##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 þ
    
    Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the quarterly period ended September 30, 2006.
 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 registrant as specified in its charter)
 Florida
(State or other jurisdiction of incorporation or organization)
    
    65-0735612
(I.R.S. Employer Identification No.)9000 Town Center ParkwayBradenton, Florida
    
    34202(Address of principal executive offices)
    
    (Zip Code)
 (Registrants telephone number, including area code): (941) 741-4300
 þ o
  o þ o
 o þ
  Class of common stock
    
    Outstanding as of October 26, 2006Par value $0.01 per share
    
    25,182,576




---



##### 



TABLE OF CONTENTS
 PagePART I. FINANCIAL INFORMATIONITEM 1. Financial Statements
    
    
    3Condensed Consolidated Statements of Operations for the three and nine months
ended September 30, 2006 and 2005 (unaudited)
    
    
    3Condensed Consolidated Balance Sheets as of September 30, 2006 and
December 31, 2005 (unaudited)
    
    
    4Condensed Consolidated Statements of Cash Flows
for the nine months ended September 30, 2006 and 2005 (unaudited)
    
    
    6Notes to Condensed Consolidated Financial Statements (unaudited)
    
    
    7ITEM 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations
    
    
    20ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    37ITEM 4. Controls and Procedures
    
    
    37PART II. OTHER INFORMATIONITEM 1. Legal Proceedings
    
    
    38ITEM 1A. Risk Factors
    
    
    38ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    38ITEM 6. Exhibits
    
    
    39SIGNATURE
    
    
    40EX-10.1 AGREEMENT BETWEEN GEVITY HR, INC. AND ROY KING, EFFECTIVE 10-13-06EX-31.1 SECTION 302 CERTIFICATION OF CEOEX-31.2 SECTION 302 CERTIFICATION OF CFOEX-32 SECTION 906 CERTIFICATION OF CEO/CFO
  2




---



##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 GEVITY HR, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 UNAUDITED
 (in $000s, except share and per share data)
 FOR THE THREE MONTHS ENDED
    
    
    FOR THE NINE MONTHS ENDEDSEPTEMBER 30,
    
    
    SEPTEMBER 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Revenues
    
    $
    160,615
    
    
    $
    152,896
    
    
    $
    491,512
    
    
    $
    454,625Cost of services
    
    
    110,012
    
    
    
    102,388
    
    
    
    343,009
    
    
    
    315,152Gross profit
    
    
    50,603
    
    
    
    50,508
    
    
    
    148,503
    
    
    
    139,473Operating expenses:Salaries, wages and commissions
    
    
    20,956
    
    
    
    18,346
    
    
    
    61,331
    
    
    
    52,765Other general and administrative
    
    
    13,959
    
    
    
    12,032
    
    
    
    39,634
    
    
    
    34,410Reinsurance contract (gain) loss
    
    
    (3,000
    )
    
    
    
    
    
    
    1,650
    
    
    
    Depreciation and amortization
    
    
    3,573
    
    
    
    3,620
    
    
    
    10,406
    
    
    
    11,107Total operating expenses
    
    
    35,488
    
    
    
    33,998
    
    
    
    113,021
    
    
    
    98,282Operating income
    
    
    15,115
    
    
    
    16,510
    
    
    
    35,482
    
    
    
    41,191Interest income
    
    
    361
    
    
    
    407
    
    
    
    797
    
    
    
    935Interest expense
    
    
    (137
    )
    
    
    (88
    )
    
    
    (563
    )
    
    
    (267
    )Other income (expense), net
    
    
    
    
    
    
    16
    
    
    
    (148
    )
    
    
    38Income before income taxes
    
    
    15,339
    
    
    
    16,845
    
    
    
    35,568
    
    
    
    41,897Income tax provision
    
    
    5,782
    
    
    
    6,146
    
    
    
    10,913
    
    
    
    14,413Net income
    
    $
    9,557
    
    
    $
    10,699
    
    
    $
    24,655
    
    
    $
    27,484Net income per common share:- Basic
    
    $
    0.36
    
    
    $
    0.39
    
    
    $
    0.94
    
    
    $
    1.00- Diluted
    
    $
    0.35
    
    
    $
    0.37
    
    
    $
    0.91
    
    
    $
    0.96Weighted average common shares
outstanding:- Basic
    
    
    26,239,342
    
    
    
    27,691,968
    
    
    
    26,248,449
    
    
    
    27,583,708- Diluted
    
    
    26,967,949
    
    
    
    28,761,788
    
    
    
    27,100,497
    
    
    
    28,628,485
  3




---



##### Table of Contents



GEVITY HR, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 UNAUDITED
 (in $000s)
 September 30,
    
    
    December 31,2006
    
    
    2005ASSETSCurrent assets:Cash and cash equivalents
    
    $
    54,951
    
    
    $
    52,525Certificates of deposit  restricted
    
    
    
    
    
    
    33Marketable securities  restricted
    
    
    4,423
    
    
    
    4,281Accounts receivable, net
    
    
    120,220
    
    
    
    113,864Short-term workers compensation receivable, net
    
    
    21,471
    
    
    
    32,552Other current assets
    
    
    14,954
    
    
    
    15,713Total current assets
    
    
    216,019
    
    
    
    218,968Property and equipment, net
    
    
    22,996
    
    
    
    13,810Long-term marketable securities  restricted
    
    
    3,701
    
    
    
    7,891Long-term workers compensation receivable, net
    
    
    83,053
    
    
    
    95,766Intangible assets, net
    
    
    23,266
    
    
    
    30,494Goodwill
    
    
    8,692
    
    
    
    8,692Deferred tax asset, net
    
    
    12,339
    
    
    
    11,678Other assets
    
    
    603
    
    
    
    570Total assets
    
    $
    370,669
    
    
    $
    387,869
  4




---



##### Table of Contents



GEVITY HR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (continued)
UNAUDITED
(in $000s, except share and per share data)
 September 30,
    
    
    December 31,2006
    
    
    2005LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accrued payroll and payroll taxes
    
    $
    135,426
    
    
    $
    152,940Accrued insurance premiums, health and
workers compensation insurance reserves
    
    
    14,603
    
    
    
    20,536Customer deposits and prepayments
    
    
    11,039
    
    
    
    8,315Accounts payable and other accrued liabilities
    
    
    11,678
    
    
    
    9,995Deferred tax liability, net
    
    
    33,069
    
    
    
    31,567Dividends payable
    
    
    2,332
    
    
    
    1,846Total current liabilities
    
    
    208,147
    
    
    
    225,199Long-term accrued workers compensation insurance reserves
    
    
    221
    
    
    
    242Other long-term liabilities
    
    
    2,654
    
    
    
    7,013Total liabilities
    
    
    211,022
    
    
    
    232,454Commitments and contingencies (see notes)Shareholders equity:Preferred stock, $0.01 par value, 10,000,000 shares authorized, none
issued and outstanding as of September 30, 2006 and December 31,
2005
    
    
    
    
    
    
    Common stock, $.01 par value, 100,000,000 shares authorized,
31,927,064 and 31,237,453 issued and outstanding as of September 30,
2006 and December 31, 2005, respectively
    
    
    319
    
    
    
    312Additional paid-in capital
    
    
    177,088
    
    
    
    165,876Retained earnings
    
    
    75,715
    
    
    
    58,137Deferred compensation
    
    
    
    
    
    
    (2,543
    )Treasury stock (6,014,988 and 4,863,098 shares at cost, respectively)
    
    
    (93,475
    )
    
    
    (66,367
    )Total shareholders equity
    
    
    159,647
    
    
    
    155,415Total liabilities and shareholders equity
    
    $
    370,669
    
    
    $
    387,869
  5




---



##### Table of Contents



GEVITY HR, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 UNAUDITED
 (in $000s)
 For the Nine Months EndedSeptember 30,2006
    
    
    2005CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    24,655
    
    
    $
    27,484Adjustments to reconcile net income to net cash provided by
operating activities:Depreciation and amortization
    
    
    10,406
    
    
    
    11,107Deferred tax provision, net
    
    
    841
    
    
    
    4,854Stock compensation
    
    
    3,022
    
    
    
    310Provision for bad debts
    
    
    381
    
    
    
    403Other
    
    
    187
    
    
    
    (8
    )Changes in operating working capital:Accounts receivable, net
    
    
    (6,737
    )
    
    
    (1,550
    )Other current assets
    
    
    759
    
    
    
    (2,477
    )Workers compensation receivable, net
    
    
    23,794
    
    
    
    11,574Deferred tax asset, net
    
    
    
    
    
    
    9,786Other assets
    
    
    (34
    )
    
    
    (165
    )Accrued insurance premiums, health and
workers compensation insurance reserves
    
    
    (5,933
    )
    
    
    (3,516
    )Accrued payroll and payroll taxes
    
    
    (17,640
    )
    
    
    6,017Accounts payable and other accrued liabilities
    
    
    1,203
    
    
    
    2,442Income taxes payable
    
    
    
    
    
    
    (4,018
    )Customer deposits and prepayments
    
    
    2,724
    
    
    
    (6,212
    )Long-term accrued workers compensation insurance
reserves
    
    
    (21
    )
    
    
    (243
    )Other long-term liabilities
    
    
    (50
    )
    
    
    (191
    )Net cash provided by operating activities
    
    
    37,557
    
    
    
    55,597CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of marketable securities and certificates of deposit
    
    
    (262
    )
    
    
    (141
    )Maturity of certificate of deposit
    
    
    34
    
    
    
    Capital expenditures
    
    
    (13,410
    )
    
    
    (3,720
    )Net cash used in investing activities
    
    
    (13,638
    )
    
    
    (3,861
    )CASH FLOWS FROM FINANCING ACTIVITIES:Net borrowings under revolving credit facility
    
    
    
    
    
    
    Proceeds from exercise of stock options
    
    
    6,615
    
    
    
    2,688Excess tax benefits from share-based arrangements
    
    
    4,199
    
    
    
    Dividends paid
    
    
    (6,591
    )
    
    
    (5,503
    )Purchase of treasury stock
    
    
    (25,716
    )
    
    
    (2,220
    )Net cash used in financing activities
    
    
    (21,493
    )
    
    
    (5,035
    )Net increase in cash and cash equivalents
    
    
    2,426
    
    
    
    46,701Cash and cash equivalents  beginning of period
    
    
    52,525
    
    
    
    40,776Cash and cash equivalents  end of period
    
    $
    54,951
    
    
    $
    87,477Supplemental disclosure of cash flow information:Income taxes paid
    
    $
    6,734
    
    
    $
    3,791Interest paid
    
    $
    552
    
    
    $
    132
     6




---



##### Table of Contents



GEVITY HR, INC. AND SUBSIDIARIES
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 (in $000s, except share and per share data)
 1. GENERAL
    Significant Accounting Policies
 Stock-Based Compensation Share-Based Payment
 Accounting
for Stock Issued to Employees Accounting for Stock-Based Compensation Accounting for Stock-Based Compensation-Transitions and Disclosures
   7




---



##### Table of Contents



Three Months Ended
    
    Nine Months EndedSeptember 30, 2005
    
    September 30, 2005Net income
    
    As reported
    
    $
    10,699
    
    
    $
    27,484Add: Total stock-based
compensation included in
net income, net of tax
effect
    
    As reported
    
    
    89
    
    
    
    203Less: Total stock-based
employee compensation
expense determined under
fair value method for all
awards, net of tax effect
    
    Pro forma
    
    
    (772
    )
    
    
    (2,393
    )Net income
    
    Pro forma
    
    $
    10,016
    
    
    $
    25,294Basic earnings per share
    
    As reported
    
    $
    0.39
    
    
    $
    1.00Pro forma
    
    $
    0.36
    
    
    $
    0.92Diluted earnings per share
    
    As reported
    
    $
    0.37
    
    
    $
    0.96Pro forma
    
    $
    0.35
    
    
    $
    0.88
  
    
    compensation cost for all share-based awards (expected to vest) granted prior to,
but not yet vested as of January 1, 2006, based upon grant-date fair value estimated in
accordance with the original provisions of SFAS 123; and
    
    compensation cost for all share-based awards (expected to vest) granted during the
nine-month period ended September 30, 2006, based upon grant-date fair value estimated
in accordance with the provisions of SFAS 123R.
    
    
    Salaries, wages and commissions include $1,141 and $3,022, respectively, of
stock-based compensation expense (which is the same impact for income from continuing
operations and income before income taxes).
    
    Provision for income taxes is reduced by $451 and $1,194, respectively.
    
    Net income is reduced by $690 and $1,828, respectively.
    
    Basic earnings per share is reduced by $0.03 and $0.07, respectively.
    
    Diluted earnings per share is reduced by $0.03 and $0.07 respectively.
  8




---



##### Table of Contents



Recent Accounting Pronouncements
 Accounting for Uncertainty in Income Taxes An Interpretation of FASB Statement No. 109
 Fair Value Measurements
 Considering the Effects of Prior Year Misstatements When Quantifying Misstatements in Current
Year Financial Statements
 2. MARKETABLE SECURITIES  RESTRICTED
    9




---



##### Table of Contents



GrossAmortized
    
    
    Unrealized
    
    
    EstimatedCost
    
    
    Gain
    
    
    Fair ValueAs of September 30, 2006:Short-termMoney market  restricted
    
    $
    4,423
    
    
    $
    
    
    
    $
    4,423Total
short-term marketable securities  restricted
    
    $
    4,423
    
    
    $
    
    
    
    $
    4,423Long-termMoney market
 restricted
    
    $
    3,701
    
    
    $
    
    
    
    $
    3,701Total
long-term marketable securities  restricted
    
    $
    3,701
    
    
    $
    
    
    
    $
    3,701As of December 31, 2005:Short-termMoney market  restricted
    
    $
    4,281
    
    
    $
    
    
    
    $
    4,281Total
short-term marketable securities  restricted
    
    $
    4,281
    
    
    $
    
    
    
    $
    4,281Long-termMoney market
 restricted
    
    $
    3,582
    
    
    $
    
    
    
    $
    3,582Mutual funds
 trading  restricted
    
    
    4,309
    
    
    
    
    
    
    
    4,309Total
long-term marketable securities  restricted
    
    $
    7,891
    
    
    $
    
    
    
    $
    7,891
  3. ACCOUNTS RECEIVABLE
  September 30,
    
    
    December 31,2006
    
    
    2005Billed to clients
    
    $
    7,827
    
    
    $
    10,090Unbilled revenues
    
    
    112,834
    
    
    
    104,280120,661
    
    
    
    114,370Less: Allowance for doubtful accounts
    
    
    (441
    )
    
    
    (506
    )Total
    
    $
    120,220
    
    
    $
    113,864
  4. WORKERS COMPENSATION RECEIVABLE/ RESERVES
  10




---



##### Table of Contents



11




---



##### Table of Contents



5. INTANGIBLE ASSETS
  September 30,
    
    
    December 31,2006
    
    
    2005Purchased client service agreements
    
    $
    47,929
    
    
    $
    47,929Accumulated amortization
    
    
    (24,663
    )
    
    
    (17,435
    )Intangible assets, net
    
    $
    23,266
    
    
    $
    30,494
  6. HEALTH BENEFITS
  12




---



##### Table of Contents



13




---



##### Table of Contents



7. REVOLVING CREDIT FACILITY
     8. COMMITMENTS AND CONTINGENCIES
 Litigation
  14




---



##### Table of Contents



Regulatory Matters
  9. EQUITY
 Share Repurchase Program
     10. STOCK COMPENSATION
   15




---



##### Table of Contents



Stock Option Awards
  September 30,
    
    September 30,2006
    
    2005Risk-free interest rate
    
    
    4.71
    %
    
    
    3.37
    %Expected life (in years)
    
    
    3.7
    
    
    
    3.1Expected volatility
    
    
    50.83
    %
    
    
    59.28
    %Dividend yield
    
    
    1.31
    %
    
    
    1.34
    %
  16




---



##### Table of Contents



Weighted-AverageWeighted-
    
    RemainingAverage
    
    Contractual
    
    AggregateStock Options
    
    Shares
    
    Exercise Price
    
    Term
    
    Intrinsic ValueOutstanding at January 1, 2006
    
    
    2,891,544
    
    
    $
    12.02Granted
    
    
    571,556
    
    
    $
    27.59Exercised
    
    
    (631,558
    )
    
    $
    9.84Forfeited
    
    
    (255,858
    )
    
    $
    20.03Expired
    
    
    (14,705
    )
    
    $
    25.35Outstanding at September 30,
2006
    
    
    2,560,979
    
    
    $
    15.15
    
    
    
    7.25
    
    
    $
    38,810Exercisable at September 30,
2006
    
    
    1,339,842
    
    
    $
    7.79
    
    
    
    6.06
    
    
    $
    10,435
  Non-Vested Stock Awards
  WeightedAverage Grant-Date FairNon-Vested Stock
    
    Shares
    
    ValueOutstanding at January 1, 2006
    
    
    135,689
    
    
    $
    22.10Granted
    
    
    58,053
    
    
    $
    26.64Vested
    
    
    (28,007
    )
    
    $
    20.78Forfeited
    
    
    (14,465
    )
    
    $
    23.65Outstanding at September 30, 2006
    
    
    151,270
    
    
    $
    23.94
  Employee Stock Purchase Plan (ESPP)
  17




---



##### Table of Contents



11. INCOME TAXES
  12. EARNINGS PER SHARE (EPS)
  Net Income
    
    
    Shares
    
    
    Per Share(Numerator)
    
    
    (Denominator)
    
    
    AmountFor the Three Months Ended September 30, 2006:Basic EPS:Net income
    
    $
    9,557
    
    
    
    26,239,342
    
    
    $
    0.36Effect of dilutive securities:Options to purchase common stock
    
    
    
    
    
    
    703,828Non-vested stock
    
    
    
    
    
    
    24,779Diluted EPS:Net income
    
    $
    9,557
    
    
    
    26,967,949
    
    
    $
    0.35
  Net Income
    
    
    Shares
    
    
    Per Share(Numerator)
    
    
    (Denominator)
    
    
    AmountFor the Three Months Ended September 30, 2005:Basic EPS:Net income
    
    $
    10,699
    
    
    
    27,691,968
    
    
    $
    0.39Effect of dilutive securities:Options to purchase common stock
    
    
    
    
    
    
    1,050,635Non-vested stock
    
    
    
    
    
    
    19,185Diluted EPS:Net income
    
    $
    10,699
    
    
    
    28,761,788
    
    
    $
    0.37
  18




---



##### Table of Contents



Net Income
    
    
    Shares
    
    
    Per Share(Numerator)
    
    
    (Denominator)
    
    
    AmountFor the Nine Months Ended September 30, 2006:Basic EPS:Net income
    
    $
    24,655
    
    
    
    26,248,449
    
    
    $
    0.94Effect of dilutive securities:Options to purchase common stock
    
    
    
    
    
    
    825,996Non-vested stock
    
    
    
    
    
    
    26,052Diluted EPS:Net income
    
    $
    24,655
    
    
    
    27,100,497
    
    
    $
    0.91
  Net Income
    
    
    Shares
    
    
    Per Share(Numerator)
    
    
    (Denominator)
    
    
    AmountFor the Nine Months Ended September 30, 2005:Basic EPS:Net income
    
    $
    27,484
    
    
    
    27,583,708
    
    
    $
    1.00Effect of dilutive securities:Options to purchase common stock
    
    
    
    
    
    
    1,035,035Non-vested stock
    
    
    
    
    
    
    9,742Diluted EPS:Net income
    
    $
    27,484
    
    
    
    28,628,485
    
    
    $
    0.96
  19




---



##### Table of Contents



ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
  OVERVIEW AND INTRODUCTION
  
    
    Workforce alignment is the term used by the Company to refer to the engagement of the
right people in the right place at the right time doing the right things. The Company
assists its clients in achieving workforce alignment by helping them find exceptional
talent, implement formal human resource processes and professional management standards,
and utilize employee motivation and retention practices.
    
    Administrative relief is obtained by clients through the Companys management of
employee administrative matters, such as processing of payroll, taxes and insurance
premiums, and by the Companys comprehensive record keeping and technology.
    
    The Company provides business protection by helping clients ensure employment-related
regulatory compliance and sound risk management practices. The Company also provides
up-to-date regulatory compliance and access to cost-effective risk management practices and
insurance programs.
  
    
    increasing clients productivity by improving employee satisfaction and generating
greater employee retention;
    
    allowing clients and their employees to focus on revenue producing activities rather
than human resource matters; and
    
    reducing clients exposure to liabilities associated with non-compliance with human
resource-related regulatory and tax matters.
  20
    Table of Contents       Three Months Ended September 30,2006
    
    2005
    
    % ChangeStatistical data:Client employees at period end
    
    
    138,338
    
    
    
    134,809
    
    
    
    2.6
    %Clients at period end (1)
    
    
    7,911
    
    
    
    8,300
    
    
    
    (4.7
    )%Average number of client
employees/clients at period end
    
    
    17.49
    
    
    
    16.24
    
    
    
    7.7
    %Average number of client employees
paid by month (2)
    
    
    128,035
    
    
    
    125,438
    
    
    
    2.1
    %Annualized average wage per average
number of client employees paid by
month (3)
    
    $
    39,758
    
    
    $
    38,831
    
    
    
    2.4
    %Annualized professional service
fees per average number of client
employees paid by month
(3)
    
    $
    1,316
    
    
    $
    1,145
    
    
    
    14.9
    %Annualized gross profit per average
number of client employees paid by
month (3)
    
    $
    1,581
    
    
    $
    1,611
    
    
    
    (1.9
    )%Annualized operating income per
average number of client employees
paid by month (3)
    
    $
    472
    
    
    $
    526
    
    
    
    (10.3
    )%Annualized adjusted operating
income per average number of client
employees paid by month (3),
(4), (5)
    
    $
    378
    
    
    $
    492
    
    
    
    (23.2
    )%
 21




---



##### Table of Contents



Nine Months Ended September 30,2006
    
    2005
    
    % ChangeStatistical data:Client employees at period end
    
    
    138,338
    
    
    
    134,809
    
    
    
    2.6
    %Clients at period end (1)
    
    
    7,911
    
    
    
    8,300
    
    
    
    (4.7
    )%Average number of client
employees/clients at period end
    
    
    17.49
    
    
    
    16.24
    
    
    
    7.7
    %Average number of client employees
paid by month (2)
    
    
    127,976
    
    
    
    120,871
    
    
    
    5.9
    %Annualized average wage per average
number of client employees paid by
month (3)
    
    $
    39,786
    
    
    $
    37,710
    
    
    
    5.5
    %Annualized professional service
fees per average number of client
employees paid by month
(3)
    
    $
    1,282
    
    
    $
    1,153
    
    
    
    11.2
    %Annualized gross profit per average
number of client employees paid by
month (3)
    
    $
    1,547
    
    
    $
    1,539
    
    
    
    0.5
    %Annualized operating income per
average number of client employees
paid by month (3)
    
    $
    370
    
    
    $
    454
    
    
    
    (18.5
    )%Annualized adjusted operating
income per average number of client
employees paid by month (3),
(4), (5)
    
    $
    387
    
    
    $
    418
    
    
    
    (7.4
    )%
 
 (1)
    
    Clients measured by individual client Federal Employer Identification
Number (FEIN).(2)
    
    The average number of client employees paid by month is calculated based
upon the sum of the number of paid client employees at the end of each month divided
by the number of months in the period.(3)
    
    Annualized statistical information is based upon actual period-to-date
amounts, which have been annualized (divided by three or nine and multiplied by
twelve) and then divided by the average number of client employees paid by month.(4)
    
    For purposes of calculating this statistic, operating income for the three
and nine months ended September 30, 2005 has been reduced for the impact of the pro
forma stock compensation expense of $1.1 million and $3.3 million, respectively,
which was previously reported on a pro forma basis as allowed by Statement of
Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based
Compensation(SFAS 123). See Use of Non-GAAP Financial Measures. For purposes of
calculating this statistic, operating income for the three and nine months ended
September 30, 2006 includes the effect of the implementation of SFAS No. 123R,
Share-Based Payment(SFAS 123R), in that period.(5)
    
    For purposes of calculating this statistic, operating income for the three
and nine months ended September 30, 2006 has been adjusted to exclude the effect of a
$3.0 million gain and $1.65 million net loss, respectively, arising from the
liquidation proceeding related to the Bermuda reinsurance company formerly
responsible for covering the Companys workers compensation claims liabilities
between $0.5 million and $2.0 million. See additional discussion under Operating
Expenses and Use of Non-GAAP Financial Measures.  
    
    the amount of time required for sales personnel to begin to acquire new client
employees may be longer than anticipated;
    
    the current client employee retention levels may decrease if clients decide to use
alternative providers to service their human resource outsourcing needs;
 22




---



##### Table of Contents




    
    the Company (under its co-employed service option) may not be able to continue to
provide insurance-related products of a quality or price to acquire new client
employees and to retain current client employees; and
    
    the time to achieve acceptance by prospective clients of the Companys new business
model may be longer than anticipated.
 RESULTS OF OPERATIONS
 Three Months Ended September 30, 2006 Compared to Three Months Ended September 30, 2005
 Revenue
  Three Months EndedSeptember 30,
    
    
    September 30,
    
    
    %2006
    
    
    2005
    
    
    Change(in thousands, except statistical data)Revenues:Professional service fees
    
    $
    42,131
    
    
    $
    35,913
    
    
    
    17.3
    %Employee health and welfare benefits
    
    
    87,916
    
    
    
    84,533
    
    
    
    4.0
    %Workers compensation
    
    
    26,469
    
    
    
    29,083
    
    
    
    (9.0
    )%State unemployment taxes and other
    
    
    4,099
    
    
    
    3,367
    
    
    
    21.7
    %Total revenues
    
    $
    160,615
    
    
    $
    152,896
    
    
    
    5.0
    %Statistical data:Gross salaries and wages (in
thousands)
    
    $
    1,272,617
    
    
    $
    1,217,708
    
    
    
    4.5
    %Average number of client employees
paid by month (1)
    
    
    128,035
    
    
    
    125,438
    
    
    
    2.1
    %Annualized average wage per average
client employees paid by month
(2)
    
    $
    39,758
    
    
    $
    38,831
    
    
    
    2.4
    %Workers compensation billing per
one hundred dollars of workers
compensation wages (3)
    
    $
    2.34
    
    
    $
    2.57
    
    
    
    (8.9
    )%Workers compensation manual
premium per one hundred dollars of
workers compensation wages
(3), (4)
    
    $
    2.71
    
    
    $
    3.28
    
    
    
    (17.4
    )%Annualized professional service
fees per average number of client
employees paid by month
(2)
    
    $
    1,316
    
    
    $
    1,145
    
    
    
    14.9
    %Client employee health benefits
participation
    
    
    38
    %
    
    
    38
    %
    
    
    
 
 (1)
    
    The average number of client employees paid by month is calculated based
upon the sum of the number of paid client employees at the end of each month
divided by the number of months in the period.(2)
    
    Annualized statistical information is based upon actual quarter-to-date
amounts, which have been annualized (divided by three and multiplied by twelve),
and then divided by the average number of client employees paid by month.(3)
    
    Workers compensation wages exclude the wages of clients electing out of
the Companys workers compensation program. 23




---



##### Table of Contents



(4)
    
    Manual premium rate data is derived from tables of member insurance
companies of American International Group, Inc. (AIG) in effect for 2006 and
2005, respectively.       24




---



##### Table of Contents



Cost of Services
  Three Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    % Change(in thousands, except statistical data)Cost of services:Employee health and
welfare benefits
    
    $
    89,071
    
    
    $
    83,901
    
    
    
    6.2
    %Workers compensation
    
    
    15,474
    
    
    
    14,655
    
    
    
    5.6
    %State unemployment taxes
and other
    
    
    5,467
    
    
    
    3,832
    
    
    
    42.7
    %Total cost of services
    
    $
    110,012
    
    
    $
    102,388
    
    
    
    7.4
    %Statistical data:Gross salaries and wages
(in thousands)
    
    $
    1,272,617
    
    
    $
    1,217,708
    
    
    
    4.5
    %Average number of client
employees paid by month
(1)
    
    
    128,035
    
    
    
    125,438
    
    
    
    2.1
    %Workers compensation cost
rate per one hundred
dollars of workers
compensation wages
(2)
    
    $
    1.37
    
    
    $
    1.29
    
    
    
    6.2
    %Number of workers
compensation claims
(3)
    
    
    1,574
    
    
    
    1,742
    
    
    
    (9.6
    )%Frequency of workers
compensation claims per
one million dollars of
workers compensation
wages (2)
    
    
    1.39x
    
    
    
    1.54x
    
    
    
    (9.7
    )%
 
 (1)
    
    The average number of client employees paid by month is calculated based
upon the sum of the number of paid client employees at the end of each month divided
by the number of months in the period.(2)
    
    Workers compensation wages exclude the wages of clients electing out of
the Companys workers compensation program.(3)
    
    The number of workers compensation claims reflects the number of claims
reported by the end of the respective period and does not include claims with
respect to a specific policy year that are reported subsequent to the end of such
period.  25




---



##### Table of Contents



Operating Expenses
  Three Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    % Change(in thousands, except statistical data)Operating expenses:Salaries, wages and commissions
    
    $
    20,956
    
    
    $
    18,346
    
    
    
    14.2
    %Other general and administrative
    
    
    13,959
    
    
    
    12,032
    
    
    
    16.0
    %Reinsurance contract gain
    
    
    (3,000
    )
    
    
    
    
    
    
    n/aDepreciation and amortization
    
    
    3,573
    
    
    
    3,620
    
    
    
    (1.3
    )%Total operating expenses
    
    $
    35,488
    
    
    $
    33,998
    
    
    
    4.4
    %Statistical data:Internal employees at quarter end
    
    
    1,006
    
    
    
    1,053
    
    
    
    (4.5
    )%
   26




---



##### Table of Contents



Income Taxes
  Net Income and Diluted Earnings Per Share
   27




---



##### Table of Contents



Nine Months Ended September 30, 2006 Compared to Nine Months Ended September 30, 2005
 Revenue
  Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    % Change(in thousands, except statistical data)Revenues:Professional service fees
    
    $
    123,051
    
    
    $
    104,484
    
    
    
    17.8
    %Employee health and
welfare benefits
    
    
    265,212
    
    
    
    245,244
    
    
    
    8.1
    %Workers compensation
    
    
    79,739
    
    
    
    85,405
    
    
    
    (6.6
    )%State unemployment taxes
and other
    
    
    23,510
    
    
    
    19,492
    
    
    
    20.6
    %Total revenues
    
    $
    491,512
    
    
    $
    454,625
    
    
    
    8.1
    %Statistical data:Gross salaries and wages
(in thousands)
    
    $
    3,818,766
    
    
    $
    3,418,508
    
    
    
    11.7
    %Average number of client
employees paid by month
(1)
    
    
    127,976
    
    
    
    120,871
    
    
    
    5.9
    %Annualized average wage
per average client
employees paid by month
(2)
    
    $
    39,786
    
    
    $
    37,710
    
    
    
    5.5
    %Workers compensation
billing per one hundred
dollars of workers
compensation wages
(3)
    
    $
    2.35
    
    
    $
    2.69
    
    
    
    (12.6
    )%Workers compensation
manual premium per one
hundred dollars of
workers compensation
wages (3),
(4)
    
    $
    2.74
    
    
    $
    3.29
    
    
    
    (16.7
    )%Annualized professional
service fees per
average number of
client employees paid
by month (2)
    
    $
    1,282
    
    
    $
    1,153
    
    
    
    11.2
    %Client employee health
benefits participation
    
    
    38
    %
    
    
    38
    %
    
    
    
 
 (1)
    
    The average number of client employees paid by month is calculated based
upon the sum of the number of paid client employees at the end of each month
divided by the number of months in the period.(2)
    
    Annualized statistical information is based upon actual year-to-date
amounts, which have been annualized (divided by nine and multiplied by twelve), and
then divided by the average number of client employees paid by month.(3)
    
    Workers compensation wages exclude the wages of clients electing out of
the Companys workers compensation program.(4)
    
    Manual premium rate data is derived from tables of member insurance
companies of AIG in effect for 2006 and 2005, respectively.  28




---



##### Table of Contents



Cost of Services
  29




---



##### Table of Contents



Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    % Change(in thousands, except statistical data)Cost of services:Employee health and
welfare benefits
    
    $
    263,188
    
    
    $
    241,282
    
    
    
    9.1
    %Workers compensation
    
    
    53,356
    
    
    
    54,760
    
    
    
    (2.6
    )%State unemployment taxes
and other
    
    
    26,465
    
    
    
    19,110
    
    
    
    38.5
    %Total cost of services
    
    $
    343,009
    
    
    $
    315,152
    
    
    
    8.8
    %Statistical data:Gross salaries and wages
(in thousands)
    
    $
    3,818,766
    
    
    $
    3,418,508
    
    
    
    11.7
    %Average number of client
employees paid by month
(1)
    
    
    127,976
    
    
    
    120,871
    
    
    
    5.9
    %Workers compensation cost
rate per one hundred
dollars of workers
compensation wages
(2)
    
    $
    1.57
    
    
    $
    1.73
    
    
    
    (9.2
    )%Number of workers
compensation claims
(3)
    
    
    4,582
    
    
    
    4,717
    
    
    
    (2.9
    )%Frequency of workers
compensation claims per
one million dollars of
workers compensation
wages (2)
    
    
    1.35x
    
    
    
    1.49x
    
    
    
    (9.4
    )%
 
 (1)
    
    The average number of client employees paid by month is calculated based upon
the sum of the number of paid client employees at the end of each month divided by the
number of months in the period.(2)
    
    Workers compensation wages exclude the wages of clients electing out of the
Companys workers compensation program.(3)
    
    The number of workers compensation claims reflects the number of claims
reported by the end of the respective period and does not include claims with respect
to a specific policy year that are reported subsequent to the end of such period.    30




---



##### Table of Contents



Operating Expenses
  Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    % Change(in thousands, except statistical data)Operating expenses:Salaries, wages and commissions
    
    $
    61,331
    
    
    $
    52,765
    
    
    
    16.2
    %Other general and administrative
    
    
    39,634
    
    
    
    34,410
    
    
    
    15.2
    %Reinsurance contract loss
    
    
    1,650
    
    
    
    
    
    
    
    n/aDepreciation and amortization
    
    
    10,406
    
    
    
    11,107
    
    
    
    (6.3
    )%Total operating expenses
    
    $
    113,021
    
    
    $
    98,282
    
    
    
    15.0
    %Statistical data:Internal employees at quarter end
    
    
    1,006
    
    
    
    1,053
    
    
    
    (4.5
    )%
     31




---



##### Table of Contents



Income Taxes
  Net Income and Diluted Earnings Per Share
   LIQUIDITY AND CAPITAL RESOURCES
 Cash Flow
 General
   32




---



##### Table of Contents



Restricted Cash
   September 30,
    
    
    December 31,2006
    
    
    2005(in thousands)Certificates of deposit  restricted:Other
    
    $
    
    
    
    $
    33Total certificates of deposit  restricted
    
    
    
    
    
    
    33Short-term marketable securities  restricted:General insurance collateral obligations  AIG
    
    
    4,423
    
    
    
    4,281Total short-term marketable securities  restricted
    
    
    4,423
    
    
    
    4,281Long-term marketable securities restricted:Workers compensation collateral  AIG
    
    
    3,701
    
    
    
    3,582Rabbi trust
    
    
    
    
    
    
    4,309Total long-term marketable securities  restricted
    
    
    3,701
    
    
    
    7,891Total restricted assets
    
    $
    8,124
    
    
    $
    12,205
  33




---



##### Table of Contents



Cash Flows from Operating Activities
    Cash Flow from Investing Activities
  34




---



##### Table of Contents



Cash Flow from Financing Activities
    Commitments and Contractual Obligations
 Off-Balance Sheet Arrangements
  Contractual Obligations
  CRITICAL ACCOUNTING ESTIMATES
  35




---



##### Table of Contents



CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
   Use of Non-GAAP Financial Measures
  36




---



##### Table of Contents



For the Three Months
    
    
    For the Nine MonthsEnded September 30,
    
    
    Ended September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Operating income  GAAP
    
    $
    15,115
    
    
    $
    16,510
    
    
    $
    35,482
    
    
    $
    41,191SFAS 123 pro forma stock compensation expense
    
    
    
    
    
    
    (1,089
    )
    
    
    
    
    
    
    (3,338
    )Reinsurance contract (gain) loss
    
    
    (3,000
    )
    
    
    
    
    
    
    1,650
    
    
    
    Operating income  non-GAAP
    
    $
    12,115
    
    
    $
    15,421
    
    
    $
    37,132
    
    
    $
    37,853Net income  GAAP
    
    $
    9,557
    
    
    $
    10,699
    
    
    $
    24,655
    
    
    $
    27,484SFAS 123 pro forma stock compensation expense
    
    
    
    
    
    
    (683
    )
    
    
    
    
    
    
    (2,190
    )Reinsurance contract (gain) loss
    
    
    (1,815
    )
    
    
    
    
    
    
    998
    
    
    
    Net income  non-GAAP
    
    $
    7,742
    
    
    $
    10,016
    
    
    $
    25,653
    
    
    $
    25,294Net income per common share  diluted  GAAP
    
    $
    0.35
    
    
    $
    0.37
    
    
    $
    0.91
    
    
    $
    0.96SFAS 123 pro forma stock compensation expense
    
    
    
    
    
    
    (0.02
    )
    
    
    
    
    
    
    (0.08
    )Reinsurance contract (gain) loss
    
    
    (0.06
    )
    
    
    
    
    
    
    0.04
    
    
    
    Net income per common share  diluted 
Non-GAAP
    
    $
    0.29
    
    
    $
    0.35
    
    
    $
    0.95
    
    
    $
    0.88
  
 ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
  
 ITEM 4. Controls and Procedures
  37




---



##### Table of Contents



PART II. OTHER INFORMATION
 
 ITEM 1. Legal Proceedings
  
 ITEM 1A. Risk Factors
  We may not be successful in recovering the remaining premium we paid to the Bermuda
reinsurance company that is subject to liquidation proceeding.
  
 ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
  Total Number of
    
    Approximate
    
    ApproximateTotal
    
    
    
    
    
    Shares Purchased
    
    Number of
    
    Dollar Value ofNumber of
    
    
    
    
    
    as Part of
    
    Shares That May
    
    Shares That MayShares
    
    Average
    
    Publicly
    
    Yet Be Purchased
    
    Yet Be PurchasedPurchased
    
    Price Paid
    
    Announced
    
    Under the
    
    Under the ProgramPeriod
    
    (1), (2)
    
    per Share
    
    Program (1), (2)
    
    Program (1)
    
    ($000s) (2)7/01/2006 
7/31/2006
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8/01/2006 
8/31/2006
    
    
    300,775
    
    
    $
    24.06
    
    
    
    300,775
    
    
    
    293,154
    
    
    $
    75,0009/01/2006 
9/30/2006
    
    
    422,485
    
    
    $
    22.73
    
    
    
    422,485
    
    
    
    
    
    
    $
    72,003Total
    
    
    723,260
    
    
    $
    23.28
    
    
    
    723,260
 
 (1)
    
    On February 28, 2006, the Company announced that the board of directors had authorized the
purchase of up to 1,000,000 additional shares of the Companys common stock under a new share
repurchase program. Share repurchases under this program were to be made through open market
repurchases, block trades or in private transactions at such times and in such amounts as the
Company deemed appropriate based upon a variety of factors including price, regulatory
requirements, market conditions and other corporate opportunities. The Company completed this
share repurchase program in September 2006. 38




---



##### Table of Contents



(2)
    
    On August 15, 2006, the Company announced that the board of directors had authorized the
purchase of up to an additional $75.0 million of the Companys common stock under a new share
repurchase program. Share repurchases under the new program are to be made through open market
repurchases, block trades or in private transactions at such times and in such amounts as the
Company deems appropriate based upon a variety of factors including price, regulatory
requirements, market conditions and other corporate opportunities. 
 ITEM 6. Exhibits
 10.1
    
    Agreement between Gevity HR, Inc. and Roy King, effective October 13,
2006.31.1
    
    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.
 39




---



##### Table of Contents



SIGNATURE
  GEVITY HR, INC.Dated:  November 1, 2006
    /s/ PETER C. GRABOWSKIPeter C. GrabowskiChief Financial Officer
(Principal Financial and Accounting Officer) 40