Annual Reports

 
Quarterly Reports

  • 10-Q (May 11, 2009)
  • 10-Q (Nov 10, 2008)
  • 10-Q (Aug 11, 2008)
  • 10-Q (May 12, 2008)
  • 10-Q (Nov 9, 2007)
  • 10-Q (Aug 9, 2007)

 
8-K

 
Other

Gevity HR 10-Q 2008

Documents found in this filing:

  1. 10-Q
  2. Ex-10.3
  3. Ex-31.1
  4. Ex-31.2
  5. Ex-32
  6. Ex-32

Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

 

x

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended September 30, 2008.

 

or

 

o

Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the transition period from             to            

 

Commission File No. 0-22701

 

GEVITY HR, INC.

(Exact name of registrant as specified in its charter)

 

Florida

 

65-0735612

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

 

 

9000 Town Center Parkway

 

 

Bradenton, Florida

 

34202

(Address of principal executive offices)

 

(Zip Code)

 

(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, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer o

 

Accelerated filer x

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange 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.

 

Class of common stock

 

Outstanding as of  October 31, 2008

Par value $0.01 per share

 

24,690,272

 

 

 



Table of Contents

 

TABLE OF CONTENTS

 

 

 

 

Page

 

 

 

 

PART I.

FINANCIAL INFORMATION

 

 

 

 

 

 

ITEM 1.

Financial Statements

3

 

 

 

 

 

 

Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2008 and 2007 (unaudited)

3

 

 

 

 

 

 

Condensed Consolidated Balance Sheets as of September 30, 2008 and December 31, 2007 (unaudited)

4

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2008 and 2007 (unaudited)

6

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements (unaudited)

7

 

 

 

 

 

ITEM 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

17

 

 

 

 

 

ITEM 3.

Quantitative and Qualitative Disclosures About Market Risk

30

 

 

 

 

 

ITEM 4.

Controls and Procedures

30

 

 

 

 

PART II.

OTHER INFORMATION

 

 

 

 

 

 

ITEM 1.

Legal Proceedings

31

 

 

 

 

 

ITEM 1A.

Risk Factors

31

 

 

 

 

 

ITEM 2.

Unregistered Sales of Equity Securities and Use of Proceeds

32

 

 

 

 

 

ITEM 6.

Exhibits

33

 

 

 

 

 

SIGNATURE

34

 

2



Table of Contents

 

PART I.  FINANCIAL INFORMATION

 

Item 1.  Financial Statements

 

GEVITY HR, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

UNAUDITED

(in thousands, except share and per share data)

 

 

 

For the Three Months Ended
September 30,

 

For the Nine Months Ended
September 30,

 

 

 

2008

 

2007

 

2008

 

2007

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

125,077

 

$

145,515

 

$

395,431

 

$

455,577

 

 

 

 

 

 

 

 

 

 

 

Cost of services (exclusive of depreciation and amortization shown below)

 

90,785

 

101,399

 

288,979

 

319,904

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

34,292

 

44,116

 

106,452

 

135,673

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries, wages and commissions

 

18,552

 

20,768

 

56,089

 

62,493

 

 

 

 

 

 

 

 

 

 

 

Other general and administrative

 

12,170

 

13,918

 

36,000

 

42,846

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

4,093

 

3,898

 

11,971

 

11,431

 

 

 

 

 

 

 

 

 

 

 

Total operating expenses

 

34,815

 

38,584

 

104,060

 

116,770

 

 

 

 

 

 

 

 

 

 

 

Operating (loss) income

 

(523

)

5,532

 

2,392

 

18,903

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

117

 

346

 

372

 

678

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

(825

)

(1,155

)

(2,132

)

(2,151

)

 

 

 

 

 

 

 

 

 

 

Other income (expense), net

 

25

 

3

 

(10

)

(20

)

 

 

 

 

 

 

 

 

 

 

(Loss) income from continuing operations before income taxes

 

(1,206

)

4,726

 

622

 

17,410

 

 

 

 

 

 

 

 

 

 

 

Income tax provision

 

566

 

1,517

 

710

 

5,953

 

 

 

 

 

 

 

 

 

 

 

(Loss) income from continuing operations

 

(1,772

)

3,209

 

(88

)

11,457

 

 

 

 

 

 

 

 

 

 

 

Loss from discontinued operations, net of tax

 

(179

)

(755

)

(3,290

)

(1,799

)

 

 

 

 

 

 

 

 

 

 

Net (loss) income

 

$

(1,951

)

$

2,454

 

$

(3,378

)

$

9,658

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income per common share

 

 

 

 

 

 

 

 

 

- Basic:

 

 

 

 

 

 

 

 

 

(Loss) income from continuing operations

 

$

(0.07

)

$

0.14

 

$

 

$

0.48

 

Loss from discontinued operations

 

(0.01

)

(0.03

)

(0.14

)

(0.08

)

Net (loss) income

 

$

(0.08

)

$

0.11

 

$

(0.14

)

$

0.40

 

 

 

 

 

 

 

 

 

 

 

- Diluted:

 

 

 

 

 

 

 

 

 

(Loss) income from continuing operations

 

$

(0.07

)

$

0.13

 

$

 

$

0.47

 

Loss from discontinued operations

 

(0.01

)

(0.03

)

(0.14

)

(0.07

)

Net (loss) income

 

$

(0.08

)

$

0.10

 

$

(0.14

)

$

0.40

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

 

- Basic

 

23,595,233

 

23,235,677

 

23,340,808

 

23,860,934

 

- Diluted

 

23,595,233

 

23,769,362

 

23,340,808

 

24,449,770

 

 

See notes to condensed consolidated financial statements.

 

3



Table of Contents

 

GEVITY HR, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

UNAUDITED

(in thousands, except share and per share data)

 

 

 

September 30,
2008

 

December 31,
2007

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

12,466

 

$

9,950

 

 

 

 

 

 

 

Marketable securities – restricted

 

4,810

 

6,102

 

 

 

 

 

 

 

Accounts receivable, net

 

124,948

 

130,209

 

 

 

 

 

 

 

Short-term workers’ compensation receivable, net

 

23,996

 

16,950

 

 

 

 

 

 

 

Other current assets

 

12,627

 

14,515

 

 

 

 

 

 

 

Total current assets

 

178,847

 

177,726

 

 

 

 

 

 

 

Property and equipment, net

 

20,015

 

22,176

 

 

 

 

 

 

 

Long-term marketable securities – restricted

 

4,025

 

3,934

 

 

 

 

 

 

 

Long-term workers’ compensation receivable, net

 

96,900

 

105,321

 

 

 

 

 

 

 

Intangible assets, net

 

3,989

 

11,386

 

 

 

 

 

 

 

Goodwill

 

8,692

 

9,224

 

 

 

 

 

 

 

Deferred tax asset, net

 

10,613

 

10,797

 

 

 

 

 

 

 

Other assets

 

893

 

1,347

 

 

 

 

 

 

 

Total assets

 

$

323,974

 

$

341,911

 

 

See notes to condensed consolidated financial statements.

 

4



Table of Contents

 

GEVITY HR, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)

UNAUDITED

(in thousands, except share and per share data)

 

 

 

September 30,
2008

 

December 31,
2007

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

Accrued payroll and payroll taxes

 

$

131,423

 

$

151,105

 

 

 

 

 

 

 

Accrued insurance premiums and health reserves

 

11,913

 

13,557

 

 

 

 

 

 

 

Customer deposits and prepayments

 

13,139

 

13,581

 

 

 

 

 

 

 

Accounts payable and other accrued liabilities

 

8,254

 

11,881

 

 

 

 

 

 

 

Deferred tax liability, net

 

5,434

 

11,674

 

 

 

 

 

 

 

Dividends payable

 

1,235

 

2,096

 

Total current liabilities

 

171,398

 

203,894

 

 

 

 

 

 

 

Revolving credit facility

 

32,500

 

17,367

 

 

 

 

 

 

 

Other long-term liabilities

 

4,862

 

5,088

 

Total liabilities

 

208,760

 

226,349

 

 

 

 

 

 

 

Commitments and contingencies (see notes)

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

 

 

 

 

 

 

Common stock, $.01 par value, 100,000,000 shares authorized, 24,754,286 and 23,379,761 issued as of September 30, 2008 and December 31, 2007, respectively

 

248

 

234

 

 

 

 

 

 

 

Additional paid-in capital

 

37,596

 

31,475

 

 

 

 

 

 

 

Retained earnings

 

77,947

 

84,899

 

 

 

 

 

 

 

Treasury stock (64,014 and 85,660 shares at cost, respectively)

 

(577

)

(1,046

)

Total shareholders’ equity

 

115,214

 

115,562

 

 

 

 

 

 

 

Total liabilities and shareholders’ equity

 

$

323,974

 

$

341,911

 

 

See notes to condensed consolidated financial statements.

 

5



Table of Contents

 

GEVITY HR, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

UNAUDITED

(in thousands)

 

 

 

For the Nine Months Ended
September 30,

 

 

 

2008

 

2007

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

Net (loss) income

 

$

(3,378

)

$

9,658

 

Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

12,219

 

12,101

 

Impairment loss

 

532

 

 

Deferred tax benefit, net

 

(5,328

)

(9,073

)

Stock compensation

 

1,305

 

1,918

 

Excess tax benefit from share-based arrangements

 

(1,307

)

(313

)

Provision for bad debts

 

1,682

 

1,262

 

Other

 

49

 

23

 

Changes in operating working capital:

 

 

 

 

 

Accounts receivable, net

 

3,579

 

4,524

 

Other current assets

 

3,195

 

6,119

 

Workers’ compensation receivable, net

 

1,375

 

11,797

 

Other assets

 

454

 

(288

)

Accrued insurance premiums and health reserves

 

(1,644

)

(5,161

)

Accrued payroll and payroll taxes

 

(19,720

)

(36,134

)

Accounts payable and other accrued liabilities

 

(4,339

)

421

 

Customer deposits and prepayments

 

(442

)

12,220

 

Other long-term liabilities

 

(709

)

621

 

Net cash (used in) provided by operating activities

 

(12,477

)

9,695

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

Purchases of marketable securities and certificates of deposit

 

(199

)

(1,708

)

Proceeds from sale of marketable securities

 

1,400

 

 

Capital expenditures

 

(1,928

)

(5,156

)

Business acquisition

 

 

(9,495

)

Net cash used in investing activities

 

(727

)

(16,359

)

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

Net borrowings under revolving credit facility

 

15,133

 

20,467

 

Capital lease payments

 

(327

)

 

Proceeds from issuance of common stock for employee stock plans

 

4,042

 

974

 

Excess tax benefit from share-based arrangements

 

1,307

 

313

 

Dividends paid

 

(4,435

)

(6,526

)

Purchase of treasury stock

 

 

(30,290

)

Net cash provided by (used in) financing activities

 

15,720

 

(15,062

)

Net increase (decrease) in cash and cash equivalents

 

2,516

 

(21,726

)

Cash and cash equivalents - beginning of period

 

9,950

 

36,291

 

Cash and cash equivalents - end of period

 

$

12,466

 

$

14,565

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

Income taxes paid

 

$

4,955

 

$

5,883

 

Interest paid

 

$

2,055

 

$

2,116

 

 

Supplemental disclosure of non-cash transactions:

 

Capital expenditures and cash flows from financing activities for the nine months ended September 30, 2008 exclude approximately $199 of capital items purchased by the Company through capital leases.

 

Capital expenditures for the nine months ended September 30, 2008 and 2007, exclude approximately $705 and $387, respectively, of capital items purchased by the Company in the third quarter of each year and not paid for until the fourth quarter of that year.

 

See notes to condensed consolidated financial statements.

 

6



Table of Contents

 

GEVITY HR, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(in thousands, 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 (“US GAAP”) 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, 2007 (the “Form 10-K”), as filed with the Securities and Exchange Commission (the “SEC”). 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, deferred taxes and share-based payments.  During the first nine months of 2008, there have been no material changes to the Company’s significant accounting policies and critical accounting estimates except as described below.

 

Recent Accounting Pronouncements

 

In October 2008, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position (“FSP”) Statement of Financial Accounting Standards (“SFAS”) No. 157-3, Determining the Fair Value of a Financial Asset When the Market For That Asset Is Not Active (FSP SFAS No. 157-3), with an immediate effective date, including prior periods for which financial statements have not been issued.  FSP SFAS No. 157-3 amends SFAS No. 157 (as described below) to clarify the application of fair value in inactive markets and allows for the use of management’s internal assumptions about future cash flows with appropriately risk-adjusted discount rates when relevant observable market data does not exist.  The objective of SFAS No. 157 has not changed and continues to be the determination of the price that would be received in an orderly transaction that is not a forced liquidation or distressed sale at the measurement date.  The adoption of FSP SFAS No. 157-3 in the third quarter did not have a material effect on the Company’s financial position, results of operations, or cash flows.

 

In June 2008, the Emerging Issues Task Force (“EITF”) reached a consensus on EITF Issue No. 08-3, Accounting by Lessees for Maintenance Deposits under Lease Agreements (“EITF No. 08-3”). EITF No. 08-3 provides that all nonrefundable maintenance deposits paid by a lessee, under an arrangement accounted for as a lease, should be accounted for as a deposit. When the underlying maintenance is performed, the deposit is expensed or capitalized in accordance with the lessee’s maintenance accounting policy. Once it is determined that an amount on deposit is not probable of being used to fund future maintenance expense, it is recognized as additional rent expense at that time. EITF No. 08-3 is effective for the Company on January 1, 2009. The Company is currently evaluating the impact of adopting EITF No. 08-3 on the Company’s financial position, results of operations and cash flows.

 

In June 2008, the FASB issued FSP EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities (“FSP EITF No. 03-6-1”).  This FSP addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and, therefore, should be included in the earnings allocation in computing earnings per share (“EPS”) under the two-class method described in SFAS No. 128, Earnings per Share.  FSP EITF No. 03-6-1 redefines participating securities to include unvested share-based payment awards that contain non-forfeitable dividends or dividend equivalents as participating securities to be included in the computation of EPS pursuant to the “two-class method.”  Outstanding unvested restricted stock issued under employee compensation programs containing such dividend participation features would be considered participating securities subject to the “two-class method” in computing EPS rather than the “treasury stock method.”  FSP EITF No. 03-6-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008 and for interim periods within those years.  All prior-period EPS data presented is to be adjusted retrospectively to conform to the provisions of this FSP.  Early application is not permitted. The Company has not yet determined the impact, if any, that FSP EITF 03-6-1 will have on its computation and presentation of EPS.

 

7



Table of Contents

 

In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles, (“SFAS No. 162”), which becomes effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board (“PCAOB”) amendments to US Auditing Standards Section 411, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles. SFAS No. 162 identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with US GAAP. This standard is not expected to have an impact on the Company’s financial position, results of operations or cash flows.

 

In April 2008, the FASB issued FSP SFAS No. 142-3, Determination of the Useful Life of Intangible Assets (“FSP SFAS No. 142-3”). FSP SFAS No. 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, Goodwill and Other Intangible Assets. The intent of this FSP is to improve the consistency between the useful life of a recognized intangible asset and the period of expected cash flows used to measure the fair value of the asset under SFAS No. 141 (revised 2007), Business Combinations, and other US GAAP. FSP SFAS No. 142-3 is effective for the Company on January 1, 2009. The Company is currently evaluating the impact of adopting FSP SFAS No. 142-3 on the Company’s financial position, results of operations and cash flows.

 

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133 (“SFAS No. 161”). SFAS No. 161 requires enhanced disclosures about a company’s derivative and hedging activities. These enhanced disclosures will discuss (a) how and why a company uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under FASB Statement No. 133 and its related interpretations and (c) how derivative instruments and related hedged items affect a company’s financial position, results of operations and cash flows. SFAS No. 161 is effective for the Company on January 1, 2009. This standard will have no impact on the Company’s financial position, results of operations or cash flows.

 

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, Including an Amendment of FASB Statement No. 115 (“SFAS No. 159”). SFAS No. 159 gives entities the irrevocable option to carry 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 No. 159 was effective for the Company on January 1, 2008. The implementation of this standard did not have a material impact on the Company’s financial position, results of operations or cash flows.

 

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS No. 157”). SFAS No. 157 establishes a framework for the measurement of assets and liabilities that use fair value and expands disclosures about fair value measurements. SFAS No. 157 will apply whenever another US GAAP standard 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 No. 157 is effective for financial assets and financial liabilities for fiscal years beginning after November 15, 2007.  In February 2008, the FASB issued FSP 157-1, Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13, which removed leasing transactions accounted for under Statement 13 and related guidance from the scope of SFAS No. 157.  In addition, the FASB issued FSP 157-2, Partial Deferral of the Effective Date of Statement 157, which deferred the effective date of SFAS No. 157 for all nonfinancial assets and nonfinancial liabilities to fiscal years beginning after November 15, 2008.

 

The implementation of SFAS No. 157 for financial assets and financial liabilities, effective January 1, 2008, did not have a material impact on the Company’s financial position, results of operations or cash flow. The Company is currently assessing the impact of SFAS No. 157 for nonfinancial assets and nonfinancial liabilities on its financial position, results of operations and cash flows.

 

SFAS No. 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price).  SFAS No. 157 classifies the inputs used to measure fair value into the following hierarchy:

 

·

 

Level 1–

Unadjusted quoted prices in active markets for identical assets or liabilities

·

 

Level 2–

Unadjusted quoted prices in active markets for similar assets or liabilities, unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active or inputs other than quoted prices that are observable for the asset or liability

·

 

Level 3 –

Unobservable inputs for the assets or liabilities

 

The Company utilizes the best available information in measuring fair value.  Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.  The Company

 

8



Table of Contents

 

has determined that its financial assets are currently level 1 in the fair value hierarchy.  Financial assets at September 30, 2008 consist solely of investments held in money market accounts.

 

In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (“SFAS No. 141-R”), which will become effective for business combination transactions having an acquisition date on or after January 1, 2009.  This standard requires the acquiring entity in a business combination to recognize the assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree at the acquisition date to be measured at their respective fair values. SFAS No. 141-R requires acquisition related costs, as well as restructuring costs the acquirer expects to incur for which it is not obligated at the acquisition date, to be recorded against income rather than included in the purchase price determination.  It also requires recognition of contingent arrangements at their acquisition date fair values, with subsequent changes in fair value generally reflected in income. The Company does not anticipate that the adoption of SFAS No. 141-R will have a material impact on its financial position and results of operations.

 

In June 2007, the FASB ratified Emerging Issues Task Force Issue No. 06-11, Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards (“EITF No. 06-11”). EITF No. 06-11 applies to share-based payment arrangements with dividend protection features that entitle an employee to receive dividends or dividend equivalents on nonvested equity-based shares or units, when those dividends or dividend equivalents are charged to retained earnings and result in an income tax deduction for the employer under SFAS No. 123 (revised 2004), Share-Based Payment. Under EITF No. 06-11, a realized income tax benefit from dividends or dividend equivalents charged to retained earnings and paid to an employee for nonvested equity-based shares or units should be recognized as an increase in additional paid-in capital. EITF No. 06-11 is effective for fiscal years beginning after December 15, 2007 with early adoption permitted. The Company adopted EITF No. 06-11 on January 1, 2008, which did not have a material effect on the Company’s results of operations or financial position.

 

2.             DISCONTINUED OPERATIONS

 

After completion of a comprehensive strategic review, the Company decided to focus on the growth of its core co-employment offering, Gevity EdgeTM. As such, on February 25, 2008, the board of directors of the Company approved a plan to discontinue the Company’s non co-employment offering, Gevity Edge SelectTM. Clients that existed at February 25, 2008, were notified of this decision and given until June 30, 2008 to transition to other service providers.  The Company completed its transition of all remaining Gevity Edge Select clients during the second quarter of 2008, processing the final payrolls dated June 30, 2008.  The Company has determined that the exit from the Gevity Edge Select business meets the criteria of discontinued operations in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets.  Accordingly, the results of operations and related exit costs associated with Gevity Edge Select have been reported as discontinued operations for all periods presented.

 

Summarized operating results for the discontinued operations of Gevity Edge Select for the three and nine month periods ended September 30, 2008 and September 30, 2007 are as follows:

 

 

 

Three Months
Ended
September 30,
2008

 

Three Months
Ended
September 30,
2007

 

Revenues

 

$

49

 

$

993

 

Exit costs

 

38

 

 

All other expenses, net

 

300

 

2,199

 

Loss from discontinued operations before taxes

 

(289

)

(1,206

)

Income tax benefit

 

110

 

451

 

Loss from discontinued operations

 

$

(179

)

$

(755

)

 

 

 

Nine Months
Ended
September 30,
2008

 

Nine Months
Ended
September 30,
2007

 

Revenues

 

$

1,544

 

$

2,454

 

Exit costs

 

2,952

 

 

All other expenses, net

 

3,896

 

5,317

 

Loss from discontinued operations before taxes

 

(5,304

)

(2,863

)

Income tax benefit

 

2,014

 

1,064

 

Loss from discontinued operations

 

$

(3,290

)

$

(1,799

)

 

Pre-tax costs associated with the exit from the Gevity Edge Select business approximate $2,952 for the nine months ended September 30, 2008.  Management does not expect to incur any further significant costs in connection with the exit

 

9



Table of Contents

 

from this business. Costs associated with the exit from the Gevity Edge Select business are included in the loss from discontinued operations and are presented in the following table:

 

 

 

Three Months
Ended
September 30,
2008

 

Nine Months

Ended
September 30,
2008

 

Contract termination costs

 

$

 

$

1,335

 

Severance and other termination benefits

 

38

 

1,085

 

Goodwill impairment loss

 

 

532

 

Total Gevity Edge Select exit costs

 

$

38

 

$

2,952

 

 

Activity in the liability accounts associated with the exit costs related to the discontinuation of the Gevity Edge Select business for the nine months ended September 30, 2008 is presented in the following table and is included within accounts payable and other accrued liabilities in the condensed consolidated balance sheet:

 

 

 

Severance and
Termination
Benefits

 

Contract
Termination
Costs

 

Total

 

Balance at December 31, 2007

 

$

 

$

 

$

 

Expense accruals

 

1,085

 

1,335

 

2,420

 

Cash payments

 

(1,040

)

(825

)

(1,865

)

Balance at September 30, 2008

 

$

45

 

$

510

 

$

555

 

 

3.             MARKETABLE SECURITIES - RESTRICTED

 

At September 30, 2008 and December 31, 2007, 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. 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, 2008 and 2007, there were no realized gains or losses from the sale of marketable securities.  As of September 30, 2008 and December 31, 2007, there were no unrealized gains or losses on marketable securities.

 

During the third quarter of 2008, the Company reached a settlement with the former HRA owners for (i) the release of $1,400 held in escrow related to purchase price contingencies for the acquisition of HRA, and (ii) the indemnification for certain representations made by the former owners of HRA in connection with the acquisition of HRA.  The settlement resulted in the release to Gevity of the $1,400 held in escrow as well a recovery by Gevity of approximately $100 related to indemnification claims as of September 30, 2008. The indemnification recovery of $100 is included in the loss from discontinued operations for the three and nine months ended September 30, 2008.

 

4.             ACCOUNTS RECEIVABLE

 

At September 30, 2008 and December 31, 2007, accounts receivable from clients consisted of the following:

 

 

 

September 30,
2008

 

December 31,
2007

 

Billed to clients

 

$

7,625

 

$

9,124

 

Unbilled revenues

 

118,809

 

121,917

 

 

 

126,434

 

131,041

 

Less: Allowance for doubtful accounts

 

(1,486

)

(832

)

Total

 

$

124,948

 

$

130,209

 

 

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.

 

5.             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

 

10



Table of Contents

 

currently insured by member insurance companies of American International Group, Inc. (“AIG”) and includes coverage for the 2003 through 2008 policy years. In states where private insurance is not permitted, client employees are covered by state insurance funds.

 

Under the 2008 workers’ compensation program with AIG, AIG is responsible for paying the claims; the Company is responsible for paying to AIG the first $1,000 per occurrence of claims and AIG is responsible for amounts in excess of $1,000 per occurrence.  In addition, the AIG policy provides $20,000 of aggregate stop loss coverage once claims in the deductible layer exceed $138,500.

 

Similar to 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 $1,000 per occurrence deductible layer. AIG deposits the premiums into an interest bearing loss fund collateral account for reimbursement of paid claims up to the $1,000 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 2008 program, the Company initially agreed to pay $55,510 of loss fund collateral premium, subject to certain volume adjustments, and is guaranteed to receive a 3.19% 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 early, the interest rate is adjusted downward based upon a sliding scale. The 2008 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. In the third quarter of 2008 AIG agreed to reduce the 2008 loss fund collateral premium payments by $13,858 to $41,652, based upon favorable loss trends and the sufficiency of the overall loss collateral funds held by AIG related to all policy years. This reduction will eliminate the fourth quarter loss fund collateral premium payments.

 

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, 2008 and 2007, the Company revised its ultimate loss estimates for prior open policy years, which resulted in a net reduction of workers’ compensation expense of approximately $3,306 and $4,063, respectively. During the nine months ended September 30, 2008 and 2007, the Company revised its ultimate loss estimates for prior open policy years, which resulted in a net reduction of workers’ compensation expense of approximately $13,349 and $12,106, respectively. These revisions were based upon continued favorable claims development that occurred during the periods.

 

Also during the three months ended September 30, 2008 and 2007, the Company received from AIG its annual premium expense audit related to premiums, taxes and administrative costs of the prior policy years, which resulted in an increase in workers’ compensation expense during the third quarter of 2008 of $44 and a decrease in workers’ compensation expense during the third quarter of 2007 of $955.  As a result of the premium expense audit, the Company expects to receive $4,602 from AIG during the fourth quarter of 2008.

 

The balance in the loss fund collateral accounts (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 accounts are recorded as reductions to the workers’ compensation receivable, net. During the first three quarters of 2008 and 2007, AIG released approximately $35,127 ($33,127 in the third quarter) and $48,148 ($43,148 in the third quarter), respectively, of cash, from the loss fund collateral accounts in connection with the annual loss fund collateral true-up.

 

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, 2008 and December 31, 2007, the weighted average discount rate used to calculate the net present value of the claim liability was 3.91% and 4.15%, respectively. Premium payments made to AIG relating to program years 2000 through 2008 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, 2008 and December 31, 2007 of $120,896 and $122,271, respectively, of which $23,996 and $16,950 was classified as short-term at September 30, 2008 and December 31, 2007, respectively. The short-term workers’ compensation receivable consists of $4,602 expected to be received in the fourth quarter of 2008 related

 

11



Table of Contents

 

to the 2008 premium expense audit true-up and $19,394 expected to be received in the third quarter of 2009 related to the 2009 annual loss fund collateral true-up.  The Company is currently negotiating with AIG and CNA regarding the potential release during 2009 of a substantial amount of loss fund collateral relating to excess collateral held by AIG for the 2000-2002 policy years.  The Company has not reclassified this amount into short-term receivable at September 30, 2008.

 

The workers’ compensation receivable from AIG represents a significant concentration of credit risk for the Company. Gevity has various commercial insurance relationships with AIG Commercial Insurance Group (“AIG CI”), a subsidiary of AIG, including our workers’ compensation program.  As of November 7, 2008, AIG CI’s financial strength rating by A.M. Best is an “A”.  The Company does not believe that the current financial condition of AIG will have a material adverse effect on AIG CI or the Company’s workers’ compensation receivable, net, as of September 30, 2008.

 

6.             INTANGIBLE ASSETS

 

At September 30, 2008 and December 31, 2007, intangible assets consisted of the following:

 

 

 

September 30,
2008

 

December 31,
2007

 

Purchased client service agreements

 

$

48,097

 

$

48,097

 

Accumulated amortization

 

(44,108

)

(36,711

)

Intangible assets, net

 

$

3,989

 

$

11,386

 

 

Amortization expense for the three months ended September 30, 2008 and 2007 was $2,410 and $2,524, respectively. Amortization expense for the nine months ended September 30, 2008 and 2007 was $7,397 and $7,516, respectively. Estimated amortization expense for the remainder of 2008 and for 2009 is $2,164 and $1,825, respectively.

 

7.             HEALTH BENEFITS

 

Blue Cross Blue Shield of Florida, Inc. and its subsidiary Health Options, Inc. (together “BCBSF/HOI”) is the Company’s primary healthcare partner in Florida, delivering medical care benefits to approximately 19,000 Florida-based client employees. The Company’s policy with BCBSF/HOI is a minimum premium policy expiring September 30, 2009. Pursuant to this policy, the Company is obligated to reimburse BCBSF/HOI 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 in the agreement and aggregate loss coverage is provided to the Company at the level of 115% of projected claims.  The Company is required to pre-fund the estimated monthly expenses and claim liability charges of the plan by the first of each calendar month.  The estimated monthly expenses are based upon the Minimum Premium Rate and the Annual Excess liability rate, as set forth in the agreement, times the number of insureds. The monthly estimated claim liability charge is based upon an average of monthly paid claims as determined by BCBSF/HOI based on three month periods specified in the agreement.  Differences between the pre-funded amounts and actual amounts subsequently determined shall be settled in the following month. As part of the Company’s obligation to BCBSF/HOI, the Company posted an irrevocable letter of credit in favor of BSBSF/HOI in an initial amount of $5,000 on October 1, 2008, which shall be increased monthly by approximately $1,000 over a seven month period until it reaches $11,766 on May 1, 2009.

 

Aetna Health, Inc. (“Aetna”) is the Company’s largest medical care benefits provider for approximately 17,000 client employees outside the state of Florida. The Company’s 2007/2008 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. Beginning with the 2007 plan year, Aetna 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, 2008, UnitedHealthcare provides medical care benefits to approximately 3,000 client employees. The UnitedHealthcare plan is a fixed cost contract. Effective May 1, 2008, UnitedHealthcare and the Company amended their agreement to extend coverage availability through September 30, 2009 for those clients covered by UnitedHealthcare as of May 1, 2008.

 

The Company provides coverage under various regional medical benefit plans to approximately 1,000 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.

 

12



Table of Contents

 

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, 2008 and December 31, 2007 are $8,804 and $10,356, respectively, of short-term liabilities related to the Company’s health benefit plans. Of these amounts $8,773 and $10,100, respectively, represent an accrual for the estimate of claims incurred but not reported at September 30, 2008 and December 31, 2007.

 

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, plan enrollment and medical trend rates.

 

During the three months ended September 30, 2008, the Company reduced its reserve for incurred but not reported claims by approximately $940, which decreased its cost of services and resulted in a health plan surplus for the period. This reduction was based upon favorable claims development.  There were no changes to the health plan reserves that impacted cost of services during the three months ended September 30, 2007.

 

During the nine months ended September 30, 2008 and 2007, the Company reduced its reserve for incurred but not reported claims by approximately $2,671 and $2,600, respectively, which decreased its cost of services and resulted in a health plan surplus for each period. These reductions were based upon favorable claims development.

 

8.             REVOLVING CREDIT FACILITY

 

The Company maintains a 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 allowed 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. On February 25, 2008, the Company entered into the Third Amendment to Amended and Restated Credit Agreement (“Third Amendment”). The Third Amendment provides for the grant of security interests and liens in substantially all the property and assets (with agreed upon carveouts and exceptions) of the Company to the Lenders. The Third Amendment also provides for an automatic decrease of the aggregate revolving commitment of the credit facility from $100,000 to $85,000 on September 30, 2008. The Third Amendment includes additional covenants and amends certain financial covenants and negative covenants with an effective date of December 31, 2007. These include the maintenance of a minimum consolidated net worth, a maximum consolidated adjusted leverage ratio, a minimum consolidated fixed charge coverage ratio of 1.25:1.0, minimum monthly cumulative  EBITDA requirements (for 2008 only), and a ceiling on consolidated capital expenditures.  The revised covenants set forth in the Third Amendment now restrict the Company’s ability to repurchase shares of its capital stock in certain circumstances and make acquisitions and requires the Company to provide certain period reports relating to budget and profits and losses, intellectual property and insurance policies.  Each of these covenants is based on defined terms and contain exceptions in the Credit Agreement, as amended.

 

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 1.50% to 2.25% for Eurodollar Rate Loans, and from 0.25% to 1.00% for Prime Rate Loans, depending upon the Company’s consolidated leverage ratio) plus one of the following indexes: (i) Eurodollar Rate; or (ii) Prime Rate (each as defined in the credit agreement). Up to $20,000 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 ranging from 1.50% to 2.25% per annum will be charged on the aggregate stated amount of each outstanding letter of credit. A fee ranging from 0.30% to 0.45% (based upon the Company’s consolidated leverage ratio) is charged on any unused portion of the loan commitment. At September 30, 2008 the Company had outstanding advances of $32,500 at a weighted average interest rate of 5.71%. At December 31, 2007, the Company had outstanding advances of $17,367 at an interest rate of 6.11%.

 

The Company was in compliance with all of the covenants under the credit agreement at September 30, 2008. 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, 2008, the maximum facility available to the Company was approximately $66,400.

 

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

 

13



Table of Contents

 

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 may not be able to meet one of its four covenants (the monthly cumulative EBITDA covenant as defined in the credit agreement) during the fourth quarter of 2008 and may need to seek a waiver of this covenant from the Lenders.  The monthly cumulative EBITDA covenant is only in effect through December 31, 2008 and is not required after December 31, 2008.  If the Company requires a waiver in the fourth quarter of 2008 and the waiver is not obtained, this may have a material impact on the Company’s cash flow and ability to conduct its operations.

 

The Company recorded $789 and $1,131 of interest expense for the three months ended September 30, 2008 and 2007, 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, 2008 and 2007 was approximately $2,034 and $2,094, respectively.

 

9.             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 (“PEO”) constitute an evolving area due to uncertainties resulting from the non-traditional employment relationship among the PEO, the client and the client employees. Many federal and state laws relating to tax and employment matters were enacted before the widespread existence of PEO’s and do not specifically address the obligations and responsibilities of these PEO relationships. If the Internal Revenue Service concludes that PEO’s 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 and the State of California entered into negotiations in May 2008 in an attempt to resolve the dispute.  As a result, Gevity proposed a settlement offer in June 2008 that included a cash payment offer of $1,200, conceding to the State’s higher overall unemployment tax rate for tax years 2007 – 2008, along with revisions to its unemployment tax reporting methods for post 2008 tax years in consideration for the State’s withdrawal of the existing Assessment for 2004 -2006 (the “ Settlement Offer”).  The Settlement Offer is currently under review by the State.  The Company’s financial statements for the three and nine months ended September 30, 2008 reflect a charge of $82 and $1,132, respectively,  within cost of services, reflecting estimated amounts due in connection with additional unemployment tax costs for the term January 1, 2007 – September 30, 2008 should the State of California accept the Settlement Offer.  In the event that the Company is not able to reach a settlement with the State of California, the Company believes it has valid defenses regarding the assessments and will vigorously challenge the assessments.

 

14



Table of Contents

 

10.          EQUITY

 

Share Repurchase Program
 

Under the current share repurchase program (announced by the Company in August 2006 and increased in April 2007), a total of $111,527 of the Company’s common stock is authorized to be repurchased. Share repurchases under the 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 variety of factors including price, regulatory requirements, overall market conditions and other corporate opportunities. As of December 31, 2007, total shares repurchased under this program were 2,886,884 at a total cost of $60,131.  No shares were repurchased under this program during the nine month period ended September 30, 2008. The Company has suspended its share repurchase program for the time being in order to invest available cash in its business.

 

11.          INCOME TAXES

 

The Company records income tax expense (benefit) 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, 2008 and 2007, the Company’s effective rate for income from continuing operations was (46.9%) and 32.1%, respectively. The Company’s effective tax rate for the nine months ended September 30, 2008 and 2007 was 114.1% and 34.2%, respectively. The Company’s effective tax rates differed from the statutory federal tax rates because of the impact of state taxes, federal tax credits and discrete tax adjustments made during the third quarter of 2008.  The majority of the discrete adjustments made during the third quarter of 2008 related to $456 of interest expense recorded for estimated net additional taxes due determined in connection with the ongoing Internal Revenue Service examination of the Company’s 2004 tax return.   The additional taxes due of $2,246 (net, excluding interest) resulted in an adjustment in the Company’s balance sheet between current taxes payable and the Company’s current deferred tax liability during the third quarter of 2008.

 

12.          (LOSS) EARNINGS PER SHARE (“EPS”)

 

For the three months ended September 30, 2008, 324,428 common stock equivalents were excluded from the diluted earnings per share computation as their effect was anti-dilutive. Additionally, 744,265 options to purchase common stock, weighted for the portion of the period they were outstanding, were excluded from the diluted earnings per share computation substantially because the exercise prices of the options were greater than the average price of the common stock.

 

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 months ended September 30, 2007 is as follows:

 

 

 

Net Income
(Loss)
(Numerator)

 

Shares
(Denominator)

 

Per Share
Amount

 

For the Three Months Ended September 30, 2007:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic EPS:

 

 

 

 

 

 

 

Income from continuing operations

 

$

3,209

 

 

 

$

0.14

 

Loss from discontinued operations

 

(755

)

 

 

(0.03

)

Net income

 

$

2,454

 

23,235,677

 

$

0.11

 

 

 

 

 

 

 

 

 

Effect of dilutive securities:

 

 

 

 

 

 

 

Options to purchase common stock

 

 

 

526,002

 

 

 

Non-vested stock

 

 

 

7,683

 

 

 

 

 

 

 

 

 

 

 

Diluted EPS:

 

 

 

 

 

 

 

Income from continuing operations

 

$

3,209

 

 

 

$

0.13

 

Loss from discontinued operations

 

(755

)

 

 

(0.03

)

Net income

 

$

2,454

 

23,769,362

 

$

0.10

 

 

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 prices of the options were greater than the average price of the common stock.

 

15



Table of Contents

 

For the nine months ended September 30, 2008, 367,579 common stock equivalents were excluded from the diluted earnings per share computation as their effect was anti-dilutive.  Additionally, 721,449 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 prices of the options were greater than the average price of the common stock.

 

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 nine months ended September 30, 2007 is as follows:

 

 

 

Net Income
(Loss)
(Numerator)

 

Shares
(Denominator)

 

Per Share
Amount

 

For the Nine Months Ended September 30, 2007:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic EPS:

 

 

 

 

 

 

 

Income from continuing operations

 

$

11,457

 

 

 

$

0.48

 

Loss from discontinued operations

 

(1,799

)

 

 

(0.08

)

Net income

 

$

9,658

 

23,860,934

 

$

0.40

 

 

 

 

 

 

 

 

 

Effect of dilutive securities:

 

 

 

 

 

 

 

Options to purchase common stock

 

 

 

569,597

 

 

 

Non-vested stock

 

 

 

19,239

 

 

 

 

 

 

 

 

 

 

 

Diluted EPS:

 

 

 

 

 

 

 

Income from continuing operations

 

$

11,457

 

 

 

 

$

0.47

 

Loss from discontinued operations

 

(1,799

)

 

 

(0.07

)

Net income

 

$

9,658

 

24,449,770

 

$

0.40

 

 

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 prices of the options were greater than the average price of the common stock.

 

16



Table of Contents

 

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, 2007 (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

 

Gevity HR, Inc. (“Gevity” or the “Company”) specializes in providing small- and medium-sized businesses nationwide with a wide-range of competitively priced payroll, insurance and human resource (“HR”) outsourcing services.

 

Gevity is a professional employer organization (“PEO”) that provides certain HR-related services and functions for clients under a co-employment arrangement. Under the co-employment arrangement, Gevity assumes certain HR/employment-related responsibilities, as provided for by a professional services agreement (“PSA”) and as may be required under certain state laws. The co-employment relationship allows the PEO to become an employer of record and administrator for matters such as employment tax and insurance-related paperwork as well as relieving the client of these time-consuming administrative burdens. Because a PEO can aggregate a number of small clients into a larger pool, the PEO is able to create economies of scale—enabling smaller businesses to get competitively priced benefits.

 

The core services typically provided by a PEO are payroll processing, access to health and welfare benefits and workers’ compensation coverage. In addition to these core offerings, the Company’s Gevity Edge™ offering provides value-adding HR services such as employee retention programs, new hire support, employment practices liability insurance coverage and performance management programs, all designed to help clients effectively grow their businesses. Gevity is one of few PEOs with dedicated field-based HR consultants. The Company’s HR consultants work directly with clients to provide HR expertise and HR strategies that can help drive their business forward, while lowering potential exposure to HR-related claims.

 

Previously, Gevity also provided service to its clients through a non co-employment relationship. The non co-employment relationship between Gevity and its clients was also governed by a PSA. Under the non co-employment PSA, the employment related liabilities remained with the client and the client was responsible for its own workers’ compensation insurance and health and welfare plans. The Company assumed responsibility for payroll administration (including payroll processing, payroll tax filing and W-2 preparation) and provided access to all of its HR services. This non co-employment offering was known as Gevity Edge Select™.  After completion of a comprehensive strategic review, the Company decided to focus on the growth of its core co-employment offering, Gevity Edge. As such, on February 25, 2008, the board of directors of the Company approved a plan to discontinue the Company’s non co-employment offering, Gevity Edge Select. Clients that existed at February 25, 2008, were notified of this decision and given until June 30, 2008 to transition to other service providers.  The Company completed its transition of all remaining Gevity Edge Select clients during the second quarter of 2008, processing of the final payrolls dated June 30, 2008.  The Company has determined that the exit from the Gevity Edge Select business meets the criteria of discontinued operations in accordance with Statement of Financial Accounting Standards  No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets.  Accordingly, the results of operations and related exit costs associated with Gevity Edge Select have been reported as discontinued operations for all periods presented   The impact of this decision on the results of operations of the Company is included in the “Results of Operations” discussion that follows under “Discontinued Operations.”

 

RESULTS OF OPERATIONS

 

Three Months Ended September 30, 2008 Compared to Three Months Ended September 30, 2007

 

Revenue

 

The following table presents certain information related to the Company’s revenues from continuing operations for the three months ended September 30, 2008 and 2007:

 

17



Table of Contents

 

 

 

Three Months Ended

 

 

 

 

 

September 30,
2008

 

September 30,
2007

 

%
Change

 

 

 

(in thousands, except statistical data)

 

Revenues:

 

 

 

 

 

 

 

Professional service fees

 

$

27,898

 

$

35,337

 

(21.1

)%

Employee health and welfare benefits

 

79,489

 

85,763

 

(7.3

)%

Workers’ compensation

 

14,967

 

21,064

 

(28.9

)%

State unemployment taxes and other

 

2,723

 

3,351

 

(18.7

)%

Total revenues

 

$

125,077

 

$

145,515

 

(14.0

)%

 

 

 

 

 

 

 

 

Statistical data:

 

 

 

 

 

 

 

Gross salaries and wages (in thousands)

 

$

1,067,071

 

$

1,203,050

 

(11.3

)%

Client employees at period end

 

104,278

 

118,728

 

(12.2

)%

Clients at period end (1)

 

5,983

 

7,020

 

(14.8

)%

Average number of client employees/clients at period end

 

17

 

17

 

n/a

 

Average number of client employees paid (2)

 

95,717

 

113,146

 

(15.4

)%

Annualized average wage per average client employees paid (3)

 

$

44,593

 

$

42,531

 

4.8

%

Workers’ compensation billing per one hundred dollars of workers’ compensation wages (4)

 

$

1.59

 

$

1.97

 

(19.3

)%

Workers’ compensation manual premium per one hundred dollars of workers’ compensation wages (4), (5)

 

$

1.75

 

$

2.17

 

(19.4

)%

Annualized professional service fees per average number of client employees paid (3)

 

$

1,166

 

$

1,249

 

(6.6

)%

Client employee health benefits participation

 

37

%

37

%

n/a

 

 


(1)       Clients measured by individual client Federal Employer Identification Number (“FEIN”).

 

(2)       The average number of client employees paid 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 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.

 

(4)       Workers’ compensation wages exclude the wages of clients electing out of the Company’s workers’ compensation program.

 

(5)       Manual premium rate data is derived from tables of member insurance companies of American International Group, Inc. (“AIG”) in effect for 2008 and 2007, respectively.

 

For the three months ended September 30, 2008, total revenues were $125.1 million compared to $145.5 million for the three months ended September 30, 2007, representing a decrease of $20.4 million or 14.0%. This decrease was a result of the reduction in all revenue components as described below.

 

As of September 30, 2008, the Company served 5,983 clients, as measured by each client’s FEIN, with 104,278 active client employees. This compares to 7,020 clients, as measured by each client’s FEIN, with 118,728 active client employees at September 30, 2007.  The average number of client employees paid was 95,717 for the third quarter of 2008 compared to 113,146 for the third quarter of 2007.  The declines in client and client employee metrics were attributable to the impact of higher than expected client and client employee attrition levels during 2007 and the first quarter of 2008 primarily as a result of poor economic conditions, and lower than expected production levels during 2007 and 2008.  In addition, during the first three quarters of 2008, the Company terminated approximately 240 unprofitable clients (impacting approximately 4,500 client employees) in an effort to improve overall earnings in the long-term.

 

Revenues from professional service fees decreased to $27.9 million for the three months ended September 30, 2008, from $35.3 million for the three months ended September 30, 2007, representing a decrease of $7.4 million or 21.1%. The decrease was primarily due to the overall decrease in the average number of client employees paid as discussed above. Annualized professional service fees per average number of client employees paid decreased by 6.6%, from $1,249 for the three months ended September 30, 2007 to $1,166 for the three months ended September 30, 2008. This decrease was primarily attributable to general market dynamics and the impact of the 2008 terminations of unprofitable clients which, despite having a negative impact on gross profit, generally had higher professional service fee levels.

 

Revenues for providing health and welfare benefits for the three months ended September 30, 2008 were $79.5 million as compared to $85.8 million for the three months ended September 30, 2007, representing a decrease of $6.3 million

 

18



Table of Contents

 

or 7.3%. 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 13.9% 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.

 

Revenues for providing workers’ compensation insurance coverage decreased to $15.0 million for the three months ended September 30, 2008, from $21.1 million for the three months ended September 30, 2007, representing a decrease of $6.1 million or 28.9%. Workers’ compensation billings, as a percentage of workers’ compensation wages for the three months ended September 30, 2008, were 1.59% as compared to 1.97% for the same period in 2007, representing a decrease of 19.3%. Workers’ compensation revenue decreased in the third quarter of 2008 primarily due to the combined effects of a decrease in billings for Florida clients reflecting a reduction in Florida manual premium rates beginning in January 2008 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 19.4% during the three months ended September 30, 2008 as compared to the three months ended September 30, 2007. 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.

 

Revenues from state unemployment taxes and other revenues decreased to $2.7 million for the three months ended September 30, 2008 from $3.4 million for the three months ended September 30, 2007, representing a decrease of $0.6 million or 18.7%. The decrease was primarily due to the decrease in wages that provide unemployment tax revenue to the Company.

 

Cost of Services

 

The following table presents certain information related to the Company’s cost of services from continuing operations for the three months ended September 30, 2008 and 2007:

 

 

 

Three Months Ended

 

 

 

 

 

September 30,
2008

 

September 30,
2007

 

%
Change

 

 

 

(in thousands, except statistical data)

 

Cost of services:

 

 

 

 

 

 

 

Employee health and welfare benefits

 

$

78,549

 

$

85,763

 

(8.4

)%

Workers’ compensation

 

7,958

 

10,963

 

(27.4

)%

State unemployment taxes and other

 

4,278

 

4,673

 

(8.5

)%

Total cost of services

 

$

90,785

 

$

101,399

 

(10.5

)%

 

 

 

 

 

 

 

 

Statistical data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross salaries and wages (in thousands)

 

$

1,067,071

 

$

1,203,050

 

(11.3

)%

Average number of client employees paid (1)

 

95,717

 

113,146

 

(15.4

)%

Workers compensation cost rate per one hundred dollars of workers’ compensation wages (2)

 

$

0.84

 

$

1.02

 

(17.6

)%

Number of workers’ compensation claims (3)

 

867

 

1,225

 

(29.2

)%

Frequency of workers’ compensation claims per one million dollars of workers’ compensation wages (2)

 

0.92

x

1.14

x

(19.3

)%

 


(1)     The average number of client employees paid 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 $90.8 million for the three months ended September 30, 2008, compared to $101.4 million for the three months ended September 30, 2007, representing a decrease of $10.6 million or 10.5%. This decrease was due to the reduction in all of the cost of services components as described below.

 

19



Table of Contents

 

The cost of providing health and welfare benefits to clients’ employees for the three months ended September 30, 2008 was $78.5 million as compared to $85.8 million for the three months ended September 30, 2007, representing a decrease of $7.2 million or 8.4%. 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.  In addition, the third quarter of 2008 was favorably impacted by the recognition of a health benefit surplus of $0.9 million based upon favorable claims experience.  The Company expects that price increases implemented in conjunction with healthcare renewals effective October 1, 2008 and the continuation of current claims experience will continue to favorably impact healthcare costs during 2008.

 

Workers’ compensation costs were $8.0 million for the three months ended September 30, 2008, as compared to $11.0 million for the three months ended September 30, 2007, representing a decrease of $3.0 million or 27.4%. Workers’ compensation costs decreased in the third quarter of 2008 primarily due to the approximate 15.4% reduction in the average number of client employees paid and related reduction in wages and claims. The three months ended September 30, 2008 and 2007 were also favorably impacted by the reduction in the prior years’ workers’ compensation loss estimates of approximately $3.3 million and $4.1 million, respectively, as a result of continued favorable claims development for those prior open policy years. The Company expects that if current claims development trends continue, this will have a favorable impact on workers’ compensation costs for the remainder of 2008.

 

State unemployment taxes and other costs were $4.3 million for the three months ended September 30, 2008, compared to $4.7 million for the three months ended September 30, 2007, representing a decrease of $0.4 million or 8.5%. The decrease in the Company’s co-employed client employees and related taxable wages were substantially offset by an increase in state unemployment tax rates beginning January 1, 2008, that were not passed along to clients.

 

Operating Expenses

 

The following table presents certain information related to the Company’s operating expenses from continuing operations for the three months ended September 30, 2008 and 2007:

 

 

 

Three Months Ended

 

 

 

 

 

September 30,
2008

 

September 30,
2007

 

% Change

 

 

 

(in thousands, except statistical data)

 

Operating expenses:

 

 

 

 

 

 

 

Salaries, wages and commissions

 

$

18,552

 

$

20,768

 

(10.7

)%

Other general and administrative

 

12,170

 

13,918

 

(12.6

)%

Depreciation and amortization

 

4,093

 

3,898

 

5.0

%

Total operating expenses

 

$

34,815

 

$

38,584

 

(9.8

)%

 

 

 

 

 

 

 

 

Statistical data:

 

 

 

 

 

 

 

Internal employees at quarter end

 

781

 

869

 

(10.1

)%

 

Total operating expenses were $34.8 million for the three months ended September 30, 2008 as compared to $38.6 million for the three months ended September 30, 2007, representing a decrease of $3.8 million or 9.8%.

 

Salaries, wages and commissions were $18.6 million for the three months ended September 30, 2008 as compared to $20.8 million for the three months ended September 30, 2007, representing a decrease of $2.2 million or 10.7%. The decrease is primarily a result of the net effect of the reduction in management and support personnel that occurred throughout 2007 and the first three quarters of 2008 and was partially offset by the annual increase in wages. Included in salaries, wages and commissions for the three months ended September 30, 2008 are severance costs of approximately $0.9 million related to cost alignment initiatives as compared to severance wages of approximately $1.6 million for the three months ended September 30, 2007 also related to cost alignment initiatives.

 

Other general and administrative expenses were $12.2 million for the three months ended September 30, 2008 as compared to $13.9 million for the three months ended September 30, 2007, representing a decrease of $1.7 million or 12.6%. The decrease occurred across all major components of general and administrative expenses and is attributable to cost alignment measures taken during 2007and 2008. Included in other general and administrative expenses for the three months ended September 30, 2008 are costs related to branch consolidations and reduction in staffing levels of approximately $0.4 million as compared to costs related to staffing reductions of $0.7 million for the three months ended September 30, 2007.

 

Depreciation and amortization expenses were $4.1 million for the three months ended September 30, 2008 compared to $3.9 million for the three months ended September 30, 2007, representing an increase of $0.2 million or 5.0%. The increase is primarily attributable to the amortization of technology assets capitalized during 2007 and 2008.

 

20



Table of Contents

 

The Company continues to review its overhead cost structure to ensure alignment with its business development.

 

Income Taxes

 

For the three months ended September 30, 2008, income tax expense was $0.6 million compared to income tax expense of $1.5 million for the three months ended September 30, 2007.  The decrease in income tax expense is primarily a function of the reduction in income from continuing operations.  The Company’s effective tax rate for the three months ended September 30, 2008 and 2007 was (46.9%) and 32.1%, respectively.  The Company’s effective tax rates differed from the statutory federal tax rates because of the impact of state taxes, federal tax credits and discrete tax adjustments made during the third quarter of 2008. The majority of the discrete tax adjustments made during the third quarter of 2008 related to $456 of interest expense recorded for estimated net additional taxes due determined in connection with the ongoing Internal Revenue Service examination of the Company’s 2004 income tax return.

 

Gross Profit, Operating (Loss) Income, (Loss) Income from Continuing Operations and Diluted (Loss) Earnings Per Share from Continuing Operations

 

As a net result of the factors described above, the following table summarizes the changes in gross profit, operating (loss) income, (loss) income from continuing operations and diluted (loss) earnings per share from continuing operations:

 

 

 

Three Months Ended

 

 

 

 

 

September 30,
2008

 

September 30,
2007

 

% Change

 

 

 

(in thousands, except per share and statistical data)

 

Gross profit

 

$

34,292

 

$

44,116

 

(22.3

)%

Operating (loss) income

 

$

(523

)

$

5,532

 

(109.5

)%

(Loss) income from continuing operations

 

$

(1,772

)

$

3,209

 

(155.2

)%

Diluted (loss) earnings per share from continuing operations

 

$

(0.07

)

$

0.13

 

(153.8

)%

Statistical data:

 

 

 

 

 

 

 

Annualized gross profit per average number of client employees paid (1)

 

$

1,433

 

$

1,560

 

(8.1

)%

Annualized operating (loss) income per average number of client employees paid (1)

 

$

(22

)

$

196

 

(111.2

)%

 


(1)   Annualized statistical information is based upon actual period-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.

 

Discontinued Operations

 

The loss from discontinued operations for the three months ended September 30, 2008 was $0.3 million ($0.2 million net of income tax) compared to a loss of $1.2 million ($0.8 million net of income tax) for the three months ended September 30, 2007.  The decrease in the loss of $0.9 million was primarily a result of the exit from the Gevity Edge Select business.  The Company’s operations related to Gevity Edge Select ceased on June 30, 2008.  The Company does not expect to incur any further significant costs related to the exit of this business.

 

Nine Months Ended September 30, 2008 Compared to Nine Months Ended September 30, 2007

 

Revenue

 

The following table presents certain information related to the Company’s revenues from continuing operations for the nine months ended September 30, 2008 and 2007:

 

21



Table of Contents

 

 

 

Nine Months Ended

 

 

 

 

 

September 30,
2008

 

September 30,
2007

 

%
Change

 

 

 

(in thousands, except statistical data)

 

Revenues:

 

 

 

 

 

 

 

Professional service fees

 

$

86,529

 

$

108,115

 

(20.0

)%

Employee health and welfare benefits

 

244,278

 

261,853

 

(6.7

)%

Workers’ compensation

 

46,056

 

63,562

 

(27.5

)%

State unemployment taxes and other

 

18,568

 

22,047

 

(15.8

)%

Total revenues

 

$

395,431

 

$

455,577

 

(13.2

)%

 

 

 

 

 

 

 

 

Statistical data:

 

 

 

 

 

 

 

Gross salaries and wages (in thousands)

 

$

3,194,314

 

$

3,636,023

 

(12.1

)%

Client employees at period end

 

104,278

 

118,728

 

(12.2

)%

Clients at period end (1)

 

5,983

 

7,020

 

(14.8

)%

Average number of client employees/clients at period end

 

17

 

17

 

n/a

 

Average number of client employees paid (2)

 

98,044

 

114,826

 

(14.6

)%

Annualized average wage per average client employees paid (3)

 

$

43,441

 

$

42,221

 

2.9

%

Workers’ compensation billing per one hundred dollars of workers’ compensation wages (4)

 

$

1.62

 

$

1.96

 

(17.3

)%

Workers’ compensation manual premium per one hundred dollars of workers’ compensation wages (4), (5)

 

$

1.77

 

$

2.17

 

(18.4

)%

Annualized professional service fees per average number of client employees paid (3)

 

$

1,177

 

$

1,255

 

(6.2

)%

Client employee health benefits participation

 

37

%

37

%

n/a

 

 


(1)       Clients measured by individual client Federal FEIN.

 

(2)       The average number of client employees paid 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 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.

 

(4)       Workers’ compensation wages exclude the wages of clients electing out of the Company’s workers’ compensation program.

 

(5)       Manual premium rate data is derived from tables of member insurance companies of AIG in effect for 2008 and 2007, respectively.

 

For the nine months ended September 30, 2008, total revenues were $395.4 million compared to $455.6 million for the nine months ended September 30, 2007, representing a decrease of $60.1 million or 13.2%. This decrease was a result of the reduction in all revenue components as described below.

 

As of September 30, 2008, the Company served 5,983 clients, as measured by each client’s FEIN, with 104,278 active client employees. This compares to 7,020 clients, as measured by each client’s FEIN, with 118,728 active client employees at September 30, 2007.  The average number of client employees paid by month was 98,044 for the nine months ended September 30, 2008 compared to 114,826 for the nine months ended September 30, 2007.  The declines in client and client employee metrics were attributable to the impact of higher than expected client and client employee attrition levels during 2007 and the first three quarters of 2008 primarily as a result of poor economic conditions, and lower than expected production levels during 2007 and 2008. In addition, during the first nine months of 2008, the Company terminated approximately 240 unprofitable clients (impacting approximately 4,500 client employees) in an effort to improve overall earnings in the long-term.

 

Revenues from professional service fees decreased to $86.5 million for the nine months ended September 30, 2008, from $108.1 million for the nine months ended September 30, 2007, representing a decrease of $21.6 million or 20.0%. The decrease was primarily due to the overall decrease in the average number of client employees paid as discussed above. Annualized professional service fees per average number of client employees paid decreased by 6.2%, from $1,255 for the nine months ended September 30, 2007 to $1,177 for the nine months ended September 30, 2008. This decrease was

 

22



Table of Contents

 

primarily attributable to general market dynamics and the impact of the 2008 terminations of unprofitable clients which, despite having a negative impact on gross profit, generally had higher professional service fee levels.

 

Revenues for providing health and welfare benefits for the nine months ended September 30, 2008 were $244.3 million as compared to $261.9 million for the nine months ended September 30, 2007, representing a decrease of $17.6 million or 6.7%. 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 14.4% 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.

 

Revenues for providing workers’ compensation insurance coverage decreased to $46.1 million for the nine months ended September 30, 2008, from $63.6 million for the nine months ended September 30, 2007, representing a decrease of $17.5 million or 27.5%. Workers’ compensation billings, as a percentage of workers’ compensation wages for the nine months ended September 30, 2008, were 1.62% as compared to 1.96% for the same period in 2007, representing a decrease of 17.3%. Workers’ compensation revenue decreased in the first three quarters of 2008 primarily due to a decrease in billings for Florida clients reflecting a reduction in Florida manual premium rates beginning in January 2008 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 18.4% during the nine months ended September 30, 2008 as compared to the nine months ended September 30, 2007. 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.

 

Revenues from state unemployment taxes and other revenues decreased to $18.6 million for the nine months ended September 30, 2008 from $22.0 million for the nine months ended September 30, 2007, representing a decrease of $3.5 million or 15.8%. The decrease was primarily due to the decrease in wages that provide unemployment tax revenue to the Company.

 

Cost of Services

 

The following table presents certain information related to the Company’s cost of services from continuing operations for the nine months ended September 30, 2008 and 2007:

 

 

 

Nine Months Ended

 

 

 

 

 

September 30,
2008

 

September 30,
2007

 

%
Change

 

 

 

(in thousands, except statistical data)

 

Cost of services:

 

 

 

 

 

 

 

Employee health and welfare benefits

 

$

241,607

 

$

259,252

 

(6.8

)%

Workers’ compensation

 

22,208

 

34,883

 

(36.3

)%

State unemployment taxes and other

 

25,164

 

25,769

 

(2.3

)%

Total cost of services

 

$

288,979

 

$

319,904

 

(9.7

)%

 

 

 

 

 

 

 

 

Statistical data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross salaries and wages (in thousands)

 

$

3,194,314

 

$

3,636,023

 

(12.1

)%

Average number of client employees paid (1)

 

98,044

 

114,826

 

(14.6

)%

Workers compensation cost rate per one hundred dollars of workers’ compensation wages (2)

 

$

0.78

 

$

1.07

 

(27.1

)%

Number of workers’ compensation claims (3)

 

2,666

 

3,531

 

(24.5

)%

Frequency of workers’ compensation claims per one million dollars of workers’ compensation wages (2)

 

0.94

x

1.09

x

(13.8

)%

 


(1)                   The average number of client employees paid 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 $289.0 million for the nine months ended September 30, 2008,

 

23



Table of Contents

 

compared to $319.9 million for the nine months ended September 30, 2007, representing a decrease of $30.9 million or 9.7%. This decrease was due to the reduction in all of the cost of services components as described below.

 

The cost of providing health and welfare benefits to clients’ employees for the nine months ended September 30, 2008 was $241.6 million as compared to $259.3 million for the nine months ended September 30, 2007, representing a decrease of $17.6 million or 6.8%. 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.  In addition, the first nine months of 2008 and 2007 were favorably impacted by the recognition of a health benefit surplus of $2.7 million and $2.6 million, respectively, based upon favorable claims experience.

 

Workers’ compensation costs were $22.2 million for the nine months ended September 30, 2008, as compared to $34.9 million for the nine months ended September 30, 2007, representing a decrease of $12.7 million or 36.3%. Workers’ compensation costs decreased in the first nine months of 2008 primarily due to the approximate 14.6% reduction in the average number of client employees paid and related reduction in wages and claims, and the reduction in the prior years’ workers’ compensation loss estimates of approximately $13.3 million as a result of continued favorable claims development for those prior open policy years. For the nine months ended September 30, 2007, the comparable reduction in prior years’ workers’ compensation loss estimates was $12.1 million.

 

State unemployment taxes and other costs were $25.2 million for the nine months ended September 30, 2008, compared to $25.8 million for the nine months ended September 30, 2007, representing a decrease of $0.6 million or 2.3%. The decrease in the Company’s client employees and related taxable wages were substantially offset by an increase in state unemployment tax rates beginning January 1, 2008, that were not passed along to clients.  In addition, during the second and third quarters of 2008, the Company recorded a total of $1.1 million of state unemployment tax expense related to a settlement offer with the State of California as previously described in Note 9 to the condensed consolidated financial statements.

 

Operating Expenses

 

The following table presents certain information related to the Company’s operating expenses from continuing operations for the nine months ended September 30, 2008 and 2007:

 

 

 

Nine Months Ended

 

 

 

 

 

September 30,
2008

 

September 30,
2007

 

% Change

 

 

 

(in thousands, except statistical data)

 

Operating expenses:

 

 

 

 

 

 

 

Salaries, wages and commissions

 

$

56,089

 

$

62,493

 

(10.2

)%

Other general and administrative

 

36,000

 

42,846

 

(16.0

)%

Depreciation and amortization

 

11,971

 

11,431

 

4.7

%

Total operating expenses

 

$

104,060

 

$

116,770

 

(10.9

)%

 

 

 

 

 

 

 

 

Statistical data:

 

 

 

 

 

 

 

Internal employees at quarter end

 

781

 

869

 

(10.1

)%

 

Total operating expenses were $104.1 million for the nine months ended September 30, 2008 as compared to $116.8 million for the nine months ended September 30, 2007, representing a decrease of $12.7 million or 10.9%.

 

Salaries, wages and commissions were $56.1 million for the nine months ended September 30, 2008 as compared to $62.5 million for the nine months ended September 30, 2007, representing a decrease of $6.4 million or 10.2%. The decrease is primarily a result of the net effect of the reduction in management and support personnel that occurred throughout 2007 and 2008 and was partially offset by the annual increase in wages. Additionally, severance costs were approximately $2.1 million during the nine months ended September 30, 2008 compared to severance costs incurred during the nine months ended September 30, 2007 of $3.3 million and are primarily related to cost alignment efforts that have occurred throughout the periods.

 

Other general and administrative expenses were $36.0 million for the nine months ended September 30, 2008 as compared to $42.8 million for the nine months ended September 30, 2007, representing a decrease of $6.8 million or 16.0%. The decrease occurred across most major components of general and administrative expenses and is attributable to cost alignment measures taken during 2007 and the first nine months of 2008.  Included in other general and administrative expenses for the nine months ended September 30, 2008 are approximately $1.6 million of expenses related to cost alignment initiatives including employee outplacement benefits and costs associated with field office consolidations.

 

24



Table of Contents

 

Depreciation and amortization expenses were $12.0 million for the nine months ended September 30, 2008 compared to $11.4 million for the nine months ended September 30, 2007, representing an increase of $0.5 million or 4.7%. The increase is primarily attributable to the amortization of technology assets capitalized during 2007 and 2008.

 

The Company continues to review its overhead cost structure to ensure alignment with its business development.

 

Income Taxes

 

For the nine months ended September 30, 2008, the Company had an income tax expense of $0.7 million compared to income tax expense of $6.0 million for the nine months ended September 30, 2007. The change is primarily due to the reduction in income from continuing operations for the first nine months of 2008 compared to the first nine months of 2007. The Company’s effective tax rate for the nine months ended September 30, 2008 and 2007 was 114.1% and 34.2%, respectively.  The Company’s effective tax rates differed from the statutory federal tax rates because of state taxes and federal tax credits as well as discrete tax adjustments recorded during the third quarter of 2008 as previously discussed.

 

Gross Profit, Operating Income, (Loss) Income From Continuing Operations and Diluted Earnings Per Share From Continuing Operations

 

As a net result of the factors described above, the following table summarizes the changes in gross profit, operating income, (loss) income from continuing operations and diluted earnings per share from continuing operations:

 

 

 

Nine Months Ended

 

 

 

 

 

September 30,
2008

 

September 30,
2007

 

% Change

 

 

 

(in thousands, except per share and statistical data)

 

Gross profit

 

$

106,452

 

$

135,673

 

(21.5

)%

Operating income

 

$

2,392

 

$

18,903

 

(87.3

)%

(Loss) income from continuing operations

 

$

(88

)

$

11,457

 

(100.8

)%

Diluted earnings per share from continuing operations

 

$

 

$

0.47

 

(100.0

)%

Statistical data:

 

 

 

 

 

 

 

Annualized gross profit per average number of client employees paid (1)

 

$

1,448

 

$

1,575

 

(8.1

)%

Annualized operating income per average number of client employees paid (1)

 

$

33

 

$

219

 

(84.9

)%

 


(1)   Annualized statistical information is based upon actual period-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.

 

Discontinued Operations

 

The loss from discontinued operations was $5.3 million ($3.3 million net of income tax) for the nine months ended September 30, 2008 compared to $2.9 million ($1.8 million net of income tax) for the nine months ended September 30, 2007.  The increase in the loss of $2.4 million was primarily attributable to $3.0 million of exit costs for contract termination costs, severance benefits and goodwill impairment directly attributable to the Company’s decision to exit the Gevity Edge Select business.  The Company’s operations related to Gevity Edge Select ceased on June 30, 2008.  The Company does not expect to incur any further significant costs related to the exit.

 

LIQUIDITY AND CAPITAL RESOURCES

 

Cash 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 (see “Part II. Item 2. Unregistered Sales of Equity Securities and Use of Proceeds” for information regarding the suspension of the Company’s share repurchase program), the potential 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.

 

25



Table of Contents

 

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 a secured credit facility for $85.0 million with Bank of America, N.A. and Wachovia, N.A. (the “Lenders”) of which $32.5 million was outstanding as of September 30, 2008. See Note 8 to the condensed consolidated financial statements contained in this Form 10-Q for additional information regarding the Company’s credit facility. On February 25, 2008, the Company entered into the Third Amendment to Amended and Restated Credit Agreement (“Third Amendment”). The Third Amendment provides for the grant of security interests and liens in substantially all the property and assets (with agreed upon carveouts and exceptions) of the Company to the Lenders. The Third Amendment also provides for an automatic decrease of the aggregate revolving commitment of the credit facility from $100.0 million to $85.0 million on September 30, 2008. The Third Amendment includes additional covenants and amends certain financial covenants and negative covenants with an effective date of December 31, 2007. These include the maintenance of a minimum consolidated net worth, a maximum consolidated adjusted leverage ratio, a minimum consolidated fixed charge coverage ratio of 1.25:1.0, minimum monthly cumulative EBITDA requirements (for 2008 only), and a ceiling on consolidated capital expenditures. The revised covenants set forth in the Third Amendment also restrict the Company’s ability to repurchase shares of its capital stock in certain circumstances and make acquisitions and require the Company to provide certain period reports relating to budget and profits and losses, intellectual property and insurance policies. Each of these covenants is based on defined terms and contains exceptions set forth in the credit agreement, as amended. The Company was in compliance with all of the covenants under the credit agreement at September 30, 2008. 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, 2008, $32.5 million was outstanding under the credit facility and the maximum facility available to the Company was approximately $66.4 million. The Company is not currently aware of any inability of our Lenders to provide access to the full commitment of funds that exist under our credit facility, if necessary. However, due to recent economic conditions and the deteriorating business climate facing financial institutions, there can be no assurance that such facility will be available to the Company, even though it is a binding commitment.

 

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 may not be able to meet one of its four covenants (the monthly cumulative EBITDA covenant as defined in the credit agreement) during the fourth quarter of 2008 and may need to seek a waiver of this covenant.  The monthly cumulative EBITDA covenant is only in effect through December 31, 2008 and is not required after December 31, 2008.  If the Company requires a waiver in the fourth quarter of 2008 and the waiver is 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 from continuing operations during the first nine months of 2008 were salaries, wages and payroll taxes of client employees of approximately $3.4 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 PSA’s, 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 as well as bad debt expense 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 program and certain general insurance coverage. The Company uses its marketable securities to collateralize these obligations, as more fully

 

26



Table of Contents

 

described below. Marketable securities used to collateralize these obligations are designated as restricted in the Company’s condensed consolidated financial statements.

 

At September 30, 2008, the Company had $21.3 million in total cash and cash equivalents and restricted marketable securities, of which $12.5 million was unrestricted. At September 30, 2008, the Company had pledged $8.8 million of restricted marketable securities in collateral trust arrangements issued in connection with the Company’s workers’ compensation and certain general insurance coverage as follows:

 

 

 

September 30,
2008

 

December 31,
2007

 

 

 

(in thousands)

 

Short-term marketable securities - restricted:

 

 

 

 

 

General insurance collateral obligations – AIG

 

$

4,810

 

$

4,702

 

HRA escrow

 

 

1,400

 

Total short-term marketable securities – restricted

 

4,810

 

6,102

 

 

 

 

 

 

 

Long-term marketable securities restricted:

 

 

 

 

 

Workers’ compensation collateral – AIG

 

4,025

 

3,934

 

Total long-term marketable securities – restricted

 

4,025

 

3,934

 

Total restricted assets

 

$

8,835

 

$

10,036

 

 

During the third quarter of 2008, the Company reached a settlement with the former HRAmerica Inc, (“HRA”) owners that resulted in the release to Gevity of the $1.4 million held in escrow related to purchase price contingencies for the February 16, 2007 acquisition of HRA.

 

The Company’s obligation to Blue Cross Blue Shield of Florida, Inc. and its subsidiary Health Options, Inc. (together “BCBSF/HOI”) under its current contract requires an irrevocable letter of credit (“LOC”) in favor of BCBSF/HOI in an initial amount of $5.0 million on October 1, 2008, and shall be increased monthly by approximately $1.0 million over a seven month period until it reaches $11.8 million on May 1, 2009.

 

The Company does not anticipate any additional collateral obligations to be required in 2008 for its workers’ compensation arrangements.

 

As of September 30, 2008, the Company has recorded a $120.9 million receivable from AIG representing workers’ compensation premium payments made to AIG related to program years 2000 through the third quarter of 2008 in excess of the present value of the estimated claims liability.  This receivable represents a significant concentration of credit risk for the Company. Gevity has various commercial insurance relationships with AIG Commercial Insurance Group, Inc. (“AIG CI”), a subsidiary of AIG, including our workers’ compensation program.  AIG CI has publicly stated as recently as September 30, 2008, that it remains well-capitalized and financially secure, with ample resources to pay policyholder claims.  The issues that have evolved at AIG relate to entities outside of their commercial insurance division. The AIG insurance companies are regulated by state law and their affairs overseen by state insurance commissioners.  Those laws are designed in part to assure that regulated insurance companies are operated on a financially sound basis and their assets are protected from the financial problems of non-insurance affiliates. Under state insurance regulations, the assets of the AIG insurance subsidiaries are protected from the creditors of the parent company. Additionally, as of November 7, 2008, AIG CI’s financial strength rating by A.M. Best is an “A”.  Accordingly, the Company does not believe that the current financial condition of AIG will have a material adverse effect on AIG CI or the Company’s workers’ compensation receivable as of September 30, 2008.

 

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 subs