GVHR » Topics » General

These excerpts taken from the GVHR 10-Q filed May 11, 2009.
             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, 2008 (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 quarter of 2009, there have been no material changes to the Company’s significant accounting policies and critical accounting estimates except as described below.

 

General

 

The Company 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. The Company has a secured credit facility for $85.0 million with Bank of America, N.A. and Wachovia, N.A. (the “Lenders”) and had no outstanding borrowings as of March 31, 2009. 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 provided 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 consolidated adjusted 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 except in certain circumstances, 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 in each case contained in the credit agreement, as amended. The Company was in compliance with all of the revised covenants under the credit agreement at March 31, 2009. 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 March 31, 2009, no amounts were outstanding under the credit facility and the maximum facility available to the Company was approximately $32.8 million (which includes the effect on availability of the outstanding letter of credit to BCBSF/HOI of $10.0 million). The Company is not currently aware of any inability of our Lenders to provide

 

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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 unaddressed by management, the Company may not be able to meet its minimum consolidated fixed charge coverage ratio during future quarters of 2009 and may need to seek a waiver of this covenant from the Lenders.  If the Company requires a waiver 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 three months of 2009 were salaries, wages and payroll taxes of client employees of approximately $1.0 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 the Company’s professional services agreements, the Company is obligated to make certain wage, tax and regulatory payments even if the related wages tax and regulatory 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.

 

These excerpts taken from the GVHR 10-K filed Mar 16, 2009.

General

 

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.   Businesses partner with Gevity to focus their resources on what matters most — running a profitable business. Our commitment to Service First supports our delivery of solutions that enable businesses to:

 

·                  Improve their bottom line by stabilizing and controlling costs;

 

·                  Manage and reduce compliance risk;

 

·                  Retain and develop the right employees; and

 

·                  Save time by reducing payroll and administrative workload.

 

Our solutions are designed to serve the needs of these businesses and are delivered with a personal touch through our team of local and national HR professionals. Our HR professionals provide each employee with support previously only available at much larger companies.

 

Gevity is a professional employer organization (“PEO”), which means the Company provides certain HR-related services and functions for clients under what is referred to as 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™ PEO solution 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

 

1



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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.

 

Gevity also provided services to its clients through a non co-employment relationship program, which was subsequently discontinued. 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 option became known as Gevity Edge Select™ and prior to 2007 did not have a significant impact on the Company’s results of operations or financial position.  During 2007 the Company increased its investment in Gevity Edge Select beginning with the acquisition of the payroll processing firm HRAmerica, Inc. (“HRA”) on February 16, 2007 for approximately $9.5 million. The Company acquired from HRA certain assets, including its client portfolio of approximately 145 clients (as measured by Federal Employer Identification Number (“FEIN”) with approximately 16,000 client employees. Approximately 14,700 non co-employed client employees were acquired as of the date of the acquisition and approximately 1,300 co-employed client employees (8 clients) were acquired with an effective date of April 1, 2007. The acquisition provided the Company with technology and processes to enhance its non co-employment model, Gevity Edge Select.  In addition to the purchase of HRA, contracts with a national provider for benefits administration and with national and regional brokers for insurance distribution had been signed in support of 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 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 Company serves a diverse client base of small and medium-sized businesses in a wide variety of industries. The Company’s clients have employees located in all 50 states and the District of Columbia. As of December 31, 2008, these clients and their employees were served by a network of 32 offices in Arizona, California, Colorado, Florida, Georgia, Illinois, Minnesota, Nevada, New Jersey, New York, North Carolina, Tennessee and Texas. In addition, the Company has internal employees located onsite at certain client facilities. As of December 31, 2008, the Company served approximately 5,800 clients, as measured by individual client FEIN, with approximately 101,000 active client employees. For the year ended December 31, 2008, the Company’s top 25 clients accounted for less than 10% of its client billings, with no single client representing more than 2.2% of its client billings.

 

The Company’s operations are conducted through a number of wholly-owned subsidiaries. The terms “Company” or “Gevity” as used in this report includes Gevity HR, Inc. and its subsidiaries.

 

The Company was incorporated in Florida and consummated its initial public offering in 1997.

 

General



 



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.   Businesses partner with Gevity to focus
their resources on what matters most
running a profitable business.
Our commitment to Service
First
supports our delivery of solutions that enable businesses to:



 



·                  Improve their bottom line by stabilizing and controlling costs;



 



·                  Manage and reduce compliance risk;



 



·                  Retain and develop the right employees; and



 



·                  Save time by reducing payroll and administrative workload.



 



Our solutions are
designed to serve the needs of these businesses and are delivered with
a personal touch through our team of local and national HR professionals. Our
HR professionals provide each employee with support previously only available
at much larger companies.



 



Gevity is a
professional employer organization (“PEO”), which means the Company provides
certain HR-related services and functions for clients under what is referred to
as 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™ PEO solution 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



 



1




















Table of Contents



 



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.



 



Gevity also provided services to its
clients through a non co-employment relationship program, which was
subsequently discontinued. 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 option became known as Gevity Edge
Select™ and prior to 2007 did not have a significant impact on the Company’s
results of operations or financial position. 
During 2007 the Company increased its investment in Gevity Edge Select
beginning with the acquisition of the payroll processing firm HRAmerica, Inc.
(“HRA”) on February 16, 2007 for approximately $9.5 million. The Company
acquired from HRA certain assets, including its client portfolio of
approximately 145 clients (as measured by Federal Employer Identification
Number (“FEIN”) with approximately 16,000 client employees. Approximately
14,700 non co-employed client employees were acquired as of the date of the
acquisition and approximately 1,300 co-employed client employees (8 clients)
were acquired with an effective date of April 1, 2007. The acquisition
provided the Company with technology and processes to enhance its non
co-employment model, Gevity Edge Select. 
In addition to the purchase of HRA, contracts with a national provider
for benefits administration and with national and regional brokers for
insurance distribution had been signed in support of 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 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 Company serves
a diverse client base of small and medium-sized businesses in a wide variety of
industries. The Company’s clients have employees located in all 50 states
and the District of Columbia. As of December 31, 2008, these clients and
their employees were served by a network of 32 offices in Arizona, California,
Colorado, Florida, Georgia, Illinois, Minnesota, Nevada, New Jersey, New York,
North Carolina, Tennessee and Texas. In addition, the Company has internal
employees located onsite at certain client facilities. As of December 31,
2008, the Company served approximately 5,800 clients, as measured by individual
client FEIN, with approximately 101,000 active client employees. For the year
ended December 31, 2008, the Company’s top 25 clients accounted for less
than 10% of its client billings, with no single client representing more than
2.2% of its client billings.



 



The Company’s
operations are conducted through a number of wholly-owned subsidiaries. The
terms “Company” or “Gevity” as used in this report includes Gevity HR, Inc.
and its subsidiaries.



 



The Company was
incorporated in Florida and consummated its initial public offering in 1997.



 



General



 



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.   Businesses partner with Gevity to focus
their resources on what matters most
running a profitable business.
Our commitment to Service
First
supports our delivery of solutions that enable businesses to:



 



·                  Improve their bottom line by stabilizing and controlling costs;



 



·                  Manage and reduce compliance risk;



 



·                  Retain and develop the right employees; and



 



·                  Save time by reducing payroll and administrative workload.



 



Our solutions are
designed to serve the needs of these businesses and are delivered with
a personal touch through our team of local and national HR professionals. Our
HR professionals provide each employee with support previously only available
at much larger companies.



 



Gevity is a
professional employer organization (“PEO”), which means the Company provides
certain HR-related services and functions for clients under what is referred to
as 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™ PEO solution 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



 



1




















Table of Contents



 



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.



 



Gevity also provided services to its
clients through a non co-employment relationship program, which was
subsequently discontinued. 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 option became known as Gevity Edge
Select™ and prior to 2007 did not have a significant impact on the Company’s
results of operations or financial position. 
During 2007 the Company increased its investment in Gevity Edge Select
beginning with the acquisition of the payroll processing firm HRAmerica, Inc.
(“HRA”) on February 16, 2007 for approximately $9.5 million. The Company
acquired from HRA certain assets, including its client portfolio of
approximately 145 clients (as measured by Federal Employer Identification
Number (“FEIN”) with approximately 16,000 client employees. Approximately
14,700 non co-employed client employees were acquired as of the date of the
acquisition and approximately 1,300 co-employed client employees (8 clients)
were acquired with an effective date of April 1, 2007. The acquisition
provided the Company with technology and processes to enhance its non
co-employment model, Gevity Edge Select. 
In addition to the purchase of HRA, contracts with a national provider
for benefits administration and with national and regional brokers for
insurance distribution had been signed in support of 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 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 Company serves
a diverse client base of small and medium-sized businesses in a wide variety of
industries. The Company’s clients have employees located in all 50 states
and the District of Columbia. As of December 31, 2008, these clients and
their employees were served by a network of 32 offices in Arizona, California,
Colorado, Florida, Georgia, Illinois, Minnesota, Nevada, New Jersey, New York,
North Carolina, Tennessee and Texas. In addition, the Company has internal
employees located onsite at certain client facilities. As of December 31,
2008, the Company served approximately 5,800 clients, as measured by individual
client FEIN, with approximately 101,000 active client employees. For the year
ended December 31, 2008, the Company’s top 25 clients accounted for less
than 10% of its client billings, with no single client representing more than
2.2% of its client billings.



 



The Company’s
operations are conducted through a number of wholly-owned subsidiaries. The
terms “Company” or “Gevity” as used in this report includes Gevity HR, Inc.
and its subsidiaries.



 



The Company was
incorporated in Florida and consummated its initial public offering in 1997.



 



General

 

Numerous federal and state laws and regulations relating to employment matters, benefit plans and employment taxes affect the operations of the Company or specifically address issues associated with co-employment. Many of these federal and state laws were enacted before the development of non-traditional employment relationships, such as professional employer organizations, temporary employment and other employment-related outsourcing arrangements and, therefore, do not specifically address the obligations and responsibilities of a professional employer organization.

 

Other federal and state laws and regulations are relatively new, and administrative agencies and federal and state courts have not yet interpreted or applied these regulations to the Company’s business or its industry. The development of additional regulations and interpretation of those regulations can be expected to evolve over time. In addition, from time to time, states have considered, and may in the future consider, imposing certain taxes on gross revenues or service fees of the Company and its competitors.

 

Thirty-four states have passed laws that have licensing, registration or other regulatory requirements for professional employer organizations, and several other states are currently considering similar regulations. Such laws vary from state to state, but generally codify the requirements that a professional employer organization must reserve a right to hire, terminate and discipline client employees and secure workers’ compensation insurance coverage. The Company delegates or assigns such rights to the client where

 

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Table of Contents

 

allowed under state law. The laws also generally provide for monitoring the fiscal responsibility of professional employer organizations and, in many cases, the licensure of the controlling officers of the professional employer organization.

 

In addition, some states through legislative or other regulatory action may propose to modify the manner in which the Company is allowed to provide services to its clients. Such regulatory action could increase the administrative cost associated with providing such services.

 

Subject to the issues discussed below, the Company believes that its operations are currently in compliance in all material respects with applicable federal and state statutes and regulations.

 

General



 



Numerous
federal and state laws and regulations relating to employment matters, benefit
plans and employment taxes affect the operations of the Company or specifically
address issues associated with co-employment. Many of these federal and state
laws were enacted before the development of non-traditional employment
relationships, such as professional employer organizations, temporary
employment and other employment-related outsourcing arrangements and,
therefore, do not specifically address the obligations and responsibilities of
a professional employer organization.



 



Other
federal and state laws and regulations are relatively new, and administrative
agencies and federal and state courts have not yet interpreted or applied these
regulations to the Company’s business or its industry. The development of
additional regulations and interpretation of those regulations can be expected
to evolve over time. In addition, from time to time, states have considered,
and may in the future consider, imposing certain taxes on gross revenues or
service fees of the Company and its competitors.



 



Thirty-four
states have passed laws that have licensing, registration or other regulatory
requirements for professional employer organizations, and several other states
are currently considering similar regulations. Such laws vary from state to
state, but generally codify the requirements that a professional employer
organization must reserve a right to hire, terminate and discipline client
employees and secure workers’ compensation insurance coverage. The Company
delegates or assigns such rights to the client where



 



11
















Table
of Contents



 



allowed under state law. The laws also generally
provide for monitoring the fiscal responsibility of professional employer
organizations and, in many cases, the licensure of the controlling officers of
the professional employer organization.



 



In
addition, some states through legislative or other regulatory action may
propose to modify the manner in which the Company is allowed to provide
services to its clients. Such regulatory action could increase the
administrative cost associated with providing such services.



 



Subject
to the issues discussed below, the Company believes that its operations are
currently in compliance in all material respects with applicable federal and
state statutes and regulations.



 



General



 



Numerous
federal and state laws and regulations relating to employment matters, benefit
plans and employment taxes affect the operations of the Company or specifically
address issues associated with co-employment. Many of these federal and state
laws were enacted before the development of non-traditional employment
relationships, such as professional employer organizations, temporary
employment and other employment-related outsourcing arrangements and,
therefore, do not specifically address the obligations and responsibilities of
a professional employer organization.



 



Other
federal and state laws and regulations are relatively new, and administrative
agencies and federal and state courts have not yet interpreted or applied these
regulations to the Company’s business or its industry. The development of
additional regulations and interpretation of those regulations can be expected
to evolve over time. In addition, from time to time, states have considered,
and may in the future consider, imposing certain taxes on gross revenues or
service fees of the Company and its competitors.



 



Thirty-four
states have passed laws that have licensing, registration or other regulatory
requirements for professional employer organizations, and several other states
are currently considering similar regulations. Such laws vary from state to
state, but generally codify the requirements that a professional employer
organization must reserve a right to hire, terminate and discipline client
employees and secure workers’ compensation insurance coverage. The Company
delegates or assigns such rights to the client where



 



11
















Table
of Contents



 



allowed under state law. The laws also generally
provide for monitoring the fiscal responsibility of professional employer
organizations and, in many cases, the licensure of the controlling officers of
the professional employer organization.



 



In
addition, some states through legislative or other regulatory action may
propose to modify the manner in which the Company is allowed to provide
services to its clients. Such regulatory action could increase the
administrative cost associated with providing such services.



 



Subject
to the issues discussed below, the Company believes that its operations are
currently in compliance in all material respects with applicable federal and
state statutes and regulations.



 



General

 

The Company 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. The Company has a secured credit facility for $85.0 million with Bank of America, N.A. and Wachovia, N.A. (the “Lenders”) and had no outstanding borrowings as of December 31, 2008. See Note 10 to the consolidated financial statements beginning on page F-1 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 provided 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 consolidated adjusted 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 except in certain circumstances, 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 contain exceptions in each case contained in the credit agreement, as amended. The Company was in compliance with all of the revised covenants under the credit agreement at December 31, 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 December 31, 2008, no amounts were outstanding under the credit facility and the maximum facility available to the Company was approximately $48.4 million (which includes the effect on availability of the outstanding letter of credit to BCBSF/HOI of $7.0 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.

 

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 2008 were salaries, wages and payroll taxes of client employees of approximately $4.6 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 the Company’s professional services agreements, the Company is obligated to make certain wage, tax and regulatory payments even if the related wages tax and regulatory 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

 

40



Table of Contents

 

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.

 

General



 



The Company 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. The Company has a secured
credit facility for $85.0 million with Bank of America, N.A. and Wachovia, N.A.
(the “Lenders”) and had no outstanding borrowings as of December 31, 2008.
See Note 10 to the consolidated financial statements beginning on page F-1
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 provided 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 consolidated adjusted 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 except in certain circumstances, 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 contain exceptions
in each case contained in the credit agreement, as amended. The Company was in
compliance with all of the revised covenants under the credit agreement at December 31,
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 December 31, 2008,
no amounts were outstanding under the credit facility and the maximum facility
available to the Company was approximately $48.4 million (which includes the
effect on availability of the outstanding letter of credit to BCBSF/HOI of $7.0
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.



 



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
2008 were salaries, wages and payroll taxes of client employees of
approximately $4.6 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 the Company’s professional services agreements, the
Company is obligated to make certain wage, tax and regulatory payments even if
the related wages tax and regulatory 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



 



40
















Table of Contents



 



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.



 



General



 



The Company 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. The Company has a secured
credit facility for $85.0 million with Bank of America, N.A. and Wachovia, N.A.
(the “Lenders”) and had no outstanding borrowings as of December 31, 2008.
See Note 10 to the consolidated financial statements beginning on page F-1
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 provided 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 consolidated adjusted 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 except in certain circumstances, 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 contain exceptions
in each case contained in the credit agreement, as amended. The Company was in
compliance with all of the revised covenants under the credit agreement at December 31,
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 December 31, 2008,
no amounts were outstanding under the credit facility and the maximum facility
available to the Company was approximately $48.4 million (which includes the
effect on availability of the outstanding letter of credit to BCBSF/HOI of $7.0
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.



 



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
2008 were salaries, wages and payroll taxes of client employees of
approximately $4.6 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 the Company’s professional services agreements, the
Company is obligated to make certain wage, tax and regulatory payments even if
the related wages tax and regulatory 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



 



40
















Table of Contents



 



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.



 



This excerpt taken from the GVHR 10-Q filed Nov 10, 2008.

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.

 

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