Tableof Contents

 

 

 

**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington, D.C. 20549**

** **

**FORM 10-Q**

** **
| **x**                                                   | ** ** | **Quarterly Report  Pursuant to Section 13 or 15(d) of the Securities Exchange Act of  1934** |
|---------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------|
|                                                    |       |                                                                                                    |
| **For the quarterly period  ended June 30, 2008.** |
|                                                    |       |                                                                                                    |
| **or**                                                  |
|                                                    |       |                                                                                                    |
| **o**                                                   | ** ** | **Transition Report Pursuant to Section 13 or  15(d) of the Securities Exchange Act of 1934** |

 

**For the transition period from            to            **

 

**Commission File No. 0-22701**

 

**GEVITY HR, INC.**

(Exact name of registrantas specified in its charter)

** **

| **Florida**                                                     | ** ** | **65-0735612**                       |
|-----------------------------------------------------------------|------------|--------------------------------------|
| (State or other  jurisdiction of incorporation or organization) |       | (I.R.S. Employer Identification No.) |

 

| **9000 Town Center Parkway**             | ** ** | ** ** |
|------------------------------------------|------------|------------|
| **Bradenton, Florida**                   | ** ** | **34202**  |
| (Address of principal executive offices) |       | (Zip Code) |

 

(Registrant’s telephonenumber, including area code): ** (941) 741-4300**

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports) and (2) has been subject to such filing requirements for thepast 90 days.

 

Yes x         No o

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company.See definitions of “large accelerated filer,” “accelerated filer,” and “smallerreporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

| Large accelerated filer  o                    |   | Accelerated filer x          |
|-----------------------------------------------|--------|-----------------------------------|
|                                          |   |                              |
| Non-accelerated filer o                       |   | Smaller reporting  company o |
| (Do not check if a smaller reporting company) |   |                              |

 

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

 

Yes o         No x

 

Indicate the number ofshares outstanding of each of the issuer’s classes ofcommon stock, as of the latest practicable date.

 

| **Class of common stock** | ** ** | **Outstanding as of July 31, 2008** |
|------------------------------------------|------------|--------------------------------------------------------------|
| Par value $0.01 per share                | ** ** | **23,689,012**                                               |

 

 

 

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Table of Contents

 

**TABLE OF CONTENTS**

 
| ** **        | ** **                | ** **                                                                                                                  | **Page**   |
|-------------------|---------------------------|-----------------------------------------------------------------------------------------------------------------------------|------------|
| ** **        | ** **                | ** **                                                                                                                  | ** ** |
| **PART I.**  | **FINANCIAL INFORMATION** | ** **                                                                                                                  |
|              |                      |                                                                                                                        |       |
|              | ITEM 1.                   | Financial Statements                                                                                                        | 3          |
|              |                      |                                                                                                                        |       |
|              |                      | Condensed Consolidated Statements of Operations for the three and six  months ended June 30, 2008 and 2007 (unaudited) | 3          |
|              |                      |                                                                                                                        |       |
|              |                      | Condensed Consolidated Balance Sheets as of June 30, 2008 and December 31,  2007 (unaudited)                      | 4          |
|              |                      |                                                                                                                        |       |
|              |                      | Condensed Consolidated Statements of Cash Flows for the six months  ended June 30, 2008 and 2007 (unaudited)           | 6          |
|              |                      |                                                                                                                        |       |
|              |                      | Notes to Condensed Consolidated Financial  Statements (unaudited)                                                           | 7          |
|              |                      |                                                                                                                        |       |
|              | ITEM 2.                   | Management’s Discussion and Analysis of  Financial Condition and Results of Operations                                 | 16         |
|              |                      |                                                                                                                        |       |
|              | ITEM 3.                   | Quantitative and Qualitative Disclosures  About Market Risk                                                                 | 28         |
|              |                      |                                                                                                                        |       |
|              | ITEM 4.                   | Controls and Procedures                                                                                                     | 28         |
|              |                      |                                                                                                                        |       |
| **PART II.** | **OTHER INFORMATION**     | ** **                                                                                                                  |
|              |                      |                                                                                                                        |       |
|              | ITEM 1.                   | Legal Proceedings                                                                                                           | 28         |
|              |                      |                                                                                                                        |       |
|              | ITEM 1A.                  | Risk Factors                                                                                                                | 29         |
|              |                      |                                                                                                                        |       |
|              | ITEM 2.                   | Unregistered Sales of Equity Securities and  Use of Proceeds                                                                | 29         |
|              |                      |                                                                                                                        |       |
|              | ITEM 4.                   | Submission of Matters to a Vote of Security  Holders                                                                        | 29         |
|              |                      |                                                                                                                        |       |
|              | ITEM 6.                   | Exhibits                                                                                                                    | 30         |
|              |                      |                                                                                                                        |       |
|              | SIGNATURE                 | 31                                                                                                                          |
|                   |                           |                                                                                                                             |            |  |

 

2

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Table of Contents

 

**PART I.  FINANCIALINFORMATION**

 

**Item1.  Financial Statements**

 

**GEVITY HR, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OFOPERATIONS**

**UNAUDITED**

**(in thousands, except share and per share data)**

 
| ** **                                                                 | ** ** | **For the Three Months Ended   June 30,** | ** ** | **For the Six Months Ended****   June 30,** | ** ** |
|----------------------------------------------------------------------------|------------|-------------------------------------------------------------------------|------------|---------------------------------------------------------------------------|------------|
| ** **                                                                 | ** ** | **2008**                                                                | ** ** | **2007**                                                                  | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                                                       |       |                                                                    |       |                                                                      |       |   |   |   |   |
| Revenues                                                                   |       | $                                                                       | 128,656    |                                                                      | $          | 149,478 |   | $ | 270,354 |   | $ | 310,062 |   |
|                                                                       |       |                                                                    |       |                                                                      |       |   |   |   |   |
| Cost of services (exclusive of  depreciation and amortization shown below) |       | 90,736                                                                  |       | 102,823                                                                   |       | 198,194 |   | 218,505 |   |
|                                                                       |       |                                                                    |       |                                                                      |       |   |   |   |   |
| Gross profit                                                               |       | 37,920                                                                  |       | 46,655                                                                    |       | 72,160 |   | 91,557 |   |
|                                                                       |       |                                                                    |       |                                                                      |       |   |   |   |   |
| Operating expenses:                                                        |       |                                                                    |       |                                                                      |       |   |   |   |   |
|                                                                       |       |                                                                    |       |                                                                      |       |   |   |   |   |
| Salaries, wages and commissions                                            |       | 18,761                                                                  |       | 19,604                                                                    |       | 37,537 |   | 41,725 |   |
|                                                                       |       |                                                                    |       |                                                                      |       |   |   |   |   |
| Other general and  administrative                                          |       | 12,281                                                                  |       | 14,463                                                                    |       | 23,830 |   | 28,928 |   |
|                                                                       |       |                                                                    |       |                                                                      |       |   |   |   |   |
| Depreciation and amortization                                              |       | 3,942                                                                   |       | 3,930                                                                     |       | 7,878 |   | 7,533 |   |
|                                                                       |       |                                                                    |       |                                                                      |       |   |   |   |   |
| Total operating expenses                                                   |       | 34,984                                                                  |       | 37,997                                                                    |       | 69,245 |   | 78,186 |   |
|                                                                       |       |                                                                    |       |                                                                      |       |   |   |   |   |
| Operating income                                                           |       | 2,936                                                                   |       | 8,658                                                                     |       | 2,915 |   | 13,371 |   |
|                                                                       |       |                                                                    |       |                                                                      |       |   |   |   |   |
| Interest income                                                            |       | 84                                                                      |       | 190                                                                       |       | 255 |   | 332 |   |
|                                                                       |       |                                                                    |       |                                                                      |       |   |   |   |   |
| Interest expense                                                           |       | (737                                                                    | )          | (697                                                                      | )          | (1,307 | ) | (996 | ) |
|                                                                       |       |                                                                    |       |                                                                      |       |   |   |   |   |
| Other expense, net                                                         |       | (11                                                                     | )          | (9                                                                        | )          | (35 | ) | (23 | ) |
|                                                                       |       |                                                                    |       |                                                                      |       |   |   |   |   |
| Income from continuing  operations before  income  taxes                   |       | 2,272                                                                   |       | 8,142                                                                     |       | 1,828 |   | 12,684 |   |
|                                                                       |       |                                                                    |       |                                                                      |       |   |   |   |   |
| Income tax provision                                                       |       | 317                                                                     |       | 2,640                                                                     |       | 144 |   | 4,436 |   |
|                                                                       |       |                                                                    |       |                                                                      |       |   |   |   |   |
| Income from continuing  operations                                         |       | 1,955                                                                   |       | 5,502                                                                     |       | 1,684 |   | 8,248 |   |
|                                                                       |       |                                                                    |       |                                                                      |       |   |   |   |   |
| Loss from discontinued  operations, net of tax                             |       | (1,767                                                                  | )          | (812                                                                      | )          | (3,111 | ) | (1,044 | ) |
|                                                                       |       |                                                                    |       |                                                                      |       |   |   |   |   |
| Net income (loss)                                                          |       | $                                                                       | 188        |                                                                      | $          | 4,690 |   | $ | (1,427 | ) | $ | 7,204 |   |
|                                                                       |       |                                                                    |       |                                                                      |       |   |   |   |   |
| Net income (loss) per common  share                                        |       |                                                                    |       |                                                                      |       |   |   |   |   |
| - Basic:                                                                   |       |                                                                    |       |                                                                      |       |   |   |   |   |
| Income from continuing  operations                                         |       | $                                                                       | 0.08       |                                                                      | $          | 0.23 |   | $ | 0.07 |   | $ | 0.34 |   |
| Loss from discontinued  operations                                         |       | (0.07                                                                   | )          | (0.03                                                                     | )          | (0.13 | ) | (0.04 | ) |
| Net income (loss)                                                          |       | $                                                                       | 0.01       |                                                                      | $          | 0.20 |   | $ | (0.06 | ) | $ | 0.30 |   |
|                                                                       |       |                                                                    |       |                                                                      |       |   |   |   |   |
| - Diluted:                                                                 |       |                                                                    |       |                                                                      |       |   |   |   |   |
| Income from continuing  operations                                         |       | $                                                                       | 0.08       |                                                                      | $          | 0.22 |   | $ | 0.07 |   | $ | 0.33 |   |
| Loss from discontinued  operations                                         |       | (0.07                                                                   | )          | (0.03                                                                     | )          | (0.13 | ) | (0.04 | ) |
| Net income (loss)                                                          |       | $                                                                       | 0.01       |                                                                      | $          | 0.19 |   | $ | (0.06 | ) | $ | 0.29 |   |
|                                                                       |       |                                                                    |       |                                                                      |       |   |   |   |   |
| Weighted average common shares outstanding:                                |       |                                                                    |       |                                                                      |       |   |   |   |   |
| - Basic                                                                    |       | 23,217,812                                                              |       | 23,930,779                                                                |       | 23,212,205 |   | 24,178,740 |   |
| - Diluted                                                                  |       | 23,609,246                                                              |       | 24,523,901                                                                |       | 23,607,067 |   | 24,779,752 |   |

 

See notes to condensed consolidatedfinancial statements.

 

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**GEVITY HR, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**UNAUDITED**

**(in thousands, except share and per share data)**

 
| ** **                                             | ** ** | **June 30,****   2008** | ** ** | **December 31,****   2007** | ** ** |
|--------------------------------------------------------|------------|-----------------------------------|------------|---------------------------------------|------------|
|                                                   |       |                              |       |                                  |       |
| **ASSETS**                                             |       |                              |       |                                  |       |
| Current assets:                                        |       |                              |       |                                  |       |
|                                                   |       |                              |       |                                  |       |
| Cash and cash equivalents                              |       | $                                 | 16,716     |                                  | $          | 9,950 |   |
|                                                   |       |                              |       |                                  |       |
| Marketable securities –  restricted               |       | 6,183                             |       | 6,102                                 |       |
|                                                   |       |                              |       |                                  |       |
| Accounts receivable, net                               |       | 122,698                           |       | 130,209                               |       |
|                                                   |       |                              |       |                                  |       |
| Short-term workers’  compensation receivable, net |       | 17,346                            |       | 16,950                                |       |
|                                                   |       |                              |       |                                  |       |
| Other current assets                                   |       | 15,197                            |       | 14,515                                |       |
|                                                   |       |                              |       |                                  |       |
| Total current assets                                   |       | 178,140                           |       | 177,726                               |       |
|                                                   |       |                              |       |                                  |       |
| Property and equipment, net                            |       | 20,108                            |       | 22,176                                |       |
|                                                   |       |                              |       |                                  |       |
| Long-term marketable securities  – restricted     |       | 4,002                             |       | 3,934                                 |       |
|                                                   |       |                              |       |                                  |       |
| Long-term workers’ compensation  receivable, net  |       | 125,162                           |       | 105,321                               |       |
|                                                   |       |                              |       |                                  |       |
| Intangible assets, net                                 |       | 6,399                             |       | 11,386                                |       |
|                                                   |       |                              |       |                                  |       |
| Goodwill                                               |       | 8,692                             |       | 9,224                                 |       |
|                                                   |       |                              |       |                                  |       |
| Deferred tax asset, net                                |       | 10,183                            |       | 10,797                                |       |
|                                                   |       |                              |       |                                  |       |
| Other assets                                           |       | 926                               |       | 1,347                                 |       |
|                                                   |       |                              |       |                                  |       |
| Total assets                                           |       | $                                 | 353,612    |                                  | $          | 341,911 |   |

 

Seenotes to condensed consolidated financial statements.

 

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**GEVITY HR, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED BALANCE SHEETS(Continued)**

**UNAUDITED**

**(in thousands, except share and per share data)**

 
| ** **                                                                                                                                                           | ** ** | **June 30,****   2008** | ** ** | **December 31,****   2007** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------|------------|---------------------------------------|------------|
| ** **                                                                                                                                                           | ** ** | ** **                        | ** ** | ** **                            | ** ** |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                                                                                        | ** ** | ** **                        | ** ** | ** **                            | ** ** |
| ** **                                                                                                                                                           | ** ** | ** **                        | ** ** | ** **                            | ** ** |
| Current liabilities:                                                                                                                                                 |       |                              |       |                                  |       |
|                                                                                                                                                                 |       |                              |       |                                  |       |
| Accrued payroll and payroll  taxes                                                                                                                                   |       | $                                 | 131,865    |                                  | $          | 151,105 |   |
|                                                                                                                                                                 |       |                              |       |                                  |       |
| Accrued insurance premiums and  health reserves                                                                                                                      |       | 12,258                            |       | 13,557                                |       |
|                                                                                                                                                                 |       |                              |       |                                  |       |
| Customer deposits and  prepayments                                                                                                                                   |       | 8,752                             |       | 13,581                                |       |
|                                                                                                                                                                 |       |                              |       |                                  |       |
| Accounts payable and other  accrued liabilities                                                                                                                      |       | 9,487                             |       | 11,881                                |       |
|                                                                                                                                                                 |       |                              |       |                                  |       |
| Deferred tax liability, net                                                                                                                                          |       | 9,504                             |       | 11,674                                |       |
|                                                                                                                                                                 |       |                              |       |                                  |       |
| Dividends payable                                                                                                                                                    |       | 1,180                             |       | 2,096                                 |       |
| Total current liabilities                                                                                                                                            |       | 173,046                           |       | 203,894                               |       |
|                                                                                                                                                                 |       |                              |       |                                  |       |
| Revolving credit facility                                                                                                                                            |       | 62,967                            |       | 17,367                                |       |
|                                                                                                                                                                 |       |                              |       |                                  |       |
| Other long-term liabilities                                                                                                                                          |       | 5,144                             |       | 5,088                                 |       |
| Total liabilities                                                                                                                                                    |       | 241,157                           |       | 226,349                               |       |
|                                                                                                                                                                 |       |                              |       |                                  |       |
| Commitments and contingencies  (see notes)                                                                                                                           |       |                              |       |                                  |       |
|                                                                                                                                                                 |       |                              |       |                                  |       |
| 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 shareholders’ equity                                                                                                                                      |       | 112,455                           |       | 115,562                               |       |
|                                                                                                                                                                 |       |                              |       |                                  |       |
| Total liabilities and  shareholders’ equity                                                                                                                     |       | $                                 | 353,612    |                                  | $          | 341,911 |   |

 

Seenotes to condensed consolidated financial statements.

 

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**GEVITY HR, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OF CASHFLOWS**

**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 arrangements                           |       | 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 prepayments                                                     |       | (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 provided 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 andcash flows from financing activities for the six months ended June 30,2008 exclude approximately $61 of capital items purchased by the Companythrough capital leases.

 

Capital expenditures forthe six months ended June 30, 2008 exclude approximately $404 of capitalitems purchased by the Company in the second quarter of 2008 and not paid foruntil the third quarter of 2008.

 

Capital expenditures forthe six months ended June 30, 2007 exclude approximately $530 of capitalitems purchased by the Company in the second quarter of 2007 and not paid foruntil the third quarter of 2007.

 

See notes to condensedconsolidated financial statements.

 

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**GEVITY HR, INC. AND SUBSIDIARIES**

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

**(UNAUDITED)**

**(in thousands, except share and per share data)**

 

**1.****                                     **GENERAL****

 

The accompanyingunaudited condensed consolidated financial statements of Gevity HR, Inc.and subsidiaries (collectively, the “Company” or “Gevity”)have been prepared in accordance with accounting principles generally acceptedin the United States of America (“US GAAP”) for interim financial informationand with the instructions to Form 10-Q.  These financialstatements should be read in conjunction with the audited consolidatedfinancial statements and notes thereto included in the Company’s Annual Reporton 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 ofnormal recurring accruals, which are, in the opinion of management, necessaryfor a fair presentation of the financial position, results of operations andcash flows for the interim periods presented.

 

The Company’s significantaccounting policies are disclosed in Note 1 of the Company’s consolidatedfinancial statements contained in the Form 10-K.  The Company’s critical accounting estimatesare disclosed in Item 7, Management’s Discussion andAnalysis of Financial Condition and Results of Operations, in the Form 10-K.  On an ongoing basis, the Company evaluatesits policies, estimates and assumptions, including those related to revenuerecognition, 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 havebeen no material changes to the Company’s significant accounting policies andcritical accounting estimates except as described below.

 

*Recent Accounting Pronouncements*

 

In June 2008, the Financial AccountingStandards Board (“FASB”) Emerging Issues Task Force (“EITF”) reached aconsensus on EITF Issue No. 08-3, *Accountingby Lessees for Maintenance Deposits under Lease Agreements*(“EITF No. 08-3”).EITF No. 08-3 provides that all nonrefundable maintenance deposits paid bya lessee, under an arrangement accounted for as a lease, should be accountedfor as a deposit. When the underlying maintenance is performed, the deposit isexpensed or capitalized in accordance with the lessee’s maintenance accountingpolicy. Once it is determined that an amount on deposit is not probable ofbeing used to fund future maintenance expense, it is recognized as additionalrent 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. 08-3on the Company’s financial position, results of operations and cash flows.

 

In May 2008, the FASB issued Statement ofFinancial Accounting Standards (“SFAS”) No. 162, *The Hierarchy of Generally Accepted AccountingPrinciples*, (“SFAS No. 162”), which becomes effective60 days following the SEC’s approval of the Public Company AccountingOversight Board (“PCAOB”) amendments to US Auditing Standards Section 411,*The Meaning of Present Fairly in ConformityWith Generally Accepted Accounting Principles*. SFAS No. 162identifies the sources of accounting principles and the framework for selectingthe principles to be used in the preparation of financial statements ofnongovernmental entities that are presented in conformity with US GAAP. Thisstandard is not expected to have an impact on the Company’s financial position,results of operations or cash flows.

 

In April 2008, the FASB issued FASB StaffPosition (“FSP”) SFAS No. 142-3, *Determinationof the Useful Life of Intangible Assets*(“FSP SFAS No. 142-3”).FSP SFAS No. 142-3 amends the factors that should be considered indeveloping renewal or extension assumptions used to determine the useful lifeof a recognized intangible asset under SFAS No. 142, *Goodwill and Other Intangible Assets*. Theintent of this FSP is to improve the consistency between the useful life of arecognized intangible asset and the period of expected cash flows used tomeasure the fair value of the asset under SFAS No. 141 (revised2007), *Business Combinations*, andother US GAAP. FSP SFAS No. 142-3 is effective for the Companyon January 1, 2009. The Company is currently evaluating the impact ofadopting FSP SFAS No. 142-3 on the Company’s financial position,results of operations and cash flows.

 

In March 2008, the FASB issued SFAS No. 161,*Disclosures about Derivative Instruments andHedging Activities, an amendment of FASB Statement No. 133*(“SFAS No. 161”).SFAS No. 161 requires enhanced disclosures about a company’sderivative and hedging activities. These enhanced disclosures will discuss (a) howand why a company uses derivative instruments, (b) how derivativeinstruments and related hedged items are accounted for under FASB Statement No. 133and its related interpretations and (c) how derivative instruments andrelated hedged items affect a company’s financial position, results ofoperations and cash flows. SFAS No. 161 is effective for the Companyon January 1, 2009. This standard will have no impact on the Company’sfinancial 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, Includingan Amendment of FASB Statement**No. 115*(“SFAS No. 159”). SFAS No. 159 gives entitiesthe irrevocable option to carry many financial assets and financial liabilities at fair value. Unrealized gains and losses on items

 

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for which the fair value option has been elected are reported inearnings. SFAS No. 159 was effective for the Company on January 1,2008. The implementation of this standard did not have a material impact on the Company’s financial position, results of operations orcash flows.

 

In September 2006,the FASB issued SFAS No. 157, *FairValue Measurements* (“SFAS No. 157”). SFAS No. 157establishes a framework for the measurement of assets and liabilities that usefair value and expands disclosures about fair valuemeasurements. SFAS No. 157 will apply whenever another US GAAPstandard requires (or permits) assets or liabilities to be measured at fairvalue but does not expand the use of fair value to any new circumstances.SFAS No. 157 is effective for financial assets and financialliabilities for fiscal years beginning after November 15,2007.  In February 2008, the FASBissued FSP 157-1, *Application of FASBStatement No. 157 to FASB Statement No. 13 and Other AccountingPronouncements That Address Fair Value Measurements for Purposes of LeaseClassification or Measurement under Statement 13*, which removedleasing transactions accounted for under Statement 13 and related guidance fromthe 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 nonfinancialassets and nonfinancial liabilities to fiscal years beginning after November 15,2008.

 

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

 

SFAS No. 157 definesfair value as the price that would be received to sell an asset or paid totransfer a liability in an orderly transaction betweenmarket participants at the measurement date (exit price).  SFAS No. 157 classifies the inputs usedto 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 thebest available information in measuring fair value.  Financial assets and liabilities areclassified in their entirety based on the lowest level of input that issignificant to the fair value measurement. The Company has determined that its financial assets are currently level1 in the fair value hierarchy.  Financial assets at June 30, 2008consist solely of investments held in money market accounts.

 

In December 2007,the FASB issued SFAS No. 141 (revised 2007), *BusinessCombinations* (“SFAS No. 141-R”), which will become effectivefor business combination transactions having anacquisition date on or after January 1, 2009.  This standard requires the acquiring entityin a business combination to recognize the assets acquired, the liabilitiesassumed, 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 asrestructuring costs the acquirer expects to incur for which it is not obligatedat the acquisition date, to be recorded against income rather than included inthe purchase price determination.  Italso requires recognition of contingent arrangements at their acquisition datefair values, with subsequent changes in fair value generally reflected inincome. The Company does not anticipate that the adoption of SFAS No. 141-Rwill have a material impact on its financial position and results ofoperations.

 

In June 2007, theFASB ratified Emerging Issues Task Force Issue No. 06-11, *Accounting for Income Tax Benefits of Dividends on Share-Based PaymentAwards*(“EITF No. 06-11”). EITF No. 06-11 applies toshare-based payment arrangements with dividend protection features that entitlean employee to receive dividends or dividend equivalents on nonvestedequity-based shares or units, when those dividends or dividend equivalents are charged to retained earnings and result inan 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 nonvestedequity-based shares or units should be recognized as an increase in additionalpaid-in capital. EITF No. 06-11 is effective for fiscal years beginningafter December 15, 2007 with early adoption permitted. The Company adopted EITF No. 06-11 on January 1,2008, which did not have a material effect on the Company’s results ofoperations or financial position.

 

**2.****                                     **DISCONTINUED OPERATIONS****

 

After completion of a comprehensive strategicreview, the Company decided to focus on the growth of its core co-employmentoffering, Gevity EdgeTM. As such, on February 25, 2008, theboard of directors of the Company approved a plan to discontinue the Company’snon co-employment offering, Gevity Edge SelectTM. Clients thatexisted at February 25, 2008, were notified of this decision and givenuntil June 30, 2008 to transition to other service providers.  The Company completed its transition of allremaining Gevity Edge Select clients during the second quarter of 2008,processing the final payrolls

 

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dated June 30, 2008.  TheCompany has determined that the exit from the Gevity Edge Select business meetsthe 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 andrelated exit costs associated with Gevity Edge Select have been reported asdiscontinued operations for all periods presented.

 

Summarized operatingresults for the discontinued operations of Gevity Edge Select for the three andsix month periods ended June 30, 2008 and June 30, 2007 are asfollows:

 
| ** **                                      | ** ** | **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 costsassociated 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 anyfurther significant costs in connection with the exit from this business. Costsassociated with the exit from the Gevity Edge Select business are included in theloss 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 liabilityaccounts associated with the exit costs related to the discontinuation of theGevity Edge Select business for the six months ended June 30, 2008 ispresented in the following table and is included withinaccounts payable and other accrued liabilities in the condensed consolidatedbalance 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 andDecember 31, 2007, the Company’s investment portfolioconsisted of restricted money market funds classified as available-for-sale.

 

Restricted money marketfunds relate to collateral held in connection with the Company’s workers’compensation programs, collateral held in connection with the Company’s general insurance programs and amounts held in escrow relatedto purchase price contingencies associated with the Company’s acquisition ofHRAmerica, Inc. (“HRA”) on February 16, 2007. These securitiesare recorded at fair value, which is equal to cost. Theinterest earned on these investments is recognized as interest income in theCompany’s condensed consolidated statements of operations.

 

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For the three and sixmonths ended June 30, 2008 and 2007, there were no realized gains orlosses 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 iscurrently negotiating with the former HRA owners for the release of $1,400 heldin escrow related to purchase price contingencies for the acquisition of HRA aswell as for the indemnification for certain representations made by the formerowners of HRA in connection with the acquisition of HRA.  The Company does not believe that theconditions for the payment of the purchase price contingency have been met andtherefore a reserve against the $1,400 is not necessary as of June 30,2008.  Additionally, the Company has notrecorded 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 andDecember 31, 2007, accounts receivable from clients consisted of thefollowing:

 
| ** **                            | ** ** | **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 establishesan allowance for doubtful accounts based upon management’sassessment of the collectibility of specific accounts and other potentiallyuncollectible amounts.  The Companyreviews its allowance for doubtful accounts on a quarterly basis.

 

**5.****                                     **WORKERS’ COMPENSATIONRECEIVABLE/ RESERVES****

 

The Company has maintained a loss sensitive workers’ compensationinsurance program since January 1, 2000. The program is insured by CNAFinancial Corporation (“CNA”) for the 2000, 2001 and 2002program years. The program is currently insured by member insurance companiesof American International Group, Inc. (“AIG”) and includes coveragefor the 2003 through 2008 policy years. In states where private insurance isnot permitted, client employees are covered by stateinsurance funds.

 

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

 

Similar to prior years’workers’ compensation programs with AIG, the Company,through its wholly-owned Bermuda-based insurance subsidiary, remits premiums toAIG to cover claims to be paid within the Company’s $1,000 per occurrencedeductible layer. AIG deposits the premiums into an interest bearing loss fundcollateral account for reimbursement of paid claims up to the $1,000 peroccurrence amount. Interest on the loss fund collateral account (which will bereduced as claims are paid out over the life of the policy) will accrue to thebenefit of the Company at a fixed annual rate. Under the 2008 program, the Company will pay $55,510 of loss fundcollateral premium, subject to certain volume adjustments, and is guaranteed toreceive a 3.19% per annum fixed return so long as the program and the interestaccrued under the program remain with AIG for at least 10 years. If the programis terminated early, the interest rate is adjusted downward based upon asliding scale. The 2008 program provides for an initial loss fund collateralpremium true-up 18 months after the policy inception and annuallythereafter.  The true-up is based upon apre-determined loss factor times the amount of incurred claims in thedeductible layer as of the date of the true-up.

 

The Company reviews itsestimated cost of claims in the deductible layer on a quarterlybasis.  The determination of theestimated cost of claims is based upon a number of factors, including but notlimited to: actuarial calculations, current and historical loss trends, thenumber of open claims, developments relating to the actual claims incurred andthe impact of acquisitions, if any.  TheCompany uses a certain amount of judgment in this estimation process. Duringthe three months ended June 30, 2008 and 2007, the Company revisedits ultimate loss estimates for prior open policy years,which resulted in a net reduction of workers’ compensation expense ofapproximately $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 openpolicy years, which resulted in a net reduction ofworkers’ compensation expense of approximately $10,043 and $8,043,respectively. These revisions were based upon continued favorable claimsdevelopment that occurred during the periods.

 

The balance in the lossfund collateral account (including accrued interest) inexcess of the net present value of the Company’s liability to AIG with respectto claims payable within the deductible layer is recorded as a workers’compensation

 

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receivable. Returns to the Company of amounts held in the loss fundcollateral account are recorded as reductions to the workers’ compensationreceivable, net. During the first two quarters of 2008 and 2007, AIG releasedapproximately $2,000 and $5,000, respectively, of cash, from the 2003 loss fundcollateral 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 annualtrue-up of the loss fund collateral accounts and premium expense audit.

 

The Company accrues forworkers’ compensation costs based upon:

 

·                  premiums paid for the layer of claimsin excess of the deductible;

 

·                  estimated total costs of claims thatfall within the Company’s policy deductible calculated on a net present valuebasis;

 

·                  the administrative costs of theprograms (including claims administration, state taxes and surcharges); and

 

·                  the return on investment for lossfund premium dollars paid to AIG.

 

At June 30, 2008 andDecember 31, 2007, the weighted average discount rate used to calculatethe 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 inexcess of the net present value of the estimated claim liabilities. This hasresulted in a workers’ compensation receivable, net, at June 30,2008 and December 31, 2007 of $142,508 and $122,271, respectively, ofwhich $17,346 and $16,950 was classified as short-term at June 30, 2008and December 31, 2007, respectively. This receivable represents a significant concentration of credit risk for theCompany.

 

**6.****                                     **INTANGIBLE ASSETS****

 

At June 30, 2008 andDecember 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 forthe three months ended June 30, 2008 and 2007 was $2,508 and $2,525,respectively. Amortization expense for the six months ended June 30, 2008and 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 ofFlorida, Inc. and its subsidiary Health Options, Inc.(together “BCBSF/HOI”) is the Company’s primary healthcare partner in Florida,delivering medical care benefits to approximately 19,000 Florida-based clientemployees. The Company’s policy with BCBSF/HOI is a minimum premium policyexpiring September 30, 2008. Pursuant to thispolicy, the Company is obligated to reimburse BCBSF/HOI for the cost of theclaims incurred by participants under the plan, plus the cost of planadministration. The administrative costs per covered client employee associated with this policy are specified by year and aggregateloss coverage is provided to the Company at the level of 110% of projectedclaims. The Company’s obligation to BCBSF/HOI under its current contract mayrequire an irrevocable letter of credit (“LOC”) in favor of BCBSF/HOI if thecoverage ratio, as set forth in the BCBSF/HOI agreement, is not maintained. Thecoverage ratio is calculated quarterly. If the Company’s coverage ratio doesnot meet the minimum requirement, the Company must provide an LOC valued at upto two months of projected claims (average monthly claims approximated $9,600for the last twelve months). On February 25, 2008, the Company andBCBSF/HOI entered into the Second Amendment to Agreement to ProvideComprehensive Health Care Benefits (the “Second Amendment”)amending the Agreement to Provide Comprehensive Health Care Benefits, dated asof October 1, 2005, between the parties, restating the definitionof “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, theminimum coverage ratio was met and no LOC was required. As the Companynegotiates its renewal with BCBSF/HOI, it is possible that BCBSF/HOI willrequire collateral, the terms of which cannot yet be determined.

 

Aetna Health, Inc. (“Aetna”)is the Company’s largest medical care benefits provider for approximately15,000 client employees outside the state of Florida. The Company’s 2007/2008 policy with Aetna provides for an HMO and PPOoffering to plan participants. The Aetna HMO medical benefit plans are subjectto a guaranteed cost contract that caps the Company’s annual liability. TheAetna PPO medical benefit plan is a retrospective funding arrangement.Beginning with the 2007 plan year, Aetna agreed to eliminate the callablefeature of the PPO plan that previously existed and differences in actual planexperience versus projected plan experience for the year will factor intosubsequent year rates.

 

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In 2006, the Companyannounced the addition of UnitedHealthcare as an additional health plan option.As of June 30, 2008, UnitedHealthcare provides medical care benefits toapproximately 4,000 client employees. The UnitedHealthcare plan is a fixed cost contract. Effective May 1,2008, UnitedHealthcare and the Company amended their agreement to extendcoverage availability through September 30, 2009 for those clients coveredby UnitedHealthcare as of May 1, 2008.

 

The Company providescoverage under various regional medical benefit plans to approximately 1,000client employees in various areas of the country. Included in the list ofmedical benefit plan providers are Kaiser FoundationHealth Plan, Inc. and Harvard Pilgrim Healthcare. These regionalmedical plans are subject to fixed cost contracts.

 

The Company’s dentalplans, which include both a PPO and HMO offering, are provided by Aetna for all client employees who elect coverage. All dental plansare subject to fixed cost contracts that cap the Company’s annual liability.

 

In addition to dentalcoverage, the Company offers various fixed cost insurance programs to clientemployees such as vision care, life, accidental death anddismemberment, short-term disability and long-term disability. The Company alsooffers a flexible spending account for healthcare, dependent care and aqualified transportation fringe benefit program.

 

Part-time employees of clients are eligible to enroll in limited benefitprograms from Star HRG. These plans include fixed cost sickness and accidentand dental insurance programs, and a vision discount plan.

 

Included in accruedinsurance premiums and health reserves at June 30,2008 and December 31, 2007 are $8,713 and $10,356, respectively, ofshort-term liabilities related to the Company’s health benefit plans. Of theseamounts $8,684 and $10,100, respectively, represent an accrual for the estimateof claims incurred but not reported at June 30,2008 and December 31, 2007.

 

Health benefit reservesare determined quarterly by the Company and include an estimate of claimsincurred but not reported and claims reported but not yet paid. The calculationof these reserves is based upon a number of factors,including but not limited to actuarial calculations, current and historicalclaims payment patterns, plan enrollment and medical trend rates.

 

During the three monthsended June 30, 2008, the Company reduced its reservefor incurred but not reported claims by approximately $731, which decreased itscost of services and resulted in a health plan surplus for the period. Thisreduction was based upon favorable claims development.  There were no changes to the health planreserves that impacted cost of services during the three months ended June 30,2007.

 

During the six monthsended June 30, 2008 and 2007, the Company reduced itsreserve for incurred but not reported claims by approximately $1,731 and$2,601, respectively, which decreased its cost of services and resulted in ahealth plan surplus for each period. These reductions were based upon favorableclaims development.

 

**8.****                                     **REVOLVING CREDITFACILITY****

 

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 FirstAmendment to the Amended and Restated Credit Agreementdated August 30, 2006, which increased the amount of aggregaterevolving commitments of the credit facility from $50,000 to $75,000 andallowed 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 RestatedCredit Agreement, which increased the amount of aggregate revolving commitmentsfrom $75,000 to $100,000. On February 25, 2008, theCompany entered into the Third Amendment to Amended and Restated CreditAgreement (“Third Amendment”). The Third Amendment provides for the grant ofsecurity interests and liens in substantially all the property and assets (withagreed upon carveouts and exceptions) of the Company to the Lenders. The ThirdAmendment also provides for an automatic decrease of the aggregate revolvingcommitment of the credit facility from $100,000 to $85,000 on September 30,2008. The Third Amendment includes additional covenantsand amends certain financial covenants and negative covenants with an effectivedate of December 31, 2007. These include the maintenance of aminimum consolidated net worth, a maximum consolidated adjusted leverage ratio,a minimum consolidated fixed charge coverage ratio of1.25:1.0, minimum consolidated adjusted EBITDA requirements and a ceiling onconsolidated capital expenditures.  The revised covenants set forth in theThird Amendment now restrict the Company’s ability to repurchase shares of itscapital stock in certain circumstances and make acquisitions and requires theCompany to provide certain period reports relating to budget and profits andlosses, intellectual property and insurance policies.  Each of thesecovenants is based on defined terms and contain exceptions in the CreditAgreement, as amended.

 

Certain of the Company’ssubsidiaries named in the credit agreement have guaranteed the obligationsunder the credit agreement. The credit facility has a five-year term thatexpires August 30, 2011. Loan advances bear an interest rate equal to anApplicable Rate (which ranges from 1.50% to 2.25% for Eurodollar Rate Loans,and from 0.25% to 1.00% for Prime Rate Loans, depending upon the Company’sconsolidated leverage ratio) plus one of the followingindexes:

 

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(i) EurodollarRate; 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. Withrespect 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 eachoutstanding letter of credit. A fee ranging from 0.30% to 0.45% (based upon theCompany’s consolidated leverage ratio) is charged on any unused portion of theloan commitment. At June 30, 2008 the Company had outstandingadvances 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 of6.11%.

 

The Company was incompliance 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 financialcovenants.  Additionally, the level ofcompliance with the financial covenants determines the maximum amount availableto be drawn. At June 30, 2008, the maximum facility available tothe Company was approximately $81,000.

 

Pursuant to the terms ofthe credit agreement, the obligations of the Company may be accelerated uponthe occurrence and continuation of an Event of Default. Such events include thefollowing: (i) the failure to make principal, interest or fee payments when due (beyond applicable grace periods); (ii) thefailure to observe and perform certain covenants contained in the creditagreement; (iii) any representation or warranty made by the Company in thecredit agreement or related documents proves to beincorrect or misleading in any material respect when made or deemed made; and (iv) othercustomary events of default.

 

The Company recorded $701and $684 of interest expense for the three months ended June 30, 2008 and2007, respectively, related to the amortization of loancosts, unused loan commitment fees and interest on advances. Interest expensefor the six months ended June 30, 2008 and 2007 was approximately $1,245and $963, respectively.

 

**9.****                                     **COMMITMENTS ANDCONTINGENCIES****

 

*Litigation*

 

The Company is a party tocertain pending claims that have arisen in the ordinary course of business,none of which, in the opinion of management, is expected to have a materialadverse effect on the Company’s consolidated financial position, results ofoperations, or cash flows if adversely resolved. However, the defense andsettlement of these claims may impact the future availability of, and retentionamounts and cost to the Company for, applicable insurancecoverage.

 

*Regulatory Matters*

 

The Company’s employerand health care operations are subject to numerous federal, state and locallaws related to employment, taxes and benefit plan matters. Generally, these rules affectall companies in the United States. However, the rules thatgovern professional employer organizations (“PEO”) constitute an evolving areadue to uncertainties resulting from the non-traditional employment relationshipamong the PEO, the client and the client employees. Many federal and state laws relating to tax and employment matters were enactedbefore the widespread existence of PEO’s and do not specifically addressthe obligations and responsibilities of these PEO relationships. If theInternal Revenue Service concludes that PEO’s are not “employers”of certain client employees for purposes of the Internal Revenue Code of 1986,as amended, the tax qualified status of the Company’s defined contributionretirement plans as in effect prior to April 1, 1997 could be revoked, itscafeteria plan may lose its favorable tax status and theCompany may no longer be able to assume the client’s federal employmenttax withholding obligations and certain defined employee benefit plansmaintained 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, theCompany received a Notice of Assessment from the State of California EmploymentDevelopment Department (“EDD”) relative to the Company’s practice of reporting payroll for its subsidiaries under multiple employeraccount numbers.  The notice stated thatthe EDD was collapsing the accounts of the Company’s subsidiaries intoone account number for payroll reporting purposes and retroactively reassessedunemployment taxes due at a higher overall rate for the2004-2006 tax years resulting in an assessment of $4,684.  On May 30, 2007, the Company fileda petition with the Office of the Chief Administrative Law Judge for theCalifornia Unemployment Insurance Appeals Board askingthat the EDD’s assessment be set aside. The petition contends in partthat the EDD has exceeded the scope of its authority in issuing the assessmentby failing to comply with its own mandatory procedural requirements and thatthe statute of limitations for issuing the assessmentshas expired as the Company’s activities within the state were compliantwith California statutes and regulations.

 

The Company and the Stateof California entered into negotiations in May 2008 in an attempt toresolve the dispute.  As a result, Gevity proposed a settlement offer inJune, 2008 that included a cash payment offer of $1,200, conceding to the

 

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State’s higher overall unemployment tax rate for taxyears 2007 – 2008, along with revisions to its unemployment tax reportingmethods for post 2008 tax years in consideration for the State’s withdrawal ofthe existing Assessment for 2004 -2006 (the “Settlement Offer”).  TheSettlement Offer is currently under review by the State.  The Company’sfinancial statements for the quarter ended June 30, 2008 reflect a chargeof $1,050 within cost of services, reflecting estimated amounts due inconnection with additional unemployment tax costs for the term January 1,2007 – June 30, 2008 should the State of California accept the SettlementOffer.  In the event that the Company isnot able to reach a settlement with the State of California, the Companybelieves it has valid defenses regarding the assessments and will vigorouslychallenge the assessments.

 

**10.****                              **EQUITY****

 

###### ***Share Repurchase Program***

###### ** **

Under the current sharerepurchase program (announced by the Company in August 2006and increased in April 2007), a total of $111,527 of the Company’s commonstock is authorized to be repurchased. Share repurchases under the program maybe made through open market purchases, block trades or in private transactionsat such times and in such amounts as the Company deemsappropriate, based on a variety of factors including price, regulatoryrequirements, overall market conditions and other corporate opportunities. Asof 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 programduring the six month period ended June 30, 2008. The Company hassuspended its share repurchase program for the time beingin order to invest available cash in its business.

 

**11.****                              **INCOME TAXES****

 

The Company recordsincome tax expense (benefit) using the asset and liability method of accountingfor deferred income taxes.  Under suchmethod, deferred tax assets and liabilities arerecognized for the expected future tax consequences of temporary differencesbetween the financial statement carrying values and the income tax bases of theCompany’s assets and liabilities. The Company’s effective tax rateprovides for both federal and state income taxes. For thethree months ended June 30, 2008 and 2007, the Company’s effectiverate for income from continuing operations was 14.0% and 32.4%, respectively.The Company’s effective tax rate for the six months ended June 30, 2008and 2007 was 7.9% and 35.0%, respectively. The Company’s effective tax ratesdiffered from the statutory federal tax rates because of state taxes and federal tax credits.

 

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

 

Thereconciliation of net income attributable to common shareholders and sharesoutstanding for the purposes of calculating basic and diluted earnings pershare for the three and six months ended June 30, 2008 and 2007 isas 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 monthsended June 30, 2008, 816,792 options to purchase common stock, weightedfor the portion of the period they were outstanding, wereexcluded from the diluted earnings per share computation because the exerciseprice of the options was greater than the average price of the common stock.

 

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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 endedJune 30, 2007, 1,009,410 options to purchase common stock, weighted forthe portion of the period they were outstanding, wereexcluded from the diluted earnings per share computation because the exerciseprice 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 theperiod they were outstanding, were excluded from thediluted earnings per share computation because the exercise price of theoptions 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 ofthe period they were outstanding, were excluded from thediluted earnings per share computation because the exercise price of theoptions was greater than the average price of the common stock.

 

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**ITEM 2.  Management’s Discussion and Analysis ofFinancial Condition and Results of Operations**

 

The following discussioncontains forward-looking statements that are subject to known and unknownrisks, uncertainties (some of which are beyond the Company’s control), otherfactors and other assumptions that may cause actualresults or performance to be materially different from those expressed or impliedby such forward-looking statements. Factors that could cause or contribute tosuch differences include those discussed below, elsewhere in this Form 10-Qand in the Company’s Annual Report on Form 10-K for the year ended December 31,2007 (the “Form 10-K”), as filed with the Securities and ExchangeCommission. See “Cautionary Note Regarding Forward-Looking Statements” below inthis Item 2. The following discussion should be read inconjunction with the Company’s condensed consolidated financial statementsand related notes contained in this report. Historical results are notnecessarily 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 businessesnationwide with a wide-range of competitively priced payroll, insurance andhuman resource (“HR”) outsourcing services.

 

Gevity is a professional employer organization (“PEO”) thatprovides certain HR-related services and functions for clients under aco-employment arrangement. Under the co-employment arrangement, Gevity assumescertain HR/employment-related responsibilities, as providedfor by a professional services agreement (“PSA”) and as may be requiredunder certain state laws. The co-employment relationship allows the PEO tobecome an employer of record and administrator for matters such as employmenttax and insurance-related paperwork as well as relievingthe client of these time-consuming administrative burdens. Because a PEO canaggregate a number of small clients into a larger pool, the PEO is able tocreate economies of scale—enabling smaller businesses to get competitivelypriced benefits.

 

The core servicestypically provided by a PEO are payroll processing, access to health and welfarebenefits and workers’ compensation coverage. In addition to these coreofferings, the Company’s Gevity EdgeTM PEO offering provides value-adding HRservices such as employee retention programs, new hire support, employmentpractices liability insurance coverage and performance management programs, alldesigned to help clients effectively grow their businesses. Gevity is one offew PEOs with dedicated field-based HR consultants. The Company’s HRconsultants work directly with clients to provide HR expertise and HRstrategies that can help drive their business forward, while lowering potentialexposure to HR-related claims.

 

Previously, Gevity alsoprovided service to its clients through a non co-employment relationship. Thenon co-employment relationship between Gevity and its clients was also governedby a PSA. Under the non co-employment PSA, the employment related liabilitiesremained with the client and the client was responsible for its own workers’compensation insurance and health and welfare plans. The Company assumedresponsibility for payroll administration (including payroll processing,payroll tax filing and W-2 preparation) and providedaccess to all of its HR services. This non co-employment offering wasknown as Gevity Edge SelectTM.  Aftercompletion of a comprehensive strategic review, the Company decided to focus onthe 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 theCompany’s non co-employment offering, Gevity Edge Select. Clients that existedat 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 Selectclients during the second quarter of 2008, processing of the final payrollsdated June 30, 2008.  The Companyhas determined that the exit from the Gevity Edge Select business meets thecriteria of discontinued operations in accordance with Statement of FinancialAccounting Standards  No. 144, *Accounting for the Impairment or Disposal of Long-Lived Assets*.  Accordingly, the results of operations andrelated exit costs associated with Gevity Edge Select have been reported asdiscontinued operations for all periods presented   The impact of this decision on the resultsof operations of the Company is included in the “Resultsof Operations” discussion that follows under “Discontinued Operations”.

 

**RESULTS OFOPERATIONS**

 

***Three Months Ended June 30,2008 Compared to Three Months Ended June 30, 2007***

 

**Revenue**

 

The following tablepresents certain information related to the Company’srevenues from continuing operations for the three months ended June 30,2008 and 2007:

 

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| ** **                                                                                                      | ** ** | **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)                     Clientsmeasured by individual client Federal Employer Identification Number (“FEIN”).

 

(2)                     The averagenumber of client employees paid is calculated based upon the sum of the numberof paid client employees at the end of each month divided by the number ofmonths in the period.

 

(3)                     Annualizedstatistical information is based upon actual quarter-to-dateamounts, which have been annualized (divided by three and multiplied bytwelve), and then divided by the average number of client employees paid.

 

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

 

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

 

For the three monthsended June 30, 2008, total revenues were $128.7 million compared to $149.5million for the three months ended June 30, 2007, representing a decreaseof $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 client’s FEIN, with107,676 active client employees. This compares to 7,255 clients, as measured by each client’s FEIN, with 123,631 active clientemployees at June 30, 2007.  Theaverage number of client employees paid was 98,331 for the second quarter of2008 compared to 115,705 for the second quarter of 2007.  The declines in clientand client employee metrics is attributable to the impact of higher thanexpected client and client employee attrition levels during 2007 and the firstquarter of 2008 primarily as a result of the economy, and lower than expectedproduction levels during 2007 and 2008. In addition, during the first two quarters of 2008, the Companyterminated approximately 230 unprofitable clients (impacting approximately4,300 client employees) in an effort to improve overall earnings in thelong-term.

 

Revenues from professional service fees decreased to $28.8 million for the threemonths ended June 30, 2008, from $36.3 million for the three monthsended June 30, 2007, representing a decrease of $7.5 million or 20.6%. Thedecrease was primarily due to the overall decrease in theaverage number of client employees paid as discussed above. Annualizedprofessional service fees per average number of client employees paid decreasedby 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 2008terminations of unprofitable clients which, despite having a negative impact ongross profit, generally had higher professional service fee levels, and generalmarket dynamics.

 

Revenues for providinghealth 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 endedJune 30, 2007, representing a decrease of $6.4 million or 7.3%. Health

 

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and welfarebenefit plan revenues decreased due to the decrease inthe average number of participants in the Company’s health and welfarebenefit plans of approximately 15.1% and was partially offset by the increasein health insurance premiums as a result of higher costs to the Company toprovide such coverage for client employees and theCompany’s approach to pass along all insurance-related cost increases.

 

Revenues for providingworkers’ compensation insurance coverage decreased to $15.2 million for thethree months ended June 30, 2008, from $21.3 millionfor the three months ended June 30, 2007, representing a decreaseof $6.1 million or 28.5%. Workers’ compensation billings, as a percentage ofworkers’ compensation wages for the three months ended June 30, 2008, were1.60% as compared to 1.96% for the same period in 2007,representing a decrease of 18.4%. Workers’ compensation revenuedecreased in the second quarter of 2008 primarily due to the combined effectsof a decrease in billings for Florida clients reflecting a reduction in Floridamanual premium rates beginning in January 2008and a decrease in the number of clients that participate in the Company’sworkers’ compensation program. The manual premium rates for workers’compensation applicable to the Company’s clients decreased 18.4% during thethree 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 chargedby insurance companies for workers’ compensation insurance coverage. Thedecrease in the Company’s manual premium rates primarilyreflects the reduction in the Florida manual premium rates.

 

Revenues from stateunemployment taxes and other revenues decreased to $3.6 million for the threemonths 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 provideunemployment tax revenue to the Company.

 

**Cost ofServices**

 

The following tablepresents certain information related to the Company’scost 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 | )% |

 

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| (1)    | The average number of client employees paid is calculated based upon  the sum of the number of paid client employees at the end of each month  divided by the number of months in the period.                                                           |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                    |
| (2)    | Workers’ compensation wages exclude the wages  of clients electing out of the Company’s workers’ compensation  program.                                                                                                                  |
|   |                                                                                                                                                                                                                                                    |
| (3)    | The number of workers’ compensation claims reflects the number of claims  reported by the end of the respective period and does not include claims with respect to a specific policy year that are reported  subsequent to the end of such period. |

 

Cost of services, whichincludes the cost of the Company’s 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 thereduction in all of the cost of services components asdescribed below.

 

The cost of providinghealth 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

 

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million or 8.1%. This decrease was primarily attributable to thedecrease in the number of client employees participating in the health andwelfare benefit plans and was partially offset by higher cost of healthbenefits.  In addition, the secondquarter of 2008 was favorably impacted by the recognition of a health benefitsurplus of $0.7 million based upon favorable claims experience.  The Company expects that price increasesimplemented in conjunction with healthcare renewals effective October 1,2007 and the continuation of current claims experience will continue tofavorably impact healthcare costs during 2008.

 

Workers’ compensationcosts were $4.2 million for the three months ended June 30, 2008, ascompared 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 theapproximate 15% reduction in the average number of client employees paid andrelated reduction in wages and claims, and the reductionin the prior years’ workers’ compensation loss estimates ofapproximately $7.3 million as a result of continued favorable claimsdevelopment 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 thatif current claims development trends continue, this will have a favorableimpact on workers’ compensation costs for the remainder of 2008.

 

State unemployment taxesand 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%. Thedecrease in the Company’s co-employed client employees and relatedtaxable wages were substantially offset by an increase in state unemploymenttax rates beginning January 1, 2008, that were not passed along toclients.  In addition, during the secondquarter of 2008, the Company recorded $1.1 million of state unemployment taxexpense related to a proposed settlement offer with the State of California inconnection with an outstanding assessment. See Note 9 to the condensedconsolidated financial statements contained elsewhere in this 10-Q foradditional information related to the California unemployment tax assessment.

 

**OperatingExpenses**

 

The following table presents certain information related to the Company’soperating 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 expenseswere $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 andcommissions were $18.8 million for the three months ended June 30, 2008 ascompared to $19.6 million for the three months ended June 30,2007, representing a decrease of $0.8 million or 4.3%. The decrease isprimarily a result of the net effect of the reduction in management and supportpersonnel that occurred throughout 2007 and the first two quarters of 2008 andwas 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 costalignment initiatives.

 

Other general andadministrative expenses were $12.3 million for the three months ended June 30,2008 as compared to $14.5 million for the three monthsended June 30, 2007, representing a decrease of $2.2 million or 15.1%.The decrease occurred across all major components of general and administrativeexpenses and is attributable to cost alignment measures taken during 2007 andthe first half of 2008. Included in other general and administrative expensesfor the three months ended June 30, 2008 are approximately $1.0 million ofexpenses related to cost alignment initiatives including employee outplacementbenefits and costs associated with field office consolidations.

 

Depreciation andamortization expenses were flat at $3.9 million for the three months ended June 30,2008 and June 30, 2007.  The Companyhas not made any significant capital expenditure additions during 2008.

 

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

 

**Income Taxes**

 

For the three monthsended 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 expenseis primarily a function of the reduction in income from continuingoperations.  The Company’s effective tax rate for the three months ended June 30, 2008and 2007 was 14.0% and 32.4%, respectively. The Company’s effective tax rates differed from the statutory federaltax rates because of the impact of state taxes and federal tax credits.

 

**Gross Profit, Operating Income, Income fromContinuing Operations and Diluted Earnings Per Share from Continuing Operations**

 

As a net result of thefactors described above, the following table summarizes the changes in grossprofit, operating income, income from continuing operations and dilutedearnings 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)         Annualizedstatistical information is based upon actual period-to-date amounts, which havebeen annualized (divided by three and multiplied by twelve) and then divided bythe average number of client employees paid.

 

**DiscontinuedOperations**

 

The loss from discontinuedoperations for the three months ended June 30, 2008 was $2.8 million ($1.8million net of income tax) compared to a loss of $1.3 million ($0.8 million netof income tax) for the three months ended June 30, 2007.  The increase in the loss of $1.5 million wasprimarily a result of $1.6 million of exit costs incurred during the secondquarter of 2008 for contract termination costs and severance benefits relatedto the exit from the Gevity Edge Select business.  The Company’s operations related to GevityEdge Select ceased on June 30, 2008. The Company does not expect to incur any further significant costsrelated to the exit of this business.

 

***Six Months Ended June 30,2008 Compared to Six Months Ended June 30, 2007***

 

**Revenue**

 

The following tablepresents certain information related to the Company’srevenues from continuing operations for the six months ended June 30, 2008and 2007:

 

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| ** **                                                                                                      | ** ** | **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)                     Clientsmeasured by individual client Federal FEIN.

 

(2)                     The averagenumber of client employees paid is calculated based upon the sum of the numberof paid client employees at the end of each month divided by the number ofmonths in the period.

 

(3)                     Annualizedstatistical information is based upon actual quarter-to-dateamounts, 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 Company’s workers’ compensation program.

 

(5)                     Manualpremium rate data is derived from tables of member insurance companies of AIGin 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 sixmonths ended June 30, 2007, representing a decrease of $39.7 million or12.8%. This decrease was a result of the reduction in allrevenue components as described below.

 

As of June 30, 2008,the Company served 6,108 clients, as measured by each client’s FEIN, with107,676 active client employees. This compares to 7,255 clients, as measured by each client’s FEIN, with 123,631 active clientemployees at June 30, 2007.  Theaverage number of client employees paid by month was 99,208 for the six monthsended June 30, 2008 compared to 115,666 for the six months ended June 30,2007.  The declinein client and client employee metrics is attributable to the impact of higherthan expected client and client employee attrition levels during 2007 and thefirst quarter of 2008 primarily as a result of the economy, and lower thanexpected production levels during 2007 and 2008. In addition, during the firstsix months of 2008, the Company terminated approximately 230 unprofitableclients (impacting approximately 4,300 client employees) in an effort toimprove overall earnings in the long-term.

 

Revenues from professional service fees decreased to $58.6 million for the sixmonths ended June 30, 2008, from $72.8 million for the six monthsended June 30, 2007, representing a decrease of $14.1 million or 19.4%.The decrease was primarily due to the overall decrease inthe average number of client employees paid as discussed above. Annualizedprofessional service fees per average number of client employees paid decreasedby 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 2008terminations of unprofitable clients which, despite having a negative impact ongross profit, generally had higher professional service fee levels and generalmarket dynamics.

 

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Revenues for providinghealth 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 endedJune 30, 2007, representing a decrease of $11.3 million or 6.4%. Healthand welfare benefit plan revenues decreased due to thedecrease in the average number of participants in the Company’s healthand welfare benefit plans of approximately 14.7% and was partially offset bythe increase in health insurance premiums as a result of higher costs to theCompany to provide such coverage for client employees andthe Company’s approach to pass along all insurance-related costincreases.

 

Revenues for providingworkers’ compensation insurance coverage decreased to $31.1 million for the sixmonths ended June 30, 2008, from $42.5 million forthe six months ended June 30, 2007, representing a decrease of$11.4 million or 26.8%. Workers’ compensation billings, as a percentage ofworkers’ compensation wages for the six months ended June 30, 2008, were1.63% as compared to 1.95% for the same period in 2007,representing a decrease of 16.4%. Workers’ compensation revenuedecreased in the first two quarters of 2008 primarily due to a decrease inbillings for Florida clients reflecting a reduction in Florida manual premiumrates beginning in January 2008 and adecrease in the number of clients that participate in the Company’s workers’compensation program. The manual premium rates for workers’ compensationapplicable to the Company’s clients decreased 17.5% during the six months endedJune 30, 2008 as compared to the six months ended June 30, 2007.Manual premium rates are the allowable rates that employers are charged byinsurance companies for workers’ compensation insurance coverage. The decreasein the Company’s manual premium rates primarily reflectsthe reduction in the Florida manual premium rates.

 

Revenues from stateunemployment taxes and other revenues decreased to $15.8 million for the sixmonths 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 provideunemployment tax revenue to the Company.

 

**Cost ofServices**

 

The following tablepresents certain information related to the Company’scost 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 | )% |

 

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| (1)    | The average number of client employees paid is calculated based upon  the sum of the number of paid client employees at the end of each month  divided by the number of months in the period.                                                            |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                     |
| (2)    | Workers’ compensation wages exclude the wages  of clients electing out of the Company’s workers’ compensation  program.                                                                                                                   |
|   |                                                                                                                                                                                                                                                     |
| (3)    | The number of workers’ compensation claims reflects the number of  claims reported by the end of the respective period and does not include  claims with respect to a specific policy year that are  reported subsequent to the end of such period. |

 

Cost of services, whichincludes the cost of the Company’s 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 thereduction in all of the cost of services components asdescribed below.

 

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The cost of providinghealth 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 ofclient employees participating in the health and welfare benefit plans and waspartially offset by higher cost of health benefits.  In addition, the first six months of 2008 and2007 were favorably impacted by the recognition of a health benefit surplus of$1.7 million and $2.6 million, respectively, based upon favorable claimsexperience.

 

Workers’ compensationcosts were $14.3 million for the six months ended June 30, 2008, ascompared 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 tothe approximate 14.2% reduction in the average number of client employees paidand related reduction in wages and claims, and thereduction in the prior years’ workers’ compensation loss estimates ofapproximately $10.0 million as a result of continued favorable claimsdevelopment 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 taxesand 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%. Thedecrease in the Company’s client employees and related taxable wageswere substantially offset by an increase in state unemployment tax ratesbeginning January 1, 2008, that were not passed along to clients.  In addition, during the second quarter of2008, the Company recorded $1.1 million of state unemployment tax expenserelated to a settlement offer with the State of California as previouslydescribed.

 

**OperatingExpenses**

 

The following table presents certain information related to the Company’soperating 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 expenseswere $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 andcommissions were $37.6 million for the six months ended June 30, 2008 ascompared to $41.7 million for the six months ended June 30,2007, representing a decrease of $4.2 million or 10.0%. The decrease isprimarily a result of the net effect of the reduction in management and supportpersonnel that occurred throughout 2007 and the first half of 2008 and waspartially offset by the annual increase in wages.Severance costs of $1.3 million during the six months ended June 30, 2008are comparable to severance costs incurred during the six months ended June 30,2007 and are related to cost alignment efforts that have occurred throughoutthe periods.

 

Other general andadministrative expenses were $23.8 million for the six months ended June 30,2008 as compared to $28.9 million for the six monthsended June 30, 2007, representing a decrease of $5.1 million or17.6%. The decrease occurred across all major components of general andadministrative expenses and is attributable to cost alignment measures takenduring 2007 and the first quarter of 2008. Included in other general and administrative expenses for the six monthsended June 30, 2008 are approximately $1.1 million of expenses related tocost alignment initiatives including employee outplacement benefits and costsassociated with field office consolidations.

 

Depreciation andamortization 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 primarilyattributable to the amortization of technology assets capitalized during 2007and 2008.

 

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

 

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**Income Taxes**

 

For the six months ended June 30,2008, the Company had an income tax expense of $0.1 millioncompared 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 continuingoperations for the first six months of 2008 compared to the first six months of2007. The Company’s effective tax rate for the six monthsended June 30, 2008 and 2007 was 7.9% and 35.0%, respectively.  The Company’s effective tax rates differedfrom the statutory federal tax rates because of state taxes and federal taxcredits.

 

**Gross Profit, Operating Income, Income FromContinuing Operations and Diluted Earnings Per Share From Continuing Operations**

 

As a net result of thefactors described above, the following table summarizes the changes in grossprofit, operating income, income from continuing operations and dilutedearnings 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)        Annualizedstatistical information is based upon actual period-to-date amounts, which havebeen annualized (divided by six and multiplied by twelve) and then divided bythe average number of client employees paid.

 

**DiscontinuedOperations**

 

Theloss from discontinued operations was $5.0 million ($3.1 million net of incometax) for the six months ended June 30, 2008 compared to $1.7 million ($1.0million net of income tax) for the six months ended June 30, 2007.  The increase in the loss of $3.3 million wasprimarily attributable to $2.9 million of exit costs for contract terminationcosts, severance benefits and goodwill impairment directly attributable to theCompany’s decision to exit the Gevity Edge Select business.  The Company’soperations related to Gevity Edge Select ceased on June 30, 2008.  The Company does not expect to incur anyfurther significant costs related to the exit.

 

### **LIQUIDITY AND CAPITAL RESOURCES**

### ** **

**Cash Flow**

 

***General***

 

The Company periodicallyevaluates its liquidity requirements, capital needs and availability of capitalresources 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 EquitySecurities and Use of Proceeds” for information regarding the suspension of theCompany’s share repurchase program), the potential for expansion of its HR outsourcingportfolio through acquisitions, payment of dividends,possible acquisitions of businesses complementary to the business of theCompany, and other operating cash needs. As a result of this process, theCompany has in the past sought, and may in the future seek, to obtainadditional capital from either private or public sources.

 

The Company currentlybelieves that its current cash balances, cash flow from operations and theexisting credit facility will be sufficient to meet its operational requirementsfor the next 12 months, excluding cash required foracquisitions, if any. The Company has an unsecured credit facility for $100.0million with Bank of America, N.A. and Wachovia, N.A. (the “Lenders”) ofwhich $63.0 million was outstanding as of June 30, 2008. See Note 8 to thecondensed consolidated financial statements contained inthis Form 10-Q for additional information regarding the Company’scredit facility. On February 25,2008, the Company entered into the Third Amendment to Amended and RestatedCredit Agreement

 

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(“Third Amendment”). The Third Amendmentprovides for the grant of security interests and liens in substantially all theproperty and assets (with agreed upon carveouts and exceptions) of the Companyto the Lenders. The Third Amendment also provides for an automatic decrease ofthe aggregate revolving commitment of the credit facility from$100.0 million to $85.0 million on September 30, 2008. The Third Amendmentincludes additional covenants and amends certain financial covenants andnegative covenants with an effective date of December 31, 2007. Theseinclude the maintenance of a minimum consolidated net worth, a maximumconsolidated adjusted leverage ratio, a minimum consolidated fixed chargecoverage ratio of 1.25:1.0, minimum consolidated adjusted EBITDA requirementsand a ceiling on consolidated capitalexpenditures. The revised covenants set forth in the Third Amendment alsorestrict the Company’s abilityto repurchase shares of its capital stock in certain circumstances and makeacquisitions 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 basedon defined terms and contains exceptions set forth in the credit agreement, asamended. The Company was in compliance with all of the revised covenants underthe credit agreement at June 30,2008. The ability to draw funds under the credit agreement is dependent uponmeeting the aforementioned financial covenants. Additionally, the level ofcompliance with the financial covenants determinesthe maximum amount available to be drawn. At June 30, 2008, themaximum facility available to the Company was approximately $81.0 million.

 

Pursuant to the terms ofthe credit agreement, the obligations of the Company may be accelerated uponthe occurrence and continuation of an Event of Default. Such events include thefollowing: (i) the failure to make principal, interest or fee payments when due (beyond applicable grace periods); (ii) thefailure to observe and perform certain covenants contained in the creditagreement; (iii) any representation or warranty made by the Company in thecredit agreement or related documents proves to beincorrect or misleading in any material respect when made or deemed made; and (iv) othercustomary events of default.

 

The Company’s primaryshort-term liquidity requirements relate to the payment of accrued payroll andpayroll taxes of its internal and client employees andthe payment of workers’ compensation premiums and medical benefit planpremiums. The Company’s billings to its clients include: (i) each clientemployee’s gross wages; (ii) a professionalservice fee, which is primarily computed as a percentage of the gross wages; (iii) relatedpayroll taxes; (iv) workers’ compensation insurance charges (ifapplicable); and (v) the client’s portion of benefits, including medical and retirement benefits, provided to the clientemployees based on coverage levels elected by the client and the clientemployees. Included in the Company’s billings from continuing operationsduring the first six months of 2008 were salaries, wages and payroll taxes of client employees of approximately $2.3 billion. The billingsto clients are managed from a cash flow perspective so that a matchinggenerally exists between the time that the funds are received from a client tothe time that the funds are paid to the client employees and to the appropriatetax jurisdictions. As a co-employer, and under the terms of each of the Company’sPSA’s, the Company is obligated to make certain wage, tax and regulatorypayments even if the related payments are not made by its clients.  Therefore, theobjective of the Company is to minimize the credit risk associated withremitting the payroll and associated taxes before receiving the service feesfrom the client and generally, the Company has the right to immediatelyterminate the client relationship for non-payment. To the extent this objectiveis not achieved, short-term cash requirements as well as bad debt expense canbe significant and the results of operations and cash flow may potentially beimpacted.  In addition, the timing andamount of payments for payroll, payroll taxes and benefit premiums can varysignificantly based on various factors, including the day of the week on whicha payroll period ends and the existence of holidays at or immediately followinga payroll period-end.

 

***RestrictedCash***

 

The Company is requiredto collateralize its obligations under its workers’ compensation program andcertain general insurance coverage. The Company uses its marketable securitiesto collateralize these obligations, as more fullydescribed below. Marketable securities used to collateralize these obligationsare designated as restricted in the Company’s condensed consolidatedfinancial statements.

 

At June 30, 2008,the Company had $26.9 million in total cash and cash equivalentsand restricted marketable securities, of which $16.7 million was unrestricted.At June 30, 2008, the Company had pledged $8.8 million ofrestricted marketable securities in collateral trust arrangements issued inconnection with the Company’s workers’compensation and certain general insurance coverage and had $1.4 million heldin escrow in connection with various purchase price contingencies related tothe HRAmerica, Inc. acquisition in 2007 as follows:

 

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| ** **                                                | ** ** | **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 iscurrently negotiating with the former HRA owners for the release of $1.4 millionheld in escrow related to purchase price contingencies for the acquisition ofHRA.  The Company does not believe thatthe conditions for the payment of the purchase price contingency have been met.

 

The Company’s obligationto Blue Cross Blue Shield of Florida, Inc. and its subsidiary HealthOptions, Inc. (together “BCBSF/HOI”) underits current contract may require an irrevocable letter of credit (“LOC”) infavor of BCBSF/HOI if a coverage ratio, as set forth in the BCBSF/HOIagreement, is not maintained. The coverage ratio is calculated quarterly. Ifthe Company’s coverage ratio does not meet theminimum requirements, the Company must provide an LOC valued at up to twomonths 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 Agreementto Provide Comprehensive Health Care Benefits (the “Second Amendment”) amendingthe 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 assetand goodwill impairment charges commencing with the fiscal quarter ending December 31,2007.  As of June 30, 2008, theminimum coverage ratio was met and no LOC was required.As the Company negotiates its renewal with BCBSF/HOI, it is possible thatBCBSF/HOI will require collateral, the terms of which cannot yet be determined.

 

The Company does notanticipate any additional collateral obligations to berequired in 2008 for its workers’ compensation arrangements.

 

Asof June 30, 2008, the Company has recorded a $142.5 million receivablefrom AIG representing workers’ compensation premium payments made to AIGrelated to program years 2000 through the secondquarter of 2008 in excess of the present value of the estimated claimsliability.  This receivable represents asignificant concentration of credit risk for the Company.

 

***CaliforniaUnemployment Tax Assessment***

 

In May of 2007, theCompany received a Notice of Assessment from the State of California EmploymentDevelopment Department (“EDD”) relative to the Company’s practice of reporting payroll for its subsidiaries under multiple employeraccount numbers.  The notice stated that theEDD was collapsing the accounts of the Company’s subsidiaries into oneaccount number for payroll reporting purposes and retroactively reassessedunemployment taxes due at a higher overall rate for the2004-2006 tax years resulting in an assessment of $4.7 million.  On May 30, 2007, the Companyfiled a petition with the Office of the Chief Administrative Law Judge for theCalifornia Unemployment Insurance Appeals Board askingthat the EDD’s assessment be set aside. The petition contends in partthat the EDD has exceeded the scope of its authority in issuing the assessmentby failing to comply with its own mandatory procedural requirements and thatthe statute of limitations for issuing the assessmentshas expired as the Company’s activities within the state were compliantwith California statutes and regulations.

 

The Company and the Stateof California entered into negotiations in May 2008 in an attempt toresolve the dispute.  As a result, Gevity proposed a settlement offer inJune, 2008 that included a cash payment offer of $1.2 million, conceding to theState’s higher overall unemployment tax rate for tax years 2007 – 2008, alongwith revisions to its unemployment tax reporting methods for post 2008 taxyears in consideration for the State’s withdrawal of the existing Assessmentfor 2004 -2006 (the “ Settlement Offer”).  The Settlement Offer iscurrently under review by the State.  The Company’s financial statementsfor the quarter ended June 30, 2008 reflect a charge of $1.1 millionwithin cost of services, reflecting estimated amounts due in connection withadditional 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 toreach a settlement with the State of California, the Company believes it hasvalid defenses regarding the assessments and will vigorously challenge theassessments.

 

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***CashFlows from Operating Activities***

 

At June 30, 2008,the Company had net working capital of $5.1 million, including restricted fundsclassified 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. Theincrease in working capital during the first six months of 2008 was primarilydue to timing differences and the increase in the use ofcash from the revolving credit facility.

 

Net cash used inoperating 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 forthe six months ended June 30, 2007, representing an increase in net cashused in operating activities of $10.5 million. Cash flows from operatingactivities are significantly impacted by the timing of client payrolls, the dayof the week on which a fiscal period ends and the existenceof holidays at or immediately following a period end. The overall increase incash used in operating activities was primarily due to net timing differencesas well as the overall reduction in net income.

 

If current workers’compensation trends continue, the Company expects toreceive approximately $17.0 million from AIG during the third quarter of 2008as a net return of premiums in connection with the true-ups related tothe 2000-2007 program years.  Additional releases of premiums by AIG arealso anticipated in future years if such trends continue.  The Company believes that it has provided AIGa sufficient amount of cash to cover its short-term and long-term workerscompensation obligations related to open policy years.

 

***CashFlow from Investing Activities***

** **

Cash used in investingactivities for the six months ended June 30, 2008 of $0.9 million,includes approximately $0.8 million for capital expenditures primarily fortechnology-related items and $0.1 million for purchasesof marketable securities. This compares to cash used in investing activitiesfor the six months ended June 30, 2007 of $15.0 million, whichincludes approximately $10.9 million related to the February 16, 2007acquisition of HRA ($9.5 million of cash and relatedacquisition costs and $1.4 million included in marketable securities purchasesfor purchase price contingencies held in an escrow account). In addition theCompany spent approximately $3.9 million for capital expenditures primarily fortechnology-related items including approximately $1.7 million of capitalexpenditures 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-relateditems. Capital expenditures are expected to be funded through operations,leasing arrangements or from the Company’s revolving credit facility.

 

***CashFlow from Financing Activities***

 

Cash provided byfinancing activities for the six months ended June 30,2008 of $42.0 million was primarily a result of $45.6 million of net borrowingsunder the revolving credit facility and $0.1 million received upon the purchaseof 16,208 shares of common stock under the Company’s employeestock purchase plan. These amounts were partially offset by $3.3 million ofcash dividends paid; $0.2 million related to excess tax expense paid by theCompany for its share-based arrangements and $0.2 million of capital leasepayments.

 

This compares to cash provided by financingactivities for the six months ended June 30, 2007 of $13.8 million,primarily a result of $40.0 million of net borrowings under the revolvingcredit facility; $0.8 million received upon the exerciseof 67,992 stock options and the purchase of 11,293 shares of common stock underthe Company’s employee stock purchase plan; and $0.3 million related toexcess tax benefits received by the Company for its share-basedarrangements.  These amounts werepartially offset by the use of $22.8 million to repurchase 1,123,121shares of the Company’s common stock under its stock repurchase programs (see “Part II.Item 2. Unregistered Sales of Equity Securities and Use of Proceeds” for a discussion of the current stockrepurchase program) and $4.4 million of cash dividends paid.

 

**Commitmentsand Contractual Obligations**

 

***Off-BalanceSheet Arrangements***

 

The Company does not haveany off-balance sheet arrangements.

 

***ContractualObligations***

 

There have been nomaterial changes to the Company’s contractual obligationsfrom those disclosed in the Form 10-K under “Item 7 – Management’sDiscussion and Analysis of Financial Condition and Results of Operations.”

 

**CRITICALACCOUNTING ESTIMATES**

 

The preparation offinancial statements and related disclosures inconformity with accounting principles generally accepted in the United Statesof America, requires management to make estimates and assumptions that affectthe reported

 

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amounts of assets, liabilities, revenues and expenses and the disclosuresof contingent assets and liabilities. Accounting estimates related to workers’compensation receivables/reserves, intangible assets, medical benefit planliabilities, state unemployment taxes, allowance fordoubtful accounts, share-based payments and deferred income taxes are thosethat the Company considers critical in preparing its financial statementsbecause they are particularly dependent on estimates and assumptions made bymanagement that are uncertain at the time the accounting estimates are made.While management has used its best estimates based upon facts and circumstancesavailable at the time, different estimates reasonably could have been used inthe current period, which may have a material impact on the presentation of theCompany’s financial condition and results of operations.  Management periodically reviews the estimatesand assumptions and reflects the effects of revisions in the period they aredetermined to be necessary. The discussion under “Item7 - Managements’ Discussion and Analysis of Financial Condition and Results ofOperations — Critical Accounting Estimates” in the Form 10-K describes thesignificant accounting estimates used in the preparation of the Company’sfinancial statements.

 

**CAUTIONARYNOTE REGARDING FORWARD-LOOKING STATEMENTS**

 

Statements made in thisreport, including under the section titled “Management’s Discussion andAnalysis of Financial Condition and Results of Operations,” that are not purelyhistorical may be forward-looking statements within themeaning of Section 27A of the Securities Act of 1933 and Section 21Eof the Securities Exchange Act of 1934, including without limitation,statements regarding the Company’s expectations, hopes, beliefs, intentions or strategies regarding the future.  Words such as “may,” “will,” “should,”“could,” “would,” “predicts,” “potential,” “continue,” “expects,” “anticipates,”“future,” “intends,” “plans,” “believes,” “estimates,” and similar expressions,as well as statements in future tense, identifyforward-looking statements. Forward-looking statements are based on the Company’s currentexpectations and beliefs concerning future developments and their potentialeffects on the Company. There can be no assurance that futuredevelopments affecting the Company will be those that the Company hasanticipated.  Forward-looking statementsinvolve a number of known and unknown risks, uncertainties (some of which arebeyond the Company’s control) and other factors and assumptions that may cause actual results or performance to bematerially different from those expressed or implied by such forward-lookingstatements, including those described in “Item 1A. Risk Factors” of theCompany’s Form 10-K and the risks that are describedin other reports that the Company files with the Securities and ExchangeCommission.

 

Forward-looking statements speak only asof the date on which they are made and you should not place undue reliance onany forward-looking statement. Except as required by law, the Companyundertakes no obligation to update any forward-looking statement or statementsto reflect events or circumstances after the date on which such statement ismade or to reflect the occurrence of unanticipated events. New factors emergefrom time to time, and it is not possible for management to predict all ofthese factors. Further, management cannot assess the impact of each factor onthe Company’s business or the extent to which any factor, or combination offactors, may cause actual results to differ materially from those contained inany forward-looking statements.

 

**ITEM 3.****                                                **Quantitative andQualitative Disclosures about Market Risk****

 

There have been nomaterial changes from the information previously reported under “Item 7A.Quantitative and Qualitative Disclosures About MarketRisk” in the Form 10-K.

 

**ITEM 4.**                  **Controls and Procedures**

 

Asof the end of the period covered by this report, the Company’s management,including the Interim Chief Executive Officer/Chief Financial Officer,conducted an evaluation of the effectiveness of the design and operation of theCompany’s disclosure controls and procedures pursuant to Rule 13a-15 ofthe Securities Exchange Act of 1934. Any controls and procedures, no matter howwell designed and operated, can provide only reasonable assurance of achievingthe desired objectives. Based upon that evaluation and subject to theforegoing, the Company’s management, including the Company’s Interim ChiefExecutive Officer/Chief Financial Officer, concluded that the design andoperation of the Company’s disclosure controls and procedures providedreasonable assurance that the disclosure controls and procedures were effectiveto accomplish their objectives.

 

Additionally,no changes in the Company’s internal controls over financial reporting weremade during the fiscal quarter covered by this report that have materiallyaffected, or are reasonably likely to materially affect, the Company’s internalcontrol over financial reporting.

 

**PART II.****                                            OTHERINFORMATION**

 

**ITEM 1.****                                               LegalProceedings**

 

See Note 9 to thecondensed consolidated financial statements contained elsewhere in this Form 10-Qfor information concerning the Company’s legal proceedings.

 

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**ITEM 1A.****                                      RiskFactors**

 

There have been nomaterial changes from the information previously provided under “Item 1A.  Risk Factors,” in the Form 10-K.  See also “Cautionary Note RegardingForward-Looking Statements” included in “Part 1. Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations” ofthis Form 10-Q.

 

**ITEM 2.****                                               UnregisteredSales of Equity Securities and Use of Proceeds**

 

The following tableprovides information about Company purchases during the three months ended June 30,2008, of equity securities that are registered by theCompany pursuant to Section 12 of the Securities Exchange Act of1934:

 
| **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   ($ 000’s) (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                      |       | —                                                                  |       | —                                                 |       | —                                                                                                                                          |       |                                                                                                                                                                                                         |       |

 

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(1)        On August 15,2006, the Company announced that the board of directors had authorized thepurchase of up to $75.0 million of the Company’s common stock under a new sharerepurchase program. Share repurchases under the new programare to be made through open market repurchases, block trades or in privatetransactions at such times and in such amounts as the Company deems appropriatebased upon a variety of factors including price, regulatory requirements,market conditions and other corporate opportunities.

 

(2)        On April 20,2007, the Company’s board of directors authorized an increase to its currentshare repurchase program of approximately $36.5 million, which brings thecurrent repurchase amount authorized back up to $75.0 million.

 

(3)        The Company has disengaged from its stockrepurchase program for the time being in order to invest available cash in itsbusiness.

 

**ITEM 4.****                                               ****Submission of Matters to aVote of Security Holders**

 

Theannual 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 proxyat the meeting.  At the meeting, theCompany’s shareholders elected each of the director nominees, ratified theappointment of Deloitte & Touche LLP as the Company’s independentregistered public accounting firm for the 2008 year, and approved an amendmentto the Company’s 2005 Equity Incentive Plan. The votes of the shareholders were as follows:

 

1.  Toelect a board of directors to serve until the next annual meeting ofshareholders:

 
| ** **            | ** ** | **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.      Toratify the appointment of Deloitte & Touche LLP as the Company’sindependent registered public accounting firm:

 
| **For**    | ** ** | **Against** | ** ** | **Abstain** | ** ** |
|------------|------------|-------------|------------|-------------|------------|
| 21,021,133 |       | 419,147     |       | 2,965       |       |

 

3.      Toapprove an amendment to Gevity’s 2005 Equity Incentive Plan:

 
| **For**    | ** ** | **Against** | ** ** | **Abstain** | ** ** | **Broker Non-Vote** | ** ** |
|------------|------------|-------------|------------|-------------|------------|--------------------------|------------|
| 15,404,788 |       | 2,208,912   |       | 578,226     |       | 3,251,319                |       |

 

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**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  Company’s Quarterly Report on Form 10-Q for the quarter ended  September 30, 2004 filed November 9, 2004 and incorporated herein  by reference.) |
|                 |   |                                                                                                                                                                                                                                                                                                                                                                         |
| 3.2                  |   | Third Amended and Restated Bylaws, dated February 16, 2005  (filed as Exhibit 3.01 to the Company’s Current Report on Form 8-K  filed February 22, 2005 and incorporated herein by reference.)                                                                                                                                                      |
|                 |   |                                                                                                                                                                                                                                                                                                                                                                         |
| 10.1                 |   | Separation Agreement and Full and Final Release of Claims between  Gevity HR, Inc. and Clifford M. Sladnick dated  May 5, 2008 (filed as Exhibit 99.1 to the Company’s 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 Company’s 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 Company’s 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 Company’s Current Report on Form 8-K filed  May 28, 2008 and incorporated herein by reference.)                                                                                                                |
|                 |   |                                                                                                                                                                                                                                                                                                                                                                         |
| 10.5                 |   | Appointment Letter from the Company accepted by Edwin Hightower dated  June 30, 2008.*                                                                                                                                                                                                                                                                                  |
|                 |   |                                                                                                                                                                                                                                                                                                                                                                         |
| 31.1                 |   | Certification of the Chief Executive Officer, pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002. *                                                                                                                                                                                                                                                             |
|                 |   |                                                                                                                                                                                                                                                                                                                                                                         |
| 31.2                 |   | Certification of the Chief Financial Officer, pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002. *                                                                                                                                                                                                                                                             |
|                 |   |                                                                                                                                                                                                                                                                                                                                                                         |
| 32                   |   | Certification furnished pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002. *                                                                                                                                                                                                                                                                                   |

 

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*Filed electronically herewith.

 

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**SIGNATURE**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 
|                        |   |   |   | GEVITY HR, INC.                              |
|-----------------------------|--------|--------|--------|----------------------------------------------|
|                        |   |   |   |                                         |
|                        |   |   |   |                                         |
| Dated: August 11, 2008 |   |   |   | /s/ GARRY J. WELSH                           |
|                        |   |   |   | Garry J. Welsh                               |
|                        |   |   |   | Chief Financial Officer                      |
|                        |   |   |   | (Principal Financial and Accounting Officer) |

 

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