission. See “Cautionary Note Regarding Forward-Looking Statements” below in this Item 2. The following discussion should be read in conjunction with the Company’s condensed consolidated financial statements and related notes contained in this report. Historical results are not necessarily indicative of trends in operating results for any future period.
OVERVIEW AND INTRODUCTION
Gevity HR, Inc. (“Gevity” or the “Company”) delivers the Gevity EdgeTM, a comprehensive employment management solution comprised of innovative management and administration services, helping employers:
• Streamline human resource (“HR”) administration. Gevity takes the stress and effort out of payroll management and administration, benefits and benefits administration. • Optimize HR practices. Gevity works with the client’s team to build structure — policies, procedures and communications — for effective employment management, hiring practices and risk management over time. • Maximize people and performance. Gevity helps hone the skills and capabilities of clients’ staff and management for long-term employee retention and business success.
Gevity’s employment management solution is designed to positively impact its clients’ business results by:
• increasing clients’ productivity by improving employee performance and generating greater employee retention; • allowing clients and their employees to focus on revenue producing activities rather than HR matters; and • reducing clients’ exposure to liabilities associated with non-compliance with HR-related regulatory and tax matters.
Essentially, Gevity serves as the full-service HR department for these businesses, providing each employee with support previously only available at much larger companies.
The Company focuses on the professional service fees that it earns from its clients as the primary source of its net income and cash flow. When delivering its human resource outsourcing solution to its clients through a co-employment relationship, the Company is also responsible for providing workers’ compensation and unemployment insurance benefits to its clients’ employees as well as health and welfare benefits. In so doing, the Company has an opportunity to generate additional net income and cash flow from these offerings and the effective management of the related risk which is tempered by the need to remain competitive with its health and workers’ compensation offerings. The Company has derived significant benefit in the past from its insurance offerings.
While many clients benefit from the added insurance protection offered by the co-employment business model, the Company has seen an increase in demand for the Gevity Edge full-service HR solution on a stand-alone basis separate from insurance coverage. In response, the Company has developed a new delivery option that allows it to deliver the Gevity Edge solution detached from insurance coverage and without entering into a co-employment arrangement with the client. Now available as an additional option, Gevity EdgeTM Select, the non co-employed version of Gevity Edge, serves the needs of broader markets. In the first quarter of 2007, the Company enhanced its non co-employment delivery option with the purchase of HRAmerica, Inc. (“HRA”) on February 16, 2007. The Company acquired certain assets, including the client portfolio, of HRA, a human resource
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outsourcing firm that offers fundamental employee administration solutions including payroll processing to approximately 145 clients (as measured by Federal Employer Identification Number) with approximately 16,000 client employees. Approximately 14,700 non co-employed client employees were acquired as of the date of the acquisition and approximately 1,300 co-employed client employees were acquired with an effective date of April 1, 2007. The acquisition provided the Company with technology for the enhancement of its non co-employment model, Gevity Edge Select. In addition to the purchase of HRA, contracts with a national provider for benefits administration and with national and regional brokers for insurance distribution have been signed in support of Gevity Edge Select. Other than the impact of integration costs related to the acquisition and start-up costs related to the Gevity Edge Select product offering, the results of the non co-employment business have not had a significant impact on the Company’s revenues or results of operations.
The Company is refocusing on its core professional employer organization business (“PEO”). As a result, the Company’s previously announced long-range strategic objective to provide HR services to its clients on a non co-employed basis and to evolve into a 100% service fee driven revenue business model is not consistent with the Company’s renewed focus on its core PEO business. The Company does, however, remain committed to developing a complementary non co-employed income stream and intends to refine the Gevity Edge Select non co-employed product offering based upon feedback from market testing.
The Company believes that the primary challenge it faces in delivering its human resource outsourcing solutions is its ability to convince small- and medium-sized businesses to accept the concept of human resource outsourcing. The Company believes that most small- and medium-sized businesses outsource certain aspects of the Company’s total solution, including payroll administration, health and welfare benefits administration and providing workers’ compensation insurance, but that only a small number of businesses outsource the entire offering that the Company provides.
The Company continues to focus on increasing the profitability of each client as well as on increasing the overall number of client employees serviced. The Company believes that it can increase the overall number of client employees serviced through: (i) capitalizing on the growth opportunities within the existing client portfolio through pricing and retention; (ii) further penetration of existing markets from increased production and sales person productivity, supported by increased brand awareness, database management, and the development of additional HR products; (iii) the opening of new offices as experience and production guide the timing and location of these new offices; and (iv) and to a lesser degree, supporting growth with strategic acquisitions. In addition, the Company intends to invest in the hiring, training, support and retention of its business development managers, as well as investing in the enhanced management skill sets of its field general managers.
The following table provides information that the Company utilizes when assessing the financial performance of its business, the fluctuations of which are discussed under the “Results of Operations”:
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(1) Clients measured by individual client Federal Employer Identification Number (“FEIN”).
(2) The average number of client employees paid by month is calculated based upon the sum of the number of paid client employees at the end of each month divided by the number of months in the period.
(3) Annualized statistical information is based upon actual period-to-date amounts, which have been annualized (divided by three or nine and multiplied by twelve) and then divided by the average number of client employees paid by month.
The Company believes that the primary challenges to its ability to increase the overall number of client employees serviced include the following:
• the amount of time required for sales personnel to begin to acquire new client employees may be longer than anticipated;
• the current client employee retention levels may continue to decline if current economic conditions persist or further deteriorate, or if clients decide to use alternative providers to service their HR outsourcing needs;
• the Company (under its co-employed service option) may not be able to continue to provide insurance-related products of a quality and price to acquire new client employees and to retain current client employees;
• product enhancements related to Gevity’s non co-employment offering may take longer to develop than anticipated; and
• the longer than anticipated time to achieve acceptance by prospective clients of the Company’s non co-employed option.
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RESULTS OF OPERATIONS
Three Months Ended September 30, 2007 Compared to Three Months Ended September 30, 2006
Revenue
The following table presents certain information related to the Company’s revenues for the three months ended September 30, 2007 and 2006:
(1) The average number of client employees paid by month is calculated based upon the sum of the number of paid client employees at the end of each month divided by the number of months in the period.
(2) Annualized statistical information is based upon actual quarter-to-date amounts, which have been annualized (divided by three and multiplied by twelve), and then divided by the average number of client employees paid by month.
(3) Workers’ compensation wages exclude the wages of clients electing out of the Company’s workers’ compensation program.
(4) Manual premium rate data are derived from tables of member insurance companies of American International Group, Inc. (“AIG”) in effect for 2007 and 2006, respectively.
For the three months ended September 30, 2007, total revenues were $146.5 million compared to $160.6 million for the three months ended September 30, 2006, representing a decrease of $14.1 million or 8.8%. This decrease was a result of the reduction in all revenue components as described below.
As of September 30, 2007, the Company served approximately 7,200 clients, as measured by each client’s FEIN, with approximately 135,500 active client employees. This compares to approximately 7,900 clients, as measured by each client’s FEIN, with approximately 138,300 active client employees at September 30, 2006. The average number of client employees paid by month was 129,606 for the third quarter of 2007 compared to 128,035 for the third quarter of 2006. The September 30, 2007 client and employee counts were favorably impacted by the HRA acquisition. At September 30, 2007, approximately 131 clients and 16,000 client employees were attributable to HRA. For the quarter ended September 30, 2007, approximately 16,000 of the average number of employees paid by month were attributable to HRA. Excluding the impact of the HRA acquisition, client and the average number of client employees paid by month counts for the quarter ended September 30, 2007 declined approximately 11% when compared to the quarter ended September 30, 2006. This decline is attributable to the departure of legacy clients primarily as a result of the Company’s 2006 initiative
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to bring healthcare premiums up to retail rates and the impact in 2007 of the economy on clients in Florida and clients in the financial and business services sectors. The Company expects comparable net attrition levels in the fourth quarter of 2007 as the economy continues to remain an issue and recent changes in sales leadership will require time to produce positive results.
Revenues from professional service fees decreased to $36.1 million for the three months ended September 30, 2007, from $42.1 million for the three months ended September 30, 2006, representing a decrease of $6.0 million or 14.3%. The decrease was primarily due to the overall decrease in the average number of client employees paid (excluding the impact of the HRA acquisition). The addition of the HRA clients did not significantly impact professional service fees earned during the third quarter of 2007 as HRA clients acquired have a lower average professional service fee for a basic level of service. Accordingly, the decrease in annualized professional service fees per average number of client employees paid by month of 15.3%, from $1,316 for the three months ended September 30, 2006 to $1,114 for the three months ended September 30, 2007 was primarily attributable to the HRA acquisition. Excluding the impact of the HRA acquisition in the third quarter of 2007, annualized professional service fees decreased approximately 5.3% to $1,247 primarily as a result of an accumulation of pricing concessions taken since the third quarter of 2006, a by-product of the adjustments made to bring healthcare premiums to retail rates.
Revenues for providing health and welfare benefits for the three months ended September 30, 2007 were $85.8 million as compared to $87.9 million for the three months ended September 30, 2006, representing a decrease of $2.2 million or 2.5%. Health and welfare benefit plan revenues decreased due to the decrease in the average number of participants in the Company’s health and welfare benefit plans of approximately 11% and was partially offset by the increase in health insurance premiums as a result of higher costs to the Company to provide such coverage for client employees and the Company’s approach to pass along all insurance-related cost increases. Clients acquired in the HRA acquisition are not covered under the Company’s health and welfare benefit plans and therefore do not contribute to the Company’s health and welfare benefit revenues.
Revenues for providing workers’ compensation insurance coverage decreased to $21.1 million for the three months ended September 30, 2007, from $26.5 million for the three months ended September 30, 2006, representing a decrease of $5.3 million or 20.2%. Workers’ compensation billings, as a percentage of workers’ compensation wages for the three months ended September 30, 2007, were 1.97% as compared to 2.34% for the same period in 2006, representing a decrease of 15.8%. Workers’ compensation charges decreased in the third quarter of 2007 primarily due to a decrease in billings for Florida clients reflecting a reduction in Florida manual premium rates beginning in January 2007 and a decrease in the number of clients that participate in the Company’s workers’ compensation program. The manual premium rates for workers’ compensation applicable to the Company’s clients decreased 19.9% during the three months ended September 30, 2007 as compared to the three months ended September 30, 2006. Manual premium rates are the allowable rates that employers are charged by insurance companies for workers’ compensation insurance coverage. The decrease in the Company’s manual premium rates primarily reflects the reduction in the Florida manual premium rates. Clients acquired in the HRA acquisition are not covered under the Company’s workers’ compensation plans and do not significantly contribute to the Company’s worker’s compensation revenues. In October of 2007, Florida’s insurance commissioner approved another decrease in the state’s average workers’ compensation rate of 18.4% beginning January 1, 2008. The Company is currently evaluating the impact of this average rate reduction (which varies by workers’ compensation class codes) on its future operations.
Revenues from state unemployment taxes and other revenues decreased to $3.5 million for the three months ended September 30, 2007 from $4.1 million for the three months ended September 30, 2006, representing a decrease of $0.6 million or 14.3%. The decrease was primarily due to the net effect of a decrease in co-employment wages that provide unemployment tax revenue to the Company and was partially offset by increases in the state unemployment tax rates that were passed along to clients. Clients acquired in the HRA acquisition are primarily non co-employed clients that do not provide state unemployment tax revenue to the Company.
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Cost of Services
The following table presents certain information related to the Company’s cost of services for the three months ended September 30, 2007 and 2006:
(1) The average number of client employees paid by month is calculated based upon the sum of the number of paid client employees at the end of each month divided by the number of months in the period.
(2) Workers’ compensation wages exclude the wages of clients electing out of the Company’s workers’ compensation program.
(3) The number of workers’ compensation claims reflects the number of claims reported by the end of the respective period and does not include claims with respect to a specific policy year that are reported subsequent to the end of such period.
Cost of services, which includes the cost of the Company’s health and welfare benefit plans, workers’ compensation insurance, state unemployment taxes and other costs, was $101.4 million for the three months ended September 30, 2007, compared to $110.0 million for the three months ended September 30, 2006, representing a decrease of $8.6 million, or 7.8%. This decrease was due to the reduction in all cost of services components as described below.
The cost of providing health and welfare benefits to clients’ employees for the three months ended September 30, 2007 was $85.8 million as compared to $89.1 million for the three months ended September 30, 2006, representing a decrease of $3.3 million or 3.7%. This decrease was primarily attributable to the decrease in the number of client employees participating in the health and welfare benefit plans and was partially offset by higher cost of health benefits. Clients acquired in the HRA acquisition are not covered under the Company’s health and welfare benefit plans and therefore do not impact the Company’s health and welfare benefit costs. The Company expects that price increases implemented in conjunction with healthcare renewals effective October 1, 2007 and the continuation of current claims experience will favorably impact healthcare costs during the fourth quarter of 2007. In addition, the Company is currently reviewing health plan features and costs with its insurance providers to address competitive issues within certain regions of the country.
Workers’ compensation costs were $11.0 million for the three months ended September 30, 2007, as compared to $15.5 million for the three months ended September 30, 2006, representing a decrease of
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$4.5 million or 29.2%. Workers’ compensation costs decreased in the third quarter of 2007 due to: (i) the reduction in the prior years’ workers’ compensation loss estimates of approximately $4.1 million as a result of continued favorable claims development for those open policy years; (ii) the reduction in current year workers’ compensation costs as a result of the 11% reduction in co-employed client employees and related reduction in claims, and (iii) the reduction in prior policy years’ premium expenses and administrative costs of approximately $0.9 million as a result of the finalization of AIG premium audits in the third quarter of 2007. During the three months ended September 30, 2006, the Company recorded a net reduction in prior year’ workers’ compensation loss estimates of $0.7 million and a $4.4 million reduction of the ultimate loss estimates for the 2006 policy year due to favorable claims development. Clients acquired in the HRA acquisition are not covered under the Company’s workers’ compensation plans and therefore do not impact the Company’s worker’s compensation costs. The Company is currently reviewing its workers’ compensation options for 2008, including the potential change in the per occurrence deductible.
State unemployment taxes and other costs were $4.7 million for the three months ended September 30, 2007, compared to $5.5 million for the three months ended September 30, 2006, representing a decrease of $0.7 million or 13.7%. The decrease in the Company’s co-employed client employees and related taxable wages (excluding the impact of the HRA acquisition) were substantially offset by an increase in state unemployment tax rates beginning January 1, 2007, as well as an increase in costs associated with expanded client service offerings. Clients acquired in the HRA acquisition are primarily non co-employed clients that do not impact the Company’s state unemployment tax expense. The Company anticipates that state unemployment tax rates may increase in some jurisdictions during 2008. Whenever possible, and consistent with the Company’s overall view toward individual client profitability, the Company intends to pass such increases along to its clients.
Operating Expenses
The following table presents certain information related to the Company’s operating expenses for the three months ended September 30, 2007 and 2006:
Total operating expenses were $40.8 million for the three months ended September 30, 2007 as compared to $35.5 million for the three months ended September 30, 2006, representing an increase of $5.3 million or 14.9%.
Salaries, wages and commissions were $21.6 million for the three months ended September 30, 2007 as compared to $21.0 million for the three months ended September 30, 2006, representing an increase of $0.6 million or 2.9%. The increase is primarily a result of the net effect of $1.6 million in severance wages associated with the termination of approximately 70 support and management personnel during the third quarter of 2007 which was partially offset by a $0.9 million decrease in sales commissions associated with a lower sales volume in 2007 as well as a $0.7 million reduction in stock compensation expense attributable to an increase in the estimated forfeiture rate as a result of employee terminations. The Company expects to incur additional severance costs of approximately $1.6 million in
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the fourth quarter of 2007 in connection with the resignation of its former Chief Executive Officer in October 2007.
Other general and administrative expenses were $15.0 million for the three months ended September 30, 2007 as compared to $14.0 million for the three months ended September 30, 2006, representing an increase of $1.1 million or 7.7%. This increase is primarily due to costs associated with the launch and development of Gevity Edge Select and the integration of HRA as well as a $0.7 million increase in recruiting and outplacement costs related to the change in senior management during the third quarter of 2007, an increase in bad debt expense of approximately $0.5 million as a result of the termination of a large client in the mortgage industry, and a $0.6 million expense associated with the buy-out of a long-term information technology contract.
During the second quarter of 2006, the Company recorded a $4.65 million loss on a reinsurance contract related to its 2006 workers’ compensation program as a result of the liquidation proceeding related to the Bermuda reinsurance company responsible for covering the layer of its workers’ compensation claims between $0.5 million and $2.0 million per occurrence and the related termination of its reinsurance contract. During the third quarter of 2006, the Company recorded a gain on the reinsurance contract as a result of the receipt of $3.0 million pursuant to a court-approved settlement, which also called for the admission in the liquidation proceeding of an unsecured claim against the reinsurer in the amount of $2.2 million. The settlement was without prejudice to any claims Gevity may have against third parties relating to the reinsurer’s liquidation. The Company is actively pursuing additional recovery. Future amounts recovered, if any, will be recognized in income when realization is assured beyond a reasonable doubt. In light of the liquidation proceeding, during the second quarter of 2006 the Company secured comparable coverage for the layer of claims between $0.5 million and $2.0 million from AIG retroactively effective to January 1, 2006. The cost of the replacement coverage related to the first nine months of 2006 (approximately $3.7 million), was included in cost of services for the nine months ended September 30, 2006 and replaced the cost incurred from the original policy.
Depreciation and amortization expenses were $4.2 million for the three months ended September 30, 2007 compared to $3.6 million for the three months ended September 30, 2006, an increase of 16.6%. The increase is primarily attributable to the amortization of technology assets capitalized during 2007. Also included in the increase was the amortization of the intangible assets related to the HRA acquisition.
The Company continues to review its overhead cost structure to ensure alignment with its business development.
Income Taxes
Income taxes were $1.1 million for the three months ended September 30, 2007 compared to $5.8 million for the three months ended September 30, 2006. The decrease is primarily due to the reduction in taxable income for the third quarter of 2007 compared to the third quarter of 2006. The Company’s effective tax rate for the three months ended September 30, 2007 and 2006 was 30.3% and 37.7%, respectively. The Company’s effective tax rates differed from the statutory federal tax rates because of state taxes and federal tax credits.
Net Income and Diluted Earnings Per Share
As a result of the factors described above, net income decreased 74.3% to $2.5 million for the three months ended September 30, 2007 compared to $9.6 million for the three months ended September 30, 2006. Net income per common share on 23.8 million diluted shares was $0.10 for the three months ended September 30, 2007, compared to net income per common share of $0.35 on 27.0 million diluted shares for the three months ended September 30, 2006.
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Nine Months Ended September 30, 2007 Compared to Nine Months Ended September 30, 2006
Revenue
The following table presents certain information related to the Company’s revenues for the nine months ended September 30, 2007 and 2006:
(1) The average number of client employees paid by month is calculated based upon the sum of the number of paid client employees at the end of each month divided by the number of months in the period.
(2) Annualized statistical information is based upon actual quarter-to-date amounts, which have been annualized (divided by nine and multiplied by twelve), and then divided by the average number of client employees paid by month.
(3) Workers’ compensation wages exclude the wages of clients electing out of the Company’s workers’ compensation program.
(4) Manual premium rate data are derived from tables of member insurance companies of American International Group, Inc. (“AIG”) in effect for 2007 and 2006, respectively.
For the nine months ended September 30, 2007, total revenues were $458.0 million compared to $491.5 million for the nine months ended September 30, 2006, representing a decrease of $33.5 million or 6.8%. This decrease was a result of the reduction in all revenue components as described below.
The average number of client employees paid by month was 128,933 for the nine months ended September 30, 2007 compared to 127,976 for the nine months ended September 30, 2006. The average number of client employees paid by month for the nine months ended September 30, 2007, was favorably impacted by the HRA acquisition. For the nine months ended September 30, 2007, approximately 13,635 of the average number of client employees paid by month were attributable to HRA. Excluding the impact of the HRA acquisition, the average number of client employees paid by month declined approximately 10% when compared to the period ended September 30, 2006. This decline is attributable to the departure of legacy clients primarily as a result of the Company’s 2006 initiative to bring healthcare premiums up to retail rates, lower than expected production levels during 2007 and the impact in 2007 of the economy on clients in Florida and clients in the financial and business services sectors.
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Revenues from professional service fees decreased to $110.0 million for the nine months ended September 30, 2007, from $123.1 million for the nine months ended September 30, 2006, representing a decrease of $13.0 million or 10.6%. The decrease was primarily due to the overall decrease in the average number of client employees paid (excluding the impact of the HRA acquisition). The addition of the HRA clients did not significantly impact professional service fees earned during the first nine months of 2007 as HRA clients acquired have a lower average professional service fee for a basic level of service. Accordingly, the decrease in annualized professional service fees per average number of client employees paid by month of 11.2%, from $1,282 for the nine months ended September 30, 2006 to $1,138 for the nine months ended September 30, 2007, was primarily attributable to the HRA acquisition. Excluding the impact of the HRA acquisition in the first nine months of 2007, annualized professional service fees decreased approximately 2.3% to $1,253 primarily as a result of an accumulation of pricing concessions taken since the third quarter of 2006, a by-product of the adjustments made to bring healthcare premiums to retail rates.
Revenues for providing health and welfare benefits for the nine months ended September 30, 2007 were $261.9 million as compared to $265.2 million for the nine months ended September 30, 2006, representing a decrease of $3.4 million or 1.3%. Health and welfare benefit plan revenues decreased due to the decrease in the average number of participants in the Company’s health and welfare benefit plans of approximately 9.1% and was partially offset by the increase in health insurance premiums as a result of higher costs to the Company to provide such coverage for client employees and the Company’s approach to pass along all insurance-related cost increases. Clients acquired in the HRA acquisition are not covered under the Company’s health and welfare benefit plans and therefore do not contribute to the Company’s health and welfare benefit revenues.
Revenues for providing workers’ compensation insurance coverage decreased to $63.6 million for the nine months ended September 30, 2007, from $79.7 million for the nine months ended September 30, 2006, representing a decrease of $16.1 million or 20.2%. Workers’ compensation billings, as a percentage of workers’ compensation wages for the nine months ended September 30, 2007, were 1.96% as compared to 2.35% for the same period in 2006, representing a decrease of 16.6%. Workers’ compensation charges decreased in the first three quarters of 2007 primarily due to a decrease in billings for Florida clients reflecting a reduction in Florida manual premium rates beginning in January 2007 and a reduction in the number of clients that participate in the Company’s workers’ compensation program. The manual premium rates for workers’ compensation applicable to the Company’s clients decreased 20.8% during the nine months ended September 30, 2007 as compared to the nine months ended September 30, 2006. Clients acquired in the HRA acquisition are not covered under the Company’s workers’ compensation plans and do not significantly contribute to the Company’s worker’s compensation revenues.
Revenues from state unemployment taxes and other revenues decreased to $22.5 million for the nine months ended September 30, 2007 from $23.5 million for the nine months ended September 30, 2006, representing a decrease of $1.0 million or 4.2%. The decrease was primarily due to the net effect of a decrease in co-employed client employees and related taxable wages which was partially offset by increases in the state unemployment tax rates that were passed along to clients. Clients acquired in the HRA acquisition are primarily non co-employed clients that do not provide state unemployment tax revenue to the Company.
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Cost of Services
The following table presents certain information related to the Company’s cost of services for the nine months ended September 30, 2007 and 2006:
(1) The average number of client employees paid by month is calculated based upon the sum of the number of paid client employees at the end of each month divided by the number of months in the period.
(2) Workers’ compensation wages exclude the wages of clients electing out of the Company’s workers’ compensation program.
(3) The number of workers’ compensation claims reflects the number of claims reported by the end of the respective period and does not include claims with respect to a specific policy year that are reported subsequent to the end of such period.
Cost of services, which includes the cost of the Company’s health and welfare benefit plans, workers’ compensation insurance, state unemployment taxes and other costs, was $320.0 million for the nine months ended September 30, 2007, compared to $343.0 million for the nine months ended September 30, 2006, representing a decrease of $23.0 million, or 6.7%. This decrease was due to the reduction in all costs of services components as described below.
The cost of providing health and welfare benefits to clients’ employees for the nine months ended September 30, 2007 was $259.3 million as compared to $263.2 million for the nine months ended September 30, 2006, representing a decrease of $3.9 million or 1.5%. This decrease was primarily attributable to a decrease in the number of client employees participating in the health and welfare benefit plans and partially offset by the higher cost of health benefits. In addition, during the nine months ended September 30, 2007, the Company recorded a $2.6 million reduction in health benefit costs due to favorable claims development compared to a $2.0 million reduction in health benefit costs recognized during the first three quarters of 2006 related to the finalization of prior year premium recalls and a reduction in the incurred but not reported claim reserves based upon favorable claims experience. Clients acquired in the HRA acquisition are not covered under the Company’s health and welfare benefit plans and therefore do not impact the Company’s health and welfare benefit costs.
Workers’ compensation costs were $34.9 million for the nine months ended September 30, 2007, as compared to $53.4 million for the nine months ended September 30, 2006, representing a decrease of $18.5 million or 34.6%. Workers’ compensation costs decreased in the first nine months of 2007
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primarily due to the reduction in the prior years’ workers’ compensation loss estimates of approximately $12.1 million during the first nine months of 2007 compared to the reduction in the prior years’ loss estimates of $2.5 million during the first nine months of 2006. Workers’ compensation costs also decreased as a result of the overall decline in co-employed client employees (excluding the impact of the HRA acquisition) and the impact that has had on the 2007 program year costs. Clients acquired in the HRA acquisition are not covered under the Company’s workers’ compensation plans and therefore do not impact the Company’s worker’s compensation costs.
State unemployment taxes and other costs were $25.9 million for the nine months ended September 30, 2007, compared to $26.5 million for the nine months ended September 30, 2006, representing a decrease of $0.6 million or 2.2%. The decrease in co-employed client employees and related taxable wages were substantially offset by an increase in state unemployment tax rates beginning January 1, 2007, as well as an increase in costs associated with expanded client service offerings. Clients acquired in the HRA acquisition are primarily non co-employed clients that do not impact the Company’s state unemployment tax expense.
Operating Expenses
The following table presents certain information related to the Company’s operating expenses for the nine months ended September 30, 2007 and 2006:
Total operating expenses were $122.1 million for the nine months ended September 30, 2007 as compared to $113.0 million for the nine months ended September 30, 2006, representing an increase of $9.1 million or 8.0%.
Salaries, wages and commissions were $64.5 million for the nine months ended September 30, 2007 as compared to $61.3 million for the nine months ended September 30, 2006, representing an increase of $3.2 million or 5.2%. The increase is primarily a result of an increase in severance wages of approximately $2.3 million in the first nine months of 2007, principally related to the elimination/termination of approximately 115 support and management positions and the impact of an overall increase in base wages associated with annual merit increases, which exceeded the impact on salaries and wages of the reduction in internal employees. These increases in salary, wages and commissions were partially offset by a $1.5 million reduction in commission expense as a result of lower sales volume and a $1.1 million reduction in stock compensation expense attributable to an increase in the estimated forfeiture rate as a result of employee terminations.
Other general and administrative expenses were $45.5 million for the nine months ended September 30, 2007 as compared to $39.6 million for the nine months ended September 30, 2006, representing an increase of $5.8 million or 14.7%. This increase is primarily a result of costs associated with investments in marketing and information technology which are expected to benefit operations for the remainder of 2007 and beyond, relating to improvements in service delivery and sales including costs associated with the launch and development of Gevity Edge Select and the integration of HRA.
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Additionally, there was an increase in bad debt expense of approximately $0.9 million related to terminated accounts in 2007.
Information regarding the Company’s 2006 reinsurance contract loss can be found under “Operating Expenses” for the three months ended September 30, 2007 compared to the three months ended September 30, 2006.
Depreciation and amortization expenses were $12.1 million for the nine months ended September 30, 2007 compared to $10.4 million for the nine months ended September 30, 2006, an increase of 16.3%. The increase is primarily attributable to the amortization of technology assets capitalized during the first nine months of 2007. Also included in the increase was the amortization of the intangible assets related to the HRA acquisition.
Income Taxes
Income taxes were $4.9 million for the nine months ended September 30, 2007 compared to $10.9 million for the nine months ended September 30, 2006. The decrease is primarily due to a reduction in taxable income for the first three quarters of 2007 compared to the first three quarters of 2006. The Company’s effective tax rate for the nine months ended September 30, 2007 and 2006 was 33.6% and 30.7%, respectively. The Company’s effective tax rates differed from the statutory federal tax rates because of state taxes and federal tax credits. In addition, during the nine months ended September 30, 2006, the Company’s effective tax rate was favorably impacted as a result of the filing of a change in accounting method with the Internal Revenue Service in the second quarter of 2006 and the related reversal of a tax reserve of approximately $2.0 million.
Net Income and Diluted Earnings Per Share
As a result of the factors described above, net income decreased 60.8% to $9.7 million for the nine months ended September 30, 2007 compared to $24.7 million for the nine months ended September 30, 2006. Net income per common share on 24.4 million diluted shares was $0.40 for the nine months ended September 30, 2007, compared to net income per common share of $0.91 on 27.1 million diluted shares for the nine months ended September 30, 2006.
LIQUIDITY AND CAPITAL RESOURCESCash Flow
General
The Company periodically evaluates its liquidity requirements, capital needs and availability of capital resources in view of its collateralization requirements for insurance coverage, purchases of shares of its common stock under its share repurchase program, plans for expansion of its HR outsourcing portfolio through acquisitions, payment of dividends, possible acquisitions of businesses complementary to the business of the Company, 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 obtain additional capital from either private or public sources.
The Company currently believes that its current cash balances, cash flow from operations and the existing credit facility will be sufficient to meet its operational requirements for the next 12 months, excluding cash required for acquisitions, if any. The Company has an unsecured credit facility for $100.0 million with Bank of America, N.A. and Wachovia, N.A. (the “Lenders”) of which $20.5 million was outstanding as of September 30, 2007. See Note 7 to the condensed consolidated financial statements contained in this report for additional information regarding the Company’s credit facility. The ability to draw funds under the credit agreement is dependent upon meeting financial covenants, which may limit
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the Company’s ability to draw the full amount of the facility. At September 30, 2007, the maximum facility available to the Company was approximately $90,000. If current operating trends continue, the Company will not be able to maintain the minimum Consolidated Fixed Charge Coverage Ratio required and will need to seek covenant modifications to its credit agreement with its Lenders during the fourth quarter of 2007. The Company is currently in discussions with its Lenders regarding this issue. If such modifications are not obtained this may have a material impact on the Company’s cash flow and ability to conduct its operations.
The Company’s primary short-term liquidity requirements relate to the payment of accrued payroll and payroll taxes of its internal and client employees and the payment of workers’ compensation premiums and medical benefit plan premiums. The Company’s billings to its clients include: (i) each client employee’s gross wages; (ii) a professional service fee, which is primarily computed as a percentage of the gross wages; (iii) related payroll taxes; (iv) workers’ compensation insurance charges (if applicable); and (v) the client’s portion of benefits, including medical and retirement benefits, provided to the client employees based on coverage levels elected by the client and the client employees. Included in the Company’s billings during the first nine months of 2007 were salaries, wages and payroll taxes of client employees of $4.5 billion. The billings to clients are managed from a cash flow perspective so that a matching generally exists between the time that the funds are received from a client to the time that the funds are paid to the client employees and to the appropriate tax jurisdictions. As a co-employer, and under the terms of each of the Company’s professional services agreements, the Company is obligated to make certain wage, tax and regulatory payments even if the related payments are not made by its clients. Therefore, the objective of the Company is to minimize the credit risk associated with remitting the payroll and associated taxes before receiving the service fees from the client and generally, the Company has the right to immediately terminate the client relationship for non-payment. To the extent this objective is not achieved, short-term cash requirements can be significant and the results of operations and cash flow may potentially be impacted. In addition, the timing and amount of payments for payroll, payroll taxes and benefit premiums can vary significantly based on various factors, including the day of the week on which a payroll period ends and the existence of holidays at or immediately following a payroll period-end.
Restricted Cash
The Company is required to collateralize its obligations under its workers’ compensation and health benefit plans and certain general insurance coverage. The Company uses its marketable securities to collateralize these obligations as more fully described below. Marketable securities used to collateralize these obligations are designated as restricted in the Company’s condensed consolidated financial statements.
At September 30, 2007, the Company had $24.5 million in total cash and cash equivalents and restricted marketable securities, of which $14.6 million was unrestricted. At September 30, 2007, the Company had pledged $8.5 million of restricted marketable securities in collateral trust arrangements issued in connection with the Company’s workers’ compensation and health benefit plans and had $1.4 million held in escrow in connection with various purchase price contingencies related to the HRA acquisition as follows:
The Company’s obligation to Blue Cross/Blue Shield of Florida (“BCBSFL”), under its current contract, may require an irrevocable letter of credit (“LOC”) in favor of BCBSFL if a coverage ratio, as
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set forth in the BCBSFL agreement, is not maintained. The coverage ratio is calculated quarterly. If the Company’s coverage ratio does not meet the minimum requirements, the Company must provide an LOC valued at up to two months of projected claims (average monthly claims approximated $9.3 million during the last twelve months). As of September 30, 2007, the minimum coverage ratio was met and no LOC was required. The Company does not anticipate that the current operating trends will cause the coverage ratios to drop below the minimum requirements in the fourth quarter of 2007. The Company was not required to collateralize the Aetna program for 2007.
The Company does not anticipate any additional collateral obligations to be required in 2007 for its workers’ compensation arrangements.
As of September 30, 2007, the Company has recorded a $109.4 million receivable from AIG representing workers’ compensation premium payments made to AIG related to program years 2000 through 2007 in excess of the present value of the estimated claims liability. This receivable represents a significant concentration of credit risk for the Company.
Cash Flows from Operating Activities
At September 30, 2007, the Company had a net working capital deficit of $26.6 million, including restricted funds classified as short-term of $6.0 million, compared to a net working capital deficit of $10.7 million as of December 31, 2006, including $4.5 million of restricted funds classified as short-term. The decrease in working capital during the first nine months of 2007 was primarily due to the reduction in cash related to timing differences, the acquisition of HRA and stock repurchases under the Company’s repurchase program.
Net cash provided by operating activities was $9.7 million for the nine months ended September 30, 2007 as compared to net cash provided by operating activities of $37.6 million for the nine months ended September 30, 2006, representing a decrease in net cash provided by operating activities of $27.9 million. Cash flows from operating activities are significantly impacted by the timing of client payrolls, the day of the week on which a fiscal period ends and the existence of holidays at or immediately following a period end. The overall decrease in cash provided by operating activities was primarily due to net timing differences as well as the overall reduction in net income.
If current workers’ compensation trends continue, the Company expects to receive approximately $13.6 million from AIG during the third quarter of 2008 as a net return of premiums in connection with the true-ups related to the 2000-2007 program years. Additional releases of premiums by AIG are also anticipated in future years if such trends continue. The Company believes that it has provided AIG a sufficient amount of cash to cover its short-term and long-term workers compensation obligations related to open policy years.
Cash Flow from Investing Activities
Cash used in investing activities for the nine months ended September 30, 2007 of $16.4 million, includes approximately $10.9 million related to the February 16, 2007 acquisition of HRA ($9.5 million of cash and related acquisition costs and $1.4 million included in marketable securities purchases for purchase price contingencies held in an escrow account). In addition the Company spent approximately $5.2 million for capital expenditures primarily for technology-related items including approximately $1.7 million of capital expenditures made by the Company in 2006 and paid for in 2007. Cash used in investing activities for the nine months ended September 30, 2006 of $13.6 million primarily related to capital expenditures. The Company is currently reviewing its capital expenditure plans for the fourth quarter of 2007 and for 2008. The Company does not expect that its current level of capital spending will change significantly in the fourth quarter of 2007. Capital expenditures are expected to be funded through operations, leasing arrangements or from the Company’s revolving credit facility.
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Cash Flow from Financing Activities
Cash used in financing activities for the nine months ended September 30, 2007 of $15.1 million was a result of $20.5 million of net borrowings under the revolving credit facility; $1.0 million received upon the exercise of 82,242 stock options and the purchase of 20,301 shares of common stock under the Company’s employee stock purchase plan; and $0.3 million related to excess tax benefits received by the Company for its share-based arrangements. These amounts were offset by the use of $30.3 million to repurchase 1,543,121 shares of the Company’s common stock under its stock repurchase programs (see “Part II. Item 2. Unregistered Sales of Equity Securities and Use of Proceeds” for a discussion of the current stock repurchase program) and $6.5 million of cash dividends paid. The Company has disengaged from its share repurchase program for the time being in order to invest available cash in its business.
Cash used in financing activities for the nine months ended September 30, 2006 of $21.5 million was a result of the net effect of $25.7 million used to repurchase 1,078,230 shares of the Company’s common stock under its stock repurchase programs, including $3.4 million related to stock repurchase made in 2005 and paid for in 2006; $6.6 million of cash dividends paid; $6.6 million received from directors, officers and employees of the Company upon the exercise of 631,558 stock options and the purchase of 20,941 shares of common stock under the Company’s employee stock purchase plan; and $4.2 million related to excess tax benefits received by the Company for its share-based arrangements.
Commitments and Contractual Obligations
Off-Balance Sheet Arrangements
The Company does not have any off-balance sheet arrangements.
Contractual Obligations
There have been no material changes to the Company’s contractual obligations from those disclosed in the Form 10-K under “Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations” other than discussed below.
In connection with the October 2007 resignation of Erik Vonk, the Company’s Chief Executive Officer, the Company entered into a Separation Agreement and Full and Final Release of Claims dated November 2, 2007 (the “Separation Agreement”). The Separation Agreement provides for the payment to Mr. Vonk of $1,500,000 through October 18, 2009, together with health and welfare benefits through that period of time.
CRITICAL ACCOUNTING ESTIMATES
The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America, requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosures of contingent assets and liabilities. Accounting estimates related to workers’ compensation receivables/reserves, intangible assets, medical benefit plan liabilities, state unemployment taxes, allowance for doubtful accounts, share-based payments and deferred income taxes are those that the Company considers critical in preparing its financial statements because they are particularly dependent on estimates and assumptions made by management that are uncertain at the time the accounting estimates are made. While management has used its best estimates based upon facts and circumstances available at the time, different estimates reasonably could have been used in the current period, which may have a material impact on the presentation of the Company’s financial condition and results of operations. Management periodically reviews the estimates and assumptions and reflects the effects of revisions in the period they are determined to be necessary. The discussion under “Item 7 - Managements’ Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Estimates” in the Form 10-K describes the significant accounting estimates used in the preparation of the Company’s financial statements.
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The Company has adopted the provisions of Financial Accounting Standards Board (“FASB”) Interpretation No. 48, Accounting for Uncertainty in Income Taxes – An Interpretation of FASB Statement No. 109 (“FIN 48”), on January 1, 2007. FIN 48 clarifies the accounting for uncertainty in tax positions and requires companies to determine whether it is “more likely than not” that a tax position will be sustained upon examination by the appropriate taxing authorities before any part of the benefit can be recorded in the financial statements. It also provides guidance on the recognition, measurement and classification of income tax uncertainties, along with any related interest and penalties. See Note 1 and Note 10 to the condensed consolidated financial statements contained elsewhere in this Form 10-Q for information regarding the Company’s implementation and impact of this new accounting standard as well as information on the impact of other recently issued accounting standards.
California Unemployment Tax Assessment
In May of 2007, the Company received a Notice of Assessment from the State of California Employment Development Department (“EDD”) relative to the Company’s practice of reporting payroll for its subsidiaries under multiple employer account numbers. The notice stated that the EDD was collapsing the accounts of the Company’s subsidiaries into one account number for payroll reporting purposes and retroactively reassessed unemployment taxes due at a higher overall rate for the 2004-2006 tax years resulting in an assessment of $4.7 million. On May 30, 2007, the Company filed a petition with the Office of the Chief Administrative Law Judge for the California Unemployment Insurance Appeals Board asking that the EDD’s assessment be set aside. The petition contends in part that the state has exceeded the scope of its authority in issuing the assessment by failing to comply with its own mandatory procedural requirements and that the statute of limitations for issuing the assessments has expired as the Company’s activities within the state were compliant with California statutes and regulations. The Company believes that it has valid defenses regarding the assessments and intends to vigorously protest these claims. However, the Company cannot estimate at this point in time what amount, if any, will ultimately be due with respect to this matter.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Statements made in this report, including under the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” that are not purely historical may be 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, including without limitation, statements regarding the Company’s expectations, hopes, beliefs, intentions or strategies regarding the future. Words such as “may”, “will”, “should”, “could”, “would”, “predicts”, “potential”, “continue”, “expects”, “anticipates”, “future”, “intends”, “plans”, “believes”, “estimates”, and similar expressions, as well as statements in future tense, identify forward-looking statements. Forward-looking statements are based on the Company’s current expectations and beliefs concerning future developments and their potential effects on the Company. There can be no assurance that future developments affecting the Company will be those that the Company has anticipated. Forward-looking statements involve a number of known and unknown risks, uncertainties (some of which are beyond the Company’s control) and other factors and assumptions that may cause actual results or performance to be materially different from those expressed or implied by such forward-looking statements, including those described in “Item 1A. Risk Factors” of the Company’s Form 10-K and the risks that are described in other reports that the Company files with the Securities and Exchange Commission.
Forward-looking statements speak only as of the date on which they are made and you should not place undue reliance on any forward-looking statement. Except as required by law, the Company undertakes no obligation to update any forward-looking statement or statements to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time, and it is not possible for management to predict all of these factors. Further, management cannot assess the impact of each factor on the Company’s business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.
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ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
There have been no material changes from the information previously reported under “Item 7A. Quantitative and Qualitative Disclosures About Market Risk” in the Form 10-K.
ITEM 4. Controls and Procedures
As of the end of the period covered by this report, the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, conducted an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Rule 13a-15 of the Securities Exchange Act of 1934. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired objectives. Based upon that evaluation and subject to the foregoing, the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, concluded that the design and operation of the Company’s disclosure controls and procedures provided reasonable assurance that the disclosure controls and procedures were effective to accomplish their objectives.
Additionally, no changes in the Company’s internal controls over financial reporting were made during the fiscal quarter covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
See Note 8 to the condensed consolidated financial statements contained elsewhere in this Form 10-Q for information concerning the Company’s legal proceedings.
There have been no material changes from the information previously provided under “Item 1A. Risk Factors,” in the Form 10-K. See also “Cautionary Note Regarding Forward-Looking Statements” included in “Part 1. Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Form 10-Q.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table provides information about Company purchases during the three months ended September 30, 2007, of equity securities that are registered by the Company pursuant to Section 12 of the Securities Exchange Act of 1934:
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(1) On August 15, 2006, the Company announced that the board of directors had authorized the purchase of up to $75.0 million of the Company’s common stock under a new share repurchase program. Share repurchases under the new program are to be made through open market repurchases, block trades or in private transactions at such times and in such amounts as the Company deems appropriate based upon a variety of factors including price, regulatory requirements, market conditions and other corporate opportunities.
(2) On April 20, 2007, the Company’s board of directors authorized an increase to its current share repurchase program of approximately $36.5 million, which brings the current repurchase amount authorized back up to $75.0 million.
(3) The Company has disengaged from its stock repurchase program for the time being in order to invest available cash in its business.
3.1 Third Articles of Amendment and Restatement of the Articles of Incorporation, as filed with the Secretary of State of the State of Florida on August 12, 2004 (filed as Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2004 filed November 9, 2004 and incorporated herein by reference).
3.2 Third Amended and Restated Bylaws, dated February 16, 2005 (filed as Exhibit 3.01 to the Company’s Current Report on Form 8-K filed February 22, 2005 and incorporated herein by reference).
10.1 Separation Agreement and Full and Final Release of Claims between Gevity HR, Inc. and Erik Vonk, dated November 2, 2007. *
10.2 Separation Agreement and Full and Final Release of Claims between Gevity HR, Inc. and Peter Grabowski, dated July 24, 2007 (filed as Exhibit 99.1 to the Company’s Current Report on Form 8-K filed July 27, 2007 and incorporated herein by reference).
10.3 Offer Letter Agreement executed on August 3, 2007 between Gevity HR, Inc. and James Hardee (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed August 7, 2007 and incorporated herein by reference).
10.4 Change in Control Severance Agreement executed on August 3, 2007 between Gevity HR, Inc. and James Hardee (filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed August 7, 2007 and incorporated herein by reference).
10.5 Offer Letter Agreement executed on August 3, 2007 between Gevity HR, Inc. and Garry Welsh (filed as Exhibit 10.3 to the Company’s Current Report on Form 8-K filed August 7, 2007 and incorporated herein by reference).
10.6 Change in Control Severance Agreement executed on August 3, 2007 between Gevity HR, Inc. and Garry Welsh (filed as Exhibit 10.4 to the Company’s Current Report on Form 8-K filed August 7, 2007 and incorporated herein by reference).
10.7 Amendment Number One to the Change in Control Severance Agreement executed on August 29, 2007 between Gevity HR, Inc. and Erik Vonk (filed as Exhibit 99.1 to the Company’s Current Report on Form 8-K filed August 31, 2007 and incorporated herein by reference).
10.8 Amendment Number One to the Change in Control Severance Agreement executed on August 29, 2007 between Gevity HR, Inc. and Clifford M. Sladnick (filed as Exhibit 99.2 to the Company’s Current Report on Form 8-K filed August 31, 2007 and incorporated herein by reference).
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10.9 Revised Change in Control Severance Agreement executed on August 29, 2007 between Gevity HR, Inc. and James Hardee (filed as Exhibit 99.3 to the Company’s Current Report on Form 8-K filed August 31, 2007 and incorporated herein by reference).
10.10 Revised Change in Control Severance Agreement executed on August 29, 2007 between Gevity HR, Inc. and Garry Welsh (filed as Exhibit 99.4 to the Company’s Current Report on Form 8-K filed August 31, 2007 and incorporated herein by reference).
10.11 Change in Control Severance Agreement executed on August 29, 2007 between Gevity HR, Inc. and Paul E. Benz (filed as Exhibit 99.5 to the Company’s Current Report on Form 8-K filed August 31, 2007 and incorporated herein by reference).
31.1 Certification of the Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *
31.2 Certification of the Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *
32 Certification furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. *
*Filed electronically herewith.
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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