##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 þ
    
    
    Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934For the quarterly period ended June 30, 2006.oro
    
    
    Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934For the transition period from ________________ to__________________
 Commission File No. 0-22701
 GEVITY HR, INC.
 (Exact Name of Registrant as Specified in Its Charter)
 Florida
    
    65-0735612(State or other jurisdiction of incorporation or organization)
    
    (I.R.S. Employer Identification No.)9000 Town Center ParkwayBradenton, Florida
    
    34202(Address of principal executive offices)
    
    (Zip Code)
 (Registrants Telephone Number, Including Area Code): (941) 741-4300
  þ o
  o þ o
  o þ
  Class of common stock
    
    Outstanding as of July 31, 2006Par value $0.01 per share
    
    
    26,541,145
   1




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TABLE OF CONTENTS
 PagePART I.
    
    FINANCIAL INFORMATIONITEM 1. Financial Statements
    
    
    3Condensed Consolidated Statements of Operations for the three and six months
ended June 30, 2006 and 2005 (unaudited)
    
    
    3Condensed Consolidated Balance Sheets as of June 30, 2006 and December 31,
2005 (unaudited)
    
    
    4Condensed Consolidated Statements of Cash Flows
for the six months ended June 30, 2006 and 2005 (unaudited)
    
    
    6Notes to Condensed Consolidated Financial Statements (unaudited)
    
    
    7ITEM 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations
    
    
    19ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    36ITEM 4. Controls and Procedures
    
    
    36PART II.
    
    OTHER INFORMATIONITEM 1. Legal Proceedings
    
    
    36ITEM 1A. Risk Factors
    
    
    37ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    37ITEM 4. Submission of Matters to a Vote of Security Holders
    
    
    37ITEM 6. Exhibits
    
    
    38SIGNATURE
    
    
    39EX-31.1 CERTIFICATION OF THE CHIEF EXECUTIVE OFFICEREX-31.2 CERTIFICATION OF THE CHIEF FINANCIAL OFFICEREX-32 CERTIFICATION FURNISHED PURSUANT TO SECTION 906
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PART I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 GEVITY HR, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 UNAUDITED
 (in $000s, except share and per share data)
 FOR THE THREE MONTHS ENDED
    
    
    FOR THE SIX MONTHS ENDEDJUNE 30,
    
    
    JUNE 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Revenues
    
    $
    161,208
    
    
    $
    147,849
    
    
    $
    330,897
    
    
    $
    301,729Cost of services
    
    
    112,910
    
    
    
    102,513
    
    
    
    232,997
    
    
    
    212,764Gross profit
    
    
    48,298
    
    
    
    45,336
    
    
    
    97,900
    
    
    
    88,965Operating expenses:Salaries, wages and commissions
    
    
    19,507
    
    
    
    17,032
    
    
    
    40,375
    
    
    
    34,419Other general and administrative
    
    
    12,801
    
    
    
    11,918
    
    
    
    25,675
    
    
    
    22,378Loss on reinsurance contract
    
    
    4,650
    
    
    
    
    
    
    
    4,650
    
    
    
    Depreciation and amortization
    
    
    3,536
    
    
    
    3,734
    
    
    
    6,833
    
    
    
    7,487Total operating expenses
    
    
    40,494
    
    
    
    32,684
    
    
    
    77,533
    
    
    
    64,284Operating income
    
    
    7,804
    
    
    
    12,652
    
    
    
    20,367
    
    
    
    24,681Interest income
    
    
    184
    
    
    
    293
    
    
    
    436
    
    
    
    529Interest expense
    
    
    (162
    )
    
    
    (101
    )
    
    
    (426
    )
    
    
    (180
    )Other (expense) income, net
    
    
    (5
    )
    
    
    6
    
    
    
    (148
    )
    
    
    22Income before income taxes
    
    
    7,821
    
    
    
    12,850
    
    
    
    20,229
    
    
    
    25,052Income tax provision
    
    
    917
    
    
    
    4,240
    
    
    
    5,131
    
    
    
    8,267Net income
    
    $
    6,904
    
    
    $
    8,610
    
    
    $
    15,098
    
    
    $
    16,785Net income per common share: Basic
    
    $
    0.26
    
    
    $
    0.31
    
    
    $
    0.58
    
    
    $
    0.61 Diluted
    
    $
    0.26
    
    
    $
    0.30
    
    
    $
    0.56
    
    
    $
    0.59Weighted average common shares outstanding: Basic
    
    
    26,244,029
    
    
    
    27,598,735
    
    
    
    26,253,075
    
    
    
    27,528,678 Diluted
    
    
    27,074,808
    
    
    
    28,583,670
    
    
    
    27,130,556
    
    
    
    28,577,599
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GEVITY HR, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 UNAUDITED
 (in $000s)
 June 30,
    
    
    December 31,2006
    
    
    2005ASSETSCurrent assets:Cash and cash equivalents
    
    $
    27,355
    
    
    $
    52,525Certificates of deposit  restricted
    
    
    
    
    
    
    33Marketable securities  restricted
    
    
    4,370
    
    
    
    4,281Accounts receivable, net
    
    
    111,895
    
    
    
    113,864Short-term workers compensation receivable, net
    
    
    46,146
    
    
    
    32,552Other current assets
    
    
    14,617
    
    
    
    15,713Total current assets
    
    
    204,383
    
    
    
    218,968Property and equipment, net
    
    
    22,612
    
    
    
    13,810Long-term marketable securities  restricted
    
    
    7,936
    
    
    
    7,891Long-term workers compensation receivable, net
    
    
    98,409
    
    
    
    95,766Intangible assets, net
    
    
    25,675
    
    
    
    30,494Goodwill
    
    
    8,692
    
    
    
    8,692Deferred tax asset, net
    
    
    12,096
    
    
    
    11,678Other assets
    
    
    516
    
    
    
    570Total assets
    
    $
    380,319
    
    
    $
    387,869
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GEVITY HR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (continued)
UNAUDITED
(in $000s, except share and per share data)
 June 30,
    
    
    December 31,2006
    
    
    2005LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accrued payroll and payroll taxes
    
    $
    131,701
    
    
    $
    152,940Accrued insurance premiums, health and
workers compensation insurance reserves
    
    
    22,290
    
    
    
    20,536Customer deposits and prepayments
    
    
    7,915
    
    
    
    8,315Accounts payable and other accrued liabilities
    
    
    10,117
    
    
    
    9,995Deferred tax liability, net
    
    
    32,333
    
    
    
    31,567Dividends payable
    
    
    2,388
    
    
    
    1,846Total current liabilities
    
    
    206,744
    
    
    
    225,199Long-term accrued workers compensation
insurance reserves
    
    
    226
    
    
    
    242Other long-term liabilities
    
    
    6,913
    
    
    
    7,013Total liabilities
    
    
    213,883
    
    
    
    232,454Commitments and contingencies (see notes)Shareholders equity:Preferred stock, $0.01 par value, 10,000,000 shares authorized, none
issued and outstanding as of June 30, 2006 and December 31, 2005
    
    
    
    
    
    
    Common stock, $.01 par value, 100,000,000 shares authorized,
31,824,458 and 31,237,453 issued and outstanding as of June 30,
2006 and December 31, 2005, respectively
    
    
    318
    
    
    
    312Additional paid-in capital
    
    
    174,235
    
    
    
    165,876Retained earnings
    
    
    68,489
    
    
    
    58,137Deferred compensation
    
    
    
    
    
    
    (2,543
    )Treasury stock (5,295,717 and 4,863,098 shares at cost, respectively)
    
    
    (76,606
    )
    
    
    (66,367
    )Total shareholders equity
    
    
    166,436
    
    
    
    155,415Total liabilities and shareholders equity
    
    $
    380,319
    
    
    $
    387,869
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GEVITY HR, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 UNAUDITED
 (in $000s)
 For the Six Months EndedJune 30,2006
    
    
    2005CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    15,098
    
    
    $
    16,785Adjustments to reconcile net income to net cash (used in) provided by operating activities:Depreciation and amortization
    
    
    6,833
    
    
    
    7,487Deferred tax provision, net
    
    
    348
    
    
    
    2,081Stock compensation
    
    
    1,881
    
    
    
    170Provision for bad debts
    
    
    12
    
    
    
    303Other
    
    
    175
    
    
    
    3Changes in operating working capital:Accounts receivable, net
    
    
    1,957
    
    
    
    (26,542
    )Other current assets
    
    
    1,096
    
    
    
    (4,399
    )Workers compensation receivable, net
    
    
    (16,237
    )
    
    
    (26,063
    )Other assets
    
    
    52
    
    
    
    (182
    )Accrued insurance premiums, health and
workers compensation insurance reserves
    
    
    1,754
    
    
    
    (2,520
    )Accrued payroll and payroll taxes
    
    
    (21,317
    )
    
    
    24,083Accounts payable and other accrued liabilities
    
    
    1,786
    
    
    
    (889
    )Income taxes payable
    
    
    
    
    
    
    4,046Customer deposits and prepayments
    
    
    (400
    )
    
    
    22,822Long-term accrued workers compensation
insurance reserves
    
    
    (16
    )
    
    
    (233
    )Other long-term liabilities
    
    
    (71
    )
    
    
    (134
    )Net cash (used in) provided by operating activities
    
    
    (7,049
    )
    
    
    16,818CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of marketable securities and certificates of deposit
    
    
    (130
    )
    
    
    (83
    )Capital expenditures
    
    
    (9,285
    )
    
    
    (1,976
    )Net cash used in investing activities
    
    
    (9,415
    )
    
    
    (2,059
    )CASH FLOWS FROM FINANCING ACTIVITIES:Net borrowings under revolving credit facility
    
    
    
    
    
    
    Proceeds from exercise of stock options
    
    
    5,421
    
    
    
    1,058Excess tax benefits from share-based arrangements
    
    
    3,638
    
    
    
    Dividends paid
    
    
    (4,204
    )
    
    
    (3,575
    )Purchase of treasury stock
    
    
    (13,561
    )
    
    
    Net cash used in financing activities
    
    
    (8,706
    )
    
    
    (2,517
    )Net (decrease) increase in cash and cash equivalents
    
    
    (25,170
    )
    
    
    12,242Cash and cash equivalents  beginning of period
    
    
    52,525
    
    
    
    40,776Cash and cash equivalents  end of period
    
    $
    27,355
    
    
    $
    53,018Supplemental disclosure of cash flow information:Income taxes paid
    
    $
    3,210
    
    
    $
    2,141Interest paid
    
    $
    428
    
    
    $
    87
  
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GEVITY HR, INC. AND SUBSIDIARIES
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 (in $000s, except share and per share data)
 1. GENERAL
    Significant Accounting Policies
 Stock-Based Compensation Share-Based Payment
 Accounting
for Stock Issued to Employees Accounting for Stock-Based Compensation Accounting for Stock-Based Compensation-Transitions and Disclosures
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Three Months Ended
    
    
    Six Months EndedJune 30, 2005
    
    
    June 30, 2005Net income
    
    As reported
    
    $
    8,610
    
    
    $
    16,785Add: Total stock-based
compensation included in
net income, net of tax
effect
    
    As reported
    
    
    77
    
    
    
    114Less: Total stock-based
employee compensation
expense determined under
fair value method for all
awards, net of tax effect
    
    Pro forma
    
    
    (864
    )
    
    
    (1,621
    )Net income
    
    Pro forma
    
    $
    7,823
    
    
    $
    15,278Basic earnings per share
    
    As reported
    
    $
    0.31
    
    
    $
    0.61Pro forma
    
    $
    0.28
    
    
    $
    0.56Diluted earnings per share
    
    As reported
    
    $
    0.30
    
    
    $
    0.59Pro forma
    
    $
    0.27
    
    
    $
    0.53
  
    
    compensation cost for all share-based awards (expected to vest) granted prior to,
but not yet vested as of January 1, 2006, based upon grant-date fair value estimated in
accordance with the original provisions of SFAS 123; and
    
    compensation cost for all share-based awards (expected to vest) granted during the
six-month period ended June 30, 2006, based upon grant-date fair value estimated in
accordance with the provisions of SFAS 123R.
    
    
    Salaries, wages and commissions include $1,046 and $1,881, respectively, of
stock-based compensation expense (which is the same impact for income from continuing
operations and income before income taxes).
    
    Provision for income taxes is reduced by $414 and $743, respectively.
    
    Net income is reduced by $632 and $1,138, respectively.
    
    Basic earnings per share is reduced by $0.02 and $0.04, respectively.
    
    Diluted earnings per share is reduced by $0.02 and $0.04 respectively.
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2. MARKETABLE SECURITIES  RESTRICTED
     Amortized
    
    
    Gross Unrealized
    
    
    EstimatedCost
    
    
    Gain
    
    
    Fair ValueAs of June 30, 2006:Short-termMoney market  restricted
    
    $
    4,370
    
    
    $
    
    
    
    $
    4,370Total short-term marketable securities  restricted
    
    $
    4,370
    
    
    $
    
    
    
    $
    4,370Long-termMoney market  restricted
    
    $
    3,657
    
    
    $
    
    
    
    $
    3,657Mutual funds  trading  restricted
    
    
    4,279
    
    
    
    
    
    
    
    4,279Total long-term marketable securities  restricted
    
    $
    7,936
    
    
    $
    
    
    
    $
    7,936As of December 31, 2005:Short-termMoney market  restricted
    
    $
    4,281
    
    
    $
    
    
    
    $
    4,281Total short-term marketable securities  restricted
    
    $
    4,281
    
    
    $
    
    
    
    $
    4,281Long-termMoney market  restricted
    
    $
    3,582
    
    
    $
    
    
    
    $
    3,582Mutual funds  trading  restricted
    
    
    4,309
    
    
    
    
    
    
    
    4,309Total long-term marketable securities  restricted
    
    $
    7,891
    
    
    $
    
    
    
    $
    7,891
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3. ACCOUNTS RECEIVABLE
  June 30,
    
    
    December 31,2006
    
    
    2005Billed to clients
    
    $
    7,114
    
    
    $
    10,090Unbilled revenues
    
    
    105,038
    
    
    
    104,280112,152
    
    
    
    114,370Less: Allowance for doubtful accounts
    
    
    (257
    )
    
    
    (506
    )Total
    
    $
    111,895
    
    
    $
    113,864
  4. WORKERS COMPENSATION RECEIVABLE/ RESERVES
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5. INTANGIBLE ASSETS
  June 30,
    
    
    December 31,2006
    
    
    2005Purchased client service agreements
    
    $
    47,929
    
    
    $
    47,929Accumulated amortization
    
    
    (22,254
    )
    
    
    (17,435
    )Intangible assets, net
    
    $
    25,675
    
    
    $
    30,494
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6. HEALTH BENEFITS
         12




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7. REVOLVING CREDIT FACILITY
    8. COMMITMENTS AND CONTINGENCIES
 Litigation
  Regulatory Matters
  13




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9. EQUITY
 Share Repurchase Program
   10. STOCK COMPENSATION
     14




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Stock Option Awards
  June 30,
    
    
    June 30,2006
    
    
    2005Risk-free interest rate
    
    
    4.66
    %
    
    
    3.28
    %Expected life (in years)
    
    
    3.6
    
    
    
    3.1Expected volatility
    
    
    50.93
    %
    
    
    60.37
    %Dividend yield
    
    
    1.30
    %
    
    
    1.35
    %
   Weighted-AverageWeighted-
    
    
    RemainingAverage
    
    
    Contractual
    
    
    AggregateStock Options
    
    Shares
    
    
    Exercise Price
    
    
    Term
    
    
    Intrinsic ValueOutstanding at January 1, 2006
    
    
    2,891,544
    
    
    $
    12.02Granted
    
    
    496,556
    
    
    $
    27.85Exercised
    
    
    (533,452
    )
    
    $
    9.77Forfeited
    
    
    (76,911
    )
    
    $
    20.36Expired
    
    
    (2,505
    )
    
    $
    21.42Outstanding at June 30, 2006
    
    
    2,775,232
    
    
    $
    15.04
    
    
    
    7.27
    
    
    $
    32,956Exercisable at June 30, 2006
    
    
    1,410,324
    
    
    $
    7.73
    
    
    
    5.95
    
    
    $
    26,552
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Non-Vested Stock Awards
  WeightedAverage Grant-DateNon-Vested Stock
    
    Shares
    
    
    Fair ValueOutstanding at January 1, 2006
    
    
    135,689
    
    
    $
    22.10Granted
    
    
    53,553
    
    
    $
    28.88Vested
    
    
    (20,632
    )
    
    $
    20.60Forfeited
    
    
    (11,700
    )
    
    $
    22.85Outstanding at June 30, 2006
    
    
    156,910
    
    
    $
    24.55
  Employee Stock Purchase Plan (ESPP)
   11. INCOME TAXES
  16




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12. EARNINGS PER SHARE (EPS)
  Net Income
    
    
    Shares
    
    
    Per Share(Numerator)
    
    
    (Denominator)
    
    
    AmountFor the Three Months Ended June 30, 2006:Basic EPS:Net income
    
    $
    6,904
    
    
    
    26,244,029
    
    
    $
    0.26Effect of dilutive securities:Options to purchase common stock
    
    
    
    
    
    
    805,913Non-vested stock
    
    
    
    
    
    
    24,866Diluted EPS:Net income
    
    $
    6,904
    
    
    
    27,074,808
    
    
    $
    0.26
  Net Income
    
    
    Shares
    
    
    Per Share(Numerator)
    
    
    (Denominator)
    
    
    AmountFor the Three Months Ended June 30, 2005:Basic EPS:Net income
    
    $
    8,610
    
    
    
    27,598,735
    
    
    $
    0.31Effect of dilutive securities:Options to purchase common stock
    
    
    
    
    
    
    984,203Non-vested stock
    
    
    
    
    
    
    732Diluted EPS:Net income
    
    $
    8,610
    
    
    
    28,583,670
    
    
    $
    0.30
  Net Income
    
    
    Shares
    
    
    Per Share(Numerator)
    
    
    (Denominator)
    
    
    AmountFor the Six Months Ended June 30, 2006:Basic EPS:Net income
    
    $
    15,098
    
    
    
    26,253,075
    
    
    $
    0.58Effect of dilutive securities:Options to purchase common stock
    
    
    
    
    
    
    851,984Non-vested stock
    
    
    
    
    
    
    25,497Diluted EPS:Net income
    
    $
    15,098
    
    
    
    27,130,556
    
    
    $
    0.56
 17




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Net Income
    
    
    Shares
    
    
    Per Share(Numerator)
    
    
    (Denominator)
    
    
    AmountFor the Six Months Ended June 30, 2005:Basic EPS:Net income
    
    $
    16,785
    
    
    
    27,528,678
    
    
    $
    0.61Effect of dilutive securities:Options to purchase common stock
    
    
    
    
    
    
    1,047,674Non-vested stock
    
    
    
    
    
    
    1,247Diluted EPS:Net income
    
    $
    16,785
    
    
    
    28,577,599
    
    
    $
    0.59
  18




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ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
  OVERVIEW AND INTRODUCTION
  
    
    Workforce alignment is the term used by the Company to refer to the engagement of the
right people in the right place at the right time doing the right things. The Company
assists its clients in achieving workforce alignment by helping them find exceptional
talent, implement formal human resource processes and professional management standards,
and utilize employee motivation and retention practices.
    
    Administrative relief is obtained by clients through the Companys management of
employee administrative matters, such as processing of payroll, taxes and insurance
premiums, and by the Companys comprehensive record keeping and technology.
    
    The Company provides business protection by helping clients ensure employment-related
regulatory compliance and sound risk management practices. The Company also provides
up-to-date regulatory compliance and access to cost-effective risk management practices and
insurance programs.
  
    
    increasing clients productivity by improving employee satisfaction and generating
greater employee retention;
    
    allowing clients and their employees to focus on revenue producing activities rather
than human resource matters; and
    
    reducing clients exposure to liabilities associated with non-compliance with human
resource-related regulatory and tax matters.
   19




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Three Months Ended June 30,2006
    
    
    2005
    
    
    % ChangeStatistical data:Client employees at period end
    
    
    138,022
    
    
    
    129,061
    
    
    
    6.9
    %Clients at period end (1)
    
    
    8,018
    
    
    
    8,282
    
    
    
    (3.2
    )%Average number of client
employees/clients at period end
    
    
    17.21
    
    
    
    15.58
    
    
    
    10.5
    %Average number of client employees
paid by month (2)
    
    
    128,338
    
    
    
    119,555
    
    
    
    7.3
    %Annualized average wage per average
number of client employees paid by
month (3)
    
    $
    39,790
    
    
    $
    37,171
    
    
    
    7.0
    %Annualized professional service fees
per average number of client
employees paid by month
(3)
    
    $
    1,311
    
    
    $
    1,148
    
    
    
    14.2
    %Annualized gross profit per average
number of client employees paid by
month (3)
    
    $
    1,505
    
    
    $
    1,517
    
    
    
    (0.8
    )%Annualized operating income
per average number of client
employees paid by month (3)
    
    $
    243
    
    
    $
    423
    
    
    
    (42.6
    )%Annualized adjusted operating income
per average number of client
employees paid by month (3),
(4), (5)
    
    $
    388
    
    
    $
    384
    
    
    
    1.0
    %
 20




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##### Table of Contents



Six Months Ended June 30,2006
    
    2005
    
    % ChangeStatistical data:Client employees at period end
    
    
    138,022
    
    
    
    129,061
    
    
    
    6.9
    %Clients at period end (1)
    
    
    8,018
    
    
    
    8,282
    
    
    
    (3.2
    )%Average number of client
employees/clients at period end
    
    
    17.21
    
    
    
    15.58
    
    
    
    10.5
    %Average number of client employees
paid by month (2)
    
    
    127,947
    
    
    
    118,587
    
    
    
    7.9
    %Annualized average wage per average
number of client employees paid by
month (3)
    
    $
    39,800
    
    
    $
    37,117
    
    
    
    7.2
    %Annualized professional service fees
per average number of client
employees paid by month
(3)
    
    $
    1,265
    
    
    $
    1,156
    
    
    
    9.4
    %Annualized gross profit per average
number of client employees paid by
month (3)
    
    $
    1,530
    
    
    $
    1,500
    
    
    
    2.0
    %Annualized operating income
per average number of client
employees paid by month (3)
    
    $
    318
    
    
    $
    416
    
    
    
    (23.6
    )%Annualized adjusted operating income
per average number of client
employees paid by month (3),
(4), (5)
    
    $
    391
    
    
    $
    378
    
    
    
    3.4
    %
 
 (1)
    
    Clients measured by individual client Federal Employer Identification
Number (FEIN).(2)
    
    The average number of client employees paid by month is calculated based
upon the sum of the number of paid client employees at the end of each month divided
by the number of months in the period.(3)
    
    Annualized statistical information is based upon actual period-to-date
amounts, which have been annualized (divided by three or six and multiplied by
twelve) and then divided by the average number of client employees paid by month.(4)
    
    For purposes of calculating this statistic, operating income for the three
and six months ended June 30, 2005 has been adjusted to include the effect of $1.2
million and $2.2 million, respectively, in stock-based compensation expenses, which
were previously recognized on a pro forma basis as allowed by Statement of Financial
Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation(SFAS
123). See Use of Non-GAAP Financial
Measures. For purposes of calculating this statistic, operating income for the three and six months ended June 30, 2006
includes the effect of the implementation of SFAS No. 123R,
Share-Based Payment(SFAS 123R), in that period.(5)
    
    For purposes of calculating this statistic, operating income for the three
and six months ended June 30, 2006 has been adjusted to exclude the effect of a $4.7
million loss recorded related to a reinsurance contract as a result of the
liquidation proceedings that were commenced against the Companys reinsurer for its
workers compensation program and related termination of the reinsurance contract.
See Use of
Non-GAAP Financial Measures.  
    
    the amount of time required for sales personnel to begin to acquire new client
employees may be longer than anticipated;
 21




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##### Table of Contents




    
    the current client employee retention levels may decrease if clients decide to use
alternative providers to service their human resource outsourcing needs;
    
    the Company (under its co-employed service option) may not be able to continue to
provide insurance-related products of a quality to acquire new client employees and to
retain current client employees; and
    
    the time to achieve acceptance by prospective clients of the Companys new business
model may be longer than anticipated.
 RESULTS OF OPERATIONS
 Three Months Ended June 30, 2006 Compared to Three Months Ended June 30, 2005
 Revenue
  Three Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    %Change(in thousands, except statistical data)Revenues:Professional service fees
    
    $
    42,058
    
    
    $
    34,320
    
    
    
    22.5
    %Employee health and welfare
benefits
    
    
    88,037
    
    
    
    80,213
    
    
    
    9.8
    %Workers compensation
    
    
    25,855
    
    
    
    28,739
    
    
    
    (10.0
    )%State unemployment taxes and
other
    
    
    5,258
    
    
    
    4,577
    
    
    
    14.9
    %Total revenues
    
    $
    161,208
    
    
    $
    147,849
    
    
    
    9.0
    %Statistical data:Gross salaries and wages
(in thousands)
    
    $
    1,276,627
    
    
    $
    1,110,981
    
    
    
    14.9
    %Average number of client
employees paid by month
(1)
    
    
    128,338
    
    
    
    119,555
    
    
    
    7.3
    %Annualized average wage per
average client employees
paid by month
(2)
    
    $
    39,790
    
    
    $
    37,171
    
    
    
    7.0
    %Workers compensation
billing per one hundred
dollars of workers
compensation wages
(3)
    
    $
    2.27
    
    
    $
    2.76
    
    
    
    (17.8
    )%Workers compensation
manual premium per one
hundred dollars of workers
compensation wages
(3), (4)
    
    $
    2.74
    
    
    $
    3.32
    
    
    
    (17.5
    )%Annualized professional
service fees per average
number of client employees
paid by month
(2)
    
    $
    1,311
    
    
    $
    1,148
    
    
    
    14.2
    %Client employee health
benefits participation
    
    
    38
    %
    
    
    38
    %
    
    
    
 
 (1)
    
    The average number of client employees paid by month is calculated based
upon the sum of the number of paid client employees at the end of each month
divided by the number of months in the period.(2)
    
    Annualized statistical information is based upon actual quarter-to-date
amounts, which have been annualized (divided by three and multiplied by twelve),
and then divided by the average number of client employees paid by month. 22




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##### Table of Contents



(3)
    
    Workers compensation wages exclude the wages of clients electing out of
the Companys workers compensation program.(4)
    
    Manual premium rate data is derived from tables of member insurance
companies of American International Group, Inc. (AIG) in effect for 2006 and
2005, respectively.       23




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##### Table of Contents



Cost of Services
  Three Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    % Change(in thousands, except statistical data)Cost of services:Employee health and welfare
benefits
    
    $
    88,046
    
    
    $
    77,905
    
    
    
    13.0
    %Workers compensation
    
    
    18,533
    
    
    
    20,379
    
    
    
    (9.1
    )%State unemployment taxes and
other
    
    
    6,331
    
    
    
    4,229
    
    
    
    49.7
    %Total cost of services
    
    $
    112,910
    
    
    $
    102,513
    
    
    
    10.1
    %Statistical data:Gross salaries and
wages (in thousands)
    
    $
    1,276,627
    
    
    $
    1,110,981
    
    
    
    14.9
    %Average number of
client employees
paid by month
(1)
    
    
    128,338
    
    
    
    119,555
    
    
    
    7.3
    %Workers compensation
cost rate per one
hundred dollars of
workers
compensation wages
(2)
    
    $
    1.63
    
    
    $
    1.96
    
    
    
    (16.8
    )%Number of workers
compensation claims
(3)
    
    
    1,593
    
    
    
    1,595
    
    
    
    (0.1
    )%Frequency of
workers
compensation claims
per one million
dollars of workers
compensation wages
(2)
    
    
    1.40
    x
    
    
    1.53
    x
    
    
    (8.5
    )%
 
 (1)
    
    The average number of client employees paid by month is calculated based
upon the sum of the number of paid client employees at the end of each month divided
by the number of months in the period.(2)
    
    Workers compensation wages exclude the wages of clients electing out of
the Companys workers compensation program.(3)
    
    The number of workers compensation claims reflects the number of claims
reported by the end of the respective period and does not include claims with
respect to a specific policy year that are reported subsequent to the end of such
period. 24




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##### Table of Contents



Operating Expenses
  Three Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    % Change(in thousands, except statistical data)Operating expenses:Salaries, wages and commissions
    
    $
    19,507
    
    
    $
    17,032
    
    
    
    14.5
    %Other general and administrative
    
    
    12,801
    
    
    
    11,918
    
    
    
    7.4
    %Loss on reinsurance contract
    
    
    4,650
    
    
    
    
    
    
    
    n/aDepreciation and amortization
    
    
    3,536
    
    
    
    3,734
    
    
    
    (5.3
    )%Total operating expenses
    
    $
    40,494
    
    
    $
    32,684
    
    
    
    23.9
    %Statistical data:Internal employees at quarter end
    
    
    1,016
    
    
    
    963
    
    
    
    5.5
    %
   25




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Income Taxes
  Net Income and Diluted Earnings Per Share
   26




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##### Table of Contents



Six Months Ended June 30, 2006 Compared to Six Months Ended June 30, 2005
 Revenue
  Six Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    % Change(in thousands, except statistical data)Revenues:Professional service fees
    
    $
    80,920
    
    
    $
    68,571
    
    
    
    18.0
    %Employee health and welfare
benefits
    
    
    177,296
    
    
    
    160,711
    
    
    
    10.3
    %Workers compensation
    
    
    53,270
    
    
    
    56,322
    
    
    
    (5.4
    )%State unemployment taxes and
other
    
    
    19,411
    
    
    
    16,125
    
    
    
    20.4
    %Total revenues
    
    $
    330,897
    
    
    $
    301,729
    
    
    
    9.7
    %Statistical data:Gross salaries and wages
(in thousands)
    
    $
    2,546,149
    
    
    $
    2,200,800
    
    
    
    15.7
    %Average number of client
employees paid by month
(1)
    
    
    127,947
    
    
    
    118,587
    
    
    
    7.9
    %Annualized average wage per
average client employees
paid by month
(2)
    
    $
    39,800
    
    
    $
    37,117
    
    
    
    7.2
    %Workers compensation
billing per one hundred
dollars of workers
compensation wages
(3)
    
    $
    2.35
    
    
    $
    2.76
    
    
    
    (14.9
    )%Workers compensation
manual premium per one
hundred dollars of workers
compensation wages
(3), (4)
    
    $
    2.76
    
    
    $
    3.29
    
    
    
    (16.1
    )%Annualized professional
service fees per average
number of client employees
paid by month
(2)
    
    $
    1,265
    
    
    $
    1,156
    
    
    
    9.4
    %Client employee health
benefits participation
    
    
    38
    %
    
    
    38
    %
    
    
    
 
 (1)
    
    The average number of client employees paid by month is calculated based
upon the sum of the number of paid client employees at the end of each month
divided by the number of months in the period.(2)
    
    Annualized statistical information is based upon actual year-to-date
amounts, which have been annualized (divided by six and multiplied by twelve), and
then divided by the average number of client employees paid by month.(3)
    
    Workers compensation wages exclude the wages of clients electing out of
the Companys workers compensation program.(4)
    
    Manual premium rate data is derived from tables of member insurance
companies of American International Group, Inc. (AIG) in effect for 2006 and
2005, respectively.  27




---



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28




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##### Table of Contents



Cost of Services
  Six Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    % Change(in thousands, except statistical data)Cost of services:Employee health and welfare
benefits
    
    $
    174,117
    
    
    $
    157,381
    
    
    
    10.6
    %Workers compensation
    
    
    37,882
    
    
    
    40,106
    
    
    
    (5.5
    )%State unemployment taxes and
other
    
    
    20,998
    
    
    
    15,277
    
    
    
    37.4
    %Total cost of services
    
    $
    232,997
    
    
    $
    212,764
    
    
    
    9.5
    %Statistical data:Gross salaries and
wages (in
thousands)
    
    $
    2,546,149
    
    
    $
    2,200,800
    
    
    
    15.7
    %Average number of
client employees
paid by month
(1)
    
    
    127,947
    
    
    
    118,587
    
    
    
    7.9
    %Workers
compensation cost
rate per one
hundred dollars of
workers
compensation wages
(2)
    
    $
    1.67
    
    
    $
    1.97
    
    
    
    (15.2
    )%Number of workers
compensation claims
(3)
    
    
    3,008
    
    
    
    2,975
    
    
    
    1.1
    %Frequency of
workers
compensation claims
per one million
dollars of workers
compensation wages
(2)
    
    
    1.33
    x
    
    
    1.46
    x
    
    
    (8.9
    )%
 
 (1)
    
    The average number of client employees paid by month is calculated based upon
the sum of the number of paid client employees at the end of each month divided by the
number of months in the period.(2)
    
    Workers compensation wages exclude the wages of clients electing out of the
Companys workers compensation program.(3)
    
    The number of workers compensation claims reflects the number of claims
reported by the end of the respective period and does not include claims with respect
to a specific policy year that are reported subsequent to the end of such period.   29




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##### Table of Contents



Operating Expenses
  Six Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    % Change(in thousands, except statistical data)Operating expenses:Salaries, wages and commissions
    
    $
    40,375
    
    
    $
    34,419
    
    
    
    17.3
    %Other general and administrative
    
    
    25,675
    
    
    
    22,378
    
    
    
    14.7
    %Loss on reinsurance contract
    
    
    4,650
    
    
    
    
    
    
    
    n/aDepreciation and amortization
    
    
    6,833
    
    
    
    7,487
    
    
    
    (8.7
    )%Total operating expenses
    
    $
    77,533
    
    
    $
    64,284
    
    
    
    20.6
    %Statistical data:Internal employees at quarter end
    
    
    1,016
    
    
    
    963
    
    
    
    5.5
    %
     30




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##### Table of Contents



Income Taxes
  Net Income and Diluted Earnings Per Share
   LIQUIDITY AND CAPITAL RESOURCES
 Cash Flow
 General
   31




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##### Table of Contents



Restricted Cash
   June 30,
    
    
    December 31,2006
    
    

2005(in thousands)Certificates of deposit  restricted:Other
    
    $
    
    
    
    $
    33Total certificates of deposit  restricted
    
    
    
    
    
    
    33Short-term marketable securities  restricted:General insurance collateral obligations  AIG
    
    
    4,370
    
    
    
    4,281Total short-term marketable securities  restricted
    
    
    4,370
    
    
    
    4,281Long-term marketable securities restricted:Workers compensation collateral  AIG
    
    
    3,657
    
    
    
    3,582Rabbi trust
    
    
    4,279
    
    
    
    4,309Total long-term marketable securities  restricted
    
    
    7,936
    
    
    
    7,891Total restricted assets
    
    $
    12,306
    
    
    $
    12,205
 32




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##### Table of Contents



Cash Flows from Operating Activities
    Cash Flow from Investing Activities
  33




---



##### Table of Contents



Cash Flow from Financing Activities
   Commitments and Contractual Obligations
 Off-Balance Sheet Arrangements
  Contractual Obligations
  CRITICAL ACCOUNTING ESTIMATES
   34




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##### Table of Contents



CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
   Use of Non-GAAP Financial Measures
  35




---



##### Table of Contents



For the Three Months
    
    
    For the Six MonthsEnded June 30,
    
    
    Ended June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Operating income  GAAP
    
    $
    7,804
    
    
    $
    12,652
    
    
    $
    20,367
    
    
    $
    24,681SFAS 123 pro forma stock compensation expense
    
    
    
    
    
    
    (1,174
    )
    
    
    
    
    
    
    (2,249
    )Loss on reinsurance contract
    
    
    4,650
    
    
    
    
    
    
    
    4,650
    
    
    
    Operating income  non-GAAP
    
    $
    12,454
    
    
    $
    11,478
    
    
    $
    25,017
    
    
    $
    22,432Net income  GAAP
    
    $
    6,904
    
    
    $
    8,610
    
    
    $
    15,098
    
    
    $
    16,785SFAS 123 pro forma stock compensation expense
    
    
    
    
    
    
    (787
    )
    
    
    
    
    
    
    (1,507
    )Loss on reinsurance contract
    
    
    2,813
    
    
    
    
    
    
    
    2,813
    
    
    
    Net income  non-GAAP
    
    $
    9,717
    
    
    $
    7,823
    
    
    $
    17,911
    
    
    $
    15,278Net income per common share  diluted  GAAP
    
    $
    0.26
    
    
    $
    0.30
    
    
    $
    0.56
    
    
    $
    0.59SFAS 123 pro forma stock compensation expense
    
    
    
    
    
    
    (0.03
    )
    
    
    
    
    
    
    (0.06
    )Loss on reinsurance contract
    
    
    0.10
    
    
    
    
    
    
    
    0.10
    
    
    
    Net income per common share  diluted 
Non-GAAP
    
    $
    0.36
    
    
    $
    0.27
    
    
    $
    0.66
    
    
    $
    0.53
  
 ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
  
 ITEM 4. Controls and Procedures
  
 PART II. OTHER INFORMATION
 
 ITEM 1. Legal Proceedings
  36




---



##### Table of Contents



ITEM 1A. Risk Factors
  We may not be successful in recovering the premiums we paid to the Bermuda reinsurance
company that is subject to liquidation proceedings.
  
 ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
  Total Number of
    
    
    Approximate NumberShares Purchased as
    
    
    of Shares That MayTotal Number of
    
    
    
    
    
    
    Part of Publicly
    
    
    Yet Be PurchasedShares Purchased
    
    
    Average Price Paid
    
    
    Announced Program
    
    
    Under the ProgramPeriod
    
    (1)
    
    
    per Share
    
    
    (1)
    
    
    (1)4/01/2006 
4/30/2006
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5/01/2006 
5/31/2006
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6/01/2006 
6/30/2006
    
    
    25,719
    
    
    
    $    25.63
    
    
    
    406,071
    
    
    
    593,929
 
 (1)
    
    On February 28, 2006 the Company announced that the board of directors had authorized the
purchase of up to 1,000,000 additional shares of the Companys common stock under a new share
repurchase program. Share repurchases under the new program may be made through open market
repurchases, block trades or in private transactions at such times and in such amounts as the
Company deems appropriate based upon a variety of factors including price, regulatory
requirements, market conditions and other corporate opportunities. 
 ITEM 4. Submission of Matters to a Vote of Security Holders
  37




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##### Table of Contents



For
    
    
    WithheldErik Vonk
    
    
    23,466,181
    
    
    
    276,907George B. Beitzel
    
    
    21,563,253
    
    
    
    2,179,835Darcy E. Bradbury
    
    
    22,520,914
    
    
    
    1,222,174James E. Cowie
    
    
    22,834,331
    
    
    
    908,757Jonathan H. Kagan
    
    
    23,685,770
    
    
    
    57,318David S. Katz
    
    
    22,174,702
    
    
    
    1,568,386Jeffrey A. Sonnenfeld
    
    
    23,468,963
    
    
    
    274,125Paul R. Daoust
    
    
    23,687,070
    
    
    
    56,018
 
 ITEM 6. Exhibits
 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.
 38




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##### Table of Contents



SIGNATURE
  GEVITY HR, INC.Dated: August 9, 2006
    
    /s/ PETER C. GRABOWSKIPeter C. GrabowskiChief Financial Officer(Principal Financial and Accounting Officer)
 39