Never Give Up

'Never Give Up'

In 2002, Gevity HR was in a survive-or-die scenario. Erik Vonk was the right guy at the right time.

By Matt Walsh

Editor

"No time. We were living on borrowed time."

That was Erik Vonk's welcome as chairman and chief executive officer at Bradenton-based Gevity HR in April 2002.

There was no time to take his time. Gevity HR, once the vaunted leader in the nation's employee leasing industry, was on the verge of needing a respirator. Maybe even a little worse.

Three months earlier, Gevity reported it lost $29.2 million on its operations, its second consecutive year of losses. Lenders wouldn't touch the company. Nor would insurers, which are essential to Gevity's survival. Gevity's workers' comp insurer, CNA Insurance, already had indicated it would not renew its agreement with Gevity after 2002. Without a workers' compensation carrier, Gevity might as well lock its doors. The air hanging over the bullpen and through the hallways of Gevity's Bradenton headquarters carried noticeable concentrations of doom.

"The only way to get through this," Vonk says looking back, "was to be a 'possibilitarian.' "

It worked. In March, Gevity HR is expected to announce net income for the year ending Dec. 31, 2003, of 60 cents a share, an increase of 172% over the previous year. Revenues were on track to increase 10%, to more than $410 million. Earlier in the year, Gevity completed a private placement that brought in $30 million in capital. And this past November, Gevity had the wherewithal and cash to look outside of its walls and acquire an HR outsourcing division of California-based TeamStaff for $9.5 million. Gevity is not only still alive, it's gaining momentum and strength.

The turnaround at Gevity over the past two years is indeed a lesson in possibilitarianism. It's also a lesson in business principles, leadership and what is often so difficult for any corporate board or executive to predict: having the right people in the right place at the right time.

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Gevity has had a few wrong leaders in the wrong place at the wrong time. This started a decade ago, when the highly successful Bill Mullis, one of the Bradenton entrepreneurs who founded what became Staff Leasing, sold his company in a leveraged buyout to Charles S. Craig, a Northeast investor and investment-and-merchant banker. When Craig, in his mid-40s, led the buyout of Staff Leasing in 1993, he was managing director of his own investment firm, Craig Capital Corp., chairman of another company and had served on the boards of such companies as CP Industries, Curtis Industries Inc., Sinclair & Valentine LP, Schuylkill Metals Corp. and NASCO Inc., none of them employee leasing firms. Clearly, employee leasing was not his passion.

So Craig assembled a team of professionals to operate what had become the nation's largest employee leasing firm. One of them was a 40-year-old business transactions lawyer from a New York City law firm, Richard Goldman. Goldman became Staff Leasing's president and the day-to-day operations chief in 1995; Craig served as chairman and CEO.

For the next two years, Staff Leasing observers could see that the company's strategy was geared toward rapid revenue growth and expansion, culminating in a public offering that would allow Craig to cash in - a classic leveraged buyout. Indeed, gross sales grew 70% from 1995 to 1997, to $1.8 billion, and Staff Leasing went public (July 1997). The offering, which started at $17 a share, raised $61 million, of which Craig and his affiliate companies received at least $13 million, according to public documents.

The management structure also changed in 1997. Craig and the board created a leadership committee - an Office of the Chairman, with Craig, Goldman and Chief Financial Officer John Panning as members. Goldman and Panning were the hands-on managers.

This setup appeared to work. Staff Leasing enjoyed its most profitable years from 1997 through 1999, reporting operating income of $26 million, $34 million and $32 million, respectively and spreading to eight states. In spite of these earnings, however, the company's stock in 1999 began falling, from a high of $30 a share in 1998 to $9.50 a share at the end of 1999. Also in 1999: A shareholder group sued Staff Leasing for rejecting a $17 a share bid to buy the company.

On top of this, the employee leasing market was changing. Up to this point, Staff Leasing's model was largely that of an aggregator playing insurance arbitrage. The company gathered large numbers of customers from small businesses that could not afford health and workers' comp insurance on their own. With that volume, Staff Leasing negotiated low insurance rates and sold marked-up insurance to its clients - even though the rates were still better than what the companies would have paid otherwise.

To Staff Leasing management's credit, it negotiated favorable rates with Liberty Mutual Insurance through 1999. But once Liberty and other insurers figured out the employee leasing companies' arbitrage - combined with rising workers' comp costs and claims nationwide - Staff Leasing's insurance costs were about to take a big jump. When it switched from Liberty Mutual to CNA Insurance in 2000, the new contract shifted more of the claims-loss burden to Staff Leasing. And the investing public knew it. Between Dec. 31, 1999, and March 31, 2000, Gevity's stock lost half of its value, falling to $5.80 a share.

At the same time, to try to control its rising insurance costs, the company began its efforts to shift its client base from the construction industry and blue-collar employees, typically the groups that incur the highest workers' comp claims. Still, in the first six months of 2000, the company's workers' comp costs had risen 52% while profits declined 22%. On June 30, 2000, Staff Leasing's stock closed at $3.56 a share.

On July 1, 2000, Goldman surprised the Manatee and Sarasota business community. He resigned.

Was he the wrong guy at the wrong time? It would be hard to argue that he was. Goldman was part of a committee and the Staff Leasing board, whose members set the company's strategic direction. But as one board member told GCBR: "Directionally we had no clue." Said another board member: "The workers' comp world wasn't where the long-term play should be." Asked whether Staff Leasing was a victim of problems brought on by a changing market, the board member, who asked not to be identified, said: "Some of them the management team initiated themselves. There were a lot of wounds internally."

Those wounds compounded when the board replaced Goldman with Michael Phippen in July 2000. Phippen, despite his pedigreed experience, turned out to be the wrong guy at the wrong time.

When Phippen was hired as Staff Leasing's chairman and chief executive officer, he had recently, abruptly resigned as CEO of Westaff Inc., a California-based recruiting firm with sales of $650 million a year. He had risen to that position after spending 22 years in the recruiting business, starting in 1977 as a branch manager for Kelly Services.

To Staff Leasing's board, Phippen appeared to be a great match. Staff Leasing was trying to shift away from the label of an employee leasing firm to one of a human resources provider. On Phippen's watch, Staff Leasing became Gevity HR. But also on his watch, Gevity finished 2000 with a $3.7 million operating loss. Nine months later, Phippen had to report to the board a shocking $26 million operating loss - related primarily to Gevity's workers' comp and health insurance contracts. Gevity's stock had fallen to $1.40 a share. On. Oct. 10, 2001, Phippen resigned.

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For nearly three years, Gevity's management and fortunes were on a down slope, hitting bottom with Phippen's dismissal. One of the senior management ballasts throughout this period, however, was Chief Financial Officer John Panning. He had served in that role since the mid-1990s and had been one of the three members of the Office of the Chief Executive with Craig and Goldman. But as solid as he was as CFO, Panning was known to be a quiet, low-key leader.

Instead of naming Panning the company's CEO, the board brought out of retirement James Manning, 73. Manning had served as Staff Leasing's president from 1995 to 1996, he was vice chairman of the board in 1997 and previously was a long-time executive with IBM and a business consultant. His mission: stabilize the company and find a new CEO.

When Manning returned to Gevity's Bradenton headquarters, here's what he found: Gevity's stock price was $1.05. Board members worried it would keep falling and, as Manning put it: "The team was very despondent. They were running the company by committee."

Manning applied basic business and leadership principles. "All I did was something extremely tactical," he says. He put together a plan that, if executed, would generate a profit at year-end 2002 of 20 cents a share. On paper the plan was straightforward: Cut expenses, drop unprofitable customers and raise prices as high as possible without becoming uncompetitive.

Manning stopped Gevity's hemorrhaging.

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While Gevity's fortunes were falling, a tall, 48-year-old Dutchman named Erik Vonk was sewing his good fortunes on his south Georgia farm. Recently retired, he dreamed of harvesting his tobacco and sugar cane crops and enjoying a glass of homemade rum and a homegrown cigar.

Vonk had just finished nine fast-paced years as the president of Ranstad North America, the U.S. unit of Ranstad Holding, N.V., a Netherlands-based recruiting firm. From the day he opened an office in Atlanta in 1992, with $0 revenues and no U.S. customers until he retired from Ronstad in 2001, Vonk grew Ranstad to $1.7 billion in revenues and more than $340 million in operating profits. He accomplished in nine years what it took his parent company 32 years to achieve.

Vonk had set a goal of retiring before age 50. But after six to nine months on the farm, Vonk says: "I was bored."

As a former senior banker for Chase Manhattan and an international merchant banker with Switzerland-based Bank Cantrade, Vonk reignited connections with a Chicago-based investment group, the Frontenac Company. Coincidentally, its partners were looking for a CEO to help them invest in and build a staffing or human resources outsourcing company.

Vonk began the search for a company to buy. Eventually, as he says, he stumbled onto the employee leasing/professional employee organization sector, which led him to Gevity.

Vonk and Frontenac originally targeted Gevity as a candidate to acquire, convert to an HR outsourcing company, take private and then re-emerge several years later as a public company - essentially a repeat of what Craig did when he bought Gevity. But when Vonk inquired with Gevity's board, it said no to a sale.

Manning, nonetheless, immediately eyed Vonk as a candidate for Gevity's chairman and CEO positions. "Among all the candidates," Manning says, "he was the strongest. He had a clear vision, he was bright. He was strong enough to be consistent and be able to communicate a clear direction internally and externally."

In March 2002, Vonk joined Gevity. Vonk OKd the move with his Chicago partners, who, it would turn out, would invest in Gevity and become board members in 2003. Vonk signed on for a salary of $500,000 a year, plus options on 1 million shares, with an exercise price of $3 to $3.90 a share. Vonk also agreed to invest $500,000 of his own capital in 165,000 shares of Gevity stock.

Vonk says he thought he had a good idea of what he was walking into. Manning had schooled him well. "One thing I made sure of is there wouldn't be discontinuity," Manning says. "The employees didn't need that. They needed consistency of direction, stability and a plan to make money that everyone believed in."

Adds Vonk: "I set my course on Jim Manning. Jim stopped the leak. He is the risk hero here."

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Early on, Manning and Vonk had a small victory. For the quarter ending, March 30, 2002, Gevity earned 5 cents a share. To celebrate, Manning, Vonk and a group of the company's top salespeople handed out commemorative nickels to each employee at the company's headquarters. "Everyone got the point that making money is very important," Manning says.

In the process, Vonk was struck by Gevity's employees' dedication in the face of desperation. "They were an extraordinary group of people looking for direction. They were saying to me, 'We know we have opportunities, but we don't know how to get there.'

The people were under-recognized, and they had tens of millions of dollars invested in technology platforms that were completely underutilized." Vonk learned, for instance, Gevity over the previous five years had invested nearly $40 million in an Oracle payroll/human resources software platform that is Oracle's largest installed HR system in the world.

That system would be of little use, however, if Vonk quickly couldn't settle two issues on his to-do list. Issue "1-A," he says, was to find a workers' comp insurance carrier to replace CNA by year-end 2002. Issue "1-B," he says, was to find liquidity. "We were running out of cash," says Vonk. And what made the cash situation more desperate was the unknown amount of money an insurer would require as collateral if, in fact, Gevity was able to find an insurer to underwrite the company's workers' comp plans.

In the hunt for CNA's replacement, Vonk and Panning called on virtually every workers' comp carrier - to no avail. "It was depressing," Vonk says.

There was one company, one of the biggest in the world, they didn't call - AIG. "It didn't make sense to try to talk to them if all the others were saying no," Vonk says. "But we said, 'Screw it.' " Rather than go through their intermediary to get to AIG, Vonk called one of the company's senior executives on the telephone directly. The AIG executive told Vonk he knew of Gevity's search and that he also knew of Gevity's previous experiences with Liberty and CNA; AIG was not interested.

But Vonk was ready with a different approach: "I said workers' comp insurance is not our primary interest. We'd like to talk to you about becoming strategic channel partners." With AIG serving as one of the world's largest insurers of small businesses, Gevity had a customer base of 8,000 small to medium-size companies that could be customers of AIG as well. AIG reconsidered.

By October 2002, Vonk had verbal assurances that AIG would become Gevity's workers' comp insurer. "It was a narrow escape," he says. Especially narrow because, just as Vonk solidified the AIG deal, he received a call on his cell phone while traveling to Miami for a short vacation: Gevity's health insurers, Blue Cross-Blue Shield and Aetna, were worried whether Gevity's collateral reserves with them were sufficient. Vonk skipped the vacation.

Again Vonk avoided catastrophe. By year-end Gevity satisfied the health insurers, had a deal with AIG and reported three consecutive profitable quarters. Wiping his brow in refief, Vonk says, "All of a sudden, we said, 'Yes!' "

Throughout his first nine months at Gevity and for all of 2003, Vonk followed Manning's cue - consistency. Consistency with all of Gevity's stakeholders, including employees, customers and vendors. Knowing there was little cash to invest in new people and new products, Vonk preached inside Gevity the message of doing more with what the company had. "What can we do to increase the value of what we have as quickly as possible?" he asked. Customers received as much attention as possible as Vonk visited many of them to reassure them Gevity would continue to provide their HR services.

Vonk also made a point each quarter of the management team standing in front of Gevity's 450 headquarters employees, with a simultaneous Webcast for 450 more out-of-state employees, and "sharing the good, the bad, the ugly, the challenges, the accomplishments."

In the process of communicating and while resuscitating the company, Vonk also learned that as Gevity tumbled deeper into trouble, it made compromises in its hiring. "There was less opportunity to associate with the right people," he says. "To a certain extent, it created mediocrity. Intolerance for mediocrity is part of our culture."

Another part of the Vonk culture: passion. "That is the key to any successful form of entrepreneurship," he says. "You have to have an overarching passion for the business you're in. If that's not the case, anyone who could read an instruction manual could run a business.

"When you're managing a business, it's like you are on a stage performing. You have to put everything into it - your heart, your soul, everything."

His style apparently has rubbed off. Manning now sees confidence in the faces of Gevity's employees. Anne-Marie Megela, a longtime Gevity employee and senior director of investor relations, says, with Vonk's arrival and leadership seeping into the company, "I saw more of a team dedication, a dedicated optimism. A lot of people realize if Erik weren't here, we wouldn't be here either."

The right man in the right place at the right time.

GEVITY BY THE NUMBERS

BALANCE SHEET DATA

($ in thousands)

Current Assets2002200120001999 Cash and Cash Equivalents$33,769$66,112$51,269$23,08

Short Term Investments$92,454$26,780$45,699$42,69

Net Receivables$95,286$84,996$71,343$41,63

Other Current Assets$13,068$4,206$3,723$11,494

Total Current Assets$234,577$182,094$172,034$118,897

Long Term Assets

Fixed Assets$16,398$23,646$25,040$28,833

Goodwill$8,692$8,692$9,426$10,159

Other Assets$5,745$4,569$4,942$3,731

Deferred Asset Charges$123$902$896$1,950

Total Assets$265,535$219,903$212,338$163,570

Current Liabilities

Accounts Payable$136,798$109,875$110,655$77,95

Other Current Liabilities$8,150$4,203$3,298$3,523

Total Current Liabilities$144,948$114,078$113,953$81,47

Other Liabilities$61,982$48,314$20,925$1,335

Total Liabilities$206,930$162,392$134,878$82,814

Stock Holders Equity

Common Stocks$208$206$207$217

Capital Surplus$39,238$38,726$38,960$42,98

Retained Earnings$19,158$18,578$38,305$37,701

Other Equity$1$1($12) ($149)

Total Equity$58,605$57,511$77,460$80,756

Liquidity ratios

Current Ratio162%160%151%146%

Quick Ratio153%156%148%132%

Cash Ratio87%81%85%81%

Profitability Ratios

Gross Margin24%2%3%5%

Operating Margin1%-1%-0%1%

Pre-Tax Margin2%-1%-0%1%

Profit Margin1%-0%0%1%

Pre-Tax ROE12%-45%-1%43%

After Tax ROE8%-27%1%27%

OPERATING INCOME (LOSS)

($ in thousands)

1995($20,276)

1996(441)

199726,446

199834,342

199932,,975

2000(3,784)

2001(29,288)

20024,976

200311,300*

* Estimate

GEVITY STOCK PRICE

Close

6/30/97$18.750

12/31/9718.875

6/30/9829.500

12/31/9811.625

6/30/9912.875

12/31/999.500

6/30/003.562

12/31/003.000

6/30/013.810

12/31/012.540

6/30/023.960

12/31/024.050

6/30/0311.780

12/31/0322.240

1/21/0424.650

ANOTHER LOSS FOR BRADENTON?

When Tropicana Products Inc. announced at the end of 2003 that it was moving its top management to Chicago, a logical question arose:

Will Gevity HR Inc. do the same?

The Bradenton-based company, which employs about 450 people in its headquarters and another 450 around the United States, will reach the end of its lease at 600 301 Blvd. West in 2005.

Asked if the company will be moving from its current location, Chief Executive Officer Erik Vonk says: "Maybe."

Vonk says Gevity is investigating all possibilities. Toward that end, he says the company has surveyed all of its local employees to determine where they live.

"If we move out of the city, it won't be far," he says. "Moving farther away would upset too many private lives."

Still, he says the company would consider relocating to Tampa or St. Petersburg if an offer made sense. "We need to do what's best for all stakeholders. We have a fiduciary responsibility to look at everything."

LESSONS FROM

A TURNAROUND

In Erik Vonk's 22 months as chairman and chief executive officer, the challenge of rescuing and reviving Gevity HR has reconfirmed for him a few lessons:

× "I've learned it's much more difficult to transition an existing business from one segment to another than it is to build a new business."

× "There are always a handful of people who start to row against the change. But if you want to change, you must confront the people who don't believe it's right."

× "One person can only make a small input. It's a collection of dedicated minds here. That's the most gratifying aspect here."

× "You need to be a possibilitarian," he says. "Churchill was right. Never, never, ever give up. Just never give up."