**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C.  20549**

** **

**FORM 10-Q**

** **

**x****  Quarterly Report Pursuant to Section 13or 15(d) of the Securities Exchange Act of 1934**

 

**For the quarterly period ended March 31,2008.**

 

**or**

 

**o**  **Transition Report Pursuant to Section 13 or15(d) of the Securities Exchange Act of 1934**

 

**For the transition period from             to            **

 

**Commission File No. 0-22701**

 

**GEVITYHR, INC.**

 (Exact name of registrant as specified in itscharter)

** **

| **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 telephone number,including area code): ** (941) 741-4300**

 

Indicate by check mark whether the registrant (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports) and (2) has beensubject to such filing requirements for the past 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 mark whether the registrant is a shell company (asdefined in Rule 12b-2 of the Exchange Act).

 

Yes o         No x

 

Indicate the number of shares outstanding of each of the issuer’sclasses of common stock, as of the latest practicable date.

 

| **Class of common stock** | ** ** | **Outstanding as of April 30, 2008** |
|------------------------------------------|------------|---------------------------------------------------------------|
| Par value $0.01 per share                | ** ** | **23,311,817**                                                |

 

 

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**TABLEOF CONTENTS**

 
| ** **        | ** **                | ** **                                                                                                           | **Page**   |
|-------------------|---------------------------|----------------------------------------------------------------------------------------------------------------------|------------|
| ** **        | ** **                | ** **                                                                                                           | ** ** |
| **PART I.**  | **FINANCIAL INFORMATION** | ** **                                                                                                           |
|              |                      |                                                                                                                 |       |
|              | ITEM 1.                   | Financial Statements                                                                                                 | 3          |
|              |                      |                                                                                                                 |       |
|              |                      | Condensed Consolidated Statements of Operations for the three months  ended March 31, 2008 and 2007 (unaudited) | 3          |
|              |                      |                                                                                                                 |       |
|              |                      | Condensed Consolidated Balance Sheets as of March 31, 2008 and  December 31, 2007 (unaudited)              | 4          |
|              |                      |                                                                                                                 |       |
|              |                      | Condensed Consolidated Statements of Cash Flows for the three months  ended March 31, 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                                                          | 29         |
|              |                      |                                                                                                                 |       |
|              | ITEM 4.                   | Controls and Procedures                                                                                              | 29         |
|              |                      |                                                                                                                 |       |
| **PART II.** | **OTHER INFORMATION**     | ** **                                                                                                           |
|              |                      |                                                                                                                 |       |
|              | ITEM 1.                   | Legal Proceedings                                                                                                    | 30         |
|              |                      |                                                                                                                 |       |
|              | ITEM 1A.                  | Risk Factors                                                                                                         | 30         |
|              |                      |                                                                                                                 |       |
|              | ITEM 2.                   | Unregistered Sales of Equity Securities and  Use of Proceeds                                                         | 30         |
|              |                      |                                                                                                                 |       |
|              | ITEM 6.                   | Exhibits                                                                                                             | 31         |
|              |                      |                                                                                                                 |       |
|              | SIGNATURE                 | 32                                                                                                                   |

 

2

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**PART I.  FINANCIALINFORMATION**

 

**Item 1.  Financial Statements**

 

**GEVITY HR, INC.AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OFOPERATIONS**

**UNAUDITED**

**(in $000’s,except share and per share data)**

 
| ** **                                                                 | ** ** | **For the Three Months Ended  March 31,** | ** ** |
|----------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                                                 | ** ** | **2008**                                                           | ** ** | **2007** | ** ** |
|                                                                       |       |                                                               |       |   |   |
| Revenues                                                                   |       | $                                                                  | 142,642    |   | $ | 161,115 |   |
|                                                                       |       |                                                               |       |   |   |
| Cost of services (exclusive of  depreciation and amortization shown below) |       | 107,469                                                            |       | 115,721 |   |
|                                                                       |       |                                                               |       |   |   |
| Gross profit                                                               |       | 35,173                                                             |       | 45,394 |   |
|                                                                       |       |                                                               |       |   |   |
| Operating expenses:                                                        |       |                                                               |       |   |   |
|                                                                       |       |                                                               |       |   |   |
| Salaries, wages and commissions                                            |       | 20,050                                                             |       | 22,538 |   |
|                                                                       |       |                                                               |       |   |   |
| Other general and  administrative                                          |       | 12,661                                                             |       | 14,793 |   |
|                                                                       |       |                                                               |       |   |   |
| Impairment loss                                                            |       | 532                                                                |       | — |   |
|                                                                       |       |                                                               |       |   |   |
| Depreciation and amortization                                              |       | 4,037                                                              |       | 3,735 |   |
|                                                                       |       |                                                               |       |   |   |
| Total operating expenses                                                   |       | 37,280                                                             |       | 41,066 |   |
|                                                                       |       |                                                               |       |   |   |
| Operating (loss) income                                                    |       | (2,107                                                             | )          | 4,328 |   |
|                                                                       |       |                                                               |       |   |   |
| Interest income                                                            |       | 180                                                                |       | 165 |   |
|                                                                       |       |                                                               |       |   |   |
| Interest expense                                                           |       | (579                                                               | )          | (299 | ) |
|                                                                       |       |                                                               |       |   |   |
| Other expense, net                                                         |       | (104                                                               | )          | (14 | ) |
|                                                                       |       |                                                               |       |   |   |
| (Loss) income before income  taxes                                         |       | (2,610                                                             | )          | 4,180 |   |
|                                                                       |       |                                                               |       |   |   |
| Income tax (benefit) provision                                             |       | (995                                                               | )          | 1,666 |   |
|                                                                       |       |                                                               |       |   |   |
| Net (loss) income                                                          |       | $                                                                  | (1,615     | ) | $ | 2,514 |   |
|                                                                       |       |                                                               |       |   |   |   |   |
| Net (loss) income per common  share                                        |       |                                                               |       |   |   |
| - Basic                                                                    |       | $                                                                  | (0.07      | ) | $ | 0.10 |   |
| - Diluted                                                                  |       | $                                                                  | (0.07      | ) | $ | 0.10 |   |
| Weighted average common shares outstanding                                 |       |                                                               |       |   |   |
| - Basic                                                                    |       | 23,206,595                                                         |       | 24,429,466 |   |
| - Diluted                                                                  |       | 23,206,595                                                         |       | 25,040,419 |   |

 

See notes to condensed consolidatedfinancial statements.

 

3

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**GEVITY HR, INC.AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**UNAUDITED**

**(in $000’s,except share and per share data)**

 
| ** **                                             | ** ** | **March 31,****2008** | ** ** | **December 31,****2007** | ** ** |
|--------------------------------------------------------|------------|----------------------------|------------|-------------------------------|------------|
|                                                   |       |                       |       |                          |       |
| **ASSETS**                                             |       |                       |       |                          |       |
| Current assets:                                        |       |                       |       |                          |       |
|                                                   |       |                       |       |                          |       |
| Cash and cash equivalents                              |       | $                          | 15,110     |                          | $          | 9,950 |   |
|                                                   |       |                       |       |                          |       |
| Marketable securities –  restricted               |       | 6,151                      |       | 6,102                         |       |
|                                                   |       |                       |       |                          |       |
| Accounts receivable, net                               |       | 118,291                    |       | 130,209                       |       |
|                                                   |       |                       |       |                          |       |
| Short-term workers’  compensation receivable, net |       | 18,375                     |       | 16,950                        |       |
|                                                   |       |                       |       |                          |       |
| Other current assets                                   |       | 14,818                     |       | 14,515                        |       |
|                                                   |       |                       |       |                          |       |
| Total current assets                                   |       | 172,745                    |       | 177,726                       |       |
|                                                   |       |                       |       |                          |       |
| Property and equipment, net                            |       | 20,731                     |       | 22,176                        |       |
|                                                   |       |                       |       |                          |       |
| Long-term marketable securities  – restricted     |       | 3,975                      |       | 3,934                         |       |
|                                                   |       |                       |       |                          |       |
| Long-term workers’ compensation  receivable, net  |       | 110,217                    |       | 105,321                       |       |
|                                                   |       |                       |       |                          |       |
| Intangible assets, net                                 |       | 8,907                      |       | 11,386                        |       |
|                                                   |       |                       |       |                          |       |
| Goodwill                                               |       | 8,692                      |       | 9,224                         |       |
|                                                   |       |                       |       |                          |       |
| Deferred tax asset, net                                |       | 11,189                     |       | 10,797                        |       |
|                                                   |       |                       |       |                          |       |
| Other assets                                           |       | 832                        |       | 1,347                         |       |
|                                                   |       |                       |       |                          |       |
| Total assets                                           |       | $                          | 337,288    |                          | $          | 341,911 |   |

 

See notes to condensed consolidatedfinancial statements.

 

4

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| ** **                                                                                                                                                          | ** ** | **March 31,****2008** | ** ** | **December 31,****2007** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------|------------|-------------------------------|------------|
| ** **                                                                                                                                                          | ** ** | ** **                 | ** ** | ** **                    | ** ** |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                                                                                       | ** ** | ** **                 | ** ** | ** **                    | ** ** |
| ** **                                                                                                                                                          | ** ** | ** **                 | ** ** | ** **                    | ** ** |
| Current liabilities:                                                                                                                                                |       |                       |       |                          |       |
|                                                                                                                                                                |       |                       |       |                          |       |
| Accrued payroll and payroll  taxes                                                                                                                                  |       | $                          | 136,575    |                          | $          | 151,105 |   |
|                                                                                                                                                                |       |                       |       |                          |       |
| Accrued insurance premiums and  health reserves                                                                                                                     |       | 11,831                     |       | 13,557                        |       |
|                                                                                                                                                                |       |                       |       |                          |       |
| Customer deposits and  prepayments                                                                                                                                  |       | 10,766                     |       | 13,581                        |       |
|                                                                                                                                                                |       |                       |       |                          |       |
| Accounts payable and other  accrued liabilities                                                                                                                     |       | 7,362                      |       | 11,881                        |       |
|                                                                                                                                                                |       |                       |       |                          |       |
| Deferred tax liability, net                                                                                                                                         |       | 11,537                     |       | 11,674                        |       |
|                                                                                                                                                                |       |                       |       |                          |       |
| Dividends payable                                                                                                                                                   |       | 1,166                      |       | 2,096                         |       |
| Total current liabilities                                                                                                                                           |       | 179,237                    |       | 203,894                       |       |
|                                                                                                                                                                |       |                       |       |                          |       |
| Revolving credit facility                                                                                                                                           |       | 40,467                     |       | 17,367                        |       |
|                                                                                                                                                                |       |                       |       |                          |       |
| Other long-term liabilities                                                                                                                                         |       | 4,555                      |       | 5,088                         |       |
| Total liabilities                                                                                                                                                   |       | 224,259                    |       | 226,349                       |       |
|                                                                                                                                                                |       |                       |       |                          |       |
| Commitments and contingencies  (see notes)                                                                                                                          |       |                       |       |                          |       |
|                                                                                                                                                                |       |                       |       |                          |       |
| Shareholders’ equity:                                                                                                                                          |       |                       |       |                          |       |
|                                                                                                                                                                |       |                       |       |                          |       |
| Common stock, $.01 par value,  100,000,000 shares authorized,  23,387,261 and 23,379,761 issued as of March 31,  2008 and December 31, 2007, respectively |       | 234                        |       | 234                           |       |
|                                                                                                                                                                |       |                       |       |                          |       |
| Additional paid-in capital                                                                                                                                          |       | 31,552                     |       | 31,475                        |       |
|                                                                                                                                                                |       |                       |       |                          |       |
| Retained earnings                                                                                                                                                   |       | 82,119                     |       | 84,899                        |       |
|                                                                                                                                                                |       |                       |       |                          |       |
| Treasury stock (74,735 and  85,660 shares at cost, respectively)                                                                                                    |       | (876                       | )          | (1,046                        | )          |
| Total shareholders’ equity                                                                                                                                     |       | 113,029                    |       | 115,562                       |       |
|                                                                                                                                                                |       |                       |       |                          |       |
| Total liabilities and  shareholders’ equity                                                                                                                    |       | $                          | 337,288    |                          | $          | 341,911 |   |

 

See notes to condensedconsolidated financial statements.

 

5

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**GEVITY HR, INC.AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OF CASHFLOWS**

**UNAUDITED**

**(in $000’s)**

 
| ** **                                                                            | ** ** | **For the Three Months Ended  March 31,** | ** ** |
|---------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                                                            | ** ** | **2008**                                                           | ** ** | **2007** | ** ** |
| CASH FLOWS FROM OPERATING  ACTIVITIES:                                                |       |                                                               |       |   |   |
| Net (loss) income                                                                     |       | $                                                                  | (1,615     | ) | $ | 2,514 |   |
| Adjustments to reconcile net  (loss) income to net cash used in operating activities: |       |                                                               |       |   |   |
| Depreciation and amortization                                                         |       | 4,037                                                              |       | 3,735 |   |
| Impairment loss                                                                       |       | 532                                                                |       | — |   |
| Deferred tax benefit, net                                                             |       | (528                                                               | )          | (2,408 | ) |
| Stock compensation                                                                    |       | 280                                                                |       | 841 |   |
| Excess tax expense (benefits)  from share-based arrangements                          |       | 120                                                                |       | (243 | ) |
| Provision for bad debts                                                               |       | 392                                                                |       | 524 |   |
| Other                                                                                 |       | 37                                                                 |       | 145 |   |
| Changes in operating working  capital:                                                |       |                                                               |       |   |   |
| Accounts receivable, net                                                              |       | 11,526                                                             |       | 9,608 |   |
| Other current assets                                                                  |       | (303                                                               | )          | (1,037 | ) |
| Workers’ compensation  receivable, net                                           |       | (6,321                                                             | )          | (3,533 | ) |
| Other assets                                                                          |       | 515                                                                |       | (327 | ) |
| Accrued insurance premiums and  health reserves                                       |       | (1,726                                                             | )          | (3,320 | ) |
| Accrued payroll and payroll  taxes                                                    |       | (14,547                                                            | )          | (17,407 | ) |
| Accounts payable and other  accrued liabilities                                       |       | (4,590                                                             | )          | (2,009 | ) |
| Customer deposits and prepayments                                                     |       | (2,815                                                             | )          | 1,227 |   |
| Other long-term liabilities                                                           |       | (453                                                               | )          | 303 |   |
| Net cash used in operating  activities                                                |       | (15,459                                                            | )          | (11,387 | ) |
|                                                                                  |       |                                                               |       |   |   |
| CASH FLOWS FROM INVESTING  ACTIVITIES:                                                |       |                                                               |       |   |   |
| Purchases of marketable  securities and certificates of deposit                       |       | (90                                                                | )          | (1,499 | ) |
| Capital expenditures                                                                  |       | (202                                                               | )          | (2,108 | ) |
| Business acquisition                                                                  |       | —                                                             |       | (9,466 | ) |
| Net cash used in investing  activities                                                |       | (292                                                               | )          | (13,073 | ) |
|                                                                                  |       |                                                               |       |   |   |
| CASH FLOWS FROM FINANCING  ACTIVITIES:                                                |       |                                                               |       |   |   |
| Net borrowings under revolving  credit facility                                       |       | 23,100                                                             |       | 2,249 |   |
| Capital lease payments                                                                |       | (80                                                                | )          | — |   |
| Proceeds from exercise of stock  options                                              |       | 106                                                                |       | 674 |   |
| Excess tax (expense) benefits  from share-based arrangements                          |       | (120                                                               | )          | 243 |   |
| Dividends paid                                                                        |       | (2,095                                                             | )          | (2,222 | ) |
| Purchase of treasury stock                                                            |       | —                                                             |       | (6,686 | ) |
| Net cash provided by (used in)  financing activities                                  |       | 20,911                                                             |       | (5,742 | ) |
| Net increase (decrease) in cash  and cash equivalents                                 |       | 5,160                                                              |       | (30,202 | ) |
| Cash and cash equivalents -  beginning of period                                      |       | 9,950                                                              |       | 36,291 |   |
| Cash and cash equivalents - end  of period                                            |       | $                                                                  | 15,110     |   | $ | 6,089 |   |
|                                                                                  |       |                                                               |       |   |   |
| Supplemental disclosure of cash  flow information:                                    |       |                                                               |       |   |   |
| Income taxes paid                                                                     |       | $                                                                  | 4,856      |   | $ | 3,578 |   |
| Interest paid                                                                         |       | $                                                                  | 554        |   | $ | 282 |   |

 

Supplementaldisclosure of non-cash transactions:

 

Capital expenditures and cash flows from financingactivities for the three months ended March 31, 2008 exclude approximately$61 of capital items purchased by the Company through capital leases.

 

Capital expenditures for the three months ended March 31,2007 exclude approximately $802 of capital items purchased by the Company inthe first quarter of 2007 and not paid for until the second quarter of 2007. Nosuch items were applicable to the three months ended March 31, 2008.

 

See notes to condensed consolidated financialstatements.

 

6

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**GEVITY HR, INC. ANDSUBSIDIARIES**

**NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(UNAUDITED)**

**(in $000’s, except share and per share data)**

 

**1.****             GENERAL**

 

The accompanying unaudited condensed consolidated financial statementsof Gevity HR, Inc. and subsidiaries (collectively, the “Company” or“Gevity”) have been prepared in accordance with accounting principles generallyaccepted in the United States of America (“US GAAP”) for interim financialinformation and with the instructions to Form 10-Q.  These financial statements should be read inconjunction with the audited consolidated financial statements and notesthereto included in the Company’s Annual Report on Form 10-K for the yearended December 31, 2007 (the “Form 10-K”), as filed with theSecurities and Exchange Commission. These financial statements reflect alladjustments, consisting only of normal recurring accruals, which are, in theopinion of management, necessary for a fair presentation of the financialposition, results of operations and cash flows for the interim periodspresented.

 

The Company’s significant accounting policies are disclosed in Note 1of the Company’s consolidated financial statements contained in the Form 10-K.  The Company’s critical accounting estimatesare disclosed in Item 7, Management’s Discussion and Analysis of FinancialCondition 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 fordoubtful accounts, deferred taxes and share-based payments.  During the first quarter of 2008, there havebeen no material changes to the Company’s significant accounting policies andcritical accounting estimates except as described below.

 

*Recent Accounting Pronouncements*

 

In February 2007, the Financial Accounting Standards Board(“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 159,*The Fair Value Option for**Financial Assets and Financial Liabilities, Includingan Amendment of FASB Statement**No. 115*(“SFAS 159”). SFAS 159 gives entities the irrevocableoption to carry many financial assets and financial liabilities at fair value.Unrealized gains and losses on items for which the fair value option has beenelected are reported in earnings. SFAS 159 was effective for the Companyon January 1, 2008. The implementation of this standard did not have amaterial impact on the Company’s financial position and results of operations.

 

In September 2006, the FASB issued SFAS No. 157, *Fair Value Measurements* (“SFAS 157”).SFAS 157 establishes a framework for the measurement of assets andliabilities that use fair value and expands disclosures about fair valuemeasurements. SFAS 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 157 iseffective for financial assets and financial liabilities for fiscal yearsbeginning after November 15, 2007. In February 2008, the FASB issued FASB Staff Position (“FSP”)157-1, *Application of FASB Statement No. 157 to FASBStatement No. 13 and Other Accounting Pronouncements That Address FairValue Measurements for Purposes of Lease Classification or Measurement underStatement 13*, which removed leasing transactions accounted for underStatement 13 and related guidance from the scope of SFAS 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 157 for all nonfinancial assets andnonfinancial liabilities to fiscal years beginning after November 15,2008.

 

The implementation of SFAS 157 for financial assets and financialliabilities, effective January 1, 2008, did not have a material impact onthe Company’s financial position and results of operations. The 

 

7

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Company iscurrently assessing the impact of SFAS 157 for nonfinancial assets andnonfinancial liabilities on its financial position and results of operations.

 

SFAS 157 defines fair value as the price that would be received to sellan asset or paid to transfer a liability in an orderly transaction betweenmarket participants at the measurement date (exit price).  SFAS 157 classifies the inputs used tomeasure 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 Companyutilizes the best available information in measuring fair value.  Financial assets and liabilities areclassified in their entirety based on the lowest level of input that issignificant to the fair value measurement. The Company has determined that its financial assets are currently level1 in the fair value hierarchy.  Financialassets at March 31, 2008 consist solely of investments held in moneymarket accounts.

 

In December 2007,the FASB issued SFAS No. 141 (revised 2007), *BusinessCombinations* (“SFAS 141-R”), which will become effective forbusiness combination transactions having an acquisition date on or after January 1,2009.  This standard requires theacquiring entity in a business combination to recognize the assets acquired,the liabilities assumed, and any noncontrolling interest in the acquiree at theacquisition date to be measured at their respective fair values. SFAS 141-Rrequires acquisition related costs, as well as restructuring costs the acquirerexpects to incur for which it is not obligated at the acquisition date, to berecorded against income rather than included in the purchase pricedetermination.  It also requiresrecognition of contingent arrangements at their acquisition date fair values,with subsequent changes in fair value generally reflected in income. TheCompany does not anticipate that the adoption of SFAS 141-R will have amaterial impact on its financial position and results of operations.

 

In June 2007, the FASBratified Emerging Issues Task Force Issue No. 06-11, *Accountingfor Income Tax Benefits of Dividends on Share-Based Payment Awards*(“EITF06-11”). EITF 06-11 applies to share-based payment arrangements with dividendprotection features that entitle an employee to receive dividends or dividendequivalents on nonvested equity-based shares or units, when those dividends ordividend equivalents are charged to retained earnings and result in an incometax deduction for the employer under SFAS No. 123 (revised 2004), *Share-Based Payment*. Under EITF 06-11, a realized income taxbenefit from dividends or dividend equivalents charged to retained earnings andpaid to an employee for nonvested equity-based shares or units should berecognized as an increase in additional paid-in capital. EITF 06-11 iseffective for fiscal years beginning after December 15, 2007 with earlyadoption permitted. The Company adopted EITF 06-11 on January 1,2008, which did not have a material effect onthe Company’s results of operations or financial position.

 

**2.****             SEGMENT REPORTING**

 

Ouroperations are classified into two principal segments, our core co-employmentoffering, Gevity EdgeTM and our non co-employment offering, GevityEdge SelectTM. The segments are generally based on economic andoperational characteristics and financial performance review by the chiefoperating decision maker.

 

8

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Resultsfor the three months ended March 31, 2008 and 2007 are as follows:

 
| **Three Months Ended March 31, 2008** | ** ** | **Gevity  Edge** | ** ** | **Gevity  Edge Select** | ** ** | **Total** | ** ** |
|----------------------------------------------------------------|------------|------------------|------------|-------------------------|------------|-----------|------------|
| Revenues                                                       |       | $                | 141,698    |                    | $          | 944       |       | $ | 142,642 |   |
|                                                           |       |             |       |                    |       |      |       |
| Operating loss (1)                                             |       | $                | (21        | )                       | $          | (2,086    | )          | $ | (2,107 | ) |
| Items excluded from segment loss:                              |       |             |       |                    |       |      |       |
| Interest income                                                |       |             |       |                    |       | 180       |       |
| Interest expense                                               |       |             |       |                    |       | (579      | )          |
| Other expense, net                                             |       |             |       |                    |       | (104      | )          |
| Loss before income taxes                                       |       |             |       |                    |       | $         | (2,610     | ) |

 

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(1)           Includes the $532goodwill impairment of Gevity Edge Select and other costs related to the exitof the Gevity Edge Select segment as described below.

 
| **Three Months Ended March 31, 2007** | ** ** | **Gevity  Edge** | ** ** | **Gevity  Edge Select** | ** ** | **Total** | ** ** |
|----------------------------------------------------------------|------------|------------------|------------|------------------------------|------------|-----------|------------|
| Revenues                                                       |       | $                | 160,584    |                         | $          | 531       |       | $ | 161,115 |   |
|                                                           |       |             |       |                         |       |      |       |
| Operating income (loss)                                        |       | $                | 4,713      |                         | $          | (385      | )          | $ | 4,328 |   |
| Items excluded from segment profit (loss):                     |       |             |       |                         |       |      |       |
| Interest income                                                |       |             |       |                         |       | 165       |       |
| Interest expense                                               |       |             |       |                         |       | (299      | )          |
| Other expense, net                                             |       |             |       |                         |       | (14       | )          |
| Income before income taxes                                     |       |             |       |                         |       | $         | 4,180      |   |

 

***Discontinuation of Gevity Edge Select***

 

After completion of a comprehensive strategicreview, the Company decided to focus on the growth of its core co-employmentoffering, Gevity Edge. As such, on February 25, 2008, the board ofdirectors of the Company approved a plan to discontinue the Company’s nonco-employment offering, Gevity Edge Select, effective immediately. The Companyis working closely with its existing non co-employed clients to provide asmooth transition to either its core Gevity Edge offering or an alternative serviceprovider.  The Company plans to continue to operate the Gevity EdgeSelect platform maintained in its service facility in Charlotte, North Carolinafor an interim period to allow affected non co-employed clients to eithertransition to its core Gevity Edge offering or an alternative service provider.The Company intends to complete this transition and close its service facilityin Charlotte, North Carolina no later than June 30, 2008. Approximately 30jobs will be eliminated in both the Company’s service center in Charlotte,North Carolina and its branch office in Atlanta, Georgia.

 

Management estimates that the pre-tax costs associated with the exitfrom the Gevity Edge Select business will total approximately $3,000 to$3,500.  These costs consist of thefollowing estimates:

 

·    $1,400of contract termination costs;

 

·    $1,000to $1,100 for severance and other termination benefits;

 

·    $532of goodwill impairment related to the write-off of the remaining goodwill forthe Gevity Edge Select segment; and

 

·    $100to $500 of other cash and non-cash charges.

 

Costs associated with the exit from the Gevity Edge Select business arepresented in the following table.  Of thefollowing amounts, $535 was recognized in salaries, wages and commissions, $293was recognized in other general and administrative expenses and $532 wasrecognized as an impairment loss.

 

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| ** **                               | ** ** | **Three Months  Ended March 31,  2008** | ** ** |
|------------------------------------------|------------|--------------------------------------------------------|------------|
| Severance and other termination benefits |       | $                                                      | 676        |   |
| Contract termination costs               |       | 152                                                    |       |
| Goodwill impairment loss                 |       | 532                                                    |       |
| Total Gevity Edge Select exit costs      |       | $                                                      | 1,360      |   |

 

Activity in the liability accounts associatedwith the exit from the Gevity Edge Select business for the three months ended March 31,2008 is presented in the following table and is included within accountspayable and other accrued liabilities on the consolidated balance sheet:

 
| ** **                        | ** ** | **Severance and  Termination  Benefits** | ** ** | **Contract  Termination  Costs** | ** ** | **Total** | ** ** |
|-----------------------------------|------------|-----------------------------------------------|------------|----------------------------------|------------|-----------|------------|
| Balance at December 31, 2007 |       | $                                             | —     |                             | $          | —    |       | $ | — |   |
| Expense accruals                  |       | 676                                           |       | 152                              |       | 828       |       |
| Cash payments                     |       | (179                                          | )          | —                           |       | (179      | )          |
| Non-cash charge                   |       | —                                        |       | (114                             | )          | (114      | )          |
| Balance at March 31, 2008    |       | $                                             | 497        |                             | $          | 38        |       | $ | 535 |   |

 

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

 

At March 31, 2008 and December 31, 2007, the Company’sinvestment portfolio consisted of restricted money market funds classified asavailable-for-sale.

 

Restricted money market funds relate to collateral held in connectionwith the Company’s workers’ compensation programs, collateral held inconnection with the Company’s general insurance programs and amounts held inescrow related to purchase price contingencies associated with the Company’sacquisition of HRAmerica, Inc. (“HRA”) on February 16, 2007. Thesesecurities are 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 months ended March 31, 2008 and 2007, there were norealized gains or losses from the sale of marketable securities.  As of March 31, 2008 and December 31,2007, there were no unrealized gains or losses on marketable securities.

 

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

 

At March 31, 2008 and December 31, 2007, accounts receivablefrom clients consisted of the following:

 
| ** **                            | ** ** | **March 31,  2008** | ** ** | **December 31,  2007** | ** ** |
|---------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| Billed to clients                     |       | $                        | 6,313      |                        | $          | 9,124 |   |
| Unbilled revenues                     |       | 112,872                  |       | 121,917                     |       |
|                                  |       | 119,185                  |       | 131,041                     |       |
| Less: Allowance for doubtful accounts |       | (894                     | )          | (832                        | )          |
| Total                                 |       | $                        | 118,291    |                        | $          | 130,209 |   |

 

The Company establishes an allowance for doubtful accounts based uponmanagement’s assessment of the collectibility of specific accounts and otherpotentially uncollectible amounts.  TheCompany reviews its allowance for doubtful accounts on a quarterly basis.

 

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

 

**               **TheCompany has maintained a loss sensitive workers’ compensation insurance programsince January 1, 2000. The program is insured by CNA Financial Corporation(“CNA”) for the 2000, 2001 and 2002 program years. The program is currentlyinsured by member insurance companies of American International Group, Inc.(“AIG”) and includes coverage for the 2003 through 2008 policy years. In stateswhere private insurance is not permitted, client employees are covered by stateinsurance funds.

 

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

 

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

 

The Company reviews its estimated cost of claims in the deductiblelayer on a quarterly basis.  Thedetermination of the estimated cost of claims is based upon a number offactors, including but not limited to: actuarial calculations, current andhistorical loss trends, the number of open claims, developments relating to theactual claims incurred and the impact of acquisitions, if any.  The Company uses a certain amount of judgmentin this estimation process. During the three months ended March 31, 2008and 2007, the Company revised its ultimate loss estimates for prior open policyyears, which resulted in a net reduction of workers’ compensation expense ofapproximately $2,710 and $1,249, respectively. These revisions were based uponcontinued favorable claims development that occurred during the periods.

 

The balance in the loss fund collateral account (including accruedinterest) in excess of the net present value of the Company’s liability to AIGwith respect to claims payable within the deductible layer is recorded as aworkers’ compensation receivable. Returns to the Company of amounts held in theloss fund collateral account are recorded as reductions to the workers’compensation receivable, net. During the first quarters’ of 2008 and 2007, AIGreleased approximately $2,000 and $5,000, respectively, of cash, from the 2003loss fund collateral account in advance of the annual loss provisionadjustment.  The Company expects toreceive approximately $18,375, net, from AIG during the third quarter of 2008related to the annual true-up of the loss fund collateral accounts and premiumexpense audit.

 

The Company accrues for workers’ 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.

 

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At March 31, 2008 and December 31, 2007, the weighted averagediscount rate used to calculate the net present value of the claim liabilitywas 3.91% and 4.15%, respectively. Premium payments made to AIG related toprogram years 2000 through 2008 are in excess of the net present value of theestimated claim liabilities. This has resulted in a workers’ compensationreceivable, net, at March 31, 2008 and December 31, 2007 of $128,592and $122,271, respectively, of which $18,375 and $16,950 was classified asshort-term at March 31, 2008 and December 31, 2007, respectively.This receivable represents a significant concentration of credit risk for theCompany.

 

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

 

AtMarch 31, 2008 and December 31,2007, intangible assets consisted of the following:

 
| ** **                          | ** ** | **March 31,  2008** | ** ** | **December 31,  2007** | ** ** |
|-------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| Purchased client service agreements |       | $                        | 48,097     |                        | $          | 48,097 |   |
| Accumulated amortization            |       | (39,190                  | )          | (36,711                     | )          |
| Intangible assets, net              |       | $                        | 8,907      |                        | $          | 11,386 |   |

 

Amortization expense for the three months ended March 31, 2008 and2007 was $2,479 and $2,467, respectively. Estimated amortization expense forthe remainder of 2008 and for 2009 is $7,082 and $1,825, respectively.

 

**7.****             GOODWILL**

 

For the year ended March 31, 2008, therollforward of goodwill by operating segment is as follows:

 
| ** **                                       | ** ** | **Gevity Edge** | ** ** | **Gevity  Edge Select** | ** ** | **Total** | ** ** |
|--------------------------------------------------|------------|----------------------|------------|------------------------------|------------|-----------|------------|
| Goodwill balance at December 31, 2007       |       | $                    | 8,692      |                         | $          | 532       |       | $ | 9,224 |   |
| Gevity Edge Select goodwill impairment  (Note 2) |       | —               |       | (532                         | )          | (532      | )          |
| Goodwill balance at March 31, 2008          |       | $                    | 8,692      |                         | $          | —    |       | $ | 8,692 |   |

 

**8.****             HEALTH BENEFITS**

 

Blue Cross Blue Shield of Florida, Inc. and its subsidiary HealthOptions, Inc. (together “BCBSF/HOI”) is the Company’s primary healthcarepartner in Florida, delivering medical care benefits to approximately 19,000Florida-based client employees. The Company’s policy with BCBSF/HOI is aminimum premium policy expiring September 30, 2008. Pursuant to thispolicy, the Company is obligated to reimburse BCBSF/HOI for the cost of theclaims incurred by participants under the plan, plus the cost of planadministration. The administrative costs per covered client employee associatedwith this policy are specified by year and aggregate loss coverage is providedto the Company at the level of 110% of projected claims. The Company’sobligation to BCBSF/HOI under its current contract may require an irrevocableletter of credit (“LOC”) in favor of BCBSF/HOI if the coverage ratio, as setforth in the BCBSF/HOI agreement, is not maintained. The coverage ratio iscalculated quarterly. If the Company’s coverage ratio does not meet the minimumrequirement, the Company must provide an LOC valued at up to two months ofprojected claims (average monthly claims approximated $9,700 for the lasttwelve months). On February 25, 2008, the Company and BCBSF/HOI enteredinto the Second Amendment to Agreement to Provide Comprehensive Health Care Benefits(the “Second Amendment”) amending the Agreement to Provide Comprehensive HealthCare Benefits, dated as of October 1, 2005, between the parties, restatingthe definition of “Coverage Ratio” to exclude certain non-cash asset andgoodwill impairment charges commencing with the fiscal quarter ending December 31,2007.  As of March 31, 2008, theminimum coverage ratio was met and no LOC was required. If current trendscontinue, the Company will not be able to maintain the minimum coverage ratiothrough the end of the current contract 

 

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with BCBSF/HOIand will need to either seek modifications or provide an LOC as discussedabove. If such modifications are not obtained or an LOC is required, this mayhave a material impact on the Company’s cash flow and ability to conduct itsoperations.

 

Aetna Health, Inc. (“Aetna”) is the Company’s largest medical carebenefits provider for approximately 15,000 client employees outside the stateof Florida. The Company’s 2007/2008 policy with Aetna provides for an HMO andPPO offering to plan participants. The Aetna HMO medical benefit plans aresubject to a guaranteed cost contract that caps the Company’s annual liability.The Aetna 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 into subsequentyear rates.

 

In 2006, the Company announced the addition of UnitedHealthcare as anadditional health plan option. As of March 31, 2008, UnitedHealthcareprovides medical care benefits to approximately 5,000 client employees. TheUnitedHealthcare plan is a fixed cost contract expiring September 30,2008, that caps the Company’s annual liability. Under the terms of the currentagreement with UnitedHealthcare, this plan is no longer offered as an optionfor new co-employed clients after July 1, 2007. Coverage throughUnitedHealthcare will continue to be an option for clients covered byUnitedHealthcare as of June 30, 2007. Effective May 1, 2008,UnitedHealthcare and the Company amended their agreement to extend coverageavailability through September 30, 2009 for those clients covered byUnitedHealthcare as of May 1, 2008.

 

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

 

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

 

In addition to dental coverage, the Company offers various fixed costinsurance programs to client employees such as vision care, life, accidentaldeath and dismemberment, short-term disability and long-term disability. TheCompany also offers a flexible spending account for healthcare, dependent careand a qualified transportation fringe benefit program.

 

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

 

Included in accrued insurance premiums and health reserves at March 31,2008 and December 31, 2007 are $8,841 and $10,356, respectively, ofshort-term liabilities related to the Company’s health benefit plans. Of theseamounts $8,812 and $10,100, respectively, represent an accrual for the estimateof claims incurred but not reported at March 31, 2008 and December 31,2007.

 

Health benefit reserves are determined quarterly by the Company andinclude an estimate of claims incurred but not reported and claims reported butnot yet paid. The calculation of these reserves is based upon a number offactors, including but not limited to actuarial calculations, current andhistorical claims payment patterns, plan enrollment and medical trend rates.

 

During the three months ended March 31, 2008 and 2007, the Companyreduced its reserve for incurred but not reported claims by approximately$1,000 and $2,601, respectively, which decreased its cost of services andresulted in a health plan surplus for each period. These reductions were basedupon favorable claims development.

 

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**9.****             REVOLVING CREDITFACILITY**

 

The Company maintains a $100,000 unsecured credit facility with Bank ofAmerica, N.A. and Wachovia, N.A. (the “Lenders”). On May 7, 2007, theCompany entered into the First Amendment to the Amended and Restated CreditAgreement dated August 30, 2006, which increased the amount of aggregaterevolving commitments of the credit facility from $50,000 to $75,000 andallowed the Company to repurchase up to $125,000 of its capital stock duringthe term of the agreement. On June 14, 2007, the Company entered into theSecond Amendment to the Amended and Restated Credit Agreement, which increasedthe amount of aggregate revolving commitments from $75,000 to $100,000. On February 25,2008, the Company entered into the Third Amendment to Amended and RestatedCredit Agreement (“Third Amendment”). The Third Amendment provides for thegrant of security interests and liens in substantially all the property andassets (with agreed upon carveouts and exceptions) of the Company to theLenders. The Third Amendment also provides for an automatic decrease of theaggregate revolving commitment of the credit facility from $100,000 to$85,000 on September 30, 2008. The Third Amendment includes additional covenantsand amends certain financial covenants and negative covenants with an effectivedate of December 31, 2007. These include the maintenance of a minimumconsolidated net worth, a maximum consolidated adjusted leverage ratio, aminimum consolidated fixed charge coverage ratio of 1.25:1.0, minimumconsolidated adjusted EBITDA requirements and a ceiling on consolidated capitalexpenditures.  The revised covenants set forth in the Third Amendment nowrestrict the Company’s ability to repurchase shares of its capital stock incertain circumstances and make acquisitions and requires the Company to providecertain period reports relating to budget and profits and losses, intellectualproperty and insurance policies.  Each of these covenants is based on definedterms and contain exceptions in the Credit Agreement, as amended.

 

Certain of the Company’s subsidiaries named in the credit agreementhave guaranteed the obligations under the credit agreement. The credit facilityhas a five-year term that expires August 30, 2011. Loan advances bear aninterest rate equal to an Applicable Rate (which ranges from 1.50% to 2.25% forEurodollar Rate Loans, and from 0.25% to 1.00% for Prime Rate Loans, dependingupon the Company’s consolidated leverage ratio) plus one of the followingindexes: (i) Eurodollar Rate; or (ii) Prime Rate (each as defined inthe 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 a fronting fee ranging from1.50% to 2.25% per annum will be charged on the aggregate stated amount of eachoutstanding letter of credit. A fee ranging from 0.30% to 0.45% (based upon theCompany’s consolidated leverage ratio) is charged on any unused portion of theloan commitment. At March 31, 2008 the Company had outstanding advances of$40,467 at a weighted average interest rate of 4.43%. At December 31,2007, the Company had outstanding advances of $17,367 at an interest rate of6.11%.

 

The Company was in compliance with all of the revised covenants underthe credit agreement at March 31, 2008. The ability to draw funds underthe 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 March 31, 2008, the maximum facility available to theCompany was approximately $89,000.

 

Pursuant to the terms of the credit agreement, the obligations of theCompany may be accelerated upon the occurrence and continuation of an Event ofDefault. Such events include the following: (i) the failure to makeprincipal, interest or fee payments when due (beyond applicable grace periods);(ii) the failure to observe and perform certain covenants contained in thecredit agreement; (iii) any representation or warranty made by the Companyin the credit agreement or related documents proves to be incorrect ormisleading in any material respect when made or deemed made; and (iv) othercustomary events of default.

 

The Company recorded $544 and $279 of interest expense for the threemonths ended March 31, 2008 and 2007, respectively, related to theamortization of loan costs, unused loan commitment fees and interest onadvances.

 

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**10.****          COMMITMENTS ANDCONTINGENCIES**

 

*Litigation*

 

The Company isa party to certain pending claims that have arisen in the ordinary course ofbusiness, none of which, in the opinion of management, is expected to have amaterial adverse effect on the Company’s consolidated financial position,results of operations, or cash flows if adversely resolved. However, thedefense and settlement of these claims may impact the future availability of,and retention amounts and cost to the Company for, applicable insurancecoverage.

 

*Regulatory Matters*

 

The Company’s employer and health care operations are subject tonumerous federal, state and local laws related to employment, taxes and benefitplan matters. Generally, these rules affect all companies in the UnitedStates. However, the rules that govern professional employer organizations(“PEO”) constitute an evolving area due to uncertainties resulting from thenon-traditional employment relationship among the PEO, the client and theclient employees. Many federal and state laws relating to tax and employmentmatters were enacted before the widespread existence of PEO’s and do notspecifically address the obligations and responsibilities of these PEOrelationships. If the Internal 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 the Company may no longerbe able to assume the client’s federal employment tax withholding obligationsand certain defined employee benefit plans maintained by the Company may bedenied the ability to deliver benefits on a tax-favored basis as intended.

 

*California Unemployment Tax Assessment*

 

In May of 2007, the Company received a Notice of Assessment fromthe State of California Employment Development Department (“EDD”) relative tothe Company’s practice of reporting payroll for its subsidiaries under multipleemployer account numbers.  The noticestated that the EDD was collapsing the accounts of the Company’s subsidiariesinto one account number for payroll reporting purposes and retroactivelyreassessed unemployment taxes due at a higher overall rate for the 2004-2006tax years resulting in an assessment of $4,684. On May 30, 2007, the Company filed a petition with the Office ofthe Chief Administrative Law Judge for the California Unemployment InsuranceAppeals Board asking that the EDD’s assessment be set aside. The petitioncontends in part that the EDD has exceeded the scope of its authority inissuing the assessment by failing to comply with its own mandatory proceduralrequirements and that the statute of limitations for issuing the assessmentshas expired as the Company’s activities within the state were compliant withCalifornia statutes and regulations. The Company believes that it has validdefenses regarding the assessments and intends to vigorously protest theseclaims. However, the Company cannot estimate at this point in time what amount,if any, will ultimately be due with respect to this matter.

 

**11.****          EQUITY**

 

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

###### ** **

Under the current share repurchase program (announced by the Company inAugust 2006 and increased in April 2007), a total of $111,527 of theCompany’s common stock is authorized to be repurchased. Share repurchases underthe program may be made through open market purchases, block trades or inprivate transactions at 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 were2,886,884 at a total cost of $60,131.  Noshares were repurchased under this program during the three 

 

15

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month period ended March 31, 2008. The Company has suspended itsshare repurchase program for the time being in order to invest available cashin its business.

 

**12.****          INCOME TAXES**

 

The Company records income tax expense using the asset and liabilitymethod of accounting for deferred income taxes. Under such method, deferred tax assets and liabilities are recognizedfor the expected future tax consequences of temporary differences between thefinancial statement carrying values and the income tax bases of the Company’sassets and liabilities. The Company’s effective tax rate provides for bothfederal and state income taxes. For the three months ended March 31, 2008and 2007, the Company’s effective rate was 38.1% and 39.9%, respectively. TheCompany’s effective tax rates differed from the statutory federal tax ratesbecause of state taxes and federal tax credits.

 

**13.****          EARNINGS PER SHARE (“EPS”)**

 

For the three months ended March 31, 2008, 395,104 common stockequivalents were excluded from the diluted earnings per share computation astheir effect was anti-dilutive. Additionally, 859,989 options to purchasecommon stock, weighted for the portion of the period they were outstanding,were excluded from the diluted earnings per share computation because theexercise price of the options was greater than the average price of the commonstock.

 

The reconciliation of net income attributable to common shareholdersand shares outstanding for the purposes of calculating basic and dilutedearnings per share for the three months ended March 31, 2007 is asfollows:

 
| ** **                                       | ** ** | **Net Income  (Numerator)** | ** ** | **Shares  (Denominator)** | ** ** | **Per Share  Amount** | ** ** |
|--------------------------------------------------|------------|----------------------------------|------------|---------------------------|------------|----------------------------|------------|
| For the Three Months Ended  March 31, 2007: |       |                             |       |                      |       |                       |       |
|                                             |       |                             |       |                      |       |                       |       |
| Basic EPS:                                       |       |                             |       |                      |       |                       |       |
| Net income                                       |       | $                                | 2,514      |                      | 24,429,466 |                       | $          | 0.10 |   |
|                                             |       |                             |       |                      |       |                       |       |
| Effect of dilutive securities:                   |       |                             |       |                      |       |                       |       |
| Options to purchase common stock                 |       |                             |       | 596,216                   |       |                       |       |
| Non-vested stock                                 |       |                             |       | 14,737                    |       |                       |       |
|                                             |       |                             |       |                      |       |                       |       |
| Diluted EPS:                                     |       |                             |       |                      |       |                       |       |
| Net income                                       |       | $                                | 2,514      |                      | 25,040,419 |                       | $          | 0.10 |   |

 

For the three months ended March 31, 2007, 831,783 options topurchase common stock, weighted for the portion of the period they wereoutstanding, were excluded from the diluted earnings per share computationbecause the exercise price of the options was greater than the average price ofthe common stock.

 

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

 

The following discussion contains forward-looking statements that aresubject to known and unknown risks, uncertainties (some of which are beyond theCompany’s control), other factors 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 for theyear 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. The following discussionshould be read in conjunction with the Company’s condensed consolidatedfinancial statements and related notes contained in this report. Historicalresults are not necessarily indicative of trends in operating results for any futureperiod.

 

**OVERVIEW**

 

Gevity HR, Inc.(“Gevity” or the “Company”) specializes in providing small- and medium-sized businesses nationwidewith a wide-range of competitively priced payroll, insurance and human resource(“HR”) outsourcing services.

 

Gevity is a professional employer organization (“PEO”) that providescertain HR-related services and functions for clients under a co-employmentarrangement. Under the co-employment arrangement, Gevity assumes certainHR/employment-related responsibilities, as provided for by a professionalservices agreement (“PSA”) and as may be required under certain state laws. Theco-employment relationship allows the PEO to become an employer of record andadministrator for matters such as employment tax and insurance-relatedpaperwork as well as relieving the client of these time-consumingadministrative burdens. Because a PEO can aggregate a number of small clientsinto a larger pool, the PEO is able to create economies of scale—enablingsmaller businesses to get competitively priced benefits.

 

The core services typically provided by a PEO are payroll processing,access to health and welfare benefits and workers’ compensation coverage. Inaddition to these core offerings, the Company’s Gevity EdgeTM PEO offeringprovides value-adding HR services such as employee retention programs, new hiresupport, employment practices liability insurance coverage and performancemanagement programs, all designed to help clients effectively grow their businesses.Gevity is one of few PEOs with dedicated field-based HR consultants. TheCompany’s HR consultants work directly with clients to provide HR expertise andHR strategies that can help drive their business forward, while loweringpotential exposure to HR-related claims.

 

Gevityalso provides service to its clients through a non co-employment relationship.The non co-employment relationship between Gevity and its clients is alsogoverned by a PSA. Under the non co-employment PSA, the employment relatedliabilities remain with the client and the client is responsible for its ownworkers’ compensation insurance and health and welfare plans. The Companyassumes responsibility for payroll administration (including payrollprocessing, payroll tax filing and W-2 preparation) and provides access to allof its HR services. This non co-employment option is known as Gevity EdgeSelectTM.

 

After completion of a comprehensive strategic review, the Companydecided to focus on the growth of its core co-employment offering, Gevity Edge.As such, on February 25, 2008, the board of directors of the Companyapproved a plan to discontinue the Company’s non co-employment offering, GevityEdge Select, effective immediately. The Company is working closely with itsexisting non co-employed clients to provide a smooth transition to either itscore Gevity Edge offering or an alternative service provider.  The Company plans to continue to operate theGevity Edge Select platform maintained in its service facility in Charlotte,North Carolina for an interim period to allow affected non co-employed clientsto either transition to its core Gevity Edge offering or an alternative serviceprovider. The Company intends to complete this transition and close its servicefacility in Charlotte, North Carolina no 

 

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later than June 30, 2008. Approximately 30 jobs will be eliminatedin both the Company’s service center in Charlotte, North Carolina and itsbranch office in Atlanta, Georgia. Management estimates that the pre-tax costsassociated with the exit from the Gevity Edge Select business will totalapproximately $3.0 million to $3.5 million during 2008, of which $1.4 millionwas expensed during the three months ended March 31, 2008.  The impact of this decision on the results ofoperations of the Company is included in the “Results of Operations” discussionthat follows.

 

**RESULTS OF OPERATIONS – ANALYSIS OFCONSOLIDATED OPERATIONS**

 

***Three Months Ended March 31,2008 Compared to Three Months Ended March 31, 2007***

 

**Revenue**

 

The following table presents certain information related to the Company’soverall consolidated revenues for the three months ended March 31, 2008and 2007:

 
| ** **                                                                                                      | ** ** | **Three Months Ended**                                | ** ** | ** **               | ** ** |
|-----------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|--------------------------|------------|
| ** **                                                                                                      | ** ** | **March 31,  2008**                                        | ** ** | **March 31,  2007** | ** ** | **%  Change** | ** ** |
| ** **                                                                                                      | ** ** | **(in thousands, except statistical data)** | ** ** |
| Revenues:                                                                                                       |       |                                                            |       |                     |       |   |   |
| Professional service fees                                                                                       |       | $                                                               | 30,550     |                     | $          | 36,869 |   | (17.1 | )% |
| Employee health and welfare benefits                                                                            |       | 83,813                                                          |       | 88,752                   |       | (5.6 | )% |
| Workers’ compensation                                                                                      |       | 15,846                                                          |       | 21,200                   |       | (25.3 | )% |
| State unemployment taxes and other                                                                              |       | 12,433                                                          |       | 14,294                   |       | (13.0 | )% |
| Total revenues                                                                                                  |       | $                                                               | 142,642    |                     | $          | 161,115 |   | (11.5 | )% |
|                                                                                                            |       |                                                            |       |                     |       |   |   |
| Statistical data:                                                                                               |       |                                                            |       |                     |       |   |   |
| Gross salaries and wages (in thousands)                                                                         |       | $                                                               | 1,316,860  |                     | $          | 1,348,296 |   | (2.3 | )% |
| Client employees at period end                                                                                  |       | 122,919                                                         |       | 140,004                  |       | (12.2 | )% |
| Clients at period end (1)                                                                                       |       | 6,492                                                           |       | 7,445                    |       | (12.8 | )% |
| Average number of client employees/clients  at period end                                                       |       | 18.93                                                           |       | 18.81                    |       | 0.6 | % |
| Average number of client employees paid (2)                                                                     |       | 113,087                                                         |       | 123,902                  |       | (8.7 | )% |
| Annualized average wage per average client  employees paid (3)                                                  |       | $                                                               | 46,579     |                     | $          | 43,528 |   | 7.0 | % |
| Workers’ compensation billing per one  hundred dollars of workers’ compensation wages (4)             |       | $                                                               | 1.67       |                     | $          | 1.94 |   | (13.9 | )% |
| Workers’ compensation manual premium per  one hundred dollars of workers’ compensation wages (4), (5) |       | $                                                               | 1.81       |                     | $          | 2.18 |   | (17.0 | )% |
| Annualized professional service fees per  average number of client employees paid (3)                           |       | $                                                               | 1,081      |                     | $          | 1,190 |   | (9.2 | )% |
| Client employee health benefits  participation                                                                  |       | 32                                                              | %          | 33                       | %          | (3.0 | )% |

 

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(1)                      Clients measured by individualclient Federal Employer Identification Number (“FEIN”).

 

(2)                      The average number of clientemployees paid is calculated based upon the sum of the number of paid clientemployees at the end of each month divided by the number of months in theperiod.

 

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

 

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

 

(5)                      Manual premium rate data arederived from tables of member insurance companies of American InternationalGroup, Inc. (“AIG”) in effect for 2008 and 2007, respectively.

 

18

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For the three months ended March 31, 2008, total revenues were$142.6 million compared to $161.1 million for the three months ended March 31,2007, representing a decrease of $18.5 million or 11.5%. This decrease was aresult of the reduction in all revenue components as described below.

 

As of March 31, 2008, the Company served approximately 6,500clients, as measured by each client’s FEIN, with approximately 122,900 activeclient employees. This compares to approximately 7,400 clients, as measured byeach client’s FEIN, with approximately 140,000 active client employees at March 31,2007.  The average number of clientemployees paid by month was 113,087 for the first quarter of 2008 compared to123,902 for the first quarter of 2007. The declines in client and client employee metrics is attributable tothe impact of higher than expected client and client employee attrition levelsduring 2007 and the first quarter of 2008 primarily as a result of the economyand lower than expected production levels during 2007. In addition, during thefirst quarter of 2008, the Company terminated approximately 200 unprofitableclients (impacting approximately 4,100 client employees) in an effort toimprove overall earnings in the long term.

 

Revenues from professional service fees decreased to $30.6 million forthe three months ended March 31, 2008, from $36.9 million for the threemonths ended March 31, 2007, representing a decrease of $6.3 million or17.1%. The decrease was primarily due to the overall decrease in the averagenumber of client employees paid as discussed above. Annualized professionalservice fees per average number of client employees paid decreased by 9.2%,from $1,190 for the three months ended March 31, 2007 to $1,081 for thethree months ended March 31, 2008. This decrease was primarilyattributable to the impact of the first quarter 2008 termination ofunprofitable clients which generally had higher fee levels and the economy withits related impact on pricing.

 

Revenues for providing health and welfare benefits for the three monthsended March 31, 2008 were $83.8 million as compared to $88.8 million forthe three months ended March 31, 2007, representing a decrease of $4.9million or 5.6%. Health and welfare benefit plan revenues decreased due to thedecrease in the average number of participants in the Company’s health andwelfare benefit plans of approximately 14% 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 and the Company’sapproach to pass along all insurance-related cost increases.

 

Revenues for providing workers’ compensation insurance coveragedecreased to $15.8 million for the three months ended March 31, 2008, from$21.2 million for the three months ended March 31, 2007, representing adecrease of $5.4 million or 25.3%. Workers’ compensation billings, as apercentage of workers’ compensation wages for the three months ended March 31,2008, were 1.67% as compared to 1.94% for the same period in 2007, representinga decrease of 13.9%. Workers’ compensation revenue decreased in the firstquarter of 2008 primarily due to a decrease in billings for Florida clientsreflecting a reduction in Florida manual 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 17.0% during thethree months ended March 31, 2008 as compared to the three months ended March 31,2007. 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 primarily reflects the reductionin the Florida manual premium rates.

 

Revenues from state unemployment taxes and other revenues decreased to$12.4 million for the three months ended March 31, 2008 from $14.3 millionfor the three months ended March 31, 2007, representing a decrease of $1.9million or 13.0%. The decrease was primarily due to the decrease in Gevity Edgeco-employment wages that provide unemployment tax revenue to the Company.

 

**Cost of Services**

 

The following table presents certain information related to the Company’soverall consolidated cost of services for the three months ended March 31,2008 and 2007:

 

19

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| ** **                                                                                                      | ** ** | **Three Months Ended**                                | ** ** | ** **               | ** ** |
|-----------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|--------------------------|------------|
| ** **                                                                                                      | ** ** | **March 31,  2008**                                        | ** ** | **March 31,  2007** | ** ** | **%  Change** | ** ** |
| ** **                                                                                                      | ** ** | **(in thousands, except statistical data)** | ** ** |
| Cost of services:                                                                                               |       |                                                            |       |                     |       |   |   |
| Employee health and welfare benefits                                                                            |       | $                                                               | 82,813     |                     | $          | 86,151 |   | (3.9 | )% |
| Workers’ compensation                                                                                      |       | 10,042                                                          |       | 15,016                   |       | (33.1 | )% |
| State unemployment taxes and other                                                                              |       | 14,614                                                          |       | 14,554                   |       | 0.4 | % |
| Total cost of services                                                                                          |       | $                                                               | 107,469    |                     | $          | 115,721 |   | (7.1 | )% |
|                                                                                                            |       |                                                            |       |                     |       |   |   |
| Statistical data:                                                                                               |       |                                                            |       |                     |       |   |   |
|                                                                                                            |       |                                                            |       |                     |       |   |   |
| Gross salaries and wages (in thousands)                                                                         |       | $                                                               | 1,316,860  |                     | $          | 1,348,296 |   | (2.3 | )% |
| Average number of client employees paid (1)                                                                     |       | 113,087                                                         |       | 123,902                  |       | (8.7 | )% |
| Workers compensation cost rate per one  hundred dollars of workers’ compensation wages (2)                 |       | $                                                               | 1.06       |                     | $          | 1.38 |   | (23.2 | )% |
| Number of workers’ compensation claims (3)                                                                 |       | 867                                                             |       | 1,065                    |       | (18.6 | )% |
| Frequency of workers’ compensation claims  per one million dollars of workers’ compensation wages (2) |       | 0.91                                                            | x          | 0.98                     | x          | (7.1 | )% |

 

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(1)                The average number of clientemployees paid is calculated based upon the sum of the number of paid clientemployees at the end of each month divided by the number of months in theperiod.

 

(2)                Workers’ compensation wagesexclude 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 therespective period and does not include claims with respect to a specific policyyear that are reported subsequent to the end of such period.

 

Cost of services, which includes the cost of the Company’s health andwelfare benefit plans, workers’ compensation insurance, state unemploymenttaxes and other costs, was $107.5 million for the three months ended March 31,2008, compared to $115.7 million for the three months ended March 31,2007, representing a decrease of $8.3 million or 7.1%. This decrease was due tothe reduction in the majority of the cost of services components as describedbelow.

 

The cost of providing health and welfare benefits to clients’ employeesfor the three months ended March 31, 2008 was $82.8 million as compared to$86.2 million for the three months ended March 31, 2007, representing adecrease of $3.3 million or 3.9%. This decrease was primarily attributable tothe decrease in the number of client employees participating in the health andwelfare benefit plans and was partially offset by higher cost of healthbenefits.  In addition, the firstquarters of 2008 and 2007 were favorably impacted by the recognition of ahealth benefit surplus of $1.0 million and $2.6 million, respectively, basedupon favorable claims experience.  TheCompany expects that price increases implemented in conjunction with healthcarerenewals effective October 1, 2007 and the continuation of current claimsexperience will continue to favorably impact healthcare costs during 2008. Inaddition, the Company is currently reviewing health plan features and costs withits insurance providers to address competitive issues within certain regions ofthe country.

 

Workers’ compensation costs were $10.0 million for the three monthsended March 31, 2008, as compared to $15.0 million for the three monthsended March 31, 2007, representing a decrease of $5.0 million or 33.1%.Workers’ compensation costs decreased in the first quarter of 2008 primarilydue to the approximate 13% reduction in the average number of co-employedclient employees paid and related reduction in claims, and the reduction in theprior years’ workers’ compensation loss estimates of approximately $2.7 millionas a result of continued favorable claims development for those prior openpolicy years. For the three months ended March 31, 2007, the comparable reductionin prior years’ workers’ compensation loss estimates was $1.2 million.

 

20

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State unemployment taxes and other costs were $14.6 million for boththe three month periods ended March 31, 2008 and 2007. The decrease in theCompany’s co-employed client employees and related taxable wages weresubstantially offset by an increase in state unemployment tax rates beginning January 1,2008, that were not passed along to clients.

 

**Operating Expenses**

 

The following table presents certain information related to the Company’soverall consolidated operating expenses for the three months ended March 31,2008 and 2007:

 
| ** **                        | ** ** | **Three Months Ended**                                | ** ** | ** **               | ** ** |
|-----------------------------------|------------|-----------------------------------------------------------------|------------|--------------------------|------------|
| ** **                        | ** ** | **March 31,  2008**                                        | ** ** | **March 31,  2007** | ** ** | **% Change** | ** ** |
| ** **                        | ** ** | **(in thousands, except statistical data)** | ** ** |
| Operating expenses:               |       |                                                            |       |                     |       |   |   |
| Salaries, wages and commissions   |       | $                                                               | 20,050     |                     | $          | 22,538 |   | (11.0 | )% |
| Other general and administrative  |       | 12,661                                                          |       | 14,793                   |       | (14.4 | )% |
| Impairment loss                   |       | 532                                                             |       | —                   |       | n/a |   |
| Depreciation and amortization     |       | 4,037                                                           |       | 3,735                    |       | 8.1 | % |
| Total operating expenses          |       | $                                                               | 37,280     |                     | $          | 41,066 |   | (9.2 | )% |
|                              |       |                                                            |       |                     |       |   |   |
| Statistical data:                 |       |                                                            |       |                     |       |   |   |
| Internal employees at quarter end |       | 843                                                             |       | 999                      |       | (15.6 | )% |

 

Total operating expenses were $37.3 million for the three months ended March 31,2008 as compared to $41.1 million for the three months ended March 31,2007, representing a decrease of $3.8 million or 9.2%.

 

Salaries, wages and commissions were $20.1 million for the three monthsended March 31, 2008 as compared to $22.5 million for the three monthsended March 31, 2007, representing a decrease of $2.5 million or 11.0%.The decrease is primarily a result of the net effect of the reduction inmanagement and support personnel that occurred throughout 2007 and the firstquarter of 2008 and was partially offset by the annual increase in wages andseverance costs of $1.0 million related to both the Gevity Edge and Gevity EdgeSelect segments.

 

Other general and administrative expenses were $12.7 million for thethree months ended March 31, 2008 as compared to $14.8 million for thethree months ended March 31, 2007, representing a decrease of $2.1 millionor 14.4%. The decrease is attributable to cost alignment measures taken during2007 and the first quarter of 2008.

 

During the first quarter of 2008, the Company recorded a $0.5 millionimpairment loss related to the write-off of the remaining goodwill associatedthe acquisition of HRAmerica, Inc. (“HRA”) in 2007.  As previously discussed, the Company decidedin the first quarter of 2008 that it would exit the Gevity Edge Select business(which included the operations acquired from HRA). As a result of this decisionit was determined that the goodwill should be written off.

 

Depreciation and amortization expenses were $4.0 million for the threemonths ended March 31, 2008 compared to $3.7 million for the three monthsended March 31, 2007, representing an increase of $0.3 million or 8.1%.The increase is primarily attributable to the amortization of technology assetscapitalized during 2007 and 2008.

 

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

 

21

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**Income Taxes**

 

For the three months ended March 31, 2008, the Company had anincome tax benefit of $1.0 million compared to income tax expense of $1.7million for the three months ended March 31, 2007. The change is primarilydue to an operating loss for the first quarter of 2008 compared to operatingincome in the first quarter of 2007. The Company’s effective tax rate for thethree months ended March 31, 2008 and 2007 was 38.1% and 39.9%,respectively.  The Company’s effectivetax rates differed from the statutory federal tax rates because of state taxesand federal tax credits.

 

**Gross Profit, Operating (Loss) Income, Net(Loss) Income and Diluted (Loss) Earnings Per Share**

 

As a net result of the factors describedabove, the following table summarizes the changes in gross profit, operating(loss) income, net (loss) income and diluted (loss) earnings per share:

 
| ** **                                                                          | ** ** | **Three Months Ended**                                              | ** ** | ** **               | ** ** |
|-------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------|------------|--------------------------|------------|
| ** **                                                                          | ** ** | **March 31,  2008**                                                      | ** ** | **March 31,  2007** | ** ** | **% Change** | ** ** |
| ** **                                                                          | ** ** | **(in thousands, except per share and statistical data)** | ** ** |
| Gross profit                                                                        |       | $                                                                             | 35,173     |                     | $          | 45,394 |   | (22.5 | )% |
| Operating (loss) income                                                             |       | $                                                                             | (2,107     | )                        | $          | 4,328 |   | n/a |   |
| Net (loss) income                                                                   |       | $                                                                             | (1,615     | )                        | $          | 2,514 |   | n/a |   |
| Diluted (loss) earnings per share                                                   |       | $                                                                             | (0.07      | )                        | $          | 0.10 |   | n/a |   |
| Statistical data:                                                                   | ** ** | ** **                                                                    | ** ** | ** **               | ** ** | ** ** | ** ** |
| Annualized gross profit per average number  of client employees paid (1)       |       | $                                                                             | 1,244      |                     | $          | 1,465 |   | (15.1 | )% |
| Annualized operating (loss) income per  average number of client employees paid (1) |       | $                                                                             | (75        | )                        | $          | 140 |   | n/a |   |

 

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(1)          Annualized statistical information isbased upon actual period-to-date amounts, which have been annualized (dividedby three and multiplied by twelve) and then divided by the average number ofclient employees paid.

 

22

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** **

**RESULTS OF OPERATIONS—ANALYSIS OF REPORTABLE SEGMENTS**

 

The following presents certain information related to the Company’ssegment revenues, operating income and statistical analysis for the threemonths ended March 31, 2008 and 2007:

 
| ** **                                                                   | ** ** | **March 31,  2008**                                        | ** ** | **March 31,  2007** | ** ** | **% Change** | ** ** |
|------------------------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|--------------------------|------------|-------------------|------------|
| ** **                                                                   | ** ** | **(In thousands, except statistical data)** | ** ** |
| Revenues:                                                                    |       |                                                            |       |                     |       |              |       |
| Gevity Edge                                                                  |       | $                                                               | 141,698    |                     | $          | 160,584           |       | (11.8 | )% |
| Gevity Edge Select                                                           |       | 944                                                             |       | 531                      |       | 77.8              | %          |
| Total revenues                                                               |       | $                                                               | 142,642    |                     | $          | 161,115           |       | (11.5 | )% |
| Operating (loss) income:                                                     |       |                                                            |       |                     |       |              |       |
| Gevity Edge                                                                  |       | $                                                               | (21        | )                        | $          | 4,713             |       | n/a |   |
| Gevity Edge Select                                                           |       | (2,086                                                          | )          | (385                     | )          | (441.8            | )%         |
| Total operating (loss) income                                                |       | $                                                               | (2,107     | )                        | $          | 4,328             |       | n/a |   |
| Clients at period end(1):                                                    |       |                                                            |       |                     |       |              |       |
| Gevity Edge                                                                  |       | 6,282                                                           |       | 7,293                    |       | (13.9             | )%         |
| Gevity Edge Select                                                           |       | 210                                                             |       | 152                      |       | 38.2              | %          |
| Total clients at period end                                                  |       | 6,492                                                           |       | 7,445                    |       | (12.8             | )%         |
| Average number of client employees paid(2):                                  |       |                                                            |       |                     |       |              |       |
| Gevity Edge                                                                  |       | 100,084                                                         |       | 115,627                  |       | (13.4             | )%         |
| Gevity Edge Select                                                           |       | 13,003                                                          |       | 8,275                    |       | 57.1              | %          |
| Total average number of client employees  paid                               |       | 113,087                                                         |       | 123,902                  |       | (8.7              | )%         |
| Professional service fees per average  number of client employees paid:      |       |                                                            |       |                     |       |              |       |
| Gevity Edge                                                                  |       | $                                                               | 1,192      |                     | $          | 1,263             |       | (5.6 | )% |
| Gevity Edge Select                                                           |       | $                                                               | 222        |                     | $          | 171               |       | 29.8 | % |
| Total professional service fees per average  number of client employees paid |       | $                                                               | 1,081      |                     | $          | 1,190             |       | (9.2 | )% |

 

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(1)   Numberof clients measured by individual client FEIN.

 

(2)   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.

 

The revenues for each segment are based upon revenues from the clientsassigned to each segment. Operating income for Gevity Edge Select is based uponinformation that is reviewed by management on a regular basis and includes onlythe direct costs for the Gevity Edge Select segment. The Company does notallocate corporate, indirect general and administrative costs, interest or incometaxes from the Gevity Edge segment to the Gevity Edge Select segment. Theaccounting policies for each segment are the same.

 

**Gevity Edge**

 

***Three Months Ended March 31, 2008 Compared to Three Months Ended March 31,2007***

 

***Revenues***

 

Gevity Edge revenues decreased approximately 11.8% from$160.6 million for the three months ended March 31, 2007 to $141.7million for the three months ended March 31, 2008 or $18.9 million.The decrease is due to a decline in professional service fee revenues of$6.7 million, a decline in employee health and welfare benefits revenue ofapproximately $4.9 million, a decline in workers’ compensation revenue of$5.4 million and a decline in state unemployment taxes and other revenueof $1.9 million. The overall decrease in Gevity Edge revenues wasprimarily due to the 13.4% decrease in the average number of Gevity Edge clientemployees paid from 115,627 for the three months ended March 31, 2007 to 

 

23

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100,084for the three months ended March 31, 2008. The decline in clientand client employee metrics is attributable to the impact of higher thanexpected client and client employee attrition levels during 2007 and the firstquarter of 2008 primarily as a result of the economy and lower than expectedproduction levels during 2007. In addition, during the first quarter of 2008,the Company terminated approximately 200 unprofitable clients (impactingapproximately 4,100 client employees) in an effort to improve overall earningsin the long term. The decline inGevity Edge professional service revenues of $6.7 million is a result ofthe decline in average paid client employees quarter over prior year quarter aswell as 5.6% decrease in professional service fee per average number of clientemployees paid from $1,263 in the first three months of 2007 to $1,192 in thefirst three months of 2008, primarily as a result of the economy with itsrelated impact on pricing. The decrease in employee health and welfare benefitsrevenue, workers’ compensation revenue and state unemployment taxes and otherrevenue is as previously discussed under “Results Of Operations—Analysis OfConsolidated Operations, Three Months Ended March 31, 2008 Compared toThree Months Ended March 31, 2007 - Revenue” as there is no employeehealth and welfare benefits revenue or worker’s compensation revenue fromGevity Edge Select and an insignificant amount of other revenue included instate unemployment taxes and other revenues.

 

***Operating Income***

 

Gevity Edge operating income decreased from $4.7 million in thefirst three months of 2007 to an operating loss of $0.02 million in thefirst three months of 2008 or $4.7 million. The decline in Gevity Edgeoperating income is due to a decrease in gross profit of $10.6 million andpartially offset by a decrease in operating expenses of $5.9 million as aresult of cost alignment measures taken during 2007 and the first three monthsof 2008. The $10.6 million decrease in gross profit is due to the net effectof:

 

·                  a decline in professional service fees of$6.7 million as discussed above;

 

·                  a decrease in employee health and welfaregross profit of $1.6 million due to the net effect of a $2.6 millionhealth plan surplus in 2007 versus a $1.0 million health plan surplus in2008;

 

·                  a decrease in workers’ compensation grossprofit of $0.3 million primarily due to a decrease in client employees aswell as a decrease in Florida manual premium rates and partially offset by anincrease in the benefit from the revision of prior year loss estimates aspreviously discussed; and

 

·                  a decrease in state unemployment taxes andother gross profit of $2.0 primarily due to unemployment tax rate increasesthat were not passed along to clients.

 

**Gevity Edge Select**

 

***Three Months Ended March 31, 2008 Compared to Three Months Ended March 31,2007***

 

***Revenues***

 

The Gevity Edge Select revenues increased $0.4 million to$0.9 million for the three months ended March 31, 2008 from$0.5 million for the three months ended March 31, 2007. The increaseis primarily attributable to the increase in average number of client employeespaid from 8,275 in 2007 to 13,003 in 2008 primarily as a result of the 2007acquisition of HRA occurring midway through the first quarter of 2007. TheGevity Edge Select revenue is primarily comprised of professional service feesand other miscellaneous service revenues. The professional service fee revenueper average client employee paid increased from $171 for the first three monthsof 2007 to $222 during the first three months of 2008. The increase wasprimarily due to Gevity Edge Select clients brought on after the acquisition ofHRA that had a higher professional service fee.

 

24

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***Operating Loss***

 

The Gevity Edge Select operating loss increased from $0.4 millionin the first three months of 2007 to $2.1 million for the first threemonths of 2008 or $1.7 million. The increase was primarily related to thefirst quarter 2008 decision to exit the Gevity Edge Select business. Inconnection with the decision to exit the Gevity Edge Select business, theCompany wrote off the remaining balance of Gevity Edge Select goodwill of $0.5million and recorded $0.9 million of severance and other costs related to exitactivities. The balance of the increase in the loss is due to the effect of havinga full quarter impact of Gevity Edge Select operating expenses in the firstquarter of 2008 versus one-half a quarter of operating expenses in 2007 as theHRA acquisition occurred on February 16, 2007.

 

### **LIQUIDITY AND CAPITALRESOURCES**

 

**Cash Flow**

 

***General***

 

The Company periodically evaluates its liquidity requirements, capitalneeds and availability of capital resources in view of its collateralizationrequirements for insurance coverage, purchases of shares of its common stockunder its share repurchase program (see “Item 2. Unregistered Sales of EquitySecurities and Use of Proceeds” for information regarding the suspension of theCompany’s share repurchase program), the potential for expansion of its HRoutsourcing portfolio through acquisitions, payment of dividends, possibleacquisitions of businesses complementary to the business of the Company, andother operating cash needs. As a result of this process, the Company has in thepast sought, and may in the future seek, to obtain additional capital from eitherprivate or public sources.

 

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 requiredfor acquisitions, if any. The Company has an unsecured credit facility for$100.0 million with Bank of America, N.A. and Wachovia, N.A. (the “Lenders”) ofwhich $40.5 million was outstanding as of March 31, 2008. See Note 9 tothe condensed consolidated financial statements contained in this report foradditional information regarding the Company’s credit facility. On February 25, 2008, the Companyentered into the Third Amendment to Amended and Restated Credit Agreement (“ThirdAmendment”). The Third Amendment provides for the grant of security interestsand liens in substantially all the property and assets (with agreed uponcarveouts and exceptions) of the Company to the Lenders. The Third Amendmentalso provides for an automatic decrease of the aggregate revolving commitmentof the credit facility from $100.0 million to $85.0 million on September 30,2008. The Third Amendment includes additional covenants and amends certainfinancial covenants 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 fixedcharge coverage ratio of 1.25:1.0, minimum consolidated adjusted EBITDArequirements and a ceiling on consolidated capital expenditures. The revisedcovenants set forth in the Third Amendment also restrict the Company’s abilityto repurchase shares of its capital stock in certain circumstances and makeacquisitions and require the Company to provide certain period reports relatingto budget and profits and losses, intellectual property and insurance policies.Each of these covenants is based on defined terms and contains exceptions inthe credit agreement, as amended. The Company was in compliance with all of therevised covenants under the credit agreement at March 31, 2008. Theability to draw funds under the credit agreement is dependent upon meeting theaforementioned financial covenants. Additionally, the level of compliance withthe financial covenants determines the maximum amount available to be drawn. AtMarch 31, 2008, the maximum facility available to the Company wasapproximately $89.0 million.

 

The Company’s primary short-term liquidity requirements relate to thepayment of accrued payroll and payroll taxes of its internal and clientemployees and the payment of workers’ compensation premiums and medical benefitplan premiums. The Company’s billings to its clients include: (i) each 

 

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client employee’s gross wages; (ii) a professional service 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 medicaland retirement benefits, provided to the client employees based on coveragelevels elected by the client and the client employees. Included in the Company’sbillings during the first three months of 2008 were salaries, wages and payrolltaxes of client employees of approximately $1.4 billion. The billings toclients are managed from a cash flow perspective so that a matching generallyexists between the time that the funds are received from a client to the timethat the funds are paid to the client employees and to the appropriate taxjurisdictions. As a co-employer, and under the terms of each of the Company’sPSA’s, the Company is obligated to make certain wage, tax and regulatorypayments even if the related payments are not made by its clients.  Therefore, 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.

 

***Restricted Cash***

 

The Company is required to collateralize its obligations under itsworkers’ compensation and health benefit plans and certain general insurancecoverage. The Company uses its marketable securities to collateralize theseobligations, as more fully described below. Marketable securities used tocollateralize these obligations are designated as restricted in the Company’scondensed consolidated financial statements.

 

At March 31, 2008, the Company had $25.2 million in total cash andcash equivalents and restricted marketable securities, of which $15.1 millionwas unrestricted. At March 31, 2008, the Company had pledged $8.7 millionof restricted marketable securities in collateral trust arrangements issued inconnection with the Company’s workers’ compensation and certain generalinsurance coverage and had $1.4 million held in escrow in connection withvarious purchase price contingencies related to the HRA acquisition as follows:

 
| ** **                                                | ** ** | **March 31,  2008** | ** ** | **December 31,  2007** | ** ** |
|-----------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                                                | ** ** | **(in thousands)**  | ** ** |
| Short-term marketable securities -  restricted:           |       |                     |       |                        |       |
| General insurance collateral obligations –  AIG      |       | $                        | 4,751      |                        | $          | 4,702 |   |
| HRA escrow                                                |       | 1,400                    |       | 1,400                       |       |
| Total short-term marketable securities –  restricted |       | 6,151                    |       | 6,102                       |       |
|                                                      |       |                     |       |                        |       |
| Long-term marketable securities restricted:               |       |                     |       |                        |       |
| Workers’ compensation collateral – AIG          |       | 3,975                    |       | 3,934                       |       |
| Total long-term marketable securities –  restricted  |       | 3,975                    |       | 3,934                       |       |
| Total restricted assets                                   |       | $                        | 10,126     |                        | $          | 10,036 |   |

 

TheCompany does not anticipate that any purchase price contingency amounts will bepaid out to the former owners of HRA and the $1.4 million held in escrow willbe ultimately returned to the Company.

 

The Company’s obligation to Blue Cross Blue Shield of Florida, Inc.and its subsidiary Health Options, Inc. (together “BCBSF/HOI”) under itscurrent contract may require an irrevocable letter of credit (“LOC”) in favorof BCBSF/HOI if a coverage ratio, as set forth in the BCBSF/HOI agreement, isnot maintained. The coverage ratio is calculated quarterly. If the Company’scoverage ratio does not meet the minimum requirements, the Company must providean LOC valued at up to two months of projected 

 

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claims(average monthly claims approximated $9.7 million during the last twelvemonths). On February 25, 2008, the Company and BCBSF/HOI entered into theSecond Amendment to Agreement to Provide Comprehensive Health Care Benefits(the “Second Amendment”) amending the Agreement to Provide Comprehensive HealthCare Benefits, dated as of October 1, 2005, between the parties, restatingthe definition of coverage ratio to exclude certain non-cash asset and goodwillimpairment charges commencing with the fiscal quarter ending December 31,2007.  As of March 31, 2008, theminimum coverage ratio was met and no LOC was required. If current trendscontinue, the Company will not be able to maintain the minimum coverage ratiothrough the end of the current contract with BCBSF/HOI and will need to eitherseek modifications or provide an LOC as discussed above. If such modificationsare not obtained or an LOC is required, this may have a material impact on theCompany’s cash flow and ability to conduct its operations.

 

The Company does not anticipate any additional collateral obligations tobe required in 2008 for its workers’ compensation arrangements.

 

As of March 31, 2008, the Company hasrecorded a $128.6 million receivable from AIG representing workers’compensation premium payments made to AIG related to program years 2000 throughthe first quarter of 2008 in excess of the present value of the estimatedclaims liability.  This receivablerepresents a significant concentration of credit risk for the Company.

 

*California Unemployment Tax Assessment*

 

In May of 2007, the Company received a Notice of Assessment fromthe State of California Employment Development Department (“EDD”) relative tothe Company’s practice of reporting payroll for its subsidiaries under multipleemployer account numbers.  The noticestated that the EDD was collapsing the accounts of the Company’s subsidiariesinto one account number for payroll reporting purposes and retroactivelyreassessed unemployment taxes due at a higher overall rate for the 2004-2006tax years resulting in an assessment of $4.7 million.  On May 30, 2007, the Company filed apetition with the Office of the Chief Administrative Law Judge for theCalifornia Unemployment Insurance Appeals Board asking that the EDD’sassessment be set aside. The petition contends in part that the state hasexceeded the scope of its authority in issuing the assessment by failing tocomply with its own mandatory procedural requirements and that the statute oflimitations for issuing the assessments has expired as the Company’s activitieswithin the state were compliant with California statutes and regulations. TheCompany believes that it has valid defenses regarding the assessments andintends to vigorously protest these claims. However, the Company cannotestimate at this point in time what amount, if any, will ultimately be due withrespect to this matter.

 

***Cash Flows fromOperating Activities***

 

At March 31, 2008, the Company had a net working capital deficitof $6.5 million, including restricted funds classified as short-term of $6.2million, 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. Thedecrease in working capital deficit during the first quarter of 2008 wasprimarily due to timing differences and the increase in the use of cash fromthe revolving credit facility.

 

Net cash used in operating activities was $15.5 million for the threemonths ended March 31, 2008 as compared to net cash used in operatingactivities of $11.4 million for the three months ended March 31, 2007,representing an increase in net cash used in operating activities of $4.1million. Cash flows from operating activities are significantly impacted by thetiming of client payrolls, the day of the week on which a fiscal period endsand 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.

 

If current workers’ compensation trends continue, the Company expectsto receive approximately $18.4 million from AIG during the third quarter of2008 as a net return of premiums in connection with 

 

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the true-ups related to the 2000-2007 program years.  Additional releases of premiums by AIG arealso anticipated in future years if such trends continue.  The Company believes that it has provided AIGa sufficient amount of cash to cover its short-term and long-term workerscompensation obligations related to open policy years.

 

***Cash Flow from Investing Activities***

** **

Cash used in investing activities for the three months ended March 31,2008 of $0.3 million, includes approximately $0.2 million for capitalexpenditures primarily for technology-related items and $0.1 million forpurchases of marketable securities. This compares to cash used in investingactivities for the three months ended March 31, 2007 of $13.1 million,which includes approximately $10.9 million related to the February 16,2007 acquisition of HRA ($9.5 million of cash and related acquisition costs and$1.4 million included in marketable securities purchases for purchase pricecontingencies held in an escrow account). In addition the Company spentapproximately $2.1 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$6.0 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 revolving creditfacility.

 

***Cash Flow fromFinancing Activities***

 

Cash provided by financing activities for the three months ended March 31,2008 of $20.9 million was primarily a result of $23.1 million of net borrowingsunder the revolving credit facility and $0.1 million received upon the purchaseof 16,208 shares of common stock under the Company’s employee stock purchaseplan. These amounts were offset by $2.1 million of cash dividends paid; $0.1million related to excess tax expense paid by the Company for its share-basedarrangements and $0.1 million of capital lease payments.

 

This compares to cash used in financing activities for the three monthsended March 31, 2007 of $5.7 million, primarily a result of the use of$6.7 million to repurchase 306,921 shares of the Company’s common stock underits stock repurchase programs (see “Part II. Item 2. Unregistered Sales of Equity Securities andUse of Proceeds” for a discussion of the current stock repurchase program) and$2.2 million of cash dividends paid. These amounts were partially offset by$2.2 million of net borrowings under the revolving credit facility; $0.7million received upon the exercise of 57,242 stock options and the purchase of11,293 shares of common stock under the Company’s employee stock purchase plan;and $0.2 million related to excess tax benefits received by the Company for itsshare-based arrangements.

 

**Commitments and Contractual Obligations**

 

***Off-Balance SheetArrangements***

 

The Company does not have any off-balance sheet arrangements.

 

***ContractualObligations***

 

There have been no material changes to the Company’s contractualobligations from those disclosed in the Form 10-K under “Item 7 –Management’s Discussion and Analysis of Financial Condition and Results ofOperations” other than discussed below.

 

**CRITICAL ACCOUNTING ESTIMATES**

 

The preparation of financial 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 

 

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disclosures of contingent assets and liabilities.  Accounting estimates related to workers’compensation receivables/reserves, intangible assets, medical benefit planliabilities, state unemployment taxes, allowance for doubtful accounts,share-based payments and deferred income taxes are those that the Companyconsiders critical in preparing its financial statements because they areparticularly dependent on estimates and assumptions made by management that areuncertain at the time the accounting estimates are made. While management hasused its best estimates based upon facts and circumstances available at thetime, different estimates reasonably could have been used in the currentperiod, which may have a material impact on the presentation of the Company’sfinancial condition and results of operations. Management periodically reviews the estimates and assumptions andreflects the effects of revisions in the period they are determined to benecessary. The discussion under “Item 7 - Managements’ Discussion and Analysisof Financial Condition and Results of Operations — Critical AccountingEstimates” in the Form 10-K describes the significant accounting estimatesused in the preparation of the Company’s financial statements.

 

**CAUTIONARYNOTE REGARDING FORWARD-LOOKING STATEMENTS**

 

Statements made in this report, including under the section titled “Management’sDiscussion and Analysis of Financial Condition and Results of Operations,” thatare not purely historical may be forward-looking statements within the meaningof Section 27A of the Securities Act of 1933 and Section 21E of theSecurities Exchange Act of 1934, including without limitation, statementsregarding the Company’s expectations, hopes, beliefs, intentions or strategiesregarding the future.  Words such as “may,”“will,” “should,” “could,” “would,” “predicts,” “potential,” “continue,” “expects,”“anticipates,” “future,” “intends,” “plans,” “believes,” “estimates,” andsimilar expressions, as well as statements in future tense, identifyforward-looking statements. Forward-looking statements are based on the Company’s currentexpectations and beliefs concerning future developments and their potentialeffects on the Company.  There can be noassurance that future developments affecting the Company will be those that theCompany has anticipated.  Forward-lookingstatements involve a number of known and unknown risks, uncertainties (some ofwhich are beyond the Company’s control) and other factors and assumptions thatmay cause actual results or performance to be materially different from thoseexpressed or implied by such forward-looking statements, including thosedescribed in “Item 1A. Risk Factors” of the Company’s Form 10-K and therisks that are described in other reports that the Company files with theSecurities 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 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.

 

**ITEM3.****                  Quantitativeand Qualitative Disclosures about Market Risk**

 

There have been no material changes from the information previouslyreported under “Item 7A. Quantitative and Qualitative Disclosures About MarketRisk” in the Form 10-K.

 

**ITEM4.****                  Controlsand Procedures**

 

Asof the end of the period covered by this report, the Company’s management,including the Interim Chief Executive Officer/Chief Financial Officer, conductedan evaluation of the effectiveness of the design and operation of the Company’sdisclosure controls and procedures pursuant to Rule 13a-15 of theSecurities Exchange Act of 1934. Any controls and procedures, no matter howwell designed and operated, can provide only reasonable assurance of achievingthe desired objectives. Based upon that evaluation and subject to theforegoing, the Company’s management, including the Company’s Interim 

 

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Chief ExecutiveOfficer/Chief Financial Officer, concluded that the design and operation of theCompany’s disclosure controls and procedures provided reasonable assurance thatthe disclosure 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.

 

**PART II.                OTHER INFORMATION**

 

**ITEM1.                 Legal Proceedings**

 

See Note 10 to the condensed consolidated financial statementscontained elsewhere in this Form 10-Q for information concerning theCompany’s legal proceedings.

 

**ITEM1A.              Risk Factors**

 

There havebeen no material changes from the information previously provided under “Item1A.  Risk Factors,” in the Form 10-K.  See also “Cautionary Note RegardingForward-Looking Statements” included in “Part 1. Item 2.  Management’s Discussion and Analysis ofFinancial Condition and Results of Operations” of this Form 10-Q.

 

**ITEM2.                 Unregistered Sales ofEquity Securities and Use of Proceeds**

 

The followingtable provides information about Company purchases during the three monthsended March 31, 2008, of equity securities that are registered by theCompany pursuant to Section 12 of the Securities Exchange Act of 1934:

 
| **Period**                 | ** ** | **Total  Number of  Shares  Purchased (1)** | ** ** | **Average Price  Paid per Share** | ** ** | **Total Number of  Shares Purchased  as Part of  Publicly  Announced  Program (1)** | ** ** | **Approximate Dollar  Value of Shares That  May Yet Be Purchased  Under the Program  ($ 000’s) (1), (2), (3)** | ** ** |
|----------------------------|------------|-------------------------------------------------------|------------|--------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| 1/01/2008 – 1/31/2008 |       | —                                                |       | —                                           |       | —                                                                                                            |       | $                                                                                                                                                                                    | 51,396     |   |
| 2/01/2008 – 2/29/2008 |       | —                                                |       | —                                           |       | —                                                                                                            |       | $                                                                                                                                                                                    | 51,396     |   |
| 3/01/2008 – 3/31/2008 |       | —                                                |       | —                                           |       | —                                                                                                            |       | $                                                                                                                                                                                    | 51,396     |   |
| Total                      |       | —                                                |       | —                                           |       | —                                                                                                            |       |                                                                                                                                                                                 |       |

 

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(1)                On August 15, 2006, the Companyannounced that the board of directors had authorized the purchase of up to$75.0 million of the Company’s common stock under a new share repurchaseprogram. Share repurchases under the new program are to be made through openmarket repurchases, block trades or in private transactions at such times andin such amounts as the Company deems appropriate based upon a variety offactors including price, regulatory requirements, market conditions and othercorporate opportunities.

 

(2)                On April 20, 2007, the Company’sboard of directors authorized an increase to its current share repurchaseprogram of approximately $36.5 million, which brings the current repurchaseamount authorized back up to $75.0 million.

 

(3)                The Company has disengaged from itsstock repurchase program for the time being in order to invest available cashin its business.

 

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| **ITEM 6.** | ** ** | **Exhibits**                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **       | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 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             |       | Third  Amendment to the Amended and Restated Credit Agreement with Bank of America,  N.A. dated February 25, 2008 (filed as Exhibit 10.1 to the  Company’s Current Report on Form 8-K filed February 26, 2008 and  incorporated herein by reference).                                                                                                                                                                                                   |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.2             |       | Second  Amendment to Agreement to Provide Comprehensive Health Care Benefits dated  February 25, 2008 (filed as Exhibit 10.2 to the Company’s Current  Report on Form 8-K filed February 26, 2008 and incorporated herein  by reference).                                                                                                                                                                                                               |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.3             |       | First Amendment to the  Group Benefits Agreement dated as of May 1, 2008 entered into among  United Healthcare Services, Inc. and United HealthCare Insurance Company  and Gevity HR, Inc. (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 the requirements of the Securities Exchange Act of 1934,the registrant has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized.

 
|                    |   |   |   | GEVITY HR, INC.                              |
|-------------------------|--------|--------|--------|----------------------------------------------|
|                    |   |   |   |                                         |
|                    |   |   |   |                                         |
| Dated: May 9, 2008 |   |   |   | /s/ GARRY J. WELSH                           |
|                    |   |   |   | Garry J. Welsh                               |
|                    |   |   |   | Chief Financial Officer                      |
|                    |   |   |   | (Principal Financial and Accounting Officer) |

 

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