Table
of Contents
UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C.
20549
FORM 10-Q
x
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|
Quarterly Report
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
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For the quarterly period
ended June 30, 2008.
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or
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o
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Transition Report Pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934
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For the transition period from
to
Commission File No. 0-22701
GEVITY HR, INC.
(Exact name of registrant
as specified in its charter)
Florida
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65-0735612
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(State
or other
jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No.)
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9000 Town Center Parkway
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Bradenton, Florida
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34202
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(Address of principal executive offices)
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(Zip Code)
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(Registrants 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
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Accelerated filer
x
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Non-accelerated filer
o
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Smaller reporting
company
o
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(Do not check if a smaller reporting company)
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|
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 issuers classes of
common stock, as of the latest practicable date.
Class of common stock
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Outstanding as of July 31, 2008
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Par value $0.01 per share
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23,689,012
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Table of Contents
PART I. FINANCIAL
INFORMATION
Item
1. Financial Statements
GEVITY HR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS
UNAUDITED
(in thousands, except share and per share data)
|
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For the Three Months Ended
June 30,
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For the Six Months Ended
June 30,
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2008
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2007
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2008
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2007
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Revenues
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$
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128,656
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$
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149,478
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$
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270,354
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$
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310,062
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Cost of services (exclusive of
depreciation and amortization shown below)
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90,736
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102,823
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198,194
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218,505
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Gross profit
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37,920
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46,655
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72,160
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91,557
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Operating expenses:
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Salaries, wages and commissions
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18,761
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19,604
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37,537
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41,725
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Other general and
administrative
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12,281
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14,463
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23,830
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28,928
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Depreciation and
amortization
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3,942
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3,930
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7,878
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7,533
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Total operating expenses
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34,984
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37,997
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69,245
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78,186
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Operating income
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2,936
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8,658
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2,915
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13,371
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|
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Interest income
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84
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190
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|
255
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332
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Interest expense
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(737
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)
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(697
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)
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(1,307
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)
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(996
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)
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Other expense, net
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(11
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)
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(9
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)
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(35
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)
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(23
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)
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Income from continuing
operations before
income
taxes
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2,272
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8,142
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1,828
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12,684
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Income tax provision
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317
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2,640
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144
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4,436
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Income from continuing
operations
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1,955
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5,502
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1,684
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8,248
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Loss from discontinued
operations, net of tax
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(1,767
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)
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(812
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)
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(3,111
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)
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(1,044
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)
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Net income (loss)
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$
|
188
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$
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4,690
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$
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(1,427
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)
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$
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7,204
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Net income (loss) per common
share
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- Basic:
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Income from continuing
operations
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$
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0.08
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$
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0.23
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$
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0.07
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$
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0.34
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Loss from discontinued
operations
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(0.07
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)
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(0.03
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)
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(0.13
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)
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(0.04
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)
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Net income (loss)
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$
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0.01
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$
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0.20
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$
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(0.06
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)
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$
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0.30
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- Diluted
:
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Income from continuing
operations
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$
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0.08
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$
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0.22
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$
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0.07
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$
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0.33
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Loss from discontinued
operations
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(0.07
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)
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(0.03
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)
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(0.13
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)
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(0.04
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)
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Net income (loss)
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$
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0.01
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$
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0.19
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$
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(0.06
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)
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$
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0.29
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Weighted average common shares outstanding:
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- Basic
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23,217,812
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23,930,779
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23,212,205
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24,178,740
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- Diluted
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23,609,246
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24,523,901
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23,607,067
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24,779,752
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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)
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June 30,
2008
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December 31,
2007
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ASSETS
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Current assets:
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Cash and cash equivalents
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$
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16,716
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$
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9,950
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|
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Marketable securities
restricted
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6,183
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6,102
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Accounts receivable, net
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122,698
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130,209
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Short-term workers
compensation receivable, net
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17,346
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16,950
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|
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Other current assets
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15,197
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14,515
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Total current assets
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178,140
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177,726
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Property and equipment, net
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20,108
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22,176
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Long-term marketable securities
restricted
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4,002
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3,934
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Long-term workers compensation
receivable, net
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125,162
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105,3
21
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Intangible assets, net
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6,399
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11,386
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Goodwill
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8,692
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9,224
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Deferred tax asset, net
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10,183
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10,797
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Other assets
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926
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1,347
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Total assets
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$
|
353,612
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|
$
|
341,911
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|
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)
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|
June 30,
2008
|
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December 31,
2007
|
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LIABILITIES AND SHAREHOLDERS EQUITY
|
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Current liabilities:
|
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|
|
|
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Accrued payroll and payroll
taxe
s
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$
|
131,865
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$
|
151,105
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|
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Accrued insurance premiums and
health reserves
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12,258
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|
13,557
|
|
|
|
|
|
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Customer deposits and
prepayments
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8,752
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13,581
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|
|
|
|
|
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Accounts payable and other
accrued liabilities
|
|
9,487
|
|
11,881
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|
|
|
|
|
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Defer
red tax liability, net
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|
9,504
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|
11,674
|
|
|
|
|
|
|
|
Dividends payable
|
|
1,180
|
|
2,096
|
|
Total current liabilities
|
|
173,046
|
|
203,894
|
|
|
|
|
|
|
|
Revolving credit facility
|
|
62,967
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|
17,367
|
|
|
|
|
|
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|
Other long-term liabilities
|
|
5,144
|
|
5,088
|
|
Total liab
ilities
|
|
241,157
|
|
226,349
|
|
|
|
|
|
|
|
Commitments and contingencies
(see notes)
|
|
|
|
|
|
|
|
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|
|
|
Shareholders equity:
|
|
|
|
|
|
|
|
|
|
|
|
Common stock, $.01 par value, 100,000,000
shares authorized,
23,683,911
and 23,379,761 issued as of June 30, 2008 and December 31, 2007,
respectively
|
|
237
|
|
234
|
|
|
|
|
|
|
|
Additional paid-in capital
|
|
31,969
|
|
31,475
|
|
|
|
|
|
|
|
Retained earnings
|
|
81,128
|
|
84,899
|
|
|
|
|
|
|
|
Treasury stock (77,094 and
85,660 shares at cost, respectively)
|
|
(879
|
)
|
(1,046
|
)
|
Total shareholde
rs equity
|
|
112,455
|
|
115,562
|
|
|
|
|
|
|
|
Total liabilities and
shareholders equity
|
|
$
|
353,612
|
|
$
|
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 Six Months Ended
June 30,
|
|
|
|
2008
|
|
2007
|
|
CASH FLOWS FROM OPERATING
ACTIVITIES:
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(1,427
|
)
|
$
|
7,204
|
|
Adjustments to reconcile net
(loss) income to
net cash used in operating activities:
|
|
|
|
|
|
Depreciation and amortization
|
|
8,111
|
|
7,936
|
|
Impairment loss
|
|
532
|
|
|
|
Deferred tax benefit, net
|
|
(803
|
)
|
(5,712
|
)
|
Stock compensation
|
|
792
|
|
1,434
|
|
Excess tax expense (benefit)
from share-based arrangem
ents
|
|
211
|
|
(290
|
)
|
Provision for bad debts
|
|
536
|
|
593
|
|
Other
|
|
59
|
|
140
|
|
Changes in operating working
capital:
|
|
|
|
|
|
Accounts receivable, net
|
|
6,975
|
|
5,862
|
|
Other current assets
|
|
(893
|
)
|
4,756
|
|
Workers compensation
receivable, net
|
|
(20,237
|
)
|
(17,342
|
)
|
Other assets
|
|
421
|
|
(112
|
)
|
Accrued insurance premiums and
health reserves
|
|
(1,299
|
)
|
(2,658
|
)
|
Accrued payroll and payroll
taxes
|
|
(19,260
|
)
|
(28,855
|
)
|
Accounts payable and other
accrued liabilities
|
|
(2,757
|
)
|
(2,499
|
)
|
Customer deposits and prepayme
nts
|
|
(4,829
|
)
|
5,561
|
|
Other long-term liabilities
|
|
(498
|
)
|
137
|
|
Net cash used in operating
activities
|
|
(34,366
|
)
|
(23,845
|
)
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING
ACTIVITIES:
|
|
|
|
|
|
Purchases of marketable
securities and certificates of deposit
|
|
(149
|
)
|
(1,603
|
)
|
Capital expenditures
|
|
(762
|
)
|
(3,875
|
)
|
Business acquisition
|
|
|
|
(9,495
|
)
|
Net cash used in investing
activities
|
|
(911
|
)
|
(14,973
|
)
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING
ACTIVITIES:
|
|
|
|
|
|
Net borrowings under revolving
credit facility
|
|
45,600
|
|
39,967
|
|
Capital lease payments
|
|
(192
|
)
|
|
|
Proceeds from issuance of common
stock for employee stock plans
|
|
106
|
|
751
|
|
Excess tax (expense) benefit
from share-based arrangements
|
|
(211
|
)
|
290
|
|
Dividends paid
|
|
(3,260
|
)
|
(4,420
|
)
|
Purchase of treasury stock
|
|
|
|
(22,818
|
)
|
Net cash prov
ided by financing
activities
|
|
42,043
|
|
13,770
|
|
Net increase (decrease) in cash
and cash equivalents
|
|
6,766
|
|
(25,048
|
)
|
Cash and cash equivalents -
beginning of period
|
|
9,950
|
|
36,291
|
|
Cash and cash equivalents - end
of period
|
|
$
|
16,716
|
|
$
|
11,243
|
|
|
|
|
|
|
|
Supplemental disclosure of cash
flow information:
|
|
|
|
|
|
Income taxes paid
|
|
$
|
4,912
|
|
$
|
4,396
|
|
Interest paid
|
|
$
|
1,259
|
|
$
|
968
|
|
Supplemental disclosure of non-cash transactions:
Capital expenditures and
cash flows from financing activities for the six months ended June 30,
2008 exclude approximately $61 of capital items purchased by the Company
through capital leases.
Capital expenditures for
the six months ended June 30, 2008 exclude approximately $404 of capital
items purchased by the Company in the second quarter of 2008 and not paid for
until the third quarter of 2008.
Capital expenditures for
the six months ended June 30, 2007 exclude approximately $530 of capital
items purchased by the Company in the second quarter of 2007 and not paid for
until the third quarter of 2007.
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 Companys 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 Companys significant
accounting policies are disclosed in Note 1 of the Companys consolidated
financial statements contained in the Form 10-K. The Companys critical accounting estimates
are disclosed in Item 7, Managements 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 half of 2008, there have
been no material changes to the Companys significant accounting policies and
critical accounting estimates except as described below.
Recent Accounting Pronouncements
In June 2008, the Financial Accounting
Standards Board (FASB) 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 lessees 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 Companys financial position, results of operations and cash flows.
In May 2008, the FASB issued Statement of
Financial Accounting Standards (SFAS) No. 162,
The Hierarchy of Generally Accepted Accounting
Principles
, (SFAS No. 162), which becomes effective
60 days following the SECs 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 Companys financial position,
results of operations or cash flows.
In April 2008, the FASB issued FASB Staff
Position (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 Companys 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 companys
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 companys 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 Companys
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
7
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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 Companys 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 Companys 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 has determined that its financial assets are currently level
1 in the fair value hierarchy. Financial assets at June 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 Companys 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 Edge
TM
. As such, on February 25, 2008, the
board of directors of the Company approved a plan to discontinue the Companys
non co-employment offering, Gevity Edge Select
TM
. 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
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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
six month periods ended June 30, 2008 and June 30, 2007 are as
follows:
|
|
Three Months
Ended June 30,
2008
|
|
Three Months
Ended June 30,
2007
|
|
Revenues
|
|
$
|
551
|
|
$
|
930
|
|
Exit costs
|
|
1,554
|
|
|
|
All other expenses, net
|
|
1,846
|
|
2,225
|
|
Loss from discontinued operations before
taxes
|
|
(2,849
|
)
|
(1,295
|
)
|
Income tax benefit
|
|
1,082
|
|
483
|
|
Loss from discontinued operations
|
|
$
|
(1,767
|
)
|
$
|
(812
|
)
|
|
|
Six Months
Ended June 30,
2008
|
|
Six Months
Ended June 30,
2007
|
|
Revenues
|
|
$
|
1,495
|
|
$
|
1,461
|
|
Exit costs
|
|
2,914
|
|
|
|
All other expenses, net
|
|
3,596
|
|
3,118
|
|
Loss from discontinued operations before
taxes
|
|
(5,015
|
)
|
(1,657
|
)
|
Income tax benefit
|
|
1,904
|
|
613
|
|
Loss from discontinued operations
|
|
$
|
(3,111
|
)
|
$
|
(1,044
|
)
|
Pre-tax costs
associated with the exit from the Gevity Edge Select business approximate
$2,914 for the six months ended June 30, 2008. Management does not expect to incur any
further significant costs in connection with the exit 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 June 30,
2008
|
|
Six Months
Ended June 30,
2008
|
|
Contract termination
costs
|
|
$
|
1,183
|
|
$
|
1,335
|
|
Severance and other termination benefits
|
|
371
|
|
1,047
|
|
Goodwill impairment loss
|
|
|
|
532
|
|
Total Gevity Edge Select exit costs
|
|
$
|
1,554
|
|
$
|
2,914
|
|
Activity in the liability
accounts associated with the exit costs related to the discontinuation of the
Gevity Edge Select business for the six months ended June 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
|
|
1,047
|
|
1,335
|
|
2,382
|
|
Cash payments
|
|
(254
|
)
|
(485
|
)
|
(739
|
)
|
Balance at June 30, 2008
|
|
$
|
793
|
|
$
|
850
|
|
$
|
1,643
|
|
3.
MARKETABLE SECURITIES -
RESTRICTED
At June 30, 2008 and
December 31, 2007, the Companys 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 Companys workers
compensation programs, collateral held in connection with the Companys general insurance programs and amounts held in escrow related
to purchase price contingencies associated with the Companys 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
Companys condensed consolidated statements of operations.
9
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For the three and six
months ended June 30, 2008 and 2007, there were no realized gains or
losses from the sale of marketable securities. As of June 30, 2008 and December 31,
2007, there were no unrealized gains or losses on marketable securities.
The Company is
currently negotiating with the former HRA owners for the release of $1,400 held
in escrow related to purchase price contingencies for the acquisition of HRA as
well as for the indemnification for certain representations made by the former
owners of HRA in connection with the acquisition of HRA. The Company does not believe that the
conditions for the payment of the purchase price contingency have been met and
therefore a reserve against the $1,400 is not necessary as of June 30,
2008. Additionally, the Company has not
recorded any recovery for indemnification claims as of June 30, 2008.
Receipt of indemnification amounts, if any, will be recorded when received.
4.
ACCOUNTS RECEIVABLE
At June 30, 2008 and
December 31, 2007, accounts receivable from clients consisted of the
following:
|
|
June 30,
2008
|
|
December 31,
2007
|
|
Billed to clients
|
|
$
|
5,977
|
|
$
|
9,124
|
|
Unbilled revenues
|
|
117,521
|
|
121,917
|
|
|
|
123,498
|
|
131,041
|
|
Less: Allowance for doubtful accounts
|
|
(800
|
)
|
(832
|
)
|
Total
|
|
$
|
122,698
|
|
$
|
130,209
|
|
The Company establishes
an allowance for doubtful accounts based upon managements
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 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 Companys $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 will 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.
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 June 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 $7,333 and $6,794, respectively. During the six months ended June 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 $10,043 and $8,043,
respectively. These revisions were based upon continued favorable claims
development that occurred during the periods.
The balance in the loss
fund collateral account (including accrued interest) in
excess of the net present value of the Companys liability to AIG with respect
to claims payable within the deductible layer is recorded as a workers
compensation
10
Table
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receivable. Returns to the Company of amounts held in the loss fund
collateral account are recorded as reductions to the workers compensation
receivable, net. During the first two quarters of 2008 and 2007, AIG released
approximately $2,000 and $5,000, respectively, of cash, from the 2003 loss fund
collateral account in advance of the annual loss provision adjustment. The Company expects to receive approximately
$17,000, net, from AIG during the third quarter of 2008 related to the annual
true-up of the loss fund collateral accounts and premium expense audit.
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 Companys 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 June 30, 2008 and
December 31, 2007, the weighted average discount rate used to calculate
the net present value of the claim liability was 3.92% 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 June 30,
2008 and December 31, 2007 of $142,508 and $122,271, respectively, of
which $17,346 and $16,950 was classified as short-term at June 30, 2008
and December 31, 2007, respectively. This receivable represents a significant concentration of credit risk for the
Company.
6.
INTANGIBLE ASSETS
At June 30, 2008 and
December 31, 2007, intangible assets consisted of the following:
|
|
June 30,
2008
|
|
December 31,
2007
|
|
Purchased client service agreements
|
|
$
|
48,097
|
|
$
|
48,097
|
|
Accumulated amortization
|
|
(41,698
|
)
|
(36,711
|
)
|
Intangible assets, net
|
|
$
|
6,399
|
|
$
|
11,386
|
|
Amortization expense for
the three months ended June 30, 2008 and 2007 was $2,508 and $2,525,
respectively. Amortization expense for the six months ended June 30, 2008
and 2007 was $4,987 and $4,992, respectively. Estimated amortization expense for the remainder of 2008 and for 2009 is $4,574 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 Companys primary healthcare partner in Florida,
delivering medical care benefits to approximately 19,000 Florida-based client
employees. The Companys policy with BCBSF/HOI is a minimum premium policy
expiring September 30, 2008. 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 by year and aggregate
loss coverage is provided to the Company at the level of 110% of projected
claims. The Companys obligation to BCBSF/HOI under its current contract may
require an irrevocable letter of credit (LOC) in favor of BCBSF/HOI if the
coverage ratio, as set forth in the BCBSF/HOI agreement, is not maintained. The
coverage ratio is calculated quarterly. If the Companys coverage ratio does
not meet the minimum requirement, the Company must provide an LOC valued at up
to two months of projected claims (average monthly claims approximated $9,600
for the last twelve months). On February 25, 2008, the Company and
BCBSF/HOI entered into the Second Amendment to Agreement to Provide
Comprehensive Health Care Benefits (the Second Amendment)
amending the Agreement to Provide Comprehensive Health Care Benefits, dated as
of October 1, 2005, between the parties, restating the definition
of Coverage Ratio to exclude certain non-cash asset and goodwill impairment charges commencing with the fiscal quarter ending December 31,
2007. As of June 30, 2008, the
minimum coverage ratio was met and no LOC was required. As the Company
negotiates its renewal with BCBSF/HOI, it is possible that BCBSF/HOI will
require collateral, the terms of which cannot yet be determined.
Aetna Health, Inc. (Aetna)
is the Companys largest medical care benefits provider for approximately
15,000 client employees outside the state of Florida. The Companys 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 Companys 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.
11
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In 2006, the Company
announced the addition of UnitedHealthcare as an additional health plan option.
As of June 30, 2008, UnitedHealthcare provides medical care benefits to
approximately 4,000 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 Companys 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 Companys annual liability.
In addition to dental
coverage, the Company offers various fixed cost insurance programs to client
employees such as vision care, life, accidental death and
dismemberment, short-term disability and long-term disability. The Company also
offers a flexible spending account for healthcare, dependent care and a
qualified transportation fringe benefit program.
Part-time employees of clients are eligible to enroll in limited benefit
programs from Star HRG. These plans include fixed cost sickness and accident
and dental insurance programs, and a vision discount plan.
Included in accrued
insurance premiums and health reserves at June 30,
2008 and December 31, 2007 are $8,713 and $10,356, respectively, of
short-term liabilities related to the Companys health benefit plans. Of these
amounts $8,684 and $10,100, respectively, represent an accrual for the estimate
of claims incurred but not reported at June 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 June 30, 2008, the Company reduced its reserve
for incurred but not reported claims by approximately $731, 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 June 30,
2007.
During the six months
ended June 30, 2008 and 2007, the Company reduced its
reserve for incurred but not reported claims by approximately $1,731 and
$2,601, 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
$100,000 unsecured credit facility with Bank of America, N.A. and Wachovia,
N.A. (the Lenders). On May 7, 2007, the Company entered into the First
Amendment to the Amended and Restated Credit Agreement
dated August 30, 2006, which increased the amount of aggregate
revolving commitments of the credit facility from $50,000 to $75,000 and
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 consolidated adjusted EBITDA requirements and a ceiling on
consolidated capital expenditures. The revised covenants set forth in the
Third Amendment now restrict the Companys 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 Companys
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 Companys
consolidated leverage ratio) plus one of the following
indexes:
12
Table
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(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
Companys consolidated leverage ratio) is charged on any unused portion of the
loan commitment. At June 30, 2008 the Company had outstanding
advances of $62,967 at a weighted average interest rate of 4.24%. 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 revised covenants under the credit agreement at June 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 June 30, 2008, the maximum facility available to
the Company was approximately $81,000.
Pursuant to the terms of
the credit agreement, the obligations of the Company may be accelerated upon
the occurrence and continuation of an Event of Default. Such events include the
following: (i) the failure to make principal, interest or fee payments when due (beyond applicable grace periods); (ii) the
failure to observe and perform certain covenants contained in the credit
agreement; (iii) any representation or warranty made by the Company in the
credit agreement or related documents proves to be
incorrect or misleading in any material respect when made or deemed made; and (iv) other
customary events of default.
The Company recorded $701
and $684 of interest expense for the three months ended June 30, 2008 and
2007, respectively, related to the amortization of loan
costs, unused loan commitment fees and interest on advances. Interest expense
for the six months ended June 30, 2008 and 2007 was approximately $1,245
and $963, 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 Companys 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 Companys 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 PEOs and do not specifically address
the obligations and responsibilities of these PEO relationships. If the
Internal Revenue Service concludes that PEOs are not employers
of certain client employees for purposes of the Internal Revenue Code of 1986,
as amended, the tax qualified status of the Companys 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 clients 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 Companys practice of reporting payroll for its subsidiaries under multiple employer
account numbers. The notice stated that
the EDD was collapsing the accounts of the Companys 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 EDDs 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 Companys 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
13
Table
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States 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 States withdrawal of
the existing Assessment for 2004 -2006 (the Settlement Offer). The
Settlement Offer is currently under review by the State. The Companys
financial statements for the quarter ended June 30, 2008 reflect a charge
of $1,050 within cost of services, reflecting estimated amounts due in
connection with additional unemployment tax costs for the term January 1,
2007 June 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.
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 Companys 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 six month period ended June 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
Companys assets and liabilities. The Companys effective tax rate
provides for both federal and state income taxes. For the
three months ended June 30, 2008 and 2007, the Companys effective
rate for income from continuing operations was 14.0% and 32.4%, respectively.
The Companys effective tax rate for the six months ended June 30, 2008
and 2007 was 7.9% and 35.0%, respectively. The Companys effective tax rates
differed from the statutory federal tax rates because of state taxes and federal tax credits.
12.
EARNINGS (LOSS) PER SHARE
(EPS)
The
reconciliation of net income attributable to common shareholders and shares
outstanding for the purposes of calculating basic and diluted earnings per
share for the three and six months ended June 30, 2008 and 2007 is
as follows:
|
|
Net Income
(Loss)
(Numerator)
|
|
Shares
(Denominator)
|
|
Per Share
Amount
|
|
For the Three Months Ended
June 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic EPS:
|
|
|
|
|
|
|
|
Income from continuing
operations
|
|
$
|
1,955
|
|
|
|
$
|
0.08
|
|
Loss from discontinued
operations
|
|
(1,767
|
)
|
|
|
(0.07
|
)
|
Net income
|
|
$
|
188
|
|
23,217,812
|
|
$
|
0.01
|
|
|
|
|
|
|
|
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
Options to purchase common stock
|
|
|
|
388,346
|
|
|
|
Non-vested stock
|
|
|
|
3,088
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS:
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
1,955
|
|
|
|
$
|
0.08
|
|
Loss from discontinued
operations
|
|
(1,767
|
)
|
|
|
(0.07
|
)
|
Net income
|
|
$
|
188
|
|
23,609,246
|
|
$
|
0.01
|
|
For the three months
ended June 30, 2008, 816,792 options to purchase common stock, weighted
for the portion of the period they were outstanding, were
excluded from the diluted earnings per share computation because the exercise
price of the options was greater than the average price of the common stock.
14
Table
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|
|
Net Income
(Loss)
(Numerator)
|
|
Shares
(Denominator)
|
|
Per Share
Amount
|
|
For the Three Months Ended
June 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic EPS:
|
|
|
|
|
|
|
|
Income from continuing
operations
|
|
$
|
5,502
|
|
|
|
$
|
0.23
|
|
Loss from discontinued
operations
|
|
(812
|
)
|
|
|
(0.03
|
)
|
Net income
|
|
$
|
4,690
|
|
23,930,779
|
|
$
|
0.20
|
|
|
|
|
|
|
|
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
Options to purchase common stock
|
|
|
|
580,467
|
|
|
|
Non-vested stock
|
|
|
|
12,655
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS:
|
|
|
|
|
|
|
|
Income from continuing
operations
|
|
$
|
5,502
|
|
|
|
$
|
0.22
|
|
Loss from discontinued
operations
|
|
(812
|
)
|
|
|
(0.03
|
)
|
Net income
|
|
$
|
4,690
|
|
24,523,901
|
|
$
|
0.19
|
|
For the three months ended
June 30, 2007, 1,009,410 options to purchase common stock, weighted for
the portion of the period they were outstanding, were
excluded from the diluted earnings per share computation because the exercise
price of the options was greater than the average price of the common stock.
|
|
Net Income
(Loss)
(Numerator)
|
|
Shares
(Denominator)
|
|
Per Share
Amount
|
|
For the Six Months Ended
June 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic EPS:
|
|
|
|
|
|
|
|
Income from continuing
operations
|
|
$
|
1,684
|
|
|
|
$
|
0.07
|
|
Loss from discontinued
operations
|
|
(3,111
|
)
|
|
|
(0.13
|
)
|
Net loss
|
|
$
|
(1,427
|
)
|
23,212,205
|
|
$
|
(0.06
|
)
|
|
|
|
|
|
|
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
Options to purchase common stock
|
|
|
|
389,681
|
|
|
|
Non-vested stock
|
|
|
|
5,181
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS:
|
|
|
|
|
|
|
|
Income from continuing
operations
|
|
$
|
1,684
|
|
|
|
$
|
0.07
|
|
Loss from discontinued
operations
|
|
(3,111
|
)
|
|
|
(0.13
|
)
|
Net loss
|
|
$
|
(1,427
|
)
|
23,607,067
|
|
$
|
(0.06
|
)
|
For the six months ended June 30,
2008, 807,534 options to purchase common stock, weighted for the portion of the
period they were outstanding, were excluded from the
diluted earnings per share computation because the exercise price of the
options was greater than the average price of the common stock.
|
|
Net Income
(Loss)
(Numerator)
|
|
Shares
(Denominator)
|
|
Per Share
Amount
|
|
For the Six Months Ended
June 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic EPS:
|
|
|
|
|
|
|
|
Income from continuing
operations
|
|
$
|
8,248
|
|
|
|
$
|
0.34
|
|
Loss from discontinued
operations
|
|
(1,044
|
)
|
|
|
(0.04
|
)
|
Net income
|
|
$
|
7,204
|
|
24,178,740
|
|
$
|
0.30
|
|
|
|
|
|
|
|
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
Options to purchase common stock
|
|
|
|
585,892
|
|
|
|
Non-vested stock
|
|
|
|
15,120
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS:
|
|
|
|
|
|
|
|
Income from continuing
operations
|
|
$
|
8,248
|
|
|
|
$
|
0.33
|
|
Loss from discontinued
operations
|
|
(1,044
|
)
|
|
|
(0.04
|
)
|
Net income
|
|
$
|
7,204
|
|
24,779,752
|
|
$
|
0.29
|
|
For the six months ended June 30,
2007, 1,004,272 options to purchase common stock, weighted for the portion of
the period they were outstanding, were excluded from the
diluted earnings per share computation because the exercise price of the
options was greater than the average price of the common stock.
15
Table
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ITEM 2. Managements 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 Companys 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 Companys 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 Companys 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 scaleenabling 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 Companys Gevity Edge PEO 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 Companys 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
Companys 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 June 30,
2008 Compared to Three Months Ended June 30, 2007
Revenue
The following table
presents certain information related to the Companys
revenues from continuing operations for the three months ended June 30,
2008 and 2007:
16
Table
of Contents
|
|
Three Months Ended
|
|
|
|
|
|
June 30,
2008
|
|
June 30,
2007
|
|
%
Change
|
|
|
|
(in thousands, except statistical data)
|
|
Revenues:
|
|
|
|
|
|
|
|
Professional service
fees
|
|
$
|
28,802
|
|
$
|
36,262
|
|
(20.6
|
)%
|
Employee health and welfare benefits
|
|
80,975
|
|
87,338
|
|
(7.3
|
)%
|
Workers compensation
|
|
15,243
|
|
21,310
|
|
(28.5
|
)%
|
State unemployment taxes and other
|
|
3,636
|
|
4,568
|
|
(20.4
|
)%
|
Total revenues
|
|
$
|
128,656
|
|
$
|
149,478
|
|
(13.9
|
)%
|
|
|
|
|
|
|
|
|
Statistical data:
|
|
|
|
|
|
|
|
Gross salaries and wages (in thousands)
|
|
$
|
1,073,796
|
|
$
|
1,222,095
|
|
(12.1
|
)%
|
Client employees at period end
|
|
107,676
|
|
123,631
|
|
(12.9
|
)%
|
Clients at period end (1)
|
|
6,108
|
|
7,255
|
|
(15.8
|
)%
|
Average number of client employees/clients
at period end
|
|
18
|
|
17
|
|
5.9
|
%
|
Average number of client employees paid (2)
|
|
98,331
|
|
115,705
|
|
(15.0
|
)%
|
Annualized average wage per average client
employees paid (3)
|
|
$
|
43,681
|
|
$
|
42,249
|
|
3.4
|
%
|
Workers compensation
billing per one hundred dollars of workers compensation wages (4)
|
|
$
|
1.60
|
|
$
|
1.96
|
|
(18.4
|
)%
|
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)
|
|
$
|
1,172
|
|
$
|
1,254
|
|
(6.5
|
)%
|
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 Companys 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 June 30, 2008, total revenues were $128.7 million compared to $149.5
million for the three months ended June 30, 2007, representing a decrease
of $20.8 million or 13.9%. This decrease was a result of the reduction in all revenue components as described below.
As of June 30, 2008,
the Company served 6,108 clients, as measured by each clients FEIN, with
107,676 active client employees. This compares to 7,255 clients, as measured by each clients FEIN, with 123,631 active client
employees at June 30, 2007. The
average number of client employees paid was 98,331 for the second quarter of
2008 compared to 115,705 for the second quarter of 2007. The declines in client
and client employee metrics is 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 the economy, and lower than expected
production levels during 2007 and 2008.
In addition, during the first two quarters of 2008, the Company
terminated approximately 230 unprofitable clients (impacting approximately
4,300 client employees) in an effort to improve overall earnings in the
long-term.
Revenues from professional service fees decreased to $28.8 million for the three
months ended June 30, 2008, from $36.3 million for the three months
ended June 30, 2007, representing a decrease of $7.5 million or 20.6%. 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 6.5%, from $1,254 for the three months ended June 30, 2007 to
$1,172 for the three months ended June 30,
2008. This decrease was primarily attributable to 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, and general
market dynamics.
Revenues for providing
health and welfare benefits for the three months ended June 30,
2008 were $81.0 million as compared to $87.3 million for the three months ended
June 30, 2007, representing a decrease of $6.4 million or 7.3%. Health
17
Table
of Contents
and welfare
benefit plan revenues decreased due to the decrease in
the average number of participants in the Companys health and welfare
benefit plans of approximately 15.1% and was partially offset by the increase
in health insurance premiums as a result of higher costs to the Company to
provide such coverage for client employees and the
Companys approach to pass along all insurance-related cost increases.
Revenues for providing
workers compensation insurance coverage decreased to $15.2 million for the
three months ended June 30, 2008, from $21.3 million
for the three months ended June 30, 2007, representing a decrease
of $6.1 million or 28.5%. Workers compensation billings, as a percentage of
workers compensation wages for the three months ended June 30, 2008, were
1.60% as compared to 1.96% for the same period in 2007,
representing a decrease of 18.4%. Workers compensation revenue
decreased in the second 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 Companys
workers compensation program. The manual premium rates for workers
compensation applicable to the Companys clients decreased 18.4% during the
three months ended June 30, 2008 as compared to the three months ended June 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 Companys manual premium rates primarily
reflects the reduction in the Florida manual premium rates.
Revenues from state
unemployment taxes and other revenues decreased to $3.6 million for the three
months ended June 30, 2008 from $4.6 million for the three months ended June 30,
2007, representing a decrease of $0.9 million or 20.4%.
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 Companys
cost of services from continuing operations for the three months ended June 30,
2008 and 2007:
|
|
Three Months Ended
|
|
|
|
|
|
June 30,
2008
|
|
June 30,
2007
|
|
%
Change
|
|
|
|
(in thousands, except statistical data)
|
|
Cost of services:
|
|
|
|
|
|
|
|
Employee health and welfare benefits
|
|
$
|
80,244
|
|
$
|
87,338
|
|
(8.1
|
)%
|
Workers compensation
|
|
4,208
|
|
8,904
|
|
(52.7
|
)%
|
State unemployment taxes and other
|
|
6,284
|
|
6,581
|
|
(4.5
|
)%
|
Total cost of services
|
|
$
|
90,736
|
|
$
|
102,823
|
|
(11.8
|
)%
|
|
|
|
|
|
|
|
|
Statistical data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross salaries and wages (in thousands)
|
|
$
|
1,073,796
|
|
$
|
1,222,095
|
|
(12.1
|
)%
|
Average number of client employees paid (1)
|
|
98,331
|
|
115,705
|
|
(15.0
|
)%
|
Workers compensation
cost rate per one hundred dollars of workers compensation wages (2)
|
|
$
|
0.44
|
|
$
|
0.82
|
|
(46.3
|
)%
|
Number of workers compensation claims (3)
|
|
932
|
|
1,241
|
|
(24.9
|
)%
|
Frequency of workers compensation claims
per one million dollars of workers compensation wages
(2)
|
|
0.98
|
x
|
1.14
|
x
|
(14.0
|
)%
|
(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 Companys 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 Companys health and welfare benefit plans, workers
compensation insurance, state unemployment taxes and other costs, was $90.7 million for the three months ended June 30,
2008, compared to $102.8 million for the three months ended June 30, 2007,
representing a decrease of $12.1 million or 11.8%. 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 three months ended June 30,
2008 was $80.2 million as compared to $87.3 million for the three months ended June 30,
2007, representing a decrease of $7.1
18
Table
of Contents
million or 8.1%. 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 second
quarter of 2008 was favorably impacted by the recognition of a health benefit
surplus of $0.7 million based upon favorable claims experience. The Company expects that price increases
implemented in conjunction with healthcare renewals effective
October 1,
2007 and the continuation of current claims experience will continue to
favorably impact healthcare costs during 2008.
Workers compensation
costs were $4.2 million for the three months ended June 30, 2008, as
compared to $8.9 million for the three months ended June 30, 2007, representing a decrease of $4.7 million or 52.7%. Workers
compensation costs decreased in the second quarter of 2008 primarily due to the
approximate 15% 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 $7.3 million as a result of continued favorable claims
development for those prior open policy years. For the three months ended June 30,
2007, the comparable reduction in prior years
workers compensation loss estimates was $6.8 million. 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 $6.3 million for the three months ended June 30,
2008, compared to $6.6 million for the three months ended June 30, 2007,
representing a decrease of $0.3 million of 4.5%. The
decrease in the Companys 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. In addition, during the second
quarter of 2008, the Company recorded $1.1 million of state unemployment tax
expense related to a proposed settlement offer with the State of California in
connection with an outstanding assessment. See Note 9 to the condensed
consolidated financial statements contained elsewhere in this 10-Q for
additional information related to the California unemployment tax assessment.
Operating
Expenses
The following table presents certain information related to the Companys
operating expenses from continuing operations for the three months ended June 30,
2008 and 2007:
|
|
Three Months Ended
|
|
|
|
|
|
June 30,
2008
|
|
June 30,
2007
|
|
% Change
|
|
|
|
(in thousands, except statistical data)
|
|
Operating expenses:
|
|
|
|
|
|
|
|
Salaries, wages and commissions
|
|
$
|
18,761
|
|
$
|
19,604
|
|
(4.3
|
)%
|
Other general and administrative
|
|
12,281
|
|
14,463
|
|
(15.1
|
)%
|
Depreciation and amortization
|
|
3,942
|
|
3,930
|
|
0.3
|
%
|
Total operating expenses
|
|
$
|
34,984
|
|
$
|
37,997
|
|
(7.9
|
)%
|
|
|
|
|
|
|
|
|
Statistical data:
|
|
|
|
|
|
|
|
Internal employees at quarter end
|
|
798
|
|
940
|
|
(15.1
|
)%
|
Total operating expenses
were $35.0 million for the three months ended June 30, 2008 as compared to $38.0 million for the three months ended June 30,
2007, representing a decrease of $3.0 million or 7.9%.
Salaries, wages and
commissions were $18.8 million for the three months ended June 30, 2008 as
compared to $19.6 million for the three months ended June 30,
2007, representing a decrease of $0.8 million or 4.3%. 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 two quarters of 2008 and
was partially offset by the annual increase in wages.
Included in salaries, wages and commissions for the three months ended June 30,
2008 are severance costs of approximately $0.8 million related to cost
alignment initiatives.
Other general and
administrative expenses were $12.3 million for the three months ended June 30,
2008 as compared to $14.5 million for the three months
ended June 30, 2007, representing a decrease of $2.2 million or 15.1%.
The decrease occurred across all major components of general and administrative
expenses and is attributable to cost alignment measures taken during 2007 and
the first half of 2008. Included in other general and administrative expenses
for the three months ended June 30, 2008 are approximately $1.0 million of
expenses related to cost alignment initiatives including employee outplacement
benefits and costs associated with field office consolidations.
Depreciation and
amortization expenses were flat at $3.9 million for the three months ended June 30,
2008 and June 30, 2007. The Company
has not made any significant capital expenditure additions during 2008.
19
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 June 30, 2008, income tax expense was $0.3 million compared to $2.6 million for the three months ended June 30,
2007. The decrease in income tax expense
is primarily a function of the reduction in income from continuing
operations. The Companys effective tax rate for the three months ended June 30, 2008
and 2007 was 14.0% and 32.4%, respectively.
The Companys effective tax rates differed from the statutory federal
tax rates because of the impact of state taxes and federal tax credits.
Gross Profit, Operating Income, 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, income from continuing operations and diluted
earnings per share from continuing operations:
|
|
Three Months Ended
|
|
|
|
|
|
June 30,
2008
|
|
June 30,
2007
|
|
% Change
|
|
|
|
(in thousands, except per share and statistical data)
|
|
Gross profit
|
|
$
|
37,920
|
|
$
|
46,655
|
|
(18.7
|
)%
|
Operating income
|
|
$
|
2,936
|
|
$
|
8,658
|
|
(66.1
|
)%
|
Income from continuing operations
|
|
$
|
1,955
|
|
$
|
5,502
|
|
(64.5
|
)%
|
Diluted earnings per share from continuing
operations
|
|
$
|
0.08
|
|
$
|
0.22
|
|
(63.6
|
)%
|
Statistical data:
|
|
|
|
|
|
|
|
Annualized gross profit per average number
of client employees paid (1)
|
|
$
|
1,543
|
|
$
|
1,613
|
|
(4.3
|
)%
|
Annualized operating income per average number of client employees paid (1)
|
|
$
|
119
|
|
$
|
299
|
|
(60.2
|
)%
|
(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 June 30, 2008 was $2.8 million ($1.8
million net of income tax) compared to a loss of $1.3 million ($0.8 million net
of income tax) for the three months ended June 30, 2007. The increase in the loss of $1.5 million was
primarily a result of $1.6 million of exit costs incurred during the second
quarter of 2008 for contract termination costs and severance benefits related
to the exit from the Gevity Edge Select business. The Companys 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.
Six Months Ended June 30,
2008 Compared to Six Months Ended June 30, 2007
Revenue
The following table
presents certain information related to the Companys
revenues from continuing operations for the six months ended June 30, 2008
and 2007:
20
Table
of Contents
|
|
Six Months Ended
|
|
|
|
|
|
June 30,
2008
|
|
June 30,
2007
|
|
%
Change
|
|
|
|
(in thousands, except statistical data)
|
|
Revenues:
|
|
|
|
|
|
|
|
Professional service
fees
|
|
$
|
58,631
|
|
$
|
72,778
|
|
(19.4
|
)%
|
Employee health and welfare benefits
|
|
164,789
|
|
176,090
|
|
(6.4
|
)%
|
Workers compensation
|
|
31,089
|
|
42,498
|
|
(26.8
|
)%
|
State unemployment taxes and other
|
|
15,845
|
|
18,696
|
|
(15.2
|
)%
|
Total revenues
|
|
$
|
270,354
|
|
$
|
310,062
|
|
(12.8
|
)%
|
|
|
|
|
|
|
|
|
Statistical data:
|
|
|
|
|
|
|
|
Gross salaries and wages (in thousands)
|
|
$
|
2,127,244
|
|
$
|
2,432,973
|
|
(12.6
|
)%
|
Client employees at period end
|
|
107,676
|
|
123,631
|
|
(12.9
|
)%
|
Clients at period end (1)
|
|
6,108
|
|
7,255
|
|
(15.8
|
)%
|
Average number of client employees/clients
at period end
|
|
18
|
|
17
|
|
5.9
|
%
|
Average number of client employees paid (2)
|
|
99,208
|
|
115,666
|
|
(14.2
|
)%
|
Annualized average wage per average client
employees paid (3)
|
|
$
|
42,885
|
|
$
|
42,069
|
|
1.9
|
%
|
Workers compensation
billing per one hundred dollars of workers compensation wages (4)
|
|
$
|
1.63
|
|
$
|
1.95
|
|
(16.4
|
)%
|
Workers compensation manual premium per
one hundred dollars of workers compensation wages (4), (5)
|
|
$
|
1.79
|
|
$
|
2.17
|
|
(17.5
|
)%
|
Annualized professional
service fees per average number of client employees paid (3)
|
|
$
|
1,182
|
|
$
|
1,258
|
|
(6.0
|
)%
|
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 six 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 Companys 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 six months ended June 30,
2008, total revenues were $270.4 million compared to $310.1 million for the six
months ended June 30, 2007, representing a decrease of $39.7 million or
12.8%. This decrease was a result of the reduction in all
revenue components as described below.
As of June 30, 2008,
the Company served 6,108 clients, as measured by each clients FEIN, with
107,676 active client employees. This compares to 7,255 clients, as measured by each clients FEIN, with 123,631 active client
employees at June 30, 2007. The
average number of client employees paid by month was 99,208 for the six months
ended June 30, 2008 compared to 115,666 for the six months ended June 30,
2007. The decline
in client and client employee metrics is 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 the economy, and lower than
expected production levels during 2007 and 2008. In addition, during the first
six months of 2008, the Company terminated approximately 230 unprofitable
clients (impacting approximately 4,300 client employees) in an effort to
improve overall earnings in the long-term.
Revenues from professional service fees decreased to $58.6 million for the six
months ended June 30, 2008, from $72.8 million for the six months
ended June 30, 2007, representing a decrease of $14.1 million or 19.4%.
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 6.0%, from $1,258 for the six months ended June 30, 2007 to
$1,182 for the six months ended June 30,
2008. This decrease was primarily attributable to 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 and general
market dynamics.
21
Table
of Contents
Revenues for providing
health and welfare benefits for the six months ended June 30,
2008 were $164.8 million as compared to $176.1 million for the six months ended
June 30, 2007, representing a decrease of $11.3 million or 6.4%. Health
and welfare benefit plan revenues decreased due to the
decrease in the average number of participants in the Companys health
and welfare benefit plans of approximately 14.7% 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 Companys approach to pass along all insurance-related cost
increases.
Revenues for providing
workers compensation insurance coverage decreased to $31.1 million for the six
months ended June 30, 2008, from $42.5 million for
the six months ended June 30, 2007, representing a decrease of
$11.4 million or 26.8%. Workers compensation billings, as a percentage of
workers compensation wages for the six months ended June 30, 2008, were
1.63% as compared to 1.95% for the same period in 2007,
representing a decrease of 16.4%. Workers compensation revenue
decreased in the first two 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 Companys workers
compensation program. The manual premium rates for workers compensation
applicable to the Companys clients decreased 17.5% during the six months ended
June 30, 2008 as compared to the six months ended June 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 Companys manual premium rates primarily reflects
the reduction in the Florida manual premium rates.
Revenues from state
unemployment taxes and other revenues decreased to $15.8 million for the six
months ended June 30, 2008 from $18.7 million for the six months ended June 30,
2007, representing a decrease of $2.9 million or 15.2%.
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 Companys
cost of services from continuing operations for the six months ended June 30,
2008 and 2007:
|
|
Six Months Ended
|
|
|
|
|
|
June 30,
2008
|
|
June 30,
2007
|
|
%
Change
|
|
|
|
(in thousands, except statistical data)
|
|
Cost of services:
|
|
|
|
|
|
|
|
Employee health and welfare benefits
|
|
$
|
163,058
|
|
$
|
173,489
|
|
(6.0
|
)%
|
Workers compensation
|
|
14,250
|
|
23,920
|
|
(40.4
|
)%
|
State unemployment taxes and other
|
|
20,886
|
|
21,096
|
|
(1.0
|
)%
|
Total cost of services
|
|
$
|
198,194
|
|
$
|
218,505
|
|
(9.3
|
)%
|
|
|
|
|
|
|
|
|
Statistical data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross salaries and wages (in thousands)
|
|
$
|
2,127,244
|
|
$
|
2,432,973
|
|
(12.6
|
)%
|
Average number of client employees paid (1)
|
|
99,208
|
|
115,666
|
|
(14.2
|
)%
|
Workers compensation
cost rate per one hundred dollars of workers compensation wages (2)
|
|
$
|
0.75
|
|
$
|
1.10
|
|
(31.8
|
)%
|
Number of workers compensation claims (3)
|
|
1,799
|
|
2,306
|
|
(22.0
|
)%
|
Frequency of workers compensation claims
per one million dollars of workers compensation wages
(2)
|
|
0.95
|
x
|
1.06
|
x
|
(10.4
|
)%
|
(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 Companys 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 Companys health and welfare benefit plans, workers
compensation insurance, state unemployment taxes and other costs, was $198.2 million for the six months ended June 30,
2008, compared to $218.5 million for the six months ended June 30, 2007,
representing a decrease of $20.3 million or 9.3%. This decrease was due to the
reduction in all of the cost of services components as
described below.
22
Table
of Contents
The cost of providing
health and welfare benefits to clients employees for the six months ended June 30,
2008 was $163.1 million as compared to $173.5 million for the six months ended June 30,
2007, representing a decrease of $10.4 million or 6.0%.
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 six months of 2008 and
2007 were favorably impacted by the recognition of a health benefit surplus of
$1.7 million and $2.6 million, respectively, based upon favorable claims
experience.
Workers compensation
costs were $14.3 million for the six months ended June 30, 2008, as
compared to $23.9 million for the six months ended June 30, 2007, representing a decrease of $9.7 million or 40.4%. Workers
compensation costs decreased in the first six months of 2008 primarily due to
the approximate 14.2% 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 $10.0 million as a result of continued favorable claims
development for those prior open policy years. For the six months ended June 30,
2007, the comparable reduction in prior years
workers compensation loss estimates was $8.0 million.
State unemployment taxes
and other costs were $20.9 million for the six months ended June 30, 2008,
compared to $21.1 million for the six months ended June 30, 2007,
representing a decrease of $0.2 million or 1.0%. The
decrease in the Companys 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 quarter of
2008, the Company recorded $1.1 million of state unemployment tax expense
related to a settlement offer with the State of California as previously
described.
Operating
Expenses
The following table presents certain information related to the Companys
operating expenses from continuing operations for the six months ended June 30,
2008 and 2007:
|
|
Six Months Ended
|
|
|
|
|
|
June 30,
2008
|
|
June 30,
2007
|
|
% Change
|
|
|
|
(in thousands, except statistical data)
|
|
Operating expenses:
|
|
|
|
|
|
|
|
Salaries, wages and commissions
|
|
$
|
37,537
|
|
$
|
41,725
|
|
(10.0
|
)%
|
Other general and administrative
|
|
23,830
|
|
28,928
|
|
(17.6
|
)%
|
Depreciation and amortization
|
|
7,878
|
|
7,533
|
|
4.6
|
%
|
Total operating expenses
|
|
$
|
69,245
|
|
$
|
78,186
|
|
(11.4
|
)%
|
|
|
|
|
|
|
|
|
Statistical data:
|
|
|
|
|
|
|
|
Internal employees at quarter end
|
|
798
|
|
940
|
|
(15.1
|
)%
|
Total operating expenses
were $69.2 million for the six months ended June 30, 2008 as compared to $78.2 million for the six months ended June 30,
2007, representing a decrease of $8.9 million or 11.4%.
Salaries, wages and
commissions were $37.6 million for the six months ended June 30, 2008 as
compared to $41.7 million for the six months ended June 30,
2007, representing a decrease of $4.2 million or 10.0%. 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 half of 2008 and was
partially offset by the annual increase in wages.
Severance costs of $1.3 million during the six months ended June 30, 2008
are comparable to severance costs incurred during the six months ended June 30,
2007 and are related to cost alignment efforts that have occurred throughout
the periods.
Other general and
administrative expenses were $23.8 million for the six months ended June 30,
2008 as compared to $28.9 million for the six months
ended June 30, 2007, representing a decrease of $5.1 million or
17.6%. The decrease occurred across all major components of general and
administrative expenses and is attributable to cost alignment measures taken
during 2007 and the first quarter of 2008.
Included in other general and administrative expenses for the six months
ended June 30, 2008 are approximately $1.1 million of expenses related to
cost alignment initiatives including employee outplacement benefits and costs
associated with field office consolidations.
Depreciation and
amortization expenses were $7.9 million for the six months ended June 30,
2008 compared to $7.5 million for the six months ended June 30, 2007,
representing an increase of $0.3 million or 4.6%. 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.
23
Table
of Contents
Income Taxes
For the six months ended June 30,
2008, the Company had an income tax expense of $0.1 million
compared to income tax expense of $4.4 million for the six months ended June 30,
2007. The change is primarily due to the reduction in income from continuing
operations for the first six months of 2008 compared to the first six months of
2007. The Companys effective tax rate for the six months
ended June 30, 2008 and 2007 was 7.9% and 35.0%, respectively. The Companys effective tax rates differed
from the statutory federal tax rates because of state taxes and federal tax
credits.
Gross Profit, Operating Income, 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, income from continuing operations and diluted
earnings per share from continuing operations:
|
|
Six Months Ended
|
|
|
|
|
|
June 30,
2008
|
|
June 30,
2007
|
|
% Change
|
|
|
|
(in thousands, except per share and statistical data)
|
|
Gross profit
|
|
$
|
72,160
|
|
$
|
91,557
|
|
(21.2
|
)%
|
Operating income
|
|
$
|
2,915
|
|
$
|
13,371
|
|
(78.2
|
)%
|
Income from continuing operations
|
|
$
|
1,684
|
|
$
|
8,248
|
|
(79.6
|
)%
|
Diluted earnings per share from continuing
operations
|
|
$
|
0.07
|
|
$
|
0.33
|
|
(78.8
|
)%
|
Statistical data:
|
|
|
|
|
|
|
|
Annualized gross profit per average number
of client employees paid (1)
|
|
$
|
1,455
|
|
$
|
1,583
|
|
(8.1
|
)%
|
Annualized operating income per average number of client employees paid (1)
|
|
$
|
59
|
|
$
|
231
|
|
(74.5
|
)%
|
(1)
Annualized
statistical information is based upon actual period-to-date amounts, which have
been annualized (divided by six and multiplied by twelve) and then divided by
the average number of client employees paid.
Discontinued
Operations
The
loss from discontinued operations was $5.0 million ($3.1 million net of income
tax) for the six months ended June 30, 2008 compared to $1.7 million ($1.0
million net of income tax) for the six months ended June 30, 2007. The increase in the loss of $3.3 million was
primarily attributable to $2.9 million of exit costs for contract termination
costs, severance benefits and goodwill impairment directly attributable to the
Companys decision to exit the Gevity Edge Select business.
The Companys
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 Item 2. Unregistered Sales of Equity
Securities and Use of Proceeds for information regarding the suspension of the
Companys 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.
The Company currently
believes that its current cash balances, cash flow from operations and the
existing credit facility will be sufficient to meet its operational requirements
for the next 12 months, excluding cash required for
acquisitions, if any. The Company has an unsecured credit facility for $100.0
million with Bank of America, N.A. and Wachovia, N.A. (the Lenders) of
which $63.0 million was outstanding as of June 30, 2008. See Note 8 to the
condensed consolidated financial statements contained in
this Form 10-Q for additional information regarding the Companys
credit facility.
On February 25,
2008, the Company entered into the Third Amendment to Amended and Restated
Credit Agreement
24
Table
of Contents
(Third Amendment). The Third A
mendment
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 consolidated adjusted EBITDA requirements
and a ceiling on consolidated capital
expenditures. The revised covenants set forth in the Third Amendment also
restrict the Companys 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 revised covenants under
the credit agreement at June 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 June 30, 2008, the
maximum facility available to the Company was approximately $81.0 million.
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 Companys 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 Companys billings to its clients include: (i) each client
employees 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 clients 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 Companys billings from continuing operations
during the first six months of 2008 were salaries, wages and payroll taxes of client employees of approximately $2.3 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 Companys
PSAs, 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
described below. Marketable securities used to collateralize these obligations
are designated as restricted in the Companys condensed consolidated
financial statements.
At June 30, 2008,
the Company had $26.9 million in total cash and cash equivalents
and restricted marketable securities, of which $16.7 million was unrestricted.
At June 30, 2008, the Company had pledged $8.8 million of
restricted marketable securities in collateral trust arrangements issued in
connection with the Companys workers
compensation and certain general insurance coverage and had $1.4 million held
in escrow in connection with various purchase price contingencies related to
the HRAmerica, Inc. acquisition in 2007 as follows:
25
Table
of Contents
|
|
June 30,
2008
|
|
December 31,
2007
|
|
|
|
(in thousands)
|
|
Short-term marketable
securities - restricted:
|
|
|
|
|
|
General insurance collateral obligations
AIG
|
|
$
|
4,783
|
|
$
|
4,702
|
|
HRA escrow
|
|
1,400
|
|
1,400
|
|
Total short-term marketable securities
restricted
|
|
6,183
|
|
6,102
|
|
|
|
|
|
|
|
Long-term marketable securities restricted:
|
|
|
|
|
|
Workers compensation collateral AIG
|
|
4,002
|
|
3,934
|
|
Total long-term marketable securities
restricted
|
|
4,002
|
|
3,934
|
|
Total restricted assets
|
|
$
|
10,185
|
|
$
|
10,036
|
|
The Company is
currently negotiating with the former HRA owners for the release of $1.4 million
held in escrow related to purchase price contingencies for the acquisition of
HRA. The Company does not believe that
the conditions for the payment of the purchase price contingency have been met.
The Companys obligation
to Blue Cross Blue Shield of Florida, Inc. and its subsidiary Health
Options, Inc. (together BCBSF/HOI) under
its current contract may require an irrevocable letter of credit (LOC) in
favor of BCBSF/HOI if a coverage ratio, as set forth in the BCBSF/HOI
agreement, is not maintained. The coverage ratio is calculated quarterly. If
the Companys coverage ratio does not meet the
minimum requirements, the Company must provide an LOC valued at up to two
months of projected claims (average monthly claims approximated
$9.6 million during the last twelve months). On February 25,
2008, the Company and BCBSF/HOI entered into the Second Amendment to Agreement
to Provide Comprehensive Health Care Benefits (the Second Amendment) amending
the Agreement to Provide Comprehensive Health Care Benefits, dated as of October 1, 2005, between the parties,
restating the definition of coverage ratio to exclude certain non-cash asset
and goodwill impairment charges commencing with the fiscal quarter ending December 31,
2007. As of June 30, 2008, the
minimum coverage ratio was met and no LOC was required.
As the Company negotiates its renewal with BCBSF/HOI, it is possible that
BCBSF/HOI will require collateral, the terms of which cannot yet be determined.
The Company does not
anticipate any additional collateral obligations to be
required in 2008 for its workers compensation arrangements.
As
of June 30, 2008, the Company has recorded a $142.5 million receivable
from AIG representing workers compensation premium payments made to AIG
related to program years 2000 through th
e second
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.
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 Companys practice of reporting payroll for its subsidiaries under multiple employer
account numbers. The notice stated that the
EDD was collapsing the accounts of the Companys subsidiaries into one
account number for payroll reporting purposes and retroactively reassessed
unemployment taxes due at a higher overall rate for the
2004-2006 tax years resulting in an assessment of $4.7 million. On May 30, 2007, the Company
filed a petition with the Office of the Chief Administrative Law Judge for the
California Unemployment Insurance Appeals Board asking
that the EDDs 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 Companys 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 $1.2 million, conceding to the
States 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 States withdrawal of the existing Assessment
for 2004 -2006 (the Settlement Offer). The Settlement Offer is
currently under review by the State. The Companys financial statements
for the quarter ended June 30, 2008 reflect a charge of $1.1 million
within cost of services, reflecting estimated amounts due in connection with
additional unemployment tax costs for the term January 1, 2007 June 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.
26
Table
of Contents
Cash
Flows from Operating Activities
At June 30, 2008,
the Company had net working capital of $5.1 million, including restricted funds
classified as short-term of $6.2 million, compared to a net working capital deficit of $26.2 million as of December 31,
2007, including $6.1 million of restricted funds classified as short-term. The
increase in working capital during the first six months of 2008 was primarily
due to timing differences and the increase in the use of
cash from the revolving credit facility.
Net cash used in
operating activities was $34.4 million for the six months ended June 30,
2008 as compared to net cash used in operating activities of $23.8 million for
the six months ended June 30, 2007, representing an increase in net cash
used in operating activities of $10.5 million. Cash flows from operating
activities are significantly impacted by the timing of client payrolls, the day
of the week on which a fiscal period ends and the existence
of holidays at or immediately following a period end. The overall increase in
cash used in operating activities was primarily due to net timing differences
as well as the overall reduction in net income.
If current workers
compensation trends continue, the Company expects to
receive approximately $17.0 million from AIG during the third quarter of 2008
as a net return of premiums in connection with the true-ups related to
the 2000-2007 program years. Additional releases of premiums by AIG are
also anticipated in future years if such trends continue. The Company believes that it has provided AIG
a sufficient amount of cash to cover its short-term and long-term workers
compensation obligations related to open policy years.
Cash
Flow from Investing Activities
Cash used in investing
activities for the six months ended June 30, 2008 of $0.9 million,
includes approximately $0.8 million for capital expenditures primarily for
technology-related items and $0.1 million for purchases
of marketable securities. This compares to cash used in investing activities
for the six months ended June 30, 2007 of $15.0 million, which
includes approximately $10.9 million related to the February 16, 2007
acquisition of HRA ($9.5 million of cash and related
acquisition costs and $1.4 million included in marketable securities purchases
for purchase price contingencies held in an escrow account). In addition the
Company spent approximately $3.9 million for capital expenditures primarily for
technology-related items including approximately $1.7 million of capital
expenditures made by the Company in 2006 and paid for in 2007. The Company expects to spend approximately
$5.5 million on capital expenditures in 2008 primarily for the purchase of technology-related
items. Capital expenditures are expected to be funded through operations,
leasing arrangements or from the Companys revolving credit facility.
Cash
Flow from Financing Activities
Cash provided by
financing activities for the six months ended June 30,
2008 of $42.0 million was primarily a result of $45.6 million of net borrowings
under the revolving credit facility and $0.1 million received upon the purchase
of 16,208 shares of common stock under the Companys employee
stock purchase plan. These amounts were partially offset by $3.3 million of
cash dividends paid; $0.2 million related to excess tax expense paid by the
Company for its share-based arrangements and $0.2 million of capital lease
payments.
This compares to cash provided by financing
activities for the six months ended June 30, 2007 of $13.8 million,
primarily a result of $40.0 million of net borrowings under the revolving
credit facility; $0.8 million received upon the exercise
of 67,992 stock options and the purchase of 11,293 shares of common stock under
the Companys employee stock purchase plan; and $0.3 million related to
excess tax benefits received by the Company for its share-based
arrangements. These amounts were
partially offset by the use of $22.8 million to repurchase 1,123,121
shares of the Companys common stock under its stock repurchase programs (see Part II.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds for a discussion of the current stock
repurchase program) and $4.4 million of cash dividends paid.
Commitments
and Contractual Obligations
Off-Balance
Sheet Arrangements
The Company does not have
any off-balance sheet arrangements.
Contractual
Obligations
There have been no
material changes to the Companys contractual obligations
from those disclosed in the Form 10-K under Item 7 Managements
Discussion and Analysis of Financial Condition and Results of Operations.
CRITICAL
ACCOUNTING ESTIMATES
The preparation of
financial statements and related disclosures in
conformity with accounting principles generally accepted in the United States
of America, requires management to make estimates and assumptions that affect
the reported
27
Table
of Contents
amounts of assets, liabilities, revenues and expenses and the
disclosures
of contingent assets and liabilities. Accounting estimates related to workers
compensation receivables/reserves, intangible assets, medical benefit plan
liabilities, state unemployment taxes, allowance for
doubtful accounts, share-based payments and deferred income taxes are those
that the Company considers critical in preparing its financial statements
because they are particularly dependent on estimates and assumptions made by
management that are uncertain at the time the accounting estimates are made.
While management has used its best estimates based upon facts and circumstances
available at the time, different estimates reasonably could have been used in
the current period, which may have a material impact on the presentation of the
Companys financial condition and results of operations. Management periodically reviews the estimates
and assumptions and reflects the effects of revisions in the period they are
determined to be necessary. The discussion under Item
7 - Managements Discussion and Analysis of Financial Condition and Results of
Operations Critical Accounting Estimates in the Form 10-K describes the
significant accounting estimates used in the preparation of the Companys
financial statements.
CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS
Statements made in this
report, including under the section titled Managements Discussion and
Analysis of Financial Condition and Results of Operations, that are not purely
historical may be forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934, including without limitation,
statements regarding the Companys expectations, hopes, beliefs, intentions or strategies regarding the future. Words such as may, will, should,
could, would, predicts, potential, continue, expects, anticipates,
future, intends, plans, believes, estimates, and similar expressions,
as well as statements in future tense, identify
forward-looking statements.
Forward-looking statements are based on the Companys current
expectations and beliefs concerning future developments and their potential
effects on the Company. There can be no assurance that future
developments affecting the Company will be those that the Company has
anticipated. Forward-looking statements
involve a number of known and unknown risks, uncertainties (some of which are
beyond the Companys control) and other factors and assumptions that may cause actual results or performance to be
materially different from those expressed or implied by such forward-looking
statements, including those described in Item 1A. Risk Factors of the
Companys Form 10-K and the risks that are described
in other reports that the Company files with the Securities and Exchange
Commission.
Forward-looking statements speak only as
of the date on which they are made and you should not place undue reliance on
any forward-looking statement. Except as required by law, the Company
undertakes no obligation to update any forward-looking statement or statements
to reflect events or circumstances after the date on which such statement is
made or to reflect the occurrence of unanticipated events. New factors emerge
from time to time, and it is not possible for management to predict all of
these factors. Further, management cannot assess the impact of each factor on
the Companys business or the extent to which any factor, or combination of
factors, may cause actual results to differ materially from those contained in
any forward-looking statements.
ITEM 3.
Quantitative and
Qualitative Disclosures about Market Risk
There have been no
material changes from the information previously reported under Item 7A.
Quantitative and Qualitative Disclosures About Market
Risk in the Form 10-K.
ITEM 4.
Controls and Procedures
As
of the end of the period covered by this report, the Companys management,
including the Interim Chief Executive Officer/Chief Financial Officer,
conducted an evaluation of the effectiveness of the design and operation of the
Companys disclosure controls and procedures pursuant to Rule 13a-15 of
the Securities Exchange Act of 1934. Any controls and procedures, no matter how
well designed and operated, can provide only reasonable assurance of achieving
the desired objectives. Based upon that evaluation and subject to the
foregoing, the Companys management, including the Companys Interim Chief
Executive Officer/Chief Financial Officer, concluded that the design and
operation of the Companys disclosure controls and procedures provided
reasonable assurance that the disclosure controls and procedures were effective
to accomplish their objectives.
Additionally,
no changes in the Companys internal controls over financial reporting were
made during the fiscal quarter covered by this report that have materially
affected, or are reasonably likely to materially affect, the Companys internal
control over financial reporting.
PART II.
OTHER
INFORMATION
ITEM 1.
Legal
Proceedings
See Note 9 to the
condensed consolidated financial statements contained elsewhere in this Form 10-Q
for information concerning the Companys legal proceedings.
28
Table
of Contents
ITEM 1A.
Risk
Factors
There have been no
material changes from the information previously provided under Item 1A. Risk Factors, in the Form 10-K. See also Cautionary Note Regarding
Forward-Looking Statements included in Part 1. Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations of
this Form 10-Q.
ITEM 2.
Unregistered
Sales of Equity Securities and Use of Proceeds
The following table
provides information about Company purchases during the three months ended June 30,
2008, of equity securities that are registered by the
Company pursuant to Section 12 of the Securities Exchange Act of
1934:
Period
|
|
Total
Number of
Shares
Purchased (1)
|
|
Average Price
Paid per Share
|
|
Total Number of
Shares Purchased
as Part of
Publicly
Announced
Program (1)
|
|
Approximate Dollar
Value of Shares That
May Yet Be Purchased
Under the Program
($ 000s) (1), (2), (3)
|
|
4/01/2008 4/30/2008
|
|
|
|
|
|
|
|
$
|
51,396
|
|
5/01/2008 5/31/2008
|
|
|
|
|
|
|
|
$
|
51,396
|
|
6/01/2008 6/30/2008
|
|
|
|
|
|
|
|
$
|
51,396
|
|
Total
|
|
|
|
|
|
|
|
|
|
(1)
On August 15,
2006, the Company announced that the board of directors had authorized the
purchase of up to $75.0 million of the Companys common stock under a new share
repurchase program. Share repurchases under the new program
are to be made through open market repurchases, block trades or in private
transactions at such times and in such amounts as the Company deems appropriate
based upon a variety of factors including price, regulatory requirements,
market conditions and other corporate opportunities.
(2)
On April 20,
2007, the Companys board of directors authorized an increase to its current
share repurchase program of approximately $36.5 million, which brings the
current repurchase amount authorized back up to $75.0 million.
(3)
The Company has disengaged from its stock
repurchase program for the time being in order to invest available cash in its
business.
ITEM 4.
Submission of Matters to a
Vote of Security Holders
The
annual meeting of shareholders of the Company was held on May 21, 2008.
Holders of 21,443,245 shares of common stock were present in person or by proxy
at the meeting. At the meeting, the
Companys shareholders elected each of the director nominees, ratified the
appointment of Deloitte & Touche LLP as the Companys independent
registered public accounting firm for the 2008 year, and approved an amendment
to the Companys 2005 Equity Incentive Plan.
The votes of the shareholders were as follows:
1.
To
elect a board of directors to serve until the next annual meeting of
shareholders:
|
|
For
|
|
Withheld
|
|
Michael J. Lavington
|
|
20,916,479
|
|
526,766
|
|
George B. Beitzel
|
|
20,317,738
|
|
1,125,507
|
|
Todd F. Bourell
|
|
21,097,638
|
|
345,607
|
|
Paul R. Daoust
|
|
20,632,956
|
|
810,289
|
|
Jonathan H. Kagan
|
|
20,291,809
|
|
1,151,436
|
|
David S. Katz
|
|
21,095,314
|
|
347,931
|
|
Jeffrey A. Sonnenfeld
|
|
20,971,847
|
|
471,398
|
|
Daniel J. Sullivan
|
|
20,659,683
|
|
783,562
|
|
2.
To
ratify the appointment of Deloitte & Touche LLP as the Companys
independent registered public accounting firm:
For
|
|
Against
|
|
Abstain
|
|
21,021,133
|
|
419,147
|
|
2,965
|
|
3.
To
approve an amendment to Gevitys 2005 Equity Incentive Plan:
For
|
|
Against
|
|
Abstain
|
|
Broker Non-Vote
|
|
15,404,788
|
|
2,208,912
|
|
578,226
|
|
3,251,319
|
|
29
Table
of Contents
ITEM 6. Exhibits
Exhibit No.
|
|
Description
|
3.1
|
|
Third Articles of Amendment and Restatement of
the Articles of Incorporation, as filed with the Secretary of State of the
State of Florida on August 12, 2004 (filed as Exhibit 3.1 to the
Companys Quarterly Report on Form 10-Q for the quarter ended
September 30, 2004 filed November 9, 2004 and incorporated herein
by reference.)
|
|
|
|
3.2
|
|
Third Amended and Restated Bylaws, dated February 16, 2005
(filed as Exhibit 3.01 to the Companys Current Report on Form 8-K
filed February 22, 2005 and incorporated herein by reference.)
|
|
|
|
10.1
|
|
Separation Agreement and Full and Final Release of Claims between
Gevity HR, Inc. and Clifford M. Sladnick dated
May 5, 2008 (filed as Exhibit 99.1 to the Companys Current Report
on Form 8-K filed May 6, 2008 and incorporated herein by
reference.)
|
|
|
|
10.2
|
|
Consulting Agreement between Gevity HR, Inc. and Clifford M.
Sladnick dated May 5, 2008 (filed as
Exhibit 99.2 to the Companys Current Report on Form 8-K filed
May 6, 2008 and incorporated herein by reference.)
|
|
|
|
10.3
|
|
Form of
Executive Restricted Stock Award under Gevity HR, 2005 Equity Incentive Plan
(filed as Exhibit 99.1 to the Companys Current Report
on Form 8-K filed May 21, 2008 and incorporated herein by
reference.)
|
|
|
|
10.4
|
|
Amendment
Number One to the Gevity HR, Inc. 2005 Equity Incentive Plan dated
February 20, 2008
(filed as
Exhibit 99.1 to the Companys Current Report on Form 8-K filed
May 28, 2008 and incorporated herein by reference.)
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10.5
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Appointment Letter from the Company accepted by Edwin Hightower dated
June 30, 2008.*
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31.1
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Certification of the Chief Executive Officer, pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002. *
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31.2
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Certification of the Chief Financial Officer, pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002. *
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32
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Certification furnished pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. *
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*Filed electronically herewith.
30
Table
of Contents
SIGNATURE
Pursuant to the
requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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GEVITY HR, INC.
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Dated: August 11, 2008
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/s/ GARRY J. WELSH
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Garry J. Welsh
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Chief Financial Officer
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(Principal Financial and Accounting Officer)
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31
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