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 September 30, 2008.** |
|                                                         |
| **or**                                                       |
|                                                         |
| **o**                                                        | **Transition Report Pursuant to Section 13 or  15(d) of the Securities Exchange Act of 1934** |

 

**For the transition period from            to            **

 

**Commission File No. 0-22701**

 

**GEVITY HR, INC.**

(Exact name of 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 mark whether the registrant is a large acceleratedfiler, an accelerated filer, a non-accelerated filer, or a smaller reportingcompany. See definitions of “large accelerated filer,” “accelerated filer,” and“smaller reporting company” in Rule 12b-2 of the Exchange Act. (Checkone):

 

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

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange 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  October 31, 2008** |
|------------------------------------------|------------|-----------------------------------------------------------------------|
| Par value $0.01 per share                | ** ** | **24,690,272**                                                        |

 

 

 

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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 nine months ended September 30, 2008 and  2007 (unaudited) | 3          |
|              |                      |                                                                                                                               |       |
|              |                      | Condensed Consolidated Balance Sheets as of  September 30, 2008 and December 31, 2007 (unaudited)                        | 4          |
|              |                      |                                                                                                                               |       |
|              |                      | Condensed Consolidated Statements of Cash  Flows for the nine months ended September 30, 2008 and 2007 (unaudited)            | 6          |
|              |                      |                                                                                                                               |       |
|              |                      | Notes to  Condensed Consolidated Financial Statements (unaudited)                                                                  | 7          |
|              |                      |                                                                                                                               |       |
|              | ITEM 2.                   | Management’s Discussion and Analysis of  Financial Condition and Results of Operations                                        | 17         |
|              |                      |                                                                                                                               |       |
|              | ITEM 3.                   | Quantitative and Qualitative Disclosures  About Market Risk                                                                        | 30         |
|              |                      |                                                                                                                               |       |
|              | ITEM 4.                   | Controls and Procedures                                                                                                            | 30         |
|              |                      |                                                                                                                               |       |
| **PART II.** | **OTHER INFORMATION**     | ** **                                                                                                                         |
|              |                      |                                                                                                                               |       |
|              | ITEM 1.                   | Legal Proceedings                                                                                                                  | 31         |
|              |                      |                                                                                                                               |       |
|              | ITEM 1A.                  | Risk Factors                                                                                                                       | 31         |
|              |                      |                                                                                                                               |       |
|              | ITEM 2.                   | Unregistered Sales of Equity Securities and  Use of Proceeds                                                                       | 32         |
|              |                      |                                                                                                                               |       |
|              | ITEM 6.                   | Exhibits                                                                                                                           | 33         |
|              |                      |                                                                                                                               |       |
|              | SIGNATURE                 | 34                                                                                                                                 |

 

2

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Table of Contents

 

**PART I. FINANCIAL INFORMATION**

 

**Item 1.  FinancialStatements**

 

**GEVITY HR, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OFOPERATIONS**

**UNAUDITED**

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

 
| ** **                                                                 | ** ** | **For the Three Months Ended  September 30,** | ** ** | **For the Nine Months Ended****September 30,** | ** ** |
|----------------------------------------------------------------------------|------------|------------------------------------------------------------------------|------------|-------------------------------------------------------------------------|------------|
| ** **                                                                 | ** ** | **2008**                                                               | ** ** | **2007**                                                                | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                                                       |       |                                                                   |       |                                                                    |       |   |   |   |   |
| Revenues                                                                   |       | $                                                                      | 125,077    |                                                                    | $          | 145,515 |   | $ | 395,431 |   | $ | 455,577 |   |
|                                                                       |       |                                                                   |       |                                                                    |       |   |   |   |   |
| Cost of services (exclusive of  depreciation and amortization shown below) |       | 90,785                                                                 |       | 101,399                                                                 |       | 288,979 |   | 319,904 |   |
|                                                                       |       |                                                                   |       |                                                                    |       |   |   |   |   |
| Gross profit                                                               |       | 34,292                                                                 |       | 44,116                                                                  |       | 106,452 |   | 135,673 |   |
|                                                                       |       |                                                                   |       |                                                                    |       |   |   |   |   |
| Operating expenses:                                                        |       |                                                                   |       |                                                                    |       |   |   |   |   |
|                                                                       |       |                                                                   |       |                                                                    |       |   |   |   |   |
| Salaries, wages and commissions                                            |       | 18,552                                                                 |       | 20,768                                                                  |       | 56,089 |   | 62,493 |   |
|                                                                       |       |                                                                   |       |                                                                    |       |   |   |   |   |
| Other general and  administrative                                          |       | 12,170                                                                 |       | 13,918                                                                  |       | 36,000 |   | 42,846 |   |
|                                                                       |       |                                                                   |       |                                                                    |       |   |   |   |   |
| Depreciation and amortization                                              |       | 4,093                                                                  |       | 3,898                                                                   |       | 11,971 |   | 11,431 |   |
|                                                                       |       |                                                                   |       |                                                                    |       |   |   |   |   |
| Total operating expenses                                                   |       | 34,815                                                                 |       | 38,584                                                                  |       | 104,060 |   | 116,770 |   |
|                                                                       |       |                                                                   |       |                                                                    |       |   |   |   |   |
| Operating (loss) income                                                    |       | (523                                                                   | )          | 5,532                                                                   |       | 2,392 |   | 18,903 |   |
|                                                                       |       |                                                                   |       |                                                                    |       |   |   |   |   |
| Interest income                                                            |       | 117                                                                    |       | 346                                                                     |       | 372 |   | 678 |   |
|                                                                       |       |                                                                   |       |                                                                    |       |   |   |   |   |
| Interest expense                                                           |       | (825                                                                   | )          | (1,155                                                                  | )          | (2,132 | ) | (2,151 | ) |
|                                                                       |       |                                                                   |       |                                                                    |       |   |   |   |   |
| Other income (expense), net                                                |       | 25                                                                     |       | 3                                                                       |       | (10 | ) | (20 | ) |
|                                                                       |       |                                                                   |       |                                                                    |       |   |   |   |   |
| (Loss) income from continuing  operations before  income  taxes            |       | (1,206                                                                 | )          | 4,726                                                                   |       | 622 |   | 17,410 |   |
|                                                                       |       |                                                                   |       |                                                                    |       |   |   |   |   |
| Income tax provision                                                       |       | 566                                                                    |       | 1,517                                                                   |       | 710 |   | 5,953 |   |
|                                                                       |       |                                                                   |       |                                                                    |       |   |   |   |   |
| (Loss) income from continuing  operations                                  |       | (1,772                                                                 | )          | 3,209                                                                   |       | (88 | ) | 11,457 |   |
|                                                                       |       |                                                                   |       |                                                                    |       |   |   |   |   |
| Loss from discontinued  operations, net of tax                             |       | (179                                                                   | )          | (755                                                                    | )          | (3,290 | ) | (1,799 | ) |
|                                                                       |       |                                                                   |       |                                                                    |       |   |   |   |   |
| Net (loss) income                                                          |       | $                                                                      | (1,951     | )                                                                       | $          | 2,454 |   | $ | (3,378 | ) | $ | 9,658 |   |
|                                                                       |       |                                                                   |       |                                                                    |       |   |   |   |   |
| Net (loss) income per common  share                                        |       |                                                                   |       |                                                                    |       |   |   |   |   |
| - Basic:                                                                   |       |                                                                   |       |                                                                    |       |   |   |   |   |
| (Loss) income from continuing  operations                                  |       | $                                                                      | (0.07      | )                                                                       | $          | 0.14 |   | $ | — |   | $ | 0.48 |   |
| Loss from discontinued  operations                                         |       | (0.01                                                                  | )          | (0.03                                                                   | )          | (0.14 | ) | (0.08 | ) |
| Net (loss) income                                                          |       | $                                                                      | (0.08      | )                                                                       | $          | 0.11 |   | $ | (0.14 | ) | $ | 0.40 |   |
|                                                                       |       |                                                                   |       |                                                                    |       |   |   |   |   |
| - Diluted:                                                                 |       |                                                                   |       |                                                                    |       |   |   |   |   |
| (Loss) income from continuing  operations                                  |       | $                                                                      | (0.07      | )                                                                       | $          | 0.13 |   | $ | — |   | $ | 0.47 |   |
| Loss from discontinued  operations                                         |       | (0.01                                                                  | )          | (0.03                                                                   | )          | (0.14 | ) | (0.07 | ) |
| Net (loss) income                                                          |       | $                                                                      | (0.08      | )                                                                       | $          | 0.10 |   | $ | (0.14 | ) | $ | 0.40 |   |
|                                                                       |       |                                                                   |       |                                                                    |       |   |   |   |   |
| Weighted average common shares outstanding:                                |       |                                                                   |       |                                                                    |       |   |   |   |   |
| - Basic                                                                    |       | 23,595,233                                                             |       | 23,235,677                                                              |       | 23,340,808 |   | 23,860,934 |   |
| - Diluted                                                                  |       | 23,595,233                                                             |       | 23,769,362                                                              |       | 23,340,808 |   | 24,449,770 |   |

 

See notes to condensed consolidatedfinancial statements.

 

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**GEVITY HR, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**UNAUDITED**

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

 
| ** **                                             | ** ** | **September 30,****2008** | ** ** | **December 31,****2007** | ** ** |
|--------------------------------------------------------|------------|--------------------------------|------------|-------------------------------|------------|
|                                                   |       |                           |       |                          |       |
| **ASSETS**                                             |       |                           |       |                          |       |
| Current assets:                                        |       |                           |       |                          |       |
|                                                   |       |                           |       |                          |       |
| Cash and cash equivalents                              |       | $                              | 12,466     |                          | $          | 9,950 |   |
|                                                   |       |                           |       |                          |       |
| Marketable securities –  restricted               |       | 4,810                          |       | 6,102                         |       |
|                                                   |       |                           |       |                          |       |
| Accounts receivable, net                               |       | 124,948                        |       | 130,209                       |       |
|                                                   |       |                           |       |                          |       |
| Short-term workers’  compensation receivable, net |       | 23,996                         |       | 16,950                        |       |
|                                                   |       |                           |       |                          |       |
| Other current assets                                   |       | 12,627                         |       | 14,515                        |       |
|                                                   |       |                           |       |                          |       |
| Total current assets                                   |       | 178,847                        |       | 177,726                       |       |
|                                                   |       |                           |       |                          |       |
| Property and equipment, net                            |       | 20,015                         |       | 22,176                        |       |
|                                                   |       |                           |       |                          |       |
| Long-term marketable securities  – restricted     |       | 4,025                          |       | 3,934                         |       |
|                                                   |       |                           |       |                          |       |
| Long-term workers’ compensation  receivable, net  |       | 96,900                         |       | 105,321                       |       |
|                                                   |       |                           |       |                          |       |
| Intangible assets, net                                 |       | 3,989                          |       | 11,386                        |       |
|                                                   |       |                           |       |                          |       |
| Goodwill                                               |       | 8,692                          |       | 9,224                         |       |
|                                                   |       |                           |       |                          |       |
| Deferred tax asset, net                                |       | 10,613                         |       | 10,797                        |       |
|                                                   |       |                           |       |                          |       |
| Other assets                                           |       | 893                            |       | 1,347                         |       |
|                                                   |       |                           |       |                          |       |
| Total assets                                           |       | $                              | 323,974    |                          | $          | 341,911 |   |

 

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)**

 
| ** **                                                                                                                                                               | ** ** | **September 30,****2008** | ** ** | **December 31,****2007** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------|------------|-------------------------------|------------|
| ** **                                                                                                                                                               | ** ** | ** **                     | ** ** | ** **                    | ** ** |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                                                                                            | ** ** | ** **                     | ** ** | ** **                    | ** ** |
| ** **                                                                                                                                                               | ** ** | ** **                     | ** ** | ** **                    | ** ** |
| Current liabilities:                                                                                                                                                     |       |                           |       |                          |       |
|                                                                                                                                                                     |       |                           |       |                          |       |
| Accrued payroll and payroll taxes                                                                                                                                        |       | $                              | 131,423    |                          | $          | 151,105 |   |
|                                                                                                                                                                     |       |                           |       |                          |       |
| Accrued insurance premiums and  health reserves                                                                                                                          |       | 11,913                         |       | 13,557                        |       |
|                                                                                                                                                                     |       |                           |       |                          |       |
| Customer deposits and  prepayments                                                                                                                                       |       | 13,139                         |       | 13,581                        |       |
|                                                                                                                                                                     |       |                           |       |                          |       |
| Accounts payable and other  accrued liabilities                                                                                                                          |       | 8,254                          |       | 11,881                        |       |
|                                                                                                                                                                     |       |                           |       |                          |       |
| Deferred tax liability, net                                                                                                                                              |       | 5,434                          |       | 11,674                        |       |
|                                                                                                                                                                     |       |                           |       |                          |       |
| Dividends payable                                                                                                                                                        |       | 1,235                          |       | 2,096                         |       |
| Total current liabilities                                                                                                                                                |       | 171,398                        |       | 203,894                       |       |
|                                                                                                                                                                     |       |                           |       |                          |       |
| Revolving credit facility                                                                                                                                                |       | 32,500                         |       | 17,367                        |       |
|                                                                                                                                                                     |       |                           |       |                          |       |
| Other long-term liabilities                                                                                                                                              |       | 4,862                          |       | 5,088                         |       |
| Total liabilities                                                                                                                                                        |       | 208,760                        |       | 226,349                       |       |
|                                                                                                                                                                     |       |                           |       |                          |       |
| Commitments and contingencies  (see notes)                                                                                                                               |       |                           |       |                          |       |
|                                                                                                                                                                     |       |                           |       |                          |       |
| Shareholders’ equity:                                                                                                                                               |       |                           |       |                          |       |
|                                                                                                                                                                     |       |                           |       |                          |       |
| Common stock, $.01 par value,  100,000,000 shares authorized,  24,754,286 and 23,379,761 issued as of September 30,  2008 and December 31,  2007, respectively |       | 248                            |       | 234                           |       |
|                                                                                                                                                                     |       |                           |       |                          |       |
| Additional paid-in capital                                                                                                                                               |       | 37,596                         |       | 31,475                        |       |
|                                                                                                                                                                     |       |                           |       |                          |       |
| Retained earnings                                                                                                                                                        |       | 77,947                         |       | 84,899                        |       |
|                                                                                                                                                                     |       |                           |       |                          |       |
| Treasury stock (64,014 and  85,660 shares at cost, respectively)                                                                                                         |       | (577                           | )          | (1,046                        | )          |
| Total shareholders’ equity                                                                                                                                          |       | 115,214                        |       | 115,562                       |       |
|                                                                                                                                                                     |       |                           |       |                          |       |
| Total liabilities and  shareholders’ equity                                                                                                                         |       | $                              | 323,974    |                          | $          | 341,911 |   |

 

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 Nine Months Ended  September 30,** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                                                                           | ** ** | **2008**                                                              | ** ** | **2007** | ** ** |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                                                |       |                                                                  |       |   |   |
| Net (loss) income                                                                                    |       | $                                                                     | (3,378     | ) | $ | 9,658 |   |
| Adjustments to reconcile net  (loss) income to net cash (used in) provided by operating  activities: |       |                                                                  |       |   |   |
| Depreciation and amortization                                                                        |       | 12,219                                                                |       | 12,101 |   |
| Impairment loss                                                                                      |       | 532                                                                   |       | — |   |
| Deferred tax benefit, net                                                                            |       | (5,328                                                                | )          | (9,073 | ) |
| Stock compensation                                                                                   |       | 1,305                                                                 |       | 1,918 |   |
| Excess tax benefit from  share-based arrangements                                                    |       | (1,307                                                                | )          | (313 | ) |
| Provision for bad debts                                                                              |       | 1,682                                                                 |       | 1,262 |   |
| Other                                                                                                |       | 49                                                                    |       | 23 |   |
| Changes in operating working  capital:                                                               |       |                                                                  |       |   |   |
| Accounts receivable, net                                                                             |       | 3,579                                                                 |       | 4,524 |   |
| Other current assets                                                                                 |       | 3,195                                                                 |       | 6,119 |   |
| Workers’ compensation  receivable, net                                                          |       | 1,375                                                                 |       | 11,797 |   |
| Other assets                                                                                         |       | 454                                                                   |       | (288 | ) |
| Accrued insurance premiums and  health reserves                                                      |       | (1,644                                                                | )          | (5,161 | ) |
| Accrued payroll and payroll  taxes                                                                   |       | (19,720                                                               | )          | (36,134 | ) |
| Accounts payable and other  accrued liabilities                                                      |       | (4,339                                                                | )          | 421 |   |
| Customer deposits and prepayments                                                                    |       | (442                                                                  | )          | 12,220 |   |
| Other long-term liabilities                                                                          |       | (709                                                                  | )          | 621 |   |
| Net cash (used in) provided by  operating activities                                                 |       | (12,477                                                               | )          | 9,695 |   |
|                                                                                                 |       |                                                                  |       |   |   |
| CASH FLOWS FROM INVESTING  ACTIVITIES:                                                               |       |                                                                  |       |   |   |
| Purchases of marketable  securities and certificates of deposit                                      |       | (199                                                                  | )          | (1,708 | ) |
| Proceeds from sale of  marketable securities                                                         |       | 1,400                                                                 |       | — |   |
| Capital expenditures                                                                                 |       | (1,928                                                                | )          | (5,156 | ) |
| Business acquisition                                                                                 |       | —                                                                |       | (9,495 | ) |
| Net cash used in investing  activities                                                               |       | (727                                                                  | )          | (16,359 | ) |
|                                                                                                 |       |                                                                  |       |   |   |
| CASH FLOWS FROM FINANCING  ACTIVITIES:                                                               |       |                                                                  |       |   |   |
| Net borrowings under revolving  credit facility                                                      |       | 15,133                                                                |       | 20,467 |   |
| Capital lease payments                                                                               |       | (327                                                                  | )          | — |   |
| Proceeds from issuance of common  stock for employee stock plans                                     |       | 4,042                                                                 |       | 974 |   |
| Excess tax benefit from  share-based arrangements                                                    |       | 1,307                                                                 |       | 313 |   |
| Dividends paid                                                                                       |       | (4,435                                                                | )          | (6,526 | ) |
| Purchase of treasury stock                                                                           |       | —                                                                |       | (30,290 | ) |
| Net cash provided by (used in)  financing activities                                                 |       | 15,720                                                                |       | (15,062 | ) |
| Net increase (decrease) in cash  and cash equivalents                                                |       | 2,516                                                                 |       | (21,726 | ) |
| Cash and cash equivalents -  beginning of period                                                     |       | 9,950                                                                 |       | 36,291 |   |
| Cash and cash equivalents - end  of period                                                           |       | $                                                                     | 12,466     |   | $ | 14,565 |   |
|                                                                                                 |       |                                                                  |       |   |   |
| Supplemental disclosure of cash  flow information:                                                   |       |                                                                  |       |   |   |
| Income taxes paid                                                                                    |       | $                                                                     | 4,955      |   | $ | 5,883 |   |
| Interest paid                                                                                        |       | $                                                                     | 2,055      |   | $ | 2,116 |   |

 

Supplemental disclosure of non-cash transactions:

 

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

 

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

 

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 nine months of 2008, therehave been no material changes to the Company’s significant accounting policiesand critical accounting estimates except as described below.

 

*Recent Accounting Pronouncements*

 

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

 

In June 2008, the 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.

 

InJune 2008, the FASB issued FSP EITF 03-6-1, *Determining Whether Instruments Granted in Share-Based PaymentTransactions Are Participating Securities*(“FSP EITF No. 03-6-1”).* *ThisFSP addresses whether instruments granted in share-based payment transactionsare participating securities prior to vesting and, therefore, should beincluded in the earnings allocation in computing earnings per share (“EPS”)under the two-class method described in SFAS No. 128, *Earnings per Share*.  FSP EITF No. 03-6-1redefines participating securities to include unvested share-based paymentawards that contain non-forfeitable dividends or dividend equivalents asparticipating securities to be included in the computation of EPS pursuant tothe “two-class method.”  Outstanding unvested restricted stock issuedunder employee compensation programs containing such dividend participationfeatures would be considered participating securities subject to the “two-classmethod” in computing EPS rather than the “treasury stock method.”  FSP EITF No. 03-6-1 is effective forfinancial statements issued for fiscal years beginning after December 15,2008 and for interim periods within those years.  All prior-period EPSdata presented is to be adjusted retrospectively to conform to the provisionsof this FSP.  Early application is not permitted. The Company has not yetdetermined the impact, if any, that FSP EITF 03-6-1 will have on itscomputation and presentation of EPS.

 

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In May 2008, the FASB issued 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 FSP SFAS No. 142-3, *Determination of the Useful Life of Intangible Assets*(“FSP SFAS No. 142-3”). FSP SFAS No. 142-3 amends thefactors that should be considered in developing renewal or extensionassumptions used to determine the useful life of a recognized intangible assetunder SFAS No. 142, *Goodwill andOther Intangible Assets*. The intent of this FSP is to improve theconsistency between the useful life of a recognized intangible asset and theperiod of expected cash flows used to measure the fair value of the asset underSFAS No. 141 (revised 2007), *BusinessCombinations*, and other US GAAP. FSP SFAS No. 142-3is effective for the Company on January 1, 2009. The Company is currentlyevaluating the impact of adopting FSP SFAS No. 142-3 on the Company’sfinancial position, results of operations and cash flows.

 

In March 2008, the FASB issued SFAS No. 161, *Disclosures about Derivative Instruments and HedgingActivities, 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 forwhich the fair value option has been elected are reported in earnings.SFAS No. 159 was effective for the Company on January 1,2008. The implementation of this standard did not have a material impact on the Company’s financial position, results of operations 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 GAAP standardrequires (or permits) assets or liabilities to be measured at fair value butdoes not expand the use of fair value to any new circumstances. SFAS No. 157is effective for financial assets and financial liabilities for fiscal yearsbeginning after November 15, 2007. In February 2008, the FASB issued FSP 157-1, *Applicationof FASB Statement No. 157 to FASB Statement No. 13 and OtherAccounting Pronouncements That Address Fair Value Measurements for Purposes ofLease Classification or Measurement under Statement 13*, whichremoved leasing transactions accounted for under Statement 13 and relatedguidance from the scope of SFAS No. 157. In addition, the FASB issued FSP 157-2, *Partial Deferral of the Effective Date of Statement 157*,which deferred the effective date of SFAS No. 157 for all 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 

 

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

 

In December 2007,the FASB issued SFAS No. 141 (revised 2007), *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 dated June 30, 2008.  The Company has determined that the exit fromthe Gevity Edge Select business meets the criteria of discontinued operationsin accordance with SFAS No. 144, *Accounting for theImpairment 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 andnine month periods ended September 30, 2008 and September 30, 2007are as follows:

 
| ** **                                      | ** ** | **Three Months  Ended  September 30,  2008** | ** ** | **Three Months  Ended  September 30,  2007** | ** ** |
|-------------------------------------------------|------------|--------------------------------------------------------|------------|--------------------------------------------------------|------------|
| Revenues                                        |       | $                                                      | 49         |                                                   | $          | 993 |   |
| Exit costs                                      |       | 38                                                     |       | —                                                 |       |
| All other expenses, net                         |       | 300                                                    |       | 2,199                                                  |       |
| Loss from discontinued operations before  taxes |       | (289                                                   | )          | (1,206                                                 | )          |
| Income tax benefit                              |       | 110                                                    |       | 451                                                    |       |
| Loss from discontinued operations               |       | $                                                      | (179       | )                                                      | $          | (755 | ) |

 
| ** **                                      | ** ** | **Nine Months  Ended  September 30,  2008** | ** ** | **Nine Months  Ended  September 30,  2007** | ** ** |
|-------------------------------------------------|------------|-------------------------------------------------------|------------|-------------------------------------------------------|------------|
| Revenues                                        |       | $                                                     | 1,544      |                                                  | $          | 2,454 |   |
| Exit costs                                      |       | 2,952                                                 |       | —                                                |       |
| All other expenses, net                         |       | 3,896                                                 |       | 5,317                                                 |       |
| Loss from discontinued operations before  taxes |       | (5,304                                                | )          | (2,863                                                | )          |
| Income tax benefit                              |       | 2,014                                                 |       | 1,064                                                 |       |
| Loss from discontinued operations               |       | $                                                     | (3,290     | )                                                     | $          | (1,799 | ) |

 

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

 

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

 
| ** **                               | ** ** | **Three Months  Ended  September 30,  2008** | ** ** | **Nine Months**

**Ended  September 30,  2008** | ** ** |
|------------------------------------------|------------|--------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| Contract termination  costs              |       | $                                                      | —     |                                                      | $          | 1,335 |   |
| Severance and other termination benefits |       | 38                                                     |       | 1,085                                                     |       |
| Goodwill impairment loss                 |       | —                                                 |       | 532                                                       |       |
| Total Gevity Edge Select exit costs      |       | $                                                      | 38         |                                                      | $          | 2,952 |   |

 

Activity in the liabilityaccounts associated with the exit costs related to the discontinuation of theGevity Edge Select business for the nine months ended September 30, 2008is presented in the following table and is includedwithin accounts payable and other accrued liabilities in the condensedconsolidated balance sheet:

 
| ** **                         | ** ** | **Severance and  Termination  Benefits** | ** ** | **Contract  Termination  Costs** | ** ** | **Total** | ** ** |
|------------------------------------|------------|-----------------------------------------------|------------|----------------------------------|------------|-----------|------------|
| Balance at December 31, 2007  |       | $                                             | —     |                             | $          | —    |       | $ | — |   |
| Expense accruals                   |       | 1,085                                         |       | 1,335                            |       | 2,420     |       |
| Cash payments                      |       | (1,040                                        | )          | (825                             | )          | (1,865    | )          |
| Balance at September 30, 2008 |       | $                                             | 45         |                             | $          | 510       |       | $ | 555 |   |

 

**3.****             **MARKETABLE SECURITIES -RESTRICTED****

 

At September 30,2008 and December 31, 2007, the Company’s investment portfolio consisted of restricted money market funds classifiedas 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. The interestearned on these investments is recognized as interest income in the Company’scondensed consolidated statements of operations.

 

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

 

During the thirdquarter of 2008, the Company reached a settlement with the former HRA ownersfor (i) the release of $1,400 held in escrow related to purchase pricecontingencies for the acquisition of HRA, and (ii) the indemnification forcertain representations made by the former owners of HRA in connection with theacquisition of HRA.  The settlementresulted in the release to Gevity of the $1,400 held in escrow as well arecovery by Gevity of approximately $100 related to indemnification claims asof September 30, 2008. The indemnification recovery of $100 is included inthe loss from discontinued operations for the three and nine months ended September 30,2008.

 

**4.****             **ACCOUNTS RECEIVABLE****

 

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

 
| ** **                            | ** ** | **September 30,  2008** | ** ** | **December 31,  2007** | ** ** |
|---------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| Billed to clients                     |       | $                            | 7,625      |                        | $          | 9,124 |   |
| Unbilled revenues                     |       | 118,809                      |       | 121,917                     |       |
|                                  |       | 126,434                      |       | 131,041                     |       |
| Less: Allowance for doubtful accounts |       | (1,486                       | )          | (832                        | )          |
| Total                                 |       | $                            | 124,948    |                        | $          | 130,209 |   |

 

The Company 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 

 

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currently insured by member insurancecompanies of American International Group, Inc.(“AIG”) and includes coverage for the 2003 through 2008 policy years. In stateswhere private insurance is not permitted, clientemployees are covered by state insurance 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 of claimsand AIG is responsible for amounts in excess of $1,000 per occurrence.  In addition, the AIG policy provides $20,000of aggregate stop loss coverage once claims in the deductible layer exceed$138,500.

 

Similar to prior years’workers’ compensation programs with AIG, the Company,through its wholly-owned Bermuda-based insurance subsidiary, remits premiums 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 initially agreed to pay $55,510 ofloss fund collateral premium, subject to certain volume adjustments, and isguaranteed to receive a 3.19% per annum fixed return so long as the program andthe interest accrued under the program remain with AIG for at least 10 years.If the program is terminated early, the interest rate is adjusted downwardbased upon a sliding scale. The 2008 program provides for an initial loss fundcollateral premium 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. In the third quarter of 2008AIG agreed to reduce the 2008 loss fund collateral premium payments by $13,858to $41,652, based upon favorable loss trends and the sufficiency of the overallloss collateral funds held by AIG related to all policy years. This reductionwill eliminate the fourth quarter loss fund collateral premium payments.

 

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

 

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

 

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

 

The Company accrues forworkers’ compensation costs based upon:

 

·      premiums paid for the layerof claims in excess of the deductible;

 

·      estimated total costs ofclaims that fall within the Company’s policy deductible calculated on a netpresent value basis;

 

·      the administrative costs ofthe programs (including claims administration, state taxes and surcharges); and

 

·      the return on investment forloss fund premium dollars paid to AIG.

 

At September 30, 2008 and December 31,2007, the weighted average discount rate used to calculate the net presentvalue of the claim liability was 3.91% and 4.15%, respectively. Premiumpayments made to AIG relating to program years 2000 through 2008 are in excessof the net present value of the estimated claim liabilities. This has resulted in a workers’ compensation receivable, net, at September 30,2008 and December 31, 2007 of $120,896 and $122,271, respectively, ofwhich $23,996 and $16,950 was classified as short-term at September 30,2008 and December 31, 2007, respectively. The short-term workers’compensation receivable consists of $4,602 expected to be received in thefourth quarter of 2008 related 

 

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to the 2008 premium expense audit true-up and$19,394 expected to be received in the third quarter of 2009 related to the2009 annual loss fund collateral true-up. The Company is currently negotiating with AIG and CNA regarding thepotential release during 2009 of a substantial amount of loss fund collateralrelating to excess collateral held by AIG for the 2000-2002 policy years.  The Company has not reclassified this amountinto short-term receivable at September 30, 2008.

 

Theworkers’ compensation receivable from AIG represents asignificant concentration of credit risk for the Company. Gevityhas various commercial insurance relationships with AIG Commercial InsuranceGroup (“AIG CI”), a subsidiary of AIG, including our workers’ compensationprogram.  As of November 7, 2008, AIG CI’sfinancial strength rating by A.M. Best is an “A”.  The Company does not believe that the currentfinancial condition of AIG will have a material adverse effect on AIG CI or theCompany’s workers’ compensation receivable, net, as of September 30, 2008.

 

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

 

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

 
| ** **                          | ** ** | **September 30,  2008** | ** ** | **December 31,  2007** | ** ** |
|-------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| Purchased client service agreements |       | $                            | 48,097     |                        | $          | 48,097 |   |
| Accumulated amortization            |       | (44,108                      | )          | (36,711                     | )          |
| Intangible assets, net              |       | $                            | 3,989      |                        | $          | 11,386 |   |

 

Amortization expense forthe three months ended September 30, 2008 and 2007 was $2,410 and $2,524,respectively. Amortization expense for the nine months ended September 30,2008 and 2007 was $7,397 and $7,516, respectively. Estimated amortizationexpense for the remainder of 2008 and for 2009 is $2,164and $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, 2009. 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 in the agreement andaggregate loss coverage is provided to the Company at the level of 115% ofprojected claims.  The Company isrequired to pre-fund the estimated monthly expenses and claim liability chargesof the plan by the first of each calendar month.  The estimated monthly expenses are based uponthe Minimum Premium Rate and the Annual Excess liability rate, as set forth inthe agreement, times the number of insureds. The monthly estimated claimliability charge is based upon an average of monthly paid claims as determinedby BCBSF/HOI based on three month periods specified in the agreement.  Differences between the pre-funded amountsand actual amounts subsequently determined shall be settled in the followingmonth. As part of the Company’s obligation to BCBSF/HOI, the Company posted anirrevocable letter of credit in favor of BSBSF/HOI in an initial amount of$5,000 on October 1, 2008, which shall be increased monthly byapproximately $1,000 over a seven month period until it reaches $11,766 on May 1,2009.

 

Aetna Health, Inc. (“Aetna”)is the Company’s largest medical care benefits provider for approximately17,000 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.

 

In 2006, the Companyannounced the addition of UnitedHealthcare as an additional health plan option.As of September 30, 2008, UnitedHealthcare provides medical care benefitsto approximately 3,000 client employees. The UnitedHealthcare plan is a fixed cost contract. Effective May 1,2008, UnitedHealthcare and the Company amended their agreement to 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.

 

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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 September 30,2008 and December 31, 2007 are $8,804 and $10,356, respectively, ofshort-term liabilities related to the Company’s health benefit plans. Of theseamounts $8,773 and $10,100, respectively, represent an accrual for the estimateof claims incurred but not reported at September 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 September 30, 2008, the Company reduced itsreserve for incurred but not reported claims by approximately $940, whichdecreased its cost of services and resulted in a health plan surplus for theperiod. This reduction was based upon favorable claims development.  There were no changes to the health planreserves that impacted cost of services during the three months ended September 30,2007.

 

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

 

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

 

The Company maintains acredit facility with Bank of America, N.A. and Wachovia, N.A. (the “Lenders”).On May 7, 2007, the Company entered into the First Amendment to the Amended and Restated Credit Agreement dated August 30,2006, which increased the amount of aggregate revolving commitments of thecredit facility from $50,000 to $75,000 and allowed the Company to repurchaseup to $125,000 of its capital stock during the term ofthe agreement. On June 14, 2007, the Company entered into the SecondAmendment to the Amended and Restated Credit Agreement, which increased theamount of aggregate revolving commitments from $75,000 to $100,000. On February 25,2008, the Company entered into the Third Amendment toAmended and Restated Credit Agreement (“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 $100,000 to$85,000 on September 30, 2008. The Third Amendment includesadditional covenants and amends certain financialcovenants and negative covenants with an effective date of December 31,2007. These include the maintenance of a minimum consolidated net worth, amaximum consolidated adjusted leverage ratio, a minimum consolidated fixed charge coverage ratio of 1.25:1.0, minimum monthlycumulative  EBITDA requirements (for 2008only), and a ceiling on consolidated capital expenditures.  The revisedcovenants set forth in the Third Amendment now restrict the Company’s abilityto repurchase shares of its capital stock in certain circumstances and makeacquisitions and requires the Company to provide certain period reportsrelating to budget and profits and losses, intellectual property and insurancepolicies.  Each of these covenants is based on defined terms and containexceptions in the Credit Agreement, 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: (i) Eurodollar Rate; or (ii) Prime Rate (each as definedin the credit agreement). Up to $20,000 of the loan commitment can be drawnthrough letters of credit. With respect to outstanding letters of credit, a feedetermined by reference to the Applicable Rate plus afronting fee ranging from 1.50% to 2.25% per annum will be charged on theaggregate stated amount of each outstanding letter of credit. A fee rangingfrom 0.30% to 0.45% (based upon the Company’s consolidated leverage ratio) ischarged on any unused portion of the loan commitment. At September 30,2008 the Company had outstanding advances of $32,500 at a weighted averageinterest rate of 5.71%. At December 31, 2007, the Company had outstandingadvances of $17,367 at an interest rate of 6.11%.

 

The Company was incompliance with all of the covenants under the credit agreement at September 30,2008. The ability to draw funds under the credit agreement is dependent upon meeting the aforementioned financialcovenants.  Additionally, the level ofcompliance with the financial covenants determines the maximum amount availableto be drawn. At September 30, 2008, the maximum facility availableto the Company was approximately $66,400.

 

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 

 

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contained in thecredit agreement; (iii) any representation or warranty made by the Companyin the credit agreement or related documents proves to beincorrect or misleading in any material respect when made or deemed made; and (iv) othercustomary events of default. If current operating trends continue, the Companymay not be able to meet one of its four covenants (the monthly cumulativeEBITDA covenant as defined in the credit agreement) during the fourth quarterof 2008 and may need to seek a waiver of this covenant from the Lenders.  The monthly cumulative EBITDA covenant isonly in effect through December 31, 2008 and is not required after December 31,2008.  If the Company requires a waiverin the fourth quarter of 2008 and the waiver is not obtained, this may have amaterial impact on the Company’s cash flow and ability to conduct itsoperations.

 

The Company recorded $789and $1,131 of interest expense for the three months ended September 30,2008 and 2007, respectively, related to the amortizationof loan costs, unused loan commitment fees and interest on advances. Interestexpense for the nine months ended September 30, 2008 and 2007 wasapproximately $2,034 and $2,094, 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 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 in June 2008that included a cash payment offer of $1,200, conceding to the State’s higheroverall unemployment tax rate for tax years 2007 – 2008, along with revisionsto its unemployment tax reporting methods for post 2008 tax years inconsideration for the State’s withdrawal of the existing Assessment for 2004-2006 (the “ Settlement Offer”).  The Settlement Offer is currently underreview by the State.  The Company’s financial statements for the three andnine months ended September 30, 2008 reflect a charge of $82 and $1,132,respectively,  within cost of services,reflecting estimated amounts due in connection with additional unemployment taxcosts for the term January 1, 2007 – September 30, 2008 should theState 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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**10.****          **EQUITY****

 

###### ***ShareRepurchase 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 nine month period ended September 30, 2008. The Companyhas suspended its share repurchase program for the timebeing in 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 September 30, 2008 and 2007, the Company’seffective rate for income from continuing operations was (46.9%) and 32.1%,respectively. The Company’s effective tax rate for the nine months ended September 30,2008 and 2007 was 114.1% and 34.2%, respectively. The Company’s effective taxrates differed from the statutory federal tax rates because of the impact ofstate taxes, federal tax credits and discrete taxadjustments made during the third quarter of 2008.  The majority of the discrete adjustments madeduring the third quarter of 2008 related to $456 of interest expense recordedfor estimated net additional taxes due determined in connection with theongoing Internal Revenue Service examination of the Company’s 2004 taxreturn.   The additional taxes due of$2,246 (net, excluding interest) resulted in an adjustment in the Company’sbalance sheet between current taxes payable and the Company’s current deferredtax liability during the third quarter of 2008.

 

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

 

For the three monthsended September 30, 2008, 324,428 common stock equivalents were excludedfrom the diluted earnings per share computation as their effect wasanti-dilutive. Additionally, 744,265 options to purchasecommon stock, weighted for the portion of the period they were outstanding,were excluded from the diluted earnings per share computation substantiallybecause the exercise prices of the options were greater than the average priceof the common stock.

 

Thereconciliation of net income attributable to common shareholders and sharesoutstanding for the purposes of calculating basic and diluted earnings pershare for the three months ended September 30, 2007 is as follows:

 
| ** **                                           | ** ** | **Net Income  (Loss)  (Numerator)** | ** ** | **Shares  (Denominator)** | ** ** | **Per Share  Amount** | ** ** |
|------------------------------------------------------|------------|------------------------------------------|------------|---------------------------|------------|----------------------------|------------|
| For the Three Months Ended  September 30, 2007: |       |                                     |       |                      |       |                       |       |
|                                                 |       |                                     |       |                      |       |                       |       |
| Basic EPS:                                           |       |                                     |       |                      |       |                       |       |
| Income from continuing  operations                   |       | $                                        | 3,209      |                      |       |                       | $          | 0.14 |   |
| Loss from discontinued  operations                   |       | (755                                     | )          |                      |       | (0.03                      | )          |
| Net income                                           |       | $                                        | 2,454      |                      | 23,235,677 |                       | $          | 0.11 |   |
|                                                 |       |                                     |       |                      |       |                       |       |
| Effect of dilutive securities:                       |       |                                     |       |                      |       |                       |       |
| Options to purchase common stock                     |       |                                     |       | 526,002                   |       |                       |       |
| Non-vested stock                                     |       |                                     |       | 7,683                     |       |                       |       |
|                                                 |       |                                     |       |                      |       |                       |       |
| Diluted EPS:                                         |       |                                     |       |                      |       |                       |       |
| Income from continuing  operations                   |       | $                                        | 3,209      |                      |       |                       | $          | 0.13 |   |
| Loss from discontinued  operations                   |       | (755                                     | )          |                      |       | (0.03                      | )          |
| Net income                                           |       | $                                        | 2,454      |                      | 23,769,362 |                       | $          | 0.10 |   |

 

For the three monthsended September 30, 2007, 1,133,077 options to purchase common stock,weighted for the portion of the period they wereoutstanding, were excluded from the diluted earnings per share computationbecause the exercise prices of the options were greater than the average priceof the common stock.

 

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For the nine months endedSeptember 30, 2008, 367,579 common stock equivalents were excluded fromthe diluted earnings per share computation as their effect wasanti-dilutive.  Additionally, 721,449options to purchase common stock, weighted for the portion of the period theywere outstanding, were excluded from the diluted earningsper share computation because the exercise prices of the options were greaterthan the average price of the common stock.

 

Thereconciliation of net income attributable to common shareholders and sharesoutstanding for the purposes of calculating basic and diluted earnings pershare for the nine months ended September 30, 2007 is as follows:

 
| ** **                                          | ** ** | **Net Income  (Loss)  (Numerator)** | ** ** | **Shares  (Denominator)** | ** ** | **Per Share  Amount** | ** ** |
|-----------------------------------------------------|------------|------------------------------------------|------------|---------------------------|------------|----------------------------|------------|
| For the Nine Months Ended  September 30, 2007: |       |                                     |       |                      |       |                       |       |
|                                                |       |                                     |       |                      |       |                       |       |
| Basic EPS:                                          |       |                                     |       |                      |       |                       |       |
| Income from continuing  operations                  |       | $                                        | 11,457     |                      |       |                       | $          | 0.48 |   |
| Loss from discontinued  operations                  |       | (1,799                                   | )          |                      |       | (0.08                      | )          |
| Net income                                          |       | $                                        | 9,658      |                      | 23,860,934 |                       | $          | 0.40 |   |
|                                                |       |                                     |       |                      |       |                       |       |
| Effect of dilutive securities:                      |       |                                     |       |                      |       |                       |       |
| Options to purchase common stock                    |       |                                     |       | 569,597                   |       |                       |       |
| Non-vested stock                                    |       |                                     |       | 19,239                    |       |                       |       |
|                                                |       |                                     |       |                      |       |                       |       |
| Diluted EPS:                                        |       |                                     |       |                      |       |                       |       |
| Income from continuing  operations                  |       | $                                        | 11,457     |                      |       |                       |       | $ | 0.47 |   |
| Loss from discontinued  operations                  |       | (1,799                                   | )          |                      |       | (0.07                      | )          |
| Net income                                          |       | $                                        | 9,658      |                      | 24,449,770 |                       | $          | 0.40 |   |
|                                                     |            |                                          |            |                           |            |                            |            |  |  |  |  |

 

For the nine months endedSeptember 30, 2007, 993,245 options to purchase common stock, weighted forthe portion of the period they were outstanding, wereexcluded from the diluted earnings per share computation because the exerciseprices of the options were 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 orimplied by such forward-looking statements. Factors that could cause orcontribute to such differences include those discussed below, elsewhere in thisForm 10-Q and in the Company’s Annual Report on Form 10-K forthe year ended December 31, 2007 (the “Form 10-K”), as filed with theSecurities and Exchange Commission. See “Cautionary Note RegardingForward-Looking Statements” below in this Item 2. Thefollowing discussion should be read in conjunction with the Company’scondensed consolidated financial statements and related notes contained in thisreport. Historical results are not necessarily indicative of trends inoperating 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 andwelfare benefits and workers’ compensation coverage. In addition to these coreofferings, the Company’s Gevity EdgeTM 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 September 30,2008 Compared to Three Months Ended September 30, 2007***

 

**Revenue**

 

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

 

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| ** **                                                                                                      | ** ** | **Three Months Ended**                                | ** ** | ** **                   | ** ** |
|-----------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                                                                      | ** ** | **September 30,  2008**                                    | ** ** | **September 30,  2007** | ** ** | **%  Change** | ** ** |
| ** **                                                                                                      | ** ** | **(in thousands, except statistical data)** | ** ** |
| Revenues:                                                                                                       |       |                                                            |       |                         |       |   |   |
| Professional service  fees                                                                                      |       | $                                                               | 27,898     |                         | $          | 35,337 |   | (21.1 | )% |
| Employee health and welfare benefits                                                                            |       | 79,489                                                          |       | 85,763                       |       | (7.3 | )% |
| Workers’ compensation                                                                                      |       | 14,967                                                          |       | 21,064                       |       | (28.9 | )% |
| State unemployment taxes and other                                                                              |       | 2,723                                                           |       | 3,351                        |       | (18.7 | )% |
| Total revenues                                                                                                  |       | $                                                               | 125,077    |                         | $          | 145,515 |   | (14.0 | )% |
|                                                                                                            |       |                                                            |       |                         |       |   |   |
| Statistical data:                                                                                               |       |                                                            |       |                         |       |   |   |
| Gross salaries and wages (in thousands)                                                                         |       | $                                                               | 1,067,071  |                         | $          | 1,203,050 |   | (11.3 | )% |
| Client employees at period end                                                                                  |       | 104,278                                                         |       | 118,728                      |       | (12.2 | )% |
| Clients at period end (1)                                                                                       |       | 5,983                                                           |       | 7,020                        |       | (14.8 | )% |
| Average number of client employees/clients  at period end                                                       |       | 17                                                              |       | 17                           |       | n/a |   |
| Average number of client employees paid (2)                                                                     |       | 95,717                                                          |       | 113,146                      |       | (15.4 | )% |
| Annualized average wage per average client  employees paid (3)                                                  |       | $                                                               | 44,593     |                         | $          | 42,531 |   | 4.8 | % |
| Workers’ compensation  billing per one hundred dollars of workers’ compensation wages (4)             |       | $                                                               | 1.59       |                         | $          | 1.97 |   | (19.3 | )% |
| Workers’ compensation manual premium per  one hundred dollars of workers’ compensation wages (4), (5) |       | $                                                               | 1.75       |                         | $          | 2.17 |   | (19.4 | )% |
| Annualized professional  service fees per average number of client employees paid (3)                           |       | $                                                               | 1,166      |                         | $          | 1,249 |   | (6.6 | )% |
| Client employee health benefits participation                                                                   |       | 37                                                              | %          | 37                           | %          | n/a |   |

 

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

 

(2)       The average number of client employees paid iscalculated based upon the sum of the number of paid client employees at the endof each month divided by the number of months in the period.

 

(3)       Annualized statistical information is based uponactual quarter-to-date amounts, which have beenannualized (divided by three and multiplied by twelve), and then divided by theaverage number of client employees paid.

 

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

 

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

 

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

 

As of September 30,2008, the Company served 5,983 clients, as measured by each client’s FEIN, with104,278 active client employees. This compares to 7,020 clients, as measured by each client’s FEIN, with 118,728 active clientemployees at September 30, 2007. The average number of client employees paid was 95,717 for the thirdquarter of 2008 compared to 113,146 for the third quarter of 2007.  The declines in clientand client employee metrics were 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 poor economic conditions, and lowerthan expected production levels during 2007 and 2008.  In addition, during the first three quartersof 2008, the Company terminated approximately 240 unprofitable clients(impacting approximately 4,500 client employees) in an effort to improveoverall earnings in the long-term.

 

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

 

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

 

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or 7.3%. Healthand welfare benefit plan revenues decreased due to the decreasein the average number of participants in the Company’s health andwelfare benefit plans of approximately 13.9% and was partially offset by theincrease 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 $15.0 million for thethree months ended September 30, 2008, from $21.1 millionfor the three months ended September 30, 2007, representing adecrease of $6.1 million or 28.9%. Workers’ compensation billings, as apercentage of workers’ compensation wages for the three months ended September 30,2008, were 1.59% as compared to 1.97% for the same periodin 2007, representing a decrease of 19.3%. Workers’ compensation revenuedecreased in the third quarter of 2008 primarily due to the combined effects ofa 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 19.4% during thethree months ended September 30, 2008 as compared to the three monthsended September 30, 2007. Manual premium rates are the allowable ratesthat employers are charged by insurance companies for workers’ compensationinsurance coverage. The decrease in the Company’s manual premium rates primarily reflects the reduction in the Florida manualpremium rates.

 

Revenues from stateunemployment taxes and other revenues decreased to $2.7 million for the threemonths ended September 30, 2008 from $3.4 million for the three monthsended September 30, 2007, representing a decrease of$0.6 million or 18.7%. The decrease was primarily due to the decrease in wagesthat provide unemployment 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 September 30,2008 and 2007:

 
| ** **                                                                                                      | ** ** | **Three Months Ended**                                | ** ** | ** **                   | ** ** |
|-----------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                                                                      | ** ** | **September 30,  2008**                                    | ** ** | **September 30,  2007** | ** ** | **%  Change** | ** ** |
| ** **                                                                                                      | ** ** | **(in thousands, except statistical data)** | ** ** |
| Cost of services:                                                                                               |       |                                                            |       |                         |       |   |   |
| Employee health and welfare benefits                                                                            |       | $                                                               | 78,549     |                         | $          | 85,763 |   | (8.4 | )% |
| Workers’ compensation                                                                                      |       | 7,958                                                           |       | 10,963                       |       | (27.4 | )% |
| State unemployment taxes and other                                                                              |       | 4,278                                                           |       | 4,673                        |       | (8.5 | )% |
| Total cost of services                                                                                          |       | $                                                               | 90,785     |                         | $          | 101,399 |   | (10.5 | )% |
|                                                                                                            |       |                                                            |       |                         |       |   |   |
| Statistical data:                                                                                               |       |                                                            |       |                         |       |   |   |
|                                                                                                            |       |                                                            |       |                         |       |   |   |
| Gross salaries and wages (in thousands)                                                                         |       | $                                                               | 1,067,071  |                         | $          | 1,203,050 |   | (11.3 | )% |
| Average number of client employees paid (1)                                                                     |       | 95,717                                                          |       | 113,146                      |       | (15.4 | )% |
| Workers compensation  cost rate per one hundred dollars of workers’ compensation wages (2)                 |       | $                                                               | 0.84       |                         | $          | 1.02 |   | (17.6 | )% |
| Number of workers’ compensation claims (3)                                                                 |       | 867                                                             |       | 1,225                        |       | (29.2 | )% |
| Frequency of workers’ compensation claims  per one million dollars of workers’ compensation wages (2) |       | 0.92                                                            | x          | 1.14                         | x          | (19.3 | )% |

 

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(1)     The average number of client employees paid iscalculated based upon the sum of the number of paid client employees at the endof each month divided by the number of months in the period.

 

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

 

(3)     The number of workers’ compensation claimsreflects the number of claims reported by the end of the respective period anddoes not include claims with respect to a specific policyyear 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 $90.8 million for the three months ended September 30,2008, compared to $101.4 million for the three months ended September 30,2007, representing a decrease of $10.6 million or 10.5%. This decrease was dueto the reduction in all of the cost of services componentsas described below.

 

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The cost of providinghealth and welfare benefits to clients’ employees for the three months ended September 30,2008 was $78.5 million as compared to $85.8 million for the three months ended September 30,2007, representing a decrease of $7.2 million or 8.4%.This decrease was primarily attributable to the decrease in the number of clientemployees participating in the health and welfare benefit plans and waspartially offset by higher cost of health benefits.  In addition, the third quarter of 2008 wasfavorably impacted by the recognition of a health benefit surplus of $0.9million based upon favorable claims experience. The Company expects that price increases implemented in conjunction withhealthcare renewals effective October 1, 2008 and the continuationof current claims experience will continue to favorably impact healthcare costsduring 2008.

 

Workers’ compensationcosts were $8.0 million for the three months ended September 30, 2008, ascompared to $11.0 million for the three months ended September 30, 2007, representing a decrease of $3.0 million or 27.4%. Workers’compensation costs decreased in the third quarter of 2008 primarily due to theapproximate 15.4% reduction in the average number of client employees paid andrelated reduction in wages and claims. The three months ended September 30,2008 and 2007 were also favorably impacted by thereduction in the prior years’ workers’ compensation loss estimates ofapproximately $3.3 million and $4.1 million, respectively, as a result ofcontinued favorable claims development for those prior open policy years. TheCompany expects that if current claims development trends continue, this willhave a favorable impact on workers’ compensation costs for the remainder of2008.

 

State unemployment taxesand other costs were $4.3 million for the three months ended September 30,2008, compared to $4.7 million for the three months ended September 30,2007, representing a decrease of $0.4 million or 8.5%. 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.

 

**OperatingExpenses**

 

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

 
| ** **                        | ** ** | **Three Months Ended**                                | ** ** | ** **                   | ** ** |
|-----------------------------------|------------|-----------------------------------------------------------------|------------|------------------------------|------------|
| ** **                        | ** ** | **September 30,  2008**                                    | ** ** | **September 30,  2007** | ** ** | **% Change** | ** ** |
| ** **                        | ** ** | **(in thousands, except statistical data)** | ** ** |
| Operating expenses:               |       |                                                            |       |                         |       |   |   |
| Salaries, wages and commissions   |       | $                                                               | 18,552     |                         | $          | 20,768 |   | (10.7 | )% |
| Other general and administrative  |       | 12,170                                                          |       | 13,918                       |       | (12.6 | )% |
| Depreciation and amortization     |       | 4,093                                                           |       | 3,898                        |       | 5.0 | % |
| Total operating expenses          |       | $                                                               | 34,815     |                         | $          | 38,584 |   | (9.8 | )% |
|                              |       |                                                            |       |                         |       |   |   |
| Statistical data:                 |       |                                                            |       |                         |       |   |   |
| Internal employees at quarter end |       | 781                                                             |       | 869                          |       | (10.1 | )% |

 

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

 

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

 

Other general and administrativeexpenses were $12.2 million for the three months ended September 30, 2008as compared to $13.9 million for the three months ended September 30,2007, representing a decrease of $1.7 million or 12.6%. The decrease occurredacross all major components of general and administrative expenses and isattributable to cost alignment measures taken during 2007and 2008. Included inother general and administrative expenses for the three months ended September 30,2008 are costs related to branch consolidations and reduction in staffinglevels of approximately $0.4 million as compared to costs related to staffingreductions of $0.7 million for the three months ended September 30, 2007.

 

Depreciation andamortization expenses were $4.1 million for the three months ended September 30,2008 compared to $3.9 million for the three months ended September 30,2007, representing an increase of $0.2 million or 5.0%. The increase isprimarily attributable to the amortization of technology assets capitalizedduring 2007 and 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 September 30, 2008, income tax expense was $0.6 million compared to income tax expense of $1.5 million for the threemonths ended September 30, 2007. The decrease in income tax expense is primarily a function of thereduction in income from continuing operations.  The Company’s effectivetax rate for the three months ended September 30, 2008 and 2007 was(46.9%) and 32.1%, respectively.  TheCompany’s effective tax rates differed from the statutory federal tax ratesbecause of the impact of state taxes, federal tax credits and discrete taxadjustments made during the third quarter of 2008. The majority of the discretetax adjustments made during the third quarter of 2008 related to $456 ofinterest expense recorded for estimated net additional taxes due determined inconnection with the ongoing Internal Revenue Service examination of the Company’s2004 income tax return.

 

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

 

As a net result of thefactors described above, the following table summarizes the changes in grossprofit, operating (loss) income, (loss) income from continuing operations anddiluted (loss) earnings per share from continuing operations:

 
| ** **                                                                          | ** ** | **Three Months Ended**                                                             | ** ** | ** **                   | ** ** |
|-------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                                          | ** ** | **September 30,  2008**                                                                 | ** ** | **September 30,  2007** | ** ** | **% Change** | ** ** |
| ** **                                                                          | ** ** | **(in thousands, except per share and statistical data)** | ** ** |
| Gross profit                                                                        |       | $                                                                                            | 34,292     |                         | $          | 44,116 |   | (22.3 | )% |
| Operating (loss) income                                                             |       | $                                                                                            | (523       | )                            | $          | 5,532 |   | (109.5 | )% |
| (Loss) income from continuing operations                                            |       | $                                                                                            | (1,772     | )                            | $          | 3,209 |   | (155.2 | )% |
| Diluted (loss) earnings per share from  continuing operations                       |       | $                                                                                            | (0.07      | )                            | $          | 0.13 |   | (153.8 | )% |
| Statistical data:                                                                   | ** ** | ** **                                                                                   | ** ** | ** **                   | ** ** | ** ** | ** ** |
| Annualized gross profit per average number  of client employees paid (1)       |       | $                                                                                            | 1,433      |                         | $          | 1,560 |   | (8.1 | )% |
| Annualized operating (loss) income per  average number of client employees paid (1) |       | $                                                                                            | (22        | )                            | $          | 196 |   | (111.2 | )% |

 

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(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.

 

**Discontinued Operations**

 

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

 

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

 

**Revenue**

 

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

 

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| ** **                                                                                                      | ** ** | **Nine Months Ended**                                 | ** ** | ** **                   | ** ** |
|-----------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                                                                      | ** ** | **September 30,  2008**                                    | ** ** | **September 30,  2007** | ** ** | **%  Change** | ** ** |
| ** **                                                                                                      | ** ** | **(in thousands, except statistical data)** | ** ** |
| Revenues:                                                                                                       |       |                                                            |       |                         |       |   |   |
| Professional service  fees                                                                                      |       | $                                                               | 86,529     |                         | $          | 108,115 |   | (20.0 | )% |
| Employee health and welfare benefits                                                                            |       | 244,278                                                         |       | 261,853                      |       | (6.7 | )% |
| Workers’ compensation                                                                                      |       | 46,056                                                          |       | 63,562                       |       | (27.5 | )% |
| State unemployment taxes and other                                                                              |       | 18,568                                                          |       | 22,047                       |       | (15.8 | )% |
| Total revenues                                                                                                  |       | $                                                               | 395,431    |                         | $          | 455,577 |   | (13.2 | )% |
|                                                                                                            |       |                                                            |       |                         |       |   |   |
| Statistical data:                                                                                               |       |                                                            |       |                         |       |   |   |
| Gross salaries and wages (in thousands)                                                                         |       | $                                                               | 3,194,314  |                         | $          | 3,636,023 |   | (12.1 | )% |
| Client employees at period end                                                                                  |       | 104,278                                                         |       | 118,728                      |       | (12.2 | )% |
| Clients at period end (1)                                                                                       |       | 5,983                                                           |       | 7,020                        |       | (14.8 | )% |
| Average number of client employees/clients  at period end                                                       |       | 17                                                              |       | 17                           |       | n/a |   |
| Average number of client employees paid (2)                                                                     |       | 98,044                                                          |       | 114,826                      |       | (14.6 | )% |
| Annualized average wage per average client  employees paid (3)                                                  |       | $                                                               | 43,441     |                         | $          | 42,221 |   | 2.9 | % |
| Workers’ compensation  billing per one hundred dollars of workers’ compensation wages (4)             |       | $                                                               | 1.62       |                         | $          | 1.96 |   | (17.3 | )% |
| Workers’ compensation manual premium per  one hundred dollars of workers’ compensation wages (4), (5) |       | $                                                               | 1.77       |                         | $          | 2.17 |   | (18.4 | )% |
| Annualized professional  service fees per average number of client employees paid (3)                           |       | $                                                               | 1,177      |                         | $          | 1,255 |   | (6.2 | )% |
| Client employee health benefits  participation                                                                  |       | 37                                                              | %          | 37                           | %          | n/a |   |

 

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(1)       Clients measured by individual client FederalFEIN.

 

(2)       The average number of client employees paid iscalculated based upon the sum of the number of paid client employees at the endof each month divided by the number of months in the period.

 

(3)       Annualized statistical information is based uponactual quarter-to-date amounts, which have beenannualized (divided by nine and multiplied by twelve), and then divided by theaverage number of client employees paid.

 

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

 

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

 

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

 

As of September 30,2008, the Company served 5,983 clients, as measured by each client’s FEIN, with104,278 active client employees. This compares to 7,020 clients, as measured by each client’s FEIN, with 118,728 active clientemployees at September 30, 2007. The average number of client employees paid by month was 98,044 for thenine months ended September 30, 2008 compared to 114,826 for the nine monthsended September 30, 2007.  Thedeclines in client and client employee metrics wereattributable to the impact of higher than expected client and client employeeattrition levels during 2007 and the first three quarters of 2008 primarily asa result of poor economic conditions, and lower than expected production levelsduring 2007 and 2008. In addition, during the first nine months of 2008, theCompany terminated approximately 240 unprofitable clients (impactingapproximately 4,500 client employees) in an effort to improve overall earningsin the long-term.

 

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

 

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primarilyattributable to general market dynamics and the impact of the 2008 terminationsof unprofitable clients which, despite having a negative impact on grossprofit, generally had higher professional service fee levels.

 

Revenues for providinghealth and welfare benefits for the nine months ended September 30,2008 were $244.3 million as compared to $261.9 million for the nine monthsended September 30, 2007, representing a decrease of $17.6 million or6.7%. Health and welfare benefit plan revenues decreased due to the decrease in the average number of participants in theCompany’s health and welfare benefit plans of approximately 14.4% andwas partially offset by the increase in health insurance premiums as a resultof higher costs to the Company to provide such coveragefor client employees and the Company’s approach to pass along allinsurance-related cost increases.

 

Revenues for providingworkers’ compensation insurance coverage decreased to $46.1 million for thenine months ended September 30, 2008, from $63.6 millionfor the nine months ended September 30, 2007, representing adecrease of $17.5 million or 27.5%. Workers’ compensation billings, as apercentage of workers’ compensation wages for the nine months ended September 30,2008, were 1.62% as compared to 1.96% for the same periodin 2007, representing a decrease of 17.3%. Workers’ compensation revenuedecreased in the first three 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 18.4% during the nine monthsended September 30, 2008 as compared to the nine months ended September 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 $18.6 million for the ninemonths ended September 30, 2008 from $22.0 million for the nine monthsended September 30, 2007, representing a decrease of$3.5 million or 15.8%. The decrease was primarily due to the decrease in wagesthat provide unemployment tax revenue to the Company.

 

**Cost ofServices**

 

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

 
| ** **                                                                                                       | ** ** | **Nine Months Ended**                                 | ** ** | ** **                   | ** ** |
|------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                                                                       | ** ** | **September 30,  2008**                                    | ** ** | **September 30,  2007** | ** ** | **%  Change** | ** ** |
| ** **                                                                                                       | ** ** | **(in thousands, except statistical data)** | ** ** |
| Cost of services:                                                                                                |       |                                                            |       |                         |       |   |   |
| Employee health and welfare benefits                                                                             |       | $                                                               | 241,607    |                         | $          | 259,252 |   | (6.8 | )% |
| Workers’ compensation                                                                                       |       | 22,208                                                          |       | 34,883                       |       | (36.3 | )% |
| State unemployment taxes and other                                                                               |       | 25,164                                                          |       | 25,769                       |       | (2.3 | )% |
| Total cost of services                                                                                           |       | $                                                               | 288,979    |                         | $          | 319,904 |   | (9.7 | )% |
|                                                                                                             |       |                                                            |       |                         |       |   |   |
| Statistical data:                                                                                                |       |                                                            |       |                         |       |   |   |
|                                                                                                             |       |                                                            |       |                         |       |   |   |
| Gross salaries and wages (in thousands)                                                                          |       | $                                                               | 3,194,314  |                         | $          | 3,636,023 |   | (12.1 | )% |
| Average number of client employees paid (1)                                                                      |       | 98,044                                                          |       | 114,826                      |       | (14.6 | )% |
| Workers compensation  cost rate per one hundred dollars of workers’ compensation wages (2)                  |       | $                                                               | 0.78       |                         | $          | 1.07 |   | (27.1 | )% |
| Number of workers’ compensation claims (3)                                                                  |       | 2,666                                                           |       | 3,531                        |       | (24.5 | )% |
| Frequency of workers’ compensation claims  per one million dollars of workers’ compensation wages  (2) |       | 0.94                                                            | x          | 1.09                         | x          | (13.8 | )% |

 

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(1)                   Theaverage number of client employees paid is calculated based upon the sum of thenumber of paid client employees at the end of each month divided by the numberof months in the period.

 

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

 

(3)                   Thenumber of workers’ compensation claims reflects the number of claims reportedby the end of the respective period and does not include claims with respect to a specific policy year that are reportedsubsequent 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 $289.0 million for the nine months ended September 30,2008, 

 

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compared to $319.9million for the nine months ended September 30, 2007, representing adecrease of $30.9 million or 9.7%. This decrease was due to the reduction inall of the cost of services components as describedbelow.

 

The cost of providinghealth and welfare benefits to clients’ employees for the nine months ended September 30,2008 was $241.6 million as compared to $259.3 million for the nine months endedSeptember 30, 2007, representing a decrease of $17.6million or 6.8%. This decrease was primarily attributable to the decrease inthe number of client employees participating in the health and welfare benefitplans and was partially offset by higher cost of health benefits.  In addition, the first nine months of 2008and 2007 were favorably impacted by the recognition of a health benefit surplusof $2.7 million and $2.6 million, respectively, based upon favorable claimsexperience.

 

Workers’ compensationcosts were $22.2 million for the nine months ended September 30, 2008, ascompared to $34.9 million for the nine months ended September 30, 2007, representing a decrease of $12.7 million or 36.3%. Workers’compensation costs decreased in the first nine months of 2008 primarily due tothe approximate 14.6% 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 $13.3 million as a result of continued favorable claimsdevelopment for those prior open policy years. For the nine months ended September 30,2007, the comparable reduction in prior years’workers’ compensation loss estimates was $12.1 million.

 

State unemployment taxesand other costs were $25.2 million for the nine months ended September 30,2008, compared to $25.8 million for the nine months ended September 30,2007, representing a decrease of $0.6 million or 2.3%. 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 and thirdquarters of 2008, the Company recorded a total of $1.1 million of stateunemployment tax expense related to a settlement offer with the State ofCalifornia as previously described in Note 9 to the condensed consolidatedfinancial statements.

 

**OperatingExpenses**

 

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

 
| ** **                        | ** ** | **Nine Months Ended**                                 | ** ** | ** **                   | ** ** |
|-----------------------------------|------------|-----------------------------------------------------------------|------------|------------------------------|------------|
| ** **                        | ** ** | **September 30,  2008**                                    | ** ** | **September 30,  2007** | ** ** | **% Change** | ** ** |
| ** **                        | ** ** | **(in thousands, except statistical data)** | ** ** |
| Operating expenses:               |       |                                                            |       |                         |       |   |   |
| Salaries, wages and commissions   |       | $                                                               | 56,089     |                         | $          | 62,493 |   | (10.2 | )% |
| Other general and administrative  |       | 36,000                                                          |       | 42,846                       |       | (16.0 | )% |
| Depreciation and amortization     |       | 11,971                                                          |       | 11,431                       |       | 4.7 | % |
| Total operating expenses          |       | $                                                               | 104,060    |                         | $          | 116,770 |   | (10.9 | )% |
|                              |       |                                                            |       |                         |       |   |   |
| Statistical data:                 |       |                                                            |       |                         |       |   |   |
| Internal employees at quarter end |       | 781                                                             |       | 869                          |       | (10.1 | )% |

 

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

 

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

 

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

 

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

 

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

 

**Income Taxes**

 

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

 

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

 

As a net result of thefactors described above, the following table summarizes the changes in grossprofit, operating income, (loss) income from continuing operations and dilutedearnings per share from continuing operations:

 
| ** **                                                                    | ** ** | **Nine Months Ended**                                                              | ** ** | ** **                   | ** ** |
|-------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                                    | ** ** | **September 30,  2008**                                                                 | ** ** | **September 30,  2007** | ** ** | **% Change** | ** ** |
| ** **                                                                    | ** ** | **(in thousands, except per share and statistical data)** | ** ** |
| Gross profit                                                                  |       | $                                                                                            | 106,452    |                         | $          | 135,673 |   | (21.5 | )% |
| Operating income                                                              |       | $                                                                                            | 2,392      |                         | $          | 18,903 |   | (87.3 | )% |
| (Loss) income from continuing operations                                      |       | $                                                                                            | (88        | )                            | $          | 11,457 |   | (100.8 | )% |
| Diluted earnings per share from continuing  operations                        |       | $                                                                                            | —     |                         | $          | 0.47 |   | (100.0 | )% |
| Statistical data:                                                             | ** ** | ** **                                                                                   | ** ** | ** **                   | ** ** | ** ** | ** ** |
| Annualized gross profit per average number  of client employees paid (1) |       | $                                                                                            | 1,448      |                         | $          | 1,575 |   | (8.1 | )% |
| Annualized operating income per average number of client employees paid (1)   |       | $                                                                                            | 33         |                         | $          | 219 |   | (84.9 | )% |

 

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(1)   Annualized statistical information is based uponactual period-to-date amounts, which have been annualized (divided by nine andmultiplied by twelve) and then divided by the average numberof client employees paid.

 

**DiscontinuedOperations**

 

Theloss from discontinued operations was $5.3 million ($3.3 million net of incometax) for the nine months ended September 30, 2008 compared to $2.9 million($1.8 million net of income tax) for the nine months ended September 30,2007.  The increase in the loss of $2.4million was primarily attributable to $3.0 million of exit costs for contracttermination costs, severance benefits and goodwill impairment directly attributableto the Company’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 “Part II. Item 2. Unregistered Sales ofEquity Securities and Use of Proceeds” for information regarding the suspensionof the Company’s share repurchase program), the potential for expansion of itsHR outsourcing portfolio through acquisitions, payment ofdividends, possible acquisitions of businesses complementary to the business ofthe Company, 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.

 

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The Company currently believes that its current cash balances, cashflow from operations and the existing credit facility will be sufficient tomeet its operational requirements for the next 12 months, excluding cash required for acquisitions, if any. The Company has a secured creditfacility for $85.0 million with Bank of America, N.A. and Wachovia, N.A. (the “Lenders”)of which $32.5 million was outstanding as of September 30, 2008. See Note8 to the condensed consolidated financial statementscontained in this Form 10-Q for additional information regarding theCompany’s credit facility. On February 25, 2008, the Company entered into the Third Amendmentto Amended and Restated Credit Agreement (“Third Amendment”). The Third Amendment provides for the grant of security interests and liensin substantially all the property and assets (with agreed upon carveouts andexceptions) of the Company to the Lenders. The Third Amendment also providesfor an automatic decrease of the aggregate revolving commitment of the creditfacility 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 monthly cumulative EBITDA requirements (for2008 only), and 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 covenants under thecredit agreement at September 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 September 30, 2008,$32.5 million was outstanding under the credit facility and the maximumfacility available to the Company was approximately $66.4 million. The Company is not currently aware of anyinability of our Lenders to provide access to the full commitment of funds thatexist under our credit facility, if necessary. However, due to recent economicconditions and the deteriorating business climate facing financialinstitutions, there can be no assurance that such facility will be available tothe Company, even though it is a binding commitment.

 

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. If current operating trends continue, the Companymay not be able to meet one of its four covenants (the monthly cumulativeEBITDA covenant as defined in the credit agreement) during the fourth quarterof 2008 and may need to seek a waiver of this covenant.  The monthly cumulative EBITDA covenant isonly in effect through December 31, 2008 and is not required after December 31,2008.  If the Company requires a waiverin the fourth quarter of 2008 and the waiver is not obtained, this may have amaterial impact on the Company’s cash flow and ability to conduct itsoperations.

 

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 nine months of 2008 were salaries, wages and payroll taxes of client employees of approximately $3.4 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 regulatory paymentseven if the related payments are not made by its clients.  Therefore, the objective of the Company is tominimize the credit risk associated with remitting the payroll and associatedtaxes before receiving the service fees from the client and generally, theCompany has the right to immediately terminate the client relationship fornon-payment. To the extent this objective is not achieved, short-term cashrequirements as well as bad debt expense can be significant and the results ofoperations and cash flow may potentially be impacted.  In addition, the timing and amount ofpayments for payroll, payroll taxes and benefit premiums can vary significantlybased on various factors, including the day of the week on which a payrollperiod ends and the existence of holidays at or immediately following a payrollperiod-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 fully 

 

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described below. Marketable securities used to collateralize theseobligations are designated as restricted in the Company’scondensed consolidated financial statements.

 

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

 
| ** **                                                | ** ** | **September 30,  2008** | ** ** | **December 31,  2007** | ** ** |
|-----------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                                                | ** ** | **(in thousands)**      | ** ** |
| Short-term marketable  securities - restricted:           |       |                         |       |                        |       |
| General insurance collateral obligations –  AIG      |       | $                            | 4,810      |                        | $          | 4,702 |   |
| HRA escrow                                                |       | —                       |       | 1,400                       |       |
| Total short-term marketable securities –  restricted |       | 4,810                        |       | 6,102                       |       |
|                                                      |       |                         |       |                        |       |
| Long-term marketable securities restricted:               |       |                         |       |                        |       |
| Workers’ compensation collateral – AIG          |       | 4,025                        |       | 3,934                       |       |
| Total long-term marketable securities –  restricted  |       | 4,025                        |       | 3,934                       |       |
| Total restricted assets                                   |       | $                            | 8,835      |                        | $          | 10,036 |   |

 

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

 

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

 

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

 

As of September 30, 2008, the Company has recorded a $120.9million receivable from AIG representing workers’ compensation premium paymentsmade to AIG related to program years 2000 through thethird quarter of 2008 in excess of the present value of the estimated claimsliability.  This receivable represents asignificant concentration of credit risk for the Company. Gevityhas various commercial insurance relationships with AIG Commercial InsuranceGroup, Inc. (“AIG CI”), a subsidiary of AIG, including our workers’compensation program.  AIG CI has publicly stated as recently as September 30,2008, that it remains well-capitalized and financially secure, with ample resourcesto pay policyholder claims.  The issuesthat have evolved at AIG relate to entities outside of their commercialinsurance division. The AIG insurance companies are regulated by state law andtheir affairs overseen by state insurance commissioners.  Those laws are designed in part to assurethat regulated insurance companies are operated on a financially sound basisand their assets are protected from the financial problems of non-insuranceaffiliates. Under state insurance regulations, the assets of the AIG insurancesubsidiaries are protected from the creditors of the parent company. Additionally,as of November 7, 2008, AIG CI’s financial strength rating by A.M. Best is an“A”.  Accordingly, the Company does notbelieve that the current financial condition of AIG will have a materialadverse effect on AIG CI or the Company’s workers’ compensation receivable asof September 30, 2008.

 

***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 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 $4.7 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.

 

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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 in June 2008that included a cash payment offer of $1.2 million, conceding to the State’shigher overall unemployment tax rate for tax years 2007 – 2008, along withrevisions to its unemployment tax reporting methods for post 2008 tax years inconsideration for the State’s withdrawal of the existing assessment for 2004-2006 (the “ Settlement Offer”).  The Settlement Offer is currently underreview by the State.  The Company’s financial statements for the ninemonths ended September 30, 2008 reflect a charge of $1.1 million withincost of services, reflecting estimated amounts due in connection withadditional unemployment tax costs for the term January 1, 2007 – September 30,2008 should the State of California accept the Settlement Offer.   In the event that the Company is not able toreach a settlement with the State of California, the Company believes it hasvalid defenses regarding the assessments and will vigorously challenge theassessments.

 

***CashFlows from Operating Activities***

 

At September 30, 2008,the Company had net working capital of $7.4 million, including restricted fundsclassified as short-term of $4.8 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 nine months of 2008 was primarilydue to the reduction in accrued payroll taxes as a result of the reduction inclient employees as well as timing differences related to the day of the weekthat the quarter ended on and the increase in the use ofcash from the revolving credit facility to pay down liabilities.

 

Net cash used inoperating activities was $12.5 million for the nine months ended September 30,2008 as compared to net cash provided by operating activities of $9.7 millionfor the nine months ended September 30, 2007, representing an increase innet cash used in operating activities of $22.2 million. Cash flows fromoperating activities are significantly impacted by the timing of clientpayrolls, the day of the week on which a fiscal period ends and the existence of holidays at or immediately following a period end. Theoverall increase in cash used in operating activities was primarily due to nettiming differences as well as the overall reduction in net income related tothe reduction in client employees.

 

During the nine months ended September 30, 2008, the Companyreceived $35.1 million of loss fund collateral premium refunds from AIG inconnection with its annual loss fund true-up ($33.1 million in the thirdquarter.)   The Company expects toreceive approximately $4.6 million from AIG in the fourth quarter of 2008related to the annual premium expense audit. If current workers’ compensation trendscontinue, the Company expects to receive approximately$19.4 million during the third quarter of 2009 as a net return of premiums inconnection with the annual loss fund collateral true-ups related to the2000-2008 program years.  In addition, in the third quarter of 2008, AIG agreed to a reduction ofthe 2008 loss fund collateral premium payments by $13.9 million based uponfavorable loss trends and the sufficiency of the overall loss collateral fundsheld by AIG related to all policy years. This reduction relieves the Company frommaking loss fund collateral premium payments to AIG in the fourth quarter of2008.

 

TheCompany is currently negotiating with AIG and CNA regarding the potential  release during 2009 of a substantial amountof loss fund collateral relating to excess collateral held by AIG for the2000-2002 policy years.  The Company hasnot reclassified this amount into short-term receivable at September 30,2008.

 

Additionalreleases of premiums by AIG are also anticipated in future years if such trendscontinue.  The Company believes that ithas provided AIG a sufficient amount of cash to cover its short-term andlong-term workers compensation obligations related to open policy years.

 

***CashFlow from Investing Activities***

** **

Cash used in investingactivities for the nine months ended September 30, 2008 of $0.7 million,includes approximately $1.9 million for capital expenditures primarily fortechnology-related items and $0.2 million for purchasesof marketable securities. These amounts are partially offset by proceeds from thereturn of $1.4 million previously held in an escrow account for purchase pricecontingencies in the HRA acquisition. This compares to cash used in investingactivities for the nine months ended September 30, 2007 of $16.4million, which includes approximately $10.9 million related to the February 16,2007 acquisition 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 $5.2 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 oftechnology-related items. Capital expenditures are expected to be fundedthrough operations, leasing arrangements or from the Company’s revolvingcredit facility.

 

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***CashFlow from Financing Activities***

 

Cash provided byfinancing activities for the nine months ended September 30,2008 of $15.7 million was primarily a result of $15.1 million of net borrowingsunder the revolving credit facility; $4.0 million received upon the exercise of1,003,625 stock options and the purchase of 40,479 shares of common stock underthe Company’s employee stock purchase plan; and $1.3million related to excess tax benefits received by the Company for itsshare-based arrangements. These amounts were partially offset by $4.4 millionof cash dividends paid and $0.3 million of capital lease payments.

 

This compares to cash used in financingactivities for the nine months ended September 30, 2007 of $15.1million, primarily a result of $20.5 million of net borrowings under therevolving credit facility; $1.0 million received upon theexercise of 82,242 stock options and the purchase of 20,301 shares of commonstock under the Company’s employee stock purchase plan; and $0.3 millionrelated to excess tax benefits received by the Company for its share-based arrangements. These amounts were offset by the use of $30.3 million torepurchase 1,543,121 shares of the Company’s common stock under its stockrepurchase programs (see “Part II. Item 2. Unregistered Sales of Equity Securities andUse of Proceeds” for adiscussion of the current stock repurchase program) and $6.5 million ofcash 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 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. Whilemanagement 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-lookingstatements are based on the Company’s current expectations and beliefsconcerning future developments and their potential effects on the Company.There can be no assurance that future developmentsaffecting the Company will be those that the Company has anticipated.  Forward-looking statements involve a numberof known and unknown risks, uncertainties (some of which are beyond the Company’scontrol) and other factors and assumptions that may causeactual results or performance to be materially different from those expressedor implied by such forward-looking statements, including those described in “Item1A. Risk Factors” of the Company’s Form 10-K and the risks that aredescribed in other reports that the Company files withthe Securities and Exchange Commission.

 

Forward-lookingstatements speak only as of the date on which they are made and you should notplace undue reliance on any forward-looking statement. Except as required bylaw, the Company undertakes no obligation to update any forward-lookingstatement or statements to reflect events or circumstances after the date onwhich such statement is made or to reflect the occurrence of unanticipatedevents. New factors emerge from time to time, and it is not possible formanagement to predict all of these factors. Further, management cannot assessthe impact of each factor on the Company’s 

 

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business or the extent to which anyfactor, or combination of factors, may cause actual results to differmaterially from those contained in any forward-looking statements.

 

**ITEM 3.****                  **Quantitative and Qualitative Disclosuresabout Market Risk****

 

There have been no materialchanges from the information previously reported under “Item 7A. Quantitative and Qualitative Disclosures About Market Risk” in the Form 10-K.

 

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

 

As of the endof the period covered by this report, the Company’s management, including theChief Executive Officer and the Chief Financial Officer, conducted anevaluation of the effectiveness of the design and operation of the Company’sdisclosure controls and procedures pursuant to Rule 13a-15 of the SecuritiesExchange Act of 1934. Any controls and procedures, no matter how well designedand operated, can provide only reasonable assurance of achieving the desiredobjectives. Based upon that evaluation and subject to the foregoing, theCompany’s management, including the Company’s Chief Executive Officer and ChiefFinancial Officer, concluded that the design and operation of the Company’sdisclosure controls and procedures provided reasonable assurance that thedisclosure controls and procedures were effective to accomplish theirobjectives.

 

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.

 

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**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.

 

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

 

There have been nomaterial changes from the information previously provided under “Item 1A.  Risk Factors,” in the Form 10-K otherthan indicated below.  See also “CautionaryNote Regarding Forward-Looking Statements” included in “Part 1. Item2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations” ofthis Form 10-Q.

 

***Our workers’ compensation coverage is provided by AIG CI.  Our workers’ compensation receivable from AIGCI represents a significant concentration of credit risk.  If AIG CI were unable to pay our claims orreturn our excess loss fund collateral that comprises our workers’ compensationreceivable, our results of operation, financial condition and cash flows wouldbe materially and adversely affected.***

 

As of September 30,2008, we have a net workers’ compensation receivable from AIG CI of $120.9million for premium payments made to AIG CI for program years 2000-2008 inexcess of the present value of the estimated claims liability and the relatedaccrued interest receivable on those payments. If AIG CI were to cease operations or otherwise default on theirobligations we may not be able to recover our receivable and the payment of ourclaims could be significantly impaired. This would have a material and adverseeffect on our results of operations, financial condition and cash flows.

 

Disruptions in thefinancial markets, exposure to sub-prime mortgage securities and adverse actionby rating agencies could adversely affect the financial stability of certaininsurance companies.  As a result, theability of the insurance companies to pay claims could be significantlyimpaired.  AIG has been negativelyimpacted by the current economic crisis. However, AIG has publicly stated that its regulated member insurancecompany subsidiaries remain well capitalized and financially secure and currentinsurance agency ratings are strong.  Wedo not believe that the current financial condition of AIG will have a materialadverse effect on the ability of its regulated insurance company subsidiariesto pay out claims or return excess collateral.

 

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***Current economic conditions, particularly in our Florida markets, mayinhibit new sales growth and negatively impact our current clients, causingthem to reduce staffing levels or cease operations.***

 

The current economicdownturn is negatively impacting small and medium size businesses, whichconstitute our primary markets, inhibiting their growth as well as their accessto capital.  In turn, these businessesare cutting costs, including trimming employees from their payrolls, or ceasingoperations.  This negatively impacts ourrevenues, as we rely on a “per employee” professional service fee from ourclients and could potentially materially impact the amount of our bad debtexpense.  In addition, businesses aremore reluctant to enter into new service agreements because of the uncertainty regardingthe timing of any economic recovery.

 

***The financial markets have recentlyexperienced significant turmoil which may negatively impact our liquidity, ourability to obtain financing and our ability to process transactions through thebanking system.***

 

**Ourliquidity and our ability to obtain financing may be negatively impacted if oneof our Lenders under our credit facility, or another financial institution,suffers liquidity issues.  In such anevent, we may not be able to draw on all, or a substantial portion of ourcredit facility or timely process payroll and collection transactions through thebanking system.  Also, if we attempt toobtain future financing in addition to our current credit facility, the creditmarket turmoil could negatively impact our ability to obtain such financingwhich would materially adversely affect our operations and our financialcondition.**

 

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

 

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

 

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| **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)** | ** ** |
|----------------------------|------------|-------------------------------------------------------|------------|--------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| 7/01/2008 – 7/31/2008 |       | —                                                |       | —                                           |       | —                                                                                                            |       | $                                                                                                                                                                                    | 51,396     |   |
| 8/01/2008 – 8/31/2008 |       | —                                                |       | —                                           |       | —                                                                                                            |       | $                                                                                                                                                                                    | 51,396     |   |
| 9/01/2008 – 9/30/2008 |       | —                                                |       | —                                           |       | —                                                                                                            |       | $                                                                                                                                                                                    | 51,396     |   |
| Total                      |       | —                                                |       | —                                           |       | —                                                                                                            |       |                                                                                                                                                                                 |       |

 

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(1)   On August 15, 2006, theCompany announced that the board of directors had authorized the purchase of upto $75.0 million of the Company’s common stock under a new share repurchaseprogram. Share repurchases under the new program are tobe 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, theCompany’s board of directors authorized an increase to its current sharerepurchase program of approximately $36.5 million, which brings the currentrepurchase amount authorized back up to $75.0 million.

 

(3)   TheCompany has disengaged from its stock repurchase program for the time being inorder to invest available cash in its business.

 

**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                 |       | Employment Agreement between Gevity HR, Inc. and Michael J.  Lavington dated September 15, 2008 (filed as  Exhibit 10.1 to the Company’s Current Report on Form 8-K filed  September 16, 2008 and incorporated herein by reference.)                                                                                                                                                                    |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.2                 |       | Change in Control Severance Agreement between Gevity HR, Inc.  and Michael J. Lavington dated September 15, 2008  (filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K  filed September 16, 2008 and incorporated herein by reference.)                                                                                                                                                   |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.3                 |       | Healthcare Benefits Contract Among Blue Cross/Blue Shield of  Florida, Inc., Health Options, Inc., and the Company, effective  October 1, 2008 (certain confidential information contained in this  document, marked by asterisks and brackets, has been omitted and filed  separately with the Securities and Exchange Commission pursuant to  Rule 24b-2 of the Securities Exchange Act of 1934, as amended.) * |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 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: November 10, 2008 | /s/ GARRY J. WELSH                           |
|                          | Garry J. Welsh                               |
|                          | Chief Financial Officer                      |
|                          | (Principal Financial and Accounting Officer) |

 

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