**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 September  30, 2007.**                                                                                                                                                                                                           |
|                                                                                                                                                                                                                                                              |       |                                                                                          |
| **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 of registrant asspecified in its charter)

** **

| **Florida**                                                     | ** ** | **65-0735612**                       |
|-----------------------------------------------------------------|------------|--------------------------------------|
| (State or other jurisdiction of incorporation or  organization) |       | (I.R.S. Employer Identification No.) |
| ** **                                                      | ** ** | ** **                           |
| **9000 Town Center Parkway**                                    | ** ** | ** **                           |
| **Bradenton, Florida**                                          | ** ** | **34202**                            |
| (Address of principal executive offices)                        |       | (Zip Code)                           |

 

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

 

Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports) and (2) has been subject to suchfiling requirements for the past 90 days.

 

Yes x      No o

 

Indicate by check mark whether the registrant is a large acceleratedfiler, an accelerated filer, or a non-accelerated filer  (as defined in Rule 12b-2 of the ExchangeAct).

 
|   | Large accelerated filer  o | Accelerated filer  x |   | Non-accelerated filer  o |
|--------|--------------------------------------|--------------------------------|--------|------------------------------------|

 

Indicate by check mark whether the registrantis a shell company (as defined in Rule 12b-2 of the Act). Yes  o   No  x

 

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

 
| **Class of common stock** | ** ** | **Outstanding as of October 31, 2007** |
|------------------------------------------|------------|-----------------------------------------------------------------|
| Par  value $0.01 per share               | ** ** | **23,294,373**                                                  |

 

 

----

 

**TABLE OF CONTENTS**

** **

 

 

 
| ** **   | ** **                                                                                          | **Page**                                                                                                                     |
|--------------|-----------------------------------------------------------------------------------------------------|------------------------------------------------------------------------------------------------------------------------------|
| ** **   | ** **                                                                                          | ** **                                                                                                                   |
| **PART I.**  | **FINANCIAL INFORMATION**                                                                           | ** **                                                                                                                   |
|         |                                                                                                |                                                                                                                         |
|         | ITEM 1. Financial Statements                                                                        | 3                                                                                                                            |
|         |                                                                                                |                                                                                                                         |
|         |                                                                                                | Condensed Consolidated Statements of Operations for the three and  nine months ended September 30, 2007 and 2006 (unaudited) | 3 |
|         |                                                                                                |                                                                                                                         |   |
|         |                                                                                                | Condensed Consolidated Balance Sheets as of September 30, 2007 and  December 31, 2006 (unaudited)                            | 4 |
|         |                                                                                                |                                                                                                                         |   |
|         |                                                                                                | Condensed Consolidated Statements of Cash Flows for the nine months ended  September 30, 2007 and 2006 (unaudited)           | 6 |
|         |                                                                                                |                                                                                                                         |   |
|         |                                                                                                | Notes to Condensed Consolidated Financial  Statements (unaudited)                                                            | 7 |
|         |                                                                                                |                                                                                                                         |
|         | ITEM 2. Management’s Discussion and  Analysis of Financial Condition and Results of Operations | 17                                                                                                                           |
|         |                                                                                                |                                                                                                                         |
|         | ITEM 3. Quantitative and Qualitative Disclosures  About Market Risk                                 | 34                                                                                                                           |
|         |                                                                                                |                                                                                                                         |
|         | ITEM 4. Controls and Procedures                                                                     | 34                                                                                                                           |
|         |                                                                                                |                                                                                                                         |
| **PART II.** | **OTHER INFORMATION**                                                                               | ** **                                                                                                                   |
|         |                                                                                                |                                                                                                                         |
|         | ITEM 1. Legal Proceedings                                                                           | 34                                                                                                                           |
|         |                                                                                                |                                                                                                                         |
|         | ITEM 1A. Risk Factors                                                                               | 34                                                                                                                           |
|         |                                                                                                |                                                                                                                         |
|         | ITEM 2. Unregistered Sales of Equity  Securities and Use of Proceeds                                | 34                                                                                                                           |
|         |                                                                                                |                                                                                                                         |
|         | ITEM 6. Exhibits                                                                                    | 35                                                                                                                           |
|         |                                                                                                |                                                                                                                         |
|         | SIGNATURE                                                                                           | 37                                                                                                                           |

 

2

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**PART I. FINANCIALINFORMATION**

 

**Item 1. Financial Statements**

 

**GEVITY HR, INC.AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OFOPERATIONS**

**UNAUDITED**

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

 
| ** **                                                                 | ** ** | **For The Three Months Ended  September 30,** | ** ** | **For The Nine Months Ended****September 30,** | ** ** |
|----------------------------------------------------------------------------|------------|------------------------------------------------------------------------|------------|-------------------------------------------------------------------------|------------|
| ** **                                                                 | ** ** | **2007**                                                               | ** ** | **2006**                                                                | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                                                 | ** ** | ** **                                                             | ** ** | ** **                                                              | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenues                                                                   |       | $                                                                      | 146,508    |                                                                    | $          | 160,615 |   | $ | 458,031 |   | $ | 491,512 |   |
|                                                                       |       |                                                                   |       |                                                                    |       |   |   |   |   |   |   |   |   |
| Cost of services (exclusive of  depreciation and amortization shown below) |       | 101,443                                                                |       | 110,012                                                                 |       | 320,021 |   | 343,009 |   |
|                                                                       |       |                                                                   |       |                                                                    |       |   |   |   |   |
| Gross profit                                                               |       | 45,065                                                                 |       | 50,603                                                                  |       | 138,010 |   | 148,503 |   |
|                                                                       |       |                                                                   |       |                                                                    |       |   |   |   |   |
| Operating expenses:                                                        |       |                                                                   |       |                                                                    |       |   |   |   |   |
|                                                                       |       |                                                                   |       |                                                                    |       |   |   |   |   |
| Salaries, wages and commissions                                            |       | 21,566                                                                 |       | 20,956                                                                  |       | 64,495 |   | 61,331 |   |
|                                                                       |       |                                                                   |       |                                                                    |       |   |   |   |   |
| Other general and  administrative                                          |       | 15,028                                                                 |       | 13,959                                                                  |       | 45,478 |   | 39,634 |   |
|                                                                       |       |                                                                   |       |                                                                    |       |   |   |   |   |
| Reinsurance contract (gain)  loss                                          |       | —                                                                 |       | (3,000                                                                  | )          | — |   | 1,650 |   |
|                                                                       |       |                                                                   |       |                                                                    |       |   |   |   |   |
| Depreciation and amortization                                              |       | 4,165                                                                  |       | 3,573                                                                   |       | 12,101 |   | 10,406 |   |
| Total operating expenses                                                   |       | 40,759                                                                 |       | 35,488                                                                  |       | 122,074 |   | 113,021 |   |
|                                                                       |       |                                                                   |       |                                                                    |       |   |   |   |   |
| Operating income                                                           |       | 4,306                                                                  |       | 15,115                                                                  |       | 15,936 |   | 35,482 |   |
|                                                                       |       |                                                                   |       |                                                                    |       |   |   |   |   |
| Interest income                                                            |       | 375                                                                    |       | 361                                                                     |       | 791 |   | 797 |   |
|                                                                       |       |                                                                   |       |                                                                    |       |   |   |   |   |
| Interest expense                                                           |       | (1,164                                                                 | )          | (137                                                                    | )          | (2,160 | ) | (563 | ) |
|                                                                       |       |                                                                   |       |                                                                    |       |   |   |   |   |
| Other income (expense), net                                                |       | 3                                                                      |       | —                                                                  |       | (20 | ) | (148 | ) |
|                                                                       |       |                                                                   |       |                                                                    |       |   |   |   |   |
| Income before income taxes                                                 |       | 3,520                                                                  |       | 15,339                                                                  |       | 14,547 |   | 35,568 |   |
|                                                                       |       |                                                                   |       |                                                                    |       |   |   |   |   |
| Income tax provision                                                       |       | 1,066                                                                  |       | 5,782                                                                   |       | 4,889 |   | 10,913 |   |
|                                                                       |       |                                                                   |       |                                                                    |       |   |   |   |   |
| Net income                                                                 |       | $                                                                      | 2,454      |                                                                    | $          | 9,557 |   | $ | 9,658 |   | $ | 24,655 |   |
|                                                                       |       |                                                                   |       |                                                                    |       |   |   |   |   |
| Net income per common share:                                               |       |                                                                   |       |                                                                    |       |   |   |   |   |
|  - Basic                                                              |       | $                                                                      | 0.11       |                                                                    | $          | 0.36 |   | $ | 0.40 |   | $ | 0.94 |   |
|  - Diluted                                                            |       | $                                                                      | 0.10       |                                                                    | $          | 0.35 |   | $ | 0.40 |   | $ | 0.91 |   |
|                                                                       |       |                                                                   |       |                                                                    |       |   |   |   |   |   |   |   |   |
| Weighted average common shares outstanding:                                |       |                                                                   |       |                                                                    |       |   |   |   |   |
|  - Basic                                                              |       | 23,235,677                                                             |       | 26,239,342                                                              |       | 23,860,934 |   | 26,248,449 |   |
|  - Diluted                                                            |       | 23,769,362                                                             |       | 26,967,949                                                              |       | 24,449,770 |   | 27,100,497 |   |

 

See notes to condensed consolidatedfinancial statements.

 

3

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**GEVITY HR, INC.AND SUBSIDIARIES**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

**UNAUDITED**

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

 
| ** **                                             | ** ** | **September 30,****2007** | ** ** | **December 31,****2006** | ** ** |
|--------------------------------------------------------|------------|--------------------------------|------------|-------------------------------|------------|
|                                                   |       |                           |       |                          |       |
| **ASSETS**                                             |       |                           |       |                          |       |
| ** **                                             |       |                           |       |                          |       |
| Current assets:                                        |       |                           |       |                          |       |
|                                                   |       |                           |       |                          |       |
| Cash and cash equivalents                              |       | $                              | 14,565     |                          | $          | 36,291 |   |
|                                                   |       |                           |       |                          |       |   |   |
| Marketable securities –  restricted               |       | 6,046                          |       | 4,478                         |       |
|                                                   |       |                           |       |                          |       |
| Accounts receivable, net                               |       | 121,150                        |       | 126,936                       |       |
|                                                   |       |                           |       |                          |       |
| Short-term workers’  compensation receivable, net |       | 13,581                         |       | 35,354                        |       |
|                                                   |       |                           |       |                          |       |
| Other current assets                                   |       | 10,396                         |       | 15,927                        |       |
| Total current assets                                   |       | 165,738                        |       | 218,986                       |       |
|                                                   |       |                           |       |                          |       |
| Property and equipment, net                            |       | 24,159                         |       | 23,847                        |       |
|                                                   |       |                           |       |                          |       |
| Long-term marketable securities  – restricted     |       | 3,887                          |       | 3,747                         |       |
|                                                   |       |                           |       |                          |       |
| Long-term workers’ compensation  receivable, net  |       | 95,848                         |       | 85,872                        |       |
|                                                   |       |                           |       |                          |       |
| Intangible assets, net                                 |       | 15,640                         |       | 20,856                        |       |
|                                                   |       |                           |       |                          |       |
| Goodwill                                               |       | 14,658                         |       | 8,692                         |       |
|                                                   |       |                           |       |                          |       |
| Deferred tax asset, net                                |       | 13,659                         |       | 11,938                        |       |
|                                                   |       |                           |       |                          |       |
| Other assets                                           |       | 1,291                          |       | 622                           |       |
| Total assets                                           |       | $                              | 334,880    |                          | $          | 374,560 |   |

 

See notes to condensedconsolidated financial statements.

 

4

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| ** **                                                                                                                                                    | ** ** | **September 30,****2007** | ** ** | **December 31,  2006** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                    | ** ** | ** **                     | ** ** | ** **                  | ** ** |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                                                                                 | ** ** | ** **                     | ** ** | ** **                  | ** ** |
| ** **                                                                                                                                                    | ** ** | ** **                     | ** ** | ** **                  | ** ** |
| Current liabilities:                                                                                                                                          |       |                           |       |                        |       |
|                                                                                                                                                          |       |                           |       |                        |       |
| Accrued payroll and payroll  taxes                                                                                                                            |       | $                              | 127,420    |                        | $          | 163,410 |   |
|                                                                                                                                                          |       |                           |       |                        |       |   |   |
| Accrued insurance premiums and  health reserves                                                                                                               |       | 12,126                         |       | 17,287                      |       |
|                                                                                                                                                          |       |                           |       |                        |       |
| Customer deposits and  prepayments                                                                                                                            |       | 24,113                         |       | 11,893                      |       |
|                                                                                                                                                          |       |                           |       |                        |       |
| Accounts payable and other  accrued liabilities                                                                                                               |       | 9,348                          |       | 10,243                      |       |
|                                                                                                                                                          |       |                           |       |                        |       |
| Deferred tax liability, net                                                                                                                                   |       | 17,231                         |       | 24,583                      |       |
|                                                                                                                                                          |       |                           |       |                        |       |
| Dividends payable                                                                                                                                             |       | 2,096                          |       | 2,223                       |       |
| Total current liabilities                                                                                                                                     |       | 192,334                        |       | 229,639                     |       |
|                                                                                                                                                          |       |                           |       |                        |       |
| Revolving credit facility                                                                                                                                     |       | 20,467                         |       | —                      |       |
|                                                                                                                                                          |       |                           |       |                        |       |
| Other long-term liabilities                                                                                                                                   |       | 4,722                          |       | 2,869                       |       |
| Total liabilities                                                                                                                                             |       | 217,523                        |       | 232,508                     |       |
|                                                                                                                                                          |       |                           |       |                        |       |
| Commitments and contingencies  (see notes)                                                                                                                    |       |                           |       |                        |       |
|                                                                                                                                                          |       |                           |       |                        |       |
| Shareholders’ equity:                                                                                                                                    |       |                           |       |                        |       |
|                                                                                                                                                          |       |                           |       |                        |       |
| Common stock, $.01 par value,  100,000,000 shares authorized,  23,370,261 and 31,962,314 issued as of September 30,  2007 and December 31, 2006, respectively |       | 234                            |       | 320                         |       |
|                                                                                                                                                          |       |                           |       |                        |       |
| Additional paid-in capital                                                                                                                                    |       | 31,512                         |       | 177,949                     |       |
|                                                                                                                                                          |       |                           |       |                        |       |
| Retained earnings                                                                                                                                             |       | 86,657                         |       | 84,110                      |       |
|                                                                                                                                                          |       |                           |       |                        |       |
| Treasury stock (84,320 and  7,260,175 shares at cost, respectively)                                                                                           |       | (1,046                         | )          | (120,327                    | )          |
| Total shareholders’ equity                                                                                                                               |       | 117,357                        |       | 142,052                     |       |
|                                                                                                                                                          |       |                           |       |                        |       |
| Total liabilities and  shareholders’ equity                                                                                                              |       | $                              | 334,880    |                        | $          | 374,560 |   |

 

See notes to condensedconsolidated financial statements.

 

5

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**GEVITY HR, INC.AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OF CASHFLOWS**

**UNAUDITED**

**(in $000’s)**

 
| ** **                                                                         | ** ** | **For the Nine Months Ended**

**September 30,** | ** ** |
|------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------|------------|
| ** **                                                                         | ** ** | **2007**                                                                  | ** ** | **2006** | ** ** |
| CASH FLOWS FROM OPERATING  ACTIVITIES:                                             |       |                                                                      |       |   |   |
| Net income                                                                         |       | $                                                                         | 9,658      |   | $ | 24,655 |   |
| Adjustments to reconcile net  income to net cash provided by operating activities: |       |                                                                      |       |   |   |
| Depreciation and amortization                                                      |       | 12,101                                                                    |       | 10,406 |   |
| Deferred tax (benefit)  provision, net                                             |       | (9,073                                                                    | )          | 841 |   |
| Stock compensation                                                                 |       | 1,918                                                                     |       | 3,022 |   |
| Excess tax benefits from  share-based arrangements                                 |       | (313                                                                      | )          | (4,199 | ) |
| Provision for bad debts                                                            |       | 1,262                                                                     |       | 381 |   |
| Other                                                                              |       | 23                                                                        |       | 187 |   |
| Changes in operating working  capital:                                             |       |                                                                      |       |   |   |
| Accounts receivable, net                                                           |       | 4,524                                                                     |       | (6,737 | ) |
| Other current assets                                                               |       | 6,119                                                                     |       | 4,958 |   |
| Workers’ compensation  receivable, net                                        |       | 11,797                                                                    |       | 23,794 |   |
| Other assets                                                                       |       | (288                                                                      | )          | (34 | ) |
| Accrued insurance premiums and  health reserves                                    |       | (5,161                                                                    | )          | (5,933 | ) |
| Accrued payroll and payroll  taxes                                                 |       | (36,134                                                                   | )          | (17,640 | ) |
| Accounts payable and other  accrued liabilities                                    |       | 421                                                                       |       | 1,203 |   |
| Customer deposits and  prepayments                                                 |       | 12,220                                                                    |       | 2,724 |   |
| Other long-term liabilities                                                        |       | 621                                                                       |       | (71 | ) |
| Net cash provided by operating  activities                                         |       | 9,695                                                                     |       | 37,557 |   |
|                                                                               |       |                                                                      |       |   |   |
| CASH FLOWS FROM INVESTING  ACTIVITIES:                                             |       |                                                                      |       |   |   |
| Purchases of marketable  securities and certificates of deposit                    |       | (1,708                                                                    | )          | (262 | ) |
| Maturity of certificate of deposit                                                 |       | —                                                                    |       | 34 |   |
| Capital expenditures                                                               |       | (5,156                                                                    | )          | (13,410 | ) |
| Business acquisition                                                               |       | (9,495                                                                    | )          | — |   |
| Net cash used in investing  activities                                             |       | (16,359                                                                   | )          | (13,638 | ) |
|                                                                               |       |                                                                      |       |   |   |
| CASH FLOWS FROM FINANCING  ACTIVITIES:                                             |       |                                                                      |       |   |   |
| Net borrowings under revolving  credit facility                                    |       | 20,467                                                                    |       | — |   |
| Proceeds from exercise of stock  options                                           |       | 974                                                                       |       | 6,615 |   |
| Excess tax benefits from  share-based arrangements                                 |       | 313                                                                       |       | 4,199 |   |
| Dividends paid                                                                     |       | (6,526                                                                    | )          | (6,591 | ) |
| Purchase of treasury stock                                                         |       | (30,290                                                                   | )          | (25,716 | ) |
| Net cash used in financing  activities                                             |       | (15,062                                                                   | )          | (21,493 | ) |
| Net (decrease) increase in cash  and cash equivalents                              |       | (21,726                                                                   | )          | 2,426 |   |
| Cash and cash equivalents -  beginning of period                                   |       | 36,291                                                                    |       | 52,525 |   |
| Cash and cash equivalents - end  of period                                         |       | $                                                                         | 14,565     |   | $ | 54,951 |   |
|                                                                               |       |                                                                      |       |   |   |
| Supplemental disclosure of cash  flow information:                                 |       |                                                                      |       |   |   |
| Income taxes paid                                                                  |       | $                                                                         | 5,883      |   | $ | 6,734 |   |
| Interest paid                                                                      |       | $                                                                         | 2,116      |   | $ | 552 |   |

 

Supplemental disclosure of non-cash transactions:

 

Capital expenditures forthe nine months ended September 30, 2007 exclude approximately $387 of capitalitems purchased by the Company in the third quarter of 2007 and not paid foruntil the fourth quarter of 2007.

 

Capital expenditures forthe nine months ended September 30, 2006 exclude approximately $568 of capitalitems purchased by the Company in the third quarter of 2006 and not paid foruntil the fourth quarter of 2006.

 

The purchase of treasuryshares for the nine months ended September 30, 2006 excludes approximately$4,707 of third quarter 2006 common stock purchases that were paid for in thefourth quarter of 2006.

 

See notes to condensedconsolidated financial statements.

 

6

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**GEVITY HR, INC.AND SUBSIDIARIES**

**NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**

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

 

**1.****                                      GENERAL**

 

The accompanying unaudited condensed consolidated financial statementsof Gevity HR, Inc. and subsidiaries (collectively, the “Company” or “Gevity”)have been prepared in accordance with accounting principles generally acceptedin the United States of America for interim financial information and with theinstructions to Form 10-Q. These financial statements should be read inconjunction with the audited consolidated financial statements and notesthereto included in the Company’s Annual Report on Form 10-K for the year endedDecember 31, 2006 (the “Form 10-K”), as filed with the Securities and Exchange Commission.These financial statements reflect all adjustments, consisting only of normalrecurring accruals, which are, in the opinion of management, necessary for afair presentation of the financial position, results of operations and cashflows for the interim periods presented.

 

The Company’s significant accounting policies are disclosed in Note 1of the Company’s consolidated financial statements contained in the Form 10-K. TheCompany’s critical accounting estimates are disclosed in Item 7, Management’sDiscussion and Analysis of Financial Condition and Results of Operations, inthe Form 10-K. On an ongoing basis, the Company evaluates its policies,estimates and assumptions, including those related to revenue recognition,workers’ compensation receivable/reserves, intangible assets, medical benefitplan liabilities, state unemployment taxes, allowance for doubtful accounts,and deferred taxes. During the first nine months of 2007, there have been nomaterial changes to the Company’s significant accounting policies and criticalaccounting estimates except as described below.

 

Certain prior period amounts have been reclassified to conform tocurrent period presentation.

 

*Recent Accounting Pronouncements*

 

The Company adopted the provisions of Financial Accounting StandardsBoard (“FASB”) Interpretation No. 48, *Accountingfor Uncertainty in Income Taxes* – *AnInterpretation of FASB Statement No. 109*(“FIN 48”), on January 1,2007. FIN 48 clarifies the accounting for uncertainty in tax positions andrequires companies to determine whether it is “more likely than not” that a taxposition will be sustained upon examination by the appropriate taxingauthorities before any part of the benefit can be recorded in the financialstatements. It also provides guidance on the recognition, measurement andclassification of income tax uncertainties, along with any related interest andpenalties. The disclosure requirements and cumulative effect of adoption of FIN48 are presented in Note 10.

 

In February 2007, the FASB issued Statement of Financial AccountingStandards (“SFAS”) No. 159, *The Fair ValueOption for Financial Assets and Financial Liabilities, Including an Amendmentof FASB Statement No. 115* (“SFAS 159”). SFAS 159 permits entities tochoose to measure many financial assets and financial liabilities at fairvalue. Unrealized gains and losses on items for which the fair value option hasbeen elected are reported in earnings. SFAS 159 is effective for fiscal yearsbeginning after November 15, 2007. The Company is currently evaluating thepotential impact this standard may have on its financial position and resultsof operations.

 

In September 2006, the FASB issued SFAS No. 157, *Fair Value Measurements* (“SFAS 157”). SFAS157 establishes a framework for the measurement of assets and liabilities thatuse fair value and expands disclosures about fair value measurements. SFAS 157will apply whenever another accounting principle generally accepted in theUnited States requires (or permits) assets or liabilities to be measured atfair value but does not expand the use of fair value to any new circumstances. SFAS157 is effective for financial statements issued for fiscal years beginningafter November 15, 2007. The Company is currently evaluating the potentialimpact this standard may have on its financial position and results ofoperations.

 

7

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**2.****                                      MARKETABLESECURITIES - RESTRICTED**

 

At September 30, 2007 and December 31, 2006, the Company’s investmentportfolio consisted of restricted money market funds classified asavailable-for-sale.

 

Restricted money market funds relate to collateral held in connectionwith the Company’s workers’ compensation programs, collateral held inconnection with the Company’s general insurance programs and amounts held inescrow related to purchase price contingencies associated with the Company’sacquisition of HRAmerica, Inc. (“HRA”) on February 16, 2007 (see Note 5). Thesesecurities are recorded at fair value, which is equal to cost. The interestearned on these investments is recognized as interest income in the Company’scondensed consolidated statements of operations.

 

For the three and nine months ended September 30, 2007 and 2006, therewere no realized gains or losses from the sale of marketable securities. As ofSeptember 30, 2007 and December 31, 2006, there were no unrealized gains orlosses on marketable securities.

 

**3.****                                      ACCOUNTSRECEIVABLE**

 

At September 30, 2007 and December 31, 2006, accounts receivable fromclients consisted of the following:

 
| ** **                            | ** ** | **September 30,**

**2007** | ** ** | **December 31,  2006** | ** ** |
|---------------------------------------|------------|----------------------------------|------------|-----------------------------|------------|
| Billed to clients                     |       | $                                | 8,165      |                        | $          | 10,622 |   |
| Unbilled revenues                     |       | 114,084                          |       | 116,937                     |       |
|                                  |       | 122,249                          |       | 127,559                     |       |
| Less: Allowance for doubtful accounts |       | (1,099                           | )          | (623                        | )          |
| Total                                 |       | $                                | 121,150    |                        | $          | 126,936 |   |

 

The Company establishes an allowance for doubtful accounts based uponmanagement’s assessment of the collectibility of specific accounts and otherpotentially uncollectible amounts. The Company reviews its allowance fordoubtful accounts on a quarterly basis. During the quarter endedSeptember 30, 2007, the Company increased its allowance for doubtful accountsby $470 as a result of the termination of a large client in the mortgageindustry.

 

**4.****                                      WORKERS’COMPENSATION RECEIVABLE/ RESERVES**

 

The Company has maintained a loss sensitive workers’ compensationinsurance program since January 1, 2000. The program is insured by CNAFinancial Corporation (“CNA”) for the 2000, 2001 and 2002 program years. Theprogram is currently insured by member insurance companies of American InternationalGroup, Inc. (“AIG”) and includes coverage for the 2003 through 2007 policyyears. In states where private insurance is not permitted, client employees arecovered by state insurance funds.

 

 Under the 2007 workers’compensation program with AIG, AIG is responsible for paying the claims; theCompany is responsible for paying to AIG the first $500 per occurrence ofclaims and AIG is responsible for amounts in excess of $500 per occurrence. Inaddition, the AIG policy provides $20,000 of aggregate stop loss coverage onceclaims in the deductible layer exceed $136,700.

 

Similar to the prior years’ workers’ compensation programs with AIG,the Company, through its wholly-owned Bermuda-based insurance subsidiary,remits premiums to AIG to cover claims to be paid within the Company’s $500 peroccurrence deductible layer. AIG deposits the premiums into an interest bearingloss fund collateral account for reimbursement of paid claims up to the $500per occurrence amount. Interest on the loss fund collateral account (which willbe reduced as claims are paid out over the life of the policy) will accrue tothe benefit of the Company at a fixed annual rate. Under the 2007 program, theCompany will pay $66,500 of loss fund collateral premium, subject to certain volumeadjustments, and is guaranteed to receive a 5.01% per annum fixed return solong as the program and the interest accrued under the program remain with AIGfor at least 10 years. If the program is terminated 

 

8

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early, the interest rate is adjusted downward based upon a slidingscale. The 2007 program provides for an initial loss fund collateral premiumtrue-up 18 months after the policy inception and annually thereafter. Thetrue-up is based upon a pre-determined loss factor times the amount of incurredclaims in the deductible layer as of the date of the true-up.

 

The Company reviews its estimated cost of claims in the deductiblelayer on a quarterly basis. The determination of the estimated cost of claimsis based upon a number of factors, including but not limited to: actuarialcalculations, current and historical loss trends, the number of open claims,developments relating to the actual claims incurred, and the impact ofacquisitions, if any. The Company uses a certain amount of judgment in thisestimation process. During the three months ended September 30, 2007 and 2006,the Company revised its ultimate loss estimates for prior open policy years,which resulted in a net reduction of workers’ compensation expense ofapproximately $4,063 and $660, respectively. During the nine months endedSeptember 30, 2007 and 2006, the Company revised its ultimate loss estimatesfor prior open policy years, which resulted in a net reduction of workers’compensation expense of approximately $12,106 and $2,542, respectively. Theserevisions were based upon continued favorable claims development that occurredduring the periods. Also, during the three months ended September 30, 2007 and2006, the Company received from AIG the premium expense audits foradministrative costs of the prior policy years, which resulted in a reductionof workers’ compensation expense by approximately $955 and $1,378,respectively.

 

The balance in the loss fund collateral account (including accruedinterest) in excess of the net present value of the Company’s liability to AIGwith respect to claims payable within the deductible layer is recorded as aworkers’ compensation receivable. Returns to the Company of amounts held in theloss fund collateral account are recorded as reductions to the workers’compensation receivable, net. During the first quarter of 2007, AIG releasedapproximately $5,000 of cash from the 2003 loss fund collateral account inadvance of the annual loss provision adjustment. During the third quarter of2007 the Company received from AIG approximately $40,945, net, relating to theannual loss fund collateral true-up and the finalization of outstanding prioryear premium expense audits.

 

The Company accrues for workers’ compensation costs based upon:

 

•                  premiums paidfor the layer of claims in excess of the deductible;

 

•                  estimated totalcosts of claims that fall within the Company’s policy deductible calculated ona net present value basis;

 

•                  theadministrative costs of the programs (including claims administration, statetaxes and surcharges); and

 

•                  the return oninvestment for loss fund premium dollars paid to AIG.

 

At September 30, 2007 and December 31, 2006, the weighted averagediscount rate used to calculate the net present value of the claim liabilitywas 4.19% and 3.70% respectively. Premium payments made to AIG related toprogram years 2000 through 2007 are in excess of the net present value of theestimated claim liabilities. This has resulted in a workers’ compensationreceivable, net, at September 30, 2007 and December 31, 2006 of $109,429 and$121,226, respectively, of which $13,581 and $35,354 was classified asshort-term at September 30, 2007 and December 31, 2006, respectively. Thisreceivable represents a significant concentration of credit risk for theCompany.

 

**5.****                                      INTANGIBLEASSETS**

 

On February 16, 2007, the Company acquired certain assets, includingthe client portfolio of HRA, a human resource outsourcing firm that offersfundamental employee administration solutions including payroll processing toapproximately 145 clients (as measured by Federal Employer IdentificationNumber) with approximately 16,000 client employees. Approximately 14,700non-coemployed client employees were acquired as of the date of the acquisitionand approximately 1,300 co-employed client employees (8 clients) were acquiredwith an effective date of April 1, 2007. The

 

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acquisition provides the Company with technology and processes to enhanceits non co-employment model, Gevity Edge TM Select.

 

Thepurchase price for the acquired assets was approximately $10,895 (includingdirect acquisition costs of approximately $652), which the Company paidin cash from its revolving credit facility. Of this amount, $1,400 is beingheld in an escrow account and is included in marketable securities - restrictedat September 30, 2007. The amounts held in escrow represent purchase pricecontingencies related to potential earn outs and the achievement of certainclient retention percentages up through the first anniversary date of theacquisition. Unearned escrow amounts, if any, will be returned to the Company.

 

The HRA acquisitionwas accounted for by the purchase method in accordance with SFAS No. 141, *Business Combinations*. The results ofoperations for HRA are included in the Company’s statement of operations forthe period February 17, 2007 through September 30, 2007. The effects of the HRAacquisition on the historical financial statements of the Company had itoccurred January 1, 2006 are not material and therefore pro forma informationis not presented. The purchase price of $9,495 (excluding $1,400 of contingentpurchase price included with marketable securities-restricted at September 30,2007) was preliminarily allocated to assets and liabilities acquired based upontheir preliminary fair value on the date of acquisition as follows:

 
| Other current assets          |   | $     | 275    |   |
|-------------------------------|--------|-------|--------|--------|
| Software                      |   | 800   |   |
| Property and equipment        |   | 327   |   |
| Client service agreements     |   | 2,300 |   |
| Goodwill                      |   | 5,966 |   |
| Other current liabilities     |   | (36   | )      |
| Other long-term liabilities   |   | (137  | )      |
| Net value of purchased assets |   | $     | 9,495  |   |

 

The client service agreements intangible assetis being amortized on a straight-line basis over its estimated life of 5 years.

 

The Company iscurrently reviewing the preliminary fair value determinations. The ultimateallocation of the purchase price may differ from the amounts included in thesefinancial statements. Adjustments to the purchase price allocations, if any,are expected to be finalized prior to December 31, 2007 and will be reflectedin future filings. Management does not expect these adjustments, if any, tohave a material effect on the Company’s financial position or results ofoperations. Resolution of the purchase price contingency may result inadditional amounts allocated to goodwill.

 

AtSeptember 30, 2007 and December 31, 2006, intangible assets consisted of thefollowing:

 
| ** **                          | ** ** | **September 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|-------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| Purchased client service agreements |       | $                            | 50,229     |                        | $          | 47,929 |   |
| Accumulated amortization            |       | (34,589                      | )          | (27,073                     | )          |
| Intangible assets, net              |       | $                            | 15,640     |                        | $          | 20,856 |   |

 

Amortization expense for the three months ended September 30, 2007 and2006 was $2,524 and $2,409, respectively. Amortization expense for the ninemonths ended September 30, 2007 and 2006 was $7,516 and $7,228, respectively.Estimated amortization expense for the remainder of 2007 and for each of theremaining years is $2,525, $9,852, $2,285, $460, $460 and $58, respectively.

 

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**6.****                                      HEALTHBENEFITS**

 

Blue CrossBlue Shield of Florida (“BCBSFL”) is the Company’s primary healthcare partnerin Florida, delivering medical care benefits to approximately 21,500Florida-based client employees. The Company’s policy with BCBSFL is a minimumpremium policy expiring September 30, 2008. Pursuant to this policy, theCompany is obligated to reimburse BCBSFL for the cost of the claims incurred byparticipants under the plan, plus the cost of plan administration. The administrativecosts per covered client employee associated with this policy are specified byyear and aggregate loss coverage is provided to the Company at the level of110% of projected claims. The Company’s obligation to BCBSFL under its currentcontract may require an irrevocable letter of credit (“LOC”) in favor of BCBSFLif the coverage ratio, as set forth in the BCBSFL agreement, is not maintained.The coverage ratio is calculated quarterly. If the Company’s coverage ratiodoes not meet the minimum requirement, the Company must provide an LOC valuedat up to two months of projected claims (average monthly claims approximated$9,250 for the last twelve months). As of September 30, 2007, the minimumcoverage ratio was met and no LOC was required. The Company does not anticipatethat the current operating trends will cause the coverage ratios to drop belowthe minimum requirements in the fourth quarter of 2007.

 

Aetna Health,Inc. (“Aetna”) is the Company’s largest medical care benefits provider forapproximately 16,500 client employees outside the state of Florida. The Company’s2006/2007 policy with Aetna provides for an HMO and PPO offering to planparticipants. The Aetna HMO medical benefit plans are subject to a guaranteedcost contract that caps the Company’s annual liability. The Aetna PPO medicalbenefit plan is a retrospective funding arrangement. For the 2007 plan yearAetna has agreed to eliminate the callable feature of the PPO plan thatpreviously existed and differences in actual plan experience versus projectedplan experience for the year will factor into subsequent year rates.

 

In 2006, theCompany announced the addition of UnitedHealthcare as an additional health planoption. As of September 30, 2007, UnitedHealthcare provides medical care benefitsto approximately 5,300 client employees. The UnitedHealthcare plan is a fixedcost contract expiring September 30, 2008, that caps the Company’s annualliability. Under the terms of the current agreement with UnitedHealthcare, thisplan will no longer be offered as an option for new co-employed clients afterJuly 1, 2007. Coverage through UnitedHealthcare will continue to be an optionfor clients covered by UnitedHealthcare as of June 30, 2007.

 

The Companyprovides coverage under various regional medical benefit plans to approximately1,200 client employees in various areas of the country. Included in the list ofmedical benefit plan providers are Kaiser Foundation Health Plan, Inc. andHarvard Pilgrim Healthcare. These regional medical plans are subject to fixedcost contracts.

 

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

 

In addition todental coverage, the Company offers various fixed cost insurance programs toclient employees such as vision care, life, accidental death and dismemberment,short-term disability and long-term disability. The Company also offers a flexiblespending account for healthcare, dependent care and a qualified transportationfringe benefit program.

 

Part-timeemployees of clients are eligible to enroll in limited benefit programs fromStar HRG. These plans include fixed cost sickness and accident and dentalinsurance programs, and a vision discount plan.

 

Included inaccrued insurance premiums and health reserves at September 30, 2007 andDecember 31, 2006 are $8,565 and $13,066, respectively, of short-termliabilities related to the Company’s health benefit plans. Of these amounts$8,341 and $10,609, respectively, represent an accrual for the estimate ofclaims incurred but not reported at September 30, 2007 and December 31, 2006.

 

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Health benefitreserves are determined quarterly by the Company and include an estimate ofclaims incurred but not reported and claims reported but not yet paid. Thecalculation of these reserves is based upon a number of factors, including butnot limited to actuarial calculations, current and historical claims paymentpatterns and medical trend rates.

 

There were nochanges to the health plan reserves during the three months ended September 30,2007 that impacted costs of services. During the three months ended September30, 2006, the Company increased its reserve for incurred but not reportedclaims by approximately $1,200 due to claims development within the period. Forthe nine months ended September 30, 2007 and 2006, the Company reduced itsreserve for incurred but not reported claims by approximately $2,600 and$2,000, respectively, which decreased its cost of services and resulted in ahealth plan surplus for each period. These reductions were based upon overallfavorable claims development within the period.

 

**7.****                                      REVOLVINGCREDIT FACILITY**

 

The Company maintains a $100,000 unsecured credit facility with Bank ofAmerica, N.A. and Wachovia, N.A. (the “Lenders”). On May 7, 2007, the Companyentered into the First Amendment to the Amended and Restated Credit Agreementdated August 30, 2006, which increased the amount of aggregate revolvingcommitments of the credit facility from $50,000 to $75,000 and allows theCompany to repurchase up to $125,000 of its capital stock during the term ofthe agreement. On June 14, 2007, the Company entered into the Second Amendmentto the Amended and Restated Credit Agreement, which increased the amount ofaggregate revolving commitments from $75,000 to $100,000. 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 rate equal toan Applicable Rate (which ranges from 1.25% to 1.75% for Eurodollar Rate Loans,and from 0.00% to 0.25% for Prime Rate Loans, depending upon the Company’sConsolidated Leverage Ratio) plus one of the following indexes: (i) EurodollarRate or (ii) the Prime Rate (each as defined in the credit agreement). Up to$10,000 of the loan commitment can be drawn through letters of credit. Withrespect to outstanding letters of credit, a fee determined by reference to theApplicable Rate plus a fronting fee of 0.125% per annum will be charged on theaggregate stated amount of each outstanding letter of credit. A fee rangingfrom 0.20% to 0.30% (based upon the Company’s Consolidated Leverage Ratio) ischarged on any unused portion of the loan commitment. At September 30, 2007,the Company had outstanding advances of $20,467 at an interest rate of 6.38%.There were no outstanding advances under the credit agreement at December 31,2006.

 

The credit agreement includes financial covenants and affirmative andnegative covenants, including the maintenance of minimum Consolidated NetWorth, a minimum Consolidated Fixed Charge Coverage Ratio of 1.5:1.0 and amaximum Consolidated Leverage Ratio of 2.0:1.0 (each as defined in the creditagreement). The covenants in the credit agreement also restrict, among otherthings, the Company’s ability to incur liens, make certain investments, incuradditional indebtedness, engage in certain fundamental corporate transactions,dispose of property or make certain restricted payments. The Company wasin compliance with all covenants under the credit agreement at September 30,2007. 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 September 30, 2007, the maximum facilityavailable to the Company was approximately $90,000.

 

Pursuant to the terms of the credit agreement, the obligations of theCompany may be accelerated upon the occurrence and continuation of an Event ofDefault. Such events include the following: (i) the failure to 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 be incorrect or misleading inany material respect when made or deemed made; and (iv) other customary eventsof default. If current operating trends continue, the Company will notbe able to maintain the minimum Consolidated Fixed Charge Coverage Ratiorequired and will need to seek covenant modifications to its credit agreementwith its Lenders during the fourth quarter of 2007.  The Company is currently in discussions with itsLenders regarding this issue. If such modifications are not obtained this mayhave a material impact on the Company’s cash flow and ability to conduct itsoperations.

 

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The Company recorded $1,131 and $120 of interest expense for the threemonths ended September 30, 2007 and 2006, respectively, related to theamortization of loan costs, unused loan commitment fees and interest onadvances. Interest expense for the nine months ended September 30, 2007 and2006 was approximately $2,094 and $335, respectively.

 

**8.****                                      COMMITMENTSAND CONTINGENCIES**

 

*Litigation*

 

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

 

*Regulatory Matters*

 

The Company’s employer and health care operations are subject tonumerous federal, state and local laws related to employment, taxes and benefitplan matters. Generally, these rules affect all companies in the United States.However, the rules that govern professional employer organizations constitutean evolving area due to uncertainties resulting from the non-traditionalemployment relationship among the professional employer organization, theclient and the client employees. Many federal and state laws relating to taxand employment matters were enacted before the widespread existence ofprofessional employer organizations and do not specifically address the obligationsand responsibilities of these professional employer organization relationships.If the Internal Revenue Service concludes that professional employerorganizations are not “employers” of certain client employees for purposes ofthe Internal Revenue Code of 1986, as amended, the tax qualified status of theCompany’s defined contribution retirement plans as in effect prior to April 1,1997 could be revoked, its cafeteria plan may lose its favorable tax status and the Company may no longer beable to assume the client’s federal employment tax withholding obligations andcertain defined employee benefit plans maintained by the Company may be deniedthe ability to deliver benefits on a tax-favored basis as intended.

 

*California Unemployment Tax Assessment*

 

In May of 2007, the Company received a Notice of Assessment from theState of California Employment Development Department (“EDD”) relative to theCompany’s practice of reporting payroll for its subsidiaries under multipleemployer account numbers. The notice stated that the EDD was collapsing theaccounts 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 of theChief Administrative Law Judge for the California Unemployment InsuranceAppeals Board asking that the EDD’s assessment be set aside. The petitioncontends in part that the EDD has exceeded the scope of its authority inissuing the assessment by failing to comply with its own mandatory proceduralrequirements and that the statute of limitations for issuing the assessmentshas expired as the Company’s activities within the state were compliant withCalifornia statutes and regulations. The Company believes that it has validdefenses regarding the assessments and intends to vigorously protest theseclaims. However, the Company cannot estimate at this point in time what amount,if any, will ultimately be due with respect to this matter.

 

**9.****                                      EQUITY**

 

###### ***ShareRepurchase Program***

###### ** **

On August 15, 2006, the Company announced that the board of directorsauthorized the repurchase of up to $75,000 of the Company’s common stock undera new share repurchase program. Share repurchases under the new program may bemade through open market purchases, block trades or in private transactions atsuch times and in such amounts as the Company deems appropriate, based on a

 

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variety of factors including price, regulatory requirements, overallmarket conditions and other corporate opportunities. As of March 31, 2007, theCompany had purchased 1,650,684 shares of its common stock under this new programat a total cost of $36,527. On April 20, 2007, the Company’s board of directorsauthorized an increase to this share repurchase program bringing the repurchaseamount authorized back up to $75,000.

 

For the three and nine month periods ended September 30, 2007, theCompany repurchased 420,000 and 1,543,121 shares, respectively, under thisrepurchase program at a total cost of $7,472 and $30,290, respectively. As ofSeptember 30, 2007, total shares repurchased under this program since itsinception in August 2006 were 2,886,884 shares at a total cost of $60,131. TheCompany has disengaged from its share repurchase program for the time being inorder to invest available cash in its business.

 

All repurchased shares were initially held as treasury shares. Duringthe third quarter of 2007, the Company retired 8,732,527 shares of its commonstock, which had been held in treasury. In connection with the retirement ofthese shares, the Company reclassified $149,606 of the costs associated withthese treasury shares to additional paid-in capital.

 

**10.****                               INCOMETAXES**

 

The Company records income tax expense using the asset and liabilitymethod of accounting for deferred income taxes. Under such method, deferred taxassets and liabilities are recognized for the expected future tax consequencesof temporary differences between the financial statement carrying values andthe income tax bases of the Company’s assets and liabilities. The Company’seffective tax rate provides for both federal and state income taxes. For thethree months ended September 30, 2007 and 2006, the Company’s effective ratewas 30.3% and 37.7%, respectively. The Company’s effective tax rate for thenine months ended September 30, 2007 and 2006 was and 33.6% and 30.7%,respectively. The Company’s effective tax rates differed from the statutoryfederal tax rates because of state taxes and federal tax credits. Additionally,in connection with the filing of a change in accounting method with theInternal Revenue Service in the second quarter of 2006, the Company reversed atax reserve of approximately $1,973, which favorably impacted the Company’seffective tax rate for the nine month period ended September 30, 2006.

 

On January 1, 2007, the Company adopted the provisions of FIN 48, whichclarifies the accounting for uncertainty in income tax positions. As a resultof the implementation of FIN 48, the Company recognized a net increase in itsliability for unrecognized tax benefits of $712, which was accounted for as adecrease to the January 1, 2007 balance of retained earnings. Following theadoption on January 1, 2007, the Company had $1,095 of unrecognized taxbenefits, the recognition of which would affect the Company’s effective taxrate. At September 30, 2007, the Company has $1,563 of unrecognized taxbenefits.

 

It is reasonably possible that the gross unrecognized tax benefit,including interest, of $1,563 ($1,095 at the adoption date of January 1, 2007)will decrease in its entirety within twelve months. The Company is pursuing aruling to clarify an uncertain position with respect to state incomerecognition.

 

The Company and its subsidiaries are subject to tax in the U.S. federaland various state and local jurisdictions. The Company is no longer subject toU.S. federal, state and local income tax examinations by tax authorities inmaterial jurisdictions for tax years beginning prior to January 1, 2002. TheInternal Revenue Service commenced an examination of the Company’s U.S. incometax returns for 2002 through 2004 in July 2006.

 

The Company will continue to recognize interest and penalties relatedto its uncertain tax positions in income tax expense. The Company had $33 ofinterest and no penalties accrued in the unrecognized tax benefit as of January1, 2007.

 

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**11.****                               EARNINGSPER SHARE (“EPS”)**

 

The reconciliation of net income attributable to common shareholdersand shares outstanding for the purposes of calculating basic and dilutedearnings per share for the three and nine months ended September 30, 2007 and2006 is as follows:

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

 

For the three months ended September 30, 2007, 1,133,077 options topurchase common stock, weighted for the portion of the period they wereoutstanding, were excluded from the diluted earnings per share computationbecause the exercise price of the options was greater than the average price ofthe common stock.

 
| ** **                                      | ** ** | **Net Income  (Numerator)** | ** ** | **Shares  (Denominator)** | ** ** | **Per Share  Amount** | ** ** |
|-------------------------------------------------|------------|----------------------------------|------------|---------------------------|------------|----------------------------|------------|
| For the Three Months Ended  September 30, 2006: |       |                             |       |                      |       |                       |       |
|                                            |       |                             |       |                      |       |                       |       |
| Basic EPS:                                      |       |                             |       |                      |       |                       |       |
| Net income                                      |       | $                                | 9,557      |                      | 26,239,342 |                       | $          | 0.36 |   |
|                                            |       |                             |       |                      |       |                       |       |
| Effect of dilutive securities:                  |       |                             |       |                      |       |                       |       |
| Options to purchase common stock                |       |                             |       | 703,828                   |       |                       |       |
| Non-vested stock                                |       |                             |       | 24,779                    |       |                       |       |
|                                            |       |                             |       |                      |       |                       |       |
| Diluted EPS:                                    |       |                             |       |                      |       |                       |       |
| Net income                                      |       | $                                | 9,557      |                      | 26,967,949 |                       | $          | 0.35 |   |

 

For the three months ended September 30, 2006, 677,534 options topurchase common stock, weighted for the portion of the period they wereoutstanding, were excluded from the diluted earnings per share computationbecause the exercise price of the options was greater than the average price ofthe common stock.

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

 

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For the nine months ended September 30, 2007, 993,245 options topurchase common stock, weighted for the portion of the period they wereoutstanding, were excluded from the diluted earnings per share computationbecause the exercise price of the options was greater than the average price ofthe common stock.

 
| ** **                                     | ** ** | **Net Income  (Numerator)** | ** ** | **Shares  (Denominator)** | ** ** | **Per Share  Amount** | ** ** |
|------------------------------------------------|------------|----------------------------------|------------|---------------------------|------------|----------------------------|------------|
| For the Nine Months Ended  September 30, 2006: |       |                             |       |                      |       |                       |       |
|                                           |       |                             |       |                      |       |                       |       |
| Basic EPS:                                     |       |                             |       |                      |       |                       |       |
| Net income                                     |       | $                                | 24,655     |                      | 26,248,449 |                       | $          | 0.94 |   |
|                                           |       |                             |       |                      |       |                       |       |
| Effect of dilutive securities:                 |       |                             |       |                      |       |                       |       |
| Options to purchase common stock               |       |                             |       | 825,996                   |       |                       |       |
| Non-vested stock                               |       |                             |       | 26,052                    |       |                       |       |
|                                           |       |                             |       |                      |       |                       |       |
| Diluted EPS:                                   |       |                             |       |                      |       |                       |       |
| Net income                                     |       | $                                | 24,655     |                      | 27,100,497 |                       | $          | 0.91 |   |

 

For the nine months ended September 30, 2006, 443,424 options topurchase common stock, weighted for the portion of the period they wereoutstanding, were excluded from the diluted earnings per share computationbecause the exercise price of the options was greater than the average price ofthe common stock.

 

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**ITEM 2. Management’s Discussion and Analysisof Financial Condition and Results of Operations**

 

The following discussion contains forward-looking statements that aresubject to known and unknown risks, uncertainties (some of which are beyond theCompany’s control), other factors and other assumptions that may cause actualresults or performance to be materially different from those expressed orimplied by such forward-looking statements. Factors that could cause orcontribute to such differences include those discussed below, elsewhere in thisForm 10-Q and in the Company’s Annual Report on Form 10-K for the year endedDecember 31, 2006 (the “Form 10-K”), as filed with the Securities and ExchangeCommission. See “Cautionary Note Regarding Forward-Looking Statements” below inthis Item 2. The following discussion should be read in conjunction with theCompany’s condensed consolidated financial statements and related notescontained in this report. Historical results are not necessarily indicative oftrends in operating results for any future period.

 

**OVERVIEW AND INTRODUCTION**

 

Gevity HR,Inc. (“Gevity” or the “Company”) delivers the Gevity EdgeTM, acomprehensive employment management solution comprised of innovative managementand administration services, helping employers:

 

•       Streamline human resource (“HR”)administration. Gevity takes the stress and effort out of payroll managementand administration, benefits and benefits administration.

•       Optimize HR practices.Gevity works with the client’s team to build structure — policies,procedures and communications — for effective employment management,hiring practices and risk management over time.

•      Maximize people andperformance. Gevity helps hone the skills and capabilities of clients’ staffand management for long-term employee retention and business success.

 

Gevity’semployment management solution is designed to positively impact its clients’business results by:

 

•      increasing clients’productivity by improving employee performance and generating greater employeeretention;

•      allowing clients and theiremployees to focus on revenue producing activities rather than HRmatters; and

•       reducing clients’ exposureto liabilities associated with non-compliance with HR-related regulatory andtax matters.

 

Essentially,Gevity serves as the full-service HR department for these businesses, providingeach employee with support previously only available at much larger companies.

 

The Company focuses on the professional service fees that it earns fromits clients as the primary source of its net income and cash flow. Whendelivering its human resource outsourcing solution to its clients through aco-employment relationship, the Company is also responsible for providingworkers’ compensation and unemployment insurance benefits to its clients’employees as well as health and welfare benefits. In so doing, the Company hasan opportunity to generate additional net income and cash flow from theseofferings and the effective management of the related risk which is tempered bythe need to remain competitive with its health and workers’ compensationofferings. The Company has derived significant benefit in the past fromits insurance offerings.

 

While many clients benefit from the added insurance protection offeredby the co-employment business model, the Company has seen an increase in demandfor the Gevity Edge full-service HR solution on a stand-alone basis separatefrom insurance coverage. In response, the Company has developed a new deliveryoption that allows it to deliver the Gevity Edge solution detached frominsurance coverage and without entering into a co-employment arrangement withthe client. Now available as an additional option, Gevity EdgeTMSelect, the non co-employed version of Gevity Edge, serves the needs of broadermarkets. In the first quarter of 2007, the Company enhanced its nonco-employment delivery option with the purchase of HRAmerica, Inc. (“HRA”) onFebruary 16, 2007. The Company acquired certain assets, including the clientportfolio, of HRA, a human resource

 

17

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outsourcing firm that offers fundamental employee administrationsolutions including payroll processing to approximately 145 clients (asmeasured by Federal Employer Identification Number) with approximately 16,000client employees. Approximately 14,700 non co-employed client employees wereacquired as of the date of the acquisition and approximately 1,300 co-employedclient employees were acquired with an effective date of April 1, 2007. Theacquisition provided the Company with technology for the enhancement of its nonco-employment model, Gevity Edge Select. In addition to the purchase of HRA,contracts with a national provider for benefits administration and withnational and regional brokers for insurance distribution have been signed insupport of Gevity Edge Select. Other than the impact of integration costsrelated to the acquisition and start-up costs related to the Gevity Edge Selectproduct offering, the results of the non co-employment business have not had asignificant impact on the Company’s revenues or results of operations.

 

The Company is refocusing on its core professional employerorganization business (“PEO”).  As aresult, the Company’s previously announced long-range strategic objective toprovide HR services to its clients on a non co-employed basis and to evolveinto a 100% service fee driven revenue business model is not consistent withthe Company’s renewed focus on its core PEO business.  The Company does, however, remain committedto developing a complementary non co-employed income stream and intends torefine the Gevity Edge Select non co-employed product offering based uponfeedback from market testing.

 

The Company believes that the primary challenge it faces in deliveringits human resource outsourcing solutions is its ability to convince small- andmedium-sized businesses to accept the concept of human resource outsourcing.The Company believes that most small- and medium-sized businesses outsourcecertain aspects of the Company’s total solution, including payrolladministration, health and welfare benefits administration and providingworkers’ compensation insurance, but that only a small number of businessesoutsource the entire offering that the Company provides.

 

The Company continues to focus on increasing the profitability of eachclient as well as on increasing the overall number of client employeesserviced. The Company believes that it can increase the overall number ofclient employees serviced through: (i) capitalizing on the growth opportunitieswithin the existing client portfolio through pricing and retention; (ii)further penetration of existing markets from increased production and salesperson productivity, supported by increased brand awareness, databasemanagement, and the development of additional HR products;  (iii) the opening of new offices asexperience and production guide the timing and location of these new offices;and (iv) and to a lesser degree, supporting growth with strategic acquisitions.In addition, the Company intends to invest in the hiring, training, support andretention of its business development managers, as well as investing in theenhanced management skill sets of its field general managers.

 

The following table provides information that the Company utilizes whenassessing the financial performance of its business, the fluctuations of whichare discussed under the “Results of Operations”:

 
| ** **                                                                                     | ** ** | **Three Months Ended September 30,** | ** ** |
|------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                                                                     | ** ** | **2007**                                                 | ** ** | **2006** | ** ** | **% Change** | ** ** |
| Statistical data:                                                                              | ** ** | ** **                                               | ** ** | ** ** | ** ** | ** ** | ** ** |
| Client employees at period end                                                                 |       | 135,469                                                  |       | 138,338 |   | (2.1 | )% |
| Clients at period end (1)                                                                      |       | 7,172                                                    |       | 7,911 |   | (9.3 | )% |
| Average number of client employees/clients  at period end                                      |       | 18.89                                                    |       | 17.49 |   | 8.0 | % |
| Average number of client employees paid by  month (2)                                          |       | 129,606                                                  |       | 128,035 |   | 1.2 | % |
| Annualized professional service fees per  average number of client employees paid by month (3) |       | $                                                        | 1,114      |   | $ | 1,316 |   | (15.3 | )% |
| Annualized gross profit per average number  of client employees paid by month (3)         |       | $                                                        | 1,391      |   | $ | 1,581 |   | (12.0 | )% |
| Annualized operating income per average  number of client employees paid by month (3)     |       | $                                                        | 133        |   | $ | 472 |   | (71.8 | )% |

 

18

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| ** **                                                                                     | ** ** | **Nine Months Ended September 30,** | ** ** |
|------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                                                     | ** ** | **2007**                                                | ** ** | **2006** | ** ** | **% Change** | ** ** |
| Statistical data:                                                                              | ** ** | ** **                                              | ** ** | ** ** | ** ** | ** ** | ** ** |
| Client employees at period end                                                                 |       | 135,469                                                 |       | 138,338 |   | (2.1 | )% |
| Clients at period end (1)                                                                      |       | 7,172                                                   |       | 7,911 |   | (9.3 | )% |
| Average number of client employees/clients  at period end                                      |       | 18.89                                                   |       | 17.49 |   | 8.0 | % |
| Average number of client employees paid by  month (2)                                          |       | 128,933                                                 |       | 127,976 |   | 0.7 | % |
| Annualized professional service fees per  average number of client employees paid by month (3) |       | $                                                       | 1,138      |   | $ | 1,282 |   | (11.2 | )% |
| Annualized gross profit per average number  of client employees paid by month (3)         |       | $                                                       | 1,427      |   | $ | 1,547 |   | (7.8 | )% |
| Annualized operating income per average  number of client employees paid by month (3)     |       | $                                                       | 165        |   | $ | 370 |   | (55.4 | )% |

 

----

(1)          Clients measured by individual clientFederal Employer Identification Number (“FEIN”).

 

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

 

(3)          Annualized statistical information isbased upon actual period-to-date amounts, which have been annualized (dividedby three or nine and multiplied by twelve) and then divided by the averagenumber of client employees paid by month.

 

The Company believes that the primary challenges to its ability toincrease the overall number of client employees serviced include the following:

 

•                  the amount oftime required for sales personnel to begin to acquire new client employees maybe longer than anticipated;

 

•                  the currentclient employee retention levels may continue to decline if current economicconditions persist or further deteriorate, or if clients decide to usealternative providers to service their HR outsourcing needs;

 

•                  the Company(under its co-employed service option) may not be able to continue to provideinsurance-related products of a quality and price to acquire new clientemployees and to retain current client employees;

 

•                  productenhancements related to Gevity’s non co-employment offering may take longer todevelop than anticipated; and

 

•                  the longer thananticipated time to achieve acceptance by prospective clients of the Company’snon co-employed option.

 

19

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**RESULTS OF OPERATIONS**

 

***Three Months EndedSeptember 30, 2007 Compared to Three Months Ended September 30, 2006***

 

**Revenue**

 

The following table presents certain information related to the Company’srevenues for the three months ended September 30, 2007 and 2006:

 

 
| ** **                                                                                                      | ** ** | **Three Months Ended**                                | ** ** | ** **                   | ** ** |
|-----------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                                                                      | ** ** | **September 30,  2007**                                    | ** ** | **September 30,  2006** | ** ** | **%  Change** | ** ** |
| ** **                                                                                                      | ** ** | **(in thousands, except statistical data)** | ** ** |
| Revenues:                                                                                                       |       |                                                            |       |                         |       |   |   |
| Professional service fees                                                                                       |       | $                                                               | 36,109     |                         | $          | 42,131 |   | (14.3 | )% |
| Employee health and welfare benefits                                                                            |       | 85,762                                                          |       | 87,916                       |       | (2.5 | )% |
| Workers’ compensation                                                                                      |       | 21,126                                                          |       | 26,469                       |       | (20.2 | )% |
| State unemployment taxes and other                                                                              |       | 3,511                                                           |       | 4,099                        |       | (14.3 | )% |
| Total revenues                                                                                                  |       | $                                                               | 146,508    |                         | $          | 160,615 |   | (8.8 | )% |
|                                                                                                            |       |                                                            |       |                         |       |   |   |
| Statistical data:                                                                                               |       |                                                            |       |                         |       |   |   |
| Gross salaries and wages (in thousands)                                                                         |       | $                                                               | 1,398,858  |                         | $          | 1,272,617 |   | 9.9 | % |
| Average number of client employees paid by  month (1)                                                           |       | 129,606                                                         |       | 128,035                      |       | 1.2 | % |
| Workers’ compensation billing per one  hundred dollars of workers’ compensation wages (3)             |       | $                                                               | 1.97       |                         | $          | 2.34 |   | (15.8 | )% |
| Workers’ compensation manual premium per  one hundred dollars of workers’ compensation wages (3), (4) |       | $                                                               | 2.17       |                         | $          | 2.71 |   | (19.9 | )% |
| Annualized professional service fees per  average number of client employees paid by month (2)                  |       | $                                                               | 1,114      |                         | $          | 1,316 |   | (15.3 | )% |

 

----

(1)        The average number ofclient employees paid by month is calculated based upon the sum of the numberof paid client employees at the end of each month divided by the number ofmonths in the period.

 

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

 

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

 

(4)        Manual premium rate dataare derived from tables of member insurance companies of American InternationalGroup, Inc. (“AIG”) in effect for 2007 and 2006, respectively.

 

For the three months ended September 30, 2007, total revenues were$146.5 million compared to $160.6 million for the three months ended September30, 2006, representing a decrease of $14.1 million or 8.8%. This decrease was aresult of the reduction in all revenue components as described below.

 

As of September 30, 2007, the Company served approximately 7,200clients, as measured by each client’s FEIN, with approximately 135,500 activeclient employees. This compares to approximately 7,900 clients, as measured byeach client’s FEIN, with approximately 138,300 active client employees atSeptember 30, 2006. The average number of client employees paid by month was129,606 for the third quarter of 2007 compared to 128,035 for the third quarterof 2006. The September 30, 2007 client and employee counts were favorablyimpacted by the HRA acquisition. At September 30, 2007, approximately 131clients and 16,000 client employees were attributable to HRA. For the quarterended September 30, 2007, approximately 16,000 of the average number ofemployees paid by month were attributable to HRA. Excluding the impact of theHRA acquisition, client and the average number of client employees paid bymonth counts for the quarter ended September 30, 2007declinedapproximately 11% when compared to the quarter ended September 30, 2006. Thisdecline is attributable to the departure of legacy clients primarily as aresult of the Company’s 2006 initiative

 

20

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to bring healthcare premiums up to retail rates and the impact in 2007of the economy on clients in Florida and clients in the financial and businessservices sectors. The Company expects comparable net attrition levels in thefourth quarter of 2007 as the economy continues to remain an issue and recentchanges in sales leadership will require time to produce positive results.

 

Revenues from professional service fees decreased to $36.1 million forthe three months ended September 30, 2007, from $42.1 million for the threemonths ended September 30, 2006, representing a decrease of $6.0 million or14.3%. The decrease was primarily due to the overall decrease in the averagenumber of client employees paid (excluding the impact of the HRA acquisition).The addition of the HRA clients did not significantly impact professionalservice fees earned during the third quarter of 2007 as HRA clients acquiredhave a lower average professional service fee for a basic level of service.Accordingly, the decrease in annualized professional service fees per averagenumber of client employees paid by month of 15.3%, from $1,316 for the threemonths ended September 30, 2006 to $1,114 for the three months ended September30, 2007 was primarily attributable to the HRA acquisition. Excluding theimpact of the HRA acquisition in the third quarter of 2007, annualizedprofessional service fees decreased approximately 5.3% to $1,247 primarily as aresult of an accumulation of pricing concessions taken since the third quarterof 2006, a by-product of the adjustments made to bring healthcare premiums toretail rates.

 

Revenues for providing health and welfare benefits for the three monthsended September 30, 2007 were $85.8 million as compared to $87.9 million forthe three months ended September 30, 2006, representing a decrease of $2.2million or 2.5%. Health and welfare benefit plan revenues decreased due to thedecrease in the average number of participants in the Company’s health andwelfare benefit plans of approximately 11% and was partially offset by theincrease in health insurance premiums as a result of higher costs to theCompany to provide such coverage for client employees and the Company’sapproach to pass along all insurance-related cost increases. Clients acquiredin the HRA acquisition are not covered under the Company’s health and welfarebenefit plans and therefore do not contribute to the Company’s health andwelfare benefit revenues.

 

Revenues for providing workers’ compensation insurance coveragedecreased to $21.1 million for the three months ended September 30, 2007, from$26.5 million for the three months ended September 30, 2006, representing adecrease of $5.3 million or 20.2%. Workers’ compensation billings, as apercentage of workers’ compensation wages for the three months ended September30, 2007, were 1.97% as compared to 2.34% for the same period in 2006,representing a decrease of 15.8%. Workers’ compensation charges decreased inthe third quarter of 2007 primarily due to a decrease in billings for Floridaclients reflecting a reduction in Florida manual premium rates beginning inJanuary 2007 and a decrease in the number of clients that participate in theCompany’s workers’ compensation program. The manual premium rates for workers’compensation applicable to the Company’s clients decreased 19.9% during thethree months ended September 30, 2007 as compared to the three months endedSeptember 30, 2006. Manual premium rates are the allowable rates that employersare charged by insurance companies for workers’ compensation insurancecoverage. The decrease in the Company’s manual premium rates primarily reflectsthe reduction in the Florida manual premium rates. Clients acquired in the HRAacquisition are not covered under the Company’s workers’ compensation plans anddo not significantly contribute to the Company’s worker’s compensationrevenues. In October of 2007, Florida’s insurance commissioner approved anotherdecrease in the state’s average workers’ compensation rate of 18.4% beginningJanuary 1, 2008. The Company is currently evaluating the impact of this averagerate reduction (which varies by workers’ compensation class codes) on itsfuture operations.

 

Revenues from state unemployment taxes and other revenues decreased to$3.5 million for the three months ended September 30, 2007 from $4.1 millionfor the three months ended September 30, 2006, representing a decrease of $0.6million or 14.3%. The decrease was primarily due to the net effect of adecrease in co-employment wages that provide unemployment tax revenue to theCompany and was partially offset by increases in the state unemployment taxrates that were passed along to clients. Clients acquired in the HRAacquisition are primarily non co-employed clients that do not provide stateunemployment tax revenue to the Company.

 

21

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**Cost of Services**

 

The following table presents certain information related to the Company’scost of services for the three months ended September 30, 2007 and 2006:

 
| ** **                           | ** ** | **Three Months Ended**                                | ** ** | ** **                   | ** ** |
|--------------------------------------|------------|-----------------------------------------------------------------|------------|------------------------------|------------|
| ** **                           | ** ** | **September 30,  2007**                                         | ** ** | **September 30,  2006** | ** ** | **%  Change** | ** ** |
| ** **                           | ** ** | **(in thousands, except statistical data)** | ** ** |
| Cost of services:                    |       |                                                            |       |                         |       |   |   |
| Employee health and welfare benefits |       | $                                                               | 85,762     |                         | $          | 89,071 |   | (3.7 | )% |
| Workers’ compensation           |       | 10,963                                                          |       | 15,474                       |       | (29.2 | )% |
| State unemployment taxes and other   |       | 4,718                                                           |       | 5,467                        |       | (13.7 | )% |
| Total cost of services               |       | $                                                               | 101,443    |                         | $          | 110,012 |   | (7.8 | )% |

 
| Statistical data:                                                                                               |   |    |      |    |   |      |   |
|-----------------------------------------------------------------------------------------------------------------|--------|---------|-----------|---------|--------|-----------|--------|
| Gross salaries and wages (in thousands)                                                                         |   | $       | 1,398,858 |    | $      | 1,272,617 |   | 9.9 | % |
| Average number of client employees paid by  month (1)                                                           |   | 129,606 |      | 128,035 |   | 1.2       | %      |
| Workers compensation cost rate per one  hundred dollars of workers’ compensation wages (2)                 |   | $       | 1.02      |    | $      | 1.37      |   | (25.5 | )% |
| Number of workers’ compensation claims (3)                                                                 |   | 1,225   |      | 1,574   |   | (22.2     | )%     |
| Frequency of workers’ compensation claims  per one million dollars of workers’ compensation wages (2) |   | 1.14    | x         | 1.39    | x      | (18.0     | )%     |

 

----

(1)   The average number of clientemployees paid by month 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.

 

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

 

(3)   The number of workers’compensation claims reflects the number of claims reported by the end of therespective period and does not include claims with respect to a specific policyyear that are reported subsequent to the end of such period.

 

Cost of services, which includes the cost of the Company’s health andwelfare benefit plans, workers’ compensation insurance, state unemploymenttaxes and other costs, was $101.4 million for the three months ended September30, 2007, compared to $110.0 million for the three months ended September 30,2006, representing a decrease of $8.6 million, or 7.8%. This decrease was dueto the reduction in all cost of services components as described below.

 

The cost of providing health and welfare benefits to clients’ employeesfor the three months ended September 30, 2007 was $85.8 million as compared to$89.1 million for the three months ended September 30, 2006, representing adecrease of $3.3 million or 3.7%. This decrease was primarily attributable tothe decrease in the number of client employees participating in the health andwelfare benefit plans and was partially offset by higher cost of healthbenefits. Clients acquired in the HRA acquisition are not covered under theCompany’s health and welfare benefit plans and therefore do not impact theCompany’s health and welfare benefit costs. The Company expects that priceincreases implemented in conjunction with healthcare renewals effective October1, 2007 and the continuation of current claims experience will favorably impacthealthcare costs during the fourth quarter of 2007. In addition, the Company iscurrently reviewing health plan features and costs with its insurance providersto address competitive issues within certain regions of the country.

 

Workers’ compensation costs were $11.0 million for the three monthsended September 30, 2007, as compared to $15.5 million for the three monthsended September 30, 2006, representing a decrease of 

 

22

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$4.5 million or 29.2%. Workers’ compensation costs decreased in thethird quarter of 2007 due to: (i) the reduction in the prior years’ workers’compensation loss estimates of approximately $4.1 million as a result ofcontinued favorable claims development for those open policy years; (ii) thereduction in current year workers’ compensation costs as a result of the 11%reduction in co-employed client employees and related reduction in claims, and(iii) the reduction in prior policy years’ premium expenses and administrativecosts of approximately $0.9 million as a result of the finalization of AIGpremium audits in the third quarter of 2007. During the three months ended September30, 2006, the Company recorded a net reduction in prior year’ workers’compensation loss estimates of $0.7 million and a $4.4 million reduction of theultimate loss estimates for the 2006 policy year due to favorable claimsdevelopment. Clients acquired in the HRA acquisition are not covered under theCompany’s workers’ compensation plans and therefore do not impact the Company’sworker’s compensation costs. The Company is currently reviewing its workers’compensation options for 2008, including the potential change in the peroccurrence deductible.

 

State unemployment taxes and other costs were $4.7 million for thethree months ended September 30, 2007, compared to $5.5 million for the threemonths ended September 30, 2006, representing a decrease of $0.7 million or13.7%. The decrease in the Company’s co-employed client employees and relatedtaxable wages (excluding the impact of the HRA acquisition) were substantiallyoffset by an increase in state unemployment tax rates beginning January 1,2007, as well as an increase in costs associated with expanded client serviceofferings. Clients acquired in the HRA acquisition are primarily nonco-employed clients that do not impact the Company’s state unemployment taxexpense. The Company anticipates that state unemployment tax rates may increasein some jurisdictions during 2008. Whenever possible, and consistent with theCompany’s overall view toward individual client profitability, the Companyintends to pass such increases along to its clients.

 

**Operating Expenses**

 

The following table presents certain information related to the Company’soperating expenses for the three months ended September 30, 2007 and 2006:

 
| ** **                        | ** ** | **Three Months Ended**                                | ** ** | ** **                   | ** ** |
|-----------------------------------|------------|-----------------------------------------------------------------|------------|------------------------------|------------|
| ** **                        | ** ** | **September 30,  2007**                                    | ** ** | **September 30,  2006** | ** ** | **% Change** | ** ** |
| ** **                        | ** ** | **(in thousands, except statistical data)** | ** ** |
| Operating expenses:               |       |                                                            |       |                         |       |   |   |
| Salaries, wages and commissions   |       | $                                                               | 21,566     |                         | $          | 20,956 |   | 2.9 | % |
| Other general and administrative  |       | 15,028                                                          |       | 13,959                       |       | 7.7 | % |
| Reinsurance contract gain         |       | —                                                          |       | (3,000                       | )          | n/a |   |
| Depreciation and amortization     |       | 4,165                                                           |       | 3,573                        |       | 16.6 | % |
| Total operating expenses          |       | $                                                               | 40,759     |                         | $          | 35,488 |   | 14.9 | % |
|                              |       |                                                            |       |                         |       |   |   |
| Statistical data:                 |       |                                                            |       |                         |       |   |   |
| Internal employees at quarter end |       | 913                                                             |       | 1,006                        |       | (9.2 | )% |

 

Total operating expenses were $40.8 million for the three months endedSeptember 30, 2007 as compared to $35.5 million for the three months endedSeptember 30, 2006, representing an increase of $5.3 million or 14.9%.

 

Salaries, wages and commissions were $21.6 million for the three monthsended September 30, 2007 as compared to $21.0 million for the three monthsended September 30, 2006, representing an increase of $0.6 million or 2.9%. Theincrease is primarily a result of the net effect of $1.6 million in severancewages associated with the termination of approximately 70 support and managementpersonnel during the third quarter of 2007 which was partially offset by a $0.9million decrease in sales commissions associated with a lower sales volume in2007 as well as a $0.7 million reduction in stock compensation expenseattributable to an increase in the estimated forfeiture rate as a result ofemployee terminations. The Company expects to incur additional severance costsof approximately $1.6 million in 

 

23

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the fourth quarter of 2007 in connection with the resignation of itsformer Chief Executive Officer in October 2007.

 

Other general and administrative expenses were $15.0 million for thethree months ended September 30, 2007 as compared to $14.0 million for thethree months ended September 30, 2006, representing an increase of $1.1 millionor 7.7%. This increase is primarily due to costs associated with the launch anddevelopment of Gevity Edge Select and the integration of HRA as well as a $0.7million increase in recruiting and outplacement costs related to the change insenior management during the third quarter of 2007, an increase in bad debtexpense of approximately $0.5 million as a result of the termination of a largeclient in the mortgage industry, and a $0.6 million expense associated with thebuy-out of a long-term information technology contract.

 

During the second quarter of 2006, the Company recorded a $4.65 millionloss on a reinsurance contract related to its 2006 workers’ compensationprogram as a result of the liquidation proceeding related to the Bermudareinsurance company responsible for covering the layer of its workers’compensation claims between $0.5 million and $2.0 million per occurrence andthe related termination of its reinsurance contract. During the third quarterof 2006, the Company recorded a gain on the reinsurance contract as a result ofthe receipt of $3.0 million pursuant to a court-approved settlement, which alsocalled for the admission in the liquidation proceeding of an unsecured claimagainst the reinsurer in the amount of $2.2 million. The settlement was withoutprejudice to any claims Gevity may have against third parties relating to thereinsurer’s liquidation. The Company is actively pursuing additional recovery.Future amounts recovered, if any, will be recognized in income when realizationis assured beyond a reasonable doubt. In light of the liquidation proceeding,during the second quarter of 2006 the Company secured comparable coverage forthe layer of claims between $0.5 million and $2.0 million from AIGretroactively effective to January 1, 2006. The cost of the replacementcoverage related to the first nine months of 2006 (approximately $3.7 million),was included in cost of services for the nine months ended September 30, 2006and replaced the cost incurred from the original policy.

 

Depreciation and amortization expenses were $4.2 million for the threemonths ended September 30, 2007 compared to $3.6 million for the three monthsended September 30, 2006, an increase of 16.6%. The increase is primarilyattributable to the amortization of technology assets capitalized during 2007. Alsoincluded in the increase was the amortization of the intangible assets relatedto the HRA acquisition.

 

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

 

**Income Taxes**

 

Income taxes were $1.1 million for the three months ended September 30,2007 compared to $5.8 million for the three months ended September 30, 2006.The decrease is primarily due to the reduction in taxable income for the thirdquarter of 2007 compared to the third quarter of 2006. The Company’s effectivetax rate for the three months ended September 30, 2007 and 2006 was 30.3% and37.7%, respectively. The Company’s effective tax rates differed from thestatutory federal tax rates because of state taxes and federal tax credits.

 

**Net Income and Diluted Earnings Per Share**

 

As a result of the factors described above, net income decreased 74.3%to $2.5 million for the three months ended September 30, 2007 compared to $9.6million for the three months ended September 30, 2006. Net income per commonshare on 23.8 million diluted shares was $0.10 for the three months endedSeptember 30, 2007, compared to net income per common share of $0.35 on 27.0million diluted shares for the three months ended September 30, 2006.

 

24

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***Nine Months EndedSeptember 30, 2007 Compared to Nine Months Ended September 30, 2006***

 

**Revenue**

 

The following table presents certain information related to the Company’srevenues for the nine months ended September 30, 2007 and 2006:

 
| ** **                                                                                                      | ** ** | **Nine Months Ended**                                 | ** ** | ** **                   | ** ** |
|-----------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                                                                      | ** ** | **September 30,  2007**                                    | ** ** | **September 30,  2006** | ** ** | **%  Change** | ** ** |
| ** **                                                                                                      | ** ** | **(in thousands, except statistical data)** | ** ** |
| Revenues:                                                                                                       |       |                                                            |       |                         |       |   |   |
| Professional service fees                                                                                       |       | $                                                               | 110,009    |                         | $          | 123,051 |   | (10.6 | )% |
| Employee health and welfare benefits                                                                            |       | 261,854                                                         |       | 265,212                      |       | (1.3 | )% |
| Workers’ compensation                                                                                      |       | 63,638                                                          |       | 79,739                       |       | (20.2 | )% |
| State unemployment taxes and other                                                                              |       | 22,530                                                          |       | 23,510                       |       | (4.2 | )% |
| Total revenues                                                                                                  |       | $                                                               | 458,031    |                         | $          | 491,512 |   | (6.8 | )% |
|                                                                                                            |       |                                                            |       |                         |       |   |   |
| Statistical data:                                                                                               |       |                                                            |       |                         |       |   |   |
| Gross salaries and wages (in thousands)                                                                         |       | $                                                               | 4,193,635  |                         | $          | 3,818,766 |   | 9.8 | % |
| Average number of client employees paid by  month (1)                                                           |       | 128,933                                                         |       | 127,976                      |       | 0.7 | % |
| Workers’ compensation billing per one  hundred dollars of workers’ compensation wages (3)             |       | $                                                               | 1.96       |                         | $          | 2.35 |   | (16.6 | )% |
| Workers’ compensation manual premium per  one hundred dollars of workers’ compensation wages (3), (4) |       | $                                                               | 2.17       |                         | $          | 2.74 |   | (20.8 | )% |
| Annualized professional service fees per average  number of client employees paid by month (2)                  |       | $                                                               | 1,138      |                         | $          | 1,282 |   | (11.2 | )% |

 

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(1)        The average number ofclient employees paid by month is calculated based upon the sum of the numberof paid client employees at the end of each month divided by the number ofmonths in the period.

 

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

 

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

 

(4)        Manual premium rate dataare derived from tables of member insurance companies of American InternationalGroup, Inc. (“AIG”) in effect for 2007 and 2006, respectively.

 

For the nine months ended September 30, 2007, total revenues were$458.0 million compared to $491.5 million for the nine months ended September30, 2006, representing a decrease of $33.5 million or 6.8%. This decrease was aresult of the reduction in all revenue components as described below.

 

The average number of client employees paid by month was 128,933 forthe nine months ended September 30, 2007 compared to 127,976 for the ninemonths ended September 30, 2006. The average number of client employees paid bymonth for the nine months ended September 30, 2007, was favorably impacted bythe HRA acquisition. For the nine months ended September 30, 2007,approximately 13,635 of the average number of client employees paid by monthwere attributable to HRA. Excluding the impact of the HRA acquisition, theaverage number of client employees paid by month declined approximately 10%when compared to the period ended September 30, 2006. This decline isattributable to the departure of legacy clients primarily as a result of theCompany’s 2006 initiative to bring healthcare premiums up to retail rates,lower than expected production levels during 2007 and the impact in 2007 of theeconomy on clients in Florida and clients in the financial and businessservices sectors.

 

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Revenues from professional service fees decreased to $110.0 million forthe nine months ended September 30, 2007, from $123.1 million for the ninemonths ended September 30, 2006, representing a decrease of $13.0 million or10.6%. The decrease was primarily due to the overall decrease in the averagenumber of client employees paid (excluding the impact of the HRA acquisition).The addition of the HRA clients did not significantly impact professionalservice fees earned during the first nine months of 2007 as HRA clientsacquired have a lower average professional service fee for a basic level ofservice. Accordingly, the decrease in annualized professional service fees peraverage number of client employees paid by month of 11.2%, from $1,282 for thenine months ended September 30, 2006 to $1,138 for the nine months endedSeptember 30, 2007, was primarily attributable to the HRA acquisition. Excludingthe impact of the HRA acquisition in the first nine months of 2007, annualizedprofessional service fees decreased approximately 2.3% to $1,253 primarily as aresult of an accumulation of pricing concessions taken since the third quarterof 2006, a by-product of the adjustments made to bring healthcare premiums toretail rates.

 

Revenues for providing health and welfare benefits for the nine monthsended September 30, 2007 were $261.9 million as compared to $265.2 million forthe nine months ended September 30, 2006, representing a decrease of $3.4million or 1.3%. Health and welfare benefit plan revenues decreased due to thedecrease in the average number of participants in the Company’s health andwelfare benefit plans of approximately 9.1% and was partially offset by theincrease in health insurance premiums as a result of higher costs to theCompany to provide such coverage for client employees and the Company’sapproach to pass along all insurance-related cost increases. Clients acquiredin the HRA acquisition are not covered under the Company’s health and welfarebenefit plans and therefore do not contribute to the Company’s health andwelfare benefit revenues.

 

Revenues for providing workers’ compensation insurance coveragedecreased to $63.6 million for the nine months ended September 30, 2007, from$79.7 million for the nine months ended September 30, 2006, representing adecrease of $16.1 million or 20.2%. Workers’ compensation billings, as apercentage of workers’ compensation wages for the nine months ended September30, 2007, were 1.96% as compared to 2.35% for the same period in 2006,representing a decrease of 16.6%. Workers’ compensation charges decreased inthe first three quarters of 2007 primarily due to a decrease in billings forFlorida clients reflecting a reduction in Florida manual premium ratesbeginning in January 2007 and a reduction in the number of clients thatparticipate in the Company’s workers’ compensation program. The manual premiumrates for workers’ compensation applicable to the Company’s clients decreased20.8% during the nine months ended September 30, 2007 as compared to the ninemonths ended September 30, 2006. Clients acquired in the HRA acquisition arenot covered under the Company’s workers’ compensation plans and do not significantlycontribute to the Company’s worker’s compensation revenues.

 

Revenues from state unemployment taxes and other revenues decreased to$22.5 million for the nine months ended September 30, 2007 from $23.5 millionfor the nine months ended September 30, 2006, representing a decrease of $1.0million or 4.2%. The decrease was primarily due to the net effect of a decreasein co-employed client employees and related taxable wages which was partiallyoffset by increases in the state unemployment tax rates that were passed alongto clients. Clients acquired in the HRA acquisition are primarily nonco-employed clients that do not provide state unemployment tax revenue to theCompany.

 

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**Cost of Services**

 

The following table presents certain information related to the Company’scost of services for the nine months ended September 30, 2007 and 2006:

 
| ** **                                 | ** ** | **Nine Months Ended**                                 | ** ** | ** **                   | ** ** |
|--------------------------------------------|------------|-----------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                 | ** ** | **September 30,  2007**                                    | ** ** | **September 30,  2006** | ** ** | **%  Change** | ** ** |
| ** **                                 | ** ** | **(in thousands, except statistical data)** | ** ** |
| Cost of services:                          |       |                                                            |       |                         |       |   |   |
|  Employee health and welfare benefits |       | $                                                               | 259,253    |                         | $          | 263,188 |   | (1.5 | )% |
| Workers’ compensation                 |       | 34,883                                                          |       | 53,356                       |       | (34.6 | )% |
|  State unemployment taxes and other   |       | 25,885                                                          |       | 26,465                       |       | (2.2 | )% |
| Total cost of services                     |       | $                                                               | 320,021    |                         | $          | 343,009 |   | (6.7 | )% |

 
| Statistical data:                                                                                               |   |    |      |    |   |      |   |
|-----------------------------------------------------------------------------------------------------------------|--------|---------|-----------|---------|--------|-----------|--------|
| Gross salaries and wages (in thousands)                                                                         |   | $       | 4,193,635 |    | $      | 3,818,766 |   | 9.8 | % |
| Average number of client employees paid by  month (1)                                                           |   | 128,933 |      | 127,976 |   | 0.7       | %      |
| Workers compensation cost rate per one  hundred dollars of workers’ compensation wages (2)                 |   | $       | 1.07      |    | $      | 1.57      |   | (31.8 | )% |
| Number of workers’ compensation claims (3)                                                                 |   | 3,531   |      | 4,582   |   | (22.9     | )%     |
| Frequency of workers’ compensation claims  per one million dollars of workers’ compensation wages (2) |   | 1.09x   |      | 1.35x   |   | (19.3     | )%     |

 

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

 

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

 

(3)        The number ofworkers’ compensation claims reflects the number of claims reported by the endof the respective period and does not include claims with respect to a specificpolicy year that are reported subsequent to the end of such period.

 

Cost of services, which includes the cost of the Company’s health andwelfare benefit plans, workers’ compensation insurance, state unemploymenttaxes and other costs, was $320.0 million for the nine months ended September30, 2007, compared to $343.0 million for the nine months ended September 30,2006, representing a decrease of $23.0 million, or 6.7%. This decrease was dueto the reduction in all costs of services components as described below.

 

The cost of providing health and welfare benefits to clients’ employeesfor the nine months ended September 30, 2007 was $259.3 million as compared to$263.2 million for the nine months ended September 30, 2006, representing adecrease of $3.9 million or 1.5%. This decrease was primarily attributable to adecrease in the number of client employees participating in the health andwelfare benefit plans and partially offset by the higher cost of healthbenefits. In addition, during the nine months ended September 30, 2007, theCompany recorded a $2.6 million reduction in health benefit costs due tofavorable claims development compared to a $2.0 million reduction in healthbenefit costs recognized during the first three quarters of 2006 related to thefinalization of prior year premium recalls and a reduction in the incurred butnot reported claim reserves based upon favorable claims experience. Clientsacquired in the HRA acquisition are not covered under the Company’s health andwelfare benefit plans and therefore do not impact the Company’s health andwelfare benefit costs.

 

Workers’ compensation costs were $34.9 million for the nine monthsended September 30, 2007, as compared to $53.4 million for the nine monthsended September 30, 2006, representing a decrease of $18.5 million or 34.6%.Workers’ compensation costs decreased in the first nine months of 2007 

 

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primarily due to the reduction in the prior years’ workers’compensation loss estimates of approximately $12.1 million during the firstnine months of 2007 compared to the reduction in the prior years’ lossestimates of $2.5 million during the first nine months of 2006. Workers’compensation costs also decreased as a result of the overall decline inco-employed client employees (excluding the impact of the HRA acquisition) andthe impact that has had on the 2007 program year costs. Clients acquired in theHRA acquisition are not covered under the Company’s workers’ compensation plansand therefore do not impact the Company’s worker’s compensation costs.

 

State unemployment taxes and other costs were $25.9 million for thenine months ended September 30, 2007, compared to $26.5 million for the ninemonths ended September 30, 2006, representing a decrease of $0.6 million or2.2%. The decrease in co-employed client employees and related taxable wageswere substantially offset by an increase in state unemployment tax ratesbeginning January 1, 2007, as well as an increase in costs associated withexpanded client service offerings. Clients acquired in the HRA acquisition areprimarily non co-employed clients that do not impact the Company’s stateunemployment tax expense.

 

**Operating Expenses**

 

The following table presents certain information related to the Company’soperating expenses for the nine months ended September 30, 2007 and 2006:

 
| ** **                       | ** ** | **Nine Months Ended**                                 | ** ** | ** **                   | ** ** |
|----------------------------------|------------|-----------------------------------------------------------------|------------|------------------------------|------------|
| ** **                       | ** ** | **September 30,  2007**                                    | ** ** | **September 30,  2006** | ** ** | **%  Change** | ** ** |
| ** **                       | ** ** | **(in thousands, except statistical data)** | ** ** |
| Operating expenses:              |       |                                                            |       |                         |       |   |   |
| Salaries, wages and commissions  |       | $                                                               | 64,495     |                         | $          | 61,331 |   | 5.2 | % |
| Other general and administrative |       | 45,478                                                          |       | 39,634                       |       | 14.7 | % |
| Reinsurance contract loss        |       | —                                                          |       | 1,650                        |       | n/a |   |
| Depreciation and amortization    |       | 12,101                                                          |       | 10,406                       |       | 16.3 | % |
| Total operating expenses         |       | $                                                               | 122,074    |                         | $          | 113,021 |   | 8.0 | % |

 
| Statistical data:                 |   |   |   |   |   |   |   |
|-----------------------------------|--------|--------|--------|--------|--------|--------|--------|
| Internal employees at quarter end |   | 913    |   | 1,006  |   | (9.2   | )%     |

 

Total operating expenses were $122.1 million for the nine months endedSeptember 30, 2007 as compared to $113.0 million for the nine months ended September30, 2006, representing an increase of $9.1 million or 8.0%.

 

Salaries, wages and commissions were $64.5 million for the nine monthsended September 30, 2007 as compared to $61.3 million for the nine months endedSeptember 30, 2006, representing an increase of $3.2 million or 5.2%. Theincrease is primarily a result of an increase in severance wages ofapproximately $2.3 million in the first nine months of 2007, principallyrelated to the elimination/termination of approximately 115 support and managementpositions and the impact of an overall increase in base wages associated withannual merit increases, which exceeded the impact on salaries and wages of thereduction in internal employees. These increases in salary, wages andcommissions were partially offset by a $1.5 million reduction in commissionexpense as a result of lower sales volume and a $1.1 million reduction in stockcompensation expense attributable to an increase in the estimated forfeiturerate as a result of employee terminations.

 

Other general and administrative expenses were $45.5 million for thenine months ended September 30, 2007 as compared to $39.6 million for the ninemonths ended September 30, 2006, representing an increase of $5.8 million or14.7%. This increase is primarily a result of costs associated with investmentsin marketing and information technology which are expected to benefitoperations for the remainder of 2007 and beyond, relating to improvements inservice delivery and sales including costs associated with the launch anddevelopment of Gevity Edge Select and the integration of HRA.

 

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Additionally, there was an increase in bad debt expense ofapproximately $0.9 million related to terminated accounts in 2007.

 

Information regarding the Company’s 2006 reinsurance contract loss canbe found under “Operating Expenses” for the three months ended September 30,2007 compared to the three months ended September 30, 2006.

 

Depreciation and amortization expenses were $12.1 million for the ninemonths ended September 30, 2007 compared to $10.4 million for the nine monthsended September 30, 2006, an increase of 16.3%. The increase is primarilyattributable to the amortization of technology assets capitalized during thefirst nine months of 2007. Also included in the increase was the amortizationof the intangible assets related to the HRA acquisition.

 

**Income Taxes**

 

Income taxes were $4.9 million for the nine months ended September 30,2007 compared to $10.9 million for the nine months ended September 30, 2006. Thedecrease is primarily due to a reduction in taxable income for the first threequarters of 2007 compared to the first three quarters of 2006. The Company’seffective tax rate for the nine months ended September 30, 2007 and 2006 was33.6% and 30.7%, respectively. The Company’s effective tax rates differed fromthe statutory federal tax rates because of state taxes and federal tax credits.In addition, during the nine months ended September 30, 2006, the Company’seffective tax rate was favorably impacted as a result of the filing of a changein accounting method with the Internal Revenue Service in the second quarter of2006 and the related reversal of a tax reserve of approximately $2.0 million. 

 

**Net Income and Diluted Earnings Per Share**

 

As a result of the factors described above, net income decreased 60.8%to $9.7 million for the nine months ended September 30, 2007 compared to $24.7million for the nine months ended September 30, 2006. Net income per commonshare on 24.4 million diluted shares was $0.40 for the nine months endedSeptember 30, 2007, compared to net income per common share of $0.91 on 27.1million diluted shares for the nine months ended September 30, 2006.

 

### **LIQUIDITY AND CAPITAL RESOURCES**

### ** **

**Cash Flow**

 

***General***

 

The Company periodically evaluates its liquidity requirements, capitalneeds and availability of capital resources in view of its collateralizationrequirements for insurance coverage, purchases of shares of its common stockunder its share repurchase program, plans for expansion of its HR outsourcingportfolio through acquisitions, payment of dividends, possible acquisitions ofbusinesses complementary to the business of the Company, and other operatingcash needs. As a result of this process, the Company has in the past sought,and may in the future seek, to obtain additional capital from either private orpublic sources.

 

The Company currently believes that its current cash balances, cashflow from operations and the existing credit facility will be sufficient tomeet its operational requirements for the next 12 months, excluding cashrequired for acquisitions, if any. The Company has an unsecured credit facilityfor $100.0 million with Bank of America, N.A. and Wachovia, N.A. (the “Lenders”)of which $20.5 million was outstanding as of September 30, 2007. See Note 7 tothe condensed consolidated financial statements contained in this report foradditional information regarding the Company’s credit facility. The ability todraw funds under the credit agreement is dependent upon meeting financialcovenants, which may limit 

 

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the Company’s ability to draw the full amount of the facility. AtSeptember 30, 2007, the maximum facility available to the Company wasapproximately $90,000. If current operating trends continue, the Companywill not be able to maintain the minimum Consolidated Fixed Charge CoverageRatio required and will need to seek covenant modifications to its creditagreement with its Lenders during the fourth quarter of 2007.  The Company is currently in discussions withits Lenders regarding this issue. If such modifications are not obtained thismay have a material impact on the Company’s cash flow and ability to conductits operations.

 

The Company’s primary short-term liquidity requirements relate to thepayment of accrued payroll and payroll taxes of its internal and clientemployees and the payment of workers’ compensation premiums and medical benefitplan premiums. The Company’s billings to its clients include: (i) each clientemployee’s gross wages; (ii) a professional service fee, which is primarilycomputed as 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 during the first nine months of2007 were salaries, wages and payroll taxes of client employees of $4.5billion. The billings to clients are managed from a cash flow perspective sothat a matching generally exists between the time that the funds are receivedfrom a client to the time that the funds are paid to the client employees andto the appropriate tax jurisdictions. As a co-employer, and under the terms ofeach of the Company’s professional services agreements, the Company isobligated to make certain wage, tax and regulatory payments even if the relatedpayments 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 can be significant and the results of operations and cashflow may potentially be impacted. In addition, the timing and amount ofpayments for payroll, payroll taxes and benefit premiums can vary significantlybased on various factors, including the day of the week on which a payrollperiod ends and the existence of holidays at or immediately following a payrollperiod-end.

 

***Restricted Cash***

 

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

 

At September 30, 2007, the Company had $24.5 million in total cash andcash equivalents and restricted marketable securities, of which $14.6 millionwas unrestricted. At September 30, 2007, the Company had pledged $8.5 millionof restricted marketable securities in collateral trust arrangements issued inconnection with the Company’s workers’ compensation and health benefit plansand had $1.4 million held in escrow in connection with various purchase pricecontingencies related to the HRA acquisition as follows:

 
| ** **                                                | ** ** | **September 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|-----------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                                                | ** ** | **(in thousands)**      | ** ** |
| Short-term marketable securities -  restricted:           |       |                         |       |                        |       |
| General insurance collateral obligations –  AIG      |       | $                            | 4,646      |                        | $          | 4,478 |   |
| HRA escrow                                                |       | 1,400                        |       | —                      |       |
| Total short-term marketable securities –  restricted |       | 6,046                        |       | 4,478                       |       |
|                                                      |       |                         |       |                        |       |
| Long-term marketable securities restricted:               |       |                         |       |                        |       |
| Workers’ compensation collateral – AIG          |       | 3,887                        |       | 3,747                       |       |
| Total long-term marketable securities –  restricted  |       | 3,887                        |       | 3,747                       |       |
| Total restricted assets                                   |       | $                            | 9,933      |                        | $          | 8,225 |   |

 

The Company’s obligation to Blue Cross/Blue Shield of Florida (“BCBSFL”),under its current contract, may require an irrevocable letter of credit (“LOC”)in favor of BCBSFL if a coverage ratio, as 

 

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set forth in the BCBSFL agreement, is not maintained. The coverageratio is calculated quarterly. If the Company’s coverage ratio does not meetthe minimum requirements, the Company must provide an LOC valued at up to twomonths of projected claims (average monthly claims approximated $9.3 millionduring the last twelve months). As of September 30, 2007, the minimum coverageratio was met and no LOC was required. The Company does not anticipate that thecurrent operating trends will cause the coverage ratios to drop below theminimum requirements in the fourth quarter of 2007. The Company was notrequired to collateralize the Aetna program for 2007.

 

The Company does not anticipate any additional collateral obligationsto be required in 2007 for its workers’ compensation arrangements.

 

As of September 30, 2007, the Company hasrecorded a $109.4 million receivable from AIG representing workers’compensation premium payments made to AIG related to program years 2000 through2007 in excess of the present value of the estimated claims liability. Thisreceivable represents a significant concentration of credit risk for theCompany.

 

***Cash Flows fromOperating Activities***

 

At September 30, 2007, the Company had a net working capital deficit of$26.6 million, including restricted funds classified as short-term of $6.0million, compared to a net working capital deficit of $10.7 million as ofDecember 31, 2006, including $4.5 million of restricted funds classified asshort-term. The decrease in working capital during the first nine months of2007 was primarily due to the reduction in cash related to timing differences,the acquisition of HRA and stock repurchases under the Company’s repurchaseprogram.

 

Net cash provided by operating activities was $9.7 million for the ninemonths ended September 30, 2007 as compared to net cash provided by operatingactivities of $37.6 million for the nine months ended September 30, 2006,representing a decrease in net cash provided by operating activities of $27.9million. Cash flows from operating activities are significantly impacted by thetiming of client payrolls, the day of the week on which a fiscal period endsand the existence of holidays at or immediately following a period end. Theoverall decrease in cash provided by operating activities was primarily due tonet timing differences as well as the overall reduction in net income.

 

If current workers’ compensation trends continue, the Company expectsto receive approximately $13.6 million from AIG during the third quarter of2008 as a net return of premiums in connection with the true-ups related to the2000-2007 program years. Additional releases of premiums by AIG are alsoanticipated in future years if such trends continue. The Company believes thatit has provided AIG a sufficient amount of cash to cover its short-term andlong-term workers compensation obligations related to open policy years.

 

***CashFlow from Investing Activities***

** **

Cash used in investing activities for the nine months ended September30, 2007 of $16.4 million, includes approximately $10.9 million related to theFebruary 16, 2007 acquisition of HRA ($9.5 million of cash and relatedacquisition costs and $1.4 million included in marketable securities purchasesfor purchase price contingencies held in an escrow account). In addition theCompany spent approximately $5.2 million for capital expenditures primarily fortechnology-related items including approximately $1.7 million of capitalexpenditures made by the Company in 2006 and paid for in 2007. Cash used ininvesting activities for the nine months ended September 30, 2006 of $13.6million primarily related to capital expenditures. The Company is currentlyreviewing its capital expenditure plans for the fourth quarter of 2007 and for2008. The Company does not expect that its current level of capital spendingwill change significantly in the fourth quarter of 2007. Capital expendituresare expected to be funded through operations, leasing arrangements or from theCompany’s revolving credit facility.

 

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***Cash Flow fromFinancing Activities***

 

Cash used in financing activities for the nine months ended September30, 2007 of $15.1 million was a result of $20.5 million of net borrowings underthe revolving credit facility; $1.0 million received upon the exercise of82,242 stock options and the purchase of 20,301 shares of common stock underthe Company’s employee stock purchase plan; and $0.3 million related to excesstax benefits received by the Company for its share-based arrangements. Theseamounts were offset by the use of $30.3 million to repurchase 1,543,121 sharesof the Company’s common stock under its stock repurchase programs (see “PartII. Item 2. Unregistered Sales ofEquity Securities and Use of Proceeds” for a discussion of the current stockrepurchase program) and $6.5 million of cash dividends paid. The Companyhas disengaged from its share repurchase program for the time being in order toinvest available cash in its business.

 

Cash used in financing activities for the nine months ended September30, 2006 of $21.5 million was a result of the net effect of $25.7 million usedto repurchase 1,078,230 shares of the Company’s common stock under its stockrepurchase programs, including $3.4 million related to stock repurchase made in2005 and paid for in 2006; $6.6 million of cash dividends paid; $6.6 millionreceived from directors, officers and employees of the Company upon theexercise of 631,558 stock options and the purchase of 20,941 shares of commonstock under the Company’s employee stock purchase plan; and $4.2 millionrelated to excess tax benefits received by the Company for its share-basedarrangements.

 

**Commitments and Contractual Obligations**

 

***Off-Balance SheetArrangements***

 

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

 

***ContractualObligations***

 

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

 

In connection with the October 2007 resignation of Erik Vonk, theCompany’s Chief Executive Officer, the Company entered into a SeparationAgreement and Full and Final Release of Claims dated November 2, 2007 (the “SeparationAgreement”). The Separation Agreement provides for the payment to Mr. Vonk of$1,500,000 through October 18, 2009, together with health and welfare benefitsthrough that period of time.

 

**CRITICAL ACCOUNTING ESTIMATES**

 

The preparation of financial statements and related disclosures inconformity with accounting principles generally accepted in the United Statesof America, requires management to make estimates and assumptions that affectthe reported amounts of assets, liabilities, revenues and expenses and thedisclosures of contingent assets and liabilities. Accounting estimates relatedto workers’ compensation receivables/reserves, intangible assets, medicalbenefit plan liabilities, state unemployment taxes, allowance for doubtfulaccounts, share-based payments and deferred income taxes are those that theCompany considers critical in preparing its financial statements because theyare particularly dependent on estimates and assumptions made by management thatare uncertain at the time the accounting estimates are made. While managementhas used its best estimates based upon facts and circumstances available at thetime, different estimates reasonably could have been used in the currentperiod, which may have a material impact on the presentation of the Company’sfinancial condition and results of operations. Management periodically reviewsthe estimates and assumptions and reflects the effects of revisions in theperiod they are determined to be necessary. The discussion under “Item 7 -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.

 

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The Company has adopted the provisions of Financial AccountingStandards Board (“FASB”) Interpretation No. 48, *Accounting for Uncertainty in Income Taxes* – *An Interpretation of FASB Statement No. 109*(“FIN48”), on January 1, 2007. FIN 48 clarifies the accounting for uncertainty intax positions and requires companies to determine whether it is “more likelythan not” that a tax position will be sustained upon examination by theappropriate taxing authorities before any part of the benefit can be recorded inthe financial statements. It also provides guidance on the recognition,measurement and classification of income tax uncertainties, along with anyrelated interest and penalties. See Note 1 and Note 10 to the condensedconsolidated financial statements contained elsewhere in this Form 10-Q forinformation regarding the Company’s implementation and impact of this newaccounting standard as well as information on the impact of other recentlyissued accounting standards.

 

*California Unemployment Tax Assessment*

 

In May of 2007, the Company received a Notice of Assessment from theState of California Employment Development Department (“EDD”) relative to theCompany’s practice of reporting payroll for its subsidiaries under multipleemployer account numbers. The notice stated that the EDD was collapsing theaccounts 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$4.7 million. On May 30, 2007, the Company filed a petition with the Office ofthe Chief Administrative Law Judge for the California Unemployment InsuranceAppeals Board asking that the EDD’s assessment be set aside. The petitioncontends in part that the state has exceeded the scope of its authority inissuing the assessment by failing to comply with its own mandatory proceduralrequirements and that the statute of limitations for issuing the assessmentshas expired as the Company’s activities within the state were compliant withCalifornia statutes and regulations. The Company believes that it has validdefenses regarding the assessments and intends to vigorously protest theseclaims. However, the Company cannot estimate at this point in time what amount,if any, will ultimately be due with respect to this matter.

 

**CAUTIONARYNOTE REGARDING FORWARD-LOOKING STATEMENTS**

 

Statements made in this report, including under the section titled “Management’sDiscussion and Analysis of Financial Condition and Results of Operations,” thatare not purely historical may be forward-looking statements within the meaningof Section 27A of the Securities Act of 1933 and Section 21E of the SecuritiesExchange Act of 1934, including without limitation, statements regarding theCompany’s expectations, hopes, beliefs, intentions or strategies regarding thefuture. 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,identify forward-looking statements. Forward-looking statements are based onthe Company’s current expectations and beliefs concerning future developmentsand their potential effects on the Company. There can be no assurance thatfuture developments affecting the Company will be those that the Company hasanticipated. Forward-looking statements involve a number of known and unknownrisks, uncertainties (some of which are beyond the Company’s control) and otherfactors 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 the Company’sForm 10-K and the risks that are described in other reports that the Companyfiles with the Securities and Exchange Commission.

 

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

 

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**ITEM3.                  Quantitative andQualitative Disclosures about Market Risk**

 

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

 

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

 

As of the end of theperiod covered by this report, the Company’s management, including the ChiefExecutive Officer and the Chief Financial Officer, conducted an evaluation ofthe effectiveness of the design and operation of the Company’s disclosurecontrols and procedures pursuant to Rule 13a-15 of the Securities Exchange Actof 1934. Any controls and procedures, no matter how well designed and operated,can provide only reasonable assurance of achieving the desired objectives.Based upon that evaluation and subject to the foregoing, the Company’smanagement, including the Company’s Chief Executive Officer and Chief FinancialOfficer, concluded that the design and operation of the Company’s disclosurecontrols and procedures provided reasonable assurance that the disclosurecontrols and procedures were effective to accomplish their objectives.

 

Additionally, no changesin the Company’s internal controls over financial reporting were made duringthe fiscal quarter covered by this report that have materially affected, or arereasonably likely to materially affect, the Company’s internal control overfinancial reporting.

 

**PARTII.****                OTHERINFORMATION**

 

**ITEM1.****                  LegalProceedings**

 

See Note 8 to the condensed consolidated financial statements containedelsewhere in this Form 10-Q for information concerning the Company’s legalproceedings.

 

**ITEM1A.****               RiskFactors**

 

There havebeen no material changes from the information previously provided under “Item1A. Risk Factors,” in the  Form 10-K. Seealso “Cautionary Note Regarding Forward-Looking Statements” included in “Part1. Item 2. Management’s Discussion and Analysis of Financial Condition andResults of Operations” of this Form 10-Q.

 

**ITEM2.****                  UnregisteredSales of Equity Securities and Use of Proceeds**

 

The followingtable provides information about Company purchases during the three monthsended September 30, 2007, of equity securities that are registered by theCompany pursuant to Section 12 of the Securities Exchange Act of 1934:

 
| **Period**                 | ** ** | **Total  Number of  Shares  Purchased (1)** | ** ** | **Average Price  Paid per Share** | ** ** | **Total Number of  Shares Purchased  as Part of  Publicly  Announced  Program (1)** | ** ** | **Approximate Dollar  Value of Shares That  May Yet Be Purchased  Under the Program  ($ 000’s) (1), (2), (3)** | ** ** |
|----------------------------|------------|-------------------------------------------------------|------------|--------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| 7/01/2007 – 7/31/2007 |       | 340,000                                               |       | $                                                | 18.87      |                                                                                                              | 340,000    |                                                                                                                                                                                 | $          | 52,442 |   |
| 8/01/2007 – 8/31/2007 |       | 80,000                                                |       | $                                                | 13.04      |                                                                                                              | 80,000     |                                                                                                                                                                                 | $          | 51,396 |   |
| 9/01/2007 – 9/30/2007 |       | —                                                |       | —                                           |       | —                                                                                                            |       | $                                                                                                                                                                                    | 51,396     |   |
|                       |       |                                                  |       |                                             |       |                                                                                                              |       |                                                                                                                                                                                 |       |   |
| Total                      |       | 420,000                                               |       | $                                                | 17.76      |                                                                                                              | 420,000    |                                                                                                                                                                                 |       |   |

 

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(1)        On August 15, 2006, the Company announced thatthe board of directors had authorized the purchase of up to $75.0 million ofthe Company’s common stock under a new share repurchase program. Sharerepurchases under the new program are to be made through open marketrepurchases, block trades or in private transactions at such times and in suchamounts as the Company deems appropriate based upon a variety of factorsincluding price, regulatory requirements, market conditions and other corporateopportunities.

 

(2)        On April 20, 2007, the Company’s board of directorsauthorized an increase to its current share repurchase program of approximately$36.5 million, which brings the current 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.

 

**ITEM6.****  Exhibits**

 

3.1                                                 ThirdArticles of Amendment and Restatement of the Articles of Incorporation, asfiled 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 thequarter ended September 30, 2004 filed November 9, 2004 and incorporated hereinby reference).

 

3.2                                                 ThirdAmended and Restated Bylaws, dated February 16, 2005 (filed as Exhibit 3.01 tothe Company’s Current Report on Form 8-K filed February 22, 2005 andincorporated herein by reference).

 

10.1                                           SeparationAgreement and Full and Final Release of Claims between Gevity HR, Inc. and ErikVonk, dated November 2, 2007. *

 

10.2                                           SeparationAgreement and Full and Final Release of Claims between Gevity HR, Inc. andPeter Grabowski, dated July 24, 2007 (filed as Exhibit 99.1 to the Company’sCurrent Report on Form 8-K filed July 27, 2007 and incorporated herein byreference).

 

10.3                                           OfferLetter Agreement executed on August 3, 2007 between Gevity HR, Inc. and JamesHardee (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filedAugust 7, 2007 and incorporated herein by reference).

 

10.4                                           Changein Control Severance Agreement executed on August 3, 2007 between Gevity HR,Inc. and James Hardee (filed as Exhibit 10.2 to the Company’s Current Report onForm 8-K filed August 7, 2007 and incorporated herein by reference).

 

10.5                                           OfferLetter Agreement executed on August 3, 2007 between Gevity HR, Inc. and GarryWelsh (filed as Exhibit 10.3 to the Company’s Current Report on Form 8-K filedAugust 7, 2007 and incorporated herein by reference).

 

10.6                                           Changein Control Severance Agreement executed on August 3, 2007 between Gevity HR,Inc. and Garry Welsh (filed as Exhibit 10.4 to the Company’s Current Report onForm 8-K filed August 7, 2007 and incorporated herein by reference).

 

10.7                                           AmendmentNumber One to the Change in Control Severance Agreement executed on August 29,2007 between Gevity HR, Inc. and Erik Vonk (filed as Exhibit 99.1 to theCompany’s Current Report on Form 8-K filed August 31, 2007 and incorporatedherein by reference).

 

10.8                                           AmendmentNumber One to the Change in Control Severance Agreement executed on August 29,2007 between Gevity HR, Inc. and Clifford M. Sladnick (filed as Exhibit 99.2 tothe Company’s Current Report on Form 8-K filed August 31, 2007 and incorporatedherein by reference).

 

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10.9                                           RevisedChange in Control Severance Agreement executed on August 29, 2007 betweenGevity HR, Inc. and James Hardee (filed as Exhibit 99.3 to the Company’sCurrent Report on Form 8-K filed August 31, 2007 and incorporated herein byreference).

 

10.10                                     RevisedChange in Control Severance Agreement executed on August 29, 2007 betweenGevity HR, Inc. and Garry Welsh (filed as Exhibit 99.4 to the Company’s CurrentReport on Form 8-K filed August 31, 2007 and incorporated herein by reference).

 

10.11                                     Changein Control Severance Agreement executed on August 29, 2007 between Gevity HR,Inc. and Paul E. Benz (filed as Exhibit 99.5 to the Company’s Current Report onForm 8-K filed August 31, 2007 and incorporated herein by reference).

 

31.1                                           Certification of the ChiefExecutive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *

 

31.2                                           Certification of the ChiefFinancial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *

 

32                                                    Certification furnishedpursuant to Section 906 of the Sarbanes-Oxley Act of 2002. *

 

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*Filed electronically herewith.

 

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**SIGNATURE**

 

 

Pursuant to the requirements of the Securities Exchange Act of 1934,the registrant has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized.

 
|                    | GEVITY HR, INC.                              |   |
|-------------------------|----------------------------------------------|--------|
|                    |                                         |   |
|                    |                                         |   |
| Dated: November 9, 2007 | /s/ GARRY J. WELSH                           |   |   |
|                    | Garry J. Welsh                               |   |
|                    | Chief Financial Officer                      |   |
|                    | (Principal Financial and Accounting Officer) |   |
|                         |                                              |        |  |

 

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