Table of Contents

 

 

 

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

** **

**FORM 10-Q**

** **

| **x**      | ** **                                                                                                                                                                                | **Quarterly Report Pursuant to Section 13 or  15(d) of the Securities Exchange Act of 1934**   |
|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------------------|
|       |                                                                                                                                                                                      |
|       | **For  the quarterly period ended March 31, 2009.**                                                                                                                                  |
|       |                                                                                                                                                                                      |
|       | **or**                                                                                                                                                                                    |
|       |                                                                                                                                                                                      |
| **o**      | ** **                                                                                                                                                                                | **Transition Report  Pursuant to Section 13 or 15(d) of the Securities Exchange Act of  1934** |
| ** ** | ** **                                                                                                                                                                                |
| ** ** | **For the transition  period from              to              ** |

 

**Commission File No. 0-22701**

 

**GEVITYHR, INC.**

(Exact name ofregistrant 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 Parkway**                                   | ** ** | ** **                            |
| **Bradenton, Florida**                                         | ** ** | **34202**                             |
| (Address of principal  executive offices)                      |       | (Zip Code)                            |

 

(Registrant’stelephone number, including area code): ** (941) 741-4300**

 

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports) and (2) hasbeen subject to such filing requirements for the past 90 days. Yes x  No o

 

Indicate by check mark whether the registrant hassubmitted electronically and posted on its corporate Web site, if any, everyInteractive Data File required to be submitted and posted pursuant to Rule 405of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (orfor such shorter period that the registrant was required to submit and postsuch files). Yes o  No o

 

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, a non-accelerated filer, or asmaller reporting company. See definitions of “large accelerated filer,” “acceleratedfiler,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

| 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 ashell company (as defined in Rule 12b-2 of the Exchange Act). Yes o  No x

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of thelatest practicable date.

 

| **Class of common stock** | ** ** | **Outstanding as of April 30, 2009** | ** ** |
|------------------------------------------|------------|---------------------------------------------------------------|------------|
| Par value  $0.01 per share               | ** ** | **24,725,422**                                                | ** ** |

 

 

 

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Table of Contents

 

**TABLE OF CONTENTS**

 
| ** **        | ** **                | ** **                                                                                                            | **Page**   |
|-------------------|---------------------------|-----------------------------------------------------------------------------------------------------------------------|------------|
| **PART I.**  | **FINANCIAL INFORMATION** | ** **                                                                                                            |
| ** **        | ** **                | ** **                                                                                                            | ** ** |
|              | ITEM 1.                   | Financial Statements                                                                                                  | 3          |
|              |                      |                                                                                                                  |       |
|              |                      | Condensed Consolidated Statements of  Operations for the three months ended March 31, 2009 and 2008  (unaudited) | 3          |
|              |                      |                                                                                                                  |       |
|              |                      | Condensed Consolidated Balance Sheets as of  March 31, 2009 and December 31, 2008 (unaudited)               | 4          |
|              |                      |                                                                                                                  |       |
|              |                      | Condensed Consolidated Statements of Cash  Flows for the three months ended March 31, 2009 and 2008 (unaudited)  | 6          |
|              |                      |                                                                                                                  |       |
|              |                      | Notes to  Condensed Consolidated Financial Statements (unaudited)                                                     | 7          |
|              |                      |                                                                                                                  |       |
|              | ITEM 2.                   | Management’s Discussion and Analysis of  Financial Condition and Results of Operations                           | 16         |
|              |                      |                                                                                                                  |       |
|              | ITEM 3.                   | Quantitative and Qualitative Disclosures  About Market Risk                                                           | 25         |
|              |                      |                                                                                                                  |       |
|              | ITEM 4.                   | Controls and Procedures                                                                                               | 25         |
|              |                      |                                                                                                                  |       |
| **PART II.** | **OTHER INFORMATION**     | ** **                                                                                                            |
| ** **        | ** **                | ** **                                                                                                            | ** ** |
|              | ITEM 1.                   | Legal Proceedings                                                                                                     | 25         |
|              |                      |                                                                                                                  |       |
|              | ITEM 1A.                  | Risk Factors                                                                                                          | 26         |
|              |                      |                                                                                                                  |       |
|              | ITEM 2.                   | Unregistered Sales of Equity Securities and  Use of Proceeds                                                          | 26         |
|              |                      |                                                                                                                  |       |
|              | ITEM 6.                   | Exhibits                                                                                                              | 27         |
|              |                      |                                                                                                                  |       |
|              | SIGNATURE                 | 28                                                                                                                    |

 

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**PART I.  FINANCIAL INFORMATION**

 

**Item 1. Financial Statements**

 

**GEVITY HR, INC. AND SUBSIDIARIES**

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS**

**UNAUDITED**

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

 
| ** **                                                                 | ** ** | **For the Three Months Ended****March 31,** | ** ** |
|----------------------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|
| ** **                                                                 | ** ** | **2009**                                                             | ** ** | **2008** | ** ** |
|                                                                       |       |                                                                 |       |   |   |
| Revenues                                                                   |       | $                                                                    | 129,584    |   | $ | 141,698 |   |
|                                                                       |       |                                                                 |       |   |   |
| Cost of services (exclusive of  depreciation and amortization shown below) |       | 104,008                                                              |       | 107,458 |   |
|                                                                       |       |                                                                 |       |   |   |
| Gross profit                                                               |       | 25,576                                                               |       | 34,240 |   |
|                                                                       |       |                                                                 |       |   |   |
| Operating expenses:                                                        |       |                                                                 |       |   |   |
|                                                                       |       |                                                                 |       |   |   |
| Salaries, wages and commissions                                            |       | 17,197                                                               |       | 18,776 |   |
|                                                                       |       |                                                                 |       |   |   |
| Other general and  administrative                                          |       | 10,881                                                               |       | 11,549 |   |
|                                                                       |       |                                                                 |       |   |   |
| Depreciation and amortization                                              |       | 3,367                                                                |       | 3,936 |   |
|                                                                       |       |                                                                 |       |   |   |
| Total operating expenses                                                   |       | 31,445                                                               |       | 34,261 |   |
|                                                                       |       |                                                                 |       |   |   |
| Operating loss                                                             |       | (5,869                                                               | )          | (21 | ) |
|                                                                       |       |                                                                 |       |   |   |
| Interest income                                                            |       | 28                                                                   |       | 171 |   |
|                                                                       |       |                                                                 |       |   |   |
| Interest expense                                                           |       | (140                                                                 | )          | (570 | ) |
|                                                                       |       |                                                                 |       |   |   |
| Other income (expense), net                                                |       | 15                                                                   |       | (24 | ) |
|                                                                       |       |                                                                 |       |   |   |
| Loss from continuing operations  before  income taxes                      |       | (5,966                                                               | )          | (444 | ) |
|                                                                       |       |                                                                 |       |   |   |
| Income tax benefit                                                         |       | 2,288                                                                |       | 173 |   |
|                                                                       |       |                                                                 |       |   |   |
| Loss from continuing operations                                            |       | (3,678                                                               | )          | (271 | ) |
|                                                                       |       |                                                                 |       |   |   |
| Loss from discontinued  operations, net of tax                             |       | (30                                                                  | )          | (1,344 | ) |
|                                                                       |       |                                                                 |       |   |   |
| Net loss                                                                   |       | $                                                                    | (3,708     | ) | $ | (1,615 | ) |
|                                                                       |       |                                                                 |       |   |   |
| Net loss per common share:                                                 |       |                                                                 |       |   |   |
| - Basic and diluted:                                                       |       |                                                                 |       |   |   |
| Loss from continuing operations                                            |       | $                                                                    | (0.15      | ) | $ | (0.01 | ) |
| Loss from discontinued  operations                                         |       | —                                                               |       | (0.06 | ) |
| Net loss                                                                   |       | $                                                                    | (0.15      | ) | $ | (0.07 | ) |
|                                                                       |       |                                                                 |       |   |   |
| Weighted average common shares outstanding:                                |       |                                                                 |       |   |   |
| - Basic and diluted                                                        |       | 24,303,954                                                           |       | 23,206,595 |   |

 

See notes tocondensed consolidated financial statements.

 

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**GEVITY HR, INC. AND SUBSIDIARIES**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

**UNAUDITED**

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

 
| ** **                                             | ** ** | **March 31,****2009** | ** ** | **December 31,****2008** | ** ** |
|--------------------------------------------------------|------------|----------------------------|------------|-------------------------------|------------|
|                                                   |       |                       |       |                          |       |
| **ASSETS**                                             |       |                       |       |                          |       |
| Current assets:                                        |       |                       |       |                          |       |
|                                                   |       |                       |       |                          |       |
| Cash and cash equivalents                              |       | $                          | 29,317     |                          | $          | 32,537 |   |
|                                                   |       |                       |       |                          |       |
| Marketable securities —  restricted               |       | 4,850                      |       | 4,836                         |       |
|                                                   |       |                       |       |                          |       |
| Accounts receivable, net                               |       | 117,327                    |       | 97,897                        |       |
|                                                   |       |                       |       |                          |       |
| Short-term workers’  compensation receivable, net |       | 24,371                     |       | 51,920                        |       |
|                                                   |       |                       |       |                          |       |
| Other current assets                                   |       | 11,919                     |       | 14,041                        |       |
|                                                   |       |                       |       |                          |       |
| Total current assets                                   |       | 187,784                    |       | 201,231                       |       |
|                                                   |       |                       |       |                          |       |
| Property and equipment, net                            |       | 17,005                     |       | 18,524                        |       |
|                                                   |       |                       |       |                          |       |
| Long-term marketable securities  — restricted     |       | 4,060                      |       | 4,048                         |       |
|                                                   |       |                       |       |                          |       |
| Long-term workers’ compensation  receivable, net  |       | 68,373                     |       | 63,413                        |       |
|                                                   |       |                       |       |                          |       |
| Intangible assets, net                                 |       | —                     |       | 1,825                         |       |
|                                                   |       |                       |       |                          |       |
| Deferred tax asset, net                                |       | 13,859                     |       | 13,054                        |       |
|                                                   |       |                       |       |                          |       |
| Other assets                                           |       | 811                        |       | 841                           |       |
|                                                   |       |                       |       |                          |       |
| Total assets                                           |       | $                          | 291,892    |                          | $          | 302,936 |   |

 

See notes to condensed consolidated financial statements.

 

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**GEVITY HR, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED BALANCE SHEETS(Continued)**

**UNAUDITED**

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

 
| ** **                                                                                                                                                             | ** ** | **March 31,****2009** | ** ** | **December 31,****2008** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------|------------|-------------------------------|------------|
| ** **                                                                                                                                                             | ** ** | ** **                 | ** ** | ** **                    | ** ** |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                                                                                          | ** ** | ** **                 | ** ** | ** **                    | ** ** |
| ** **                                                                                                                                                             | ** ** | ** **                 | ** ** | ** **                    | ** ** |
| Current liabilities:                                                                                                                                                   |       |                       |       |                          |       |
|                                                                                                                                                                   |       |                       |       |                          |       |
| Accrued payroll and payroll  taxes                                                                                                                                     |       | $                          | 141,284    |                          | $          | 125,571 |   |
|                                                                                                                                                                   |       |                       |       |                          |       |
| Accrued insurance premiums and  health reserves                                                                                                                        |       | 14,330                     |       | 13,319                        |       |
|                                                                                                                                                                   |       |                       |       |                          |       |
| Customer deposits and  prepayments                                                                                                                                     |       | 11,761                     |       | 31,793                        |       |
|                                                                                                                                                                   |       |                       |       |                          |       |
| Accounts payable and other  accrued liabilities                                                                                                                        |       | 7,831                      |       | 8,411                         |       |
|                                                                                                                                                                   |       |                       |       |                          |       |
| Deferred tax liability, net                                                                                                                                            |       | 2,265                      |       | 5,261                         |       |
|                                                                                                                                                                   |       |                       |       |                          |       |
| Dividends payable                                                                                                                                                      |       | 1,236                      |       | 1,234                         |       |
| Total current liabilities                                                                                                                                              |       | 178,707                    |       | 185,589                       |       |
|                                                                                                                                                                   |       |                       |       |                          |       |
| Revolving credit facility                                                                                                                                              |       | —                     |       | —                        |       |
|                                                                                                                                                                   |       |                       |       |                          |       |
| Other long-term liabilities                                                                                                                                            |       | 4,472                      |       | 4,432                         |       |
| Total liabilities                                                                                                                                                      |       | 183,179                    |       | 190,021                       |       |
|                                                                                                                                                                   |       |                       |       |                          |       |
| Commitments and contingencies  (see notes)                                                                                                                             |       |                       |       |                          |       |
|                                                                                                                                                                   |       |                       |       |                          |       |
| Shareholders’ equity:                                                                                                                                             |       |                       |       |                          |       |
|                                                                                                                                                                   |       |                       |       |                          |       |
| Common stock, $.01 par value,  100,000,000 shares authorized,  24,754,286 and  24,754,286  issued as of March 31,  2009  and December 31, 2008, respectively |       | 248                        |       | 248                           |       |
|                                                                                                                                                                   |       |                       |       |                          |       |
| Additional paid-in capital                                                                                                                                             |       | 38,163                     |       | 37,915                        |       |
|                                                                                                                                                                   |       |                       |       |                          |       |
| Retained earnings                                                                                                                                                      |       | 70,383                     |       | 75,329                        |       |
|                                                                                                                                                                   |       |                       |       |                          |       |
| Treasury stock (28,669 and  64,314 shares at cost, respectively)                                                                                                       |       | (81                        | )          | (577                          | )          |
| Total shareholders’ equity                                                                                                                                        |       | 108,713                    |       | 112,915                       |       |
|                                                                                                                                                                   |       |                       |       |                          |       |
| Total liabilities and  shareholders’ equity                                                                                                                       |       | $                          | 291,892    |                          | $          | 302,936 |   |

 

See notes to condensed consolidated financial statements.

 

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**GEVITY HR, INC. AND SUBSIDIARIES**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

**UNAUDITED**

**(in thousands)**

 
| ** **                                                                   | ** ** | **For the Three Months Ended  March 31,** | ** ** |
|------------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                                                   | ** ** | **2009**                                                           | ** ** | **2008** | ** ** |
| CASH FLOWS FROM OPERATING  ACTIVITIES:                                       |       |                                                               |       |   |   |
| Net loss                                                                     |       | $                                                                  | (3,708     | ) | $ | (1,615 | ) |
| Adjustments to reconcile net  loss to net cash used in operating activities: |       |                                                               |       |   |   |
| Depreciation and amortization                                                |       | 3,367                                                              |       | 4,037 |   |
| Impairment loss                                                              |       | —                                                             |       | 532 |   |
| Loss on the disposal of  property, net                                       |       | 94                                                                 |       | 40 |   |
| Deferred tax benefit, net                                                    |       | (2,705                                                             | )          | (528 | ) |
| Stock-based compensation                                                     |       | 585                                                                |       | 280 |   |
| Excess tax expense from  share-based arrangements                            |       | —                                                             |       | 120 |   |
| Provision for bad debts                                                      |       | 60                                                                 |       | 392 |   |
| Other                                                                        |       | —                                                             |       | (3 | ) |
| Changes in operating working  capital:                                       |       |                                                               |       |   |   |
| Accounts receivable, net                                                     |       | (19,490                                                            | )          | 11,526 |   |
| Other current assets                                                         |       | 2,122                                                              |       | (303 | ) |
| Workers’ compensation  receivable, net                                  |       | 22,589                                                             |       | (6,321 | ) |
| Other assets                                                                 |       | (54                                                                | )          | 515 |   |
| Accrued insurance premiums and  health reserves                              |       | 1,011                                                              |       | (1,726 | ) |
| Accrued payroll and payroll  taxes                                           |       | 15,708                                                             |       | (14,547 | ) |
| Accounts payable and other  accrued liabilities                              |       | (1,446                                                             | )          | (4,590 | ) |
| Customer deposits and prepayments                                            |       | (20,032                                                            | )          | (2,815 | ) |
| Other long-term liabilities                                                  |       | 176                                                                |       | (453 | ) |
| Net cash used in operating  activities                                       |       | (1,723                                                             | )          | (15,459 | ) |
|                                                                         |       |                                                               |       |   |   |
| CASH FLOWS FROM INVESTING  ACTIVITIES:                                       |       |                                                               |       |   |   |
| Purchases of marketable  securities and certificates of deposit              |       | (26                                                                | )          | (90 | ) |
| Capital expenditures                                                         |       | (135                                                               | )          | (202 | ) |
| Net cash used in investing  activities                                       |       | (161                                                               | )          | (292 | ) |
|                                                                         |       |                                                               |       |   |   |
| CASH FLOWS FROM FINANCING  ACTIVITIES:                                       |       |                                                               |       |   |   |
| Net borrowings under revolving  credit facility                              |       | —                                                             |       | 23,100 |   |
| Capital lease payments                                                       |       | (150                                                               | )          | (80 | ) |
| Proceeds from issuance of  common stock for employee stock plans             |       | 50                                                                 |       | 106 |   |
| Excess tax expense from  share-based arrangements                            |       | —                                                             |       | (120 | ) |
| Dividends paid                                                               |       | (1,236                                                             | )          | (2,095 | ) |
| Net cash (used in) provided by financing  activities                         |       | (1,336                                                             | )          | 20,911 |   |
| Net (decrease) increase in cash  and cash equivalents                        |       | (3,220                                                             | )          | 5,160 |   |
| Cash and cash equivalents -  beginning of period                             |       | 32,537                                                             |       | 9,950 |   |
| Cash and cash equivalents - end  of period                                   |       | $                                                                  | 29,317     |   | $ | 15,110 |   |
|                                                                         |       |                                                               |       |   |   |
| Supplemental disclosure of cash  flow information:                           |       |                                                               |       |   |   |
| Income taxes paid                                                            |       | $                                                                  | 2,683      |   | $ | 4,856 |   |
| Interest paid                                                                |       | $                                                                  | 101        |   | $ | 554 |   |

 

Supplemental disclosure of non-cash transactions:

 

Capitalexpenditures and cash flows from financing activities for the three monthsended March 31, 2008, exclude approximately $61 of capital items purchasedby the Company through capital leases. No capital items were purchased throughcapital leases during the three months ended of March 31, 2009.

 

Seenotes to condensed consolidated financial statements.

 

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**GEVITY HR, INC. AND SUBSIDIARIES**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(UNAUDITED)**

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

 

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

 

The accompanyingunaudited condensed consolidated financial statements of Gevity HR, Inc.and subsidiaries (collectively, the “Company” or “Gevity”)have been prepared in accordance with accounting principles generally acceptedin the United States of America (“US GAAP”) for interim financial informationand with the instructions to Form 10-Q.  These financialstatements should be read in conjunction with the audited consolidatedfinancial statements and notes thereto included in the Company’s Annual Reporton Form 10-K for the year ended December 31, 2008 (the “Form 10-K”),as filed with the Securities and Exchange Commission (the“SEC”). These financial statements reflect all adjustments, consisting only ofnormal recurring accruals, which are, in the opinion of management, necessaryfor a fair presentation of the financial position, results of operations andcash flows for the interim periods presented.

 

The Company’ssignificant accounting policies are disclosed in Note 1 of the Company’sconsolidated financial statements contained in the Form 10-K.  The Company’s critical accounting estimatesare disclosed in Item 7, Management’s Discussion andAnalysis of Financial Condition and Results of Operations, in the Form 10-K.  On an ongoing basis, the Company evaluatesits policies, estimates and assumptions, including those related to revenuerecognition, workers’ compensation receivable/reserves,intangible assets, medical benefit plan liabilities, state unemployment taxes,allowance for doubtful accounts, deferred taxes and share-based payments.  During the first quarter of 2009, there havebeen no material changes to the Company’s significant accounting policies andcritical accounting estimates except as described below.

 

***Potential Acquisition of Gevity***

 

On March 4,2009, Gevity, TriNet Group, Inc. (“TriNet”) and Gin Acquisition, Inc.,a wholly owned subsidiary of TriNet (“Merger Sub”), entered into an Agreementand Plan of Merger (the “Merger Agreement”). Under the Merger Agreement, MergerSub will be merged with and into Gevity (the “Merger”) with Gevity survivingthe Merger as a wholly owned subsidiary of TriNet. Pursuant to the MergerAgreement, at the effective time of the Merger, each share of common stock ofGevity issued and outstanding immediately prior to the effective time (otherthan common shares held by TriNet or Merger Sub or any of their affiliates)will be automatically converted into the right to receive $4.00 in cash. Thetransaction is not subject to a financing condition.

 

The Merger is expected to be completed in the second quarter of 2009and is subject to various customary conditions, including Gevity shareholderapproval. The Company has received clearance on certain regulatory requirementsnecessary to consummate the Merger.  Thewaiting period under the Hart-Scott-Rodino Antitrust Improvements Act hasexpired without a request for additional information from the U.S. FederalTrade Commission.  In addition, the Stateof Florida licensing authority has approved Gevity’s change in ownership applicationand the State of Arkansas licensing authority has granted preliminary approval,subject to certain supplemental filings.  The Merger Agreement contains customary representations andwarranties between Gevity, TriNet and Merger Sub. The Merger Agreement alsocontains customary covenants and agreements, including covenants relating to (a) theconduct of Gevity’s business between the date of the signing of the MergerAgreement and the closing of the Merger, (b) non-solicitation of competingacquisition proposals and (c) the efforts of the parties to cause theMerger to be completed. The Merger Agreement contains certain terminationrights and provides that, upon or following the termination of the MergerAgreement, under specified circumstances involving a competing acquisitionproposal, Gevity may be required to pay TriNet a termination fee of $2,950 andup to $1,000 of expenses incurred by TriNet and its affiliates.

 

Concurrently with the execution and delivery of the Merger Agreement,ValueAct Capital Master Fund, L.P. and certain of its affiliates (“ValueAct”)entered into a voting agreement (the “Voting Agreement”) with TriNet wherebyValueAct committed to vote for the approval of the Merger. The Voting Agreementwill terminate in the event the Merger Agreement is terminated.

 

***Recent AccountingPronouncements***

 

In September 2006, the Financial Accounting Standards Board (“FASB”)issued Statement of Financial Accounting Standards (“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 applies whenever another US GAAP standard requires(or permits) assets or liabilities to be measured at fair value but did notexpand the use of fair value to any new circumstances.  Subsequently, in February 2008, the FASBissued FASB Staff 

 

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Position (“FSP”) SFAS 157-1, *Applicationof FASB Statement No. 157 to FASB Statement No. 13 and OtherAccounting Pronouncements that Address Fair Value Measurements for Purpose ofLease Classification or Measurement Under Statement 13*(“FSP 157-1”) and FASB Staff PositionSFAS 157-2, *Effective Date of FASB StatementNo. 157*(“FSP 157-2”).FSP 157-1 excludes FASB Statement No. 13, *Accountingfor Leases*, and its related interpretive accounting pronouncementsfrom the scope of SFAS 157.  FSP157-2 delays the effective date of SFAS 157 for nonfinancial assets andnonfinancial liabilities, except for items that are recognized or disclosed atfair value in the financial statements on a recurring basis (at leastannually), to fiscal years beginning after November 15, 2008. The Companyimplemented SFAS 157 on January 1, 2008 with no material impact onits consolidated financial statements. The Company implemented SFAS 157 fornonfinancial assets and nonfinancial liabilities on January 1, 2009 withno material impact to its consolidated financial statements.

 

In April 2008, the FASB issued FASBStaff Position SFAS No. 142-3, *Determinationof the Useful Life of Intangible Assets*(“FSP 142-3”). FSP 142-3amends the factors that should be considered in developing renewal or extensionassumptions used to determine the useful life of a recognized intangible assetunder SFAS No. 142, *Goodwill andOther Intangible Assets*. The intent of this FSP is to improve theconsistency between the useful life of a recognized intangible asset and theperiod of expected cash flows used to measure the fair value of the asset underSFAS No. 141 (revised 2007), *BusinessCombinations*, and other US GAAP. FSP 142-3 was effectivefor the Company on January 1, 2009. The adoption of FSP 142-3 did not have a material impact on theCompany’s consolidated financial statements.

 

In December 2007,the FASB issued FASB Statement No. 141 (revised 2007), *Business Combinations* (“SFAS 141R”), which is 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 141Rrequires 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. The impactof SFAS 141R is dependent on the level of future acquisitions.

 

In June 2008, the FASB issued FASB Staff Position EITF 03-6-1, *Determining Whether Instruments Granted inShare-Based Payment Transactions Are Participating Securities*(“FSP EITF No. 03-6-1”).* *This FSP addresses whetherinstruments granted in share-based payment transactions are participatingsecurities prior to vesting and, therefore, should be included in the earningsallocation in computing earnings per share (“EPS”) under the two-class methoddescribed in SFAS No. 128, *Earnings perShare*.  FSP EITF No. 03-6-1 redefines participatingsecurities to include unvested share-based payment awards that containnon-forfeitable dividends or dividend equivalents as participating securitiesto be included in the computation of EPS pursuant to the “two-class method.” Outstandingunvested restricted stock issued under employee compensation programscontaining such dividend participation features would be consideredparticipating securities subject to the “two-class method” in computing EPSrather than the “treasury stock method.” FSP EITF No. 03-6-1 was effectivefor the Company on January 1, 2009.  All prior-period EPS datapresented is to be adjusted retrospectively to conform to the provisions ofthis FSP.  Implementation of FSP EITF No. 03-6-1 did not have animpact on EPS for the quarters ended March 31, 2009 or 2008 due to theoverall net loss of the Company during each of those two quarters.

 

Other new pronouncements issued but noteffective until after March 31, 2009, are not expected to have asignificant effect on the Company’s consolidated financial statements.

 

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

 

***HRA Acquisition***

 

On February 16, 2007, the Companyacquired certain assets, including the client portfolio, of HRAmerica, Inc.(“HRA”), a human resource outsourcing firm that offered fundamental employeeadministration solutions including payroll processing to approximately 145clients with approximately 16,000 client employees.  Approximately 14,700 non-coemployed clientemployees were acquired as of the date of the acquisition and approximately1,300 coemployed client employees (8 clients) were acquired with an effectivedate of April 1, 2007.  Theacquisition provided the Company with technology and processes to enhance itsnon co-employment model Gevity Edge SelectTM.

 

After completion of a comprehensive strategicreview, the Company decided to focus on the growth of its core co-employmentoffering, Gevity EdgeTM. As such, on February 25, 2008, the board ofdirectors of the Company approved a plan to discontinue the Company’s nonco-employment offering, Gevity Edge Select, which was comprised primarily ofclients acquired in the HRA acquisition. Clients that existed at February 25,2008, were notified of this decision and given until June 30, 2008 totransition to other service providers. The Company completed its transition of all remaining Gevity Edge Selectclients during the second quarter of 2008, processing the final payrolls dated June 30,2008.  The Company has determined thatthe exit from the Gevity Edge Select business meets the criteria ofdiscontinued operations in accordance 

 

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with SFAS No. 144, *Accounting for the Impairmentor Disposal of Long-Lived Assets*. Accordingly, the results of operations and related exit costs associatedwith Gevity Edge Select have been reported as discontinued operations for allperiods presented.

 

Summarizedoperating results for the discontinued operations of Gevity Edge Select for thethree months ended March 31, 2009 and 2008 are as follows:

 
| ** **                                      | ** ** | **Three Months  Ended  March 31,  2009** | ** ** | **Three Months  Ended  March 31,  2008** | ** ** |
|-------------------------------------------------|------------|----------------------------------------------------|------------|----------------------------------------------------|------------|
| Revenues                                        |       | $                                                  | —     |                                               | $          | 944 |   |
| Exit costs                                      |       | —                                             |       | 828                                                |       |
| Impairment loss                                 |       | —                                             |       | 532                                                |       |
| All other expenses, net                         |       | 48                                                 |       | 1,750                                              |       |
| Loss from discontinued operations before  taxes |       | (48                                                | )          | (2,166                                             | )          |
| Income tax benefit                              |       | (18                                                | )          | (822                                               | )          |
| Loss from discontinued operations               |       | $                                                  | (30        | )                                                  | $          | (1,344 | ) |

 

For the three months ended March 31,2009, there were no costs incurred in connection with the exit from thisbusiness and management does not expect to incur any further significant costsin connection with the exit from this business. Costs associated with the exitfrom the Gevity Edge Select business for the three months ended March 31,2008 are included in the loss from discontinued operations and are presented inthe following table:

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

 

Activity in theliability accounts associated with the exit costs related to thediscontinuation of the Gevity Edge Select business for the three months ended March 31,2009 and 2008 is presented in the following tables and isincluded within accounts payable and other accrued liabilities in the condensedconsolidated balance sheet:

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

 
| ** **                        | ** ** | **Severance and  Termination  Benefits** | ** ** | **Contract  Termination  Costs** | ** ** | **Total** | ** ** |
|-----------------------------------|------------|-----------------------------------------------|------------|----------------------------------|------------|-----------|------------|
| Balance at December 31, 2008 |       | $                                             | —     |                             | $          | 340       |       | $ | 340 |   |
| Expense accruals                  |       | —                                        |       | —                           |       | —    |       |
| Cash payments                     |       | —                                        |       | (255                             | )          | (255      | )          |
| Balance at March 31, 2009    |       | $                                             | —     |                             | $          | 85        |       | $ | 85 |   |

 

***Impairment Loss***

 

In connectionwith the decision to exit the Gevity Edge Select business during the firstquarter of 2008, an impairment loss of $532 was recorded relating to thewrite-off of the remaining HRA goodwill.

 

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

 

At March 31,2009 and December 31, 2008 the Company’s investment portfolioconsisted of restricted money 

 

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market funds classified as available-for-sale.

 

Restricted moneymarket funds relate to collateral held in connection with the Company’s workers’compensation programs and collateral held in connection with the Company’s general insurance programs. These securities arerecorded at fair value, which is equal to cost. Theinterest earned on these investments is recognized as interest income in theCompany’s condensed consolidated statements of operations.

 

For the threemonths ended March 31, 2009 and 2008, there were no realized gains orlosses from the sale of marketable securities.  As of March 31, 2009 and December 31,2008, there were no unrealized gains or losses on marketable securities.

 

Under SFAS 157, which was adopted by the Company on January 1,2008, the fair values of the money market investments are determined based uponLevel 1 of the fair value hierarchy (quoted prices inactive markets using identical assets).

 

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

 

At March 31,2009 and December 31, 2008, accounts receivable from clients consisted ofthe following:

 
| ** **                            | ** ** | **March 31,  2009** | ** ** | **December 31,  2008** | ** ** |
|---------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| Client receivables - billed           |       | $                        | 4,295      |                        | $          | 7,323 |   |
| Client receivables - accrued          |       | 113,705                  |       | 91,503                      |       |
|                                  |       | 118,000                  |       | 98,826                      |       |
| Less: Allowance for doubtful accounts |       | (673                     | )          | (929                        | )          |
| Total                                 |       | $                        | 117,327    |                        | $          | 97,897 |   |

 

The Companyestablishes 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.

 

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

 

The Company has maintained a loss sensitiveworkers’ compensation insurance program since January 1, 2000. The programis insured by CNA Financial Corporation (“CNA”) for the 2000, 2001 and 2002 program years. The program is currently insuredby member insurance companies of American International Group, Inc.(“AIG”) under AIG’s Commercial Insurance Group (“AIG CI”) and includes coveragefor the 2003 through 2009 policy years. In states where private insurance isnot permitted, client employees are covered by stateinsurance funds.

 

Under the 2009workers’ compensation program with AIG CI, AIG CI is responsible for paying theclaims; the Company is responsible for paying to AIG CI the first $1,000 peroccurrence of claims and AIG CI is responsible for amounts in excess of $1,000per occurrence.  In addition, the AIG CIpolicy provides $20,000 of aggregate stop loss coverage once claims in thedeductible layer exceed $125,000.

 

Similar to prioryears’ workers’ compensation programs with AIG CI, the Company,through its wholly-owned Bermuda-based insurance subsidiary, remits premiums toAIG CI to cover claims to be paid within the Company’s $1,000 per occurrencedeductible layer. AIG CI deposits the premiums into an interest bearing lossfund collateral 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 of interest equal to the 6-monthU.S. Constant Maturity Treasury yield plus 20 basis points.  This rate will reset annually based uponcurrent market conditions.  Under the 2009program, the Company initially agreed to pay $39,200 of loss fund collateralpremium, subject to certain volume adjustments, and it will receive a 0.48% perannum return for 2009. If the program is terminated early, the interest rate isadjusted downward, back to the inception of the 2009 program year, to the1-month U.S. Constant Maturity Treasury yield as it read at that time. The 2009program provides for an initial loss fund collateral premium true-up 18 monthsafter the policy inception and annually thereafter.  The true-up is based upon a pre-determinedloss factor times the amount of incurred claims in the deductible layer as ofthe date of the true-up.

 

The Companyreviews its estimated cost of claims in the deductible layer on a quarterly basis.  Thedetermination of the estimated cost of claims is based upon a number of factors,including but not limited to: actuarial calculations, current and historicalloss trends, the number of open claims, developments relating to the actualclaims incurred and the impact of acquisitions, if any.  The Company uses a certain amount of judgmentin this estimation process. During the three months 

 

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ended March 31, 2009 and2008, the Company revised its ultimate loss estimates for prior open policy years, which resulted in a net reduction of workers’compensation expense of approximately $1,236 and $2,710, respectively. Theserevisions were based upon continued favorable claims development that occurredduring the periods.

 

The balance in theloss fund collateral accounts (including accruedinterest) in excess of the net present value of the Company’s liability to AIGCI with 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 accounts are recorded as reductions to the workers’compensation receivable, net. During the three months ended March 31, 2009and 2008, AIG CI released approximately $26,635 and $2,000, respectively, ofcash, from the loss fund collateral accounts. The first quarter of 2009 lossfund collateral release of $26,635 related to the 2000-2002 policy years’ andwas based upon a renegotiated collateral release schedule formalized in thefourth quarter of 2008.

 

The Companyaccrues for workers’ compensation costs based upon:

 

·      premiums paid for the layer of claims in excessof the deductible;

 

·      estimated total costs of claims that fall withinthe Company’s policy deductible calculated on a net present value basis;

 

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

 

·      the return on investment for loss fund premiumdollars paid to AIG CI.

 

At March 31,2009 and December 31, 2008, the weighted average discount rate used tocalculate the net present value of the claim liability was 2.57% and 3.78%,respectively. Premium payments made to AIG CI relating to program years 2000through 2009 are in excess of the net present value of the estimated claimliabilities. This has resulted in a workers’ compensationreceivable, net, at March 31, 2009 and December 31, 2008 of$92,744 and $115,333, respectively, of which $24,371 and $51,920 was classifiedas short-term at March 31, 2009 and December 31, 2008, respectively. The Company expects to receive $21,407 during the third quarterof 2009 related to the annual loss fund collateral true-up for policy years’2003 through 2008 and an additional $2,964 during the fourth quarter of 2009related to the annual true-up of premium and other program costs.

 

The workers’ compensation receivable from AIG CI represents asignificant concentration of credit risk for the Company. Gevity has variouscommercial insurance relationships with AIG CI, a subsidiary of AIG, includingits workers’ compensation program.  AIG CI has publicly stated as recentlyas March 2, 2009, that it remains well-capitalized and financially secure,with ample resources to pay policyholder claims.  The issues that have evolved at AIG relate toentities outside of their commercial insurance division. The AIG insurancecompanies are regulated by state law and their affairs overseen by stateinsurance commissioners.  Those laws aredesigned in part to assure that regulated insurance companies are operated on afinancially sound basis and their assets are protected from the financialproblems of non-insurance affiliates. Under state insurance regulations, theassets of the AIG insurance subsidiaries are protected from the creditors ofthe parent company. On March 2, 2009, AIG also announced its intention toform a General Insurance holding company with a board of directors, managementteam and brand distinct from AIG. The Commercial Insurance group will be acomponent of this holding company. As of May 4, 2009, AIG CI’s financialstrength rating by A.M. Best was an “A”. Accordingly, the Company does not believe that the current financialcondition of AIG will have a material adverse effect on AIG CI or the Company’sworkers’ compensation receivable as of March 31, 2009.

 

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

 

At December 31,2008, intangible assets consisted of purchased client service agreements. Theseintangible assets were fully amortized as of March 31, 2009.

 

Amortizationexpense from continuing operations for the three months ended March 31,2009 and 2008 was $1,825 and $2,410, respectively. Amortization expense fromdiscontinued operations for the three months ended March 31, 2009 and 2008was $0 and $69 respectively. There is no estimated amortization expense for the remainder of 2009.

 

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**7.****             **HEALTH BENEFITS****

 

Blue Cross BlueShield of Florida, Inc. and its subsidiary HealthOptions, Inc. (together “BCBSF/HOI”) is the Company’s primaryhealthcare partner in Florida, delivering medical care benefits toapproximately 17,000 Florida-based client employees. The Company’s policy withBCBSF/HOI is a minimum premium policy expiring September 30,2009. Pursuant to this policy, the Company is obligated to reimburse BCBSF/HOIfor the cost of the claims incurred by participants under the plan, plus thecost of plan administration. The administrative costs per covered clientemployee associated with this policy are specified in theagreement and aggregate loss coverage is provided to the Company at the levelof 115% of projected claims.  The Companyis required to pre-fund the estimated monthly expenses and claim liabilitycharges of the plan by the first of each calendar month.  The estimated monthly expenses are based uponthe Minimum Premium Rate and the Annual Excess liability rate, as set forth inthe agreement, times the number of insureds. The monthly estimated claimliability charge is based upon an average of monthly paid claims as determinedby BCBSF/HOI based on three month periods specified in the agreement.  Differences between the pre-funded amountsand actual amounts subsequently determined shall be settled in the followingmonth. As part of the Company’s obligation to BCBSF/HOI, the Company posted anirrevocable letter of credit in favor of BSBSF/HOI in an initial amount of$5,000 on October 1, 2008, which shall be increased monthly byapproximately $1,000 over a seven month period until it reaches $11,766 on May 1,2009. As of March 31, 2009, the outstanding letter of credit in favor ofBSBF/HOI was $10,000.

 

Outside the stateof Florida, Aetna Health, Inc. (“Aetna”) is the Company’s largest medicalcare benefits provider for approximately 16,500 client employees. The Company’s 2008/2009 policy with Aetna provides for an HMO and PPOoffering to plan participants. The Aetna HMO and PPO medical benefit plans aresubject to a guaranteed cost contract that caps the Company’s annual liability.

 

In 2006, theCompany announced the addition of UnitedHealthcare as an additional health planoption. As of March 31, 2009, UnitedHealthcare provided medical carebenefits to approximately 2,000 client employees as well as the Company’sinternal employees. The UnitedHealthcare plan is a fixedcost contract. Effective May 1, 2008, UnitedHealthcare and theCompany amended their agreement to extend coverage availability through September 30,2009 for internal employees and those clients covered by UnitedHealthcare as ofMay 1, 2008. As such, UnitedHealthcare is no longer available as an optionto those clients not covered by UnitedHealthcare as of May 1, 2008.

 

The Companyprovides coverage under various regional medical benefit plans to approximately1,000 client employees in various areas of the country. Included in the list ofmedical benefit plan providers are Kaiser FoundationHealth Plan, Inc. and Harvard Pilgrim Healthcare. These regionalmedical plans are subject to fixed cost contracts.

 

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

 

In addition todental coverage, the Company offers various fixed cost insurance programs toclient 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 limited benefitprograms from Star HRG. These plans include fixed cost sickness and accidentand dental insurance programs, and a vision discount plan.

 

Included inaccrued insurance premiums and health reserves at March 31,2009 and December 31, 2008, are $11,614 and $10,129, respectively, ofshort-term liabilities related to the Company’s health benefit plans. Of theseamounts $11,489 and $9,491, respectively, represent an accrual for the estimateof claims incurred but not reported at March 31,2009 and December 31, 2008 related to the BCBSF/HOI contract. Healthbenefit reserves are determined quarterly by the Company and include anestimate of claims incurred but not reported and claims reported but not yetpaid. The calculation of these reserves is based upon anumber of factors, including but not limited to actuarial calculations, currentand historical claims payment patterns, plan enrollment and medical trendrates. During the three months ended March 31, 2009 and 2008, theCompany recorded net health plan surplus of approximately $3,100 and $1,000,respectively, which decreased its cost of services.

 

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

 

The Companymaintains a credit facility with Bank of America, N.A. and Wachovia, N.A. (the “Lenders”).On May 7, 2007, the Company entered into the First Amendment to the Amended and Restated Credit Agreement dated August 30,2006, which increased the amount of aggregate revolving commitments of thecredit facility from $50,000 to $75,000 and allowed the Company to repurchaseup to $125,000 of its capital stock during the term ofthe agreement. On June 14, 2007, the Company entered into theSecond Amendment to the Amended and Restated Credit Agreement, which 

 

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increased theamount of aggregate revolving commitments from $75,000 to $100,000. On February 25,2008, the Company entered into the Third Amendment to theAmended and Restated Credit Agreement (“Third Amendment”). The Third Amendmentprovides for the grant of security interests and liens in substantially all theproperty and assets (with agreed upon carveouts and exceptions) of the Companyto the Lenders. The Third Amendment also provided for an automatic decrease ofthe aggregate revolving commitment of the credit facility from $100,000 to$85,000 on September 30, 2008. The Third Amendment includesadditional covenants and amends certain financialcovenants and negative covenants with an effective date of December 31,2007. These include the maintenance of a minimum consolidated net worth, amaximum consolidated adjusted leverage ratio, a minimum consolidated fixed charge coverage ratio of 1.25:1.0, minimum monthlycumulative EBITDA requirements (for 2008 only), and a ceiling on consolidatedcapital expenditures.  The revised covenants set forth in the ThirdAmendment now restrict the Company’s ability to repurchase shares of itscapital stock except in certain circumstances, make acquisitions, and requiresthe Company to provide certain period reports relating to budget and profitsand losses, intellectual property and insurance policies.  Each of thesecovenants is based on defined terms and contains exceptions in the CreditAgreement, as amended. On March 4, 2009, the Company entered intothe Fourth Amendment to Amended and Restated Credit Agreement (the “FourthAmendment”). The Fourth Amendment amends the definition of “Change of Control”to provide that the entry into the Merger Agreement and the execution of theVoting Agreement, in and of themselves, shall not constitute a “Change ofControl” for purposes of the Credit Agreement.

 

Certain of theCompany’s subsidiaries named in the credit agreement have guaranteed theobligations under the credit agreement. The credit facility has a five-yearterm that expires August 30, 2011. Loan advances bear an interest rateequal to an Applicable Rate (which ranges from 1.50% to 2.25% for EurodollarRate Loans, and from 0.25% to 1.00% for Prime Rate Loans, depending upon theCompany’s consolidated leverage ratio) plus one of the followingindexes: (i) Eurodollar Rate; or (ii) Prime Rate (each asdefined in the credit agreement). Up to $20,000 of the loan commitment can bedrawn through letters of credit. With respect to outstanding letters of credit,a fee determined by reference to the Applicable Rate plusa fronting fee ranging from 1.50% to 2.25% per annum will be charged on theaggregate stated amount of each outstanding letter of credit. A fee rangingfrom 0.30% to 0.45% (based upon the Company’s consolidated leverage ratio) ischarged on any unused portion of the loan commitment. At March 31,2009 and December 31, 2008, the Company had no outstanding advances.

 

The Company was incompliance with all of the covenants under the credit agreement at March 31,2009. The ability to draw funds under the credit agreement is dependent upon meeting the aforementioned financialcovenants.  Additionally, the level ofcompliance with the financial covenants determines the maximum amount availableto be drawn. At March 31, 2009, the maximum facility available tothe Company was approximately $32,834 (whichincludes the impact on availability of the outstanding letter of credit toBCBSF/HOI of $10,000).

 

Pursuant to theterms of the credit agreement, the obligations of the Company may beaccelerated upon the occurrence and continuation of an Event of Default. Suchevents include the following: (i) the failure to make principal, interest or fee payments when due (beyond applicable grace periods); (ii) thefailure to observe and perform certain covenants contained in the creditagreement; (iii) any representation or warranty made by the Company in thecredit agreement or related documents proves to beincorrect or misleading in any material respect when made or deemed made; and (iv) othercustomary events of default. If current operating trends continue unaddressedby management, the Company may not be able to meet its minimum consolidatedfixed charge coverage ratio during future quarters of 2009 and may need to seeka waiver of this covenant from the Lenders. If the Company requires a waiver and the waiver is not obtained, thismay have a material impact on the Company’s cash flow and ability to conductits operations.

 

The Company recorded $115 and $544 ofinterest expense for the three months ended March 31, 2009 and 2008,respectively, related to the amortization of loan costs, unused loan commitmentfees, fees related to the outstanding letter of credit and interest onadvances.

 

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

 

***Litigation***

 

The Company is aparty 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 insurance coverage.

 

On March 13, 2009, a putative class action was commenced in theCircuit Court for Manatee County, Florida against the Company, each of theCompany’s directors and TriNet seeking to enjoin the completion of the Mergerwith TriNet, an 

 

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award of unspecified monetary damages and the recovery of certain costsincurred by the named Plaintiff.   On May 4,2009, the Company agreed in principle to settle the putative class action.  Under the terms of the proposed settlement,all claims relating to the Merger Agreement and the Merger will be dismissed onbehalf of the settlement class. The proposed settlement is subject to certainconditions, including but not limited to court approval and consummation of theMerger. As part of the proposed settlement, Gevity has agreed to pay up to$290 to the plaintiffs’ counsel for their fees and expenses, subject to finalapproval of the settlement and such fees and expenses by the court.  The proposed settlement will not affect theamount of merger consideration to be paid in the Merger or change any otherterms of the Merger or Merger Agreement.

 

***Regulatory Matters***

 

The Company’semployer and health care operations are subject to numerous federal, state andlocal laws related to employment, taxes and benefit plan matters. Generally,these rules affect all companies in the United States. However, the rules that govern professionalemployer organizations (“PEO”) constitute an evolving area due to uncertaintiesresulting from the non-traditional employment relationship among the PEO, theclient and the client employees. Many federal and statelaws relating to tax and employment matters were enacted before the widespreadexistence of PEO’s and do not specifically address the obligations andresponsibilities of these PEO relationships. If the Internal Revenue Serviceconcludes that PEO’s are not “employers” ofcertain client employees for purposes of the Internal Revenue Code of 1986, asamended, its cafeteria plan may lose its favorable taxstatus, the Company may no longer be able to assume the client’s federalemployment tax withholding obligations, and certain defined employee benefitplans maintained by the Company may be denied the ability to deliver benefits on a tax-favored basis as intended.

 

***CaliforniaUnemployment Tax Assessment***

 

In May of 2007, theCompany received a Notice of Assessment from the State of California EmploymentDevelopment Department (“EDD”) relative to the Company’s practice of reportingpayroll for its subsidiaries under multiple employer account numbers.  The notice stated that the EDD was collapsingthe accounts of the Company’s subsidiaries into one account number for payrollreporting purposes and retroactively reassessed unemployment taxes due at ahigher overall rate for the 2004-2006 tax 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 Insurance AppealsBoard asking that the EDD’s assessment be set aside. The petition contends inpart that the EDD has exceeded the scope of its authority in issuing theassessment by failing to comply with its own mandatory procedural requirementsand that the statute of limitations for issuing the assessments has expired asthe Company’s activities within the state were compliant with Californiastatutes and regulations.

 

The Company and the State ofCalifornia entered into negotiations in May 2008 in an attempt to resolvethe dispute.  As a result, Gevityproposed a settlement offer in June 2008 that included a cash paymentoffer of $1,200, conceding to the State’s higher overall unemployment tax ratefor tax years 2007 — 2008, along with revisions to its unemployment taxreporting methods for post 2008 tax years in consideration for the State’swithdrawal of the existing assessment for 2004 —2006 (the “ Settlement Offer”).  The Settlement Offer is currently underreview by the State.  The Company accrued$1,200 during the year ended December 31, 2008, reflecting estimatedamounts due in connection with additional unemployment tax costs for the term January 1,2007 — December 31, 2008, should the State of California accept theSettlement Offer.  No additional amountswere accrued for the quarter ended March 31, 2009, as the EDD is generallycharging the Company the maximum rate of 6.2% for 2009.   In the event that the Company is not able toreach a settlement with the State of California, the Company believes it has validdefenses regarding the assessments and will vigorously challenge theassessments.

 

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

 

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

###### ** **

Under the currentshare repurchase program (announced by the Company in August 2006and increased in April 2007), a total of $111,527 of the Company’s commonstock is authorized to be repurchased. Share repurchases under the program maybe made through open market purchases, block trades or in private transactionsat such times and in such amounts as the Company deemsappropriate, based on a variety of factors including price, regulatoryrequirements, overall market conditions and other corporate opportunities. Asof March 31, 2009, total shares repurchased under this program were 2,886,884 at a total cost of $60,131.  No shares were repurchased under this programduring the year ended December 31, 2008 or during the first threemonths of 2009. The Company has suspended its share repurchase program for the time being in order to invest available cash inits business.

 

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

 

The Companyrecords income tax expense (benefit) using the asset and liability method ofaccounting for deferred income taxes. Under such method, deferred tax assets andliabilities are recognized for the expected future tax consequences oftemporary differences between the financial statement carrying values and theincome tax bases of the Company’s assets and liabilities. The Company’seffective tax rate provides for both federal and stateincome taxes. For the three months ended March 31, 2009 and 2008,the Company’s effective rate for income from continuing operations was 38.4%and 39.0%, respectively. The Company’s effective tax rates differed from thestatutory federal tax rates primarily because of the impact of state taxes and federal tax credits.

 

On March 11, 2009, in connection with an ongoing examination ofthe Company’s U.S. income tax returns for 2002 through 2004, the Companyreceived Notices of Proposed Adjustment from the Internal Revenue Service (“IRS”)advising it of proposed increases to its federal income tax of approximately$41,900 including penalties. Of this amount, the Company has previously reserved$6,852 of federal income taxes in its consolidated financial statements inaccordance with the provisions of FASB Interpretation No. 48, *Accounting for Uncertainty in Income Taxes — An Interpretation of FASBStatement No. 109*.  The Company believes that theremaining proposed adjustments are either the result of the IRSmisunderstanding the facts relating to the adjustments or the result of a legalinterpretation made by the IRS that is inconsistent with existing law. The Company intends to vigorously contest these adjustments and believes thatit will ultimately prevail.  Although the ultimate outcome of the disputewith the IRS cannot be predicted with certainty, the Company believes thatadequate provision for taxes has been made in its consolidated financialstatements for any reasonably foreseeable outcome related to these proposedadjustments.   Consequently, the Company believes that ultimateresolution of this matter is unlikely to have a material adverse effect on itsfinancial condition or results of operations.

 

**12.****          LOSS**PER SHARE****

 

For the threemonths ended March 31, 2009, 13,428 common stock equivalents were excludedfrom the diluted earnings per share computation as their effect wasanti-dilutive. Additionally, 961,729 options to purchasecommon stock, weighted for the portion of the period they were outstanding,were excluded from the diluted earnings per share computation substantiallybecause the exercise prices of the options were greater than the average priceof the common stock.

 

For the threemonths ended March 31, 2008, 395,104 common stock equivalents wereexcluded from the diluted earnings per share computation as their effect wasanti-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 substantiallybecause the exercise prices of the options were greater than the average priceof the common stock.

 

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**ITEM 2. Management’s Discussion and Analysis of Financial Condition and Resultsof Operations**

 

The followingdiscussion contains forward-looking statements that are subject to known andunknown risks, uncertainties (some of which are beyond the Company’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 forthe year ended December 31, 2008 (the “Form 10-K”), as filed with theSecurities and Exchange Commission. See “Cautionary Note RegardingForward-Looking Statements” below in this Item 2. Thefollowing discussion should be read in conjunction with the Company’scondensed consolidated financial statements and related notes contained in thisreport. Historical results are not necessarily indicative of trends inoperating results for any future period.

 

**OVERVIEW**

 

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

 

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

 

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

 

Previously, Gevityalso provided service to its clients through a non co-employment relationship.The non co-employment relationship between Gevity and its clients was alsogoverned by a PSA. Under the non co-employment PSA, the employment related liabilitiesremained with the client and the client was responsible for its own workers’compensation insurance and health and welfare plans. The Company assumedresponsibility for payroll administration (including payroll processing,payroll tax filing and W-2 preparation) and providedaccess to all of its HR services. This non co-employment offering wasknown as Gevity Edge SelectTM.  Aftercompletion of a comprehensive strategic review, the Company decided to focus onthe growth of its core co-employment offering, Gevity Edge. As such, on February 25,2008, the board of directors of the Company approved a plan to discontinue theCompany’s non co-employment offering, Gevity Edge Select. Clients that existedat February 25, 2008, were notified of this decision and given until June 30,2008 to transition to other service providers. The Company completed its transition of all remaining Gevity Edge Selectclients during the second quarter of 2008, processing of the final payrollsdated June 30, 2008.  The Companydetermined that the exit from the Gevity Edge Select business met the criteriaof discontinued operations in accordance with Statement of Financial AccountingStandards No. 144, *Accounting for theImpairment or Disposal of Long-Lived Assets*.  Accordingly, the results of operations andrelated exit costs associated with Gevity Edge Select have been reported asdiscontinued operations for all periods presented   The impact of this decision on the resultsof operations of the Company is included in the “Resultsof Operations” discussion that follows under “Discontinued Operations.”

 

**PotentialAcquisition of Gevity**

 

On March 4,2009, Gevity, TriNet Group, Inc. (“TriNet”) and Gin Acquisition, Inc.,a wholly owned subsidiary of TriNet (“Merger Sub”), entered into a MergerAgreement (the “Merger Agreement”). Under the Merger Agreement, Merger Sub will be merged with and intoGevity (the “Merger”) with Gevity surviving the Merger as a wholly ownedsubsidiary of TriNet.  Pursuant to theMerger Agreement, at the effective time of the Merger, each share of commonstock of Gevity issued and outstanding immediately prior to the effective time(other than common shares held by TriNet or Merger Sub or any of theiraffiliates) will be automatically converted into the right to receive $4.00 incash. The transaction is not subject to a financing condition.

 

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The Merger is expected to be completed in the second quarter of 2009and is subject to various customary conditions, including Gevity shareholderapproval. The Company has received clearance on certain regulatory requirementsnecessary to consummate the Merger.  Thewaiting period under the Hart-Scott-Rodino Antitrust Improvements Act hasexpired without a request for additional information from the U.S. FederalTrade Commission.  In addition, the Stateof Florida licensing authority has approved Gevity’s change in ownershipapplication and the State of Arkansas licensing authority has grantedpreliminary approval, subject to certain supplemental filings.   The Merger Agreement contains customaryrepresentations and warranties between Gevity, TriNet and Merger Sub. TheMerger Agreement also contains customary covenants and agreements, includingcovenants relating to (a) the conduct of Gevity’s business between thedate of the signing of the Merger Agreement and the closing of the Merger, (b) non-solicitationof competing acquisition proposals and (c) the efforts of the parties tocause the Merger to be completed. The Merger Agreement contains certaintermination rights and provides that, upon or following the termination of theMerger Agreement, under specified circumstances involving a competingacquisition proposal, Gevity may be required to pay TriNet a termination fee of$2.95 million and up to $1.0 million of expenses incurred by TriNet andits affiliates.

 

Concurrently with the execution and delivery of the Merger Agreement,ValueAct Capital Master Fund, L.P. and certain of its affiliates (“ValueAct”)entered into a voting agreement (the “Voting Agreement”) with TriNet wherebyValueAct committed to vote for the approval of the Merger. The Voting Agreementwill terminate in the event the Merger Agreement is terminated.

 

**RESULTS OF OPERATIONS**

 

***Three Months Ended March 31,2009 Compared to Three Months Ended March 31, 2008***

 

**Revenue**

 

The followingtable presents certain information related to the Company’srevenues from continuing operations for the three months ended March 31,2009 and 2008:

 
| ** **                                                                                                      | ** ** | **Three Months Ended**                                | ** ** | ** **               | ** ** |
|-----------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|--------------------------|------------|
| ** **                                                                                                      | ** ** | **March 31,  2009**                                        | ** ** | **March 31,  2008** | ** ** | **%  Change** | ** ** |
| ** **                                                                                                      | ** ** | **(in thousands, except statistical data)** | ** ** |
| Revenues:                                                                                                       |       |                                                            |       |                     |       |   |   |
| Professional service  fees                                                                                      |       | $                                                               | 23,091     |                     | $          | 29,829 |   | (22.6 | )% |
| Employee health and welfare benefits                                                                            |       | 78,393                                                          |       | 83,814                   |       | (6.5 | )% |
| Workers’ compensation                                                                                      |       | 12,228                                                          |       | 15,846                   |       | (22.8 | )% |
| State unemployment taxes and other                                                                              |       | 15,872                                                          |       | 12,209                   |       | 30.0 | % |
| Total revenues                                                                                                  |       | $                                                               | 129,584    |                     | $          | 141,698 |   | (8.5 | )% |
|                                                                                                            |       |                                                            |       |                     |       |   |   |
| Statistical data:                                                                                               |       |                                                            |       |                     |       |   |   |
| Gross salaries and wages (in thousands)                                                                         |       | $                                                               | 969,165    |                     | $          | 1,053,448 |   | (8.0 | )% |
| Client employees at period end                                                                                  |       | 94,379                                                          |       | 106,784                  |       | (11.6 | )% |
| Clients at period end (1)                                                                                       |       | 5,607                                                           |       | 6,282                    |       | (10.7 | )% |
| Average number of client employees/clients  at period end                                                       |       | 17                                                              |       | 17                       |       | N/A |   |
| Average number of client employees paid (2)                                                                     |       | 89,591                                                          |       | 100,084                  |       | (10.5 | )% |
| Annualized average wage per average client  employees paid (3)                                                  |       | $                                                               | 43,271     |                     | $          | 42,103 |   | 2.8 | % |
| Workers’ compensation  billing per one hundred dollars of workers’ compensation wages (4)             |       | $                                                               | 1.46       |                     | $          | 1.67 |   | (12.6 | )% |
| Workers’ compensation manual premium per  one hundred dollars of workers’ compensation wages (4), (5) |       | $                                                               | 1.45       |                     | $          | 1.81 |   | (19.9 | )% |
| Annualized professional  service fees per average number of client employees paid (3)                           |       | $                                                               | 1,031      |                     | $          | 1,192 |   | (13.5 | )% |
| Client employee health benefits  participation                                                                  |       | 39                                                              | %          | 37                       | %          | 5.4 | % |

 

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(1)       Clients measured byindividual client Federal Employer Identification Number (“FEIN”).

 

(2)       The average number ofclient employees paid is calculated based upon the sum of the number of paidclient employees at the end of each month divided by the number of months inthe period.

 

(3)       Annualized statisticalinformation is based upon actual quarter-to-date amounts,which have been annualized 

 

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(divided bythree and multiplied by twelve), and then divided by the average number ofclient employees paid.

 

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

 

(5)       Manual premium rate data isderived from tables of member insurance companies of American InternationalGroup, Inc. (“AIG”) Commercial Insurance Group (“AIG CI”) in effect for2009 and 2008, respectively.

 

For the threemonths ended March 31, 2009, total revenues were $129.6 million comparedto $141.7 million for the three months ended March 31, 2008, representinga decrease of $12.1 million or 8.5%. This decrease was a result of thereduction in the majority of revenue components as describedbelow.

 

As of March 31,2009, the Company served 5,607 clients, as measured by each client’s FEIN, with94,379 active client employees. This compares to 6,282 clients, as measured by each client’s FEIN, with 106,784 active clientemployees at March 31, 2008.  Theaverage number of client employees paid was 89,591 for the first quarter of2009 compared to 100,084 for the first quarter of 2008.  The declines in clientand client employee metrics were attributable to the impact of higher thanexpected client and client employee attrition levels during 2008 and the firstquarter of 2009, which included a larger than expected decline in the worksiteemployees of existing clients. These declines were primarily a result ofgeneral economic conditions and lower than expected production levels during2008 and the first quarter of 2009.  Inaddition, during the first three quarters of 2008, the Company terminatedapproximately 240 unprofitable clients (impacting approximately 4,500 clientemployees) in an effort to improve overall earnings in the long-term.

 

Revenues fromprofessional service fees decreased to $23.1 million forthe three months ended March 31, 2009, from $29.8 million for thethree months ended March 31, 2008, representing a decrease of $6.7 millionor 22.6%. The decrease was due to the overall decrease inthe average number of client employees paid by 10.5% as discussed above as wellas a reduction in annualized professional service fees per average number ofclient employees paid by 13.5%, from $1,192 for the three months ended March 31,2008 to $1,031 for the three months ended March 31,2009. The decrease in annualized professional service fees was primarilyattributable to general economic conditions and the impact of the 2008terminations of unprofitable clients which, despite having a negative impact ongross profit, generally had higher professional service fee levels.

 

Revenues forproviding health and welfare benefits for the threemonths ended March 31, 2009 were $78.4 million as compared to $83.8million for the three months ended March 31, 2008, representing a decreaseof $5.4 million or 6.5%. Health and welfare benefit plan revenues decreased due to the decrease in the average number of participants in theCompany’s health and welfare benefit plans of approximately 8.4% and waspartially offset by the increase in health insurance premiums as a result ofhigher costs to the Company to provide such coverage forclient employees and the Company’s approach to pass through allinsurance-related cost increases.

 

Revenues forproviding workers’ compensation insurance coverage decreased to $12.2 millionfor the three months ended March 31, 2009, from $15.8 million for the three months ended March 31, 2008,representing a decrease of $3.6 million or 22.8%. Workers’ compensationbillings, as a percentage of workers’ compensation wages for the three monthsended March 31, 2009, were 1.46% as compared to 1.67% for the same period in 2008, representing a decrease of 12.6%.Workers’ compensation revenue decreased in the first quarter of 2009primarily due to the combined effects of a decrease in billings for Floridaclients reflecting a reduction in Florida manual premium rates beginning in January 2009 and a decrease in the number ofclients that participate in the Company’s workers’ compensation program. Themanual premium rates for workers’ compensation applicable to the Company’sclients decreased 19.9% during the three months ended March 31, 2009 ascompared to the three months ended March 31, 2008. Manual premium ratesare the allowable rates that employers are charged by insurance companies forworkers’ compensation insurance coverage. The decrease in the Company’s manualpremium rates primarily reflects the reduction in theFlorida manual premium rates.

 

Revenues fromstate unemployment taxes and other revenues increased to $15.9 million for thethree months ended March 31, 2009 from $12.2 million for the three monthsended March 31, 2008, representing an increase of$3.7 million or 30.0%. The impact of the overall reduction in wages ofapproximately 8.0% was more than offset by the portion of the increase in stateunemployment tax rates that were passed through to the Company’s clients.

 

**Cost of Services**

 

The followingtable presents certain information related to the Company’scost of services from continuing operations for the three months ended March 31,2009 and 2008:

 

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| ** **                                                                                                       | ** ** | **Three Months Ended**                                | ** ** | ** **               | ** ** |
|------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|--------------------------|------------|
| ** **                                                                                                       | ** ** | **March 31,  2009**                                        | ** ** | **March 31,  2008** | ** ** | **%  Change** | ** ** |
| ** **                                                                                                       | ** ** | **(in thousands, except statistical data)** | ** ** |
| Cost of services:                                                                                                |       |                                                            |       |                     |       |   |   |
| Employee health and welfare benefits                                                                             |       | $                                                               | 75,284     |                     | $          | 82,814 |   | (9.1 | )% |
| Workers’ compensation                                                                                       |       | 9,913                                                           |       | 10,042                   |       | (1.3 | )% |
| State unemployment taxes and other                                                                               |       | 18,811                                                          |       | 14,602                   |       | 28.8 | % |
| Total cost of services                                                                                           |       | $                                                               | 104,008    |                     | $          | 107,458 |   | (3.2 | )% |
|                                                                                                             |       |                                                            |       |                     |       |   |   |
| Statistical data:                                                                                                |       |                                                            |       |                     |       |   |   |
|                                                                                                             |       |                                                            |       |                     |       |   |   |
| Gross salaries and wages (in thousands)                                                                          |       | $                                                               | 969,165    |                     | $          | 1,053,448 |   | (8.0 | )% |
| Average number of client employees paid (1)                                                                      |       | 89,591                                                          |       | 100,084                  |       | (10.5 | )% |
| Workers compensation  cost rate per one hundred dollars of workers’ compensation wages (2)                  |       | $                                                               | 1.18       |                     | $          | 1.06 |   | 11.3 | % |
| Number of workers’ compensation claims (3)                                                                  |       | 666                                                             |       | 867                      |       | (23.2 | )% |
| Frequency of workers’ compensation claims  per one million dollars of workers’ compensation wages  (2) |       | 0.79                                                            | x          | 0.91                     | x          | (13.2 | )% |

 

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(1)     The average number of clientemployees paid is calculated based upon the sum of the number of paid client employeesat 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 theCompany’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 withrespect to a specific policy year that are reported subsequent to the end ofsuch period.

 

Cost of services,which includes the cost of the Company’s health and welfare benefit plans,workers’ compensation insurance, state unemployment taxes and other costs, was $104.0 million for the three months ended March 31,2009, compared to $107.5 million for the three months ended March 31,2008, representing a decrease of $3.5 million or 3.2%. This decrease was due tothe reduction in the majority of the cost of servicescomponents as described below.

 

The cost ofproviding health and welfare benefits to clients’ employees for the threemonths ended March 31, 2009 was $75.3 million as compared to $82.8 millionfor the three months ended March 31, 2008, representing a decrease of $7.5 million or 9.1%. This decrease wasprimarily attributable to the decrease in the number of client employeesparticipating in the health and welfare benefit plans and was partially offsetby higher cost of health benefits.  Inaddition, the first quarters of 2009 and 2008 were favorably impacted by therecognition of a health benefit surplus of $3.1 million and $1.0 million,respectively, based upon favorable claims experience.  The Company expects that price increasesimplemented in conjunction with healthcare renewals effective October 1,2008 and the continuation of current claims experience will continue tofavorably impact healthcare costs during 2009.

 

Workers’compensation costs were $9.9 million for the three months ended March 31,2009, as compared to $10.0 million for the three months ended March 31,2008, representing a decrease of $0.1 million or 1.3%.Workers’ compensation costs decreased in the first quarter of 2009primarily due to the approximate 10.5% reduction in the average number ofclient employees paid and related reduction in wages and claims. The threemonths ended March 31, 2009 and 2008 were also favorably impacted by the reduction in the prior years’ workers’ compensationloss estimates of approximately $1.2 million and $2.7 million, respectively, asa result of continued favorable claims development for those prior open policyyears. The Company expects that if current claims development trends continue,this will have a favorable impact on workers’ compensation costs for theremainder of 2009.

 

State unemploymenttaxes and other costs were $18.8 million for the three months ended March 31,2009, compared to $14.6 million for the three months ended March 31, 2008,representing an increase of $4.2 million or 28.8%. Theimpact of the overall reduction in wages of approximately 8.0% was more thanoffset by the increase in state unemployment tax rates.

 

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**Operating Expenses**

 

The following table presents certain information related to the Company’soperating expenses from continuing operations for the three months ended March 31,2009 and 2008:

 
| ** **                        | ** ** | **Three Months Ended**                                | ** ** | ** **               | ** ** |
|-----------------------------------|------------|-----------------------------------------------------------------|------------|--------------------------|------------|
| ** **                        | ** ** | **March 31,  2009**                                        | ** ** | **March 31,  2008** | ** ** | **% Change** | ** ** |
| ** **                        | ** ** | **(in thousands, except statistical data)** | ** ** |
| Operating expenses:               |       |                                                            |       |                     |       |   |   |
| Salaries, wages and commissions   |       | $                                                               | 17,197     |                     | $          | 18,776 |   | (8.4 | )% |
| Other general and administrative  |       | 10,881                                                          |       | 11,549                   |       | (5.8 | )% |
| Depreciation and amortization     |       | 3,367                                                           |       | 3,936                    |       | (14.5 | )% |
| Total operating expenses          |       | $                                                               | 31,445     |                     | $          | 34,261 |   | (8.2 | )% |
|                              |       |                                                            |       |                     |       |   |   |
| Statistical data:                 |       |                                                            |       |                     |       |   |   |
| Internal employees at quarter end |       | 656                                                             |       | 815                      |       | (19.5 | )% |

 

Total operatingexpenses were $31.4 million for the three months ended March 31, 2009 ascompared to $34.3 million for the three months ended March 31,2008, representing a decrease of $2.8 million or 8.2%.

 

Salaries, wagesand commissions were $17.2 million for the three months ended March 31,2009 as compared to $18.8 million for the three months ended March 31, 2008, representing a decrease of $1.6million or 8.4%. The decrease is primarily a result of the reduction inmanagement and support personnel that occurred throughout 2008 and the firstquarter of 2009. Included in salaries, wages andcommissions for the three months ended March 31, 2009 are severance costsof approximately $1.6 million related to personnel reductions as compared toseverance wages of approximately $0.4 million for the three months ended March 31,2008.

 

Other general andadministrative expenses were $10.9 million for the three months ended March 31,2009 as compared to $11.5 million for the three monthsended March 31, 2008, representing a decrease of $0.7 million or5.8%. The decrease occurred across all major components of general andadministrative expenses and is attributable to cost alignment measures takenduring 2008 and the first quarter of 2009. Partially offsetting the reductionin other general and administrative expenses for the three months ended March 31,2009 are $1.6 million of costs incurred in connection with the Merger.

 

Depreciation andamortization expenses were $3.4 million for the three months ended March 31,2009 compared to $3.9 million for the three months ended March 31, 2008,representing a decrease of $0.6 million or 14.5%. The decrease is primarilyattributable to the completion in the fourth quarter of 2008 and the firstquarter of 2009 of the amortization of intangible assets previously acquired.

 

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

 

**Income Taxes**

 

For the threemonths ended March 31, 2009, the income tax benefit from continuingoperations was $2.3 million compared to an income taxbenefit of $0.2 million for the three months ended March 31,2008.  The increased income tax benefitis primarily a function of the increased loss from continuing operations.  The Company’s effectivetax rate from continuing operations for the three months ended March 31,2009 and 2008 was 38.4% and 39.0%, respectively.  The Company’s effective tax rates differedfrom the statutory federal tax rates because of the impact of state taxes and federaltax credits.

 

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**Gross Profit, Operating Loss, Loss fromContinuing Operations and Net Loss Per Share from Continuing Operations**

 

As a net result ofthe factors described above, the following table summarizes the changes ingross profit, operating loss, loss from continuing operations and net loss pershare from continuing operations:

 
| ** **                                                                     | ** ** | **Three Months Ended**                                                             | ** ** | ** **               | ** ** |
|--------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------|------------|--------------------------|------------|
| ** **                                                                     | ** ** | **March 31,  2009**                                                                     | ** ** | **March 31,  2008** | ** ** | **% Change** | ** ** |
| ** **                                                                     | ** ** | **(in thousands, except per share and statistical data)** | ** ** |
|                                                                           |       |                                                                                         |       |                     |       |   |   |
| Gross profit                                                                   |       | $                                                                                            | 25,576     |                     | $          | 34,240 |   | (25.3 | )% |
| Operating loss                                                                 |       | $                                                                                            | (5,869     | )                        | $          | (21 | ) | N/A |   |
| Loss from continuing operations                                                |       | $                                                                                            | (3,678     | )                        | $          | (271 | ) | N/A |   |
| Net loss per share from continuing  operations                                 |       | $                                                                                            | (0.15      | )                        | $          | (0.01 | ) | N/A |   |
| Statistical data:                                                              | ** ** | ** **                                                                                   | ** ** | ** **               | ** ** | ** ** | ** ** |
| Annualized gross profit per average number  of client employees paid (1)  |       | $                                                                                            | 1,142      |                     | $          | 1,368 |   | (16.5 | )% |
| Annualized operating loss per average number of client employees paid (1) |       | $                                                                                            | (262       | )                        | $          | (1 | ) | N/A |   |

 

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(1)   Annualizedstatistical information is based upon actual period-to-date amounts, which havebeen annualized (divided by three and multiplied by twelve) and then divided bythe average number of client employees paid.

 

**DiscontinuedOperations**

 

The loss fromdiscontinued operations for the three months ended March 31, 2009 was$0.05 million ($0.03 million net of income tax) compared to a loss of $2.2million ($1.3 million net of income tax) for the three months ended March 31,2008.  The decrease in the loss of $2.1million was a result of the exit from the Gevity Edge Select business.  The Company’s operations related to GevityEdge Select ceased on June 30, 2008. The Company does not expect to incur any further significant costsrelated to the exit of this business.

 

### **LIQUIDITY AND CAPITAL RESOURCES**

### ** **

**Cash Flow**

 

***General***

 

The Company believes that its current cash balances, cash flow fromoperations and the existing credit facility will be sufficient to meet itsoperational requirements for the next 12 months. The Company has a securedcredit facility for $85.0 million with Bank of America, N.A. and Wachovia, N.A.(the “Lenders”) and had no outstanding borrowings as of March 31, 2009.See Note 8 to the condensed consolidated financial statements contained in thisform 10-Q for additional information regarding the Company’s credit facility.On February 25, 2008, the Company entered into the Third Amendment toAmended and Restated Credit Agreement (“Third Amendment”). The Third Amendmentprovides for the grant of security interests and liens in substantially all theproperty and assets (with agreed upon carveouts and exceptions) of the Companyto the Lenders. The Third Amendment also provided for an automatic decrease ofthe aggregate revolving commitment of the credit facility from $100.0 millionto $85.0 million on September 30, 2008. The Third Amendment includesadditional covenants and amends certain financial covenants and negativecovenants with an effective date of December 31, 2007. These include themaintenance of a minimum consolidated net worth, a maximum consolidatedadjusted leverage ratio, a minimum consolidated fixed charge coverage ratio of1.25:1.0, minimum consolidated adjusted EBITDA requirements (for 2008 only),and a ceiling on consolidated capital expenditures. The revised covenants setforth in the Third Amendment also restrict the Company’s ability to repurchaseshares of its capital stock except in certain circumstances, make acquisitionsand require the Company to provide certain period reports relating to budgetand profits and losses, intellectual property and insurance policies. Each of these covenants is based on defined terms and contains exceptionsin each case contained in the credit agreement, as amended. The Company was incompliance with all of the revised covenants under the credit agreement at March 31,2009. The ability to draw funds under the credit agreement is dependent uponmeeting the aforementioned financial covenants. Additionally, the level of compliance with the financial covenantsdetermines the maximum amount available to be drawn. At March 31, 2009, noamounts were outstanding under the credit facility and the maximum facilityavailable to the Company was approximately $32.8 million (which includes theeffect on availability of the outstanding letter of credit to BCBSF/HOI of$10.0 million). The Company is not currently aware of any inability of ourLenders to provide 

 

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access to the full commitment of funds that exist under our creditfacility, if necessary. However, due to recent economic conditions and thedeteriorating business climate facing financial institutions, there can be noassurance that such facility will be available to the Company, even though itis a binding commitment.

 

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 (beyondapplicable grace periods); (ii) the failure to observe and performcertain covenants contained in the credit agreement; (iii) anyrepresentation or warranty made by the Company in the credit agreement orrelated documents proves to be incorrect or misleading inany material respect when made or deemed made; and (iv) othercustomary events of default. If current operating trends continue unaddressedby management, the Company may not be able to meet its minimum consolidatedfixed charge coverage ratio during future quarters of 2009 and may need to seeka waiver of this covenant from the Lenders. If the Company requires a waiver and the waiver is not obtained, thismay have a material impact on the Company’s cash flow and ability to conductits operations.

 

The Company’sprimary short-term liquidity requirements relate to the payment of accruedpayroll and payroll taxes of its internal and client employees and the paymentof workers’ compensation premiums and medical benefit plan premiums. TheCompany’s billings to its clients include: (i) each client employee’sgross wages; (ii) a professional service fee which is primarily computedas a percentage of the gross wages; (iii) related payroll taxes; (iv) workers’compensation insurance charges (if applicable); and (v) the client’sportion of benefits, including medical and retirement benefits, provided to theclient employees based on coverage levels elected by the client and the clientemployees. Included in the Company’s billings from continuing operations duringthe first three months of 2009 were salaries, wages and payroll taxes of clientemployees of approximately $1.0 billion. The billings to clients aremanaged from a cash flow perspective so that a matching generally existsbetween the time that the funds are received from a client to the time that thefunds are paid to the client employees and to the appropriate taxjurisdictions. As a co-employer, and under the terms of the Company’sprofessional services agreements, the Company is obligated to make certainwage, tax and regulatory payments even if the related wages tax and regulatorypayments are not made by its clients. Therefore, the objective of the Companyis to minimize the credit risk associated with remitting the payroll andassociated taxes before receiving the service fees from the client and generally,the Company 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 resultsof operations and cash flow may potentially be impacted. In addition, thetiming and amount of payments for payroll, payroll taxes and benefit premiumscan vary significantly based on various factors, including the day of the weekon which a payroll period ends and the existence of holidays at or immediatelyfollowing a payroll period-end.

 

***RestrictedCash***

 

The Company isrequired to collateralize its obligations under its workers’ compensationprogram and certain general insurance coverage. The Company uses its marketablesecurities to collateralize these obligations, as morefully described below. Marketable securities used to collateralize theseobligations are designated as restricted in the Company’s condensedconsolidated financial statements.

 

At March 31,2009, the Company had $38.2 million in total cash and cash equivalents and restricted marketable securities, of which $29.3million was unrestricted. At March 31, 2009, the Company hadpledged $8.9 million of restricted marketable securities in collateral trust arrangementsissued in connection with the Company’s workers’compensation and certain general insurance coverage as follows:

 
| ** **                                                | ** ** | **March 31,  2009** | ** ** | **December 31,  2008** | ** ** |
|-----------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                                                | ** ** | **(in thousands)**  | ** ** |
| Short-term marketable  securities - restricted:           |       |                     |       |                        |       |
| General insurance collateral obligations —  AIG CI   |       | $                        | 4,850      |                        | $          | 4,836 |   |
| Total short-term marketable securities —  restricted |       | 4,850                    |       | 4,836                       |       |
|                                                      |       |                     |       |                        |       |
| Long-term marketable securities restricted:               |       |                     |       |                        |       |
| Workers’ compensation collateral — AIG CI       |       | 4,060                    |       | 4,048                       |       |
| Total long-term marketable securities —  restricted  |       | 4,060                    |       | 4,048                       |       |
| Total restricted assets                                   |       | $                        | 8,910      |                        | $          | 8,884 |   |

 

The Company’sobligation to Blue Cross Blue Shield of Florida, Inc. and its subsidiaryHealth Options, Inc. (together “BCBSF/HOI”)under its current contract requires an irrevocable letter of credit (“LOC”) infavor of BCBSF/HOI in an initial amount of $5.0 millionon October 1, 2008, and shall be increased monthly by approximately $1.0million over a seven month period until it reaches $11.8 million on May 1,2009. At March 31, 2009, the outstanding LOC in favor of 

 

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BCBSF/HOI was $10.0 million.

 

The Company doesnot anticipate any additional collateral obligations tobe required in 2009 for its workers’ compensation arrangements.

 

As of March 31, 2009, theCompany has recorded a $92.7 million receivable from AIG CI representingworkers’ compensation premium payments made to AIG CI related to program years2000 through the first quarter of 2009 in excess of the present value of theestimated claims liability.  Thisreceivable represents a significant concentration of credit risk for theCompany. Gevity has various commercial insurance relationships with AIG CI, asubsidiary of AIG, including its workers’ compensation program.  AIG CIhas publicly stated as recently as March 2, 2009, that it remainswell-capitalized and financially secure, with ample resources to paypolicyholder claims.  The issues thathave evolved at AIG relate to entities outside of their commercial insurancedivision. The AIG insurance companies are regulated by state law and theiraffairs overseen by state insurance commissioners.  Those laws are designed in part to assurethat regulated insurance companies are operated on a financially sound basisand their assets are protected from the financial problems of non-insuranceaffiliates. Under state insurance regulations, the assets of the AIG insurancesubsidiaries are protected from the creditors of the parent company. On March 2,2009, AIG also announced its intention to form a General Insurance holdingcompany with a board of directors, management team and brand distinct from AIG.The Commercial Insurance group will be a component of this holding company. Asof May 4, 2009, AIG CI’s financial strength rating by A.M. Best wasan “A”.  Accordingly, the Company doesnot believe that the current financial condition of AIG will have a materialadverse effect on AIG CI or the Company’s workers’ compensation receivable asof March 31, 2009.

 

***Internal Revenue Service Examination***

 

On March 11, 2009, in connection with an ongoing examination ofthe Company’s U.S. income tax returns for 2002 through 2004, the Companyreceived Notices of Proposed Adjustment from the Internal Revenue Service (“IRS”)advising it of proposed increases to its federal income tax of approximately$41.9 million including penalties. Of this amount, the Company haspreviously reserved $6.9 million of federal income taxes in its consolidatedfinancial statements in accordance with the provisions of Financial AccountingStandards Board Interpretation No. 48, *Accounting for Uncertaintyin Income Taxes — An Interpretation of FASB Statement No. 109*. The Company believes that the remaining proposed adjustments are either theresult of the IRS misunderstanding the facts relating to the adjustments or theresult of a legal interpretation made by the IRS that is inconsistent withexisting law.  The Company intends to vigorously contest these adjustmentsand believes that it will ultimately prevail.  Although the ultimateoutcome of the dispute with the IRS cannot be predicted with certainty, theCompany believes that adequate provision for taxes has been made in itsconsolidated financial statements for any reasonably foreseeable outcomerelated to these proposed adjustments.   Consequently, the Companybelieves that ultimate resolution of this matter is unlikely to have a materialadverse effect on its financial condition or results of operations.

 

***California Unemployment Tax Assessment***

 

In May of2007, the Company received a Notice of Assessment from the State of CaliforniaEmployment Development Department (“EDD”) relative to the Company’s practice ofreporting payroll for its subsidiaries under multipleemployer account numbers.  The noticestated that the EDD was collapsing the accounts of the Company’ssubsidiaries into one account number for payroll reporting purposes andretroactively reassessed unemployment taxes due at ahigher overall rate for the 2004-2006 tax years resulting in an assessment of$4.7 million. On May 30, 2007, the Company filed a petition withthe Office of the Chief Administrative Law Judge for the CaliforniaUnemployment Insurance Appeals Board asking that the EDD’sassessment be set aside. The petition contends in part that the EDD hasexceeded the scope of its authority in issuing the assessment by failing tocomply with its own mandatory procedural requirements and that the statute of limitations for issuing the assessments has expired as theCompany’s activities within the state were compliant with Californiastatutes and regulations.

 

The Company and the State ofCalifornia entered into negotiations in May 2008 in an attempt to resolvethe dispute.  As a result, Gevityproposed a settlement offer in June 2008 that included a cash paymentoffer of $1.2 million, conceding to the State’s higher overall unemployment taxrate for tax years 2007 — 2008, along with revisions to its unemployment taxreporting methods for post 2008 tax years in consideration for the State’swithdrawal of the existing assessment for 2004 -2006 (the “ Settlement Offer”).  The Settlement Offer is currently underreview by the State.  The Company accrued$1.2 million for the year ended  December 31,2008, reflecting estimated amounts due in connection with additionalunemployment tax costs for the term January 1, 2007 — December 31,2008, should the State of California accept the Settlement Offer.  No additional amounts were accrued for thequarter ended March 31, 2009, as the EDD is generally charging the Companythe maximum rate of 6.2% for 2009.   Inthe event that the Company is not able to reach a settlement with the State ofCalifornia, the Company believes it has valid defenses regarding theassessments and will vigorously challenge the assessments.

 

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***CashFlows from Operating Activities***

 

At March 31,2009, the Company had net working capital of $9.1 million, including restrictedfunds classified as short-term of $4.9 million, compared to net working capital of $15.6 million as of December 31, 2008,including $4.8 million of restricted funds classified as short-term. Thedecrease in working capital during the first quarter of 2009 was primarily dueto a reduction in short-term workers’ compensation receivable and an increasein accrued payroll taxes, and was partially offset by an increase in accountsreceivable and reduction in customer deposits and prepayments. The reduction inshort-term workers’ compensation receivable was attributable to $26.6 millionreceived from AIG CI during the first quarter of 2009 in connection with anegotiated loss fund collateral release. The other fluctuations in workingcapital are primarily due to timing differences related to the day of the weekthat the quarter ended on and the overall reduction in client worksiteemployees.

 

Net cash used inoperating activities was $1.7 million for the three months ended March 31,2009 as compared to net cash used in operating activities of $15.5 million forthe three months ended March 31, 2008, representing a decrease in net cashused in operating activities of $13.7 million. Cash flows from operatingactivities are significantly impacted by the timing of client payrolls, the dayof the week on which a fiscal period ends and the existenceof holidays at or immediately following a period end. The overall decrease incash used in operating activities was primarily due to net timing differencesas well as the receipt from AIG CI of $26.6 million discussed above.

 

Additional releases of premiums by AIG CI are also anticipated in thefuture if favorable claims trends continue. The Company believes that it has provided AIG CI a sufficient amount ofcash to cover its short-term and long-term workers compensation obligationsrelated to open policy years.

 

***CashFlow from Investing Activities***

** **

Cash used ininvesting activities for the three months ended March 31, 2009 of $0.2million, includes approximately $0.1 million for capital expenditures primarilyfor technology-related items. This compares to cash usedin investing activities for the three months ended March 31, 2008of $0.3 million, which includes approximately $0.2 million for capitalexpenditures primarily for technology-related items. TheCompany has temporarily suspended its capital expenditure program in connectionwith the Merger.

 

***CashFlow from Financing Activities***

 

Cash used infinancing activities for the three months ended March 31,2009 of $1.3 million was primarily a result of $1.2 millionof cash dividends paid and $0.2 million of capital lease payments. Theseamounts were partially offset by $0.1 million received upon the purchaseof 38,653 shares of common stock under the Company’s employeestock purchase plan.

 

This compares to cashprovided by financing activities for the three months ended March 31,2008 of $20.9 million, primarily a result of $23.1 million of net borrowingsunder the revolving credit facility and $0.1 millionreceived upon the purchase of 16,208 shares of common stock under the Company’semployee stock purchase plan. These amounts were offsetby $2.1 million of cash dividends paid; $0.1 million related to excess taxexpense paid by the Company for its share-based arrangements and $0.1 millionof capital lease payments.

 

**Commitments and Contractual Obligations**

 

***Off-BalanceSheet Arrangements***

 

The Company doesnot have any off-balance sheet arrangements.

 

***ContractualObligations***

 

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

 

**CRITICAL ACCOUNTING ESTIMATES**

 

The preparation offinancial statements and related disclosures inconformity with accounting principles generally accepted in the United Statesof America, requires management to make estimates and assumptions that affectthe reported amounts of assets, liabilities, revenues and expenses and the disclosuresof contingent assets and liabilities. Accounting estimates related to workers’compensation receivables/reserves, intangible assets, medical benefit planliabilities, state 

 

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unemployment taxes, allowance for doubtfulaccounts, share-based payments, deferred income taxes and asset impairment arethose that the Company considers critical in preparing its financial statementsbecause they are particularly dependent on estimates and assumptions made bymanagement that are uncertain at the time the accounting estimates are made.While management has used its best estimates based upon facts and circumstancesavailable at the time, different estimates reasonably could have been used inthe current period, which may have a material impact on the presentation of theCompany’s financial condition and results of operations.  Management periodically reviews the estimatesand assumptions and reflects the effects of revisions in the period they aredetermined to be necessary. The discussion under “Item7 - Managements’ Discussion and Analysis of Financial Condition and Results ofOperations — Critical Accounting Estimates” in the Form 10-K describes thesignificant accounting estimates used in the preparation of the Company’sfinancial statements.

 

**CAUTIONARYNOTE REGARDING FORWARD-LOOKING STATEMENTS**

 

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

 

Forward-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.

 

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

 

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

 

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

 

As of the end of the period covered by this report, the Company’smanagement, including the Chief Executive Officer and the Chief FinancialOfficer, conducted an evaluation of the effectiveness of the design andoperation of the Company’s disclosure controls and procedures pursuant to Rule 13a-15of the Securities Exchange Act of 1934. Any controls and procedures, no matterhow well designed and operated, can provide only reasonable assurance ofachieving the desired objectives. Based upon that evaluation and subject to theforegoing, the Company’s management, including the Company’s Chief ExecutiveOfficer and Chief Financial Officer, concluded that the design and operation ofthe Company’s disclosure controls and procedures provided reasonable assurancethat the disclosure controls and procedures were effective to accomplish theirobjectives.

 

Additionally, no changes in the Company’s internal controls overfinancial reporting were made during the fiscal quarter covered by this reportthat have materially affected, or are reasonably likely to materially affect,the Company’s internal control over financial reporting.

 

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

 

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

 

See Note 9 to thecondensed consolidated financial statements contained elsewhere in this Form 10-Qfor 

 

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information concerning the Company’s legal proceedings.

 

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

 

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

 

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

 

The followingtable provides information about Company purchases during the three monthsended March 31, 2009, of equity securities that areregistered by the Company pursuant to Section 12 of the SecuritiesExchange 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)** | ** ** |
|----------------------------|------------|-------------------------------------------------------|------------|--------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| 1/01/2009 – 1/31/2009 |       | —                                                |       | —                                           |       | —                                                                                                            |       | $                                                                                                                                                                                    | 51,396     |   |
| 2/01/2009 – 2/28/2009 |       | —                                                |       | —                                           |       | —                                                                                                            |       | $                                                                                                                                                                                    | 51,396     |   |
| 3/01/2009 – 3/31/2009 |       | —                                                |       | —                                           |       | —                                                                                                            |       | $                                                                                                                                                                                    | 51,396     |   |
| Total                      |       | —                                                |       | —                                           |       | —                                                                                                            |       |                                                                                                                                                                                 |       |

 

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

 

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

 

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

 

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**ITEM 6.****                                                     Exhibits**

 
| **Exhibit No.** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                       |
|----------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2.1                  |       | Agreement and Plan of Merger, by and among  the Company, TriNet Group, Inc. and Gin Acquisition, Inc., dated  March 4, 2009 (filed as Exhibit 2.1 to the Company’s Current Report  on Form 8-K filed March 6, 2009 and incorporated herein by reference).                                                                                          |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                  |
| 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).                                                                                                                                                              |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                  |
| 4.1                  |       | Third Amendment and Supplement to the  Rights Agreement between the Company and American Stock Transfer &  Trust Company, as Rights Agent, dated March 4, 2009 (filed as  Exhibit 4.1 to the Company’s Current Report on Form 8-K filed March 6,  2009 and incorporated herein by reference).                                                       |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.1                 |       | Fourth Amendment to Amended and Restated  Credit Agreement dated March 4, 2009, among the Company, certain  subsidiaries of the Company, Bank of America, N.A., as Administrative Agent  and the Other Lenders party thereto (filed as Exhibit 10.1 to the  Company’s Current Report on Form 8-K filed March 6, 2009 and  incorporated herein by reference). |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                  |
| 31.1                 |       | Certification of the Chief Executive  Officer, pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002. *                                                                                                                                                                                                                                                                     |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                  |
| 31.2                 |       | Certification of the Chief Financial  Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *                                                                                                                                                                                                                                                                      |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                  |
| 32                   |       | Certification furnished pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002. *                                                                                                                                                                                                                                                                                            |

 

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*Filed electronically herewith.

 

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**SIGNATURE**

 

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

 
|                     | GEVITY HR, INC.                               |
|--------------------------|-----------------------------------------------|
|                     |                                          |
|                     |                                          |
| Dated: May 11, 2009 | /s/ GARRY J. WELSH                            |
|                     | Garry J. Welsh                                |
|                     | Chief Financial Officer                       |
|                     | (Principal Financial and Accounting  Officer) |

 

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