Table of Contents

 

 

 

**UNITEDSTATES SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

** **

**Form 10-K**

** **

| x          | **ANNUAL  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT  OF 1934**                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| ** ** | **For  the fiscal year ended December 31, 2008**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| **or**     |
| ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| o          | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934**                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| ** ** | **For  the transition period from                                                                                   to** |

 

**CommissionFile No. 0-22701**

** **

**GEVITYHR, INC.**

(Exact name of registrant as specified in itscharter)

* *

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

 

(Registrant’sTelephone Number, Including Area Code):

**(941)741-4300**

** **

SecuritiesRegistered Pursuant to Section 12(b) of the Act:

 

| **Title of Each Class**       | ** ** | **Name of Each Exchange on Which Registered** |
|----------------------------------------------|------------|-----------------------------------------------------------------------------|
| **Common  Stock, par value $0.01 per share** | ** ** | **The  NASDAQ Stock Market LLC**                                            |
| **Common  Stock Purchase Rights**            | ** ** | ** **                                                                  |

** **

SecuritiesRegistered Pursuant to Section 12(g) of the Act:

**None**

** **

Indicate by checkmark if the registrant is a well-known seasoned issuer, as defined in Rule 405of the Securities Act. Yes o No x

 

Indicate by checkmark if the registrant is not required to file reports pursuant to Section 13or Section 15(d) of the Act. Yes o No x

 

Indicate by checkmark whether the registrant (1) has filed all reports required to be filedby Section 13 or 15(d) of the Securities Exchange Act of 1934 duringthe preceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.                                                                Yesx No o

 

Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405of this chapter) is not contained herein, and will not be contained, to thebest of registrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K.                                                       o

 

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer,a non-accelerated filer, or a smaller reporting company.  See the definitions of “large acceleratedfiler,” “accelerated filer” and “smaller reporting company” in  Rule 12b-2 of the Exchange Act.
| Large  accelerated filer o                                            | Accelerated filer x               |
|-----------------------------------------------------------------------|-----------------------------------|
| Non-accelerated  filer (Do not check if a smaller reporting company)o | Smaller reporting company  o |

 

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2of the Act).  Yes £     No x

 

As of June 30,2008, the last business day of the registrant’s most recently completed secondfiscal quarter, the aggregate market value of the registrant’s common stockheld by non-affiliates, based upon the closing price per share for theregistrant’s common stock as reported on the Nasdaq Global Select Market, wasapproximately $106.5 million.

 

The number ofshares of the registrant’s common stock, outstanding as of February 28,2009, was 24,725,617.

 

**DOCUMENTSINCORPORATED BY REFERENCE**

** **

PART III —Portions of the registrant’s definitive Proxy Statement relating to the 2009Annual Meeting of Shareholders of Gevity HR, Inc. are incorporated herein byreference in Part III of this report or will be provided by an amendmentto this report.

 

 

** **

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**Table of Contents**

** **

**TABLEOF CONTENTS**

** **
| **PART I**   | ** **                                                                                                              | 1  |
|-------------------|-------------------------------------------------------------------------------------------------------------------------|----|
| **ITEM  1.**      | **Business**                                                                                                            | 1  |
| **ITEM 1A.**      | **Risk Factors**                                                                                                        | 15 |
| **ITEM 1B.**      | **Unresolved  Staff Comments**                                                                                          | 24 |
| **ITEM 2.**       | **Properties**                                                                                                          | 24 |
| **ITEM 3.**       | **Legal Proceedings**                                                                                                   | 25 |
| **ITEM 4.**       | **Submission  of Matters to a Vote of Security Holders**                                                                | 25 |
| **PART II**  | ** **                                                                                                              | 25 |
| **ITEM 5.**       | **Market for  Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases  of Equity Securities** | 25 |
| **ITEM 6.**       | **Selected Financial  Data**                                                                                            | 28 |
| **ITEM 7.**       | **Management’s  Discussion and Analysis of Financial Condition and Results of Operations**                         | 29 |
| **ITEM 7A.**      | **Quantitative  and Qualitative Disclosures about Market Risk**                                                         | 49 |
| **ITEM 8.**       | **Financial  Statements and Supplementary Data**                                                                        | 49 |
| **ITEM 9.**       | **Changes in  and Disagreements with Accountants on Accounting and Financial Disclosure**                               | 49 |
| **ITEM 9A.**      | **Controls and  Procedures**                                                                                            | 50 |
| **ITEM 9B.**      | **Other Information**                                                                                                   | 52 |
| **PART III** | ** **                                                                                                              | 52 |
| **ITEM 10.**      | **Directors,  Executive Officers and Corporate Governance**                                                             | 52 |
| **ITEM 11.**      | **Executive  Compensation**                                                                                             | 52 |
| **ITEM 12.**      | **Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters**                    | 52 |
| **ITEM 13.**      | **Certain  Relationships and Related Transactions, and Director Independence**                                          | 52 |
| **ITEM 14.**      | **Principal  Accounting Fees and Services**                                                                             | 52 |
| **PART IV**  | ** **                                                                                                              | 52 |
| **ITEM 15.**      | **Exhibits,  Financial Statement Schedules**                                                                            | 52 |

 

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**CAUTIONARYNOTE REGARDING FORWARD-LOOKING STATEMENTS**

 

Statements made inthis report, including under the section titled “Management’s Discussion andAnalysis of Financial Condition and Results of Operations,” that are not purelyhistorical may be forward-looking statements within the meaning of Section 27Aof the Securities Act of 1933 (“Securities Act”) and Section 21E of theSecurities Exchange Act of 1934 (“Exchange Act”), including without limitation,statements regarding the Company’s expectations, hopes, beliefs, intentions orstrategies regarding the future. Words such as “may”, “will”, “should”, “could”,“would”, “predicts”, “potential”, “continue”, “expects”, “anticipates”, “future”,“intends”, “plans”, “believes”, “estimates”, and similar expressions, as wellas statements in future tense, identify forward-looking statements.Forward-looking statements are based on the Company’s current expectations andbeliefs concerning future developments and their potential effects on theCompany. There can be no assurance that future developments affecting theCompany will be those that the Company has anticipated. Forward-lookingstatements involve a number of risks, uncertainties (some of which are beyondthe Company’s control) or other assumptions that may cause actual results orperformance to be materially different from those expressed or implied byforward-looking statements, including those described in “Item 1A. RiskFactors” and the risks that are described in the reports that the Company fileswith the Securities and Exchange Commission (“SEC”).

 

The Companycautions that the risk factors described in “Item 1A. Risk Factors” couldcause actual results or outcomes to differ materially from those expressed inany forward-looking statements made by or on behalf of the Company. Anyforward-looking statement speaks only as of the date on which such statement ismade, and 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.

 

**PART I**

** **

**ITEM 1.*  BUSINESS***

 

**General**

 

Gevity HR, Inc.(“Gevity” or the “Company”) specializes in providing small- and medium-sizedbusinesses nationwide with a wide-range of competitively priced payroll,insurance and human resource (“HR”) outsourcing services.   Businesses partner with Gevity to focustheir resources on what matters most*—running a profitable business.*Our commitment to *ServiceFirst* supports our delivery of solutions that enable businesses to:

* *

·                  *Improve their bottom line by stabilizing and controlling costs;*

* *

·                  *Manage and reduce compliance risk;*

* *

·                  *Retain and develop the right employees; and*

* *

·                  *Save time by reducing payroll and administrative workload.*

* *

Our solutions aredesigned to serve the needs of these**businesses and are delivered witha personal touch through our team of local and national HR professionals. OurHR professionals provide each employee with support previously only availableat much larger companies.

 

Gevity is aprofessional employer organization (“PEO”), which means the Company providescertain HR-related services and functions for clients under what is referred toas a co-employment arrangement. Under the co-employment arrangement, Gevityassumes certain HR/employment-related responsibilities, as provided for by aprofessional services agreement (“PSA”) and as may be required under certainstate laws. The co-employment relationship allows the PEO to become an employerof record and administrator for matters such as employment tax andinsurance-related paperwork as well as relieving the client of thesetime-consuming administrative burdens. Because a PEO can aggregate a number ofsmall clients into a larger pool, the PEO is able to create economies of scale —enabling smaller businesses to get competitively priced benefits.

 

The core servicestypically provided by a PEO are payroll processing, access to health andwelfare benefits and workers’ compensation coverage. In addition to these coreofferings, the Company’s Gevity EdgeTM PEO solution provides value-adding HRservices such as employee retention programs, new hire support, employmentpractices liability insurance coverage and performance management programs, alldesigned to help clients effectively grow their businesses. Gevity is one offew PEOs with dedicated field-based 

 

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HR Consultants. The Company’s HR Consultants workdirectly with clients to provide HR expertise and HR strategies that can helpdrive their business forward, while lowering potential exposure to HR-relatedclaims.

 

Gevity also provided services to itsclients through a non co-employment relationship program, which wassubsequently discontinued. The non co-employment relationship between Gevityand its clients was also governed by a PSA. Under the non co-employment PSA, the employment related liabilitiesremained with the client and the client was responsible for its own workers’compensation insurance and health and welfare plans.  The Company assumed responsibility forpayroll administration (including payroll processing, payroll tax filing andW-2 preparation) and provided access to all of its HR services.  This option became known as Gevity EdgeSelectTM and prior to 2007 did not have a significant impact on the Company’sresults of operations or financial position. During 2007 the Company increased its investment in Gevity Edge Selectbeginning with the acquisition of the payroll processing firm HRAmerica, Inc.(“HRA”) on February 16, 2007 for approximately $9.5 million. The Companyacquired from HRA certain assets, including its client portfolio ofapproximately 145 clients (as measured by Federal Employer IdentificationNumber (“FEIN”) with approximately 16,000 client employees. Approximately14,700 non co-employed client employees were acquired as of the date of theacquisition and approximately 1,300 co-employed client employees (8 clients)were acquired with an effective date of April 1, 2007. The acquisitionprovided the Company with technology and processes to enhance its nonco-employment model, Gevity Edge Select. In addition to the purchase of HRA, contracts with a national providerfor benefits administration and with national and regional brokers forinsurance distribution had been signed in support of Gevity Edge Select.

 

After completion of a comprehensive strategicreview, the Company decided to focus on the growth of its core co-employmentoffering, Gevity Edge. As such, on February 25, 2008, the board ofdirectors of the Company approved a plan to discontinue the Company’s nonco-employment offering, Gevity Edge Select. Clients that existed at February 25,2008, were notified of this decision and given until June 30, 2008 totransition to other service providers. The Company completed its transition of all remaining Gevity Edge Selectclients during the second quarter of 2008, processing the final payrolls dated June 30,2008.  The Company has determined thatthe exit from the Gevity Edge Select business meets the criteria ofdiscontinued operations in accordance with Statement of Financial AccountingStandards No. 144, *Accounting for theImpairment or Disposal of Long-Lived Assets*.  Accordingly, the results of operations andrelated exit costs associated with Gevity Edge Select have been reported asdiscontinued operations for all periods presented.

 

The Company servesa diverse client base of small and medium-sized businesses in a wide variety ofindustries. The Company’s clients have employees located in all 50 statesand the District of Columbia. As of December 31, 2008, these clients andtheir employees were served by a network of 32 offices in Arizona, California,Colorado, Florida, Georgia, Illinois, Minnesota, Nevada, New Jersey, New York,North Carolina, Tennessee and Texas. In addition, the Company has internalemployees located onsite at certain client facilities. As of December 31,2008, the Company served approximately 5,800 clients, as measured by individualclient FEIN, with approximately 101,000 active client employees. For the yearended December 31, 2008, the Company’s top 25 clients accounted for lessthan 10% of its client billings, with no single client representing more than2.2% of its client billings.

 

The Company’soperations are conducted through a number of wholly-owned subsidiaries. Theterms “Company” or “Gevity” as used in this report includes Gevity HR, Inc.and its subsidiaries.

 

The Company wasincorporated in Florida and consummated its initial public offering in 1997.

 

***PotentialAcquisition of Gevity***

*** ***

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

 

     Theconsummation of the Merger is subject to various customary conditions,including Gevity shareholder approval, the expiration or termination of theapplicable waiting periods under the Hart-Scott-Rodino Antitrust ImprovementsAct of 1976 and the receipt of certain other state regulatory approvals.    The Merger Agreement contains customary representationsand warranties between Gevity, TriNet and Merger Sub. The Merger Agreement alsocontains customary covenants and agreements, including covenants relating to (a) theconduct of Gevity’s business between the date of the signing of the MergerAgreement and the closing of the Merger, (b) non-solicitation of competingacquisition proposals and (c) the efforts of the parties to cause theMerger to be completed. The Merger Agreement contains certain terminationrights and provides that, upon or following the termination of the MergerAgreement, under 

 

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specifiedcircumstances involving a competing acquisition proposal, Gevity may berequired to pay TriNet a termination fee of $2.95 million and up to$1.0 million of expenses.

 

     Concurrentlywith the execution and delivery of the Merger Agreement, ValueAct CapitalManagement, LP and certain of its affiliates (“ValueAct”) entered into a votingagreement (the “Voting Agreement”) with TriNet whereby ValueAct committed tovote for the approval of the Merger. The Voting Agreement will terminate in theevent the Merger Agreement is terminated.

 

On March 4, 2009, Gevity and certain subsidiaries of Gevity (the “Guarantors”)entered into the Fourth Amendment to Amended and Restated Credit Agreement (the“Fourth Amendment”) with Bank of America, N.A., as administrative agent (“BOA”)and certain other lenders parties thereto (together with BOA, the “Lenders”).The Fourth Amendment amends the definition of “Change of Control” that was setforth in the Amended and Restated Credit Agreement, dated as of August 30,2006, among Gevity, the Guarantors and the Lenders, as amended (the “CreditAgreement”), to provide that the entry into the Merger Agreement and theexecution of the Voting Agreement, in and of themselves, shall not constitute a“Change of Control” for purposes of the Credit Agreement.

 

**HumanResource Outsourcing Industry**

 

The Companybelieves that small and medium-sized businesses are the primary drivers ofeconomic growth and the chief source of job growth. These businesses are alsopotential HR outsourcing customers since many desire to outsource non-corebusiness functions, reduce regulatory compliance risk, rationalize the numberof service providers that they use, enhance their benefit offerings and reducecosts by integrating HR systems and processes.

 

The NationalAssociation of Professional Employer Organizations (“NAPEO”) defines the PEOindustry as follows:

 

Professional employer organizations (PEOs) enable clients tocost-effectively outsource the management of human resources, employeebenefits, payroll and workers’ compensation. PEO clients focus on their corecompetencies to maintain and grow their bottom line.

 

Businesses today need help managing increasingly complex employeerelated matters such as health benefits, workers’ compensation claims, payroll,payroll tax compliance, and unemployment insurance claims. They contract with aPEO to assume these responsibilities and provide expertise in human resourcesmanagement. This allows the PEO client to concentrate on the operational andrevenue-producing side of its operations.

 

A PEO provides integrated services to effectively manage critical humanresource responsibilities and employer risks for clients. A PEO delivers theseservices by establishing and maintaining an employer relationship with theemployees at the client’s worksite and by contractually assuming certainemployer rights, responsibilities, and risk.

 

PEOs provide:

 

·  Relieffrom the burden of employment administration;

 

·  A widerange of personnel management solutions through a team of professionals;

 

·  Improvedemployment practices, compliance and risk management to reduce liabilities;

 

·  Accessto a comprehensive employee benefits package, allowing clients to becompetitive in the labor market; and

 

·  Assistanceto improve productivity and profitability.

 

**ProfessionalServices Provided by the Company**

** **

The Companyprovides a broad range of tools and services to its clients. These tools andservices are primarily offered to the Company’s clients on a “bundled” orall-inclusive basis. In addition to the Company’s core services, clients mayelect to offer health and welfare and retirement programs to their employees.The Company provides these core tools and services to its clients through thefollowing methods:

 

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**Payroll(1) +Payroll Administration**

 
| **Services**                                                                                                       | ** ** | **Online Tools**                                                                                     |
|--------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------|
| Administrative  processing:                                                                                        |       | Web-based  HRMS(1) access *For Administrators:*                                                 |
| ·             Payroll  processing                 |       | ·             Account  information  |
| ·             W-2  preparation and delivery       |       | ·             Employee  data        |
| ·             Tax  processing and payment         |       | ·             Reports               |
| ·             Paid  time off processing           |       | *For Employees:*                                                                                     |
| ·             Health  and welfare plan processing |       | ·             Personal  information |
| ·             Time  and attendance service        |       | ·             Payroll  history      |
| Unemployment  claims support                                                                                       |       |                                                                                                 |
| Payroll and  HR-related reports                                                                                    |       |                                                                                                 |

 

**Benefits(1) +Benefits Administration**

 
| **Services**                                  |   | **Online Tools**                                                                                           |
|-----------------------------------------------|--------|------------------------------------------------------------------------------------------------------------|
| Benefits and insurance  plan options          |   | Web-based HRMS access                                                                                      |
| Retirement plan options                       |   | *For  Administrators:*                                                                                     |
| Workers’ compensation  insurance options |   | ·             Annual Benefits  Enrollment |
| Employee Assistance  Program                  |   | ·             Reports                     |
|                                          |   | *For  Employees:*                                                                                          |
|                                          |   | ·             Benefits information        |

 

**New HireSupport**

 
| **Services**                      |   | **Online Tools**               |
|-----------------------------------|--------|--------------------------------|
| New hire forms  kit               |   | Job description  creation tool |
| Interview  process and procedures |   | Salary survey  tool            |
| Candidate  background screening   |   |                           |
| Candidate drug  testing           |   |                           |

 

**Policies+ Procedures/Risk Management**

 
| **Services**                              |   | **Online Tools**                                                                                       |
|-------------------------------------------|--------|--------------------------------------------------------------------------------------------------------|
| Policy and  procedures audit              |   | HR knowledge  base tool                                                                                |
| Risk assessment                           |   | ·             Law  summaries          |
| Labor law  posters                        |   | ·             Model  documents        |
| Employment  practices liability insurance |   | ·             Model  company policies |
| Employee  relations consultations         |   | ·             News  and trends        |
| Separation  counseling procedures         |   |                                                                                                   |
| Employee  handbook                        |   |                                                                                                   |
| HR forms library                          |   |                                                                                                   |

 

**EmployeeDevelopment + Retention**

 
| **Services**                                                                                                    |   | **Online Tools**               |
|-----------------------------------------------------------------------------------------------------------------|--------|--------------------------------|
| Essentials  management training                                                                                 |   | Workplace compliance  training |
| ·             managing  and engaging employees |   |                           |
| ·             interviewing                     |   |                           |
| Harassment  prevention program and training                                                                     |   |                           |

 

**PerformanceManagement**

 
| **Services**                             |   | **Online Tools**            |
|------------------------------------------|--------|-----------------------------|
| Performance  management process          |   | Performance appraisal  tool |
| Progressive  counseling procedures       |   |                        |
| Employee reward  and recognition program |   |                        |

 

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(1)                    Oracle’sHuman Resource Management System (“HRMS”).

 

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**Clients**

** **

The Company hadclients classified in over 500 Standard Industrial Classification (“SIC”)codes. The following table shows the Company’s client distribution by major SICcode industry grouping for the years indicated, ranked as a percentage ofclient billings:

 
| ** **                                                             | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| **Percentage of Client Billings by Industry** | ** ** | **2008**                                   | ** ** | **2007** | ** ** | **2006** | ** ** |
| Finance and Professional Services                                      |       | 49.0                                       | %          | 47.3 | % | 46.0 | % |
| Other Trade(1)                                                         |       | 15.2                                       |       | 16.2 |   | 15.9 |   |
| Manufacturing                                                          |       | 12.1                                       |       | 11.7 |   | 12.2 |   |
| Other Services/Other(2)                                                |       | 10.8                                       |       | 10.6 |   | 11.0 |   |
| Construction(3)                                                        |       | 6.2                                        |       | 7.8 |   | 9.1 |   |
| Transportation                                                         |       | 2.9                                        |       | 2.9 |   | 2.3 |   |
| Restaurant Trade                                                       |       | 2.8                                        |       | 2.4 |   | 2.2 |   |
| Agriculture                                                            |       | 1.0                                        |       | 1.1 |   | 1.3 |   |
| Total                                                                  |       | 100.0                                      | %          | 100.0 | % | 100.0 | % |

 

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(1)              TheOther Trade category consists principally of motor vehicle dealers, motorvehicle supplies and parts stores, gasoline service stations, householdappliance and home furnishing stores, apparel and accessory stores, sportinggoods stores, hardware stores, furniture stores, grocery stores and variousother retail stores and dealers.

 

(2)              TheOther Services/Other category consists principally of personal services (e.g.,laundry and dry cleaning, beauty and barber shops), hotel and lodging services,building cleaning and maintenance, car washes, amusement and recreationservices, child day care services and miscellaneous repair services.

 

(3)              TheConstruction category consists principally of general contracting and othertrade work, such as heating, ventilation, air-conditioning, plumbing,electrical and flooring. This category does not include workers engaged inroofing or other high-elevation exposure risk activities.

 

As part of itscurrent approach to client selection, the Company offers its Gevity Edge fullservice HR solution to businesses within specified industry codes. Allprospective clients are evaluated individually on the basis of total predictedprofitability. This analysis takes into account workers’ compensation risk andclaims history, unemployment claims history, payroll adequacy, and creditstatus.

 

With respect topotential clients operating in certain industries believed by the Company topresent a level of risk exceeding industry norms, more rigorous underwritingrequirements must be met before the Company agrees to provide Gevity Edge orco-employment related services to the potential client. This process mayinclude an on-site inspection and review of workers’ compensation andunemployment claims experience for the last three years.

 

The Companyconsiders industries to be high risk if there is a likelihood of a highfrequency of on-the-job accidents involving client employees or a likelihoodthat such accidents will be severe. In addition, under the terms of the Company’sworkers’ compensation agreement, prospective clients operating in certainindustries or with historically high workers’ compensation insurance claimsexperience must also be approved by the Company’s insurance carrier before theCompany enters into a contract to provide services.

 

The Company alsomaintains a client review program that includes a detailed profitability andrisk analysis of all of its existing clients. Based on the results of theseanalyses, the Company may modify its pricing or, if necessary, terminatecertain clients that the Company believes would not contribute to its long-termprofitability or otherwise be detrimental to its business.

 

The Company’soverall client retention rate from continuing operations for 2008 wasapproximately 76%. This rate is computed by dividing the number of clients atthe end of the period by the sum of the number of clients at the beginning ofthe period plus the number of clients added during the period. The clientretention rate is affected by a number of factors, including the naturalinstability of small businesses and the number of clients that were terminatedby the Company as part of its client review program.  During 2008, the Company terminatedapproximately 240 unprofitable clients. Excluding these managed terminations,the client retention rate related to continuing operations for 2008 wasapproximately 78%.

 

All of the Company’sclients are required to enter into a professional services agreement, whichgenerally provides for an initial one-year term, subject to termination by theCompany or the client at any time upon either 30 or 45 days prior writtennotice. Following the initial term, the contract may be renewed, terminated orcontinued on a month-to-month basis. Under the co-employment business service 

 

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model, the Company and the client each becomes a *co-employer*of the client’s employees andemployment-related liabilities relating to the client’s employees arecontractually allocated between the Company and the client. Through Gevity EdgeSelect, clients were also offered the option to use the Company’s serviceswithout the Company becoming a co-employer of the client’s employees, in whichcase tax filings were made under the client’s FEIN and the client provided itsown workers’ compensation insurance and health and welfare plans.  As discussed in “Business — General,” theCompany ceased operations of the Gevity Edge Select business during 2008.

 

The Companyretains the ability to immediately terminate the client (and co-employmentrelationship) upon non-payment by a client. The Company manages its credit riskthrough the periodic nature of payroll, client credit checks, owner guarantees,the Company’s client selection process and its right to terminate the clientand the co-employment relationship with the client employees.

 

The Companyoperates as a licensed professional employer organization.  Under the professional services agreementapplicable to the co-employment model, employment-related liabilities arecontractually allocated between the Company and the client. For instance, theCompany assumes responsibility for, and manages the risks associated with, eachclient’s employee payroll obligations, including the liability for payment ofsalaries and wages to each client employee, the payment of payroll taxes and,at the client’s option, responsibility for providing group health, welfare andretirement benefits to such individuals. These Company obligations are fixed,whether or not the client makes timely payment of the associated service fee.In this regard, unlike payroll processing service providers, the Company issuesto each of the client employees payroll checks drawn on the Company’s bankaccounts. The Company also reports and remits all required employmentinformation and taxes to the applicable federal and state agencies and issues afederal Form W-2 to each client employee under the Company’s FEIN.

 

Under theco-employment model, the Company assumes the responsibility for compliance withemployment-related governmental regulations that can be effectively managedaway from the client’s worksite. The Company provides workers’ compensationinsurance coverage to each client employee under the Company’s master insurancepolicy. The client, on the other hand, contractually retains the generalday-to-day responsibility to direct, control, hire, terminate, set the wagesand salary of, and manage each of the client’s employees. The client employeeservices are performed for the exclusive benefit of the client’s business. Theclient also remains responsible for compliance with those employment-relatedgovernmental regulations that are more closely related to the day-to-daymanagement of client employees. In some cases, employment-related liabilitiesare shared between the Company and the client.

 

The followingtable summarizes the typical division of responsibilities for employment-relatedregulatory compliance under the Company’s professional services agreementapplicable to the co-employment model:

 
| **Gevity**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          | ** ** | **Client**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ·            All rules and  regulations governing the reporting, collection and payment of federal and  state payroll taxes on wages, including: (i) federal income tax  withholding provisions of the Internal Revenue Code; (ii) state and/or  local income tax withholding provisions; (iii) Federal Income  Contributions Act (FICA); (iv) Federal Unemployment Tax Act (FUTA); and  (v) applicable state unemployment tax provisions, including managing  claims

·            Applicable workers’  compensation laws that cover: (i) procuring workers’ compensation  insurance; (ii) completing and filing all required reports; and  (iii) claims processing |       | ·            Worksite and  employee safety under the Occupational Safety and Health Act (OSHA) and  related or similar federal, state or local regulations

·            Government  contracting requirements as regulated by, including, but not limited to:  (i) Executive Order 11246; (ii) Vocational Rehabilitation Act of  1973; (iii) Vietnam Era Veteran’s Readjustment Assistance Act of 1974;  (iv) Walsh-Healy Public Contracts Act; (v) Davis-Bacon Act;  (vi) the Service Contract Act of 1965; and (vii) any and all  related or similar federal, state or local laws, regulations, ordinances and  statutes |
| ·            COBRA (Consolidated  Omnibus Budget Reconciliation Act of 1986) continuation coverage for  employees covered under health plans sponsored by Gevity                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |       | ·            Professional  licensing and liability 

·            Internal Revenue  Code Sections 414 (m), (n) and (o) relating to client  maintained benefit plans                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| ·            Laws governing the  garnishment of wages, including Title III of the Consumer Credit Protection  Act                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |       | ·            Laws affecting the  assignment and ownership of intellectual property rights or affecting the  maintenance, storage and disposal of hazardous materials                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| ·            All rules and  regulations governing administration, procurement and payment of all Company  sponsored employee benefit plans elected by the client or client employee                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |       | ·            Worker Adjustment  and Retraining Notification Act (WARN)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| ·            Family and Medical  Leave Act of 1993 (FMLA)*                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |       | ·            Family  and Medical Leave Act of 1993 (FMLA)*

·            Title VII (Civil  Rights Act of 1964, as amended), Immigration Reform and Control Act, the  Americans with Disabilities Act, the Age Discrimination in Employment Act,  Older Workers                                                                                                                                                                                                                                                                                                                                                                                                     |

 

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|   |   | Benefit  Protection Act                                                                                                                                                                                                                                                                                                                          |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   | ·            All federal, state,  county or local laws, regulations, ordinances and statutes which regulate  employees’ wage and hour matters (including the Fair Labor Standards Act),  prohibit discrimination in the workplace or govern the employer/employee  relationship |

 

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*            The Company and theclient are each responsible for certain provisions under the terms of the act.

 

Under theco-employment model, the Company charges its clients a professional service feethat is designed to yield a profit and to cover the cost of certainemployment-related taxes, workers’ compensation insurance coverage and HRservices provided to the client. The component of the professional service feerelated to HR management varies according to the size of the client, the amountand frequency of the payroll payments and the method of delivery of suchpayments. The component of the service fee related to workers’ compensation andunemployment insurance is based, in part, on the client’s historical claimsexperience. In addition, the client may choose to offer certain health, welfareand retirement benefits to its employees. The Company invoices each client forthe service fee and costs of selected benefit plans, as well as the wages andother employment-related taxes of each client employee. The gross billings areinvoiced at the time that each periodic payroll is delivered to the client.

 

**ServiceDelivery and Information Technology**

 

The Companydelivers services using the power of local and national resources, on theclients’ terms, by using these delivery components:

 

·        *Gevity OnSite*TM.  Local HR consultants areavailable to work with clients onsite, either full time or on a regularlyscheduled basis.

 

·        *Gevity OnCall*TM.  A dedicated team of HRprofessionals is available by telephone to address payroll, benefits and generalHR needs for clients and their employees at a designated number.

 

·        *Gevity OnLine*TM.  Gevity clients and theiremployees have online access to view and update their information anytime viagevity.com. The Ask Gevity link on gevity.com provides up-to-date critical HR,compliance and regulatory information.

 

In order toprovide proactive client relationship management, each of the Company’s clientsis assigned a single HR consultant to serve as the client relationship manager.This allows the client to interface with the Company through a single pointperson.

 

As of December 31,2008, the Company had over 130 HR consultants with significant experience inthe HR industry. Many of the Company’s HR consultants hold industry recognizedcertifications from organizations such as the Society for Human ResourceManagement.

 

In 2008, theCompany continued to invest in both client service and technology improvementinitiatives, including a Computer Telephony Integration (CTI) and IntegratedVoice Response (IVR) pilot, enhancing the technology aspects of its BusinessContinuity Plan (BCP), strengthening the information technology securityinfrastructure and, automating the technology services managementprocesses.  These investments areintended to better serve the Company’s client base, achieve a high level ofclient satisfaction and allow the Company to improve both the efficiency andeffectiveness of its business operations.

 

The Companyprocesses payroll for the majority of its client employees using Oracle’s HRMS andPayroll processing applications. The Oracle systems enable the Company toeffectively manage its existing operations and maintain appropriate controls.The Oracle HRMS and Payroll systems provide the Company with the capability topromptly and accurately deliver HR services and generate comprehensivemanagement reports. The Company’s information systems manage all data relatingto client employee enrollment, payroll processing, administration, managementinformation and other requirements of the clients’ operations. The currentsystems have high-volume processing capabilities that allow the Company toproduce and deliver payrolls configured appropriately for its clients.

 

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TheCompany continues to improve its Gevity OnLine self-service capabilities, whichallow clients to input their payroll related information directly into the Company’spayroll applications via the Internet. Clients can regularly add or deleteemployees, view reports, and change payroll information. Gevity OnLine isintegrated with the Company’s Oracle HRMS, Payroll systems, and financialreporting system, Salesforce.com, (customer relationship management solution)as well as the Company’s comprehensive line of online tools and services. TheCompany believes that this full integration results in improved clientsatisfaction, as well as improved efficiencies and operating margins for theCompany. Oracle’s portal software provides the foundation, enabling a clientconfigurable online experience, and the Company’s custom-developed softwareprovides additional ease of use and service capabilities. The combination ofthe Oracle systems for access and functionality and Gevity’s proprietary onlinecapabilities provides a unique solution capable of growing and adapting to theevolving needs of the Company’s clients.

 

TheCompany’s information technology staff consisted of 82 employees at December 31,2008. The Company believes the development of its information technology is anintegral part of achieving its growth objectives and intends to continue toinvest in its technology infrastructure.

 

**Salesand Marketing**

 

TheCompany markets its services through a direct sales force which, as of December 31,2008, consisted of 111 business development managers distributed throughout its32 field offices. During 2008, the Company closed 11 field offices after thedetermination that sales and service coverage could be maintained in a morecost effective manner. The Company’s business development managers arecompensated through a combination of salary and commission.

 

TheCompany’s client acquisition model subdivides all markets into individuallyassigned and identified sales territories and is intended to result in thedevelopment of market share by territory. The territory methodology promotes afocused and efficient approach to market penetration and facilitates acollaborative environment among business development managers.

 

TheCompany generates sales leads from various external sources as well as fromdirect sales efforts and inquiries. Each business development manager visitshis or her clients on-site periodically in order to maintain an ongoingrelationship and to seek new business referrals. The Company also generatessales leads from independent referral relationship partners and an informationdatabase of small businesses. The Company uses a referral incentive programwith its relationship partners to encourage increased referral activity.

 

**Competition**

 

Gevityprovides a comprehensive, full-service HR solution delivered through dedicatedHR professionals and an advanced information technology platform. Gevity’s HRconsultants complement its total employment management solution, providing theresources and tools found in HR departments of large companies. The Companybelieves this model allows it to compete favorably in the highly fragmentedindustry of HR outsourcing for small and medium-sized businesses in which theprimary bases of competition are the scope and quality of services delivered.

 

TheCompany views its primary competitors in two categories. The first issingle-point solution providers that offer only one, or a few, facets of thesolution the Company provides its clients. These providers typically complementa business’ in-house HR resources. This type of competitor is exemplified byinformation technology outsourcers and broad-based consulting and outsourcingfirms that now provide, or seek to provide, HR outsourcing services. Anotherexample of this type of competitor is consulting companies that performnarrowly defined, individual HR related projects, such as the development of HRstrategy or the installation of an HR information system. The Company believesthe breadth and integrated nature of its solution positions it well againstthis type of competitor.

 

Thesecond type of competitor identified by the Company is one that provides a morecomprehensive HR solution and typically includes Administrative ServiceOrganizations (“ASOs”), PEOs and other comprehensive HR outsourcers. Theseproviders typically may be used in conjunction with a business’ in-house HRresources, or they may be used in replacement of a business’ in-house HRresources.  The Company believes itson-site delivery model, the cost savings it can pass along to its clients dueto its size, and the breadth of its service offering create competitiveadvantages and allow it to compete favorably with other PEOs and HRoutsourcers.

 

TheCompany believes that it operates one of the largest PEOs in the United Statesin terms of active client employees and revenues. Many of the businesses thatutilize the co-employment business model, especially the larger ones such asAdministaff, Inc. and the PEO division of Automatic Data Processing, Inc.,are capitalizing on the co-employment 

 

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insurance modelwhile offering additional core HR services. The Company expects competition toincrease, and competitors to develop broader service capabilities.

 

**VendorRelationships**

 

TheCompany provides its services to its client employees under arrangements with anumber of providers as described below.

 

***Workers’ Compensation Insurance***

 

Thefollowing is a description of the Company’s workers’ compensation insuranceprogram, which covers all clients who are serviced under the co-employment model(unless such clients have elected to maintain their own coverage pursuant tothe professional services agreement):

 

TheCompany has had a loss sensitive workers’ compensation insurance program since January 1,2000. The program is insured by CNA Financial Corporation (“CNA”) for the2000-2002 policy years and is insured by member insurance companies of AmericanInternational Group, Inc. (“AIG”) under AIG’s Commercial Insurance Group (“AIGCI”) for the 2003-2008 policy years. These programs provide insurance coveragefor claims incurred in each policy year but which may be paid out over futureperiods dependent upon the nature and extent of the worksite injury.  In states where private insurance is notpermitted, client employees are covered by state insurance funds.

 

Gevitypurchased fully insured workers’ compensation policies from AIG CI with varyingdeductible amounts (ranging from $0.5 million to $2.0 million) for the 2003through 2008 policy years whereby AIG CI is responsible for paying the claimsand the Company is responsible for paying to AIG CI the per occurrencedeductible amount. In addition, during 2004, the Company purchased insurancefrom AIG CI to cover its workers’ compensation claims liability up to the $1.0million per occurrence deductible level for policy years’ 2000-2002 (CNAremains the insurer on the underlying claims for these years).

 

Theworkers’ compensation program with AIG CI for policy years 2003-2008 consistsprimarily of two components.  The firstcomponent consists of cash paid to AIG CI during each policy year related topolicy expenses and program costs. This includes premium charges (for insuranceof claims in excess of the deductible and certain stop loss coverage), taxesand administration costs. The amounts charged by AIG CI are generally basedupon the volume and classification of worker’s compensation payroll.  Except for the policy true-up provisions thatoccur 18 months after policy inception and are based upon the actual volume andclassification of payrolls, as well as the claims administration cost basedupon the volume of claims processed, this component is fixed and there is noreturn of premium.  The second componentof the workers’ compensation program relates to the policy deductible.  The Company, through its wholly-ownedBermuda-based insurance subsidiary, remits premiums to AIG CI to cover claimsto be paid within the Company’s per occurrence deductible layer. AIG CIdeposits the premiums into interest bearing loss fund collateral accounts forreimbursement of paid claims up to the per occurrence deductible amount.  Interest on the loss fund collateral accounts(which will be reduced as the reimbursement of claims are paid out over thelife of the policy) accrues to the benefit of the Company at fixed annual ratesas long as the program, and the interest accrued under the program, remain withAIG CI as indicated in the table below. Information relating to the AIG CI policy years is as follows:

 
| **Program Year** | ** ** | **Initial Loss Fund  Collateral Premiums** | ** **    | **Policy Year  Deductible** | ** ** | **Guaranteed  Interest Rate** | ** ** | **Minimum Program  Life for Guaranteed  Interest Rate** | ** **   |
|-----------------------|------------|-----------------------------------------------------------|---------------|----------------------------------|------------|------------------------------------|------------|-----------------------------------------------------------------------------|--------------|
| 2003                  |       | $                                                         | 73.5 million  | (1)                              | $          | 1.0 million                        |       | 2.42                                                                        | %            | 7 years |   |
| 2003                  |       | $                                                         | 11.5 million  | (1)                              | n/a        |                               | 1.85       | %                                                                           | 7 years |   |
| 2004                  |       | $                                                         | 111.4 million |                             | $          | 2.0 million                        | (2)        | 2.92                                                                        | %            | 10 years |   |
| 2005                  |       | $                                                         | 100.0 million |                             | $          | 2.0 million                        | (2)        | 3.75                                                                        | %            | 10 years |   |
| 2006                  |       | $                                                         | 90.0 million  |                             | $          | 0.5 million                        |       | 4.58                                                                        | %            | 10 years |   |
| 2007                  |       | $                                                         | 66.5 million  |                             | $          | 0.5 million                        |       | 5.01                                                                        | %            | 10 years |   |
| 2008                  |       | $                                                         | 55.5 million  | (3)                              | $          | 1.0 million                        |       | 3.19                                                                        | %            | 10 years |   |

 

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| (1)    | The 2003 program  year consists of two loss collateral funds totaling $85.0 million.                                                                                                                                                                                                                                                                            |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                            |
| (2)    | For policy years  2004 and 2005, reinsurance was purchased by the Company’s insurance  subsidiary to effectively reduce the per occurrence deductible from $2.0  million to $1.0 million and $0.75 million, respectively.                                                                                                                                  |
|   |                                                                                                                                                                                                                                                                                                                                                            |
| (3)    | During the  fourth quarter of 2008, AIG CI agreed to defer $13.9 million of the initial  loss fund collateral pay-in until after the June 30, 2009 true-up when  it will be determined whether or not it is required based upon the results of  the true-up calculation. This resulted in an actual loss fund collateral  premium pay-in of $41.6 million. |

 

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If aprogram policy year is terminated prior to the end of the guarantee period, theinterest rate is adjusted downward based upon a sliding scale. The 2003-2008program years provide for an initial loss fund collateral true-up18 months after the program inception and annually thereafter. The true-upis calculated as the product of a pre-determined loss factor and the amount ofincurred claims in the deductible layer as of the date of the true-up. Thetrue-up may result in funds being released from the AIG CI loss fund collateralaccounts to the Company or may require additional loss fund collateral paymentsby the Company to AIG CI. During 2008, AIG CI released approximately $35.1million, net, primarily related to the annual loss fund collateral true-up andalso returned $4.7 million related the true-up of outstanding prior yearpremium expense audits. The Company expects to receive approximately $25.3million from AIG CI during 2009 in connection with the June 2009 annual true-upof policy years 2003-2008.

 

In2004, the Company entered into agreements with AIG CI and CNA whereby theCompany paid $102.0 million to purchase insurance from AIG CI to cover theCompany’s workers’ compensation claims liability up to the $1.0 million peroccurrence deductible level for policy years’ 2000-2002. Of the total premiumpaid to AIG CI, AIG CI deposited $88.9 million into an interest bearing lossfund account held by AIG CI and $5.5 million into an interest bearing escrowaccount held by CNA.  The AIG CI lossfund account will be used by AIG CI to fund all claims under the program up toAIG CI’s aggregate limit.  Interest onthe AIG CI loss fund (which will be reduced as claims are paid out over thelife of the policy) will accrue to the benefit of the Company at a fixed annualrate of 3.0% until all claims are closed. The CNA escrow account bears aninterest rate based upon the rate as provided for in the facility into which itis deposited.  Any agreed upon reductionin the escrow account between CNA and AIG CI will be deposited into the AIG CIloss fund account.  During 2008 and 2007,CNA released $0.5 million and $3.8 million, respectively, of the escrow accountwhich was deposited into the AIG CI loss fund account. AIG CI will return to theCompany that portion of the loss fund account, if any, not used or retained topay claims, including interest earned, at intervals of 36, 60, 84 and120 months from the date of the inception of the agreement. The maximumreturn amount, which is based upon a pre-determined formula, at 36 and60 months was initially limited to $5.5 million for each payment due, withno limit as to the return amount at 84 and 120 months. During 2007, AIG CIreleased $5.5 million to the Company in connection with the 36 month true-up.During 2008, AIG CI, CNA and the Company amended their agreement with respectto the 60 month true-up which was to occur June 30, 2009.  AIG CI agreed to replace the 60 month true-up(limited to a maximum of $5.5 million) with a 54 month true-up (with nomaximum).  This amendment resulted in arevised true-up amount of $26.6 million, which was received by the Company in January 2009.The amendment was a result of favorable claims development and excesscollateral amounts held in the loss fund.

 

In December 2008,the Company renewed its AIG CI workers’ compensation insurance policy for the2009 program year. Under the 2009 program, the Company will be required todeposit $39.2 million into an interest bearing loss fund with a guaranteedinterest rate of 0.48%  (which will resetannually) and be used by AIG CI to fund losses up to the $1.0 million peroccurrence deductible level.

 

Seefurther discussion of the Company’s workers’ compensation policies at “Item 7.Management’s Discussion and Analysis of Financial Condition and Results ofOperations -  Critical AccountingEstimates - Workers’ Compensation Receivable/Reserves.”

 

***Employee Benefit Plans***

 

Followingis a description of the Company’s health plans, which are offered to allclients who are served under the co-employment model who meet the minimumparticipation and contribution requirements:

 

Blue Cross and Blue Shield of Florida —Blue Cross Blue Shield of Florida, Inc. and its subsidiary Health Options, Inc. (together “BCBSF/HOI”) is theCompany’s primary healthcare partner in Florida, delivering medical carebenefits to approximately 17,500 Florida-based client employees. The Company’spolicy with BCBSF/HOI is a minimum premium policy expiringSeptember 30, 2009. Pursuant to this policy, the Company isobligated to reimburse BCBSF/HOI for the cost of the claims incurred byparticipants under the plan, plus the cost of plan administration. Theadministrative costs per covered client employee associatedwith this policy are specified in the agreement and aggregate loss coverage isprovided to the Company at the level of 115% of projected claims.  The Company is required to pre-fund theestimated monthly expenses and claim liability charges of the plan by the firstof each calendar month.  The estimatedmonthly expenses are based upon the Minimum Premium Rate and the Annual Excessliability rate, as set forth in the agreement, times the number of insureds.The monthly estimated claim liability charge is based upon an average ofmonthly paid claims as determined by BCBSF/HOI based on three month periodsspecified in the agreement.  Differencesbetween the pre-funded amounts and actual amounts subsequently determined shallbe settled in the following month. As part of the Company’s obligation toBCBSF/HOI, the Company posted an irrevocable letter of credit in favor ofBSBSF/HOI in an initial amount of $5.0 million on October 1, 2008, whichshall be increased monthly by approximately $1.0 million over a seven monthperiod until it reaches $11.8 million on May 1, 2009.  As of December 31, 2008, the outstandingletter of credit balance was $7.0 million.

 

Aetna Health, Inc. — Outside of the state of Florida, AetnaHealth, Inc. (“Aetna”) is the Company’s largest medical care benefitsprovider for approximately 17,000 client employees. The Company’s 2008/2009 policy with Aetna provides for an HMO and PPO 

 

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offering to planparticipants. The Aetna HMO and PPO medical benefit plans are subject to aguaranteed cost contract that caps the Company’s annual liability.

 

UnitedHealthcare — In 2006, the Company announced the addition ofUnitedHealthcare as an additional health plan option. As of December 31,2008, UnitedHealthcare provided medical care benefits to approximately 2,000client employees as well as the Company’s internal employees. TheUnitedHealthcare plan is a fixed cost contract.Effective May 1, 2008, UnitedHealthcare and the Company amended theiragreement to extend coverage availability through September 30, 2009 forinternal employees and those clients covered by UnitedHealthcare as of May 1,2008. As such, UnitedHealthcare is no longer available as an option to thoseclients not covered by UnitedHealthcare as of May 1, 2008.

 

OtherMedical Benefit Plans — The Company provides coverage under variousregional medical benefit plans to approximately 1,000 client employees invarious areas of the country. Included in the list of medical benefit plan providers are Kaiser Foundation Health Plan, Inc.and Harvard Pilgrim Healthcare. These regional medical plans are subject tofixed cost.

 

OtherHealth Benefit Plans — The Company’s dental plans, which include both aPPO and HMO offering, are provided by Aetna for all client employees who electcoverage. All dental plans are subject to guaranteed cost contracts that capthe Company’s annual liability.

 

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

 

Part-timeclient employees are eligible to enroll in limited benefit programs from StarHRG. These plans include fixed cost sickness and accident and dental insuranceprograms, and a vision discount plan.

 

***401(k) Plans***

 

TheCompany offers to clients served under the co-employment model a 401(k) retirementplan, designed to be a *multiple employer*planunder Section 413(c) of the Internal Revenue Code of 1986, as amended(the “Code”). Generally, employee benefit plans are subject to provisions ofboth the Code and the Employee Retirement Income Security Act (“ERISA”).

 

**InternalCompany Employees**

 

As of December 31,2008, the Company employed approximately 745 internal employees of whomapproximately 400 were located at the Company’s headquarters in Bradenton,Florida. The remaining employees were located in the Company’s field offices orin some cases onsite at client locations. None of the Company’s internalemployees are covered by a collective bargaining agreement.

 

**IndustryRegulation**

 

***General***

 

Numerousfederal and state laws and regulations relating to employment matters, benefitplans and employment taxes affect the operations of the Company or specificallyaddress issues associated with co-employment. Many of these federal and statelaws were enacted before the development of non-traditional employmentrelationships, such as professional employer organizations, temporaryemployment and other employment-related outsourcing arrangements and,therefore, do not specifically address the obligations and responsibilities ofa professional employer organization.

 

Otherfederal and state laws and regulations are relatively new, and administrativeagencies and federal and state courts have not yet interpreted or applied theseregulations to the Company’s business or its industry. The development ofadditional regulations and interpretation of those regulations can be expectedto evolve over time. In addition, from time to time, states have considered,and may in the future consider, imposing certain taxes on gross revenues orservice fees of the Company and its competitors.

 

Thirty-fourstates have passed laws that have licensing, registration or other regulatoryrequirements for professional employer organizations, and several other statesare currently considering similar regulations. Such laws vary from state tostate, but generally codify the requirements that a professional employerorganization must reserve a right to hire, terminate and discipline clientemployees and secure workers’ compensation insurance coverage. The Companydelegates or assigns such rights to the client where 

 

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allowed under state law. The laws also generallyprovide for monitoring the fiscal responsibility of professional employerorganizations and, in many cases, the licensure of the controlling officers ofthe professional employer organization.

 

Inaddition, some states through legislative or other regulatory action maypropose to modify the manner in which the Company is allowed to provideservices to its clients. Such regulatory action could increase theadministrative cost associated with providing such services.

 

Subjectto the issues discussed below, the Company believes that its operations arecurrently in compliance in all material respects with applicable federal andstate statutes and regulations.

 

***401(k) Plans***

 

Inorder to qualify for favorable tax treatment under the Code, 401(k) plansmust be established and maintained by an employer for the exclusive benefit ofits employees. Generally, an entity is an “employer” of certain workers forfederal employment tax purposes if an employment relationship exists betweenthe entity and the workers under the common law test of employment. Inaddition, the officers of a corporation are deemed to be employees of thatcorporation for federal employment tax purposes. The common law test ofemployment, as applied by the Internal Revenue Service (“IRS”), involves anexamination of many factors to ascertain whether an employment relationshipexists between a worker and a purported employer. Such a test is generallyapplied to determine whether an individual is an independent contractor or anemployee for federal employment tax purposes and not to determine whether eachof two or more companies is a “co-employer.” Substantial weight is typicallygiven to the question of whether the purported employer directs and controlsthe details of an individual’s work. The courts have provided that the commonlaw employer test applied to determine the existence of an employer-employeerelationship for federal employment tax purposes can be different than thecommon law test applied to determine employer status for other federal taxpurposes. In addition, control and supervision have been held to be lessimportant factors when determining employer status for ERISA purposes.

 

***ERISA Requirements***

 

Employeepension and welfare benefit plans are also governed by ERISA. ERISA defines an “employer”as “any person acting directly as an employer, or indirectly in the interest ofan employer, in relation to an employee benefit plan.” ERISA defines the term “employee”as “any individual employed by an employer.” The courts have held that thecommon law test of employment must be applied to determine whether anindividual is an employee or an independent contractor under ERISA. However, inapplying that test, control and supervision are less important for ERISApurposes when determining whether an employer has assumed responsibility for anindividual’s benefits status. A definitive judicial interpretation of “employer”in the context of a professional employer organization or employee leasing arrangementhas not been established.

 

If theCompany were found not to be an employer for ERISA, Code purposes, or the taxqualification requirements of the Code, the Company would be subject toliabilities, including penalties, with respect to its cafeteria benefits planfor failure to withhold and pay taxes applicable to salary deferralcontributions by its clients’ employees. In addition, as a result of such afinding, the Company and its plans would not enjoy, with respect to clientemployees, the preemption of state laws provided by ERISA and could be subjectto varying state laws and regulation, as well as to claims based upon statecommon laws.

 

***Federal Employment Taxes***

 

As aco-employer, the Company assumes responsibility and liability for the payment offederal and state employment taxes with respect to wages and salaries paid toclient employees. There are essentially three types of federal employment taxobligations: (i) withholding of income tax governed by Code Section 3401,et seq.; (ii) obligations under FICA, governed by Code Section 3101,et seq.; and (iii) obligations under FUTA, governed by Code Section 3301,et seq. Under these Code sections, employers have the obligation to withholdand remit the employer portion and, where applicable, the employee portion ofthese taxes.

 

Amongother employment tax issues related to whether professional employerorganizations are employers of client employees are issues under the Codeprovisions applicable to federal employment taxes. The issue arises as to whetherthe Company is responsible for payment of employment taxes on wages andsalaries paid to such client employees. Code Section 3401(d)(1), whichapplies to federal income tax withholding requirements, contains an exceptionto the general common law test applied to determine whether an entity is an “employer”for purposes of federal income tax withholding. The courts have extended thisexception to apply to both FICA and FUTA taxes as well. Code Section 3401(d)(1) statesthat if the person for whom services are rendered does not have control of thepayment of wages, the “employer” for this purpose is the person having controlof the payment of wages. A third party can be deemed to be the employer ofworkers under this Section for income tax withholding purposes where theperson for whom services are rendered does not have legal control of thepayment of wages. Although several courts have examined Code Section 3401(d)(1) 

 

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with regard to professional employer organizations,its ultimate scope has not been delineated. Moreover, the IRS has, to date,relied extensively on the common law test of employment in determiningliability for failure to comply with federal income tax withholdingrequirements. Accordingly, while the Company believes that it can assume thewithholding obligations for client employees, if the Company fails to meetthese obligations, the client may be held jointly and severally liable. Whilethis interpretive issue has not, to the Company’s knowledge, discouragedclients from utilizing the Company’s services, there can be no assurance that adefinitive adverse resolution of this issue would not do so in the future.

 

**SignificantTransactions in 2008**

 

***Discontinuation of Gevity EdgeSelect.***

 

**  **As discussed in “Business - General”, in the firstquarter of 2008, the Company decided to focus on the growth of its coreco-employment offering, Gevity Edge, and the Company’s board of directorsapproved a plan to discontinue the Company’s non co-employment offering, GevityEdge Select.  The Company completed itstransition of all remaining Gevity Edge Select clients during the secondquarter of 2008, processing the final payrolls dated June 30, 2008. Theoperations of Gevity Edge Select are shown as discontinued operations for allperiods presented.

 

***Impairment Loss***

 

During the fourth quarter of 2008, the Company’smarket capitalization dropped below the net book value of its equity.  In addition, forecasted cash flows decreasedreflecting continued deterioration of macroeconomic conditions whichaccelerated and became apparent during the fourth quarter of 2008. As a resultand in connection with the Company’s annual test for goodwill impairment,  the Company determined that the fair value ofthe Company was less than its carrying value and that the implied fair value ofthe goodwill was zero. Accordingly, the Company recorded a goodwill impairmentloss of $8.7 million, which eliminated goodwill in its entirety. The fair valueof the Company was based on a combination of the discounted cash flowmethod, the guideline company method, and the similar transaction method. Inconjunction with the goodwill impairment testing, the Company analyzed thevaluation of its other long-lived and intangible assets (including deferred taxassets) and, based upon the weighted probability of alternative scenarios thatexisted as of December 31, 2008, concluded that the carrying value oflong-lived assets was recoverable and no other impairments or additionalvaluation allowances were required as of December 31, 2008.

 

***AIG Early Release of Loss Fund Collateral***

 

As discussed in “Business - Vendor Relationships -Workers’ Compensation Insurance”, during the fourth quarter of 2008, theCompany, AIG CI and CNA, amended their workers’ compensation insuranceagreement related to policy years 2000-2002. The amendment provided for an early release of $26.6 million of lossfund collateral held by AIG CI in January 2009. This return offunds reflects the favorable relationship between the amount of funding heldfor these policy years, the relative low number of open claims and the maturingvalues of the estimated future costs for such claims. In addition, during thefourth quarter of 2008, AIG CI agreed to defer $13.9 million of the 2008 lossfund collateral pay-in until after the June 2009 true-up when it will bedetermined whether or not the payment is required.

 

**ExecutiveOfficers of the Registrant**

 

Thefollowing table sets forth certain information with respect to each person whois an executive officer of the Company as of March 11, 2009:

 
| **Name**                      | ** ** | **Age** | ** ** | **Position**                                                 |
|-------------------------------|------------|---------|------------|--------------------------------------------------------------|
| Michael J.  Lavington         |       | 62      |       | Chief Executive  Officer                                     |
| Garry J. Welsh                |       | 45      |       | Senior Vice  President and Chief Financial Officer           |
| Paul E. Benz                  |       | 49      |       | Senior Vice  President and Chief Information Officer         |
| James E. Hardee               |       | 53      |       | Senior Vice  President and Chief Sales and Marketing Officer |
| Edwin E.  Hightower, Jr. |       | 42      |       | Senior Vice  President and Chief Legal Officer               |

 

*Michael J. Lavington,*a citizen of the United Kingdom, has servedas Chairman of Gevity since October of 2007 and as a director of Gevitysince September 2006.  In October of2007, the Company’s board of directors announced that Mr. Lavington wasthe board’s choice for appointment as the Company’s Chief Executive Officer,subject to the obtainment of all necessary immigration approvals.  In September 2008, Mr. Lavingtonreceived his work authorization from the United States government and becamethe Chief Executive Officer of Gevity. Prior to joining Gevity, Mr. Lavington acted as an independentbusiness consultant serving clients 

 

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in the United Kingdom andthe United States since 2003.  From 2000to 2002, Mr. Lavington served as the Senior Vice President of HumanResources and Property for Global Telesystems, Inc.  From 1999 to 2000, Mr. Lavington servedas a Senior Consultant with Garner International, an executive recruitment andbusiness consultancy firm.  From 1991 to1999, Mr. Lavington worked for the Rank Group, PLC, initially as the GroupHuman Resource Director and later as President and Chief Executive Officer oftheir US subsidiary, Resorts USA, Inc.

 

*Garry J. Welsh*joined Gevity as InterimChief Financial Officer in May 2007. Mr. Welsh was appointed Senior Vice President and Chief FinancialOfficer in August 2007. Additionally, from November 2007 to September 2008,the board of directors appointed Mr. Welsh the Company’s Chief ExecutiveOfficer to serve on an interim basis. Prior to joining the Company, Mr. Welshwas managing director of Sheridan Blake Consulting Limited during 2006 and GJWConsulting during 2006 and 2007.  From September 2002to March 2005, Mr. Welsh was the Global Chief Operating Officer ofBarclays Private Bank in London.

 

*Paul E. Benz*joined Gevity in June 2006as Senior Vice President and Chief Information Officer and is responsible forthe Company’s information technology and service center organization. Prior tojoining the Company, Mr. Benz held several executive informationtechnology and finance positions with PricewaterhouseCoopers and Pepsico.  From 2004 to 2006 he directed the Southeastregion of PricewaterhouseCoopers’ Information Technology Effectivenesspractice. From 2001 to 2004, Mr. Benz served in various executive roleswith Pepsico including Vice President, Finance and Information Technology andVice President, Merger Integration.

 

*James E. Hardee*joined Gevity in August 2007as Senior Vice President and Chief Sales and Marketing Officer. Prior to that, Mr. Hardeeheld various sales, marketing, management and executive positions with IBMCorporation.  Among his positions at IBMwere VP of Sales, VP of Services, VP of ibm.com, VP of Worldwide Sales,Director of Operations/Marketing and Business Unit Executive.

 

*Edwin E. Hightower, Jr.*became Senior Vice President and Chief LegalOfficer of Gevity in July 2008. Mr. Hightower has been with Gevitysince 2002. Mr. Hightower focuses on the Company’s legal and complianceaffairs. He also serves as Secretary of the Board of Directors.  Mr. Hightower’s career before joiningGevity included having his own solo law practice as well as serving aslitigation counsel for Carnival Cruise Lines. Mr. Hightower earned his J.D. from the University of Miami Schoolof Law.

 

**AvailableInformation**

 

Youmay read and copy any document the Company files with the SEC at the SEC’spublic reference room located at 100 F Street, NE, Washington, DC 20549. Pleasecall the SEC at 1-800-SEC-0330 to obtain more information regarding the publicreference room. The SEC also maintains an Internet site at *www.sec.gov*that contains periodic andcurrent reports, proxy statements and other information filed electronically bypublic issuers (including the Company) with the SEC.

 

TheCompany also makes available all reports and other documents it files orfurnishes pursuant to the Exchange Act free of charge through the InvestorRelations page on its website, *www.gevity.com*,as soon as reasonably practicable after such reports are electronically filedwith the SEC.

 

TheCompany has adopted a Code of Business Conduct and Ethics, which applies to allemployees and members of the board of directors of the Company, including theChief Executive Officer, Chief Financial Officer and other senior financialofficers of the Company, a copy of which is available through the InvestorRelations page on the Company’s website, *www.gevity.com.*The Company intends to disclose any amendments of, or waivers to,the Code of Business Conduct and Ethics on the Investor Relations page ofits website. In addition, the Company makes available, through its website,statements of beneficial ownership of the Company’s equity securities filed byits directors, executive officers and 10% beneficial holders under Section 16of the Exchange Act. The Company also posts on its website the charters for itsAudit Committee, Compensation Committee, Nominating/Corporate GovernanceCommittee and Executive Committee.

 

Copiesof these documents may also be obtained from the Company, excluding exhibits,at no cost, by writing to the Company at 9000 Town Center Parkway, Bradenton,FL 34202, Attention: Investor Relations, by telephoning the Company at1-800-2GEVITY or by sending the Company an email via the Investor Relations page ofits website, *www.gevity.com.*

 

Theinformation on the Company’s website and its content are for your convenienceonly. The information contained on or connected to our website is notincorporated by reference into this report or filed with the SEC.

 

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**ITEM 1A.*  RISKFACTORS***

 

Inaddition to other information contained in this filing, the following riskfactors should be considered carefully in evaluating our business. Each ofthese risks is subject to many factors beyond our control. If we are notsuccessful in managing our operating strategy and each of its elements, weexpect our results of operations will be adversely affected and, as aconsequence, our stock price may decline.

 

***Current economic conditions, particularly in our Florida markets, mayinhibit new sales growth and negatively impact our current clients, causingthem to reduce staffing levels or cease operations.***

 

The current economic downturn is negatively impacting small and mediumsize businesses, which constitute our primary markets, inhibiting their growthas well as their access to capital, particularly in terms of creditavailability.  In turn, these businessesare cutting costs, including reducing employee headcount, or ceasing operationsaltogether.  This negatively impacts ourrevenues, as we rely on a “per employee” professional service fee from ourclients and could potentially materially impact the amount of our bad debtexpense.  In addition, businesses aremore reluctant to enter into new service agreements because of the uncertaintyregarding the timing of any economic recovery. If these trends continue, our operations, financial condition, and cashflows could be materially and adversely affected.

 

***The financial markets haverecently experienced significant turmoil which may negatively impact ourliquidity, our ability to obtain financing and our ability to processtransactions through the banking system.***

 

**Ourliquidity and our ability to obtain financing may be negatively impacted if oneof our Lenders under our credit facility, or another financial institution,suffers liquidity issues or ceases operations. In such an event, we may not be able to draw on all, or a substantialportion of, our credit facility or timely process payroll and collectiontransactions through the banking system. Also, if we attempt to obtain future financing, in addition to ourcurrent credit facility, we may be unable to obtain such financing which couldmaterially adversely affect our operations, financial condition and cash flows.**

 

***We rely on one financial institution to handle directdeposit payroll. Should this financial institution delay or stop processingthese transactions, our business could suffer.***

 

We currently have abanking relationship with one financial institution to electronically transferall of our payroll that is delivered to client employees by direct bank depositthrough the automated clearing house, or ACH, system with this bank.  If this bank were to terminate its services,delay the processing of transfers or cease operating and we were not able toobtain these services in a timely manner or on acceptable terms from otherbanks, our business could materially suffer.

 

***Our short-term results may be negativelyimpacted due to changes in health insurance******claims, state unemployment tax ratesand workers’ compensation rates, which we may******not be able to immediately passthrough to our clients.***

 

Healthinsurance costs, workers’ compensation and employment practices liabilityinsurance rates and state unemployment taxes are primarily determined by ourclaims experience and comprise a significant portion of our actual costs.Should we experience a significant increase in claims activity, due to thecurrent economic downturn or otherwise, we may experience a substantial increasein our health insurance premiums, unemployment taxes, or workers’ compensationand employment practices liability insurance rates. Our ability to pass suchincreases through to our clients on a timely basis may be delayed and ourclients may not agree to the increases, which could have a material adverseeffect on our financial condition, results of operations and cash flows.

 

***Our insurance-related loss reserves may beinadequate to cover our ultimate liability******for losses and as a result ourfinancial results could be materially and adversely******affected.***

 

Wemaintain loss reserves to cover our liabilities for the costs of our healthcare and workers’ compensation programs. These reserves are not an exactcalculation of our liability, but rather are estimates based on a number offactors including but not limited to actuarial calculations, current andhistorical loss trends and payment patterns, the number of open claims,developments relating to the actual claims incurred, medical trend rates andthe impact of acquisitions, if any. Variables in the reserve estimation may beaffected by both internal and external factors, such as changes in claimshandling procedures, fluctuations in the administrative costs associated withthe program, economic conditions, fiscal policies, interest rates, legaldeterminations and legislative and regulatory changes. Although our reservesestimates are regularly refined as historical loss experience develops andadditional claims are reported and settled, because of the uncertainties ofestimating loss reserves, we cannot assure you that our reserves are adequate,and actual costs 

 

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and expenses may exceed our reserves. If our reservesare insufficient to cover actual losses we may incur potentially materialcharges to our earnings.

 

***Our results of operations may be adverselyaffected if insurance coverage for******workers’ compensation or medicalbenefits is not available or if we lose******relationships with our key providersor if our key providers are unable to pay our claims.***

 

Aspart of our full range of services, we offer medical benefits coverage andworkers’ compensation insurance to our clients. We depend on a small number ofkey providers for the majority of our medical benefits and workers compensationcoverage, including AIG CI, BCBSF/HOI, UnitedHealthcare and Aetna. If any ofour insurance providers discontinue coverage or cease operations, the time andexpense of providing replacement coverage could be disruptive to our businessand could adversely affect our operating results, financial condition and cashflows. Replacement coverage could lead to client dissatisfaction and attrition(especially since most clients may terminate with either 30 or 45 daysnotice) due to the lack of continuity between coverage providers and thedifference in the terms and conditions of their respective coverage plans. Inaddition, if at any time we are unable to renew our existing policies onfinancial terms and premium rates acceptable to us, our ability to provide suchinsurance and benefits to our clients would be adversely impacted, which couldlead to significant client attrition, and our results of operations could beadversely affected. Our inability to renew existing policies may jeopardizecompliance with state regulatory requirements and subject us to fines and extracosts to satisfy the state requirements or, at worst, eliminate our ability toprovide services in those states. The loss of our ability to provide services,even for a short period, would negatively impact our image with our clients andcould lead to the termination of our service agreements and our results ofoperations may be adversely affected. Additionally, disruptions in thefinancial markets, exposure to sub-prime mortgage securities and adverse actionby rating agencies could adversely affect the financial stability of certaininsurance companies.  As a result theability of the insurance companies to pay claims could be significantlyimpaired.

 

***We are required to provide significant cashcollateral or letters of credit for our obligations to our******insurance providers andthe amount of cash or letter of credit necessary to provide that collateral may******increase in the future.***

 

Ourworkers’ compensation provider and one of our primary health care insuranceproviders require cash collateralization of our insurance plans either by wayof a cash deposit or delivery of a letter of credit.  In the future our other health care insuranceproviders may require cash collateral or letters of credit as a condition ofrenewing their respective programs. The extent of such requirements isdependent upon several factors such as our financial condition, as well as theworkers’ compensation and health insurance claims experience of ourclients.  We have little control over ourclients’ claims experience except in the decision to initially accept andretain such clients. These collateral requirements may affect our need forcapital, as well as our profitability. We may not be able to raise or providethe additional capital or collateral, if needed. In addition, we may berequired to post additional collateral for the benefit of our insuranceproviders as a result of growing our business, which amounts could besignificant, and may cause a significant amount of our cash to be restrictedfrom other uses.  We may not be able toraise, access or provide the additional capital or letters of credit ascollateral, if needed which could materially adversely impact our results ofoperation, financial condition and cash flows.

 

***Our workers’ compensationcoverage is provided by AIG CI.  Ourworkers’ compensation receivable from AIG CI represents a significant concentrationof credit risk.  If AIG CI were unable topay our claims or return our excess loss fund collateral that comprises ourworkers’ compensation receivable, our results of operation, financial conditionand cash flows would be materially and adversely affected.***

 

As of December 31, 2008, we have a net workers’ compensationreceivable from AIG CI of $115.3 million for premium payments and the relatedaccrued interest receivable on those payments made to AIG CI for program years2000-2008 in excess of the present value of the estimated claimsliability.  If AIG CI were to ceaseoperations or otherwise default on their obligations, we may not be able torecover our receivable and the payment of our claims could be significantlyimpaired. This would have a material and adverse effect on our results ofoperations, financial condition and cash flows.

 

Disruptions in the financial markets, the current economic downturn,exposure to sub-prime mortgage securities and adverse action by rating agenciescould adversely affect the financial stability of certain insurancecompanies.  As a result, the ability ofthe insurance companies to pay claims could be significantly impaired. AIG hasbeen negatively impacted by the current economic crisis.  However, AIG has publicly stated that itsregulated member insurance company subsidiaries remain well capitalized andfinancially secure and current insurance agency ratings are strong.  We do not believe that the current financialcondition of AIG will have a material adverse effect on the ability of itsregulated insurance company subsidiaries to pay out claims or return excesscollateral.

 

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***Our ability to manage health care costsaffects our profitability.***

 

Our profitability dependsin part on our ability to appropriately predict and manage future health carecosts through underwriting criteria and negotiation of favorable contracts withhealth care plan providers. The aging of the population and other demographiccharacteristics, the introduction of new or costly treatments resulting fromadvances in medical technology and other factors continue to contribute torising health care costs. Government-imposed limitations on Medicare andMedicaid reimbursements have also caused the private sector to assume a greatershare of increasing health care costs. Changes in health care practices,inflation, new technologies, increases in the cost of prescription drugs,direct-to-consumer marketing by pharmaceutical companies, clusters of high costcases, utilization levels, changes in the regulatory environment, health careprovider or member fraud, and numerous other factors affecting the cost ofhealth care can be beyond any health plan provider’s control and may adverselyaffect our ability to predict and manage health care costs, as well as ourbusiness, financial condition and operating results.

 

We useactuarial data to assist us in analyzing and projecting these amounts, however,we and our carriers may not be successful in managing the cost of our plans.Accordingly, our costs under our health benefit plans may exceed our estimates,requiring us to fund the difference. Any significant funding obligation mayhave a material adverse effect on our financial condition, results ofoperations and liquidity.

 

***Our business issubject to risks associated with vendor agreements.***

 

Werely on certain vendors to provide services to our clients. If these vendorscease operations, are sold or cancel/do not renew their service agreements withus, it may cause potential service interruptions while replacement providersare located, in addition to potential increases in costs of obtaining theseservices.

 

***Our business issubject to risks associated with geographic market concentration.***

 

Whilewe currently have offices in 13 states and client employees all 50 statesand the District of Columbia, billings from our Florida operations accountedfor approximately, 56% in 2006, 50% in 2007 and 56% in 2008. As a result of thesize of our base of client employees in Florida and anticipated continuedgrowth from our Florida operations, our profitability over the next severalyears is expected to be largely dependent on economic and regulatory conditionsin Florida and other states representing more than 5% of our billings. As theFlorida economy or the economies of other key states experience economicdownturns and their growth rates slow, our profitability and growth prospects,or perception of these things, may be adversely affected. In addition, there isno assurance that we will be able to duplicate in other markets the revenuegrowth and operating results experienced in Florida.

 

***Our quarterlyresults of operations may fluctuate, and we may not be able to grow as******we have planned.***

 

Ourrevenue, margins and results from operations generally have fluctuated in thepast and may continue to fluctuate in the future. Quarterly variations in ouroperating results occur as a result of a number of factors beyond our control,including:

 

·        competition for, and winning and maintaining,new clients with large employee counts;

 

·        market acceptance of new services;

 

·        market acceptance of our pricing;

 

·        our ability to achieve our strategy andlong-term performance standards, including our ability to pass through costs ofour products and services, such as rising health insurance premiums and stateunemployment taxes, among other elements of our strategy;

 

·        charges due to workers’ compensation claims,health insurance claims, and state unemployment taxes;

 

·        new product introductions or announcements byus or our competitors;

 

·        client attrition;

 

·        effectively controlling our operating and otherexpenses;

 

·        the costs of hiring and training of additionalstaff; and

 

·        general economic conditions.

 

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Due tothe presence of any of these factors, we may not be able to sustain our levelof total revenue or our historical rate of revenue growth on a quarterly or annualbasis. Our operating results could fall below our targets and the expectationsof stock market analysts and investors, which could cause the price of ourcommon stock to decline significantly.

 

***We may find it difficult to expand ormaintain our business in certain states due to varying******state regulatory requirements andthe existing competitive environment.***

 

Wecurrently operate primarily in Arizona, California, Colorado, Florida, Georgia,Illinois, New Jersey, New York, North Carolina, Tennessee and Texas. Futuregrowth or maintenance of our operations in these states or additional statesdepends, in part, on the regulatory and competitive environment in such states.In order to operate effectively in a state, we must obtain all necessaryregulatory approvals, adapt our procedures to that state’s regulatoryrequirements and adapt our service offerings to local market conditions. Incertain states, we may determine that the costs of doing business exceeds ouractual or anticipated financial performance resulting in a reduction orcessation of operations within such state or decision not to expand into astate.  We are also subject to additionalcompetition from regional and local competitors in the markets in which weexpand. In the event that we expand into additional states, we may not be ableto duplicate in other markets the financial performance experienced in ourcurrent markets and could experience losses as a result.

 

***We operate in a complex regulatoryenvironment and failure to comply with applicable******laws and regulations could adverselyaffect our business.***

 

The HRoutsourcing and PEO environment is subject to a number of federal and statelaws and regulations, including those applicable to payroll practices, taxes,benefits administration, insurance, wage and hour, employment practices anddata privacy.  As many of these laws donot specifically address the obligations and responsibilities of a professionalemployer organization, assuring compliance with such laws and assessing thefinancial impact of such compliance can be difficult. For example, the AmericanRecovery and Reinvestment Act of 2009, enacted on February 17, 2009,includes significant modifications of the COBRA continuation coverage rules includingan additional period of sixty days for eligible employees to elect to continuetheir benefit coverage and a subsidy of 65% of the applicable COBRA premium forup to nine months for employees “involuntarily terminated” by their employerbetween September 1, 2008 and December 31, 2009.  At this time it is unclear how thesemodifications will be applied where a “co-employer” sponsors the benefit plansand has been contractually allocated responsibility for compliance with theCOBRA continuation rules.  The Companyanticipates that it will incur additional costs associated with compliance withthese new rules but the amount of such costs and the impact of these new rules onthe Company’s business are currently unclear.

 

Becauseour clients have employees in states throughout the United States, we must alsoperform our services in compliance with the legal and regulatory requirementsof multiple jurisdictions. Some of these laws and regulations may be difficultto ascertain or interpret, may conflict and may change over time, and theaddition of new services may subject us to additional laws and regulations.Many of these laws and regulations were instituted prior to the development ofthe professional employer organization industry, and therefore can be difficultto interpret or assess and may change over time. As a result of uncertainty andinconsistency in the interpretation and application of many of these laws andregulations, from time to time we have had disagreements with regulatoryagencies in various states, some of which have resulted in administrativeproceedings between a state agency and us. If we are unable to continue to provide certain contractual obligations,such as the payment of employment taxes on the salaries and wages paid toclient employees, due to an adverse determination regarding our regulatorystatus as an “employer”, our clients may be held jointly and severally liablefor such payments. Violation of these laws and regulations could subject us tofines and penalties, damage our reputation, constitute breach of our client contractsand impair our ability to do business in various jurisdictions or in accordancewith established processes.

 

In addition, many statesin which we operate have enacted laws that require licensing or registration ofprofessional employer organizations, including Florida, our largest market, andTexas, and additional states are considering such legislation. We may not beable to satisfy the licensing requirements or other applicable regulations ofany particular state, or we may be unable to renew our licenses in the statesin which we currently operate upon expiration of such licenses, which couldprevent us from providing services to client employees in a certain state. Inaddition, many of these states have reciprocal disciplinary arrangements underwhich disciplinary action in one state can be the basis for disciplinary actionin one or more other states.  Futurechanges in or additions to these requirements may require us to modify themanner in which we provide services to our clients, which may increase ourcosts in providing such services.

 

We are also increasinglyaffected by legal requirements relating to privacy of information. Weanticipate that additional federal and state privacy laws and regulationsbeyond the federal Health Insurance Portability and Accountability Act of 1996and the regulations 

 

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promulgatedthereunder will continue to be enacted and implemented. The scope of any suchnew laws and regulations may be very broad and entail significant costs for usto be in compliance.

 

***Ifour captive insurance subsidiary is not recognized as an insurance company wemay be subject to additional and/or accelerated income tax payments and/orpenalties.***

 

When delivering our HRoutsourcing solution to clients through a co-employment relationship, we areusually responsible for providing workers’ compensation coverage to our clients’employees.  Since 2003, a portion of thiscoverage is arranged through a wholly-owned captive insurance subsidiary (the “Captive”).We recognize the Captive as an insurance company for income tax purposes withrespect to our income tax returns.  Whilewe have determined it is more likely than not the Captive qualifies as aninsurance company, in the event the taxing authorities were to assert that theCaptive does not qualify as an insurance company and were such assertionultimately upheld, we could be required to make additional income tax paymentsand/or accelerate income tax payments that we otherwise would have deferreduntil future periods.

 

***We face direct and overlapping competitionfrom a number of other companies which may affect our ability to retainexisting clients and attract new clients.***

 

Inorder to acquire new clients, we must first convince potential clients that aHR outsourcing provider is a superior option as compared to their currentinternal HR solutions. For potential clients that choose to outsource theseservices, we then face direct competition from a number of providers that alsooperate on a co-employment platform, such as Administaff, Inc., as well ascompanies that primarily provide payroll processing services in addition toco-employment services such as Automatic Data Processing Inc.  We also face competition from certaininformation technology outsourcing firms and broad-based outsourcing andconsultancy firms that provide or may seek to provide HR outsourcing servicesin addition to consulting companies that perform individual projects, such asdevelopment of HR strategy and information systems. Historically, most of thesevendors have focused on discrete processes, but many are now promotingintegrated process management offerings that may compete with our offerings. Weexpect that market experience to date and the predicted growth of the HRoutsourcing market will continue to attract and motivate more competitors.

 

***Certain of our existing or potentialcompetitors may have substantially greater******financial, technical and marketingresources, larger customer bases, greater name******recognition and more establishedrelationships with their clients and key product and******service suppliers than we do. Thismay enable them to develop and expand their******delivery infrastructure and serviceofferings more quickly, which could adversely******affect our ability to attain newclients.***

 

Certainof our existing or potential competitors may have substantially greaterfinancial, technical and marketing resources, larger customer bases, greatername recognition and more established relationships with their clients and keyproduct and service suppliers than we do. This may enable them to develop andexpand their delivery infrastructure and service offerings more quickly and:

 

·        achieve greater scale and cost efficiencies;adapt more quickly to new or emerging technologies and changing client needs;

 

·        take advantage of acquisitions and otheropportunities more readily; establish operations in new markets more rapidly;

 

·        devote greater resources to the marketing andsale of their services; and

 

·        adopt more aggressive pricing policies andprovide clients with additional benefits at lower overall costs in order togain market share or in anticipation of future improvements in delivery costs.

 

If ourcompetitive advantages are not compelling or sustainable and we are not able toeffectively compete with competitors, then we may not be able to increase ormaintain our clients at profitable levels or at all.

 

***The market for our services and our revenuegrowth depends on our ability to use the******Internet as a means of delivering HRservices and this exposes us to various security******risks.***

 

Werely on the Internet as a primary mechanism for delivering services to ourclients and use public networks to transmit and store extremely confidentialinformation about our clients and their employees. Our target clients may notcontinue to be receptive to HR services delivered over the Internet because ofconcerns over transaction security, user privacy, the reliability and qualityof Internet service and other reasons. A security breach could disrupt ouroperations, damage our reputation and expose us to litigation and possibleliability. We may be required to expend significant capital and other resourcesto address security breaches, and we cannot be certain that our securitymeasures will be adequate. In addition, emerging or uncertain laws andregulations relating to Internet user 

 

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privacy, property ownership, consumer protection,intellectual property, export of encryption technology, and libel could impairour existing Internet usage. This could decrease the popularity or impede theexpansion of the Internet and decrease demand for our services. If we becomesubject to the application of laws and regulations from jurisdictions whoselaws do not currently apply to our business, or the application of existing lawsand regulations to the Internet and other online services, our profitabilityand growth prospects may be adversely affected.

 

***We are dependent upon technology services,and any damage, interruption, security breach or failure******in our computer and telecommunicationssystems could adversely affect our existing******client relationships and our abilityto attract new clients.***

 

Our business could beinterrupted and we may lose data as a result of damage to or disruption of ourcomputer and telecommunications equipment and software systems from naturaldisasters, floods, fire, power loss, hardware or software malfunctions,penetration by computer hackers, terrorist acts, vandalism, sabotage, computerviruses, vendor performance failures or insolvency, and other causes. Ourbusiness involves the storage and transmission of sensitive information aboutour clients and their employees and any system or equipment failure or securitybreach we experience could adversely affect our clients’ businesses, and couldexpose us to a risk of loss of this sensitive information, damage to ourgoodwill and reputation, litigation and possible liability. If our securitymeasures are breached as a result of third-party action, employee error,malfeasance or otherwise and, as a result, someone obtains unauthorized accessto client data, our reputation will be damaged, our business may suffer and wecould incur significant liability. The precautions that we have taken toprotect ourselves and minimize the impact of such events (such as our disasterrecovery plans and encryption of sensitive information) may not be adequate,and we may be unable to recover data used in our operations or preventunauthorized access to our client and employee data. Techniques used to obtainunauthorized access or to sabotage systems change frequently and generally arenot recognized until launched against a target. As a result, we may be unableto anticipate these techniques or implement adequate preventative measures. Ifan actual or perceived breach of our security occurs, the market perception ofour security measures could be harmed, and we could lose sales and clients.

 

***We may not be ableto keep pace with changes in technology.***

 

Tomaintain our growth strategy, we must adapt and respond to technological advancesand technological requirements of our clients. Our future success will dependon our ability to enhance capabilities and increase the performance of ourinternal use systems, particularly our systems that meet our clients’requirements. We continue to make significant investments related to thedevelopment of new technology. If our systems become outdated, we may be at adisadvantage when competing in our industry. There can be no assurance that ourefforts to update and integrate systems will be successful. If we do not timelyintegrate and update our systems, or if our investments in technology fail toprovide the expected results, there could be an adverse impact to our businessand results of operations.

 

***We depend on third-party technology licensesand the loss or******inability to maintain these licenses or errors in thesoftware we license could******result in increased costs, reduced service levels anddelayed sales of our products******and services.***

 

Werely on third-party vendors for software, and if their products are notavailable, or are inadequate, our business could be seriously harmed. Forexample, we process payroll for most of our client employees using Oracle’sHuman Resources Management System (HRMS) and Payroll processing applications.Our service delivery capability incorporates and relies on Oracle software thatwe license directly from Oracle. If Oracle or our other software vendors changeor fail to maintain a product that we are using or do not permit use of thatproduct by our clients or us, or if our licensing agreements are terminated ornot renewed, we could be forced to delay or discontinue our services untilsubstitute technology can be found, licensed and installed. We could also beforced to pay significantly higher licensing fees with respect to suchsubstitute technology. In addition, our products depend upon the successfuloperation of third-party services and products, and any undetected errors inthese products could prevent the implementation or impair the functionality ofour products, delay new product introductions, and harm our reputation andsales.

 

***Our businessdepends on the confidentiality, integrity and availability of the data in ourtechnology infrastructure.***

 

Our ability to provideeffective and efficient service to our customers, and to accurately report ourfinancial results, depends on the confidentiality, integrity and availabilityof the data in our technology infrastructure including our service deliverysystem. As a result of technology initiatives, changes in our system platformsand integration of new business acquisitions, we operate a number of differentsystems requiring frequent maintenance, expansion, replacement andupgrades.  If the information we relyupon to run our business were found to be inaccurate or unreliable, or if suchinformation were to be lost or corrupted in the process of consolidating,upgrading, expanding or replacing all or part of our technology infrastructure,or if we otherwise fail to maintain our information systems and data integrityeffectively, we could face damage to our reputation and ability to attract andretain clients, have increases in operating expenses or suffer other adverseconsequences. In addition, failure to consolidate, upgrade, expand or replaceall or part of 

 

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thecomponents of our technology infrastructure successfully could result in higherthan expected costs and diversion of management’s time and energy, which couldmaterially impact our business, financial condition and operating results.

 

***Our professional services agreement allowsclients to terminate their relationship******with us upon either 30 or45 days notice, and as a result, we could lose a******significant number of customers in ashort period of time.***

 

Inorder to utilize our professional services, each of our clients is required toenter into our professional services agreement, which generally provides for aninitial one-year term, subject to termination by our client or us at any timeupon either 30 or 45 days prior written notice. Following the initialterm, the contract may be renewed, terminated or continued on a month-to-monthbasis. As a result, a significant number of our clients may terminate theiragreement with us at any time. In particular, they may decide to discontinueour services or their relationship with us due to our attempts to increase ourservices fees or increase our medical or workers’ compensation insurancecharges.  Clients may also be unwillingto pay for broadened service offerings if additional or increased feesaccompany such changes. These termination provisions could cause us to lose asignificant number of customers in a short period of time or make it difficultfor us to increase our prices, thereby adversely affecting our results ofoperations.

 

***As a result of our co-employmentrelationship with most of our clients and client******employees, we may be subject toliabilities as a result of their acts or omissions.***

 

We enter into a contractual relationship with each ofour clients, whereby the client transfers certain employment-related risks andliabilities to us and retains other risks and liabilities. Many federal andstate laws that apply to the employer-employee relationship do not specificallyaddress the obligations and responsibilities of this “co-employment”relationship. Consequently, we may be subject to liability for violations ofemployment or discrimination laws, including violations of federal and statewage and hour laws, by our clients despite the contractual division ofresponsibilities between us, even if we do not participate in such violations.This risk is increased with respect to clients serviced by our HR consultantswho are located on-site at our clients’ offices and who are designated servicerepresentatives of one or two clients because of their greater presence on aclient’s premises and potential involvement in client employee relations. Inaddition, our client employees may also be deemed to be acting as our agents,subjecting us to further liability for the acts or omissions of such clientemployees. Although our professional services agreement provides that theclient will indemnify us for any liability attributable to its own or itsemployees’ conduct, we may not be able to effectively enforce or collect suchcontractual indemnification. Any such liability imposed upon us could have amaterial adverse impact on our results of operations, financial condition andcash flows.

 

***Because we assume the obligation to make wage, tax andregulatory payments on behalf******of our clients, we are exposed tocertain credit risks with respect to our clients.***

 

Underthe terms of our professional services agreement, for clients serviced on aco-employed basis we generally assume responsibility for and manage the risksassociated with each of our client’s employee payroll obligations, includingthe payment of salaries, wages and associated taxes, and, at the client’soption, the responsibility for providing group health, welfare and retirementbenefits to each client employee. In this “co-employment” relationship, wedirectly assume these obligations, and unlike payroll processing serviceproviders, we issue payroll checks to each client employee drawn on our ownbank accounts. In several states, we are required to pay wages, payroll taxesand other amounts related to payroll regardless of whether the client timelyfunds such payments to us.  For clientsserviced either on a co-employed or non co-employed basis, who meet certainfinancial underwriting requirements, Gevity may issue payroll to a client’semployees prior to irrevocable receipt of payroll, taxes and associated servicefees. If we are unable to collect these payments from our larger clients, theremay be a material adverse effect on our results of operations, financialcondition and cash flows.

 

***We may make errors and omissions in performing our services,which could subject us to losses and fines and harm our reputation.***

 

Our payroll processingand related administrative services are subject to various risks resulting fromerrors and omissions in filing tax returns covering employment-related taxes,paying tax liabilities with respect to those returns, transmitting funds tobenefit plans, billing clients and paying wages to our clients’ employees.Tracking, processing and paying such amounts and administering retirement andother benefit plans is complex. Errors and omissions have occurred in the pastand may occur in the future in connection with these services. We and ourclients are subject to cash penalties imposed by tax authorities for latefilings or underpayment of taxes or required plan contributions. We may alsotransfer to or withdraw funds from the wrong party in error or transfer orwithdraw incorrect amounts and may not be able to correct the error or retrievethe funds. These penalties could, in some cases, be substantial and could harmour business and operating results. Our human resources consulting servicesalso entail the risk of 

 

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errors andomissions. Additionally, our failure to fulfill our obligations under ourprofessional service agreements could harm our reputation, our relationshipwith our clients and our ability to gain new clients.

 

***If we are determined not to be an “employer”pursuant to applicable ERISA and IRS******rules and regulations, we maybe subject to additional regulations and liabilities.***

 

If itis determined that we are not the “employer” for purposes of ERISA or the Code,we could be subject to liabilities, including penalties, with respect to ourcafeteria benefits plan operated under Section 125 of the Code, asamended, for failure to withhold and pay taxes applicable to salary deferralcontributions by our client employees. As a result of such a finding, we andour plans may not enjoy, with respect to our client employees, the preemptionof state laws provided by ERISA, and we could be subject to additional varyingstate laws and regulation, as well as to claims based upon state commonlaw.  In addition, if it were determinedthat we are not an “employer” for purposes of IRS rules and regulations wemay be unable to either make certain payroll tax payments or take certain taxcredits which could have a material adverse impact on our results ofoperations, financial condition and cash flows.

 

***Laws and regulations relating to verifying individuals’eligibility for employment could subject us to significant penalties andcompliance costs.***

 

Federal law requiresemployers to verify that all persons employed by them in the United States haveestablished both their identity and their eligibility to accept such work.Employers that knowingly employ unauthorized persons can be subject tosignificant civil and criminal sanctions. We rely on our clients to verifytheir employees’ identity and eligibility for employment and the responsibilityfor such verification is allocated to our clients in the professional servicesagreement. The treatment of PEOs for such purposes, including whether the PEO,its client, or both might be regarded as an employer of a worksite employee,has not been definitively established.

 

***We may be liable for 401(k) testing failures and anysuch liability may have an adverse effect on our results of operations andfinancial condition.***

 

Our401(k) plan is structured as a multiple employer plan. Each participatingclient is considered a participating employer within the plan and is separatelytested for compliance with certain participation-related legal requirements(commonly referred to as discrimination testing). Failure of any portion of theplan relating to one participating employer could jeopardize the qualifiedstatus of, and our ability to continue to operate the entire plan.

 

 ***Our credit agreement contains restrictive covenants that mayrestrict our******financial and operating flexibility.***

 

Ourcredit agreement, which is fully secured by liens on substantiallyall the property and assets of the Company (with agreed upon carveouts andexceptions), restricts us and our subsidiaries from various actions,including the following, in each case subject to various specified exceptionsand limits:

 

·        incurring liens and debt;

 

·        making acquisitions;

 

·        repurchasing shares of the Company’s stock;

 

·        making capital expenditures;

 

·        making investments;

 

·        entering into a merger, sale of all orsubstantially all of our assets or undergoing a change of control;

 

·        selling assets;

 

·        paying dividends and making other restrictedpayments;

 

·        entering into transactions with affiliates;

 

·        entering into agreements that limit the abilityof our subsidiaries from paying dividends, debt, loans or entering into otherrestrictions;

 

·        amending the terms of other debt of ours;

 

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·         enteringinto sale and leaseback transactions; and

 

·         materiallymodifying our workers compensation arrangements.

 

We arealso required to maintain financial covenants regarding leverage, coverage andfixed charges. These restrictions may limit our financial and operatingflexibility and, as a result, reduce our ability to grow and execute on ourstrategic objectives. Our level of compliance with the financial covenantsdetermines the maximum amount of the credit facility available to us.  Additionally, if we fail to meet the minimumrequirements of the financial covenants, and we are unable to obtain a waiveror amendment, the lender would have the right to terminate the credit agreementand require us to immediately repay all outstanding amounts.  If we are unable to make borrowings under thecredit agreement or were required to immediately repay all outstanding amounts,our cash flows, financial condition and results of operations could bematerially and adversely affected.

 

***Our acquisitionstrategy subjects us to numerous risks.***

 

Subjectto the Merger Agreement, one important component of our growth strategy is topursue selective acquisitions. This strategy entails numerous risks, includingthe following:

 

*Integration & Operational Risks.*  Weface risks associated with integrating new organizations, including theirmanagement, personnel and clients, into our established business. An inabilityto successfully integrate acquired businesses into our operations could causeattrition of acquired personnel and clients. An acquisition may not provide thebenefits originally anticipated by management while we continue to incuroperating expenses to provide the services provided formerly by the acquiredcompany.

 

*Financial Risks.*  We may financean acquisition with cash, by issuing equity securities (which could be dilutiveto existing shareholders) or by incurring debt (which would increase ourleverage and interest expense and could impose additional restrictivecovenants). We cannot assure you that we will be able to access the capitalmarkets for these transactions, and, even if we were able to do so, we cannotassure you we would be able to obtain commercially reasonable terms for anysuch financing.

 

*Legal Risks.  *An acquiredcompany may have liabilities that are difficult to assess, for which there areinadequate reserves and that may be significant. For example, employee benefitplans of an acquired company could result in liability due to the plan’sfailure to comply with applicable laws and regulations. Further, there may beacquisition-related disputes, including disputes over earn-outs, indemnitiesand escrows.

 

*Completion Risks. * Even if wepursue possible acquisition candidates, we cannot assure you that we will beable to close on them at attractive prices or at all. As a result, we mayexpend considerable resources (such as management time and money) on pursuingacquisitions without successfully acquiring any new businesses.

 

Manyof these risks are beyond our ability to control. As a result, there can be noassurances that we will be able to achieve this component of our growthstrategy. These risks could also have a material adverse impact on our resultsof operations. In addition, these risks could be compounded if we completeseveral acquisitions within a relatively short period of time.

 

***We are dependent upon key personnel, andthe recruitment and retention of key******employees may be difficult andexpensive.***

 

Webelieve that the successful operation of our business is dependent upon ourretention of key personnel including our executive team. In general, theemployment of our key personnel may be terminated by either the employee or usat any time, without cause or advance notice, subject to severance obligationsunder specified circumstances. If any of these individuals were unable orunwilling to continue working for us, we could have difficulty finding areplacement, and our operations and profitability could be adversely affected,which would likely have an adverse impact on the price of our common stock. Inaddition, we are not the beneficiary under any life insurance contractscovering any of our key personnel. We also rely heavily upon stock options tosupplement compensation for many of our key employees, and if we continue togrant options to these employees, the treatment of options as an expense inresponse to regulatory requirements may significantly increase our reportedcosts.

 

***If we cannot attract and retain qualifiedindividuals, the quality of our services******may deteriorate and our results ofoperations could be adversely affected.***

 

Oursuccess depends upon our ability to attract and retain qualified personnelincluding HR consultants and business development managers (“BDMs”) who possessthe specific skills and experience necessary to identify, acquire and retainclients. Finding and retaining qualified personnel is difficult because of thespecific skill set that we require in order for us to adequately operate in the

 

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complex HR regulatory environment. We compete forqualified personnel not only with other HR service providers, but also withinternal HR departments. Our ability to attract and retain qualified personnelincluding HR consultants and BDMs could be impaired by any diminution of ourreputation, decrease in compensation levels, restructuring of our compensationsystem, or competition from our competitors.

 

***Anti-takeover provisions in ourorganizational documents and Florida law may limit******the ability of our shareholders tocontrol our policies and effect a change of******control of our company, which maynot be in your best interests.***

 

Thereare provisions in our articles of incorporation that may discourage a thirdparty from making a proposal to acquire us, even if some of our shareholdersmight consider the proposal to be in their best interests. For example, ourarticles of incorporation authorize our board of directors to issue one or moreclasses or series of preferred stock that could discourage or delay a tenderoffer or change in control. In addition, we have entered into a shareholderrights plan, commonly known as a “poison pill,” that may delay or prevent achange of control.

 

Additionally,we are subject to statutory “anti-takeover” provisions under Florida law. Section 607.0901of the Florida Business Corporation Act (the “FBCA”) imposes restrictions uponacquirers of 10% or more of our outstanding voting shares and requires approvalby the corporation’s disinterested directors or a supermajority of uninterestedshareholders for certain business combinations and corporate transactions withthe interested shareholder or any entity or individual controlled by theinterested shareholder, unless certain statutory exemptions apply. Section 607.0902of the FBCA eliminates the voting rights of common stock acquired by a partywho, by such acquisition, controls at least 20% of all voting rights of thecorporation’s issued and outstanding stock.

 

***Our headquarters, many of our clients’headquarters, and the facilities of many of******the third parties on which we relyto provide us and our clients with critical******services are located in an area ofthe United States that is susceptible to hurricane******damage and other natural disasters.***

 

OurFlorida facilities, including our principal executive offices and field supportoffices, as well as certain of our vendors and a significant number of ourclients are located in an area prone to natural disasters such as hurricanes,floods, tornadoes, and other adverse weather conditions. A hurricane or otherdisaster could significantly disrupt our services, particularly if it resultsin prolonged disruptions to the Internet and telecommunications services onwhich we heavily rely. The precautions that we have taken to protect ourselvesand minimize the impact of such events (such as our disaster recovery plans)may not be adequate, and we may lose, not be able to access, or be unable torecover data, hardware, software and other systems used in our operations. Inaddition, our regional clients could also suffer the effects of a significantnatural disaster and not be able to fulfill their contractual requirementspursuant to the terms of our professional services agreement. Our businesscould be materially and adversely affected should our ability to provideservices and products, or our ability to collect our service fees, be impactedby such an event.

 

***The pending merger transaction, pursuant to which TriNetwould acquire all of our outstanding common stock, may be delayed or may notclose.***

 

We have announced thatthe pending transaction with TriNet is expected to close in the second quarterof 2009.   The consummation of the Mergeris subject to various customary conditions, including Gevity shareholderapproval, the expiration or termination of the applicable waiting periods underthe Hart-Scott-Rodino Antitrust Improvements Act of 1976, and the receipt ofcertain other state regulatory approvals. The timing of such events and the completion of the Merger are subjectto factors beyond our control. In addition, while our board of directors hasrecommended that shareholders approve the transaction, we cannot predict theoutcome of the shareholder vote.

 

**ITEM 1B.*  UNRESOLVEDSTAFF COMMENTS***

 

None.

 

**ITEM 2.*  PROPERTIES***

 

On June 6,2005, the Company entered into a lease agreement with Osprey-Lakewood RanchProperties, LLC, to relocate the Company’s corporate facility within Bradenton,Florida. Under the terms of the lease agreement, the Company has leased fromthe landlord approximately 97,000 square feet in the office buildinglocated at 9000 Town Center Parkway, Bradenton, Florida 34202. The lease is fora term of 10 years, unless sooner terminated or extended as provided inthe lease agreement and commenced on December 1, 2005. The lease agreementprovides for commercially reasonable base rent in consideration of the size andtype of building and the surrounding area. The base rent will increase 3% eachyear beginning on the first anniversary of the commencement 

 

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date of the term of the lease. The Company has theoption to renew the lease for two additional five-year terms on the same termsand conditions as are applicable to the initial term, except that the baseannual rent during each renewal term will be equal to the fair market baseannual rent for the leased property determined in accordance with the leaseagreement; provided, however, that the base annual rent during each year of arenewal term will not be less than the base annual rent during the last year ofthe immediately preceding term. The Company began operating out of thisfacility in January 2006.

 

As of December 31,2008, the Company leased space for its 32 field offices located in Arizona,California, Colorado, Florida, Georgia, Illinois, Minnesota, New Jersey, NewYork, Nevada, North Carolina, Tennessee and Texas. The Company believes thatits field office leases, which generally have terms of one to five years, caneither be renewed on acceptable terms or that other, comparable space can belocated upon the expiration of any field office lease without significantadditional cost to the Company. The Company considers its facilities to beadequate for its current and prospective operations.

 

**ITEM 3.*  LEGALPROCEEDINGS***

 

TheCompany is a party to certain pending claims that have arisen in the ordinarycourse of business, none of which, in the opinion of management, is expected tohave a material adverse effect on the consolidated financial position, resultsof operations, or cash flows if adversely resolved. However, the defense andsettlement of these claims may impact the future availability of, and retentionamounts and cost to the Company for applicable insurance coverage.

 

Fromtime to time, the Company is made a party to claims based upon the acts oromissions of its clients’ employees for the acts or omissions of such clientemployees and vigorously defends against such claims.

 

OnMarch 13, 2009, a putative class action was commenced in the Circuit Court forManatee County, Florida against the Company, each of the Company’s directorsand TriNet alleging that Gevity’s board of directors breached its fiduciaryduties to the Company’s shareholders in approving and adopting a mergeragreement that contains preclusive deal protection measures and allegedlyunfair merger consideration. The complaint further alleges that the Company andTriNet aided and abetted Gevity’s directors in this alleged breach of fiduciaryduty. The complaint seeks to enjoin the completion of the merger, an award ofunspecified monetary damages and to recover certain costs incurred by theplaintiff. The Company believes the complaint to be entirely without merit andintends to defend it vigorously.

 

**ITEM 4.*  SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS***

 

Nomatters were submitted to a vote of the Company’s stockholders during thefourth quarter of 2008.

 

**Part II.**

** **

**ITEM 5.*MARKET FOR REGISTRANT’S COMMON EQUITY,RELATED STOCKHOLDER******MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES***

 

**MarketInformation**

 

TheCompany’s common stock is traded on the NASDAQ Global Select Market under theticker symbol “GVHR.” The following table sets forth the high and low salesprices for the common stock as reported on the NASDAQ Stock Market anddividends per share of common stock paid during the last two fiscal years:

 
| **Fiscal Year Ended December 31, 2008** | ** ** | **High** | ** ** | **Low** | ** ** | **Dividends** | ** ** |
|------------------------------------------------------------------|------------|----------|------------|---------|------------|---------------|------------|
| Fourth Quarter                                                   |       | $        | 7.87       |    | $          | 1.00          |       | $ | 0.05 |   |
| Third Quarter                                                    |       | $        | 8.85       |    | $          | 4.61          |       | $ | 0.05 |   |
| Second Quarter                                                   |       | $        | 8.85       |    | $          | 4.81          |       | $ | 0.05 |   |
| First Quarter                                                    |       | $        | 8.89       |    | $          | 5.21          |       | $ | 0.09 |   |

 
| **Fiscal Year Ended December 31, 2007** | ** ** | **High** | ** ** | **Low** | ** ** | **Dividends** | ** ** |
|------------------------------------------------------------------|------------|----------|------------|---------|------------|---------------|------------|
| Fourth Quarter                                                   |       | $        | 13.10      |    | $          | 4.06          |       | $ | 0.09 |   |
| Third Quarter                                                    |       | $        | 19.46      |    | $          | 9.85          |       | $ | 0.09 |   |
| Second Quarter                                                   |       | $        | 22.51      |    | $          | 18.43         |       | $ | 0.09 |   |
| First Quarter                                                    |       | $        | 24.11      |    | $          | 19.26         |       | $ | 0.09 |   |

 

**Dividends**

 

TheCompany did not pay any cash dividends prior to the first quarter of 2001. TheCompany paid a cash dividend of $0.05 per share of common stock for thatquarter and for each subsequent quarter through the first quarter of 2004.Beginning in the second quarter of 2004, the Company increased its quarterlycash dividend payment to $0.06. Beginning the second quarter of 2005, the Companyincreased its quarterly cash dividend to $0.07. In the second quarter of 2006,the Company increased its quarterly cash dividend payment to $0.09. The Companydecreased its quarterly cash dividend to $0.05 in the second quarter of 2008.The Company reduced its dividend payment to reflect an appropriate level ofpayout in relation to earnings, to allow sustainability, and to allow forinvestment in client facing aspects of its technology platform.  On March 4, 2009, the board of directorsdeclared a quarterly cash 

 

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dividend of $0.05 per share of common stock,payable on April 30, 2009 to holders of record on April 16, 2009.Subject to the Merger Agreement, any future determination as to the payment ofdividends will be made at the discretion of the Company’s board of directorsand will depend upon the Company’s operating results, financial condition,capital requirements, general business conditions and such other factors as theboard deems relevant.

 

**Holders**

 

As of February 11,2009, there were 458 holders of record of the Company’s common stock. Thenumber of holders of record does not include beneficial owners of the commonstock whose shares are held in the names of various dealers, clearing agencies,banks, brokers and other fiduciaries.

 

**IssuerPurchases of Equity Securities**

 

Thefollowing table provides information about Company purchases of equitysecurities during the fourth quarter of 2008 that are registered by the Companypursuant 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)** | ** ** |
|-----------------------------------|------------|-----------------------------------------------------------|------------|--------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| 10/01/2008 — 10/31/2008 |       | —                                                    |       | —                                           |       | —                                                                                                                |       | $                                                                                                                                                                          | 51,396     |   |
| 11/01/2008 — 11/30/2008 |       | —                                                    |       | —                                           |       | —                                                                                                                |       | $                                                                                                                                                                          | 51,396     |   |
| 12/01/2008 — 12/31/2008 |       | —                                                    |       | —                                           |       | —                                                                                                                |       | $                                                                                                                                                                          | 51,396     |   |
| Total                             |       | —                                                    |       | $                                                | —     |                                                                                                                  | —     |                                                                                                                                                                       |       |   |
|                                   |            |                                                           |            |                                                  |            |                                                                                                                       |            |                                                                                                                                                                            |            |  |  |

 

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

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

(3)              The Company hassuspended its stock repurchase program for the time being in order to investavailable cash in its business.

 

**Share Performance Graph**

** **

Thefollowing graph shows the cumulative total return to the Company’s shareholdersbeginning as of December 31, 2003 and for each year of the five yearsended December 31, 2008, in comparison to the NASDAQ Composite and to anindex of peer group companies that the Company has selected.

 

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| ** **       | ** ** | **12/03** | ** ** | **12/04** | ** ** | **12/05** | ** ** | **12/06** | ** ** | **12/07** | ** ** | **12/08** | ** ** |
|------------------|------------|-----------|------------|-----------|------------|-----------|------------|-----------|------------|-----------|------------|-----------|------------|
| Gevity HR        |       | $         | 100.00     |      | $          | 93.50     |       | $         | 118.55     |      | $          | 110.74    |       | $ | 36.70 |   | $ | 7.53 |   |
| NASDAQ Composite |       | $         | 100.00     |      | $          | 110.08    |       | $         | 112.88     |      | $          | 126.51    |       | $ | 138.13 |   | $ | 80.47 |   |
| Peer Group       |       | $         | 100.00     |      | $          | 104.15    |       | $         | 113.71     |      | $          | 124.11    |       | $ | 124.03 |   | $ | 101.61 |   |

 

Thepeer group consists of Administaff, Inc., Automatic Data Processing, Inc.,Barrett Business Services, Inc., CBIZ, Inc.,  Convergys Corporation, Hewitt Associates, Inc.,and Paychex, Inc.

 

Theinformation in the foregoing graph and table is not “soliciting material,” isnot deemed filed with the SEC and is not to be incorporated by reference in anyof our filings under the Securities Act or the Exchange Act, whether madebefore or after the date hereof and irrespective of any general incorporationlanguage in any such filings.

 

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**ITEM 6.*  SELECTEDFINANCIAL DATA***

 

Thefollowing table sets forth certain selected historical financial and operatingdata of the Company as of the dates and for the periods indicated. Thehistorical statement of operations data and the statistical operating data havebeen revised for comparative purposes to reflect information from continuingoperations.  The following selectedfinancial data are qualified by reference to, and should be read in conjunctionwith, the consolidated financial statements beginning on page F-1, relatednotes and other financial information included as Part II, Item 8 ofthis Annual Report on Form 10-K, as well as “Item 7. Management’sDiscussion and Analysis of Financial Condition and Results of Operations.”

 
| ** **                                                                                                  | ** ** | **For the Years Ended December 31,**                               | ** ** |
|-------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------|------------|
| ** **                                                                                                  | ** ** | **2008**                                                                                    | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                                                  | ** ** | **(In thousands except per share and statistical data)** | ** ** |
| **Statement of Operations Data:**                                                                           |       |                                                                                        |       |   |   |   |   |   |   |   |   |
| Revenues:                                                                                                   |       |                                                                                        |       |   |   |   |   |   |   |   |   |
| Professional service fees                                                                                   |       | $                                                                                           | 113,545    |   | $ | 141,496 |   | $ | 162,585 |   | $ | 140,387 |   | $ | 134,695 |   |
| Employee health and welfare benefits                                                                        |       | 325,265                                                                                     |       | 350,965 |   | 352,017 |   | 331,215 |   | 314,494 |   |
| Workers’ compensation                                                                                  |       | 61,106                                                                                      |       | 84,513 |   | 106,075 |   | 114,778 |   | 117,669 |   |
| State unemployment taxes and other                                                                          |       | 20,624                                                                                      |       | 24,620 |   | 26,850 |   | 22,151 |   | 18,537 |   |
| Total revenues                                                                                              |       | $                                                                                           | 520,540    |   | $ | 601,594 |   | $ | 647,527 |   | $ | 608,531 |   | $ | 585,395 |   |
| Gross profit                                                                                                |       | $                                                                                           | 145,337    |   | $ | 186,027 |   | $ | 203,472 |   | $ | 194,793 |   | $ | 179,322 |   |
| Operating (loss) income (1)                                                                                 |       | $                                                                                           | (803       | ) | $ | 31,027 |   | $ | 48,429 |   | $ | 56,342 |   | $ | 52,694 |   |
| (Loss) income from continuing operations (1)                                                                |       | $                                                                                           | (1,311     | ) | $ | 18,097 |   | $ | 35,571 |   | $ | 38,171 |   | $ | 35,316 |   |
| Loss from discontinued operations, net of tax                                                               |       | (3,451                                                                                      | )          | (8,138 | ) | (308 | ) | (793 | ) | (698 | ) |
| Net (loss) income (1)                                                                                       |       | $                                                                                           | (4,762     | ) | $ | 9,959 |   | $ | 35,263 |   | $ | 37,378 |   | $ | 34,618 |   |
| Net (loss) income attributable to common  shareholders                                                      |       | $                                                                                           | (4,762     | ) | $ | 9,959 |   | $ | 35,263 |   | $ | 37,378 |   | $ | 4,738 |   |
| Basic (loss) income per share:                                                                              |       |                                                                                        |       |   |   |   |   |   |   |   |   |
| (Loss) income from continuing operations (1)                                                                |       | $                                                                                           | (0.05      | ) | $ | 0.76 |   | $ | 1.37 |   | $ | 1.39 |   | $ | 0.23 |   |
| Loss from discontinued operations                                                                           |       | (0.15                                                                                       | )          | (0.34 | ) | (0.01 | ) | (0.03 | ) | (0.03 | ) |
| Net (loss) income (1)                                                                                       |       | $                                                                                           | (0.20      | ) | $ | 0.42 |   | $ | 1.36 |   | $ | 1.36 |   | $ | 0.20 |   |
| Diluted income per share:                                                                                   |       |                                                                                        |       |   |   |   |   |   |   |   |   |
| (Loss) income from continuing operations (1)                                                                |       | $                                                                                           | (0.05      | ) | $ | 0.75 |   | $ | 1.33 |   | $ | 1.34 |   | $ | 0.21 |   |
| Loss from discontinued operations                                                                           |       | (0.15                                                                                       | )          | (0.34 | ) | (0.01 | ) | (0.03 | ) | (0.03 | ) |
| Net (loss) income (1)                                                                                       |       | $                                                                                           | (0.20      | ) | $ | 0.41 |   | $ | 1.32 |   | $ | 1.31 |   | $ | 0.18 |   |
| Weighted average common shares:                                                                             |       |                                                                                        |       |   |   |   |   |   |   |   |   |
| Basic                                                                                                       |       | 23,573                                                                                      |       | 23,689 |   | 25,933 |   | 27,452 |   | 24,125 |   |
| Diluted                                                                                                     |       | 23,573                                                                                      |       | 24,247 |   | 26,790 |   | 28,534 |   | 25,735 |   |
| Dividends declared per common share                                                                         |       | $                                                                                           | 0.20       |   | $ | 0.36 |   | $ | 0.36 |   | $ | 0.28 |   | $ | 0.24 |   |
| **Statistical And Operating Data (continuing  operations):**                                                |       |                                                                                        |       |   |   |   |   |   |   |   |   |
| Client employees at period end                                                                              |       | 101,014                                                                                     |       | 115,580 |   | 127,813 |   | 135,888 |   | 129,336 |   |
| Average number of client employees paid                                                                     |       | 96,938                                                                                      |       | 113,094 |   | 125,905 |   | 121,894 |   | 119,648 |   |
| Average wage per average number of client employees  paid                                                   |       | $                                                                                           | 44,598     |   | $ | 43,586 |   | $ | 40,843 |   | $ | 38,979 |   | $ | 35,961 |   |
| Professional service fees per average number of  client employees paid                                      |       | $                                                                                           | 1,171      |   | $ | 1,251 |   | $ | 1,291 |   | $ | 1,152 |   | $ | 1,126 |   |
| Internal employees at period end                                                                            |       | 745                                                                                         |       | 871 |   | 996 |   | 1,050 |   | 993 |   |
| Number of workers’ compensation claims (2)                                                             |       | 3,388                                                                                       |       | 4,590 |   | 5,820 |   | 6,232 |   | 6,489 |   |
| Frequency of workers’ compensation claims per one  million dollars of workers’ compensation wages |       | 0.87                                                                                        | x          | 1.04 | x | 1.26 | x | 1.42 | x | 1.59 | x |
| **Balance Sheet Data:**                                                                                     |       |                                                                                        |       |   |   |   |   |   |   |   |   |
| Cash, cash equivalents and investments (3)                                                                  |       | $                                                                                           | 41,421     |   | $ | 19,986 |   | $ | 44,516 |   | $ | 64,730 |   | $ | 59,412 |   |
| Workers’ compensation receivable                                                                       |       | $                                                                                           | 115,333    |   | $ | 122,271 |   | $ | 121,226 |   | $ | 128,318 |   | $ | 112,715 |   |
| Total assets                                                                                                |       | $                                                                                           | 302,936    |   | $ | 341,911 |   | $ | 374,560 |   | $ | 387,869 |   | $ | 339,587 |   |
| Revolving credit facility                                                                                   |       | $                                                                                           | —     |   | $ | 17,367 |   | $ | — |   | $ | — |   | $ | — |   |
| Long-term accrued workers’ compensation and health  reserves                                           |       | $                                                                                           | 71         |   | $ | 90 |   | $ | 160 |   | $ | 242 |   | $ | 700 |   |
| Total shareholders’ equity                                                                             |       | $                                                                                           | 112,915    |   | $ | 115,562 |   | $ | 142,052 |   | $ | 155,415 |   | $ | 165,174 |   |

 

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| (1)    | Included in the  operating loss, loss from continuing operations, and net loss for 2008 is the  impact of a goodwill impairment charge of $8.7 million ($5.4 million net of  the related income tax) as previously discussed under “Business - Significant  Transactions in 2008 - Impairment Loss.” The impairment charge negatively  impacted basic and diluted loss per share from continuing operations and net  loss per share by $0.23. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| (2)    | The number of  workers’ compensation claims reflects the number of claims reported by the  end of the respective year and does                                                                                                                                                                                                                                                                                                                     |

 

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|   | not include any  claims with respect to a specific policy year that are reported subsequent to  the end of such year. For information regarding claims reported after the end  of each respective year from 2000 - 2007, see the first table set forth  in “Item 7. Managements’ Discussion and Analysis of Financial Condition  and Results of Operations - Critical Accounting Estimates -  Workers’ Compensation Receivable/Reserves.”                                                                                                                                                                                                                                 |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| (3)    | $8,884, $10,036,  $8,225, $12,205 and $18,636 of the cash, cash equivalents and investments  (which consist of certificates of deposit-restricted and marketable  securities-restricted, both long and short term) as of December 31,  2008, 2007, 2006, 2005, and 2004, respectively, have been utilized to  collateralize the Company’s obligations under its workers’ compensation,  health benefit plans and certain general insurance contracts as well as  amounts held in escrow related to purchase price contingencies associated  with the Company’s acquisition of HRA. These amounts are considered  “restricted” and are not available for general corporate purposes. |

 

**ITEM 7.*  MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND******RESULTS OF OPERATIONS***

 

Thefollowing discussion contains forward-looking statements that are subject toknown and unknown risks, uncertainties (some of which are beyond the Company’scontrol), other factors and other assumptions that maycause actual results or performance to be materially different from thoseexpressed or implied by such forward-looking statements. Factors thatcould cause or contribute to such differences include those discussed below andelsewhere in this Annual Report on Form 10-K. See “CautionaryNote Regarding Forward-Looking Statements” above. The following discussionshould be read in conjunction with the Company’s consolidated financialstatements and related notes beginning on page F-1 of this report.Historical results are not necessarily indicative of trends in operatingresults for any future period.

 

**Overview**

 

Gevity HR, Inc. (“Gevity” or the “Company”) specializes inproviding small- and medium-sized businesses nationwide with a wide-range ofcompetitively priced payroll, insurance and human resource (“HR”) outsourcingservices.

 

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

 

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

 

Previously, Gevity also provided service to its clients through a nonco-employment relationship. The non co-employment relationship between Gevityand its clients was also governed by a PSA. Under the non co-employment PSA,the employment related liabilities remained with the client and the client wasresponsible for its own workers’ compensation insurance and health and welfareplans. The Company assumed responsibility for payroll administration (includingpayroll processing, payroll tax filing and W-2preparation) and provided access to all of its HR services. This nonco-employment offering was known as Gevity Edge SelectTM.  As previously discussed under “Business -General”, the Company discontinued its non-coemployment offering after June 30,2008. The Company has determined that the exit from the Gevity Edge Selectbusiness meets the criteria of discontinued operations in accordance withStatement of Financial Accounting Standards No. 144, *Accounting for theImpairment or Disposal of Long-Lived Assets*.  Accordingly, the results of operations andrelated exit costs associated with Gevity Edge Select have been reported asdiscontinued operations for all periods presented   The impact of this decision on the resultsof operations of the Company is included in the “Resultsof Operations” discussion that follows under “Discontinued Operations.”

 

TheCompany believes that the primary challenges to its ability to increase theoverall number of client employees serviced are:

 

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·   the amount of time required forsales personnel to acquire new client employees may be longer than anticipated;

 

·   the current client employeeretention levels may decrease if clients decide to use alternative providers toservice their HR outsourcing needs;

 

·   other HR outsourcing clientemployee portfolios or service providers may not be available for acquisitiondue to price or quality;

 

·   theCompany (under its co-employed service option) may not be able to continue toprovide insurance-related products of a quality to acquire new client employeesand to retain current client employees; and

 

·   the impact of the economy,especially in Florida.

 

**PotentialAcquisition of Gevity**

 

 On March 4, 2009, Gevity, TriNet Group, Inc.(“TriNet”) and Gin Acquisition, Inc., a wholly owned subsidiary of TriNet(“Merger Sub”), entered into a Merger Agreement (the “Merger Agreement”).  Under the Merger Agreement, Merger Sub willbe merged with and into Gevity (the “Merger”) with Gevity surviving the Mergeras a wholly owned subsidiary of TriNet. See additional discussion of this transaction under “Business - General.”

 

The Company follows the provisions of Statement ofFinancial Accounting Standards No. 144, *Accountingfor the Impairment or Disposal of Long-Lived Assets*. Theproceeds from the proposed merger are expected to be less than the carryingvalue of the Company’s net assets. During the quarter ending March 31, 2009,the Company will consider any related impairment issues caused by the proposedtransaction.

 

**Revenues**

 

Theclient billings that the Company charges its clients under its professionalservices agreements include each client employee’s gross wages, a consolidatedservice fee and, to the extent elected by the clients, health and welfarebenefit plan costs. The Company’s consolidated service fee, which is primarilycomputed on a percentage of payroll basis, is intended to yield a profit to theCompany and to cover the costs of the HR outsourcing services provided by theCompany to the client, as well as certain employment-related taxes and workers’compensation insurance coverage. The professional service fee component of theconsolidated service fee related to HR outsourcing varies according to a numberof factors, such as the size and the location of the client. The component ofthe consolidated service fee related to workers’ compensation and unemploymentinsurance is based, in part, on the client’s historical claims experience. Allcharges by the Company are invoiced along with each periodic payroll providedto the client. The Company’s long-term profitability is largely dependent uponthe Company’s success in generating professional service fees by providingvalue to its clients.

 

TheCompany accounts for its revenues using the accrual method of accounting. Underthe accrual method of accounting, the Company recognizes its revenues in theperiod in which the client employee performs work. The Company accrues revenuesand unbilled receivables for consolidated service fees relating to workperformed by client employees but unpaid at the end of each period. Inaddition, the related costs of services are accrued as a liability for the sameperiod. Subsequent to the end of each period, those wages are paid and therelated service fees are billed.

 

TheCompany reports revenues from consolidated service fees in accordance withEmerging Issues Task Force (“EITF”) No. 99-19, *Reporting Revenue Gross as a**Principal versus Net as an Agent.*The Company reports asrevenues, on a gross basis, the total amount billed to clients for professionalservice fees, and, to the extent applicable, health and welfare benefit planfees, workers’ compensation and unemployment insurance fees. The Companyreports revenues on a gross basis for these fees because the Company is theprimary obligor and deemed to be the principal in these transactions under EITFNo. 99-19. The Company reports revenues on a net basis for the amountbilled to clients for client employee salaries, wages and certainpayroll-related taxes less amounts paid to client employees and taxingauthorities for these salaries, wages and taxes.

 

TheCompany’s revenues are impacted by the number of client employees it serves,the number of client employees paid each period and the related wages paid, andthe number of client employees participating in the Company’s benefit plans.Because a portion of the consolidated service fee charged is computed as apercentage of gross payroll, revenues are affected by fluctuations in the grosspayroll caused by the composition of the employee base, inflationary effects onwage levels and differences in the local economies in the Company’s markets.

 

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**Costof Services**

 

Costof services for Gevity Edge include health and welfare benefit plan costs,workers’ compensation insurance costs and state unemployment tax costs.Additionally, costs of services include other direct costs associated with theCompany’s revenue generating activities, such as employer liability insurancecoverage, drug screenings and background checks.

 

Healthand welfare benefit plan costs are comprised primarily of medical benefitcosts, but also include costs of other employee benefits such as dental,vision, disability and group life insurance. Benefit claims incurred by clientemployees under the benefit plans are expensed as incurred according to theterms of each contract. In addition, for certain contracts, liability reservesare established for benefit claims reported and not yet paid and claims thathave been incurred but not reported.

 

Incertain instances, the Company decides to make a contribution toward themedical benefit plan costs of certain Gevity Edge clients. The contribution isreferred to as a “health benefit subsidy”. The addition of the client employeesof these clients as participants in the Company’s medical benefit plans helpsto stabilize the overall claims experience risk associated with those plans. Anaggregate health benefit subsidy in excess of a planned amount may occur whenthe medical cost inflation exceeds expected medical cost trends or when medicalbenefit plan enrollment of those who qualify for a subsidy exceedsexpectations. Conversely, a “health benefit surplus” may occur when the medicalcost inflation is less than expected medical cost trends or when medicalbenefit plan enrollment of those who qualify for a subsidy is less thanexpected.

 

TheCompany offers its medical benefit plans through partnerships with premierhealth care companies. See “Item 1. Business - VendorRelationships - Employee Benefit Plans.” These companies have extensiveprovider networks and strong reputations in the markets in which the Companyoperates. The Company seeks to manage its health and welfare benefit plan coststhrough appropriately designed benefit plans that encourage client employeeparticipation and efficient risk pooling.

 

Substantiallyall of the Company’s client employees are covered under the Company’s workers’compensation program with AIG CI, which was effective January 1, 2003.Under this program, workers’ compensation costs for the year are based onpremiums paid to AIG CI for the current year coverage, estimated total costs ofclaims to be paid by the Company that fall within the program’s deductible, theadministrative costs of the program, the return on investment earned withrespect to premium dollars paid as part of the program and the discount rateused in determining the present value of future payments to be made under theprogram. Additionally, any revisions to the ultimate loss estimates of theprior years’ loss sensitive programs are recognized in the current year. Instates where private insurance is not permitted, client employees are covered bystate insurance funds. Premiums paid to state insurance funds are expensed asincurred.

 

On aquarterly basis, the Company reviews the current and prior year claimsinformation. The current accrual rate and overall workers compensation expensemay be adjusted based on changes in the ultimate claim liability estimate as aresult of current and historical loss trends, fluctuations in theadministrative costs associated with the program, and actual returns oninvestment earned with respect to premium dollars paid. The final costs ofcoverage will be determined by the actual claims experience over time as claimsclose, by the final administrative costs of the program and by the final returnon investment earned with respect to premium dollars paid. See “Item 1.Business - Vendor Relationships - Workers’ Compensation Insurance.”

 

TheCompany manages its workers’ compensation costs through the use of carriers whothe Company believes efficiently manage claims administration and through theCompany’s internal risk assessment and client risk management programs.

 

Stateunemployment taxes are generally paid as a percentage of payroll costs andexpensed as incurred. Rates vary from state to state and are generally basedupon the employer’s claims history. The Company actively manages its stateunemployment taxes by:

 

·         activelyreviewing unemployment claims and, if warranted, contesting claims it believesare improper;

 

·         avoidingunemployment tax rate increases through the use of voluntary contributionswhere available;

 

·         usingmultiple state accounts for the classification of its workers where available;

 

·         electingto report under its clients’ rates whenever possible; and

 

·         usingstate successorship rules for its acquisitions of client portfolios ofother companies.

 

**OperatingExpenses**

 

Operating expenses consist primarily of salaries, wages and commissionsassociated with the Company’s internal employees and general and administrativeexpenses. Sales and marketing commissions and client referral fees are expensedas incurred. The Company expects that future revenue growth, if any, wouldresult in increased operating leverage as the Company’s fixed operating 

 

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expenses are spread overa larger revenue base. The Company continues to reviewits overhead cost structure to ensure alignment with its business development.

 

**IncomeTaxes**

 

TheCompany records income tax expense using the asset and liability method ofaccounting for deferred income taxes.

 

**RESULTSOF OPERATIONS**

 

***Year Ended December 31,2008 Compared to Year Ended December 31, 2007***

 

**Revenue**

 

The following table presents certain informationrelated to the Company’s revenues from continuing operations for theyears ended December 31, 2008 (“2008”) and December 31, 2007 (“2007”):

 
| ** **                                                                                                      | ** ** | **Year Ended**                                             | ** ** | ** **                  | ** ** |
|-----------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                                                                      | ** ** | **December 31,  2008**                                     | ** ** | **December 31,  2007** | ** ** | **%  Change** | ** ** |
| ** **                                                                                                      | ** ** | **(in thousands, except statistical data)** | ** ** |
| Revenues:                                                                                                       |       |                                                            |       |                        |       |   |   |
| Professional service fees                                                                                       |       | $                                                               | 113,545    |                        | $          | 141,496 |   | (19.8 | )% |
| Employee health and welfare benefits                                                                            |       | 325,265                                                         |       | 350,965                     |       | (7.3 | )% |
| Workers’ compensation                                                                                      |       | 61,106                                                          |       | 84,513                      |       | (27.7 | )% |
| State unemployment taxes and other                                                                              |       | 20,624                                                          |       | 24,620                      |       | (16.2 | )% |
| Total revenues                                                                                                  |       | $                                                               | 520,540    |                        | $          | 601,594 |   | (13.5 | )% |
|                                                                                                            |       |                                                            |       |                        |       |   |   |
| Statistical data:                                                                                               |       |                                                            |       |                        |       |   |   |
| Gross salaries and wages (in thousands)                                                                         |       | $                                                               | 4,323,255  |                        | $          | 4,929,352 |   | (12.3 | )% |
| Client employees at period end                                                                                  |       | 101,014                                                         |       | 115,580                     |       | (12.6 | )% |
| Clients at period end (1)                                                                                       |       | 5,779                                                           |       | 6,728                       |       | (14.1 | )% |
| Average number of client employees/clients at period  end                                                       |       | 17                                                              |       | 17                          |       | n/a |   |
| Average number of client employees paid (2)                                                                     |       | 96,938                                                          |       | 113,094                     |       | (14.3 | )% |
| Average wage per average client employees paid                                                                  |       | $                                                               | 44,598     |                        | $          | 43,586 |   | 2.3 | % |
| Workers’ compensation billing  per one hundred dollars of  workers’ compensation  wages (3)           |       | $                                                               | 1.58       |                        | $          | 1.92 |   | (17.7 | )% |
| Workers’ compensation manual premium per one hundred  dollars of workers’ compensation wages (3), (4) |       | $                                                               | 1.74       |                        | $          | 2.13 |   | (18.3 | )% |
| Professional service fees per  average number of  client employees paid                                         |       | $                                                               | 1,171      |                        | $          | 1,251 |   | (6.4 | )% |
| Client employee health benefits participation                                                                   |       | 37                                                              | %          | 37                          | %          | n/a |   |

 

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(1)                      Clientsmeasured by individual client Federal Employer Identification Number (“FEIN”).

 

(2)                      The averagenumber of client employees paid 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.

 

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

 

(4)                      Manualpremium rate data is derived from tables of AIG CI in effect for 2008 and 2007,respectively.

 

For 2008, total revenues were $520.5 million compared to $601.6 millionfor 2007, representing a decrease of $81.1 million or 13.5%. This decrease wasa result of the reduction in all revenue components asdescribed below.

 

As of December 31, 2008, the Company served 5,779 clients, asmeasured by each client’s FEIN, with 101,014 active client employees. Thiscompares to 6,728 clients, as measured by each client’sFEIN, with 115,580 active client employees at December 31, 2007.  The average number of client employees paidwas 96,938 for 2008 compared to 113,094 for 2007.  The declines in clientand client employee metrics were attributable to the impact of higher thanexpected client and client employee attrition levels during 2007 and 2008primarily as a result of the economy and lower than expected production levelsduring 2007 and 2008.  In addition,during the year ended December 31, 2008, the Company terminatedapproximately 240 unprofitable clients (impacting approximately 4,500 

 

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client employees) in an effort to improve overall earningsin the long-term.

 

The average wageper average number of client employees paid for 2008 increased 2.3% to $44,598from $43,586 in 2007.  This increase wasdue to inflation as well as the Company’s strategy of focusing on clients that payhigher wages to their employees.

 

Revenues fromprofessional service fees decreased to $113.5 million forthe year ended December 31, 2008, from $141.5 million for the yearended December 31, 2007, representing a decrease of $28.0 million or19.8%. The decrease was primarily due to the overall decrease in the average number of client employees paid as discussedabove. Professional service fees per average number of client employees paiddecreased by 6.4%, from $1,251 for the year ended December 31, 2007to $1,171 for the year ended December 31,2008. This decrease was primarily attributable to general market dynamics andthe impact of the 2008 terminations of unprofitable clients which, despitehaving a negative impact on gross profit, generally had higher professionalservice fee levels.

 

Revenues forproviding health and welfare benefits for the year endedDecember 31, 2008 were $325.3 million as compared to $351.0 millionfor the year ended December 31, 2007, representing a decrease of $25.7million or 7.3%. Health and welfare benefit plan revenues decreased due to the decrease in the average number of participants in theCompany’s health and welfare benefit plans of approximately 13.8% andwas partially offset by the increase in health insurance premiums as a resultof higher costs to the Company to provide such coveragefor client employees and the Company’s approach to pass along allinsurance-related cost increases.

 

Revenues forproviding workers’ compensation insurance coverage decreased to $61.1 millionfor the year ended December 31, 2008, from $84.5 millionfor the year ended December 31, 2007, representing a decrease of$23.4 million or 27.7%. Workers’ compensation billings, as a percentage ofworkers’ compensation wages for 2008, were 1.58% as compared to 1.92% for 2007, representing a decrease of 17.7%. Workers’compensation revenue decreased in 2008 primarily due to a decrease in billingsfor Florida clients reflecting a reduction in Florida manual premium ratesbeginning in January 2008 and a decrease in thenumber of clients that participate in the Company’s workers’ compensationprogram. The manual premium rates for workers’ compensation applicable to theCompany’s clients decreased 18.3% during 2008 as compared to 2007. Manualpremium rates are the allowable rates that employers are charged by insurancecompanies for workers’ compensation insurance coverage. The decrease in theCompany’s manual premium rates primarily reflects thereduction in the Florida manual premium rates.

 

Revenues fromstate unemployment taxes and other revenues decreased to $20.6 million for theyear ended December 31, 2008 from $24.6 million for the year endedDecember 31, 2007, representing a decrease of $4.0million or 16.2%. The decrease was primarily due to the decrease in wages thatprovide unemployment tax revenue to the Company.

 

**Cost of Services**

 

The followingtable presents certain information related to the Company’scost of services from continuing operations for 2008 and 2007:

 
| ** **                                                                                                      | ** ** | **Year Ended**                                             | ** ** | ** **                  | ** ** |
|-----------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                                                                      | ** ** | **December 31,  2008**                                     | ** ** | **December 31,  2007** | ** ** | **%  Change** | ** ** |
| ** **                                                                                                      | ** ** | **(in thousands, except statistical data)** |
| Cost of services:                                                                                               |       |                                                            |       |                        |       |   |   |
| Employee health and welfare benefits                                                                            |       | $                                                               | 319,268    |                        | $          | 347,816 |   | (8.2 | )% |
| Workers’ compensation                                                                                      |       | 26,397                                                          |       | 39,371                      |       | (33.0 | )% |
| State unemployment taxes and other                                                                              |       | 29,538                                                          |       | 28,380                      |       | 4.1 | % |
| Total cost of services                                                                                          |       | $                                                               | 375,203    |                        | $          | 415,567 |   | (9.7 | )% |
|                                                                                                            |       |                                                            |       |                        |       |   |   |
| Statistical data:                                                                                               |       |                                                            |       |                        |       |   |   |
| Gross salaries and wages (in thousands)                                                                         |       | $                                                               | 4,323,255  |                        | $          | 4,929,352 |   | (12.3 | )% |
| Average number of client employees paid (1)                                                                     |       | 96,938                                                          |       | 113,094                     |       | (14.3 | )% |
| Workers compensation cost rate  per one hundred dollars of workers’ compensation wages (2)                 |       | $                                                               | 0.68       |                        | $          | 0.89 |   | (23.6 | )% |
| Number of workers’ compensation claims (3)                                                                 |       | 3,388                                                           |       | 4,590                       |       | (26.2 | )% |
| Frequency of workers’ compensation claims per one  million dollars of workers’ compensation wages (2) |       | 0.87                                                            | x          | 1.04                        | x          | (16.3 | )% |

 

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

 

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

 

(3)                   Thenumber of workers’ compensation claims reflects the number of claims reportedby the end of the respective period and does not include claims with respect to a specific policy year that are reportedsubsequent to the end of such period. For information regarding claims reportedafter the end of each respective year, see the first table set forth below inthis Item 7 under “Critical Accounting Estimates.”

 

Cost of services,which includes the cost of the Company’s health and welfare benefit plans,workers’ compensation insurance, state unemployment taxes and other costs, was $375.2 million for 2008, compared to $415.6million for 2007, representing a decrease of $40.4 million or 9.7%. Thisdecrease was due to the reduction in all of the cost of servicescomponents as described below.

 

The cost ofproviding health and welfare benefits to clients’ employees for 2008 was $319.3million as compared to $347.8 million for 2007, representing a decrease of $28.5 million or 8.2%. This decrease wasprimarily attributable to the decrease in the number of client employeesparticipating in the health and welfare benefit plans and was partially offsetby higher cost of health benefits.  Inaddition, 2008 and 2007 were favorably impacted by the recognition of a healthbenefit surplus of $6.0 million and $3.1 million, respectively, based uponfavorable claims experience.

 

Workers’compensation costs were $26.4 million for 2008, as compared to $39.4 millionfor 2007, representing a decrease of $13.0 million or33.0%. Workers’ compensation costs decreased in 2008 primarily due tothe approximate 14.3% reduction in the average number of client employees paidand related reduction in wages and claims. Also,reductions in the prior years’ workers’ compensation loss estimates ofapproximately $19.6 million and $19.8 million, respectively, as a result ofcontinued favorable claims development for those prior open policy years, favorably impacted workers’ compensation costs during 2008 and2007.

 

State unemploymenttaxes and other costs were $29.5 million for 2008, compared to $28.4 millionfor 2007, representing an increase of $1.2 million or 4.1%. The decrease in the Company’s client employees andrelated taxable wages were substantially offset by an increase in stateunemployment tax rates beginning January 1, 2008, that were not passedalong to clients.  In addition, during2008, the Company recorded $1.2 million of state unemployment tax expenserelated to a settlement offer with the State of California as described belowin this Item 7 under “Critical Accounting Estimates - State Unemployment Taxes- California Unemployment Tax Assessment.”

 

**Operating Expenses**

 

The following table presents certain information related to the Company’soperating expenses from continuing operations for  2008 and 2007:

 
| ** **                         | ** ** | **Year Ended**                                             | ** ** | ** **                  | ** ** |
|------------------------------------|------------|-----------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                         | ** ** | **December 31,  2008**                                     | ** ** | **December 31,  2007** | ** ** | **% Change** | ** ** |
| ** **                         | ** ** | **(in thousands, except statistical data)** | ** ** |
| Operating expenses:                |       |                                                            |       |                        |       |   |   |
| Salaries, wages and commissions    |       | $                                                               | 75,263     |                        | $          | 83,737 |   | (10.1 | )% |
| Other general and administrative   |       | 48,090                                                          |       | 55,937                      |       | (14.0 | )% |
| Impairment loss                    |       | 8,692                                                           |       | —                      |       | n/a |   |
| Reinsurance contract recovery, net |       | (1,650                                                          | )          | —                      |       | n/a |   |
| Depreciation and amortization      |       | 15,745                                                          |       | 15,326                      |       | 2.7 | % |
| Total operating expenses           |       | $                                                               | 146,140    |                        | $          | 155,000 |   | (5.7 | )% |
|                               |       |                                                            |       |                        |       |   |   |
| Statistical data:                  |       |                                                            |       |                        |       |   |   |
| Internal employees at year end     |       | 745                                                             |       | 871                         |       | (14.5 | )% |

 

Total operatingexpenses were $146.1 million for 2008 as compared to$155.0 million for 2007, representing a decrease of $8.9 million or 5.7%.

 

Salaries, wagesand commissions were $75.3 million for 2008 as compared to $83.7 million for2007, representing a decrease of $8.5 million or 10.1%. The decrease isprimarily a result of the net effect of the reduction in management and supportpersonnel that occurred throughout 2007 and 2008 and was partially offset by the annual increase in wages. Total severance related costsduring 2008 approximated $2.3 million (including approximately $2.1 million ofseverance costs related to cost alignment initiatives throughout 2008) comparedto severance costs incurred during  2007 ofapproximately $5.3 million (including $1.6 million related to 

 

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the severanceagreement with our former Chief Executive Officer).

 

Other general andadministrative expenses were $48.1 million for 2008 as compared to $55.9 million for 2007, representing a decrease of $7.8million or 14.0%. The decrease occurred across most major components of generaland administrative expenses and is attributable to cost alignment measurestaken during 2007 and 2008.  Included inother general and administrative expenses for 2008 are approximately $1.8 millionof expenses related to cost alignment initiatives including employeeoutplacement benefits and costs associated with field office consolidations.

 

During the fourth quarterof 2008, the Company’s market capitalization dropped below the net book value ofits equity.  In addition, forecasted cashflows decreased reflecting continued deterioration of macroeconomic conditionswhich accelerated and became apparent during the fourth quarter of 2008.  As a result and in connection with theCompany’s annual test for goodwill impairment, the Company determined that the fair value of the Company was less thanits carrying value and that the implied fair value of the goodwill waszero.  Accordingly, the Company recordeda goodwill impairment loss of $8.7 million which eliminated goodwill in itsentirety.

 

During the fourthquarter of 2008, the Company received cash of $2.0 million related to areinsurance contract previously written off in 2006, in connection with ongoingliquidation proceedings of the reinsurer. Of this amount, $1.7 million was recorded as a recovery of thereinsurance contract premium previously written off and the remaining $0.3million was included in other general and administrative expense as a reductionin recovery related costs that were previously incurred. Future amountsrecovered (related to costs incurred for pursuit of recovery), if any, will berecognized in income when realization is assured beyond a reasonable doubt. Seefurther discussion below in this Item 7 under “Year Ended December 31, 2007Compared to Year Ended December 31, 2006 - Operating Expenses.”

 

Depreciation andamortization expense totaled $15.7 million for 2008 compared to $15.3 millionfor 2007, representing an increase of $0.4 million or 2.7%. The increase isprimarily attributable to the amortization of technology assets capitalizedduring 2007 and 2008.

 

**Income Taxes**

 

For the year endedDecember 31, 2008, the Company had an income tax benefit of $1.6 million compared to income tax expense of $10.5 million for the yearended December 31, 2007. The change is primarily due to anoperating loss for 2008 compared to operating income in 2007. The Company’seffective tax rate for 2008 and 2007 was 54.3% and36.7%, respectively.  The Company’seffective tax rates differed from the statutory federal tax rates primarily becauseof state taxes and federal tax credits.

 

**Gross Profit, Operating (Loss) Income, (Loss) IncomeFrom Continuing Operations and Diluted (Loss) Earnings Per Share FromContinuing Operations**

 

As a net result ofthe factors described above, the following table summarizes the changes ingross profit, operating (loss) income, (loss) income from continuing operationsand diluted (loss) earnings per share from continuing operations:

 
| ** **                                                           | ** ** | **Year Ended**                                                                          | ** ** | ** **                  | ** ** |
|----------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                           | ** ** | **December 31,  2008**                                                                  | ** ** | **December 31,  2007** | ** ** | **% Change** | ** ** |
| ** **                                                           | ** ** | **(in thousands, except per share and statistical data)** | ** ** |
| Gross profit                                                         |       | $                                                                                            | 145,337    |                        | $          | 186,027 |   | (21.9 | )% |
| Operating (loss) income                                              |       | $                                                                                            | (803       | )                           | $          | 31,027 |   | (102.6 | )% |
| (Loss) income from continuing operations                             |       | $                                                                                            | (1,311     | )                           | $          | 18,097 |   | (107.2 | )% |
| Diluted (loss) earnings per share from continuing  operations        |       | $                                                                                            | (0.05      | )                           | $          | 0.75 |   | (106.7 | )% |
| Statistical data:                                                    | ** ** | ** **                                                                                   | ** ** | ** **                  | ** ** | ** ** | ** ** |
| Gross profit per average number of client employees  paid            |       | $                                                                                            | 1,499      |                        | $          | 1,645 |   | (8.9 | )% |
| Operating (loss) income per average number of client  employees paid |       | $                                                                                            | (8         | )                           | $          | 274 |   | (102.9 | )% |

 

**DiscontinuedOperations**

 

The loss from discontinued operations was $5.6 million($3.5 million net of income tax) for the year ended December 31, 2008compared to $13.1 million ($8.1 million net of income tax) for the year endedDecember 31, 2007.  The decrease inthe loss of $7.5 

 

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million was primarily theresult of the $8.5 million impairment charge for long-lived assets recorded in2007. The impairment charge in 2007 and the decision to exit the Gevity EdgeSelect business in 2008 were primarily a result of the poor performance of thebusiness and the integration challenges experienced in 2007. As a result of theexit decision, the remaining goodwill that originated in the HRA acquisitionwas impaired in 2008 resulting in a charge of $0.5 million.  The Company’soperations related to Gevity Edge Select ceased on June 30, 2008.  The Company does not expect to incur anyfurther significant costs related to the exit.

 

***Year Ended December 31, 2007 Compared to Year Ended December 31,2006***

 

**Revenue**

 

The followingtable presents certain information related to the Company’srevenues from continuing operations for the years ended December 31, 2007(“2007”) and December 31, 2006 (“2006”):

 
| ** **                                                                                                      | ** ** | **Year Ended**                                             | ** ** | ** **                  | ** ** |
|-----------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                                                                      | ** ** | **December 31,  2007**                                     | ** ** | **December 31,  2006** | ** ** | **%  Change** | ** ** |
| ** **                                                                                                      | ** ** | **(in thousands, except statistical data)** | ** ** |
| Revenues:                                                                                                       |       |                                                            |       |                        |       |   |   |
| Professional service fees                                                                                       |       | $                                                               | 141,496    |                        | $          | 162,585 |   | (13.0 | )% |
| Employee health and welfare benefits                                                                            |       | 350,965                                                         |       | 352,017                     |       | (0.3 | )% |
| Workers’ compensation                                                                                      |       | 84,513                                                          |       | 106,075                     |       | (20.3 | )% |
| State unemployment taxes and other                                                                              |       | 24,620                                                          |       | 26,850                      |       | (8.3 | )% |
| Total revenues                                                                                                  |       | $                                                               | 601,594    |                        | $          | 647,527 |   | (7.1 | )% |
|                                                                                                            |       |                                                            |       |                        |       |   |   |
| Statistical data:                                                                                               |       |                                                            |       |                        |       |   |   |
| Gross salaries and wages (in thousands)                                                                         |       | $                                                               | 4,929,352  |                        | $          | 5,142,387 |   | (4.1 | )% |
| Client employees at period end                                                                                  |       | 115,580                                                         |       | 127,813                     |       | (9.6 | )% |
| Clients at period end (1)                                                                                       |       | 6,728                                                           |       | 7,397                       |       | (9.0 | )% |
| Average number of client employees/clients at period  end                                                       |       | 17                                                              |       | 17                          |       | n/a |   |
| Average number of client employees paid (2)                                                                     |       | 113,094                                                         |       | 125,905                     |       | (10.2 | )% |
| Average wage per average client employees paid                                                                  |       | $                                                               | 43,586     |                        | $          | 40,843 |   | 6.7 | % |
| Workers’ compensation billing  per one hundred dollars of workers’ compensation wages (3)             |       | $                                                               | 1.92       |                        | $          | 2.30 |   | (16.5 | )% |
| Workers’ compensation manual premium per one hundred  dollars of workers’ compensation wages (3), (4) |       | $                                                               | 2.13       |                        | $          | 2.68 |   | (20.5 | )% |
| Professional service fees per  average number of client employees paid                                          |       | $                                                               | 1,251      |                        | $          | 1,291 |   | (3.1 | )% |
| Client employee health benefits participation                                                                   |       | 37                                                              | %          | 38                          | %          | (2.6 | )% |

 

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(1)                      Clientsmeasured by individual client Federal Employer Identification Number (“FEIN”).

 

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

 

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

 

(4)                      Manualpremium rate data is derived from tables of member insurance companies of AIGCI in effect for 2007 and 2006, respectively.

 

For 2007, totalrevenues were $601.6 million compared to $647.5 million for 2006, representinga decrease of $45.9 million or 7.1%. This decrease was a result of thereduction in all revenue components as described below.

 

As ofDecember 31, 2007, the Company served 6,728 clients, as measured by eachclient’s FEIN, with 115,580 active client employees. This compares to 7,397clients, as measured by each client’s FEIN, with127,813 active client employees at December 31, 2006.  The average number of client employees paidwas 113,094 for 2007 compared to 125,905 for 2006.  The declines in clientand client employee metrics were attributable to the Company’s 2006 initiativeto bring healthcare premiums up to retail rates, lower than expected productionlevels during 2007, and the impact in 2007 of the economy on clients in Floridaand clients in the financial and business service sectors.

 

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The average wage per average number of client employees paid for 2007increased 6.7% to $43,586 from $40,843 in 2006. This increase was due to inflation as well as the Company’s strategy offocusing on clients that pay higher wages to their employees.

 

Revenues from professional service fees decreasedto $141.5 million for the year ended December 31, 2007, from $162.6million for the year ended December 31, 2006, representing a decrease of$21.1 million or 13.0%. The decrease was primarily due to the overall decrease in the average number of client employees paid as discussedabove. Professional service fees per average number of client employees paiddecreased by 3.1%, from $1,291 for the year ended December 31, 2006to $1,251 for the year ended December 31,2007. This decrease was primarily attributable to general market dynamics.

 

Revenues for providing health and welfarebenefits for the year ended December 31, 2007 were $351.0 millionas compared to $352.0 million for the year ended December 31, 2006,representing a decrease of $1.1 million or 0.3%. Health and welfare benefitplan revenues decreased due to the decrease in theaverage number of participants in the Company’s health and welfarebenefit plans of approximately 10.1% and was partially offset by the increasein health insurance premiums as a result of higher costs to the Company toprovide such coverage for client employees and theCompany’s approach to pass along all insurance-related cost increases.

 

Revenues for providing workers’ compensation insurance coveragedecreased to $84.5 million for the year ended December 31, 2007, from$106.1 million for the year ended December 31,2006, representing a decrease of $21.6 million or 20.3%. Workers’ compensationbillings, as a percentage of workers’ compensation wages for 2007, were 1.92%as compared to 2.30% for 2006, representing a decrease of16.5%. Workers’ compensation revenue decreased in 2007 primarily due tothe combined effects of a decrease in billings for Florida clients reflecting areduction in Florida manual premium rates beginning in January 2007and a decrease in the number of clients that participate in the Company’sworkers’ compensation program. The manual premium rates for workers’compensation applicable to the Company’s clients decreased 20.5% during 2007 ascompared to 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 reflects the reduction in the Florida manualpremium rates.

 

Revenues from state unemployment taxes and other revenues decreased to$24.6 million for the year ended December 31, 2007, from $26.9 million forthe year ended December 31, 2006, representing adecrease of $2.2 million or 8.3%. The decrease was primarily due to thedecrease in wages that provide unemployment tax revenue to the Company and waspartially offset by increases in the state unemployment tax rates that werepassed along to clients.

 

**Cost of Services**

 

The following table presents certain informationrelated to the Company’s cost of services from continuing operations for2007 and 2006:

 
| ** **                                                                                                      | ** ** | **Year Ended**                                             | ** ** | ** **                  | ** ** |
|-----------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                                                                      | ** ** | **December 31,  2007**                                     | ** ** | **December 31,  2006** | ** ** | **%  Change** | ** ** |
| ** **                                                                                                      | ** ** | **(in thousands, except statistical data)** | ** ** |
| Cost of services:                                                                                               |       |                                                            |       |                        |       |   |   |
| Employee health and welfare benefits                                                                            |       | $                                                               | 347,816    |                        | $          | 354,531 |   | (1.9 | )% |
| Workers’ compensation                                                                                      |       | 39,371                                                          |       | 57,462                      |       | (31.5 | )% |
| State unemployment taxes and other                                                                              |       | 28,380                                                          |       | 32,062                      |       | (11.5 | )% |
| Total cost of services                                                                                          |       | $                                                               | 415,567    |                        | $          | 444,055 |   | (6.4 | )% |
|                                                                                                            |       |                                                            |       |                        |       |   |   |
| Statistical data:                                                                                               |       |                                                            |       |                        |       |   |   |
|                                                                                                            |       |                                                            |       |                        |       |   |   |
| Gross salaries and wages (in thousands)                                                                         |       | $                                                               | 4,929,352  |                        | $          | 5,142,387 |   | (4.1 | )% |
| Average number of client employees paid (1)                                                                     |       | 113,094                                                         |       | 125,905                     |       | (10.2 | )% |
| Workers compensation cost rate  per one hundred dollars of  workers’ compensation  wages (2)               |       | $                                                               | 0.89       |                        | $          | 1.25 |   | (28.8 | )% |
| Number of workers’ compensation claims (3)                                                                 |       | 4,590                                                           |       | 5,820                       |       | (21.1 | )% |
| Frequency of workers’ compensation claims per one  million dollars of workers’ compensation wages (2) |       | 1.04                                                            | x          | 1.26                        | x          | (17.5 | )% |

 

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(1)      Theaverage number of client employees paid is calculated based upon the sum of thenumber of paid client employees at the

 

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end of each monthdivided by the number of months in the period.

 

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

 

(3)      Thenumber of workers’ compensation claims reflects the number of claims reportedby the end of the respective period and does not include claims with respect to a specific policy year that are reportedsubsequent to the end of such period. For information regarding claims reportedafter the end of each respective year, see the first table set forth below inthis Item 7 under “Critical Accounting Estimates.”

 

Cost of services, which includes the cost of the Company’s health andwelfare benefit plans, workers’ compensation insurance, state unemploymenttaxes and other costs, was $415.6 million for 2007,compared to $444.1 million for 2006, representing a decrease of $28.5 millionor 6.4%. This decrease was due to the reduction in all of the cost of services components as described below.

 

The cost of providing health and welfare benefits to clients’ employeesfor 2007 was $347.8 million as compared to $354.5 million for 2006, representing a decrease of $6.7 million or 1.9%. This decrease wasprimarily attributable to the decrease in the number of client employeesparticipating in the health and welfare benefit plans and was partially offsetby higher cost of health benefits.  In addition,during 2007, the Company recorded a $3.1 million health benefit surplus due tofavorable claims development compared to a $2.5 million health benefit subsidyrecognized during 2006, primarily due to a $1.3 million one-time premium costfor the month of October 2006 not passed along to clients after thedeferral of the start of the new health plan benefit year from October 1to November 1.

 

Workers’ compensation costs were $39.4 million for 2007, as compared to$57.5 million for 2006, representing a decrease of $18.1million or 31.5%. Workers’ compensation costs decreased in 2007primarily as a result of the overall decline in the Company’s client employeesand the related impact on the 2007 program year costs. In addition, thereduction in the prior years’ workers’ compensation loss estimates were $19.8million during 2007 compared to $18.7 million during 2006.

 

State unemployment taxes and other costs were $28.4 million for 2007,compared to $32.1 million for 2006, representing a decrease of $3.7 million or11.5%. The decrease in the Company’s clientemployees and related taxable wages were substantially offset by an increase instate unemployment tax rates beginning January 1, 2007, as well as anincrease in costs associated with expanded client service offerings.

 

**Operating Expenses**

 

The following table presents certain informationrelated to the Company’s operating expenses from continuing operationsfor  2007 and 2006:

 
| ** **                       | ** ** | **Year Ended**                                             | ** ** | ** **                  | ** ** |
|----------------------------------|------------|-----------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                       | ** ** | **December 31,  2007**                                     | ** ** | **December 31,  2006** | ** ** | **% Change** | ** ** |
| ** **                       | ** ** | **(in thousands, except statistical data)** | ** ** |
| Operating expenses:              |       |                                                            |       |                        |       |   |   |
| Salaries, wages and commissions  |       | $                                                               | 83,737     |                        | $          | 85,112 |   | (1.6 | )% |
| Other general and administrative |       | 55,937                                                          |       | 54,471                      |       | 2.7 | % |
| Reinsurance contract loss, net   |       | —                                                          |       | 1,650                       |       | n/a |   |
| Depreciation and amortization    |       | 15,326                                                          |       | 13,810                      |       | 11.0 | % |
| Total operating expenses         |       | $                                                               | 155,000    |                        | $          | 155,043 |   | — | % |
|                             |       |                                                            |       |                        |       |   |   |
| Statistical data:                |       |                                                            |       |                        |       |   |   |
| Internal employees at year end   |       | 871                                                             |       | 996                         |       | (12.6 | )% |

 

Total operating expenses remained flat at  approximately $155.0 million for both 2007and 2006.

 

Salaries, wages and commissions were $83.7 million for 2007 as comparedto $85.1 million for 2006, representing a decrease of $1.4 million or 1.6%. Thedecrease is primarily a result of the net effect of the reduction in managementand support personnel that occurred throughout 2007 and was partially offset by the annual increase in wages. Additionally, severancecosts were approximately $5.3 million during the year ended December 31,2007 (including approximately $1.6 million related to the severance agreementof our former Chief Executive Officer) compared to severance costs incurredduring the year ended December 31, 2006 of $2.3 million and are primarilyrelated to cost alignment efforts that have occurred throughout the periods.

 

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Other general and administrative expenses were $55.9 million for 2007as compared to $54.5 million for 2006,representing an increase of $1.5 million or 2.7%. This increase is primarily aresult of costs associated with investments in marketing and informationtechnology which benefited operations beyond 2007, relating to improvements inservice delivery and sales. Additionally, there was an increase in bad debt expense of approximately$0.9 million related to terminated accounts in 2007.

 

The netreinsurance contract loss for the year 2006 was $1.7 million as a resultof the net effect of the following. During the second quarter of 2006, theCompany recorded a $4.7 million loss on a reinsurance contract related toits 2006 workers’ compensation program. The Company determined that, as aresult of the liquidation proceeding related to the Bermuda reinsurance companyresponsible for covering the layer of its workers’ compensation claims between$0.5 million and $2.0 million per occurrence and the relatedtermination of its reinsurance contract, a loss of $4.7 million should berecorded as of June 30, 2006, which represented the entire premium paidfor coverage in 2006. During the third quarter of 2006, the Company recorded again on the reinsurance contract as a result of the receipt of$3.0 million pursuant to a court-approved settlement, which also calledfor the admission in the liquidation proceeding of an unsecured claim againstthe reinsurer in the amount of $2.2 million. The settlement is withoutprejudice to any claims Gevity may have against third parties relating to thereinsurer’s liquidation. The Company has actively pursued additional recovery.See information regarding the 2008 recovery previously discussed in this Item 7under “Year Ended December 31, 2008 Compared to Year Ended December 31,2007 - Operating Expenses.” In light of the liquidation proceeding, during thesecond quarter of 2006, the Company secured comparable coverage for the layerof claims between $0.5 million and $2.0 million from AIGretroactively effective to January 1, 2006. The cost of the replacementcoverage for 2006 (approximately $4.8 million), has been included in costof services for 2006 and replaces the cost incurred from the original policy.

 

Depreciation and amortization expense totaled $15.3 million for 2007compared to $13.8 million for 2006, representing an increase of $1.5 million or11.0%. The increase is primarily attributable to the amortization of technologyassets capitalized during 2007.

 

**Income Taxes**

 

For the year ended December 31, 2007, the Company had an incometax expense of $10.5 million compared to income taxexpense of $13.4 million for the year ended December 31, 2006. Thechange is primarily due to the reduction in income from continuing operationsfor 2007 compared to 2006. The Company’s effective taxrate for 2007 and 2006 was 36.7% and 27.3%, respectively.  The Company’s effective tax rates differedfrom the statutory federal tax rates because of state taxes and federal taxcredits.  In addition, during 2006, theCompany’s effective tax rate was favorably impacted as a result of the filingof a change in accounting method with the Internal Revenue Service and therelated reversal of a tax reserve of approximately $2.0 million.

 

**Gross Profit, OperatingIncome, Income From Continuing Operations and Diluted Earnings Per Share FromContinuing Operations**

 

As a net result of the factors described above, the following tablesummarizes the changes in gross profit, operating income, income fromcontinuing operations and diluted earnings per share from continuingoperations:

 
| ** **                                                     | ** ** | **Year Ended**                                                                          | ** ** | ** **                  | ** ** |
|----------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                     | ** ** | **December 31,  2007**                                                                  | ** ** | **December 31,  2006** | ** ** | **% Change** | ** ** |
| ** **                                                     | ** ** | **(in thousands, except per share and statistical data)** | ** ** |
| Gross profit                                                   |       | $                                                                                            | 186,027    |                        | $          | 203,472 |   | (8.6 | )% |
| Operating income                                               |       | $                                                                                            | 31,027     |                        | $          | 48,429 |   | (35.9 | )% |
| Income from continuing operations                              |       | $                                                                                            | 18,097     |                        | $          | 35,571 |   | (49.1 | )% |
| Diluted earnings per share from continuing  operations         |       | $                                                                                            | 0.75       |                        | $          | 1.33 |   | (43.6 | )% |
| Statistical data:                                              | ** ** | ** **                                                                                   | ** ** | ** **                  | ** ** | ** ** | ** ** |
| Gross profit per average number of client employees  paid      |       | $                                                                                            | 1,645      |                        | $          | 1,616 |   | 1.8 | % |
| Operating income per average  number of client employees  paid |       | $                                                                                            | 274        |                        | $          | 385 |   | (28.8 | )% |

 

**Discontinued Operations**

 

The loss from discontinued operations was $13.1million ($8.1 million net of income tax) for the year ended December 31,2007, compared to $0.5 million ($0.3 million net of income tax) for the yearended December 31, 2006. The increase in the loss of $12.6 million wasprimarily attributable to the 2007 acquisition of HRA. Included in the 2007loss are the impact of the $8.5 million

 

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impairment loss on the long-lived and intangible assets of HRA aspreviously discussed, an increase in operating expenses of $7.1 millionrelated to the operations of HRA, integration costs of HRA, costs associatedwith the re-launch of Gevity Edge Select, and an increase in the amortizationexpense associated with intangible assets acquired in the HRA acquisition.These amounts were partially offset by the increase in Gevity Edge Select grossprofit of $2.9 million as a result of the increase in professional servicefees. The Company’s operations related to Gevity EdgeSelect ceased on June 30, 2008.

 

**LIQUIDITY AND CASH FLOWS**

** **

**CashFlow**

 

***General***

 

The Company believes that its current cash balances, cash flow fromoperations and the existing credit facility will be sufficient to meet itsoperational requirements for the next 12 months. The Company has a securedcredit facility for $85.0 million with Bank of America, N.A. and Wachovia, N.A.(the “Lenders”) and had no outstanding borrowings as of December 31, 2008.See Note 10 to the consolidated financial statements beginning on page F-1for additional information regarding the Company’s credit facility. On February 25,2008, the Company entered into the Third Amendment to Amended and RestatedCredit Agreement (“Third Amendment”). The Third Amendment provides for thegrant of security interests and liens in substantially all the property andassets (with agreed upon carveouts and exceptions) of the Company to theLenders. The Third Amendment also provided for an automatic decrease of theaggregate revolving commitment of the credit facility from $100.0 million to$85.0 million on September 30, 2008. The Third Amendment includesadditional covenants and amends certain financial covenants and negativecovenants with an effective date of December 31, 2007. These include themaintenance of a minimum consolidated net worth, a maximum consolidatedadjusted leverage ratio, a minimum consolidated fixed charge coverage ratio of1.25:1.0, minimum consolidated adjusted EBITDA requirements (for 2008 only),and a ceiling on consolidated capital expenditures. The revised covenants setforth in the Third Amendment also restrict the Company’s ability to repurchaseshares of its capital stock except in certain circumstances, make acquisitionsand require the Company to provide certain period reports relating to budgetand profits and losses, intellectual property and insurance policies. Each of these covenants is based on defined terms and contain exceptionsin each case contained in the credit agreement, as amended. The Company was incompliance with all of the revised covenants under the credit agreement at December 31,2008. 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 December 31, 2008,no amounts were outstanding under the credit facility and the maximum facilityavailable to the Company was approximately $48.4 million (which includes theeffect on availability of the outstanding letter of credit to BCBSF/HOI of $7.0million). The Company is not currently aware of any inability of our Lenders toprovide access to the full commitment of funds that exist under our creditfacility, if necessary. However, due to recent economic conditions and thedeteriorating business climate facing financial institutions, there can be noassurance that such facility will be available to the Company, even though itis a binding commitment.

 

Pursuant to the terms of the credit agreement, the obligations of theCompany may be accelerated upon the occurrence and continuation of an Event ofDefault. Such events include the following: (i) the failure to makeprincipal, interest or fee payments when due (beyondapplicable grace periods); (ii) the failure to observe and performcertain covenants contained in the credit agreement; (iii) any representationor warranty made by the Company in the credit agreement or related documents proves to be incorrect or misleading in any material respectwhen made or deemed made; and (iv) other customary events ofdefault.

 

The Company’sprimary short-term liquidity requirements relate to the payment of accruedpayroll and payroll taxes of its internal and client employees and the paymentof workers’ compensation premiums and medical benefit plan premiums. TheCompany’s billings to its clients include: (i) each client employee’sgross wages; (ii) a professional service fee which is primarily computedas a percentage of the gross wages; (iii) related payroll taxes; (iv) workers’compensation insurance charges (if applicable); and (v) the client’sportion of benefits, including medical and retirement benefits, provided to theclient employees based on coverage levels elected by the client and the clientemployees. Included in the Company’s billings from continuing operations during2008 were salaries, wages and payroll taxes of client employees ofapproximately $4.6 billion. The billings to clients are managed from acash flow perspective so that a matching generally exists between the time thatthe funds are received from a client to the time that the funds are paid to theclient employees and to the appropriate tax jurisdictions. As a co-employer,and under the terms of the Company’s professional services agreements, theCompany is obligated to make certain wage, tax and regulatory payments even ifthe related wages tax and regulatory payments are not made by its clients.Therefore, the objective of the Company is to minimize the credit riskassociated with remitting the payroll and associated taxes before receiving theservice fees from the client and generally, the Company has the right toimmediately terminate the client relationship for non-payment. To the extentthis objective is not achieved, short-term cash requirements, as well as baddebt expense, can be significant and the results of operations and cash flowmay

 

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potentially be impacted.In addition, the timing and amount of payments for payroll, payroll taxes and benefitpremiums can vary significantly based on various factors, including the day ofthe week on which a payroll period ends and the existence of holidays at orimmediately following a payroll period-end.

 

***Restricted Cash***

 

The Company isrequired to collateralize its obligations under its workers’ compensation andhealth benefit plans and certain general insurance coverage. The Company usesits marketable securities to collateralize these obligations as more fullydescribed below. Marketable securities used to collateralize these obligationsare designated as restricted in the Company’s consolidated financialstatements.

 

At December 31,2008, the Company had $41.4 million in total cash and cash equivalents andrestricted marketable securities, of which $32.5 million was unrestricted.At December 31, 2008, the Company had pledged $8.9 million ofrestricted marketable securities in collateral trust arrangements issued inconnection with the Company’s workers’ compensation and general insurancecoverage as follows:

 
| ** **                                                     | ** ** | **December 31,  2008** | ** ** | **December 31,  2007** | ** ** |
|----------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                                                     | ** ** | **(In thousands)**     | ** ** |
| Short-term marketable securities — restricted:       |       |                        |       |                        |       |
| General insurance collateral obligations — AIG       |       | $                           | 4,836      |                        | $          | 4,702 |   |
| HRA Escrow                                                     |       | —                      |       | 1,400                       |       |
| Total short-term marketable securities —  restricted |       | 4,836                       |       | 6,102                       |       |
|                                                           |       |                        |       |                        |       |
| Long-term marketable securities restricted:                    |       |                        |       |                        |       |
| Workers’ compensation collateral — AIG          |       | 4,048                       |       | 3,934                       |       |
| Total long-term marketable securities —  restricted  |       | 4,048                       |       | 3,934                       |       |
| Total restricted assets                                        |       | $                           | 8,884      |                        | $          | 10,036 |   |

 

During the third quarter of 2008, the Company reacheda settlement with the former HRAmerica Inc, (“HRA”) owners that resulted in therelease to Gevity of the $1.4 million held in escrow related to purchase pricecontingencies from the February 16, 2007 acquisition of HRA.

 

The Company’s obligation to Blue Cross Blue Shield of Florida, Inc.and its subsidiary Health Options, Inc. (together “BCBSF/HOI”)under its current contract requires an irrevocable letter of credit (“LOC”) infavor of BCBSF/HOI in an initial amount of $5.0 millionon October 1, 2008, and shall be increased monthly by approximately $1.0million over a seven month period until it reaches $11.8 million on May 1,2009. At December 31, 2008, the outstanding LOC in favor of BCBSF/HOI was$7.0 million.

 

The Company does not anticipate any additional collateral obligations to be required in 2008 for its workers’ compensationarrangements.

 

Asof December 31, 2008, the Company has recorded a $115.3 million receivablefrom AIG CI representing workers’ compensation premium payments made to AIG CIrelated to program years 2000 through the 2008 in excess of the present value of theestimated claims liability.  Thisreceivable represents a significant concentration of credit risk for the Company.Gevity has variouscommercial insurance relationships with AIG CI, a subsidiary of AIG, includingits workers’ compensation program.  AIG CI has publicly stated as recentlyas March 2, 2009, that it remains well-capitalized and financially secure,with ample resources to pay policyholder claims.  The issues that have evolved at AIG relate toentities outside of their commercial insurance division. The AIG insurancecompanies are regulated by state law and their affairs overseen by stateinsurance commissioners.  Those laws aredesigned in part to assure that regulated insurance companies are operated on afinancially sound basis and their assets are protected from the financialproblems of non-insurance affiliates. Under state insurance regulations, the assetsof the AIG insurance subsidiaries are protected from the creditors of theparent company. On March 2, 2009, AIG also announced its intention to forma General Insurance holding company with a board of directors, management teamand brand distinct from AIG. The Commercial Insurance group will be a componentof this holding company. As of March 2, 2009, AIG CI’s financial strengthrating by A.M. Best was an “A”. Accordingly, the Company does not believe that the current financialcondition of AIG will have a material adverse effect on AIG CI or the Company’sworkers’ compensation receivable as of December 31, 2008.

 

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***Cash Flows from Operating Activities***

 

At December 31,2008, the Company had a net working capital of $15.6 million, includingrestricted funds classified as short-term of $4.8 million, as compared toa net working capital deficit of $26.2 million as of December 31,2007, including $6.1 million of restricted funds classified as short-term.The increase in working capital during 2008 was primarily due to the increasein the short-term workers’ compensation receivable of $35.0 million as a resultof an increase in the estimated 2009 refunds from AIG CI ($26.6 million ofwhich was received in January 2009 and, if current trends continue,another $25.3 million is expected to be received during the second half of2009).

 

Net cash providedby operating activities was $43.3 million for the year ended December 31,2008, as compared to net cash provided by operating activities of$11.4 million for the year ended December 31, 2007, representing anincrease of $31.9 million. Cash flows from operating activities aresignificantly impacted by the timing of client payrolls, the day of the week onwhich a fiscal period ends and the existence of holidays at or immediatelyfollowing a period end. The overall increase in cash from operating activitieswas primarily due to the reduction in accounts receivables from December 31,2007, and an increase in client prepayments at December 31, 2008. Theseincreases to cash provided by operating activities were partially offset by anoverall reduction in earnings, accounts payable and accrued liabilities, aswell as accrued payroll and payroll taxes, as a result of the reduction inworksite employees that occurred throughout 2008.

 

During the year ended December 31, 2008, theCompany received $35.1 million of loss fund collateral premium refunds from AIGin connection with its annual loss fund true-up ($33.1 million in the thirdquarter) and $4.7 million during the fourth quarter of 2008 in connection withthe annual premium expense true-up. In addition, AIG CI agreed to defer the Company’s$13.9 million fourth quarter 2008 loss fund collateral premium pay-in untilafter the June 30, 2009 true-up when it will be determined whether or notit is required based upon the results of the true-up calculation.  Additional releases of premiums by AIG arealso anticipated in future years if such trends continue.  The Company believes that it has provided AIGa sufficient amount of cash to cover its short-term and long-term workerscompensation obligations related to open policy years.

 

***Cash Flows from Investing Activities***

 

Cash used ininvesting activities for the year ended December 31, 2008 of $2.1 million,includes approximately $3.2 million for capital expenditures primarily fortechnology-related items and $0.2 million for purchasesof marketable securities. These amounts are partially offset by proceeds fromthe return of $1.4 million previously held in an escrow account for purchaseprice contingencies related to the HRA acquisition. This compares tocash used in investing activities of $17.2 million for the year ended December 31,2007, which includes approximately $10.9 million related to the February 16,2007 acquisition of HRA ($9.5 million of cash and related acquisition costs and$1.4 million included in marketable securities purchases for purchase pricecontingencies held in an escrow account). In addition, the Company spentapproximately $5.9 million for capital expenditures primarily fortechnology-related items excluding approximately $0.1 million of capitalexpenditures made by the Company in 2007 and paid for in 2008 and $1.1 millionof capital assets acquired through capital leasing arrangements. The Company iscontinuing to invest capital resources in the development and enhancement ofits current information technology infrastructure and service deliverycapabilities.

 

***Cash Flows from Financing Activities***

 

 Cash used in financing activities for the year ended December 31, 2008 of $18.6million was primarily a result of $17.4 million net repayment of the revolvingcredit facility, $5.7 million of cash dividends paid and $0.5 million ofcapital lease payments. These amounts were partially offset by $4.0 millionreceived upon the exercise of 1,003,625 stock options and the purchase of40,479 shares of common stock under the Company’s employeestock purchase plan and $0.9 million related to excess tax benefits received bythe Company for its share-based arrangements.

 

This compares tocash used in financing activities for the year ended December 31, 2007 of$20.6 million primarily a result of the use of $30.3 million to repurchase1,543,121 shares of the Company’s common stock under its stock repurchaseprograms and $8.6 million ofcash dividends paid. These amounts were partially offset by $17.4 million ofnet borrowings under the revolving credit facility and $1.0 million receivedupon the exercise of 91,742 stock options and the purchase of 20,301 shares ofcommon stock under the Company’s employee stock purchase plan.

 

**Inflation**

 

The Companybelieves that inflation in salaries and wages of client employees has anoverall positive impact on its results of operations since the professionalservice fees earned from clients are generally proportional to increases insalaries and wages.

 

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**Commitmentsand Contractual Obligations**

 

*Off-BalanceSheet Arrangements* — The Company does not have anyoff-balance sheet arrangements.

 

*TableOf Contractual Arrangements* — The following tablesummarizes the Company’s contractual obligations and commercial commitments asof December 31, 2008, and the effect they are expected to have on itsliquidity and capital resources (in thousands):

 
| ** **                                                 | ** ** | **Payment Due by Period** | ** ** |
|------------------------------------------------------------|------------|------------------------------------------|------------|
| **Contractual Obligations**                           | ** ** | **Total**                                | ** ** | **Less  Than 1  Year** | ** ** | **1-3  Years** | ** ** | **4-5  Years** | ** ** | **More  Than  5 Years** | ** ** |
| 2009 Insurance policy obligations to AIG CI (1)            |       | $                                        | 52,417     |   | $ | 52,417 |   | $ | — |   | $ | — |   | $ | — |   |
| Operating lease obligations                                |       | 30,440                                   |       | 8,630 |   | 10,128 |   | 6,358 |   | 5,324 |   |
| Liability for unrecognized tax positions — FIN 48 (2) |       | 7,741                                    |       | 7,741 |   | — |   | — |   | — |   |
| Capital lease obligations                                  |       | 973                                      |       | 606 |   | 367 |   | — |   | — |   |
| Purchase obligations                                       |       | 340                                      |       | 340 |   | — |   | — |   | — |   |
| Revolving credit facility (3)                              |       | —                                   |       | — |   | — |   | — |   | — |   |
| Total                                                      |       | $                                        | 91,911     |   | $ | 69,734 |   | $ | 10,495 |   | $ | 6,358 |   | $ | 5,324 |   |

 

----

(1)                   The2009 insurance policy obligations to AIG CI include insurance obligationsrelated to workers’ compensation, auto and general liability insurancecoverage. The Company does not anticipate that any amounts will be due to AIGCI in connection with the June 30, 2009 annual loss-fund collateraltrue-up as a result of the fourth quarter deferral of $13.9 million of lossfund collateral pay-in as previously described under “Business - VendorRelationships - Workers’ Compensation Insurance.”

 

(2)                    Excludedfrom the liability for unrecognized tax positions included in the ContractualObligations table above are $2.1 million of unrecognized tax benefits; due to the uncertainty of the timing ofsettlement with taxing authorities, the Company is unable to make reasonablyreliable estimates of the period of cash settlement related to theseunrecognized tax benefits. See Note 17 to the consolidated financial statementsbeginning on page F-1 for additional information on unrecognized taxbenefits.

 

(3)                    Intereston the revolving credit facility is paid monthly; as such, no amounts areoutstanding as of December 31, 2008.

 

**CRITICALACCOUNTING ESTIMATES**

 

The preparation offinancial statements and related disclosures in conformity with accountingprinciples generally accepted in the United States, requires management to makeestimates and assumptions that affect the reported amounts of assets,liabilities, revenues and expenses and the disclosures of contingent assets andliabilities. The accounting estimates described below 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, and changes in the accounting estimates used are reasonably likely tooccur from period to period, which may have a material impact on thepresentation of the Company’s financial condition and results of operations.Management periodically reviews the estimates and assumptions and reflects theeffects of revisions in the period in which they are determined to benecessary. Management has reviewed the critical accounting estimates with theAudit Committee of the Company’s board of directors. The descriptions below aresummarized and have been simplified for clarity. A detailed description of thesignificant accounting policies used by the Company in preparing its financialstatements is included in Note 1 to the consolidated financial statementsbeginning on page F-1.

 

**Workers’Compensation Receivable/Reserves**

 

For a descriptionof the Company’s workers’ compensation program see “Item 1.Business - Vendor Relationships - Workers’ Compensation.”

 

Workers’compensation claim payments related to an individual policy year may extendover many years following the date of the worksite injury. Volatility in thedollar amount of workers’ compensation costs arises when the number ofaccidents and the severity of these accidents cannot be easily projected, thusresulting in a wide range of possible expected dollar losses for an insurancepolicy program year. Volatility in the projection of expected dollar lossescaused by the number of claims and the severity of these claims is more likelyto be associated with industries that have a high-risk level associated withthem.

 

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The Companyreviews the estimated costs of claims in the deductible layer for each openprogram year on a quarterly basis.  Thedetermination of the estimated cost of claims is based upon a number offactors, including but not limited to actuarial calculations, current andhistorical loss trends, the number of open claims, development related toactual claims incurred  and the impact ofacquisitions, if any. A significant amount of judgment is used in thisestimation process by the Company.

 

TheCompany’sconsolidated financial statements reflect the estimates made by the Company aswell as other factors related to the Company’s workers’ compensation programswithin the cost of services on the Company’s consolidated statements ofoperations and within the workers’ compensation receivable, the accruedinsurance premiums and health reserves or the other long-term liabilities onthe Company’s consolidated balance sheets. Gevity accounts for its workers’compensation insurance contracts with AIG as follows:

 

·      Premiums for claims in excess of thedeductible layer are expensed ratably during the policy year.

 

·      Administrative costs of the program(including claims administration, state taxes and surcharges) are determinedand expensed quarterly.

 

·      Gevity’s estimate of its ultimate claimliability to AIG CI for claims that fall within the policy year deductible,calculated on a net present value basis, is determined and expensed quarterly.

 

·      The return on investments earned withrespect to the loss fund collateral held by AIG CI under the insuranceagreements is determined and recorded quarterly as a reduction of workers’ compensationexpense.

 

·      The balance in the loss fund collateralaccounts held by AIG CI (including interest earned) in excess of the netpresent value of the Company’s liability to AIG CI with respect to claimspayable within the deductible layer is recorded as a workers’ compensationreceivable.

 

·      Returns of loss fund collateral depositsare recorded as reductions to the workers’ compensation receivable.

 

If the actual costof the claims incurred is higher than the estimates of its ultimate claimliability to AIG CI determined by the Company then the accrual rate used todetermine workers’ compensation costs could increase. If the actual cost of theclaims incurred is lower than the estimates of its ultimate claim liability toAIG CI determined by the Company, then the accrual rate used to determineworkers’ compensation costs could decrease. An increase or decrease to theaccrual rate is reflected in the accounting period for which the change in theamount of workers’ compensation claims is estimated. Due to the considerablevariability in the estimate of the amount of workers’ compensation claims,adjustments to workers’ compensation costs are sometimes significant. Forexample, a 1% change in overall ultimate claims liability estimate for claimsunder the Company’s deductible levels with no other changes in assumptionswould have impacted the net present value of the claims liability and workers’compensation cost as of December 31, 2008 by approximately$4.0 million.

 

During 2008 and2007, the Company, in conjunction with its quarterly reviews of its ultimateclaim liability estimates, revised its previous loss estimates for prior policyyears in recognition of the continued favorable claim development trends thatoccurred during each year. This revision of prior year loss estimates resultedin a total of $19.6 million and $19.8 million in 2008 and 2007,respectively, in favorable adjustments to costs of services and workers’compensation receivable.

 

The following lossreserve development table illustrates the change over time of reservesestablished for workers’ compensation claims for each of the open policy years.This table excludes the 2000 program year for the Texas Workers’ CompensationInsurance Fund, which was a guaranteed cost program under which all of theclaims were paid by the insurance company without any deductible payment by theCompany. The second section, reading down, shows the number of claims reported.The third section, reading down, shows the number of open claims as of the endof each successive year. The fourth section, reading down, shows the amount ofopen case reserves as of the end of each successive year. The fifth section,reading down, shows the cumulative amounts paid as of the end of successiveyears with respect to the ultimate claim liability estimates. The last section,reading down, shows re-estimates of the originally recorded ultimate claimliability estimates as of the end of each successive year, which is the resultof the Company’s expanded awareness of additional facts and circumstances thatpertain to the unsettled claims. The loss reserve development table for workers’compensation claims is cumulative and, therefore, ending balances should not beadded since the amount at the end of each calendar year includes activity forboth the current and prior years.

 

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|                                                                                                                               |       | **Years Ended December 31,** |       |
|------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| **Policy Year**                                                                                                               | ** ** | **2008**                                    | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** |
|                                                                                                                               |       | **(Dollars in thousands)**        |       |
| Originally reported ultimate loss estimates for  claims and claims expenses limited to the Company’s liability per occurrence |       | $                                           | 38,500     |   | $ | 47,800 |   | $ | 60,500 |   | $ | 64,000 |   | $ | 73,000 |   | $ | 65,000 |   | $ | 76,200 |   | $ | 103,000 |   | $ | 109,000 |   |
| Number of claims reported as of:                                                                                                   |       |                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| End of initial year                                                                                                                |       | 3,388                                       |       | 4,590 |   | 5,820 |   | 6,232 |   | 6,489 |   | 5,765 |   | 7,701 |   | 10,195 |   | 11,888 |   |
| One year later                                                                                                                     |       | —                                      |       | 4,698 |   | 5,953 |   | 6,420 |   | 6,665 |   | 5,916 |   | 7,856 |   | 10,475 |   | 12,088 |   |
| Two years later                                                                                                                    |       | —                                      |       | — |   | 5,969 |   | 6,432 |   | 6,679 |   | 5,961 |   | 7,873 |   | 10,495 |   | 12,114 |   |
| Three years later                                                                                                                  |       | —                                      |       | — |   | — |   | 6,434 |   | 6,680 |   | 5,964 |   | 7,872 |   | 10,500 |   | 12,118 |   |
| Four years later                                                                                                                   |       | —                                      |       | — |   | — |   | — |   | 6,681 |   | 5,963 |   | 7,873 |   | 10,500 |   | 12,119 |   |
| Five years later                                                                                                                   |       | —                                      |       | — |   | — |   | — |   | — |   | 5,965 |   | 7,873 |   | 10,500 |   | 12,119 |   |
| Six years later                                                                                                                    |       | —                                      |       | — |   | — |   | — |   | — |   | — |   | 7,784 |   | 10,500 |   | 12,119 |   |
| Seven years later                                                                                                                  |       | —                                      |       | — |   | — |   | — |   | — |   | — |   | — |   | 10,500 |   | 12,119 |   |
| Eight years later                                                                                                                  |       | —                                      |       | — |   | — |   | — |   | — |   | — |   | — |   | — |   | 12,118 |   |
| Number of open claims reported as of:                                                                                              |       |                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| End of initial year                                                                                                                |       | 774                                         |       | 1,162 |   | 1,474 |   | 1,628 |   | 2,045 |   | 1,604 |   | 1,632 |   | 2,632 |   | 3,077 |   |
| One year later                                                                                                                     |       | —                                      |       | 220 |   | 265 |   | 329 |   | 388 |   | 333 |   | 462 |   | 791 |   | 965 |   |
| Two years later                                                                                                                    |       | —                                      |       | — |   | 124 |   | 131 |   | 174 |   | 121 |   | 251 |   | 286 |   | 532 |   |
| Three years later                                                                                                                  |       | —                                      |       | — |   | — |   | 79 |   | 88 |   | 57 |   | 126 |   | 156 |   | 148 |   |
| Four years later                                                                                                                   |       | —                                      |       | — |   | — |   | — |   | 46 |   | 36 |   | 84 |   | 84 |   | 84 |   |
| Five years later                                                                                                                   |       | —                                      |       | — |   | — |   | — |   | — |   | 19 |   | 55 |   | 59 |   | 54 |   |
| Six years later                                                                                                                    |       | —                                      |       | — |   | — |   | — |   | — |   | — |   | 37 |   | 47 |   | 36 |   |
| Seven years later                                                                                                                  |       | —                                      |       | — |   | — |   | — |   | — |   | — |   | — |   | 32 |   | 27 |   |
| Eight years later                                                                                                                  |       | —                                      |       | — |   | — |   | — |   | — |   | — |   | — |   | — |   | 19 |   |
| Insurance carrier open case reserve amount as of:                                                                                  |       |                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| End of initial year                                                                                                                |       | $                                           | 9,010      |   | $ | 13,029 |   | $ | 13,997 |   | $ | 15,028 |   | $ | 15,339 |   | $ | 12,444 |   | $ | 15,272 |   | $ | 23,087 |   | $ | 22,315 |   |
| One year later                                                                                                                     |       | —                                      |       | $ | 6,862 |   | $ | 7,480 |   | $ | 10,079 |   | $ | 10,825 |   | $ | 9,253 |   | $ | 11,249 |   | $ | 14,086 |   | $ | 16,796 |   |
| Two years later                                                                                                                    |       | —                                      |       | — |   | $ | 3,373 |   | $ | 3,888 |   | $ | 5,902 |   | $ | 4,381 |   | $ | 6,579 |   | $ | 8,223 |   | $ | 12,105 |   |
| Three years later                                                                                                                  |       | —                                      |       | — |   | — |   | $ | 2,747 |   | $ | 3,783 |   | $ | 2,534 |   | $ | 4,697 |   | $ | 4,814 |   | $ | 5,533 |   |
| Four years later                                                                                                                   |       | —                                      |       | — |   | — |   | — |   | $ | 2,376 |   | $ | 1,613 |   | $ | 4,249 |   | $ | 2,960 |   | $ | 3,639 |   |
| Five years later                                                                                                                   |       | —                                      |       | — |   | — |   | — |   | — |   | $ | 777 |   | $ | 2,349 |   | $ | 4,225 |   | $ | 2,665 |   |
| Six years later                                                                                                                    |       | —                                      |       | — |   | — |   | — |   | — |   | — |   | $ | 2,239 |   | $ | 3,203 |   | $ | 2,629 |   |
| Seven years later                                                                                                                  |       | —                                      |       | — |   | — |   | — |   | — |   | — |   | — |   | $ | 1,866 |   | $ | 2,025 |   |
| Eight years later                                                                                                                  |       | —                                      |       | — |   | — |   | — |   | — |   | — |   | — |   | — |   | $ | 1,623 |   |
| Cumulative net paid claims by insurance carrier as  of:                                                                            |       |                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| End of initial year                                                                                                                |       | $                                           | 9,609      |   | $ | 10,837 |   | $ | 14,162 |   | $ | 14,647 |   | $ | 13,876 |   | $ | 14,502 |   | $ | 16,859 |   | $ | 21,345 |   | $ | 22,688 |   |
| One year later                                                                                                                     |       | —                                      |       | $ | 23,226 |   | $ | 28,778 |   | $ | 29,328 |   | $ | 31,488 |   | $ | 30,790 |   | $ | 38,006 |   | $ | 47,461 |   | $ | 50,524 |   |
| Two years later                                                                                                                    |       | —                                      |       | — |   | $ | 34,819 |   | $ | 38,118 |   | $ | 40,010 |   | $ | 40,343 |   | $ | 50,182 |   | $ | 65,925 |   | $ | 69,251 |   |
| Three years later                                                                                                                  |       | —                                      |       | — |   | — |   | $ | 40,664 |   | $ | 44,402 |   | $ | 43,221 |   | $ | 56,292 |   | $ | 72,457 |   | $ | 81,033 |   |
| Four years later                                                                                                                   |       | —                                      |       | — |   | — |   | — |   | $ | 46,467 |   | $ | 45,086 |   | $ | 59,056 |   | $ | 76,740 |   | $ | 85,241 |   |
| Five years later                                                                                                                   |       | —                                      |       | — |   | — |   | — |   | — |   | $ | 46,055 |   | $ | 60,727 |   | $ | 78,217 |   | $ | 88,084 |   |
| Six years later                                                                                                                    |       | —                                      |       | — |   | — |   | — |   | — |   | — |   | $ | 62,366 |   | $ | 79,475 |   | $ | 89,274 |   |
| Seven years later                                                                                                                  |       | —                                      |       | — |   | — |   | — |   | — |   | — |   | — |   | $ | 81,086 |   | $ | 90,419 |   |
| Eight years later                                                                                                                  |       | —                                      |       | — |   | — |   | — |   | — |   | — |   | — |   | — |   | $ | 91,200 |   |
| Undiscounted ultimate loss estimates re-estimated as  of:                                                                          |       |                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| End of initial year                                                                                                                |       | $                                           | 38,500     |   | $ | 47,800 |   | $ | 60,500 |   | $ | 64,000 |   | $ | 73,000 |   | $ | 65,000 |   | $ | 76,200 |   | $ | 103,000 |   | $ | 109,000 |   |
| One year later                                                                                                                     |       | —                                      |       | $ | 42,600 |   | $ | 54,700 |   | $ | 58,500 |   | $ | 63,000 |   | $ | 63,000 |   | $ | 78,000 |   | $ | 98,000 |   | $ | 109,000 |   |
| Two years later                                                                                                                    |       | —                                      |       | — |   | $ | 47,000 |   | $ | 52,700 |   | $ | 56,700 |   | $ | 56,000 |   | $ | 71,000 |   | $ | 99,000 |   | $ | 108,400 |   |
| Three years later                                                                                                                  |       | —                                      |       | — |   | — |   | $ | 48,000 |   | $ | 53,500 |   | $ | 51,600 |   | $ | 69,000 |   | $ | 93,000 |   | $ | 105,000 |   |
| Four years later                                                                                                                   |       | —                                      |       | — |   | — |   | — |   | $ | 52,100 |   | $ | 49,400 |   | $ | 69,000 |   | $ | 90,000 |   | $ | 104,000 |   |
| Five years later                                                                                                                   |       | —                                      |       | — |   | — |   | — |   | — |   | $ | 48,100 |   | $ | 66,000 |   | $ | 86,900 |   | $ | 100,000 |   |
| Six years later                                                                                                                    |       | —                                      |       | — |   | — |   | — |   | — |   | — |   | $ | 66,200 |   | $ | 85,100 |   | $ | 95,600 |   |
| Seven years later                                                                                                                  |       | —                                      |       | — |   | — |   | — |   | — |   | — |   | — |   | $ | 84,500 |   | $ | 93,800 |   |
| Eight years later                                                                                                                  |       | —                                      |       | — |   | — |   | — |   | — |   | — |   | — |   | — |   | $ | 93,300 |   |

 

The followingtable summarizes the components of the workers’ compensation receivable, net,for the open policy years as of December 31, 2008. Policy years 2000through 2002 have been combined to reflect the additional insurance coveragepurchased from AIG CI during 2004 with respect to those policy years andinclude the premium payment and claim activity with both AIG CI and CNA:

 

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| ** **                                                                | ** ** | **For the Policy Years Ended December 31,** | ** ** | ** ** | ** ** |
|---------------------------------------------------------------------------|------------|---------------------------------------------------------------------------|------------|------------|------------|
| ** **                                                                | ** ** | **2008**                                                                  | ** ** | **2007**   | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2000-2002** | ** ** | **Total** | ** ** |
| ** **                                                                | ** ** | **(In thousands)**                                                   | ** ** |
| Initial loss fund collateral payments to carriers  (1)                    |       | $                                                                         | 41,652     |       | $          | 66,500 |   | $ | 90,000 |   | $ | 100,000 |   | $ | 111,402 |   | $ | 85,000 |   | $ | 293,720 |   | $ | 788,274 |   |
| Loss fund collateral refunds received                                     |       | —                                                                    |       | (13,467    | )          | (40,217 | ) | (51,245 | ) | (60,142 | ) | (29,378 | ) | (5,500 | ) | (199,949 | ) |
| Net loss fund collateral held by carriers                                 |       | 41,652                                                                    |       | 53,033     |       | 49,783 |   | 48,755 |   | 51,260 |   | 55,622 |   | 288,220 |   | 588,325 |   |
| Claims paid by insurance carrier                                          |       | (9,609                                                                    | )          | (23,226    | )          | (34,819 | ) | (40,664 | ) | (46,467 | ) | (46,055 | ) | (234,652 | ) | (435,492 | ) |
| Estimated future claims covered by loss fund  collateral                  |       | (28,891                                                                   | )          | (19,374    | )          | (12,181 | ) | (7,336 | ) | (5,633 | ) | (2,045 | ) | (9,348 | ) | (84,808 | ) |
| Total estimated ultimate claim liability                                  |       | (38,500                                                                   | )          | (42,600    | )          | (47,000 | ) | (48,000 | ) | (52,100 | ) | (48,100 | ) | (244,000 | ) | (520,300 | ) |
| Reinsurance reimbursement                                                 |       | —                                                                    |       | —     |       | — |   | (178 | ) | — |   | — |   | — |   | (178 | ) |
| Discount on future claim payments                                         |       | 1,766                                                                     |       | 1,772      |       | 1,125 |   | 670 |   | 435 |   | 187 |   | 1,026 |   | 6,981 |   |
| Estimated premium expense refunds due (payable)                           |       | 2,441                                                                     |       | (61        | )          | 363 |   | 414 |   | 336 |   | 118 |   | 161 |   | 3,772 |   |
| Accrued interest receivable on loss fund collateral  payments             |       | 784                                                                       |       | 4,001      |       | 5,608 |   | 6,201 |   | 5,982 |   | 4,903 |   | 9,254 |   | 36,733 |   |
| Workers’ compensation receivable, net, as of  December 31, 2008 |       | $                                                                         | 8,143      |       | $          | 16,145 |   | $ | 9,879 |   | $ | 7,862 |   | $ | 5,913 |   | $ | 12,730 |   | $ | 54,661 |   | $ | 115,333 |   |

 

----

(1)          Representsinitial premium/collateral payments to carriers for the deductible portion ofthe Company’s workers’ compensation program. See discussion under “Item 1.Business — Vendor Relationships — Workers’ Compensation Insurance” regardingthe AIG CI deferral of the fourth quarter 2008 loss fund collateral paymentsfor the 2008 policy year.

 

The AIG CI workers’compensation insurance program provides for a return to the Company of excess premiumspaid eighteen months after the beginning of each program year and annuallythereafter. The adjustment amount is determined by applying a loss developmentfactor to the incurred losses based upon actual claims incurred during theprogram year and comparing that amount to actual premiums paid for the programyear. The Company expects to receive approximately $51.9  million, during2009. All other estimated premium/collateral return is expected to belong-term.

 

**IntangibleAssets**

 

The Company hasrecorded significant intangible assets as a result of acquisitions. Theintangible assets related to the client service agreements acquired wereinitially valued with the assistance of a third party, are considered to have afinite life, and are being amortized straight-line over a 5-year period basedupon the estimated rate of client attrition. The original estimate of clientattrition was based upon the previous experience of the Company. The Companyreviews the remaining life of the intangible assets periodically and reviewsfor impairment if events and circumstances warrant. Changes to the estimatedeconomic life, if any, may result in an increase in amortization expense thatmay be significant.

 

Goodwill is testedfor impairment annually and between annual tests if an event occurs orcircumstances change that would indicate the carrying amount may be impaired. During the fourth quarter of 2008, theCompany’s market capitalization dropped below the net book value of itsequity.  In addition, forecasted cash flowsdecreased reflecting continued deterioration of macroeconomic conditions whichaccelerated and became apparent during the fourth quarter of 2008.  As a result and in connection with theCompany’s annual test for goodwill impairment, the Company determined that thefair value of the Company was less than its carrying value and that the impliedfair value of the goodwill was zero. Accordingly, the Company recorded agoodwill impairment loss of $8.7 million which eliminated goodwill in itsentirety. The fair value of the Company was based on a combination ofthe discounted cash flow method, the guideline company method, and the similartransaction method. In conjunction with the goodwill impairment testing, theCompany analyzed the valuation of its other long-lived and intangible assets(including deferred tax assets) and, based upon the weighted probability ofalternative scenarios that existed as of December 31, 2008, concluded thatthe carrying value of long-lived assets was recoverable and that no otherimpairments or valuation allowances were required.

 

**MedicalBenefit Plan Liabilities**

 

The Companyprovides medical benefit plans to its client employees through several medicalbenefit plan providers; under a minimum premium plan with BCBSF/HOI and guaranteecost contracts for all other plans.

 

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With respect tothe medical benefit plans with BCBSF/HOI, the Company establishes medicalbenefit plan liabilities for benefit claims that have been reported but notpaid and claims that have been incurred but not reported. These reserves aredetermined quarterly by the Company based upon a number of factors, includingbut not limited to actuarial calculations, current and historical claim paymentpatterns, plan enrollment and medical trend.

 

For each period,the Company estimates the relevant factors, based primarily on historical dataand uses this information to determine the assumptions underlying the reservecalculations. An extensive degree of judgment is used in this estimationprocess. Due to the considerable variability of health care costs, adjustmentsto health reserves are sometimes significant. For example, an increase(decrease) in the margin factor used to calculate claims incurred but notreported by 0.5% at December 31, 2008, would have resulted in an increase(decrease) in the incurred but not reported claim reserve of approximately$0.6 million.

 

During the yearended December 31, 2008, the Company recorded a net health plan surplus of$6.0 million that decreased its cost of services and reserves for incurred butnot reported claims. During the year ended December 31, 2007, the Companyrecorded a net health plan surplus of $3.1 million that decreased its costof services and reserves for incurred but not reported claims.

 

The followingtable provides the amount of the medical benefit plan liabilities for benefitclaims that have been reported but not paid and claims that have been incurredbut not reported (in thousands):

 
| ** **                             | ** ** | **Year Ended  December 31,** | ** ** |
|----------------------------------------|------------|----------------------------------------|------------|
| ** **                             | ** ** | **2008**                               | ** ** | **2007** | ** ** |
| Incurred but not reported claims       |       | $                                      | 9,491      |   | $ | 10,100 |   |
| Other health plan liabilities          |       | 638                                    |       | 256 |   |
| Total medical benefit plan liabilities |       | $                                      | 10,129     |   | $ | 10,356 |   |

 

If the actualamount of the Company’s medical benefit plan liabilities at the end of eachperiod were to increase (decrease) from the estimates used by the Company, thenthe Company would have an increase in the amount of its future period healthbenefit subsidy (surplus).

 

The Company’sconsolidated financial statements reflect the estimates made with respect tomedical benefit plan liabilities within the cost of services on the Company’sconsolidated statement of operations and within the accrued insurance premiumsand health reserves on the company’s consolidated balance sheet.

 

**StateUnemployment Taxes**

 

The Companyrecords state unemployment tax expense based upon taxable wages and tax ratesas determined by each state. State unemployment rates vary by state and arebased, in part, on past claims experience. If the Company’s claims experienceincreases, its rates could increase. Additionally, states have the ability toincrease unemployment tax rates to cover deficiencies in the state’s unemploymenttax fund. As a result, our unemployment tax rates have increased over the lastseveral years and are expected to continue to increase. Some states haveimplemented retroactive rate increases. These increases cannot always bepredicted. Contractual arrangements with the Company’s clients may limit itsability to pass through these rate increases. Retroactive rate increases thatthe Company determines not to pass on to its clients could have a materialadverse effect on the Company’s financial position and results of operations.

 

***California Unemployment TaxAssessment***

 

In May of 2007, the Company received a Notice of Assessment fromthe State of California Employment Development Department (“EDD”) relative tothe Company’s practice of reporting payroll for itssubsidiaries under multiple employer account numbers.  The notice stated that the EDD was collapsingthe accounts of the Company’s subsidiaries into one account number forpayroll reporting purposes and retroactively reassessed unemployment taxes due at a higher overall rate for the 2004-2006 taxyears resulting in an assessment of $4.7 million.  On May 30, 2007, the Companyfiled a petition with the Office of the Chief Administrative Law Judge for theCalifornia Unemployment Insurance Appeals Board askingthat the EDD’s assessment be set aside. The petition contends in partthat the EDD has exceeded the scope of its authority in issuing the assessmentby failing to comply with its own mandatory procedural requirements and thatthe statute of limitations for issuing the assessmentshas expired as the Company’s activities within the state were compliantwith California statutes and regulations.

 

The Company andthe State of California entered into negotiations in May 2008 in anattempt to resolve the dispute.  As a result, Gevity proposed a settlementoffer in June 2008 that included a cash payment offer of $1.2 million,conceding to the State’s higher 

 

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overall unemployment taxrate for tax years 2007 – 2008, along with revisions to its unemployment taxreporting methods for post 2008 tax years in consideration for the State’swithdrawal of the existing assessment for 2004 - 2006 (the “ Settlement Offer”). The Settlement Offer is currently under review by the State.  The Company’sfinancial statements for the year ended December 31, 2008 reflect a chargeof $1.2 million within cost of services, reflecting estimated amounts due inconnection with additional unemployment tax costs for the term January 1,2007 - December 31, 2008, should the State of California accept theSettlement Offer.  In the event that theCompany is not able to reach a settlement with the State of California, theCompany believes it has valid defenses regarding the assessments and willvigorously challenge the assessments.

 

**Allowancefor Doubtful Accounts**

 

The Companymaintains an allowance for doubtful accounts for estimated losses resultingfrom the inability of its clients to pay their fees. The Company believes thatthe success of its business is heavily dependent on its ability to collectthese fees for several reasons including the following:

 

·         the Company is at riskfor the payment of its direct costs and client employee payroll costsregardless of whether the clients pay their fees;

 

·         the large volume anddollar amount of transactions processed by the Company; and

 

·         the periodic andrecurring nature of payroll, upon which the fees are based.

 

The Company hasestablished credit policies and generally requires its clients to pay inadvance or simultaneously with the delivery of its payroll. In addition, theCompany maintains the right to immediately terminate the professional servicesagreement and associated client employees or to require prepayment, letters ofcredit or other collateral upon deterioration of a client’s financial positionor upon nonpayment by a client. As a result of the Company’s strict creditpolicies, customer nonpayments historically have been low as a percentage ofrevenues (see “Schedule II - Valuation and Qualifying Accounts -Allowance for Doubtful Accounts” on page S-1). If the financial conditionof the Company’s clients were to deteriorate rapidly, resulting in non-payment,the Company’s uncollected accounts receivable could increase rapidly and theCompany could be required to provide for additional allowances.

 

**DeferredTaxes**

 

The Companyrecognizes deferred tax assets and liabilities based on the differences betweenthe financial statement carrying amounts and the tax bases of its assets andliabilities. The Company regularly reviews its deferred tax assets forrecoverability and, if necessary, establishes a valuation allowance. TheCompany considers future market growth, forecasted earnings, future taxableincome, the mix of earnings in the jurisdictions in which the Company operates,and prudent and feasible tax planning strategies in determining the need for avaluation allowance. The Company calculates the current and deferred taxprovision based on estimates and assumptions that could differ from the actualresults reflected in income tax returns filed during the subsequent year.Adjustments based on filed returns are recorded when identified, which isgenerally in the fourth quarter of the subsequent year for U.S. federal andstate provisions. If the Company were to operate at a loss or is unable togenerate sufficient future taxable income, or if there is a material change inthe actual effective tax rates or time period within which the underlyingtemporary differences become taxable or deductible, then the Company could berequired to establish a valuation allowance against all or a significantportion of the deferred tax assets, resulting in a substantial increase in theCompany’s effective tax rate. During the year ended December 31, 2007, theCompany determined that it is more likely than not that the deferred tax assetsrelated to certain state net operating loss carryforwards will not be realized.As such, at December 31, 2007, the Company established a valuationallowance of $1,304 against those certain state net operating losscarryforwards. This valuation allowance decreased by $367 during 2008 due todifferences in the actual generation and utilization of state net operatinglosses based on the Company’s 2007 tax return filing positions and increased by$116 for additional projected state net operating losses generated in 2008 thatare not expected to be realized.  If itis later determined that it is more likely than not that the net deferred taxassets would be realized, the applicable portion of the previously providedvaluation allowance will be reversed.

 

The Company adopted the provisions of FinancialAccounting Standards Board (“FASB”) Interpretation No. 48, *Accounting for Uncertainty in Income Taxes*— *An Interpretation of FASB Statement No. 109*(“FIN 48”), on January 1, 2007. FIN 48 clarifies the accountingfor uncertainty in tax positions and requires companies to determine whether itis “more likely than not” that a tax position will be sustained uponexamination by the appropriate taxing authorities before any part of thebenefit can be recorded in the financial statements. It also provides guidanceon the recognition, measurement and classification of income tax uncertainties,along with any related interest and penalties. As of December 31, 2008,the Company has recorded $9.8 million (including interest) of unrecognized taxbenefits ($2.1 million relating to the methodology used to determine stateapportionment of income and $7.7 million related to a proposed IRS adjustmentidentified during the current IRS examination).

 

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On March 11, 2009, in connection with an ongoingexamination of the Company’s U.S. income tax returns for 2002 through 2004, theCompany received Notices of Proposed Adjustment from the Internal RevenueService (“IRS”) advising it of proposed increases to its federal income tax ofapproximately $41.9 million including penalties. Of this amount, theCompany has previously reserved $6.9 million of federal income taxes in itsconsolidated financial statements in accordance with the provisions of FIN48.  The Company believes that theremaining proposed adjustments are either the result of the IRSmisunderstanding the facts relating to the adjustments or the result of a legalinterpretation made by the IRS that is inconsistent with existing law.  The Company intends to vigorously contestthese adjustments and believes that it will ultimately prevail.  Although the ultimate outcome of the disputewith the IRS cannot be predicted with certainty, the Company believes thatadequate provision for taxes has been made in its consolidated financialstatements for any reasonably foreseeable outcome related to these proposedadjustments.   Consequently, the Companybelieves that ultimate resolution of this matter is unlikely to have a materialadverse effect on its financial condition or results of operations.

 

**Stock-BasedCompensation**

 

The Company adopted SFAS No. 123R in January of 2006.  SFAS123R requires that the cost of employee share-based payments be measured atfair value on the awards’ grant date and, for those awards expected to vest,recognized in the financial statements over the requisite service period. TheCompany estimates the fair value of stock option awards on the date of grantutilizing the  Black-Scholes optionpricing model and estimates the fair value of non-vested share awards with amarket-based vesting condition using the Monte Carlo simulation model. TheBlack-Scholes option valuation model was developed for use in estimating thefair value of short-term traded options that have no vesting restrictions andare fully transferable. However, certain assumptions used in the Black-Scholesmodel, such as expected term, can be adjusted to incorporate the uniquecharacteristics of the Company’s stock option awards. Option valuation modelsrequire the input of somewhat subjective assumptions including expected stockprice volatility and expected term. The Company believes it is unlikely thatmaterially different estimates for the assumptions used in estimating the fairvalue of stock options granted would be made based on the conditions suggestedby actual historical experience and other data available at the time estimateswere made. Restricted stock awards are valued at the price of our common stockon the date of the grant. The Company utilizes judgment in the determination ofexpected forfeiture rates in its estimate of those share awards expected tovest.  The forfeiture rates are adjustedas necessary based upon actual forfeiture experience.

 

**NEWACCOUNTING PRONOUNCEMENTS**

 

See Note 1 ofnotes to the consolidated financial statements beginning on page F-1 ofthis report for a discussion of new accounting pronouncements.

 

**ITEM 7A.*  QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISK***

 

The Company issubject to market risk from exposure to changes in interest rates based on itsinvesting and cash management activities. The Company currently utilizes moneymarket funds  and has in the pastutilized U.S. government agency and other corporate debt with fixed ratesand maturities of less than one year to manage its exposures to interest rates.See Note 3 to the consolidated financial statements beginning on page F-1.The Company holds restricted collateral with respect to its insurance programsprovided by the member insurance companies of AIG, which are currently investedin money market funds and are therefore not significantly exposed to interestrate risk. If interest rates change, the interest income with respect to theseinvestments would ultimately be affected. The insurance premiums paid to AIGunder its workers’ compensation insurance program earn a fixed rate of returnand are not subject to market risk from changes in interest rates (seeNote 5 to the consolidated financial statements beginning on page F-1).The Company does not expect changes in interest rates to have a material effecton income or cash flows in 2009, although there can be no assurances thatinterest rates will not change.

 

**ITEM 8.*  FINANCIAL STATEMENTS AND SUPPLEMENTARYDATA***

 

The informationrequired by this Item 8 is contained in a separate section of this report.See “Index to Consolidated Financial Statements and Financial StatementSchedule” beginning on page F-1.

 

**ITEM 9.*  CHANGES IN AND DISAGREEMENTS WITHACCOUNTANTS ON ACCOUNTING AND******FINANCIAL DISCLOSURE***

 

None.

 

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**ITEM 9A.*  CONTROLS AND PROCEDURES***

 

**Evaluationof Disclosure Controls and Procedures; Changes in Internal Control over****Financial Reporting**

 

As of the end ofthe period covered by this Form 10-K, the Company’s management, includingthe Chief Executive Officer and the Chief Financial Officer, conducted anevaluation of the effectiveness of the design and operation of the Company’sdisclosure controls and procedures pursuant to Rule 13a-15 of the ExchangeAct. Any controls and procedures, no matter how well designed and operated, canprovide only reasonable assurance of achieving the desired objectives. Basedupon that evaluation and subject to the foregoing, the Company’s management,including the Company’s Chief Executive Officer and the Chief FinancialOfficer, concluded that the design and operation of the Company’s disclosurecontrols and procedures provided reasonable assurance that the disclosurecontrols and procedures are effective to accomplish their objectives.

 

During the quarterended December 31, 2008, there were no other changes in internal controlover financial reporting that have materially affected or are reasonably likelyto affect the Company’s internal control over financial reporting.

 

**Management’sReport On Internal Control Over Financial Reporting**

 

The management ofthe Company is responsible for establishing and maintaining adequate internalcontrol over financial reporting as defined in Rules 13a-15(f) and15d-15(f) promulgated under the Exchange Act. The Company’s internalcontrol over financial reporting is a process designed by, or under thesupervision of, the Company’s principal executive and principal financialofficers and effected by the Company’s board of directors, management and otherpersonnel, to provide reasonable assurance regarding the reliability offinancial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles in theUnited States. Internal control over financial reporting includes thosepolicies and procedures that:

 

·         pertain to themaintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of assets of the Company;

 

·         provide reasonableassurance that transactions are recorded as necessary to permit preparation offinancial statements in accordance with generally accepted accountingprinciples;

 

·         provide reasonableassurance that receipts and expenditures of the Company are being made only inaccordance with authorizations of management and directors of theCompany; and

 

·         provide reasonableassurance regarding prevention or timely detection of unauthorized acquisition,use or disposition of the Company’s assets that could have a material effect onthe financial statements.

 

Because of itsinherent limitations, internal control over financial reporting may not preventor detect misstatements. Also, projections of any evaluation of effectivenessto future periods are subject to the risk that controls may become inadequatebecause of changes in conditions, or that the degree of compliance with thepolicies or procedures may deteriorate.

 

The Company’smanagement assessed the effectiveness of the Company’s internal control overfinancial reporting as of December 31, 2008. In making this assessment,the Company’s management used the criteria set forth by the Committee ofSponsoring Organizations of the Treadway Commission (COSO) in InternalControl-Integrated Framework. Based on the assessment, management determinedthat as of December 31, 2008, the Company’s internal control overfinancial reporting was effective based upon those criteria.

 

Management’sassessment of the effectiveness of the Company’s internal control overfinancial reporting as of December 31, 2008 has been audited by Deloitte &Touche LLP, an independent registered public accounting firm, which alsoaudited the Company’s consolidated financial statements. Deloitte &Touche LLP’s attestation report on management’s assessment of internal controlover financial reporting is presented below.

 

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REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To theBoard of Directors and Stockholders ofGevity HR, Inc.Bradenton, Florida

 

Wehave audited the internal control over financial reporting of Gevity HR, Inc.and subsidiaries (the “Company”) as of December 31, 2008, based oncriteria established in *Internal Control —Integrated Framework*issued by the Committee of SponsoringOrganizations of the Treadway Commission. The Company’s management isresponsible for maintaining effective internal control over financial reportingand for its assessment of the effectiveness of internal control over financialreporting, included in the accompanying Management’s Report on Internal Controlover Financial Reporting. Our responsibility is to express an opinion on theCompany’s internal control over financial reporting based on our audit.

 

Weconducted our audit in accordance with the standards of the Public CompanyAccounting Oversight Board (United States).  Those standards require thatwe plan and perform the audit to obtain reasonable assurance about whethereffective internal control over financial reporting was maintained in allmaterial respects.  Our audit included obtaining an understanding ofinternal control over financial reporting, assessing the risk that a materialweakness exists, testing and evaluating the design and operating effectivenessof internal control based on the assessed risk, and performing such otherprocedures as we considered necessary in the circumstances.  We believethat our audit provides a reasonable basis for our opinion.

 

Acompany’s internal control over financial reporting is a process designed by,or under the supervision of, the company’s principal executive and principalfinancial officers, or persons performing similar functions, and effected bythe company’s board of directors, management, and other personnel to providereasonable assurance regarding the reliability of financial reporting and thepreparation of financial statements for external purposes in accordance withgenerally accepted accounting principles.  A company’s internal controlover financial reporting includes those policies and procedures that (1) pertainto the maintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (2) providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally acceptedaccounting principles, and that receipts and expenditures of the company arebeing made only in accordance with authorizations of management and directorsof the company; and (3) provide reasonable assurance regarding preventionor timely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

 

Becauseof the inherent limitations of internal control over financial reporting,including the possibility of collusion or improper management override ofcontrols, material misstatements due to error or fraud may not be prevented ordetected on a timely basis.  Also, projections of any evaluation of theeffectiveness of the internal control over financial reporting to futureperiods are subject to the risk that the controls may become inadequate becauseof changes in conditions, or that the degree of compliance with the policies orprocedures may deteriorate.

 

In ouropinion, the Company maintained, in all material respects, effective internalcontrol over financial reporting as of December 31, 2008, based on thecriteria established in *Internal Control —Integrated Framework*issued by the Committee of SponsoringOrganizations of the Treadway Commission.

 

We havealso audited, in accordance with the standards of the Public Company AccountingOversight Board (United States), the consolidated financial statements andfinancial statement schedule as of andfor the year ended December 31, 2008 of the Company and our report dated March 16,2009 expressed an unqualified opinion on those financial statements andfinancial statement schedule.

 

/s/ Deloitte & Touche LLP

 

CertifiedPublic Accountants

Tampa,FloridaMarch 16, 2009

 

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**ITEM 9B.*  OTHER INFORMATION***

 

None.

 

**PART III.**

** **

**ITEM 10.*  DIRECTORS, EXECUTIVE OFFICERS ANDCORPORATE GOVERNANCE***

 

Informationrequired by this Item 10 regarding the Company’s executive officers isincluded under “Item 1. Business - Executive Officers of theRegistrant.” Other information required by this Item 10 will be containedin the Company’s proxy statement relating to the 2009 Annual Meeting of Shareholders,in which case it is hereby incorporated by reference in this Annual Report on Form 10-K,or in an amendment to this Form 10-K.

 

**ITEM 11.*  EXECUTIVE COMPENSATION***

 

The informationrequired by this Item 11 will be contained in the Company’s proxy statementrelating to the 2009 Annual Meeting of Shareholders, in which case it is herebyincorporated by reference in this Annual Report on Form 10-K, or in anamendment to this Form 10-K.

 

**ITEM 12.*  SECURITY OWNERSHIP OF CERTAIN BENEFICIALOWNERS AND MANAGEMENT******AND RELATED STOCKHOLDER MATTERS***

 

The informationrequired by this Item 12 will be contained in the Company’s proxystatement relating to the 2009 Annual Meeting of Shareholders, in which case ishereby incorporated by reference in this Annual Report on Form 10-K, or inan amendment to this Form 10-K.

 

**ITEM 13.*  CERTAIN RELATIONSHIPS AND RELATEDTRANSACTIONS, AND DIRECTOR******INDEPENDENCE***

 

The informationrequired by this Item 13 will be contained in the Company’s proxystatement relating to the 2009 Annual Meeting of Shareholders, in which case itis hereby incorporated by reference in this Annual Report on Form 10-K, orin an amendment to this Form 10-K.

 

**ITEM 14.*  PRINCIPAL ACCOUNTING FEES AND SERVICES***

 

The informationrequired by this Item 14 will be contained in the Company’s proxystatement relating to the 2009 Annual Meeting of Shareholders, in which case itis hereby incorporated by reference in this Annual Report on Form 10-K, orin an amendment to this Form 10-K.

 

**PART IV.**

** **

**ITEM 15.*  EXHIBITS, FINANCIAL STATEMENT SCHEDULES***

 

(a) 1.*Financial Statements* - Seethe Index to Consolidated Financial Statements on Page F-1.

 

2. *Financial Statement Schedule:*

 

SeeSchedule II - Valuation and Qualifying Accounts - Allowance forDoubtful Accounts on Page S-1.

 

Allother schedules are omitted as the required information is inapplicable or theinformation is presented in the consolidated financial statements or relatednotes.

 

(b) *Exhibit Index:*

 

A listof exhibits filed with this report is included in the Exhibit Index thatimmediately precedes such exhibits and is incorporated by reference herein.

** **

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** **

**SIGNATURES**

** **

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of1934, Gevity HR, Inc. has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized.

 
|                        | GEVITY HR, INC.                      |
|-----------------------------|--------------------------------------|
|                        |                                 |
| Dated: March 16,  2009 | /s/  Michael  J. Lavington |
|                        | Michael J. Lavington                 |
|                        | Chairman of the Board                |
|                        | Chief Executive Officer              |
|                        | (Principal Executive  Officer)       |

 

 

Pursuant to therequirements of the Securities Exchange Act of 1934, this report has beensigned below by the following persons on behalf of the registrant and in thecapacities and on the dates indicated.

 
| Dated: March 16,  2009 | /s/  Michael  J. Lavington          |
|-----------------------------|-----------------------------------------------|
|                        | Michael J. Lavington                          |
|                        | Chairman of the Board                         |
|                        | Chief Executive Officer                       |
|                        | (Principal Executive  Officer)                |
|                        |                                          |
| Dated: March 16,  2009 | /s/  Garry J.  Welsh                |
|                        | Garry J. Welsh                                |
|                        | Chief Financial Officer                       |
|                        | (Principal Financial  and Accounting Officer) |
|                        |                                          |
| Dated: March 16,  2009 | /s/  George B. Beitzel              |
|                        | George B. Beitzel                             |
|                        | Director                                      |
|                        |                                          |
| Dated: March 16,  2009 | /s/  Todd F.  Bourell               |
|                        | Todd F. Bourell                               |
|                        | Director                                      |
|                        |                                          |
| Dated: March 16,  2009 | /s/  Paul R.  Daoust                |
|                        | Paul R. Daoust                                |
|                        | Director                                      |
|                        |                                          |
| Dated: March 16,  2009 | /s/  Jonathan  H. Kagan             |
|                        | Jonathan H. Kagan                             |
|                        | Director                                      |
|                        |                                          |
| Dated: March 16,  2009 | /s/  David S. Katz                  |
|                        | David S. Katz                                 |
|                        | Director                                      |
|                        |                                          |
| Dated: March 16,  2009 | /s/  James F.  Orr, III        |
|                        | James F. Orr, III                        |
|                        | Director                                      |
|                        |                                          |
| Dated: March 16,  2009 | /s/  Jeffrey A. Sonnenfeld          |
|                        | Jeffrey A. Sonnenfeld                         |
|                        | Director                                      |
|                        |                                          |
| Dated: March 16,  2009 | /s/  Daniel  J. Sullivan            |
|                        | Daniel J. Sullivan                            |
|                        | Director                                      |

 

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**GEVITYHR, INC. AND SUBSIDIARIES**

 

**INDEX TOCONSOLIDATED FINANCIAL STATEMENTS AND**

**FINANCIALSTATEMENT SCHEDULE**

 
| ** **                                                                                                                                                                                                 | ** ** | **Page** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|
|                                                                                                                                                                                                       |       |     |
| Report of Independent Registered Public Accounting  Firm                                                                                                                                                   |       | F-2      |
|                                                                                                                                                                                                       |       |     |
| Consolidated Balance Sheets as of December 31,  2008 and 2007                                                                                                                                         |       | F-3      |
|                                                                                                                                                                                                       |       |     |
| Consolidated Statements of Operations for the Years  Ended December 31, 2008, 2007, and 2006                                                                                                          |       | F-4      |
|                                                                                                                                                                                                       |       |     |
| Consolidated Statements of Changes in Shareholders’  Equity for the Years Ended December 31, 2008, 2007, and 2006                                                                                |       | F-5      |
|                                                                                                                                                                                                       |       |     |
| Consolidated Statements of Cash Flows for the Years  Ended December 31, 2008, 2007, and 2006                                                                                                          |       | F-6      |
|                                                                                                                                                                                                       |       |     |
| Notes to Consolidated Financial Statements                                                                                                                                                                 |       | F-8      |
|                                                                                                                                                                                                       |       |     |
| Financial Statement Schedule II — Valuation  and Qualifying Accounts                                                                                                                        |       | S-1      |
|                                                                                                                                                                                                       |       |     |
| Schedules Omitted - Certain other schedules have  been omitted because they are not required or because the information required  therein has been included in Notes to Consolidated Financial Statements. |       |     |

 

F-1

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Table of Contents

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM

 

To theBoard of Directors and Stockholders ofGevity HR, Inc.Bradenton, Florida

 

Wehave audited the accompanying consolidated balance sheets of Gevity HR, Inc.and subsidiaries (the “Company”) as of December 31, 2008 and 2007, and therelated consolidated statements of operations, changes in shareholders’ equity,and cash flows for each of the three years in the period ended December 31,2008.  Our audits also included the financial statement schedule listed inthe Index at Item 15.  These financial statements and financial statementschedule are the responsibility of the Company’s management.  Ourresponsibility is to express an opinion on the financial statements andfinancial statement schedule based on our audits.

 

We conductedour audits in accordance with the standards of the Public Company AccountingOversight Board (United States).  Those standards require that we plan andperform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement.  An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements.  An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well asevaluating the overall financial statement presentation.  We believe thatour audits provide a reasonable basis for our opinion.

 

In ouropinion, such consolidated financial statements present fairly, in all materialrespects, the financial position of the Company as of December 31, 2008and 2007, and the results of its operations and its cash flows for each of thethree years in the period ended December 31, 2008, in conformity withaccounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered inrelation to the basic consolidated financial statements taken as a whole,presents fairly, in all material respects, the information set forth therein.

 

Wehave also audited, in accordance with the standards of the Public CompanyAccounting Oversight Board (United States), the Company’s internal control overfinancial reporting as of December 31, 2008, based on the criteriaestablished in *Internal Control—IntegratedFramework* issued by the Committee of Sponsoring Organizations of theTreadway Commission and our report dated March 16, 2009 expressed anunqualified opinion on the Company’s internal control over financial reporting.

 

/s/ Deloitte & Touche LLP

 

CertifiedPublic Accountants

Tampa,FloridaMarch 16, 2009

 

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**Table ofContents**

 

**GEVITYHR, INC. AND SUBSIDIARIES**

**CONSOLIDATEDBALANCE SHEETS**

**(In $000’sexcept share and per share data)**

** **
| ** **                                                                                                                                            | ** ** | **December 31,  2008** | ** ** | **December 31,  2007** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| **ASSETS**                                                                                                                                            |       |                        |       |                        |       |
| Current assets:                                                                                                                                       |       |                        |       |                        |       |
| Cash and cash equivalents                                                                                                                             |       | $                           | 32,537     |                        | $          | 9,950 |   |
| Marketable securities – restricted                                                                                                               |       | 4,836                       |       | 6,102                       |       |
| Accounts receivable, net                                                                                                                              |       | 97,897                      |       | 130,209                     |       |
| Short-term workers’ compensation receivable, net                                                                                                 |       | 51,920                      |       | 16,950                      |       |
| Other current assets                                                                                                                                  |       | 14,041                      |       | 14,515                      |       |
| Total current assets                                                                                                                                  |       | 201,231                     |       | 177,726                     |       |
| Property and equipment, net                                                                                                                           |       | 18,524                      |       | 22,176                      |       |
| Long-term marketable securities – restricted                                                                                                     |       | 4,048                       |       | 3,934                       |       |
| Long-term workers’ compensation receivable, net                                                                                                  |       | 63,413                      |       | 105,321                     |       |
| Intangible assets, net                                                                                                                                |       | 1,825                       |       | 11,386                      |       |
| Goodwill                                                                                                                                              |       | —                      |       | 9,224                       |       |
| Deferred tax assets, net                                                                                                                              |       | 13,054                      |       | 10,797                      |       |
| Other assets                                                                                                                                          |       | 841                         |       | 1,347                       |       |
| Total assets                                                                                                                                          |       | $                           | 302,936    |                        | $          | 341,911 |   |
| ** **                                                                                                                                            | ** ** | ** **                  | ** ** | ** **                  | ** ** |
| **LIABILITIES AND SHAREHOLDERS’  EQUITY**                                                                                                        | ** ** | ** **                  | ** ** | ** **                  | ** ** |
| Current liabilities:                                                                                                                                  |       |                        |       |                        |       |
| Accrued payroll and payroll taxes                                                                                                                     |       | $                           | 125,571    |                        | $          | 151,105 |   |
| Accrued insurance premiums and health reserves                                                                                                        |       | 13,319                      |       | 13,557                      |       |
| Customer deposits and prepayments                                                                                                                     |       | 31,793                      |       | 13,581                      |       |
| Accounts payable and other accrued liabilities                                                                                                        |       | 8,411                       |       | 11,881                      |       |
| Deferred tax liabilities, net                                                                                                                         |       | 5,261                       |       | 11,674                      |       |
| Dividends payable                                                                                                                                     |       | 1,234                       |       | 2,096                       |       |
| Total current liabilities                                                                                                                             |       | 185,589                     |       | 203,894                     |       |
| Revolving credit facility                                                                                                                             |       | —                      |       | 17,367                      |       |
| Other long-term liabilities                                                                                                                           |       | 4,432                       |       | 5,088                       |       |
| Total liabilities                                                                                                                                     |       | 190,021                     |       | 226,349                     |       |
| Commitments and contingencies (see notes)                                                                                                             |       |                        |       |                        |       |
| Shareholders’ equity:                                                                                                                            |       |                        |       |                        |       |
| Common stock, $.01 par value, 100,000,000 shares authorized,  24,754,286 and  23,379,761 issued as of December 31,  2008 and 2007,  respectively |       | 248                         |       | 234                         |       |
| Additional paid-in capital                                                                                                                            |       | 37,915                      |       | 31,475                      |       |
| Retained earnings                                                                                                                                     |       | 75,329                      |       | 84,899                      |       |
| Treasury stock (64,314 and 85,660 shares at cost, respectively)                                                                                       |       | (577                        | )          | (1,046                      | )          |
| Total shareholders’ equity                                                                                                                       |       | 112,915                     |       | 115,562                     |       |
| Total liabilities and shareholders’ equity                                                                                                       |       | $                           | 302,936    |                        | $          | 341,911 |   |

 

See notes to consolidatedfinancial statements.

 

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Table of Contents

 

**GEVITYHR, INC. AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

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

 
| ** **                                                                 | ** ** | **Year Ended December 31,** | ** ** |
|----------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                 | ** ** | **2008**                                   | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                                                       |       |                                       |       |   |   |   |   |
| Revenues                                                                   |       | $                                          | 520,540    |   | $ | 601,594 |   | $ | 647,527 |   |
| Cost of services  (exclusive of depreciation and amortization shown below) |       | 375,203                                    |       | 415,567 |   | 444,055 |   |
| Gross profit                                                               |       | 145,337                                    |       | 186,027 |   | 203,472 |   |
|                                                                       |       |                                       |       |   |   |   |   |
| Operating expenses:                                                        |       |                                       |       |   |   |   |   |
| Salaries, wages and commissions                                            |       | 75,263                                     |       | 83,737 |   | 85,112 |   |
| Other general and administrative                                           |       | 48,090                                     |       | 55,937 |   | 54,471 |   |
| Impairment loss                                                            |       | 8,692                                      |       | — |   | — |   |
| Reinsurance contract (recovery) loss, net                                  |       | (1,650                                     | )          | — |   | 1,650 |   |
| Depreciation and amortization                                              |       | 15,745                                     |       | 15,326 |   | 13,810 |   |
| Total operating expenses                                                   |       | 146,140                                    |       | 155,000 |   | 155,043 |   |
|                                                                       |       |                                       |       |   |   |   |   |
| Operating (loss) income                                                    |       | (803                                       | )          | 31,027 |   | 48,429 |   |
| Interest income                                                            |       | 422                                        |       | 903 |   | 1,097 |   |
| Interest expense                                                           |       | (2,541                                     | )          | (2,800 | ) | (430 | ) |
| Other income (expense), net                                                |       | 56                                         |       | (558 | ) | (169 | ) |
| (Loss) income from continuing operations before  income taxes              |       | (2,866                                     | )          | 28,572 |   | 48,927 |   |
| Income tax (benefit) provision                                             |       | (1,555                                     | )          | 10,475 |   | 13,356 |   |
|                                                                       |       |                                       |       |   |   |   |   |
| (Loss) income from continuing operations                                   |       | (1,311                                     | )          | 18,097 |   | 35,571 |   |
|                                                                       |       |                                       |       |   |   |   |   |
| Loss from discontinued operations, net of tax                              |       | (3,451                                     | )          | (8,138 | ) | (308 | ) |
|                                                                       |       |                                       |       |   |   |   |   |
| Net (loss) income                                                          |       | $                                          | (4,762     | ) | $ | 9,959 |   | $ | 35,263 |   |
|                                                                       |       |                                       |       |   |   |   |   |
| Net (loss) income per common share                                         |       |                                       |       |   |   |   |   |
| - Basic:                                                                   |       |                                       |       |   |   |   |   |
| (Loss) income from continuing operations                                   |       | $                                          | (0.05      | ) | $ | 0.76 |   | $ | 1.37 |   |
| Loss from discontinued operations                                          |       | (0.15                                      | )          | (0.34 | ) | (0.01 | ) |
| Net (loss) income                                                          |       | $                                          | (0.20      | ) | $ | 0.42 |   | $ | 1.36 |   |
|                                                                       |       |                                       |       |   |   |   |   |
| - Diluted:                                                                 |       |                                       |       |   |   |   |   |
| (Loss) income from continuing operations                                   |       | $                                          | (0.05      | ) | $ | 0.75 |   | $ | 1.33 |   |
| Loss from discontinued operations                                          |       | (0.15                                      | )          | (0.34 | ) | (0.01 | ) |
| Net (loss) income                                                          |       | $                                          | (0.20      | ) | $ | 0.41 |   | $ | 1.32 |   |
|                                                                       |       |                                       |       |   |   |   |   |
| Weighted average  common shares outstanding:                               |       |                                       |       |   |   |   |   |
| - Basic                                                                    |       | 23,572,943                                 |       | 23,688,921 |   | 25,932,904 |   |
| - Diluted                                                                  |       | 23,572,943                                 |       | 24,247,241 |   | 26,789,652 |   |

 

See notes to consolidatedfinancial statements.

 

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**Table ofContents**

** **

**GEVITYHR, INC. AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY**

**YearsEnded December 31, 2008, 2007 and 2006**

**(In $000’s, except share data)**

 
| ** **                                                         | ** ** | **Common  Stock  (Shares)** | ** ** | **Common  Stock** | ** ** | **Additional  Paid-in  Capital** | ** ** | **Retained  Earnings** | ** ** | **Treasury  Stock** | ** ** | **Deferred  Compensation** | ** ** | **Total**  | ** ** |
|--------------------------------------------------------------------|------------|-----------------------------|------------|-------------------|------------|----------------------------------|------------|------------------------|------------|---------------------|------------|----------------------------|------------|------------|------------|
| ** **                                                         | ** ** | ** **                  | ** ** | ** **        | ** ** | ** **                       | ** ** | ** **             | ** ** | ** **          | ** ** | ** **                 | ** ** | ** ** | ** ** |
| Balance,  December 31, 2005                                   |       | 31,237,453                  |       | $                 | 312        |                             | $          | 165,876                |       | $                   | 58,137     |                       | $          | (66,367    | )          | $ | (2,543 | ) | $ | 155,415 |   |
|                                                               |       |                        |       |              |       |                             |       |                   |       |                |       |                       |       |       |       |
| Issuance of  common stock                                          |       | 724,861                     |       | 8                 |       | 6,664                            |       | —                 |       | (63                 | )          | —                     |       | 6,609      |       |
| Tax benefit of  stock option exercises                             |       | —                      |       | —            |       | 4,268                            |       | —                 |       | —              |       | —                     |       | 4,268      |       |
| Stock-based  compensation expense                                  |       | —                      |       | —            |       | 3,684                            |       | —                 |       | —              |       | —                     |       | 3,684      |       |
| Reversal of  deferred compensation upon adoption of SFAS 123R |       | —                      |       | —            |       | (2,543                           | )          | —                 |       | —              |       | 2,543                      |       | —     |       |
| Common stock  dividends declared                                   |       | —                      |       | —            |       | —                           |       | (9,290                 | )          | —              |       | —                     |       | (9,290     | )          |
| Purchase of treasury  stock                                        |       | —                      |       | —            |       | —                           |       | —                 |       | (53,897             | )          | —                     |       | (53,897    | )          |
| Net income                                                         |       | —                      |       | —            |       | —                           |       | 35,263                 |       | —              |       | —                     |       | 35,263     |       |
|                                                               |       |                        |       |              |       |                             |       |                   |       |                |       |                       |       |       |       |
| Balance,  December 31, 2006                                   |       | 31,962,314                  |       | 320               |       | 177,949                          |       | 84,110                 |       | (120,327            | )          | —                     |       | 142,052    |       |
|                                                               |       |                        |       |              |       |                             |       |                   |       |                |       |                       |       |       |       |
| Adjustment upon  adoption of FIN 48                                |       | —                      |       | —            |       | —                           |       | (711                   | )          | —              |       | —                     |       | (711       | )          |
| Issuance of  common stock                                          |       | 149,974                     |       | 1                 |       | 910                              |       | —                 |       | (35                 | )          | —                     |       | 876        |       |
| Tax benefit of  stock option exercises                             |       | —                      |       | —            |       | 56                               |       | —                 |       | —              |       | —                     |       | 56         |       |
| Stock-based  compensation expense                                  |       | —                      |       | —            |       | 2,079                            |       | —                 |       | —              |       | —                     |       | 2,079      |       |
| Common stock  dividends declared                                   |       | —                      |       | —            |       | —                           |       | (8,459                 | )          | —              |       | —                     |       | (8,459     | )          |
| Purchase of  treasury stock                                        |       | —                      |       | —            |       | —                           |       | —                 |       | (30,290             | )          | —                     |       | (30,290    | )          |
| Cancellation of  treasury shares                                   |       | (8,732,527                  | )          | (87               | )          | (149,519                         | )          | —                 |       | 149,606             |       | —                     |       | —     |       |
| Net income                                                         |       | —                      |       | —            |       | —                           |       | 9,959                  |       | —              |       | —                     |       | 9,959      |       |
|                                                               |       |                        |       |              |       |                             |       |                   |       |                |       |                       |       |       |       |
| Balance,  December 31, 2007                                   |       | 23,379,761                  |       | 234               |       | 31,475                           |       | 84,899                 |       | (1,046              | )          | —                     |       | 115,562    |       |
|                                                               |       |                        |       |              |       |                             |       |                   |       |                |       |                       |       |       |       |
| Issuance of  common stock                                          |       | 1,374,525                   |       | 14                |       | 3,522                            |       | —                 |       | 469                 |       | —                     |       | 4,005      |       |
| Tax benefit of  stock option exercises                             |       | —                      |       | —            |       | 956                              |       | —                 |       | —              |       | —                     |       | 956        |       |
| Stock-based  compensation expense                                  |       | —                      |       | —            |       | 1,962                            |       | —                 |       | —              |       | —                     |       | 1,962      |       |
| Common stock  dividends declared                                   |       | —                      |       | —            |       | —                           |       | (4,808                 | )          | —              |       | —                     |       | (4,808     | )          |
| Net loss                                                           |       | —                      |       | —            |       | —                           |       | (4,762                 | )          | —              |       | —                     |       | (4,762     | )          |
|                                                               |       |                        |       |              |       |                             |       |                   |       |                |       |                       |       |       |       |
| Balance,  December 31, 2008                                   |       | 24,754,286                  |       | $                 | 248        |                             | $          | 37,915                 |       | $                   | 75,329     |                       | $          | (577       | )          | $ | — |   | $ | 112,915 |   |

 

See notes to consolidatedfinancial statements.

** **

**F-5**

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**Table ofContents**

** **

**GEVITYHR, INC. AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(In $000’s)**

** **
| ** **                                                                                | ** ** | **Years Ended December 31,** | ** ** |
|-------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                                | ** ** | **2008**                                    | ** ** | **2007** | ** ** | **2006** | ** ** |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                                     |       |                                        |       |   |   |   |   |
| Net (loss) income                                                                         |       | $                                           | (4,762     | ) | $ | 9,959 |   | $ | 35,263 |   |
| Adjustments to reconcile net (loss) income to net cash provided by  operating activities: |       |                                        |       |   |   |   |   |
| Depreciation and amortization                                                             |       | 16,020                                      |       | 16,270 |   | 13,878 |   |
| Impairment loss                                                                           |       | 9,224                                       |       | 8,477 |   | — |   |
| Loss on the disposal of property, net                                                     |       | 1,097                                       |       | 594 |   | 238 |   |
| Deferred tax benefit, net                                                                 |       | (7,937                                      | )          | (15,217 | ) | (7,368 | ) |
| Stock compensation                                                                        |       | 1,962                                       |       | 2,079 |   | 3,684 |   |
| Excess tax benefit from share-based arrangements                                          |       | (882                                        | )          | (56 | ) | (3,349 | ) |
| Provision for bad debts                                                                   |       | 2,097                                       |       | 1,764 |   | 855 |   |
| Other                                                                                     |       | —                                      |       | (13 | ) | (12 | ) |
| Changes in operating working capital:                                                     |       |                                        |       |   |   |   |   |
| Accounts receivable, net                                                                  |       | 30,215                                      |       | (5,037 | ) | (13,927 | ) |
| Other current assets                                                                      |       | 474                                         |       | 1,687 |   | 4,178 |   |
| Workers’ compensation receivable, net                                                |       | 6,938                                       |       | (1,045 | ) | 7,092 |   |
| Other assets                                                                              |       | (227                                        | )          | (343 | ) | (55 | ) |
| Accrued insurance premiums and health reserves                                            |       | (238                                        | )          | (3,730 | ) | (3,249 | ) |
| Accrued payroll and payroll taxes                                                         |       | (25,572                                     | )          | (12,449 | ) | 10,336 |   |
| Accounts payable and other accrued liabilities                                            |       | (3,080                                      | )          | 6,352 |   | 3,304 |   |
| Customer deposits and prepayments                                                         |       | 18,212                                      |       | 1,688 |   | 3,578 |   |
| Other long-term liabilities                                                               |       | (285                                        | )          | 424 |   | (77 | ) |
| Net cash provided by operating activities                                                 |       | 43,256                                      |       | 11,404 |   | 54,369 |   |
|                                                                                      |       |                                        |       |   |   |   |   |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                                     |       |                                        |       |   |   |   |   |
| Purchases of marketable securities and certificates of deposit                            |       | (248                                        | )          | (1,811 | ) | (363 | ) |
| Proceeds from sale of marketable securities                                               |       | 1,400                                       |       | — |   | 34 |   |
| Capital expenditures                                                                      |       | (3,244                                      | )          | (5,889 | ) | (14,198 | ) |
| Business acquisition                                                                      |       | —                                      |       | (9,495 | ) | — |   |
| Net cash used in investing activities                                                     |       | (2,092                                      | )          | (17,195 | ) | (14,527 | ) |
|                                                                                      |       |                                        |       |   |   |   |   |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                                     |       |                                        |       |   |   |   |   |
| Net borrowings under revolving credit facility                                            |       | (17,367                                     | )          | 17,367 |   | — |   |
| Capital lease payments                                                                    |       | (465                                        | )          | (130 | ) | — |   |
| Proceeds from issuance of common stock for employee stock plans                           |       | 4,043                                       |       | 1,033 |   | 6,755 |   |
| Excess tax benefit from share-based arrangements                                          |       | 882                                         |       | 56 |   | 3,349 |   |
| Dividends paid                                                                            |       | (5,670                                      | )          | (8,586 | ) | (8,913 | ) |
| Purchase of treasury stock                                                                |       | —                                      |       | (30,290 | ) | (57,267 | ) |
| Net cash used in financing activities                                                     |       | (18,577                                     | )          | (20,550 | ) | (56,076 | ) |
| Net increase (decrease) in cash and cash equivalents                                      |       | 22,587                                      |       | (26,341 | ) | (16,234 | ) |
| Cash and cash equivalents - beginning of period                                           |       | 9,950                                       |       | 36,291 |   | 52,525 |   |
| Cash and cash equivalents - end of period                                                 |       | $                                           | 32,537     |   | $ | 9,950 |   | $ | 36,291 |   |
|                                                                                      |       |                                        |       |   |   |   |   |
| Supplemental disclosure of cash flow information:                                         |       |                                        |       |   |   |   |   |
| Income taxes paid                                                                         |       | $                                           | 4,958      |   | $ | 9,628 |   | $ | 15,697 |   |
| Interest paid                                                                             |       | $                                           | 2,451      |   | $ | 2,888 |   | $ | 576 |   |

 

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Tableof Contents

 

**GEVITYHR, INC. AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS (Continued)**

**(In $000’s)**

** **

Supplemental disclosure of non-cash transactions:

 

Capital expenditures forthe years ended December 31, 2008, 2007 and 2006, exclude approximately$475, $110 and $1,739, respectively, of capital items purchased by the Companyand paid for in the following year.

 

Capital expenditures andcash flows from financing activities for the years ended December 31, 2008and 2007, exclude approximately $295 and $1,079, respectively, of capital itemspurchased by the Company through capital leases.

 

See notes to consolidatedfinancial statements.

 

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Table of Contents

 

**GEVITYHR, INC. AND SUBSIDIARIES**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

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

 

**1.  SUMMARY OF SIGNIFICANTACCOUNTING POLICIES**

 

Gevity HR, Inc. (“Gevity” or the “Company”)delivers the Gevity EdgeTM,a comprehensive solution comprised of innovative management and administrationservices, helping employers improve their bottom line by stabilizing and controllingcosts, manage and reduce compliance risk, retain and develop the rightemployees, and save time by reducing payroll and administrative workload.Essentially, Gevity serves as the full-service human resource “HR”  department for these businesses, providingeach employee with support previously only available at much larger companies.

 

Gevity operates as a professional employerorganization (“PEO”) and enters into a co-employment relationship with itsclients. The terms of the co-employment relationship are governed by aProfessional Services Agreement (“PSA”) that contractually allocatesemployment-related responsibilities between the Company and the client. Underthe co-employment relationship the Company typically assumes responsibility forthe payment of salaries and wages to each client employee, the payment ofpayroll taxes, workers’ compensation insurance coverage, and, at the client’soption, responsibility for providing group health, welfare and retirementbenefits.

 

 Until June 30,2008, Gevity operated a non-co-employment business known as Gevity Edge SelectTM.  The non co-employment relationship was alsogoverned by a PSA.  Under the nonco-employment model the employment-related liabilities remained with the clientand the client was responsible for its own workers’ compensation insurance andhealth and welfare plans.  The Companyassumed responsibility for payroll administration (including payrollprocessing, payroll tax filing and W-2 preparation) and provided access to allof its HR services.  The Gevity EdgeSelect business (previously referred to as Gevity’s “Custom” business solution)was introduced in 2004 and prior to 2007 did not have a significant impact onthe Company’s revenues or results of operations.  See further discussion of the discontinuedoperations of Gevity Edge Select in Note 2.

 

***Principles ofConsolidation***

 

 Theaccompanying consolidated financial statements include the accounts of GevityHR, Inc. and all of its wholly-owned subsidiaries. All intercompanybalances and transactions have been eliminated in consolidation.

 

***Use of Estimates***

 

 The preparationof financial statements in conformity with accounting principles generallyaccepted in the United States of America (“US GAAP”) requires management tomake estimates and assumptions that affect the amounts reported in theconsolidated financial statements and accompanying disclosures. These estimatesand assumptions are based upon management’s best knowledge of current eventsand actions that the Company may take in the future. The Company’s mostsignificant estimates relate to receivables, reserves for the allowance fordoubtful accounts, workers’ compensation claims, intangible assets, medicalbenefit plan liabilities, state unemployment taxes, deferred taxes, stock-basedcompensation and the estimates used in the determination of the fair value usedin connection with the Company’s impairment analyses. Actual results coulddiffer materially from those estimates.

 

***Cash Equivalents***

 

 Cashequivalents are defined as short-term investments with original maturities ofthree months or less.

 

***MarketableSecurities***

 

 The Companyaccounts for marketable securities in accordance with Statement of FinancialAccounting Standards (“SFAS”) No. 115, *Accountingfor Certain Investments in Debt and Equity Securities.*The Companydetermines the appropriate classification of all marketable securities asheld-to-maturity, available-for-sale or trading at the time of purchase andre-evaluates such classification as of each balance sheet date. The Company’sinvestment portfolio has primarily consisted of money market funds andmarketable equity securities classified as either available-for-sale ortrading, and as a result, are reported at fair value. Unrealized gains andlosses, net of income taxes, are reported as a separate component ofshareholders’ equity and comprehensive income for available-for-sale securitiesand included in earnings for trading securities. The cost of investments soldis based on the specific identification method, and realized gains and lossesare included in other income (expense).

 

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***Property andEquipment***

 

 Property andequipment are stated at cost less accumulated depreciation. Depreciation iscomputed using the straight-line method over the lesser of the remainingestimated useful lives of the related assets or lease terms, as follows:

 
| ** **                      | ** ** | **Years**     | ** ** |
|---------------------------------|------------|---------------|------------|
| Computer  hardware and software |       | 3 to 7        |       |
| Furniture and  equipment        |       | 3 to 7        |       |
| Leasehold  improvements         |       | Life of lease |       |

 

 The Companyreviews its property and equipment amounts for impairment whenever events orchanges in circumstances indicate that the carrying amount of an asset (asset group)may not be recoverable. An impairment loss would be recognized if the carryingamount of the asset exceeded the estimated undiscounted cash flows expected tobe generated from the asset. The amount of the impairment loss recorded wouldbe calculated as the excess of the asset carrying value over its fair value.Fair value is estimated using a discounted cash flow analysis from the asset(asset group) or determined by other valuation techniques. The Company hasdetermined that no impairment of property and equipment existed as of December 31,2008.

 

***Internal UseSoftware***

 

 Certain costsof computer software developed or obtained for internal use are capitalized andamortized on a straight-line basis over the estimated useful lives of thesoftware, generally three to five years. Costs incurred during the preliminaryproject stage, as well as general and administrative, overhead, maintenance andtraining, and costs that do not add functionality to existing systems, areexpensed as incurred.

 

***Goodwill***

 

 Goodwill is theexcess of cost of an acquired entity over the amounts assigned to assetsacquired and liabilities assumed in a business combination. Goodwill is notamortized. Goodwill is tested for impairment annually and between annual testsif an event occurs or circumstances change that would indicate the carryingamount may be impaired.  See Note 7 forthe discussion of goodwill impairment at December 31, 2008 and Note 2 forthe discussion of goodwill impairment related to the discontinued operations ofGevity Edge Select.

 

***Intangible Assets***

 

 Intangibleassets represent client service agreements acquired from independent parties.Acquired intangible assets were determined to have finite lives and areamortized on a straight-line basis over their estimated economic lives of5 years. Intangible assets with finite lives are tested for impairmentwhenever events or circumstances indicate that the carrying amount of the assetexceeds the estimated undiscounted cash flows used in determining the fair valueof the asset. The Company has determined that no impairment of the intangibleassets existed as of December 31, 2008. See Note 2 for the discussion of intangible asset impairment related tothe discontinued operations of Gevity Edge Select.

 

***Fair Value of FinancialInstruments***

 

 The carryingvalues of cash and cash equivalents, accounts receivable, and accounts payableand other accrued liabilities approximate their fair values due to theshort-term maturities of these instruments.

 

***Segment Reporting***

 

     TheCompany operates in one reportable segment under SFAS No. 131, *Disclosures about Segments of an Enterprise andRelated Information*.

 

***Revenue Recognition***

 

 The grossbillings that the Company charges its clients under its professional servicesagreements include each client employee’s gross wages, employment taxes, aprofessional service fee and, to the extent elected by the clients, health andwelfare benefit plan costs. The Company’s professional service fee, which isprimarily computed as a percentage of gross wages, is intended to yield aprofit to the Company and to cover the cost of HR outsourcing services providedby the Company to the client, certain employment-related taxes and workers’compensation insurance coverage. The component of the professional service feerelated to HR outsourcing services varies according to the size and location ofthe client. The component of the service fee related to workers’ compensationand unemployment insurance is based, in part, on the client’s historical claimsexperience. All charges by the Company are invoiced along with each periodicpayroll delivered to the client. The Company accounts for its revenues usingthe accrual method of accounting.

 

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Under the accrual method of accounting, the Companyrecognizes its revenues in the period in which the client employee performswork. The Company accrues revenues and unbilled receivables for service feesrelating to work performed by client employees but unpaid at the end of eachperiod. In addition, the related costs of services are accrued as a liabilityfor the same period. Subsequent to the end of each period, such costs are paidand the related service fees are billed.

 

The Company reports revenues from service fees inaccordance with Emerging Issues Task Force (“EITF”) No. 99-19, *Reporting Revenue Gross as a Principal**versus Net as an Agent.*The Companyreports as revenues, on a gross basis, the total amount billed to clients forprofessional service fees, health and retirement plan fees, workers’compensation and unemployment insurance fees. The Company reports revenues on agross basis for these fees because the Company is the primary obligor anddeemed to be the principal in these transactions under EITF No. 99-19. TheCompany reports revenues on a net basis for the amount billed to clients foremployee salaries, wages and payroll-related taxes less amounts paid to clientemployees and taxing authorities for these salaries, wages and taxes.

 

***Sales and MarketingCommissions and Client Referral Fees***

 

 Sales andmarketing commissions and client referral fees are expensed as incurred. Suchexpenses are classified as salaries, wages and commissions in the consolidatedstatements of operations.

 

***Workers’Compensation Costs***

 

 The Company hasmaintained a loss sensitive workers’ compensation program since January 1,2000. The program was with CNA Financial Corporation, (“CNA”) until December 31,2002 and is with member insurance companies of American International Group, Inc.(“AIG”) under AIG’s Commercial Insurance Group (“AIG CI”) effective January 1,2003. These programs provide insurance coverage for claims incurred in eachplan year but which will be paid out over future periods. In states whereprivate insurance is not permitted, client employees are covered by stateinsurance funds.

 

Workers’ compensation expense for the year is basedupon premiums paid to the carrier for claims in excess of the deductible layer,administrative costs of the programs (including claims administration, statetaxes and surcharges), the estimate of the total cost of the claims that fallwithin the policy deductible layer (calculated on a net present value basis),and is reduced by the return on investment with respect to the collateral heldby AIG under the insurance agreements.

 

The Company reviews the estimated cost of claims inthe deductible layer on a quarterly basis. The determination of the estimated cost of claims is based upon a numberof factors, including but not limited to actuarial calculations, current andhistorical loss trends, the number of open claims, developments relating to theactual claims incurred, and the impact of acquisitions, if any.  A significant amount of judgment is used inthis estimation process.

 

***Health Benefits***

 

 Claims incurredunder the health benefit plans are expensed as incurred according to the termsof each contract. For certain contracts, liability reserves are established forthe benefit claims reported but not yet paid and claims that have been incurredbut not yet reported.

 

***Stock-BasedCompensation***

 

 The Companygrants stock options and non-vested stock awards to its employees, officers anddirectors. Effective January 1, 2006, the Company adopted the provisionsof SFAS No. 123R, *Share-BasedPayment*(“SFAS 123R”), for its stock-based compensationplans.  Among other things,SFAS 123R requires that compensation expense for all share-based awards berecognized in the financial statements based upon the grant-date fair value ofthose awards.

 

The Company adopted SFAS 123R using the modifiedprospective transition method and did not restate stock compensation expenseprior to adoption. Under SFAS 123R, compensation costs recognized during theyears ended December 31, 2008, 2007 and 2006 include:

 

·         compensation cost for all share-based awards(expected to vest) granted prior to, but not yet vested as of January 1,2006, based upon grant-date fair value estimated in accordance with theoriginal provisions of SFAS 123; and

 

·         compensation cost for all share-based awards(expected to vest) granted during the years ended December 31, 2008, 2007and 2006, based upon grant-date fair value estimated in accordance with theprovisions of SFAS 123R.

 

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The Company uses the Black-Scholes-Merton valuationmodel for valuing all stock options and shares granted under the Employee StockPurchase Plan. Compensation for non-vested stock awards with service-basedvesting conditions is measured at fair value on the grant date based upon thenumber of shares expected to vest and the quoted market price of the underlyingcommon stock. Compensation for non-vested stock awards with market-basedvesting conditions is measured at fair value on the grant date utilizing theMonte Carlo simulation model. Compensation cost for all awards is recognized in earnings, net ofestimated forfeitures, on a straight-line basis over the requisite serviceperiod.

 

Prior to the adoption of SFAS 123R, the Companypresented deferred compensation associated with the issuance of non-vestedstock, as a separate component of shareholders’ equity. In accordance with theprovisions of SFAS 123R, on January 1, 2006, the Company reversed thedeferred compensation balance from December 31, 2005 of $2,543 toadditional paid-in-capital.

 

See Note 15 for additional information regardingthe Company’s stock-based compensation plans and the assumptions used to calculatethe fair value of stock-based awards.

 

***Income Taxes***

 

 The Company records income tax expense usingthe asset and liability method of accounting for deferred income taxes. Undersuch method, deferred tax assets and liabilities are recognized for the expectedfuture tax consequences of temporary differences between the financialstatement carrying values and the income tax bases of the Company’s assets andliabilities. The Company 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 uncertaintyin tax 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 recordedin the financial statements. It also provides guidance on the recognition,measurement and classification of income tax uncertainties, along with anyrelated interest and penalties. The disclosure requirements and cumulativeeffect of adoption of FIN 48 are presented in Note 17.

 

***Earnings Per Share***

 

Basic earnings per share is calculated by dividing netincome attributable to common shareholders by the weighted average number ofcommon shares outstanding during the year. Diluted earnings per share iscalculated by dividing net income by the weighted average number of commonshares and common equivalent shares outstanding during the year. Commonequivalent shares are calculated using the treasury stock method for stockoptions and non-vested stock.

 

***Reclassifications***

 

 Prior periodamounts related to losses on the disposal of fixed assets, net, have beenreclassified within the Statements of Cash Flows to conform to current periodpresentation.

 

***New AccountingPronouncements***

 

 In February 2007, the FASB issuedSFAS No. 159, *The Fair ValueOption for**Financial Assets andFinancial Liabilities, Including an Amendment of FASB Statement**No. 115*(“SFAS 159”).SFAS 159 gave entities the irrevocable option to carry many financialassets and financial liabilities at fair value. Unrealized gains and losses onitems for which the fair value option was elected are reported in earnings.SFAS 159 was effective for the Company beginning January 1, 2008. Asof the initial adoption, we did not elect the fair value option for anyexisting eligible items under SFAS 159.

 

In September 2006,the FASB issued SFAS No. 157, *FairValue Measurements* (“SFAS 157”). SFAS 157 establishes aframework for the measurement of assets and liabilities that use fair value andexpands disclosures about fair value measurements. SFAS 157 applieswhenever another US GAAP standard requires (or permits) assets or liabilitiesto be measured at fair value but did not expand the use of fair value to anynew circumstances.  Subsequently, in February 2008,the FASB issued FASB Staff Position (“FSP”) SFAS 157-1, *Application of FASB Statement No. 157 to FASBStatement No. 13 and Other Accounting Pronouncements that Address FairValue Measurements for Purpose of Lease Classification or Measurement UnderStatement 13*(“FSP 157-1”)and FASB Staff Position SFAS 157-2, *EffectiveDate of FASB Statement No. 157*(“FSP 157-2”). FSP 157-1 excludes FASB Statement No. 13, *Accounting for Leases*, and its relatedinterpretive accounting pronouncements from the scope of SFAS 157.  FSP 157-2 delays the effective date ofSFAS 157 for nonfinancial assets and nonfinancial liabilities, except for itemsthat are recognized or disclosed at fair value in the financial statements on arecurring basis (at least annually), to fiscal years beginning after November 15,2008. The Company implemented SFAS 157 on January 1, 2008 with no materialimpact on its consolidated financial statements. For further information aboutthe fair value measurements of our financial assets and liabilities, see Note3. The Company is currently evaluating the potential impact of SFAS 157 fornonfinancial assets and nonfinancial liabilities on its financial position andresults of operations.

 

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In October 2008,the FASB issued FASB Staff Position SFAS No. 157-3, *Determining the Fair Value of a Financial Asset Whenthe Market For That Asset Is Not Active* (FSP 157-3), with animmediate effective date, including prior periods for which financialstatements have not been issued.  FSP 157-3 amends SFAS No. 157 (asdescribed below) to clarify the application of fair value in inactive marketsand allows for the use of management’s internal assumptions about future cashflows with appropriately risk-adjusted discount rates when relevant observablemarket data does not exist.  The objective of SFAS No. 157 has notchanged and continues to be the determination of the price that would bereceived in an orderly transaction that is not a forced liquidation ordistressed sale at the measurement date.  The adoption of FSP 157-3 in thefourth quarter did not have a material effect on the Company’s consolidatedfinancial statements.

 

In April 2008,the FASB issued FASB Staff Position SFAS No. 142-3, *Determination of the Useful Life of Intangible Assets*(“FSP 142-3”). FSP 142-3 amends the factors that should beconsidered in developing renewal or extension assumptions used to determine theuseful life of a recognized intangible asset under SFAS No. 142, *Goodwill and Other Intangible Assets*. Theintent of this FSP is to improve the consistency between the useful life of arecognized intangible asset and the period of expected cash flows used tomeasure the fair value of the asset under SFAS No. 141 (revised2007), *Business Combinations*, andother US GAAP. FSP 142-3 is effective for the Company on January 1,2009. The Company does not expect the adoption of FSP 142-3 to have amaterial impact on the Company’s consolidated financial statements.

 

In December 2007, the FASB issued FASB Statement No. 141(revised 2007), *Business Combinations* (“SFAS 141R”),which will become effective for business combination transactions having anacquisition date on or after January 1, 2009.  This standard requires the acquiring entityin a business combination to recognize the assets acquired, the liabilitiesassumed, and any noncontrolling interest in the acquiree at the acquisitiondate to be measured at their respective fair values. SFAS 141R requiresacquisition related costs, as well as restructuring costs the acquirer expectsto incur for which it is not obligated at the acquisition date, to be recordedagainst income rather than included in the purchase price determination.  It also requires recognition of contingent arrangementsat their acquisition date fair values, with subsequent changes in fair valuegenerally reflected in income. The impact of SFAS 141R is dependent on thelevel of future acquisitions.

 

In June 2008, theFASB issued FASB Staff Position EITF 03-6-1, *DeterminingWhether Instruments Granted in Share-Based Payment Transactions AreParticipating Securities*(“FSPEITF No. 03-6-1”).* *ThisFSP addresses whether instruments granted in share-based payment transactionsare participating securities prior to vesting and, therefore, should be includedin the earnings allocation in computing earnings per share (“EPS”) under thetwo-class method described in SFAS No. 128, *Earnings per Share*.  FSP EITF No. 03-6-1 redefinesparticipating securities to include unvested share-based payment awards thatcontain non-forfeitable dividends or dividend equivalents as participatingsecurities to be included in the computation of EPS pursuant to the “two-classmethod.” Outstanding unvested restricted stock issued under employeecompensation programs containing such dividend participation features would beconsidered participating securities subject to the “two-class method” incomputing EPS rather than the “treasury stock method.” FSP EITF No. 03-6-1is effective for financial statements issued for fiscal years beginning after December 15,2008 and for interim periods within those years.  All prior-period EPSdata presented is to be adjusted retrospectively to conform to the provisionsof this FSP.  Early application is not permitted. The Company is currentlyevaluating the impact, if any, that FSP EITF 03-6-1 will have on itscomputation and presentation of EPS.

 

Othernew pronouncements issued but not effective until after December 31, 2008,are not expected to have a significant effect on the company’s consolidated financialstatements.

 

**2.****              DISCONTINUEDOPERATIONS**

 

***HRA Acquisition***

 

On February 16,2007, the Company acquired certain assets, including the client portfolio, ofHRAmerica, Inc. (“HRA”), a human resource outsourcing firm that offeredfundamental employee administration solutions including payroll processing toapproximately 145 clients with approximately 16,000 client employees.  Approximately 14,700 non-coemployed clientemployees were acquired as of the date of the acquisition and approximately1,300 coemployed client employees (8 clients) were acquired with an effectivedate of April 1, 2007.  Theacquisition provided the Company with technology and processes to enhance itsnon co-employment model Gevity Edge Select. The purchase price for the acquired assets was approximately $10,895(including direct acquisition costs of approximately $652), which the Companypaid in cash from its revolving credit facility. Of this amount, $1,400 washeld in an escrow account and was included in short-term marketable securities- restricted at December 31, 2007. The amounts held in escrow representedpurchase price contingencies related to potential earn outs and the achievementof certain client retention percentages up

 

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through the firstanniversary date of the acquisition. During the thirdquarter of 2008, the Company reached a settlement with the former HRA ownersfor (i) the release of $1,400 held in escrow related to purchase pricecontingencies for the acquisition of HRA, and (ii) the indemnification forcertain representations made by the former owners of HRA in connection with theacquisition of HRA.  The settlement resultedin the release to Gevity of the $1,400 held in escrow as well as recovery byGevity of approximately $100 related to indemnification claims as of September 30,2008. The indemnification recovery of $100 is included in the loss fromdiscontinued operations for the year ended December 31, 2008.

 

After completion of a comprehensivestrategic review, the Company decided to focus on the growth of its coreco-employment offering, Gevity Edge. As such, on February 25, 2008, theboard of directors of the Company approved a plan to discontinue the Company’snon co-employment offering, Gevity Edge Select, which was comprised primarilyof clients acquired in the HRA acquisition. Clients that existed at February 25,2008, were notified of this decision and given until June 30, 2008 totransition to other service providers. The Company completed its transition of all remaining Gevity Edge Selectclients during the second quarter of 2008, processing the final payrolls dated June 30,2008.  The Company has determined thatthe exit from the Gevity Edge Select business meets the criteria ofdiscontinued operations in accordance with SFAS No. 144, *Accounting for the Impairment or Disposal of Long-Lived Assets*.  Accordingly, the results of operations andrelated exit costs associated with Gevity Edge Select have been reported asdiscontinued operations for all periods presented.

 

Summarizedoperating results for the discontinued operations of Gevity Edge Select for theyears ended December 31, 2008, 2007 and 2006 are as follows:

 
| ** **                                      | ** ** | **December 31,  2008** | ** ** | **December 31,  2007** | ** ** | **December 31,  2006** | ** ** |
|-------------------------------------------------|------------|------------------------|------------|------------------------|------------|------------------------|------------|
| Revenues                                        |       | $                      | 1,547      |                   | $          | 3,398                  |       | $ | 440 |   |
| Exit costs                                      |       | 2,304                  |       | —                 |       | —                 |       |
| Impairment loss                                 |       | 532                    |       | 8,477                  |       | —                 |       |
| All other  expenses, net                        |       | 4,265                  |       | 8,008                  |       | 930                    |       |
| Loss from  discontinued operations before taxes |       | (5,554                 | )          | (13,087                | )          | (490                   | )          |
| Income tax  benefit                             |       | 2,103                  |       | 4,949                  |       | 182                    |       |
| Loss from  discontinued operations              |       | $                      | (3,451     | )                      | $          | (8,138                 | )          | $ | (308 | ) |

 

Pre-taxcosts associated with the exit from the Gevity Edge Select business (includingthe goodwill asset impairment) approximate $2,836 for the year ended December 31,2008.  Management does not expect toincur any further significant costs in connection with the exit from thisbusiness. Costs associated with the exit from the Gevity Edge Select businessare included in the loss from discontinued operations and are presented in thefollowing table:

 
| ** **                                | ** ** | **December 31,  2008** | ** ** |
|-------------------------------------------|------------|-----------------------------|------------|
| Contract  termination costs               |       | $                           | 1,335      |   |
| Severance and  other termination benefits |       | 969                         |       |
| Goodwill  impairment loss                 |       | 532                         |       |
| Total Gevity  Edge Select exit costs      |       | $                           | 2,836      |   |

 

Activity in theliability accounts associated with the exit costs related to thediscontinuation of the Gevity Edge Select business for the year ended December 31,2008 is presented in the following table and is includedwithin accounts payable and other accrued liabilities in the condensedconsolidated balance sheet:

 
| ** **                         | ** ** | **Severance and  Termination  Benefits** | ** ** | **Contract  Termination  Costs** | ** ** | **Total** | ** ** |
|------------------------------------|------------|-----------------------------------------------|------------|----------------------------------|------------|-----------|------------|
| Balance at  December 31, 2007 |       | $                                             | —     |                             | $          | —    |       | $ | — |   |
| Expense accruals                   |       | 969                                           |       | 1,335                            |       | 2,304     |       |
| Cash payments                      |       | (969                                          | )          | (995                             | )          | (1,964    | )          |
| Balance at  December 31, 2008 |       | $                                             | —     |                             | $          | 340       |       | $ | 340 |   |

 

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***Impairment Loss***

 

During the fourth quarter of 2007, the Companyevaluated the long-lived and intangible assets of the Gevity Edge Selectsegment for impairment based upon various factors including: the low fair valueof the Gevity Edge Select segment obtained in connection with the annual testfor goodwill impairment under SFAS No. 142, *Goodwill andOther Intangible Assets*, the accumulation of costs significantly inexcess of amounts originally anticipated for the HRA integration and there-launch of Gevity Edge Select, current period operating losses, and theforecast of continued operating losses. The Gevity Edge Select segment iscomprised substantially of the assets acquired in the HRA acquisition. At thetime of the impairment testing the Gevity Edge Select asset group wasclassified as an asset to be held and used. In accordance with SFAS No. 144, Accounting *for theImpairment or Disposal of Long-Lived Assets*(“SFAS 144”), inassessing long-lived assets to be held and used for an impairment loss and fairvalue, assets are grouped with other assets and liabilities at the lowest levelfor which identifiable cash flows are largely independent of the cash flows of otherassets and liabilities within the Company. An impairment loss is recognized under SFAS 144 if the carrying amountof the asset group is not recoverable and it exceeds the fair value of theasset group.  It was determined that thecarrying amount of the Gevity Edge Select asset group was not recoverable andit exceeded the fair value of the asset group by $8,477.  The fair value of the asset group wasdetermined based upon a combination of the discounted cash flow method, theguideline company method, the similar transaction method and the net assetsmethod.  The impairment loss wasallocated to the long-lived assets of the group on a pro-rata basis using therelative carrying amounts of those assets and resulted in an impairment ofproperty, plant and equipment of $1,314, an impairment of client serviceagreements of $1,729 and an impairment of goodwill of $5,434. In connectionwith the decision to exit the Gevity Edge Select business during the firstquarter of 2008, an impairment loss of $532 was recorded relating to thewrite-off of the remaining HRA goodwill.

 

**3.  MARKETABLESECURITIES — RESTRICTED**

 

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

 

Restricted moneymarket funds relate to collateral held in connection with the Company’s workers’compensation programs, collateral held in connection with the Company’s general insurance programs and amounts held in escrow relatedto purchase price contingencies associated with the Company’s acquisition of HRA(see Note 2). These securities are recorded at fair value, which is equal tocost. The interest earned on these investments isrecognized as interest income in the Company’s condensed consolidatedstatements of operations.

 

There were no realized gains or losses on the sale ofmarketable securities for the years ended December 31, 2008, 2007 and2006. There were no unrealized gains or losses on marketable securities as of December 31,2008 and 2007.

 

SFAS No. 157defines fair value as the price that would be received to sell an asset or paidto transfer a liability in an orderly transaction betweenmarket participants at the measurement date (exit price).  SFAS No. 157 classifies the inputs usedto measure fair value into the following hierarchy:

 
| · |   | Level 1–  |   | Unadjusted quoted prices in active markets for  identical assets or liabilities                                                                                                                                                                                           |
|--------|--------|----------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| · |   | Level 2–  |   | Unadjusted quoted prices in active markets for  similar assets or liabilities, unadjusted quoted prices for identical or  similar assets or liabilities in markets that are not active or inputs other  than quoted prices that are observable for the asset or liability |
| · |   | Level 3 – |   | Unobservable inputs for the assets or liabilities                                                                                                                                                                                                                         |

 

The Companyutilizes the best available information in measuring fair value.  Financial assets are classified in theirentirety based on the lowest level of input that is significant to the fairvalue measurement.  The Company hasdetermined that its financial assets are currently level 1 in the fair valuehierarchy. Financial assets at December 31, 2008 consist solely ofinvestments held in money market accounts.

 

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**4.  ACCOUNTS RECEIVABLE**

 

At December 31, 2008 and 2007, accountsreceivable consisted of the following:

 
| ** **                             | ** ** | **December 31,  2008** | ** ** | **December 31,  2007** | ** ** |
|----------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| Client  receivables - billed           |       | $                           | 7,323      |                        | $          | 9,124 |   |
| Client  receivables - accrued          |       | 91,503                      |       | 121,917                     |       |
|                                   |       | 98,826                      |       | 131,041                     |       |
| Less: Allowance  for doubtful accounts |       | (929                        | )          | (832                        | )          |
| Total                                  |       | $                           | 97,897     |                        | $          | 130,209 |   |

 

The Company establishes an allowance for doubtfulaccounts based upon management’s assessment of the collectibility of specificaccounts and other potentially uncollectible amounts. The Company reviews itsallowance for doubtful accounts on a quarterly basis.

 

**5.  WORKERS’ COMPENSATIONRECEIVABLE/RESERVES**

 

Gevity purchased fully insured workers’ compensationpolicies from AIG CI with varying deductible amounts (ranging from $500 to$2,000) for the 2003 through 2008 policy years whereby AIG CI is responsiblefor paying the claims and the Company is responsible for paying to AIG CI theper occurrence deductible amount.   Inaddition, during 2004, the Company purchased insurance from AIG CI to cover itsworkers’ compensation claims liability up to the $1,000 per occurrencedeductible level for policy years’ 2000-2002 (CNA remains the insurer on theunderlying claims for these years).

 

The workers’ compensation program with AIG CI forpolicy years 2003-2008 consists primarily of two components.  The first component consists of cash paid toAIG CI during each policy year related to policy expenses and program costs.This includes premium charges (for insurance of claims in excess of thedeductible and certain stop loss coverage), taxes and administration costs. Theamounts charged by AIG CI are generally based upon the volume andclassification of worker’s compensation payroll.  Except for the policy true-up provisions thatoccur 18 months after policy inception and are based upon the actual volume andclassification of payrolls, as well as the claims administration cost basedupon the volume of claims processed, this component is fixed and there is noreturn of premium.  The second componentof the workers’ compensation program relates to the policy deductible.  The Company, through its wholly-ownedBermuda-based insurance subsidiary, remits premiums to AIG CI to cover claimsto be paid within the Company’s per occurrence deductible layer.  AIG CI deposits the premiums into interestbearing loss fund collateral accounts for reimbursement of paid claims up tothe per occurrence deductible amount. Interest on the loss fund collateral accounts (which will be reduced asthe reimbursement of claims are paid out over the life of the policy) accruesto the benefit of the Company at fixed annual rates as long as the program, andthe interest accrued under the program, remain with AIG CI as indicated in the tablebelow.  Information relating to the AIGCI policy years is as follows:

 
| **Program Year** | ** ** | **Initial Loss Fund  Collateral Premiums** | ** ** | **Policy Year  Deductible** | ** ** | **Guaranteed  Interest Rate** | ** ** | **Minimum Program  Life for Guaranteed  Interest Rate** | ** **   |
|-----------------------|------------|-----------------------------------------------------------|------------|----------------------------------|------------|------------------------------------|------------|-----------------------------------------------------------------------------|--------------|
| 2003                  |       | $                                                         | 73,500     | (1)                              | $          | 1,000                              |       | 2.42                                                                        | %            | 7 years |   |
| 2003                  |       | $                                                         | 11,500     | (1)                              | n/a        |                               | 1.85       | %                                                                           | 7 years |   |
| 2004                  |       | $                                                         | 111,400    |                             | $          | 2,000                              | (2)        | 2.92                                                                        | %            | 10 years |   |
| 2005                  |       | $                                                         | 100,000    |                             | $          | 2,000                              | (2)        | 3.75                                                                        | %            | 10 years |   |
| 2006                  |       | $                                                         | 90,000     |                             | $          | 500                                |       | 4.58                                                                        | %            | 10 years |   |
| 2007                  |       | $                                                         | 66,500     |                             | $          | 500                                |       | 5.01                                                                        | %            | 10 years |   |
| 2008                  |       | $                                                         | 55,500     | (3)                              | $          | 1,000                              |       | 3.19                                                                        | %            | 10 years |   |

 

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| (1) |   | The 2003 program year consists of two loss funds  totaling $85,000.                                                                                                                                                                                                                                                                |
|-----|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) |   | For policy years 2004 and 2005 reinsurance was  purchased by the Company’s insurance subsidiary to effectively reduce the per  occurrence deductible from $2,000 to $1,000 and $750, respectively.                                                                                                                            |
| (3) |   | During the fourth quarter of 2008, AIG CI agreed to  defer $13,858 of the initial loss fund collateral pay-in until after the  June 30, 2009 true-up when it will be determined whether or not it is  required based upon the results of the true-up calculation. This resulted in  a loss fund collateral pay-in of $41,652. |

 

If a policy program year is terminated prior to theend of a guarantee period, the interest rate is adjusted downward based upon asliding scale. The 2003-2008 program years provide for an initial loss fundcollateral premium true-up 18 months after the program inception andannually thereafter. The true-up is calculated as the product of apre-determined loss factor and the amount of incurred

 

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claims in the deductible layer as of the date of thetrue-up. The true-up may result in funds being released from the AIG CI lossfund collateral account to the Company or may require additional loss fundcollateral payments by the Company to AIG CI. During 2008, AIG CI releasedapproximately $39,778, net, relating to the annual loss fund collateral true-upand the true-up of outstanding prior year premium expense audits. The Companyexpects to receive approximately $25,285 from AIG CI during 2009 in connectionwith the 2009 annual true-up of policy years 2003-2008.

 

In 2004, the Company entered into agreements with AIGCI and CNA whereby the Company paid $102,000 to purchase insurance from AIG CIto cover the Company’s workers’ compensation claims liability up to the $1,000per occurrence deductible level for policy years’ 2000-2002. Of the total premiumpaid to AIG CI, AIG CI deposited $88,900 into an interest bearing loss fundaccount held by AIG CI and $5,500 into an interest bearing escrow account heldby CNA.  The AIG CI loss fund accountwill be used by AIG CI to fund all claims under the program up to AIG CI’saggregate limit.  Interest on the AIG CIloss fund (which will be reduced as claims are paid out over the life of thepolicy) will accrue to the benefit of the Company at a fixed annual rate of3.0% until all claims are closed.  TheCNA escrow account bears an interest rate based upon the rate as provided forin the facility into which it is deposited. Any agreed upon reduction in the escrow account between CNA and AIG CIwill be deposited into the AIG CI loss fund account.  During 2008 and 2007, CNA released $539 and$3,750, respectively, of the escrow account which was deposited into the AIG CIloss fund account. AIG CI will return to the Company that portion of the lossfund account, if any, not used or retained to pay claims, including interestearned, at intervals of 36, 60, 84 and 120 months from the date of theinception of the agreement. The maximum return amount, which is based upon apre-determined formula, at 36 and 60 months was initially limited to$5,500 for each payment due, with no limit as to the return amount at 84 and120 months. During 2007, AIG CI released $5,500 to the Company inconnection with the 36 month true-up. During 2008, AIG CI, CNA  and the Company amended their agreement withrespect to the 60 month true-up which was to take place June 30,2009.  AIG CI agreed to replace the 60month true-up (limited to a maximum return of $5,500) with a 54 month true-up(with no maximum).  The revised true-up,which was received in January 2009, was for $26,635. The amendment wasbased upon favorable claims development and excess collateral amounts held inthe loss fund.

 

Gevity accounts for its workers’compensation insurance contracts with AIG CI as follows:

 

·                  Premiumsfor claims in excess of the deductible layer are expensed ratably during thepolicy year.

 

·                  Administrativecosts of the program (including claims administration, state taxes andsurcharges) are determined and expensed quarterly.

 

·                  Gevity’sestimate of its ultimate claim liability to AIG CI for claims that fall withinthe policy year deductible, calculated on a net present value basis, isdetermined and expensed quarterly.

 

·                  Thereturn on investments earned with respect to the loss fund collateral held byAIG CI under the insurance agreements is determined and recorded quarterly as areduction of workers’ compensation expense.

 

·                  Thebalance in the loss fund collateral accounts held by AIG CI (including interestearned) in excess of the net present value of the Company’s liability to AIG CIwith respect to claims payable within the deductible layer is recorded as aworkers’ compensation receivable.

 

·                  Returnsof loss fund collateral deposits are recorded as reductions to the workers’compensation receivable.

 

At December 31, 2008 and 2007 theweighted average discount rate used to calculate the present value of claimsliability was 3.78% and 4.15%, respectively. Premium payments made to AIG CIduring 2003 through 2008 exceeded the present value of the estimated claimsliabilities. This resulted in a workers’ compensation receivable, net, at December 31,2008 and 2007. Since the entire amount is due from AIG CI, this receivablerepresents a significant concentration of credit risk for the Company.

 

AIG CI requires the Company to provide collateralrelated to premium payment credit risk. The required collateral was provided inthe form of cash placed into a trust account. Collateral balances as of December 31,2008 and 2007 were $4,048 and $3,934, respectively. These amounts were includedas long-term marketable securities-restricted as of December 31, 2008 and2007.

 

During the year ended December 31, 2008, theCompany lowered its ultimate claim liability loss estimates for the 2000-2007program years based upon continued favorable claims development that occurredduring the year. This revision resulted in a net reduction of workers’compensation expense for the year of approximately $19,590. During the yearended December 31, 2007, the Company lowered its ultimate claim liabilityloss estimates for the 2000-2006 program years based upon favorable claims developmentthat occurred during the year. This revision resulted in a net reduction ofworkers’ compensation expense for the year of approximately $19,805. During theyear ended December 31, 2006, the Company lowered its ultimate claimliability loss estimates for

 

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the 2000-2005 program years based upon favorableclaims development that occurred during the year. This revision resulted in anet reduction of workers’ compensation expense for the year of approximately$18,741.

 

The following table summarizes the components of theworkers’ compensation receivable as of December 31, 2008 and 2007 for theAIG CI workers’ compensation insurance programs:

 
| ** **                                                    | ** ** | **December 31,  2008** | ** ** | **December 31,  2007** | ** ** |
|---------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| Loss fund  collateral premium payments to AIG CI              |       | $                           | 588,955    |                        | $          | 547,303 |   |
| Loss fund  collateral premium refunds                         |       | (199,949                    | )          | (164,822                    | )          |
| Interest  receivable on loss fund collateral premium payments |       | 36,733                      |       | 28,973                      |       |
| Estimated  premium expense refund due                         |       | 3,772                       |       | 5,005                       |       |
| Claims paid by  AIG CI                                        |       | (236,173                    | )          | (198,523                    | )          |
| Present value of  future claims liabilities                   |       | (78,005                     | )          | (95,665                     | )          |
| Total workers’ compensation  receivable                  |       | 115,333                     |       | 122,271                     |       |
| Short-term  workers’ compensation receivable, net        |       | 51,920                      |       | 16,950                      |       |
| Long-term  workers’ compensation receivable, net         |       | $                           | 63,413     |                        | $          | 105,321 |   |

 

The workers’compensation receivable from AIG CI represents a significant concentration ofcredit risk for the Company. Gevity has various commercial insurancerelationships with AIG CI, a subsidiary of AIG, including its workers’compensation program.  AIG CI has publicly stated as recently as March 2,2009, that it remains well-capitalized and financially secure, with ampleresources to pay policyholder claims. The issues that have evolved at AIG relate to entities outside of theircommercial insurance division. The AIG insurance companies are regulated bystate law and their affairs overseen by state insurance commissioners.  Those laws are designed in part to assurethat regulated insurance companies are operated on a financially sound basisand their assets are protected from the financial problems of non-insurance affiliates.Under state insurance regulations, the assets of the AIG insurance subsidiariesare protected from the creditors of the parent company. On March 2, 2009,AIG also announced its intention to form a General Insurance holding companywith a board of directors, management team and brand distinct from AIG. TheCommercial Insurance group will be a component of this holding company. As of March 2,2009, AIG CI’s financial strength rating by A.M. Best was an “A”.  Accordingly, the Company does not believethat the current financial condition of AIG will have a material adverse effecton AIG CI or the Company’s workers’ compensation receivable as of December 31,2008.

 

***ReinsuranceContract (Recovery) Loss, net***

 

During the second quarter of 2006, the Companyrecorded a $4,650 loss on a reinsurance contract related to its 2006 workers’compensation program. The Company determined that, as a result of theliquidation proceeding related to the Bermuda reinsurance company responsiblefor covering the layer of its workers’ compensation claims between $500 and$2,000 per occurrence and the related termination of its reinsurancecontract, a loss of $4,650 should be recorded as of June 30, 2006, whichrepresented the entire premium paid for coverage in 2006. The $4,650 loss wasrecorded within operating expenses. During the third quarter of 2006, theCompany received a cash payment of $3,000 pursuant to a court-approvedsettlement, which also called for the admission in the liquidation proceedingof an unsecured claim against the reinsurer in the amount of $2,200. Thesettlement is without prejudice to any claims Gevity may have against thirdparties relating to the reinsurer’s liquidation. The $3,000 recovery wasrecorded in the third quarter of 2006 within operating expenses. During thefourth quarter of 2008, the Company received $1,982 of cash in connection withthe ongoing liquidation proceedings of the reinsurer.  Of this amount, $1,650 was recorded as arecovery of the reinsurance contract premium previously written off and theremaining $332 was included in other general and administrative as a reductionin recovery related costs that were previously incurred. Future amountsrecovered, if any, will be recognized in income when realization is assuredbeyond a reasonable doubt. In light of the liquidation proceeding, during thesecond quarter of 2006, the Company secured comparable coverage for the layerof claims between $500 and $2,000 from AIG CI retroactively effective to January 1,2006. The cost of the replacement coverage for 2006 (approximately $4,800), wasincluded in cost of services for the year ended December 31, 2006 andreplaced the cost incurred from the original policy.

 

**6.  PROPERTY AND EQUIPMENT**

 

At December 31, 2008 and 2007, property andequipment consisted of the following:

 

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| ** **                      | ** ** | **December 31,  2008** | ** ** | **December 31,  2007** | ** ** |
|---------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| Leasehold  improvements         |       | $                           | 5,122      |                        | $          | 5,137 |   |
| Furniture and  fixtures         |       | 2,505                       |       | 2,456                       |       |
| Equipment                       |       | 2,607                       |       | 2,443                       |       |
| Computer  hardware and software |       | 48,193                      |       | 45,898                      |       |
| Construction in  progress       |       | 513                         |       | 1,706                       |       |
| Total property  and equipment   |       | 58,940                      |       | 57,640                      |       |
| Less accumulated  depreciation  |       | (40,416                     | )          | (35,464                     | )          |
|                            |       | $                           | 18,524     |                        | $          | 22,176 |   |

 

For the years ended December 31, 2008, 2007, and2006, depreciation expense related to continuing operations was $6,352, $5,687,and $4,169, respectively.  For the yearsended December 31, 2008, 2007, and 2006, depreciation expense related todiscontinued  operations was $107, $541and $69, respectively.

 

**7.  GOODWILL AND INTANGIBLEASSETS**

 

At December 31, 2008 and 2007, intangible assetsconsisted of the following:

 
| ** **                 | ** ** | **December 31,  2008** | ** ** | **December 31,  2007** | ** ** |
|----------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| Client service  agreements |       | $                           | 47,929     |                        | $          | 48,097 |   |
| Accumulated  amortization  |       | (46,104                     | )          | (36,711                     | )          |
| Intangible  assets, net    |       | $                           | 1,825      |                        | $          | 11,386 |   |

 

Amortization expense from continuing operations forthe year ended December 31, 2008, 2007 and 2006 was $9,393, $9,639, and $9,638,respectively.  Amortization expense fromdiscontinued operations for the year ended December 31, 2008, 2007 and2006 was $168, $402, and $0, respectively. Estimated amortization expense for 2009 is $1,825.

 

For the years ended December 31, 2008 and 2007,the rollforward of goodwill is as follows:

 
| ** **                                  | ** ** | **Gevity Edge** | ** ** | **Discontinued  Operations of  Gevity  Edge Select** | ** ** | **Total** | ** ** |
|---------------------------------------------|------------|----------------------|------------|----------------------------------------------------------------|------------|-----------|------------|
| Goodwill balance  at December 31, 2006 |       | $                    | 8,692      |                                                           | $          | —    |       | $ | 8,692 |   |
| Acquisition of  HRA                         |       | —               |       | 5,966                                                          |       | 5,966     |       |
| HRA goodwill  impairment                    |       | —               |       | (5,434                                                         | )          | (5,434    | )          |
| Goodwill balance  at December 31, 2007 |       | 8,692                |       | 532                                                            |       | 9,224     |       |
| HRA goodwill  impairment                    |       | —               |       | (532                                                           | )          | (532      | )          |
| Goodwill  impairment                        |       | (8,692               | )          | —                                                         |       | (8,692    | )          |
| Goodwill balance  at December 31, 2008 |       | $                    | —     |                                                           | $          | —    |       | $ | — |   |

 

During the fourth quarter of2008, the Company’s market capitalization dropped below the net book value ofits equity.  In addition, forecasted cashflows decreased reflecting continued deterioration of macroeconomic conditionswhich accelerated and became apparent during the fourth quarter of 2008.  As a result and in connection with theCompany’s annual test for goodwill impairment, the Company determined that the fair value of the Company was less thanits carrying value and that the implied fair value of the goodwill was zero.  Accordingly, the Company recorded a goodwillimpairment loss of $8,692, which eliminated goodwill in its entirety. The fairvalue of the Company was based on a combination of the discounted cashflow method, the guideline company method, and the similar transaction method.In conjunction with the goodwill impairment testing, the Company analyzed thevaluation of its other long-lived and intangible assets (including deferred taxassets) and, based upon the weighted probability of alternative scenarios thatexisted as of December 31, 2008, concluded that the carrying value oflong-lived assets was recoverable and that no other impairments or valuationallowances were required.  See Note 2 fora discussion of the HRA acquisition and goodwill impairment recorded during2008 and 2007.

 

**8.  OTHER ASSETS**

 

At December 31, 2008 and 2007, other currentassets consisted of the following:

 

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| ** **                   | ** ** | **December 31,  2008** | ** ** | **December 31,  2007** | ** ** |
|------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| Prepaid  insurance           |       | $                           | 7,963      |                        | $          | 6,089 |   |
| Client employee  receivables |       | 1,617                       |       | 2,182                       |       |
| Prepaid  employment taxes    |       | 2,434                       |       | 2,820                       |       |
| Other prepaid  expenses      |       | 1,748                       |       | 2,936                       |       |
| Other  receivables           |       | 240                         |       | 403                         |       |
| Short-term  deposits         |       | 39                          |       | 85                          |       |
| Total other  current assets  |       | $                           | 14,041     |                        | $          | 14,515 |   |

 

At December 31, 2008 and 2007, other assetsconsisted of the following:

 
| ** ** | ** ** | **December 31,  2008** | ** ** | **December 31,  2007** | ** ** |
|------------|------------|-----------------------------|------------|-----------------------------|------------|
| Deposits   |       | $                           | 488        |                        | $          | 468 |   |
| Other      |       | 353                         |       | 879                         |       |
|       |       | $                           | 841        |                        | $          | 1,347 |   |

 

For the years ended December 31, 2007 and 2006,amortization expense related to other assets was  $1, and $2, respectively. There was noamortization expense related to other assets for the year ended December 31,2008.

 

**9.  HEALTH BENEFITS**

 

Blue Cross BlueShield of Florida, Inc. and its subsidiary HealthOptions, Inc. (together “BCBSF/HOI”) is the Company’s primaryhealthcare partner in Florida, delivering medical care benefits toapproximately 17,500 Florida-based client employees. The Company’s policy withBCBSF/HOI is a minimum premium policy expiring September 30,2009. Pursuant to this policy, the Company is obligated to reimburse BCBSF/HOIfor the cost of the claims incurred by participants under the plan, plus thecost of plan administration. The administrative costs per covered clientemployee associated with this policy are specified in theagreement and aggregate loss coverage is provided to the Company at the levelof 115% of projected claims.  The Companyis required to pre-fund the estimated monthly expenses and claim liabilitycharges of the plan by the first of each calendar month.  The estimated monthly expenses are based uponthe Minimum Premium Rate and the Annual Excess liability rate, as set forth inthe agreement, times the number of insureds. The monthly estimated claimliability charge is based upon an average of monthly paid claims as determinedby BCBSF/HOI based on three month periods specified in the agreement.  Differences between the pre-funded amountsand actual amounts subsequently determined shall be settled in the followingmonth. As part of the Company’s obligation to BCBSF/HOI, the Company posted anirrevocable letter of credit in favor of BSBSF/HOI in an initial amount of$5,000 on October 1, 2008, which shall be increased monthly byapproximately $1,000 over a seven month period until it reaches $11,766 on May 1,2009. As of December 31, 2008, the outstanding letter of credit in favorof BSBF/HOI was $7,000.

 

Outside the stateof Florida, Aetna Health, Inc. (“Aetna”) is the Company’s largest medicalcare benefits provider for approximately 17,000 client employees. The Company’s 2008/2009 policy with Aetna provides for an HMO and PPOoffering to plan participants. The Aetna HMO and PPO medical benefit plans aresubject to a guaranteed cost contract that caps the Company’s annual liability.

 

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

 

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

 

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

 

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

 

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

 

Included inaccrued insurance premiums and health reserves at December 31,2008 and December 31, 2007, are $10,129 and $10,356, respectively, ofshort-term liabilities related to the Company’s health benefit plans. Of theseamounts $9,491 and $10,100, respectively, represent an accrual for the estimateof claims incurred but not reported at December 31,2008 and 2007 related to the BCBSF/HOI contract. Health benefit reserves aredetermined quarterly by the Company and include an estimate of claims incurredbut not reported and claims reported but not yet paid. The calculation of thesereserves is based upon a number of factors, including butnot limited to actuarial calculations, current and historical claims paymentpatterns, plan enrollment and medical trend rates. During the yearsended December 31, 2008, 2007 and 2006, the Company recorded net healthplan surplus (subsidy) of approximately $6,000, $3,100 and ($2,500),respectively, which decreased (increased) its cost of services and reserves forincurred but not reported claims.

 

**10.  REVOLVING CREDITFACILITY**

 

The Companymaintains a credit facility with Bank of America, N.A. and Wachovia, N.A. (the “Lenders”).On May 7, 2007, the Company entered into the First Amendment to the Amended and Restated Credit Agreement dated August 30,2006, which increased the amount of aggregate revolving commitments of thecredit facility from $50,000 to $75,000 and allowed the Company to repurchaseup to $125,000 of its capital stock during the term ofthe agreement. On June 14, 2007, the Company entered into theSecond Amendment to the Amended and Restated Credit Agreement, which increasedthe amount of aggregate revolving commitments from $75,000 to $100,000. On February 25,2008, the Company entered into the Third Amendment to theAmended and Restated Credit Agreement (“Third Amendment”). The Third Amendmentprovides for the grant of security interests and liens in substantially all theproperty and assets (with agreed upon carveouts and exceptions) of the Companyto the Lenders. The Third Amendment also provided for an automatic decrease ofthe aggregate revolving commitment of the credit facility from $100,000 to$85,000 on September 30, 2008. The Third Amendment includesadditional covenants and amends certain financialcovenants and negative covenants with an effective date of December 31,2007. These include the maintenance of a minimum consolidated net worth, amaximum consolidated adjusted leverage ratio, a minimum consolidated fixed charge coverage ratio of 1.25:1.0, minimum monthlycumulative  EBITDA requirements (for 2008only), and a ceiling on consolidated capital expenditures.  The revisedcovenants set forth in the Third Amendment now restrict the Company’s abilityto repurchase shares of its capital stock except in certain circumstances, makeacquisitions, and requires the Company to provide certain period reportsrelating to budget and profits and losses, intellectual property and insurancepolicies.  Each of these covenants is based on defined terms and contain exceptionsin the Credit Agreement, as amended.

 

Certain of theCompany’s subsidiaries named in the credit agreement have guaranteed theobligations under the credit agreement. The credit facility has a five-yearterm that expires August 30, 2011. Loan advances bear an interest rateequal to an Applicable Rate (which ranges from 1.50% to 2.25% for EurodollarRate Loans, and from 0.25% to 1.00% for Prime Rate Loans, depending upon theCompany’s consolidated leverage ratio) plus one of the followingindexes: (i) Eurodollar Rate; or (ii) Prime Rate (each asdefined in the credit agreement). Up to $20,000 of the loan commitment can bedrawn through letters of credit. With respect to outstanding letters of credit,a fee determined by reference to the Applicable Rate plusa fronting fee ranging from 1.50% to 2.25% per annum will be charged on theaggregate stated amount of each outstanding letter of credit. A fee rangingfrom 0.30% to 0.45% (based upon the Company’s consolidated leverage ratio) ischarged on any unused portion of the loan commitment. At December 31,2008, the Company had no outstanding advances. At December 31, 2007, the Company had outstanding advances of$17,367 at an interest rate of 6.11%.

 

The Company was incompliance with all of the covenants under the credit agreement at December 31,2008. The ability to draw funds under the credit agreement is dependent upon meeting the aforementioned financialcovenants.  Additionally, the level ofcompliance with the financial covenants determines the maximum amount availableto be drawn. At December 31, 2008, the maximum facility availableto the Company was approximately $48,400 (whichincludes the impact on availability of the outstanding letter of credit toBCBSF/HOI of $7,000).

 

Pursuant to theterms of the credit agreement, the obligations of the Company may beaccelerated upon the occurrence and continuation of an Event of Default. Suchevents include the following: (i) the failure to make principal, interest or fee payments when due (beyond applicable grace periods); (ii) thefailure to observe and perform certain covenants contained in the creditagreement;

 

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(iii) anyrepresentation or warranty made by the Company in the credit agreement orrelated documents proves to be incorrect or misleading inany material respect when made or deemed made; and (iv) othercustomary events of default.

 

TheCompany recorded $2,451 and $2,810 of interest expense for the years ended December 31,2008 and 2007, respectively, related to the amortization of loan costs, unusedloan commitment fees, fees related to the outstanding letter of credit andinterest on advances. The Company capitalized approximately $40 and $125 ofinterest expense to the cost of internally developed software during the yearsended December 31, 2008 and 2007, respectively.

 

**11.  COMMITMENTS ANDCONTINGENCIES**

 

***Capital Leases***

 

      The Company is a party to non-cancelablelease agreements involving computer equipment, software and furnituredetermined to be capital leases.  Theleases extend for varying periods up to 3 years and generally provide for thepayment of taxes, insurance and maintenance by the lessee.  Generally, these leases have options topurchase at varying dates.  The Company’sproperty held under capital leases, included in property and equipment (Note 6)consisted of the following:

 
| ** **                      | ** ** | **December 31,  2008** | ** ** | **December 31,  2007** | ** ** |
|---------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| Furniture and  fixtures         |       | $                           | 7          |                        | $          | 55 |   |
| Equipment                       |       | 6                           |       | 17                          |       |
| Computer  hardware and software |       | 902                         |       | 65                          |       |
| Construction in  progress       |       | —                      |       | 1,079                       |       |
| Total property  and equipment   |       | 915                         |       | 1,216                       |       |
| Less accumulated  depreciation  |       | (303                        | )          | (63                         | )          |
| Total                           |       | $                           | 612        |                        | $          | 1,153 |   |

 

Amortization of assets recorded under capitalleases is included with depreciation expense.

 

The current portion of capital leaseobligations is included in accounts payable and other accrued liabilities andthe long-term portion of capital lease obligations is included in other long-termliabilities.  The approximate futureminimum lease payments for the capital lease obligations are as follows:

 
| **Year Ending December 31,** | ** ** | **Amount** | ** ** |
|---------------------------------------------|------------|------------|------------|
| 2009                                        |       | $          | 606        |   |
| 2010                                        |       | 329        |       |
| 2011                                        |       | 38         |       |
|                                        |       | 973        |       |
| Less imputed  interest                      |       | (57        | )          |
| Total                                       |       | $          | 916        |   |

 

***Operating Leases***

 

The Company occupies office facilities and leasesoffice equipment under operating leases, which expire in various years through2015, certain of which are subject to escalations including those based uponincreases in specified operating expenses or increases in the Consumer PriceIndex. Leases of real estate generally provide for payment of property taxes,insurance, maintenance and repairs. Rent expense from continuing operations was$11,108, $10,323 and $9,449 for the years ended December 31, 2008, 2007,and 2006, respectively. Future minimum payments under non-cancelable operatingleases as of December 31, 2008 are as follows:

 
| **Year Ending December 31,** | ** ** | **Amount** | ** ** |
|---------------------------------------------|------------|------------|------------|
| 2009                                        |       | $          | 8,630      |   |
| 2010                                        |       | 5,770      |       |
| 2011                                        |       | 4,358      |       |
| 2012                                        |       | 3,274      |       |
| 2013                                        |       | 3,084      |       |
| Thereafter                                  |       | 5,324      |       |
| Total                                       |       | $          | 30,440     |   |

 

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***Litigation***

 

The Company is a party to certain pending claims thathave arisen in the ordinary course of business, none of which, in the opinionof management, is expected to have a material adverse effect on theconsolidated financial position, results of operations, or cash flows ifadversely resolved. However, the defense and settlement of these claims mayimpact the future availability of, and retention amounts and cost to theCompany for applicable insurance coverage.

 

On March 13, 2009, aputative class action was commenced in the Circuit Court for Manatee County,Florida against the Company, each of the Company’s directors and TriNetalleging that Gevity’s board of directors breached its fiduciary duties to theCompany’s shareholders in approving and adopting a merger agreement thatcontains preclusive deal protection measures and allegedly unfair mergerconsideration. The complaint further alleges that the Company and TriNet aidedand abetted Gevity’s directors in this alleged breach of fiduciary duty. Thecomplaint seeks to enjoin the completion of the merger, an award of unspecifiedmonetary damages and to recover certain costs incurred by the plaintiff. TheCompany believes the complaint to be entirely without merit and intends todefend it vigorously.

 

***Regulatory Matters***

 

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

 

***CaliforniaUnemployment Tax Assessment***

 

In May of2007, the Company received a Notice of Assessment from the State of CaliforniaEmployment Development Department (“EDD”) relative to the Company’s practice ofreporting payroll for its subsidiaries under multipleemployer account numbers.  The noticestated that the EDD was collapsing the accounts of the Company’ssubsidiaries into one account number for payroll reporting purposes andretroactively reassessed unemployment taxes due at ahigher overall rate for the 2004-2006 tax years resulting in an assessment of$4,684. On May 30, 2007, the Company filed a petition with theOffice of the Chief Administrative Law Judge for the California UnemploymentInsurance Appeals Board asking that the EDD’sassessment be set aside. The petition contends in part that the EDD hasexceeded the scope of its authority in issuing the assessment by failing tocomply with its own mandatory procedural requirements and that the statute of limitations for issuing the assessments has expired as theCompany’s activities within the state were compliant with Californiastatutes and regulations.

 

The Company and the Stateof California entered into negotiations in May 2008 in an attempt toresolve the dispute.  As a result, Gevity proposed a settlement offer in June 2008that included a cash payment offer of $1,200, conceding to the State’s higheroverall unemployment tax rate for tax years 2007 — 2008, along with revisionsto its unemployment tax reporting methods for post 2008 tax years inconsideration for the State’s withdrawal of the existing Assessment for 2004-2006 (the “ Settlement Offer”).  The Settlement Offer is currently underreview by the State.  The Company’s financial statements for the yearended December 31, 2008 reflect a charge of $1,200 within cost ofservices, reflecting estimated amounts due in connection with additionalunemployment tax costs for the term January 1, 2007 — December 31,2008, should the State of California accept the Settlement Offer. In the eventthat the Company is not able to reach a settlement with the State ofCalifornia, the Company believes it has valid defenses regarding theassessments and will vigorously challenge the assessments.

 

**12.  RELATED PARTIES**

 

During 2007 and 2006, certain members of the Board ofDirectors utilized the services of the Company with respect to themselvesand/or their companies. The amount of service fees paid by the directors ortheir companies was $3 and $4 in 2007 and 2006, respectively. During 2008 and2007, Gevity utilized the services of a company where a member of the board ofdirectors is an executive officer. Payments to the company for the year ended December 31,2008 and 2007 totaled $644 and $602, respectively.

 

**13.  RETIREMENT PLAN**

 

The Company offers a defined contribution 401(k) retirementplan to its internal employees as well as its external client employees. In2008, 2007 and 2006, the Company matched 50% of internal employees’contributions up to a maximum of 2% of employees’ compensation. The Company had401(k) retirement matching expense related to continuing operations of$839, $845 and $771, for the years 2008, 2007, and 2006 respectively. TheCompany’s 401(k) plan for its external client employees is designed to bea “multiple employer” plan under the Internal Revenue Code Section 413(c).

 

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**14.  GEOGRAPHICMARKET CONCENTRATION AND DEPENDENCE ON KEY VENDORS**

 

***Geographic Market Concentration***

 

As of December 31, 2008, the Company had offices in 13 statesand client employees in all 50 states and the District of Columbia. TheCompany’s billings to Florida clients accounted for approximately 56%, 50% and56% of the Company’s total client billings in 2008, 2007 and 2006,respectively. As a result of the size of the Company’s base of client employeesin Florida, the Company’s profitability over the next several years is expectedto be largely dependent on economic and regulatory conditions in Florida. Anyadverse change in either of these conditions could have a material adverseeffect on the Company’s future profitability and growth prospects.

 

***Dependence on Key Vendors***

 

The maintenance of insurance plans including workers’ compensation andhealth that cover client employees is a significant part of the Company’sbusiness. The current contracts are provided by vendors on terms that theCompany believes to be favorable. While the Company believes that replacementcontracts could be obtained on competitive terms with other carriers, suchreplacement could cause a significant disruption to the Company’s businessresulting in a decrease in client retention and general dissatisfaction withthe Company’s service offering. This, in turn, could have a material adverseeffect on the Company’s future results of operations, financial condition, andcash flows.

 

**15.  EQUITY**

 

***Share Repurchase Program***

 

On August 15, 2006, the Company announced that the board ofdirectors authorized the repurchase of up to $75,000 of the Company’s commonstock under a new share repurchase program. Share repurchases under the newprogram were to be made through open market purchases, block trades or inprivate transactions at such times and in such amounts as the Company deemedappropriate, based on a variety of factors including price, regulatoryrequirements, overall market conditions and other corporate opportunities. Asof March 31, 2007, the Company had purchased 1,650,684 shares of itscommon stock under this new program at a total cost of $36,527. On April 20,2007, the Company’s board of directors authorized an increase to this sharerepurchase program which brought the repurchase amount authorized back up to$75,000. As of December 31, 2007, total shares repurchased under thisprogram since its inception in August 2006 were 2,886,884 shares at atotal cost of $60,131. No shares were purchased under this program during theyear ended December 31, 2008. The Company has suspended its sharerepurchase program for the time being in order to invest available cash in itsbusiness.

 

On February 28,2006, the Company announced that the board of directors had authorized thepurchase of up to 1,000,000 additional shares of the Company’s common stockunder a new share repurchase program. Share repurchases under this program wereto be made through open market repurchases, block trades or in privatetransactions at such times and in such amounts as the Company deemedappropriate based upon a variety of factors including price, regulatoryrequirements, market conditions and other corporate opportunities. The Companycompleted this share repurchase program in September 2006 with a totalpurchase of 1,000,000 shares at a cost of $23,456.

 

On September 28,2005, the Company announced that the board of directors authorized therepurchase of up to $50,000 of the Company’s common stock. Stock repurchasesunder this program were to be made at such times and in such amounts as theCompany deemed appropriate, based on a variety of factors including price,corporate and regulatory requirements and overall market conditions. As of December 31,2005, the Company had purchased 1,816,869 shares of its common stock at acost of $49,399. The Company completed this share repurchase program in January 2006with additional purchases of 23,933 shares at a cost of $601.

 

All repurchased shares were initially held as treasuryshares. During the third quarter of 2007, the Company retired 8,732,527 sharesof its common stock, which had been held in treasury. In connection with theretirement of these shares, the Company reclassified $149,606 of the costsassociated with these treasury shares to additional paid-in capital.

 

***Equity Based Compensation Plans***

 

At December 31, 2008, the Company has severalequity-based compensation plans from which stock-based compensation awards canor have been granted to eligible employees, officers and directors.

 

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In 2005, the shareholders approved the 2005 EquityIncentive Plan (the “2005 Plan”). The 2005 Plan provides for various equityincentives, including options, to be granted to key employees, officers,directors, consultants and other service providers of the Company. Under the2005 Plan, 2,000,000 shares of common stock were authorized for issuance.In May 2008, shareholders of the Company approved an amendment to the 2005Plan modifying the 400,000 share limit on the number of shares subject to stockincentive awards other than options that may be issued under the 2005 Plan. Theamendment allows the full pool of shares under the plan to be issued in theform of options, stock awards, stock appreciation rights, dividend equivalentrights, phantom shares and performance units. Generally, after the separate 400,000 share limit is exceeded, eachstock incentive granted under the plan other than as an option or stockappreciation right shall reduce the maximum plan shares by three shares ofstock for every one share subject to the stock incentive.  Stock awards granted to date under the 2005Plan have been in the form of stock options and non-vested stock and generallyhave a vesting period of 4 years for officers and key employees, whereby25% of the awards vest each year. During 2008, the first non-vested stockawards with a market-based vesting condition were granted. These awards weregranted to certain officers of the Company with a portion of the award subjectto service-based vesting over a 3 year period and the remainder of the shares(184,000) subject to issuance upon the attainment of certain stock pricetriggers over a 3.6 year period (market condition). Stock option awards grantedto non-employee directors are immediately vested or vest quarterly over a oneyear period while non-vested stock awards to non-employee directors vest over athree year period. Options may not be exercised more than 10 years fromthe date of grant.

 

In May 2002, the shareholders approved the 2002Incentive Plan (the “2002 Plan”). The 2002 Plan provided for various equityincentives including options, to be granted to key employees, officers, anddirectors of the Company. Under the 2002 Plan, 2,000,000 shares of commonstock were authorized for issuance. Stock awards granted to date under the 2002Plan have been in the form of stock options and non-vested stock and have avesting period of 4 years for officers and key employees, whereby 25% ofthe awards vest each year, and are immediately vested for non-employeedirectors. Options may not be exercised more than 10 years from the dateof grant. In connection with the approval of the 2005 Plan, no further optionsor equity awards are to be granted under the 2002 Plan.

 

In 1997, the Company adopted the 1997 Stock IncentivePlan (the “1997 Plan”). The 1997 Plan provides for various equity incentives,including options, to be granted to key employees, officers, and directors ofthe Company. Initially, 2,500,000 shares of common stock were authorizedfor issuance under the 1997 plan. In May 2000, shareholders approved anamendment to the 1997 Plan that increased the number of shares reserved forissuance under the plan to 4,500,000 shares. Options granted to date underthe 1997 Plan generally have a vesting period of 4 years for officers andkey employees, whereby 25% of the awards vest each year, and generally areimmediately vested for non-employee directors. Options may not be exercisedmore than 10 years from the date of the grant. In connection with theapproval of the 2005 Plan, no further options or equity awards are to be grantedunder the 1997 Plan.

 

Grants of stock options are generally awarded at agrant price equal to the market price of the Company’s common stock on the dateof grant. The source of shares issued upon the exercise of the Company’s stockoptions may be newly issued shares or shares issued from treasury.

 

As of December 31, 2008, there was approximately$3,593 of unrecognized compensation expense related to all non-vestedshare-based compensation arrangements granted under the Company’s stockcompensation plans. That expense is expected to be recognized over aweighted-average period of 1.7 years.

 

***Stock Option Awards***

 

The Company uses the Black-Scholes-Mertonoption-pricing model to estimate the fair value of stock options on thegrant-date under SFAS 123R, which is the same valuation techniquepreviously used for pro forma disclosures under SFAS 123. The Company usedthe following weighted average assumptions for all options granted during thetwelve months ended December 31, 2008, 2007 and 2006:

 
| ** **                      | ** ** | **Year Ended December 31,** | ** ** |
|---------------------------------|------------|--------------------------------------------|------------|
| ** **                      | ** ** | **2008**                                   | ** ** | **2007** | ** ** | **2006** | ** ** |
| Risk-free interest rate         |       | 2.77                                       | %          | 4.59 | % | 4.71 | % |
| Expected dividend yield         |       | 3.29                                       | %          | 2.13 | % | 1.31 | % |
| Expected volatility             |       | 57.53                                      | %          | 43.35 | % | 50.83 | % |
| Expected option life (in years) |       | 3.8                                        |       | 3.8 |   | 3.7 |   |

 

The risk-free interest rate is based upon theU.S. Treasury yield curve on the date of grant with a remaining termapproximating the expected term of the options granted. The dividend yield isbased upon the Company’s best estimate of future dividend yield. The 

 

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expected volatility isbased upon the historical volatility of the Company’s common stock over theperiod of time equivalent to the expected term of the options granted. Theexpected term (in years) of the options granted is derived from historicaldata; employees are divided into two groups based upon expected exercisebehavior and are considered separately for valuation purposes.

 

A summary of stock option activity for the year ended December 31,2008 is as follows:

 
| **Stock Options**                | ** ** | **Shares** | ** ** | **Weighted-  Average  Exercise Price** | ** ** | **Weighted-Average  Remaining  Contractual Term  (Years)** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
|---------------------------------------|------------|------------|------------|---------------------------------------------|------------|-----------------------------------------------------------------|------------|---------------------------------|------------|
| Outstanding at January 1, 2008   |       | 1,878,041  |       | $                                           | 11.81      |                                                            |       |                            |       |   |
| Granted                               |       | 375,000    |       | $                                           | 6.22       |                                                            |       |                            |       |   |
| Exercised                             |       | (1,003,625 | )          | $                                           | 3.81       |                                                            |       |                            |       |   |
| Forfeited                             |       | (90,782    | )          | $                                           | 21.27      |                                                            |       |                            |       |   |
| Expired                               |       | (149,217   | )          | $                                           | 22.52      |                                                            |       |                            |       |   |
| Outstanding at December 31, 2008 |       | 1,009,417  |       | $                                           | 15.25      |                                                            | 6.72       |                            | $          | — |   |
| Exercisable at December 31, 2008 |       | 496,747    |       | $                                           | 21.26      |                                                            | 4.19       |                            | $          | — |   |
| Options vested and expected to vest   |       | 829,224    |       | $                                           | 16.00      |                                                            | 6.25       |                            | $          | — |   |

 

The weighted average grant-date fair value of stockoptions granted during the years ended December 31, 2008, 2007 and 2006was $2.31, $5.82 and $10.96 respectively. The total intrinsic value of optionsexercised, determined as of the date of exercise, during the years ended December 31,2008, 2007 and 2006 was $4,198, $1,194 and $11,439, respectively. Aggregateintrinsic value is calculated as the difference between the exercise price ofthe underlying awards and the quoted market price of the Company’s stock forin-the-money stock options at December 31, 2008.

 

***Non-Vested Stock Awards***

 

The fair value of non-vested stock awards for awardswith service-based vesting conditions equals the market value of the underlyingcommon stock on the date of grant. The fair value of non-vested stock awardswith market-based vesting conditions was determined using a Monte-Carlo simulationmodel. The Monte Carlo simulation model utilizes multiple input variables thatdetermine the probability of satisfying each market condition stipulated in theaward grant and calculates the fair market value for the awards. The weightedaverage assumptions for non-vested stock awards with a market condition are asfollows:

 
| ** **               | ** ** | **Year Ended**             | ** ** |
|--------------------------|------------|---------------------------------|------------|
| ** **               | ** ** | **December 31, 2008** | ** ** |
| Risk-free interest rate  |       | 2.95                            | %          |
| Expected dividend yield  |       | 3.39                            | %          |
| Expected volatility      |       | 57.17                           | %          |
| Expected life (in years) |       | 2.15                            |       |

 

The risk-free interest rate is based upon theU.S. Treasury yield curve on the date of grant with a remaining termapproximating the expected term of the award. Expected dividend yield is basedon historical dividend payments and represents the weighted average startingdividend yield in the simulation model. The expected volatility is based on thehistorical volatility levels on the Company’s common stock over the period oftime equivalent to the expected term of the award. The expected term of theaward is based upon the contractual term of the award.  The fair value of the market-based awards isamortized straight-line over the contractual term of the award.

 

A summary of non-vested stock activity for the yearended December 31, 2008 is as follows:

 
| **Non-Vested Stock**             | ** ** | **Shares** | ** ** | **Weighted Average  Grant-  Date Fair Value** | ** ** | **Weighted-Average  Remaining  Contractual Term(Years)** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
|---------------------------------------|------------|------------|------------|--------------------------------------------------------------|------------|---------------------------------------------------------------|------------|---------------------------------|------------|
| Outstanding at January 1, 2008   |       | 114,558    |       | $                                                            | 20.33      |                                                          |       |                            |       |   |
| Granted                               |       | 370,900    |       | $                                                            | 4.75       |                                                          |       |                            |       |   |
| Vested                                |       | (47,023    | )          | $                                                            | 20.69      |                                                          |       |                            |       |   |
| Forfeited                             |       | (12,746    | )          | $                                                            | 23.79      |                                                          |       |                            |       |   |
| Outstanding at December 31, 2008 |       | 425,689    |       | $                                                            | 6.61       |                                                          | 6.43       |                            | $          | 643 |   |
| Non-vested stock expected to vest     |       | 355,252    |       | $                                                            | 6.27       |                                                          | 6.43       |                            | $          | 536 |   |

 

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The weighted average grant-date fair value ofnon-vested stock awards granted during the years ended December 31, 2008,2007 and 2006, was $4.75, $16.87 and $26.64, respectively. The total fair valueof non-vested stock awards that vested during the years ended December 31,2008, 2007 and 2006 was $296, $269 and $724.

 

***Employee Stock Purchase Plan (“ESPP”)***

 

The Company has a shareholder approved ESPP. Internalemployees of the Company, who regularly work more than 20 hours per weekand have been employed with the Company for at least ninety days prior to theoffering period, are eligible to participate in the plan. Participants, throughpayroll deductions, may purchase a maximum of 500 shares during theoffering period at a cost of 85% of the lower of the stock price as of thebeginning or ending of the stock offering period. During the years ended December 31,2008, 2007 and 2006, 40,479, 20,301 and 20,941, shares of common stock (fromtreasury), respectively, were sold to employees participating in the Company’sESPP for proceeds of approximately $217, $375 and $401, respectively.

 

**16.  (LOSS)EARNINGS PER SHARE (“EPS”)**

 

For the year ended December 31, 2008, 250,032 common stockequivalents were excluded from the diluted earnings per share computation astheir effect was anti-dilutive. Additionally, 694,553 options to purchasecommon stock, weighted for the portion of the period they were outstanding,were excluded from the diluted earnings per share computation because theexercise price of the options were greater than the average price of the commonstock.

 

The reconciliation of net income attributable tocommon shareholders and shares outstanding for the purposes of calculatingbasic and diluted earnings per share for the year ended December 31, 2007 isas follows:

 
| ** **                                  | ** ** | **Net Income  (Loss)  (Numerator)** | ** ** | **Shares  (Denominator)** | ** ** | **Per Share  Amount** | ** ** |
|---------------------------------------------|------------|------------------------------------------|------------|---------------------------|------------|----------------------------|------------|
| For the Year Ended  December 31, 2007: |       |                                     |       |                      |       |                       |       |
|                                        |       |                                     |       |                      |       |                       |       |
| Basic EPS:                                  |       |                                     |       |                      |       |                       |       |
| Income from continuing  operations          |       | $                                        | 18,097     |                      |       |                       | $          | 0.76 |   |
| Loss from discontinued  operations          |       | (8,138                                   | )          |                      |       | (0.34                      | )          |
| Net income                                  |       | $                                        | 9,959      |                      | 23,688,921 |                       | $          | 0.42 |   |
|                                        |       |                                     |       |                      |       |                       |       |
| Effect of dilutive securities:              |       |                                     |       |                      |       |                       |       |
| Options to purchase common stock            |       |                                     |       | 542,411                   |       |                       |       |
| Non-vested stock                            |       |                                     |       | 15,909                    |       |                       |       |
|                                        |       |                                     |       |                      |       |                       |       |
| Diluted EPS:                                |       |                                     |       |                      |       |                       |       |
| Income from continuing  operations          |       | $                                        | 18,097     |                      |       |                       | $          | 0.75 |   |
| Loss from discontinued  operations          |       | (8,138                                   | )          |                      |       | (0.34                      | )          |
| Net income                                  |       | $                                        | 9,959      |                      | 24,247,241 |                       | $          | 0.41 |   |

 

For the year ended December 31, 2007, 709,416 options to purchasecommon stock, weighted for the portion of the period they were outstanding, were excluded from the diluted earnings pershare computation because the exercise prices of the options were greater thanthe average price of the common stock.

 

The reconciliation of net income attributable tocommon shareholders and shares outstanding for the purposes of calculatingbasic and diluted earnings per share for the year ended December 31, 2006 isas follows:

 

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| ** **                                  | ** ** | **Net Income  (Loss)  (Numerator)** | ** ** | **Shares  (Denominator)** | ** ** | **Per Share  Amount** | ** ** |
|---------------------------------------------|------------|------------------------------------------|------------|---------------------------|------------|----------------------------|------------|
| For the Year Ended  December 31, 2006: |       |                                     |       |                      |       |                       |       |
|                                        |       |                                     |       |                      |       |                       |       |
| Basic EPS:                                  |       |                                     |       |                      |       |                       |       |
| Income from continuing  operations          |       | $                                        | 35,571     |                      |       |                       | $          | 1.37 |   |
| Loss from discontinued  operations          |       | (308                                     | )          |                      |       | (0.01                      | )          |
| Net income                                  |       | $                                        | 35,263     |                      | 25,932,904 |                       | $          | 1.36 |   |
|                                        |       |                                     |       |                      |       |                       |       |
| Effect of dilutive securities:              |       |                                     |       |                      |       |                       |       |
| Options to purchase common stock            |       |                                     |       | 808,554                   |       |                       |       |
| Non-vested stock                            |       |                                     |       | 48,194                    |       |                       |       |
|                                        |       |                                     |       |                      |       |                       |       |
| Diluted EPS:                                |       |                                     |       |                      |       |                       |       |
| Income from continuing  operations          |       | $                                        | 35,571     |                      |       |                       | $          | 1.33 |   |
| Loss from discontinued  operations          |       | (308                                     | )          |                      |       | (0.01                      | )          |
| Net income                                  |       | $                                        | 35,263     |                      | 26,789,652 |                       | $          | 1.32 |   |

 

For the year endedDecember 31, 2006, 357,237 options to purchase common stock, weighted forthe portion of the period they were outstanding, wereexcluded from the diluted earnings per share computation because the exerciseprices of the options were greater than the average price of the common stock.

 

**17.  INCOME TAXES**

 

Significantcomponents of the income tax (benefit) provision from continuing operations areas follows:

 
| ** **                                 | ** ** | **Year Ended December 31,** | ** ** |
|--------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                 | ** ** | **2008**                                   | ** ** | **2007** | ** ** | **2006** | ** ** |
| Current:                                   |       |                                       |       |   |   |   |   |
| Federal                                    |       | $                                          | 8,920      |   | $ | 19,133 |   | $ | 18,269 |   |
| State and local                            |       | 1,731                                      |       | 3,102 |   | 2,455 |   |
| Total current provision for income taxes   |       | 10,651                                     |       | 22,235 |   | 20,724 |   |
| Deferred:                                  |       |                                       |       |   |   |   |   |
| Federal                                    |       | (10,070                                    | )          | (9,888 | ) | (6,786 | ) |
| State and local                            |       | (2,136                                     | )          | (1,872 | ) | (582 | ) |
| Total deferred benefit for income taxes    |       | (12,206                                    | )          | (11,760 | ) | (7,368 | ) |
| Total (benefit) provision for income taxes |       | $                                          | (1,555     | ) | $ | 10,475 |   | $ | 13,356 |   |

 

The reconciliationof income tax (benefit) provision from continuing operations computed at theU.S. federal statutory rate to the Company’s effective income tax rate isas follows:

 
| ** **                                 | ** ** | **Year Ended December 31,** | ** ** |
|--------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                 | ** ** | **2008**                                   | ** ** | **2007** | ** ** | **2006** | ** ** |
| Statutory U.S. federal tax at 35%     |       | $                                          | (1,003     | ) | $ | 10,000 |   | $ | 17,124 |   |
| State and local  tax, less federal benefit |       | (86                                        | )          | 944 |   | 115 |   |
| Change in  valuation allowance             |       | (251                                       | )          | 1,304 |   | — |   |
| Change in tax  reserves                    |       | 646                                        |       | 439 |   | (2,482 | ) |
| Tax credits                                |       | (2,568                                     | )          | (2,400 | ) | (2,278 | ) |
| Permanent  differences                     |       | 1,113                                      |       | 982 |   | 1,107 |   |
| Tax credit  true-up                        |       | 42                                         |       | (566 | ) | — |   |
| State net  operating loss true-up          |       | 604                                        |       | (363 | ) | — |   |
| Other                                      |       | (52                                        | )          | 135 |   | (230 | ) |
| Total tax (benefit) provision              |       | $                                          | (1,555     | ) | $ | 10,475 |   | $ | 13,356 |   |
| Effective tax rate                         |       | 54.3                                       | %          | 36.7 | % | 27.3 | % |

 

The components ofdeferred tax assets and liabilities included on the balance sheet at December 31,2008 and 2007 are as follows:

 

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| ** **                                   | ** ** | **2008** | ** ** | **2007** | ** ** |
|----------------------------------------------|------------|----------|------------|----------|------------|
| **Deferred Tax Assets:**                     |       |     |       |     |       |
| Accrued expenses                             |       | $        | 6,919      |     | $          | 9,708 |   |
| Depreciation and amortization                |       | 14,842   |       | 13,586   |       |
| Net operating loss and tax credit carryover  |       | 1,187    |       | 1,791    |       |
| Valuation allowance                          |       | (1,053   | )          | (1,304   | )          |
| Total deferred  tax assets                   |       | 21,895   |       | 23,781   |       |
| **Deferred Tax Liabilities:**                |       |     |       |     |       |
| Unearned revenue                             |       | (9,906   | )          | (19,813  | )          |
| Amortization of intangibles and fixed assets |       | (4,196   | )          | (4,845   | )          |
| Total deferred  tax liabilities              |       | (14,102  | )          | (24,658  | )          |
| Net deferred tax assets (liabilities)        |       | $        | 7,793      |     | $          | (877 | ) |
| **Balance Sheet Classification:**            |       |     |       |     |       |
| Net current  deferred tax liabilities        |       | $        | (5,261     | )        | $          | (11,674 | ) |
| Net non-current  deferred tax assets         |       | 13,054   |       | 10,797   |       |
| Net deferred tax assets (liabilities)        |       | $        | 7,793      |     | $          | (877 | ) |

 

SFAS No. 109,*Accounting for Income Taxes*,requires a valuation allowance to reduce the deferred tax assets reported if,based on the weight of the available evidence, both positive and negative, foreach respective tax jurisdiction, it is more likely than not that some portionor all of the deferred tax assets will not be realized. At December 31,2007 the Company established a valuation allowance of $1,304 as it wasdetermined that it is more likely than not that the deferred tax assets relatedto certain state net operating loss carryforwards will not be utilized prior totheir expiration. This valuation allowance decreased by $367 during 2008 due todifferences in the actual generation and utilization of state net operatinglosses based on the Company’s 2007 tax return filing positions and increased by$116 for additional projected state net operating losses generated in 2008 thatare not expected to be realized. As of December 31, 2008, the Companydetermined that a valuation allowance for the remaining deferred tax assets ofthe Company was not considered necessary based upon review of the availableevidence, both positive and negative, which included the following:

 

·                  theCompany has reported earnings from continuing operations and taxable income forthe past three years (excluding a $8,692 goodwill impairment charge in 2008);

·                  theCompany’s financial plans and taxable income forecasts project future taxableincome over the planning period; and

·                  theCompany’s capacity for carry-back of over $100,000 of federal net operatinglosses.

 

The Company hasvarious tax effected state net operating loss carryforwards of approximately$1,187, (notwithstanding the valuation allowance discussed above) which areavailable for carryforward and expire through the year ending December 31,2028.

 

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 to U.S. federal, state and local incometax examinations by tax authorities in material jurisdictions for tax yearsbeginning prior to January 1, 2002. The Internal Revenue Service commenced an examination of the Company’sU.S. income tax returns for 2002 through 2004 in July 2006. In December 2007,the Service commenced the examination of the Company’s U.S. income tax returnsfor 2005 and 2006. During the year ended December 31, 2008, the Companyrecognized additional income tax charges of $436 relating to interest andpenalties associated with prior year tax filing positions in connection withthe ongoing Internal Revenue Service examination of the Company’s 2004 taxreturn. The additional taxes due of $2,246 (net, excluding interest) resultedin an adjustment in the Company’s balance sheet between current taxespayable,  the Company’s current deferredtax liability, and the Company’s FIN 48 liability at December 31, 2008.

 

On January 1, 2007, the Company adopted the provisions of FASBInterpretation No. 48, *Accounting for Uncertaintyin Income Taxes – An Interpretation of FASB Statement No. 109*,(“FIN 48”) which clarifies the accounting for uncertainty in taxpositions.  As a result of theimplementation of FIN 48, the Company recognized a net increase in itsliability for unrecognized tax benefits of $711 which was accounted for as adecrease to the January 1, 2007 balance of retained earnings.  At the adoption date of January 1, 2007,the Company had $1,094 of unrecognized tax benefits (including interest)recognition of which would affect the Company’s effective tax rate.  At December 31, 2008, the Company had$9,834 of unrecognized tax benefits (including interest). If the Company recognizedthese tax benefits, the impact on the effective tax rate would be partiallyoffset by a tax benefit received from the deductions relating to theunrecognized tax benefits, and thus the impact on the rate would be $711 and$1,704 at January 1, 2007 and December 31, 2008, respectively.

 

It is reasonably possible that $2,093 of the gross unrecognized taxbenefit (including interest of $389) at December 31, 2008 will decrease inits entirety within twelve months.  Thisportion of the unrecognized tax benefit relates to the methodology used to 

 

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determine stateapportionment of income.  The Company ispursuing a ruling to clarify this uncertain tax position and expects to receivethis ruling within the next 12 months. The remaining gross unrecognized taxbenefit at December 31, 2008 of $7,741 (including interest of $436)relates to a proposed adjustment by the IRS for the period under examinationand is highly certain, however there is uncertainty about the timing of the taxrecognition.  The disallowance of thisposition would not impact the effective income tax rate. The Company expectsthis matter to be resolved through settlement of the on-going examinationwithin the next 12 months.

 

The Company will continue to recognize interest and penalties relatedto its uncertain tax positions in income tax expense.  At January 1, 2007, December 31,2007 and December 31, 2008, the balance of accrued interest on theunrecognized tax benefit was $32, $128 and $825 respectively.  No penalties were accrued on these dates.

 

A reconciliation of the beginning and ending amount of unrecognized taxbenefits is as follows:

 
| ** **                                                                                                      | ** ** | **2008** | ** ** | **2007** | ** ** |
|-----------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Total amount of unrecognized tax benefits (excluding  interest) as of January 1                            |       | $        | 1,642      |     | $          | 1,062 |   |
| Gross amount of decrease in unrecognized tax  benefits as a result of tax positions taken during a prior period |       | 64       |       | (106     | )          |
| Reductions to unrecognized tax benefits as a result  of a lapse of the applicable statute of limitations        |       | (119     | )          | —   |       |
| Gross amount of increase in unrecognized tax  benefits as a result of tax positions taken during a prior period |       | 7,422    |       | 686      |       |
| Total amount of unrecognized tax benefits (excluding  interest) as of December 31                          |       | $        | 9,009      |     | $          | 1,642 |   |

 

On March 11, 2009, in connection with an ongoingexamination of the Company’s U.S. income tax returns for 2002 through 2004, theCompany received Notices of Proposed Adjustment from the Internal RevenueService (“IRS”) advising it of proposed increases to its federal income tax ofapproximately $41,900 including penalties. Of this amount, the Company haspreviously reserved $6,852 of federal income taxes in its consolidatedfinancial statements in accordance with the provisions of FIN 48.  The Company believes that the remainingproposed adjustments are either the result of the IRS misunderstanding thefacts relating to the adjustments or the result of a legal interpretation madeby the IRS that is inconsistent with existing law.  The Company intends to vigorously contestthese adjustments and believes that it will ultimately prevail.  Although the ultimate outcome of the disputewith the IRS cannot be predicted with certainty, the Company believes thatadequate provision for taxes has been made in its consolidated financialstatements for any reasonably foreseeable outcome related to these proposedadjustments.   Consequently, the Companybelieves that ultimate resolution of this matter is unlikely to have a materialadverse effect on its financial condition or results of operations.

 

**18.  QUARTERLYFINANCIAL DATA (UNAUDITED):**

 

The followingtable presents certain unaudited results of continuing operations data for theinterim quarterly periods during the years ended December 31, 2008 and2007. The Company believes that all adjustments, consisting only of normalrecurring adjustments, necessary to present fairly the results of operations inaccordance with accounting principles generally accepted in the United Statesof America, have been made. The results of operations for any interim periodare not necessarily indicative of the operating results for a full year or anyfuture period.

 
| ** **                               | ** ** | **Quarter Ended**                                                          | ** **    |
|------------------------------------------|------------|---------------------------------------------------------------------------------|---------------|
| ** **                               | ** ** | **2008**                                                                        | ** **    | **2007** | ** ** |
| ** **                               | ** ** | **Dec. 31(1)**                                                             | ** **    | **Sept. 30(2)** | ** ** | **June 30(3)** | ** ** | **Mar. 31(4)** | ** ** | **Dec. 31(5)** | ** ** | **Sept. 30(6)** | ** ** | **June 30(7)** | ** ** | **Mar. 31(8)** | ** ** |
| ** **                               | ** ** | **(Dollars in thousands, except per share data)** | ** **    |
| Revenues                                 |       | $                                                                               |  125,109 |   | $ |  125,077 |   | $ |  128,656 |   | $ |  141,698 |   | $ |  146,017 |   | $ |  145,515 |   | $ |  149,478 |   | $ |  160,584 |   |
| Gross profit                             |       | $                                                                               | 38,885        |   | $ | 34,292 |   | $ | 37,920 |   | $ | 34,240 |   | $ | 50,354 |   | $ | 44,116 |   | $ | 46,655 |   | $ | 44,902 |   |
| Gross profit margin                      |       | 31.1                                                                            | %             | 27.4 | % | 29.5 | % | 24.2 | % | 34.5 | % | 30.3 | % | 31.2 | % | 28.0 | % |
| (Loss) income from continuing operations |       | $                                                                               | (1,223        | ) | $ | (1,772 | ) | $ | 1,955 |   | $ | (271 | ) | $ | 6,640 |   | $ | 3,209 |   | $ | 5,502 |   | $ | 2,746 |   |
| Loss from discontinued operations        |       | (161                                                                            | )             | (179 | ) | (1,767 | ) | (1,344 | ) | (6,339 | ) | (755 | ) | (812 | ) | (232 | ) |
| Net (loss) income                        |       | $                                                                               | (1,384        | ) | $ | (1,951 | ) | $ | 188 |   | $ | (1,615 | ) | $ | 301 |   | $ | 2,454 |   | $ | 4,690 |   | $ | 2,514 |   |
| Basic (loss) earnings per share:         |       |                                                                            |          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Continuing operations                    |       | $                                                                               | (0.05         | ) | $ | (0.07 | ) | $ | 0.08 |   | $ | (0.01 | ) | $ | 0.28 |   | $ | 0.14 |   | $ | 0.23 |   | $ | 0.11 |   |
| Discontinued operations                  |       | (0.01                                                                           | )             | (0.01 | ) | (0.07 | ) | (0.06 | ) | (0.27 | ) | (0.03 | ) | (0.03 | ) | (0.01 | ) |
| Basic (loss) earnings per share          |       | $                                                                               | (0.06         | ) | $ | (0.08 | ) | $ | 0.01 |   | $ | (0.07 | ) | $ | 0.01 |   | $ | 0.11 |   | $ | 0.20 |   | $ | 0.10 |   |
| Diluted (loss) earnings per share:       |       |                                                                            |          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Continuing operations                    |       | $                                                                               | (0.05         | ) | $ | (0.07 | ) | $ | 0.08 |   | $ | (0.01 | ) | $ | 0.28 |   | $ | 0.13 |   | $ | 0.22 |   | $ | 0.11 |   |
| Discontinued operations                  |       | (0.01                                                                           | )             | (0.01 | ) | (0.07 | ) | (0.06 | ) | (0.27 | ) | (0.03 | ) | (0.03 | ) | (0.01 | ) |
| Diluted (loss) earnings per share        |       | $                                                                               | (0.06         | ) | $ | (0.08 | ) | $ | 0.01 |   | $ | (0.07 | ) | $ | 0.01 |   | $ | 0.10 |   | $ | 0.19 |   | $ | 0.10 |   |

 

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----

(1)          Includedin the fourth quarter of 2008 is the impact of:

·                  a$6,242 increase in gross profit ($3,870 net of related income tax) related tothe reduction in the ultimate loss estimates of prior years’ workers’compensation programs in recognition of continued favorable claims trends;

·                  a$3,326 increase in gross profit ($2,062 net of related income tax) related tofavorable health claims trend and the recording of a health plan surplus;

·                  a$8,692 goodwill impairment loss ($5,389 net of related income tax);

·                  a$2,366 expense ($1,467 net of related income tax) for incentive compensationattributable to the attainment of certain bonus targets in the fourth quarterof 2008;

·                  $1,650of income ($1,023 net of related income tax) from a reinsurance contractrecovery; and

·                  a$907 expense ($562 net of related income tax) related to the write-off ofsoftware no longer in use.

 

(2)          Includedin the third quarter of 2008 is the impact of:

·                  a$3,306 increase in gross profit ($2,050 net of related income tax) related tothe reduction in the ultimate loss estimates of prior years’ workers’compensation programs in recognition of continued favorable claims trends; and

·                  a$1,285 expense ($797 net of related income tax) related to cost alignmentinitiatives.

 

(3)          Includedin the second quarter of 2008 is the impact of:

·                  a$7,332 increase in gross profit ($4,546 net of related income tax) related tothe reduction in the ultimate loss estimates of prior years’ workers’compensation programs in recognition of continued favorable claims trends;

·                  a$1,050 ($651 net of related income tax) decrease in gross profit related to asettlement offer with the State of California in connection with stateunemployment taxes; and

·                  a$1,785 expense ($1,107 net of related income tax) related to cost alignmentinitiatives.

 

(4)          Includedin the first quarter of 2008 is the impact of:

·                  a$2,710 increase in gross profit ($1,680 net of related income tax) related tothe reduction in the ultimate loss estimates of prior years’ workers’compensation programs in recognition of continued favorable claims trends; and

·                  a$1,000 increase in gross profit ($620 net of related income tax) related tofavorable health claims trend and the recording of a health plan surplus.

 

(5)          Includedin the fourth quarter of 2007 is the impact of:

·                  a$7,699 increase in gross profit ($4,773 net of related income tax) related tothe reduction in the ultimate loss estimates of prior years’ workers’compensation programs in recognition of continued favorable claims trends;

·                  a$548 increase in gross profit ($340 net of related income tax) related tofavorable health claims trend and the recording of a health plan surplus;

·                  a$1,589 expense ($985 net of related income tax) related to a severanceagreement with the Company’s former Chief Executive Officer;

·                  a$508 charge ($315 net of related income tax) for the write-off of software nolonger in use;

·                  a$1,304 valuation allowance established for deferred tax assets related tocertain state net operating loss carryforwards which may not be utilized;

·                  a$1,988 expense ($1,233 net of related income tax) for incentive compensationattributable to the attainment of certain bonus targets in the fourth quarterof 2007;  and

·                  a$8,477 impairment loss ($5,256 net of related income tax) within discontinuedoperations recorded for the long-lived and intangible assets related to the2007 acquisition of HRA.

 

(6)          Includedin the third quarter of 2007 is the impact of:

·                  a$4,063 increase in gross profit ($2,519 net of related income tax) related tothe reduction in the ultimate loss estimates of prior years’ workers’compensation programs in recognition of continued favorable claims trends; and

·                  a$1,916 expense ($1,188 net of related income tax) for severance related costsassociated with the termination of approximately 70 support and managementpersonnel during the third quarter of 2007.

 

(7)          Includedin the second quarter of 2007 is the impact of:

·                  a$6,794 increase in gross profit ($4,212 net of related income tax) related tothe reduction in the ultimate loss estimates of prior years’ workers’compensation programs in recognition of continued favorable claims trends.

 

(8)          Includedin the first quarter of 2007 is the impact of:

 

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·                  a$1,249  increase in gross profit ($774net of related income tax) related to the reduction in the ultimate lossestimates of prior years’ workers’ compensation programs in recognition ofcontinued favorable claims trends;

·                  a$2,601 increase in gross profit ($1,613 net of related income tax) related tofavorable health claims trend and the recording of a health plan surplus; and

·                  a$1,448 expense ($898 net of related income tax) for severance related costsassociated with the elimination of approximately 40 support positions.

 

**19.  SUBSEQUENT EVENTS**

 

On March 4,2009, the board of directors declared a quarterly cash dividend of$0.05 per share of common stock, payable on April 30, 2009 to holdersof record on April 16, 2009.

 

***PotentialAcquisition of Gevity***

 

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

 

The consummation of the Merger is subject to various customaryconditions, including Gevity shareholder approval, the expiration ortermination of the applicable waiting periods under the Hart-Scott-RodinoAntitrust Improvements Act of 1976 and the receipt of certain other stateregulatory approvals.  The Merger Agreement contains customaryrepresentations and warranties between Gevity, TriNet and Merger Sub. TheMerger Agreement also contains customary covenants and agreements, includingcovenants relating to (a) the conduct of Gevity’s business between thedate of the signing of the Merger Agreement and the closing of the Merger, (b) non-solicitationof competing acquisition proposals and (c) the efforts of the parties tocause the Merger to be completed. The Merger Agreement contains certaintermination rights and provides that, upon or following the termination of theMerger Agreement, under specified circumstances involving a competingacquisition proposal, Gevity may be required to pay TriNet a termination fee of$2,950 and up to $1,000 of expenses.

 

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

 

On March 4, 2009, Gevity and certain subsidiaries of Gevity (the “Guarantors”)entered into the Fourth Amendment to Amended and Restated Credit Agreement (the“Fourth Amendment”) with Bank of America, N.A., as administrative agent (“BOA”)and certain other lenders parties thereto (together with BOA, the “Lenders”).The Fourth Amendment amends the definition of “Change of Control” that was setforth in the Amended and Restated Credit Agreement, dated as of August 30,2006, among Gevity, the Guarantors and the Lenders, as amended (the “CreditAgreement”), to provide that the entry into the Merger Agreement and theexecution of the Voting Agreement, in and of themselves, shall not constitute a“Change of Control” for purposes of the Credit Agreement.

 

The Company follows the provisions of SFAS No. 144, *Accounting for the Impairment or Disposal of Long-Lived Assets*. Theproceeds from the proposed merger are expected to be less than the carryingvalue of the Company’s net assets. During the quarter ending March 31, 2009,the Company will consider any related impairment issues caused by the proposedtransaction.

 

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**GEVITYHR, INC. AND SUBSIDIARIES**

** **

**SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS**

**ALLOWANCEFOR DOUBTFUL ACCOUNTS**

(Inthousands of dollars)

 
| **Balance,  January 1,  2008** | ** ** | **Provision  for Bad  Debts** | ** ** | **Determined  Uncollectible** | ** ** | **Account  Recoveries** | ** ** | **Balance,  December 31,  2008** | ** ** |
|-------------------------------------|------------|------------------------------------|------------|-------------------------------|------------|-------------------------|------------|---------------------------------------|------------|
| $                                   | 832        |                               | $          | 2,097                         |       | $                       | (2,350     | )                                     | $          | 350 |   | $ | 929 |   |
|                                     |            |                                    |            |                               |            |                         |            |                                       |            |  |  |  |  |  |

 
| **Balance,  January 1,  2007** | ** ** | **Provision  for Bad  Debts** | ** ** | **Determined  Uncollectible** | ** ** | **Account  Recoveries** | ** ** | **Balance,  December 31,  2007** | ** ** |
|-------------------------------------|------------|------------------------------------|------------|-------------------------------|------------|-------------------------|------------|---------------------------------------|------------|
| $                                   | 623        |                               | $          | 1,764                         |       | $                       | (2,027     | )                                     | $          | 472 |   | $ | 832 |   |
|                                     |            |                                    |            |                               |            |                         |            |                                       |            |  |  |  |  |  |

 
| **Balance,  January 1,  2006** | ** ** | **Provision  for Bad  Debts** | ** ** | **Determined  Uncollectible** | ** ** | **Account  Recoveries** | ** ** | **Balance,  December 31,  2006** | ** ** |
|-------------------------------------|------------|------------------------------------|------------|-------------------------------|------------|-------------------------|------------|---------------------------------------|------------|
| $                                   | 506        |                               | $          | 855                           |       | $                       | (927       | )                                     | $          | 189 |   | $ | 623 |   |
|                                     |            |                                    |            |                               |            |                         |            |                                       |            |  |  |  |  |  |

 

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**EXHIBIT INDEX**

 
| **Exhibit  No.** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                              |
|------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2.1              |       | Agreement and Plan of  Merger, by and among the Company, TriNet Group, Inc. and Gin  Acquisition, Inc., dated March 4, 2009 (filed as Exhibit 2.1  to the Company’s Current Report on Form 8-K filed March 6, 2009 and  incorporated herein by reference).                                                                                |
|             |       |                                                                                                                                                                                                                                                                                                                                                                         |
| 3.1              |       | Third Articles of  Amendment and Restatement of the Articles of Incorporation, as filed with the  Secretary of State of the State of Florida on August 12, 2004 (filed as  Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q for the  quarter ended September 30, 2004 filed November 9, 2004 and  incorporated herein by reference). |
|             |       |                                                                                                                                                                                                                                                                                                                                                                         |
| 3.2              |       | Third Amended and  Restated Bylaws, dated February 16, 2005 (filed as Exhibit 3.01 to  the Company’s Current Report on Form 8-K filed February 22, 2005  and incorporated herein by reference).                                                                                                                                                     |
|             |       |                                                                                                                                                                                                                                                                                                                                                                         |
| 4.1              |       | Rights Agreement dated  as of April 23, 2002 between the Company and American Stock  Transfer & Trust Company, and Exhibits thereto (filed as  Exhibit 1 to the Company’s Registration Statement of Form 8-A filed  April 25, 2002 and incorporated herein by reference).                                                                  |
|             |       |                                                                                                                                                                                                                                                                                                                                                                         |
| 4.2              |       | First Amendment and  Supplement to the Rights Agreement between the Company and American Stock  Transfer & Trust Company, dated March 5, 2003 (filed as  Exhibit 99.4 to the Company’s Current Report on Form 8-K filed  March 6, 2003 and incorporated herein by reference).                                                              |
|             |       |                                                                                                                                                                                                                                                                                                                                                                         |
| 4.3              |       | Second Amendment and  Supplement to the Rights Agreement between the Company and American Stock  Transfer & Trust Company, dated June 6, 2003 (filed as  Exhibit 99.7 to the Company’s Current Report on Form 8-K filed  June 10, 2003 and incorporated herein by reference).                                                              |
|             |       |                                                                                                                                                                                                                                                                                                                                                                         |
| 4.4              |       | Third Amendment and  Supplement to the Rights Agreement between the Company and American Stock  Transfer & Trust Company, as Rights Agent, dated March 4, 2009  (filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K  filed March 6, 2009 and incorporated herein by reference).                                              |
|             |       |                                                                                                                                                                                                                                                                                                                                                                         |
| 4.5              |       | Specimen Common Stock  Certificate (filed as Exhibit 4.1 to the Company’s Registration  Statement No. 333-22933 on Form S-1/A filed May 30, 1997 and  incorporated herein by reference).                                                                                                                                                            |
|             |       |                                                                                                                                                                                                                                                                                                                                                                         |
| 10.1             |       | Gevity HR, Inc.  2005 Equity Incentive Plan, (filed as Exhibit B to the Company’s  Definitive Proxy Statement on Schedule 14A filed April 8, 2005 and  incorporated here by reference).*                                                                                                                                                                 |
|             |       |                                                                                                                                                                                                                                                                                                                                                                         |
| 10.2             |       | Amendment Number One to  the Gevity HR, Inc. 2005 Equity Incentive Plan dated February 20,  2008 (filed as Exhibit 99.1 to the Company’s  Current Report on Form 8-K filed May 28, 2008 and incorporated  herein by reference).*                                                                                                               |
|             |       |                                                                                                                                                                                                                                                                                                                                                                         |
| 10.3             |       | Gevity HR, Inc.  2005 Executive Incentive Compensation Plan, (filed as Exhibit C to the  Company’s Definitive Proxy Statement on Schedule 14A filed April 8, 2005  and incorporated here by reference).*                                                                                                                                                 |
|             |       |                                                                                                                                                                                                                                                                                                                                                                         |
| 10.4             |       | Form of Employee  Option Award under Gevity HR, 2005 Equity Incentive Plan (filed as  Exhibit 10.1 to the Company’s Current Report on Form 8-K filed  November 14, 2005 and incorporated herein by reference).*                                                                                                                                     |
|             |       |                                                                                                                                                                                                                                                                                                                                                                         |
| 10.5             |       | Form of Employee  Restricted Stock Award under Gevity HR, 2005 Equity Incentive Plan (filed as  Exhibit 10.2 to the Company’s Current Report on Form 8-K filed  November 14, 2005 and incorporated herein by reference).*                                                                                                                           |
|             |       |                                                                                                                                                                                                                                                                                                                                                                         |
| 10.6             |       | Form of Executive  Stock Option Award under Gevity HR, 2005 Equity Incentive Plan (filed as  Exhibit 10.3 to the Company’s Current Report on Form 8-K filed  November 14, 2005 and incorporated herein by reference).*                                                                                                                              |
|             |       |                                                                                                                                                                                                                                                                                                                                                                         |
| 10.7             |       | Form of  Executive Restricted Stock Award under Gevity HR, 2005 Equity Incentive Plan (filed as Exhibit 99.1 to the Company’s Current Report  on Form 8-K filed May 21, 2008 and incorporated herein by  reference).*                                                                                                                               |
|             |       |                                                                                                                                                                                                                                                                                                                                                                         |
| 10.8             |       | Form of  Non-employee Director Stock Option Award under Gevity HR, 2005 Equity  Incentive Plan (filed as Exhibit 10.5 to the Company’s Current Report on  Form 8-K filed November 14, 2005 and incorporated herein by  reference).*                                                                                                                 |
|             |       |                                                                                                                                                                                                                                                                                                                                                                         |
| 10.9             |       | Form of  Non-employee Director Restricted Stock Award under Gevity HR, 2005 Equity  Incentive Plan (filed as Exhibit 10.6 to the Company’s Current Report on  Form 8-K filed November 14, 2005 and incorporated herein by  reference).*                                                                                                             |
|             |       |                                                                                                                                                                                                                                                                                                                                                                         |
| 10.10            |       | Gevity HR, Inc.  2002 Stock Incentive Plan (filed as Exhibit B to the Company’s  Definitive Proxy Statement on Schedule 14A filed April 25, 2002 and  incorporated herein by reference).*                                                                                                                                                                |
|             |       |                                                                                                                                                                                                                                                                                                                                                                         |
| 10.11            |       | Form of Employee  Vesting Schedule pursuant to the Gevity HR, Inc. 2002 Stock Incentive  Plan (filed as Exhibit 10.4 to the Company’s Current Report on  Form 8-K filed February 15, 2005 and incorporated herein by  reference).*                                                                                                             |
|             |       |                                                                                                                                                                                                                                                                                                                                                                         |
| 10.12            |       | Form of Director  Vesting Schedule pursuant to the Gevity HR, Inc. 2002 Stock Incentive  Plan (filed as Exhibit 10.5 to the Company’s Current Report on  Form 8-K filed February 15, 2005 and incorporated herein by  reference).*                                                                                                             |
|             |       |                                                                                                                                                                                                                                                                                                                                                                         |
| 10.13            |       | Form of Terms and  Conditions to the Non-Qualified Stock Option Award pursuant to the Gevity  HR, Inc. 2002 Stock Incentive Plan (filed as Exhibit 10.6 to the  Company’s Current Report on Form 8-K filed February 15, 2005 and                                                                                                               |

 

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|   |   | incorporated herein by  reference).*                                                                                                                                                                                                                                                                                                          |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                          |
| 10.14  |   | Gevity HR, Inc.  1997 Stock Incentive Plan, as amended and restated (filed as Exhibit 4.1  to the Company’s Registration Statement No. 333-68929 on Form S-8,  Amendment No. 1 filed September 30, 2003 and incorporated herein by  reference).*                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                          |
| 10.15  |   | Form of Employee  Vesting Schedule pursuant to the Gevity HR, Inc. 1997 Stock Incentive  Plan (filed as Exhibit 10.1 to the Company’s Current Report on  Form 8-K filed February 15, 2005 and incorporated herein by  reference).*                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                          |
| 10.16  |   | Form of Director  Vesting Schedule pursuant to the Gevity HR, Inc. 1997 Stock Incentive  Plan (filed as Exhibit 10.2 to the Company’s Current Report on  Form 8-K filed February 15, 2005 and incorporated herein by  reference).*                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                          |
| 10.17  |   | Form of Terms and  Conditions to the Non-Qualified Stock Option Award pursuant to the Gevity  HR, Inc. 1997 Stock Incentive Plan (filed as Exhibit 10.3 to the  Company’s Current Report on Form 8-K filed February 15, 2005 and  incorporated herein by reference).*                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                          |
| 10.18  |   | Gevity HR, Inc.  Employee Stock Purchase Plan (filed as Appendix B to the Company’s Definitive  Proxy Statement on Schedule 14A filed April 20, 2001 and incorporated  herein by reference).*                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                          |
| 10.19  |   | Employment Agreement  between Gevity HR, Inc. and Michael J. Lavington  dated September 15, 2008 (filed as Exhibit 10.1 to the Company’s  Current Report on Form 8-K filed September 16, 2008 and  incorporated herein by reference.)*                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                          |
| 10.20  |   | Change in Control  Severance Agreement between Gevity HR, Inc. and Michael J. Lavington dated September 15, 2008 (filed as Exhibit 10.2 to  the Company’s Current Report on Form 8-K filed September 16, 2008  and incorporated herein by reference).*                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                          |
| 10.21  |   | Appointment Letter from  the Company accepted by Edwin Hightower dated June 30, 2008. (filed as Exhibit 10.5 to the Company’s Quarterly Report  on Form 10-Q for the quarter ended June 30, 2008 filed  August 11, 2008 and incorporated herein by reference).*                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                          |
| 10.22  |   | Change in Control  Severance Agreement between Gevity HR, Inc. and Edwin E. Hightower dated February 12, 2008.*+                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                          |
| 10.23  |   | Offer Letter Agreement  executed on August 3, 2007 between Gevity HR, Inc. and Garry Welsh  (filed as Exhibit 10.3 to the Company’s Current Report on Form 8-K  filed August 7, 2007 and incorporated herein by reference).*                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                          |
| 10.24  |   | Revised Change in  Control Severance Agreement executed on August 29, 2007 between Gevity  HR, Inc. and Garry Welsh (filed as Exhibit 99.4 to the Company’s  Current Report on Form 8-K filed August 31, 2007 and incorporated  herein by reference).*                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                          |
| 10.25  |   | Offer Letter Agreement  executed on August 3, 2007 between Gevity HR, Inc. and James Hardee  (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K  filed August 7, 2007 and incorporated herein by reference).*                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                          |
| 10.26  |   | Revised Change in  Control Severance Agreement executed on August 29, 2007 between Gevity  HR, Inc. and James Hardee (filed as Exhibit 99.3 to the Company’s  Current Report on Form 8-K filed August 31, 2007 and incorporated  herein by reference).*                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                          |
| 10.27  |   | Employment offer letter  from the Company accepted by Paul Benz on June 19, 2006 (filed as Exhibit 10.58  to the Company’s Annual Report on Form 10-K for the year ended  December 31, 2006 filed March 16, 2007 and incorporated herein by  reference).*                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                          |
| 10.28  |   | Change in 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 on Form 8-K filed August 31, 2007 and incorporated  herein by reference).*                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                          |
| 10.29  |   | Consulting Agreement  between Gevity HR, Inc. and Clifford M. Sladnick  dated May 5, 2008 (filed as Exhibit 99.2 to the Company’s Current  Report on Form 8-K filed May 6, 2008 and incorporated herein by  reference).                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                          |
| 10.30  |   | Separation Agreement  and Full and Final Release of Claims between Gevity HR, Inc. and  Clifford M. Sladnick dated May 5, 2008 (filed as  Exhibit 99.1 to the Company’s Current Report on Form 8-K filed  May 6, 2008 and incorporated herein by reference).*                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                          |
| 10.31  |   | Separation Agreement  and Full and Final Release of Claims between Gevity HR, Inc. and Erik  Vonk, dated November 2, 2007 (filed as Exhibit 10.1 to the  Company’s Quarterly Report on Form 10-Q for the quarter ended  September 30, 2007 filed November 9, 2007 and incorporated herein  by reference).* |
|   |   |                                                                                                                                                                                                                                                                                                                                          |
| 10.32  |   | Separation Agreement  and Full and Final Release of Claims between Gevity HR, Inc. and Peter  Grabowski, dated July 24, 2007 (filed as Exhibit 99.1 to the  Company’s Current Report on Form 8-K filed July 27, 2007 and  incorporated herein by reference).*                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                          |
| 10.33  |   | Form of  Indemnification Agreement between the Company and each of its directors and  executive officers (filed as Exhibit 10.36 to the Company’s Annual  Report on Form 10-K for the year ended December 31, 2006 filed  March 16, 2007 and incorporated herein by reference).*                                |

 

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Table of Contents

 
| 10.34  |   | Agreement of Lease  between Osprey-Lakewood Ranch Properties, LLC. and the Company, dated  June 6, 2005, for premises located at 9000 Town Center Parkway,  Bradenton, Florida 34202 (certain confidential information contained in this  document, marked by asterisks and brackets, has been omitted and filed  separately with the Securities and Exchange Commission pursuant to  Rule 24b-2 of the Securities Exchange Act of 1934, as amended) (filed as  Exhibit 10.1 to the Company’s Current Report on Form 8-K filed  June 10, 2005 and incorporated herein by reference).                                                              |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.35  |   | Letter Agreement dated  June 28, 2007 between the Company and ValueAct Capital Management, L.P.  (filed as Exhibit 99.1 to the Company’s Current Report on Form 8-K  filed June 29, 2007 and incorporated herein by reference).                                                                                                                                                                                                                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.36  |   | Healthcare  Benefits Contract Among Blue Cross/Blue Shield of Florida, Inc., Health  Options, Inc., and the Company, effective October 1, 2008 (certain  confidential information contained in this document, marked by asterisks and  brackets, has been omitted and filed separately with the Securities and  Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange  Act of 1934, as amended.) (filed as Exhibit 10.3  to the Company’s Quarterly Report on Form 10-Q for the quarter ended  September 30, 2008 filed November 10, 2008 and incorporated herein  by reference).                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.37  |   | Healthcare Benefits  Contract Among Blue Cross/Blue Shield of Florida, Inc., Health  Options, Inc., and the Company, effective October 1, 2005 (certain  confidential information contained in this document, marked by asterisks and  brackets, has been omitted and filed separately with the Securities and  Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange  Act of 1934, as amended) (filed as Exhibit 10 to the Company’s Quarterly  Report on Form 10-Q for the quarter ended September 30, 2005 filed  October 27, 2005 and incorporated herein by reference).                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.38  |   | Amendment No. 1 to  the Health Care Benefits Contract between the Company and Blue Cross Clue  Shield of Florida and Health Options, Inc. dated as of February 15,  2006 (filed as Exhibit 10.1 to the Company’s Current Report on  Form 8-K filed February 22, 2006).                                                                                                                                                                                                                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.39  |   | Second Amendment to  Agreement to Provide Comprehensive Health Care Benefits date as of  February 25, 2008, among Gevity HR, Inc., Blue Cross and Blue Shield of  Florida, Inc. and its subsidiary Health Options, Inc. (filed  as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed  February 26, 2008).                                                                                                                                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.40  |   | Aetna, Inc.  Financial Conditions related to the Group Master Policy for the Company,  effective January 1, 2003 (filed as Exhibit 10.20 to the Company’s  Annual Report on Form 10-K for the year ended December 31, 2003 filed  March 15, 2004 and incorporated herein by reference).                                                                                                                                                                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.41  |   | UnitedHealthcare Group  Benefits Agreement effective as of June 1, 2006 (certain confidential  information contained in this document, marked by asterisks and brackets, has  been omitted and filed separately with the Securities and Exchange Commission  pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as  amended) (filed as Exhibit 10.1 to the Company’s Quarterly Report on  Form 10-Q for the quarter ended June 30, 2007 filed August 9,  2007 and incorporated herein by reference).                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.42  |   | First Amendment  to the Group Benefits Agreement dated as of May 1,  2008 entered into among United Healthcare Services, Inc. and United  HealthCare Insurance Company and Gevity HR, Inc. (certain confidential  information contained in this document, marked by asterisks and brackets, has  been omitted and filed separately with the Securities and Exchange Commission  pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as  amended) (filed as Exhibit 10.3 to the Company’s Quarterly Report on  Form 10-Q for the quarter ended March 31, 2008 filed May 12,  2008 and incorporated herein by reference). |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.43  |   | AIG Risk  Management, Inc. 1/1/09-10 Workers Compensation/Employers Liability  Final Bound Proposal, dated December 23, 2008 (certain confidential  information contained in this document, marked by asterisks and brackets, has  been omitted and filed separately with the Securities and Exchange Commission  pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as  amended).+ r                                                                                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.44  |   | AIG Risk  Management, Inc. 1/1/08-09 Workers Compensation/Employers Liability  Final Bound Proposal, dated December 14, 2007 (certain confidential  information contained in this document, marked by asterisks and brackets, has  been omitted and filed separately with the Securities and Exchange Commission  pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as  amended) (filed as Exhibit 10.31 to the Company’s Annual Report on  Form 10-K for the year ended December 31, 2007 filed March 17,  2008 and incorporated herein by reference).                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.45  |   | AIG Risk  Management, Inc. 1/1/07-08 Workers Compensation/Employers Liability  Final Bound Proposal, dated December 21, 2006 (certain confidential  information contained in this document, marked by asterisks and brackets, has  been omitted and filed separately with the Securities and Exchange Commission  pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as  amended) (filed as Exhibit 10.41 to the Company’s Annual Report on  Form 10-K for the year ended December 31, 2006 filed March 16,  2007 and incorporated herein by reference).                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.46  |   | AIG Risk  Management, Inc. 1/1/06-07 Workers Compensation/Employers Liability  Final Bound Proposal, dated December 21, 2005 (certain confidential  information contained in this document, marked by asterisks and brackets, has  been omitted                                                                                                                                                                                                                                                                                                                                                                                                                       |

 

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Table of Contents

 
|   |   | and filed separately  with the Securities and Exchange Commission pursuant to Rule 24b-2 of  the Securities Exchange Act of 1934, as amended) (filed as Exhibit 10.39  to the Company’s Annual Report on Form 10-K for the year ended  December 31, 2005 filed March 8, 2006 and incorporated herein by  reference).                                                                                                                                                                                                                                                                                                                                                                                  |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.47  |   | AIG Risk  Management, Inc. 1/1/05-06 Workers Compensation/Employers Liability  Final Bound Proposal, dated December 16, 2004 (certain confidential  information contained in this document, marked by asterisks and brackets, has  been omitted and filed separately with the Securities and Exchange Commission  pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as  amended) (filed as Exhibit 10.1 to the Company’s Current Report on  Form 8-K filed December 22, 2004 and incorporated herein by  reference).                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.48  |   | AIG Risk  Management, Inc. 1/1/04-05 Workers Compensation/Employers Liability  Final Bound Proposal, dated December 31, 2003 (certain confidential  information in this document, marked by an asterisk and brackets, has been  omitted and filed separately with the Securities and Exchange Commission  pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as  amended) (filed as Exhibit 10.21 to the Company’s Annual Report on  Form 10-K for the year ended December 31, 2003 filed March 15,  2004 and incorporated herein by reference).                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.49  |   | AIG Risk  Management, Inc. 1/1/03-04 Workers Compensation/Employers Liability  Final Bound Proposal, dated October 22, 2002 (filed as Exhibit 99.2  to the Company’s Current Report on Form 8-K filed October 23, 2002  and incorporated herein by reference).                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.50  |   | Finance Agreement for  Paid Loss Workers’ Compensation Deductible between the Company and  Continental Casualty Company, effective as of January 1, 2002 (filed as  Exhibit 10.20 to the Company’s Annual Report on Form 10-K for the  year ended December 31, 2001 filed April 1, 2002 and incorporated  herein by reference).                                                                                                                                                                                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.51  |   | Finance Agreement for  Paid Loss Workers’ Compensation deductible between the Company and  Continental Casualty Company, effective as of January 1, 2001 (filed as  Exhibit 10.25 to the Company’s Annual Report on Form 10-K for the  year ended December 31, 2000 filed March 29, 2001 and incorporated  herein by reference).                                                                                                                                                                                                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.52  |   | Finance Agreement for  Paid Loss Workers’ Compensation Deductible between the Company and  Continental Casualty Company, effective as of January 1, 2000 (filed as  Exhibit 10.14 to the Company’s Annual Report on Form 10-K for the  year ended December 31, 1999 filed April 3, 2000 and incorporated  herein by reference).                                                                                                                                                                                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.53  |   | Workers’ Compensation  and Employers’ Liability Policy issued by Texas Workers’ Compensation  Insurance Fund to Gevity HR of Texas, L.P., effective January 1, 2000  (filed as Exhibit 10.13 to the Company’s Annual Report on Form 10-K  for the year ended December 31, 1999 filed April 3, 2000 and  incorporated herein by reference).                                                                                                                                                                                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.54  |   | Workers’ Compensation  and Employers Liability Policy issued by Continental Casualty Co. to the  Company, effective January 1, 2000 (filed as Exhibit 10.15 to the  Company’s Annual Report on Form 10-K for the year ended  December 31, 1999 filed April 3, 2000 and incorporated herein by  reference).                                                                                                                                                                                                                                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.55  |   | Final Binder prepared  by National Union Fire Insurance Company of Vermont (a member insurance  company of American International Group, Inc.) for the Company related  to the Deductible Liability Protection Policy covering workers’ compensation  claims up to $1.0 million per occurrence for the program years 2000, 2001 and  2002, dated September 30, 2004 (filed as Exhibit 10.8 to the  Company’s Quarterly Report on Form 10-Q for the quarter ended  September 30, 2004 filed November 9, 2004 and incorporated herein  by reference).                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.56  |   | Final Binder prepared  by Continental Casualty Company, National Fire Insurance Company and  Transportation Insurance Company (collectively, “CNA”) and National Union  Fire Insurance Company of Vermont (a member insurance company of American  International Group, Inc.) for the Company related to the Deductible  Liability Protection Policy covering workers’ compensation claims up to $1.0  million per occurrence for the program years 2000, 2001 and 2002, dated  September 30, 2004 (filed as Exhibit 10.9 to the Company’s  Quarterly Report on Form 10-Q for the quarter ended September 30,  2004 filed November 9, 2004 and incorporated herein by reference). |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.57  |   | Assignment of  Deductible Liability Protection Policy Proceeds from the Company to CNA  related to coverage for workers’ compensation claims up to $1.0 million per  occurrence for program years 2000, 2001 and 2002, dated October 20, 2004  (filed as Exhibit 10.10 to the Company’s Quarterly Report on  Form 10-Q for the quarter ended September 30, 2004 filed  November 9, 2004 and incorporated herein by reference).                                                                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.58  |   | Collateral Addendum to  January 1, 2002 Paid Loss Workers’ Compensation Deductible Finance  Agreement between the Company and CNA, dated October 11, 2004 (filed as  Exhibit 10.11 to the Company’s Quarterly Report on Form 10-Q for  the quarter ended September 30, 2004 filed November 9, 2004 and  incorporated herein by reference).                                                                                                                                                                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.59  |   | Amended and Restated  Credit Agreement dated August 30, 2006 among Gevity HR, Inc., as  the Borrower, the Subsidiaries of the Borrower, as the Guarantors, Bank of  America, N.A., as Administrative Agent and Other Lenders Party thereto (filed  as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed  September 6, 2006 and incorporated herein by reference).                                                                                                                                                                                                                                                                                                                        |

 

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| 10.60  |   | First Amendment to the  Amended and Restated Credit Agreement with Bank of America, N.A. dated  May 7, 2007 (filed as Exhibit 10.1 to the Company’s Current Report  on Form 8-K filed May 10, 2007 and incorporated herein by  reference).                                                                                                                                                                |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.61  |   | Second Amendment to the  Amended and Restated Credit Agreement with Bank of America, N.A. dated  June 14, 2007 (filed as Exhibit 10.1 to the Company’s Current  Report on Form 8-K filed June 19, 2007 and incorporated herein by  reference).                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.62  |   | Third Amendment to  Amended and Restated Credit Agreement dated February 25, 2008, among  Gevity HR, Inc., as the Borrower, the Subsidiaries of the Borrower, as  the Guarantors, Bank of America, N.A. as Administrative Agent and Other  Lenders Party thereto (filed as Exhibit 10.1 to the Company’s Current  Report on Form 8-K filed February 26, 2008 and incorporated herein  by reference). |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.63  |   | Fourth Amendment to  Amended and Restated Credit Agreement dated March 4, 2009, among the  Company, certain subsidiaries of the Company, Bank of America, N.A., as  Administrative Agent and the Other Lenders party thereto (filed as  Exhibit 10.1 to the Company’s Current Report on Form 8-K filed  March 6, 2009 and incorporated herein by reference).                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 21.1   |   | List of Subsidiaries of  the Company.+                                                                                                                                                                                                                                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 23.1   |   | Consent of Independent  Registered Public Accounting Firm to Annual Report on Form 10-K for the  year ended December 31, 2008.+                                                                                                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 31.1   |   | Certification of  Michael J. Lavington, as Chief Executive Officer, pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002.+                                                                                                                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 31.2   |   | Certification of Garry  J. Welsh, as Chief Financial Officer, pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.+                                                                                                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 32     |   | Certification furnished  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.+                                                                                                                                                                                                                                                                                                                                          |

 

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| * | Management contract or  compensatory plan or arrangement.                                                                                           |
|---|-----------------------------------------------------------------------------------------------------------------------------------------------------|
| + | Filed electronically  herewith.                                                                                                                     |
| r | Confidential treatment  has been requested for this exhibit and confidential portions have been filed  with the Securities and Exchange Commission. |

 

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