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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

FOR ANNUAL AND TRANSITION REPORTS PURSUANT

TO SECTIONS 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

(Mark One)

For the fiscal year ended December 31, 2002.

or

For the transition period from                      to                     

Commission File No. 0-22701

GEVITY HR, INC.

(exact name of registrant as specified in its charter)

(Registrant’s Telephone Number, Including Area Code):

(941) 741-4300

Securities Registered Pursuant to Section 12(b) of the Act:

NONE

Securities Registered Pursuant to Section 12(g) of the Act:

Common Stock, par value $0.01 per share

(Title of class)

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes  ¨    No  x

The aggregate market value of the voting stock of Gevity HR, Inc. held by non-affiliates (based upon the March 19, 2003, $5.82 closing sale price for the Common Stock on the Nasdaq National Market) was approximately $78.5 million.

The number of shares of the Registrant’s common stock, $.01 par value per share outstanding as of March 19, 2003 was 20,901,224.

DOCUMENTS INCORPORATED BY REFERENCE

PART III – Portions of Registrant’s Proxy Statement relating to the annual meeting of shareholders to be held May 22, 2003, are incorporated by reference in Part III.

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PART I

Cautionary Note Regarding Forward-Looking Statements

In connection with the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 (the “Reform Act”), Gevity HR, Inc. (“Gevity” or the “Company”) is hereby providing cautionary statements identifying important factors that could cause the Company’s actual results to differ materially from those projected in forward-looking statements (as such term is defined in the Reform Act) made by or on behalf of the Company herein, in other filings made by the Company with the Securities and Exchange Commission, in press releases or other writings, or orally, whether in presentations, in response to questions or otherwise. Any statements that express, or involve discussions as to, expectations, beliefs, plans, objectives, assumptions or future events or performance (often, but not always, through the use of words or phrases such as “will result,” “are expected to,” “anticipated,” “plans,” “intends,” “will continue,” “estimated,” and “projection”) are not historical facts and may be forward-looking and, accordingly, such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results or performance of the Company to be materially different from any future results or performance expressed or implied by such forward-looking statements. Such known and unknown risks, uncertainties and other factors include, but are not limited to, the following:

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The Company cautions that the factors described above could cause actual results or outcomes to differ materially from those expressed in any forward-looking statements made by or on behalf of the Company. Any forward-looking statement speaks only as of the date on which such statement is made, and the Company undertakes no obligation to update any forward-looking statement or statements to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time, and it is not possible for management to predict all of such factors. Further, management cannot assess the impact of each such factor on the business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

ITEM 1.    BUSINESS

General

Gevity is a leading United States provider of human capital management solutions. The Company offers its clients, which are typically small to medium-sized businesses with between five and one hundred employees, a broad range of products and services that provide a complete solution for the clients’ human resources (“HR”) outsourcing needs. As of December 31, 2002, the Company served more than 6,600 clients, as measured by individual client Federal Employer Identification Numbers (“FEIN”), with approximately 100,000 active worksite employees, and maintained offices in Florida, Texas, Georgia, Arizona, Minnesota, North Carolina, Tennessee, Alabama, Colorado, California and New York. The Company’s products and services include assistance with employee recruiting, performance management, training and development, benefits administration, payroll administration, governmental compliance, risk management, unemployment administration, and health, welfare and retirement benefits.

The Company’s services are designed to improve the productivity and profitability of its clients’ businesses by:

In order to utilize the Company’s products and services, the client transfers certain employment-related risks and liabilities to the Company and retains other risks and liabilities. In this context, the client and the Company are each viewed as and become a “co-employer” of the client’s worksite employees. In order to enter into a co-employer relationship, the Company operates as a Professional Employer Organization (“PEO”).

As a co-employer, employment-related liabilities are contractually allocated between the Company and the client under a written Professional Services Agreement. Under the Professional Services Agreement, the Company assumes responsibility for and manages the risks associated with each client’s worksite employee payroll obligations, including the liability for payment of salaries and wages (including payroll taxes) to each worksite employee and, at the client’s option, responsibility for providing group health, welfare and retirement benefits to such individuals. These obligations of the Company are fixed, whether or not the client makes timely

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payment of the associated service fee. In this regard, it is important to understand that, unlike payroll processing service providers, the Company issues to each of the client’s worksite employees Company payroll checks drawn on the Company bank accounts. The Company also reports and remits all required employment information and taxes to the Internal Revenue Service (“IRS”) and issues a Federal Form W-2 to each worksite employee under the appropriate Company FEIN. The Company assumes the responsibility for compliance with those employment-related governmental regulations that can be effectively managed away from the client’s worksite. The Company provides to each worksite employee workers’ compensation insurance coverage under the Company’s insurance policy. The client, on the other hand, contractually retains the general day-to-day responsibility to direct, control, hire, terminate and manage each of the client’s worksite employees. The worksite employee services are performed for the exclusive benefit of the client’s business. The client also remains responsible for compliance with those employment-related governmental regulations that are more closely related to the day-to-day management of worksite employees.

The Company charges its clients a service fee that is designed to yield a profit to the Company and to cover the cost of certain employment-related taxes, workers’ compensation insurance coverage and administrative and field services provided by the Company to the client. The component of the service fee related to administration varies according to the size of the client, the amount and frequency of the payroll payments and the method of delivery of such payments. The component of the service fee related to workers’ compensation and unemployment insurance is based, in part, on the client’s historical claims experience. In addition, the client may choose to offer certain health, welfare and retirement benefits to its worksite employees. The cost of the selected plans is billed separately from the service fee. In addition to the service fee and cost of selected benefit plans, billings to each client also include the wages and other employment related taxes of each worksite employee. The gross billings are invoiced at the time of delivery of each periodic payroll delivered to the client.

The Company contracts with a licensed insurance carrier for workers’ compensation insurance coverage for its worksite employees. In 2002, CNA Financial Corporation (“CNA”) was the provider of such insurance, and in 2003, member insurance companies of American International Group, Inc. (“AIG”) will provide such insurance. The Company pays the premiums for this coverage and passes along to its clients some or all of the costs attributable to the coverage for their respective worksite employees. The Company does not act as an insurance company and is not licensed in any state as an insurance company. However, as part of managing its workers’ compensation programs in 2003 the Company will operate a wholly owned Bermuda based insurance company. The Company does assume certain workers’ compensation risk as a result of providing its services. For a more detailed analysis of the CNA and AIG programs, see “Workers Compensation Plans” beginning on page 10.

The Company has an incentive to minimize its workers’ compensation and unemployment tax costs because the Company bears the risk that its actual costs will exceed those billed to clients, and conversely, the Company profits on these components of its service offerings in the event that it effectively manages such costs.

The Company also provides on a very limited basis HR products and services to small and medium-sized businesses without entering into a co-employer relationship. These products and services range from basic payroll processing to payroll processing and HR management solutions that include most of the Company’s product offerings. These services have not been actively marketed to new clients and revenues generated from such services are not significant.

References in this report to the “Company” or “Gevity” include Gevity HR, Inc. and its consolidated wholly-owned subsidiaries unless the context indicates otherwise. The Company was originally organized in 1993 as a limited partnership (the “Partnership”) to acquire the assets of a PEO business that had operated since 1984. Gevity HR, Inc. (formerly known as Staff Leasing, Inc.) was formed in 1997 to acquire all of the limited partnership interests in the Partnership held by various investors, including certain executive officers, directors, and employees of the Company, pursuant to a reorganization (the “Reorganization”). In the Reorganization, which was concluded in July 1997 simultaneously with the Company’s initial public offering, Gevity acquired all of the limited partnership interests in the Partnership, becoming the sole limited partner and

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in effect incorporating the business of the Company. In September 1997 as part of the Reorganization, all of the issued and outstanding capital stock of Staff Acquisition, Inc., the general partner of the Partnership, was acquired from Charles S. Craig.

On August 3, 2001 the Company began doing business using the name “Gevity HR”. The new identity was intended to (i) emphasize that the Company provides a broad range of HR solutions to its clients; (ii) confirm the Company’s objective of building long-term relationships with its clients; and (iii) avoid the connotation that the Company is a staffing firm. At its 2002 Annual Meeting of Shareholders, the Company’s shareholders voted to amend the Company’s Articles of Incorporation to change the name of the Company to Gevity HR, Inc.

Recent Events

On March 6, 2003, the Company announced that it executed a letter of intent on March 5, 2003 for the sale of its convertible preferred stock to an affiliate of Frontenac Company LLC (“Frontenac”) in a private placement for a purchase price of $30 million. Frontenac is a Chicago-based private equity investment firm with over $1 billion under active management.

The Company also announced on March 6, 2003 that it executed a letter of intent with Charles S. Craig on March 5, 2003, to purchase 3.1 million shares of Gevity common stock held by Mr. Craig, at a per share price of $5.44 less $.06 per share to reimburse the Company for related expenses. The price of $5.44 per share is the average of the closing prices of the Company’s common stock for the five business days preceding the execution of such letter of intent. Mr. Craig’s holdings in the Company will be reduced from 4.9 million shares to 1.8 million shares (or 9.9% of the Company’s outstanding shares of common stock as of March 5, 2003) after the purchase is completed.

Proceeds from the sale of the convertible preferred stock will provide additional capital to the Company to enable it to pursue its growth strategy, including possible acquisitions. In addition, $16.6 million of the proceeds will be used by the Company to fund the purchase of Mr. Craig’s shares of common stock.

Under the terms of the agreement with Frontenac, dividends will accrue on the convertible preferred stock at the greater of (i) 4% of its stated value or (ii) on an as converted basis, the amount declared on the Company’s common stock on a per share basis. The convertible preferred stock will be convertible into common stock at a per share price of $5.44 which is average of the closing prices of the Company’s common stock for the five business days preceding the execution of this letter of intent. This could result in the issuance of up to 5.5 million shares of common stock upon conversion, or approximately 23.6% of the outstanding shares of common stock as of March 5, 2003, on an as-converted basis, after the repurchase of Mr. Craig’s shares.

As part of the financing, two representatives of Frontenac will join the Board of Directors of the Company. The closing of the private placement with Frontenac is subject to the Company and Frontenac entering into a definitive agreement, approval of the Company’s Board of Directors, shareholder approval and other customary conditions. Such shareholder approval will be sought at the Annual Meeting of Shareholders to be held on May 22, 2003. The closing of the private placement and the repurchase of Mr. Craig’s shares will occur promptly after such shareholder approval is received.

HR Outsourcing Industry

The HR outsourcing industry began to evolve in the early 1980s, largely in response to the difficulties faced by small to medium-sized businesses in procuring workers’ compensation and group health insurance coverage on a cost-effective basis and operating in an increasingly complex legal and regulatory environment. While various service providers, such as payroll processing firms, benefits and safety consultants and temporary staffing firms, were available to assist these businesses with specific tasks, PEOs began to emerge as providers of a more comprehensive outsourcing solution to these burdens. PEOs combined the employees of a large number of clients and leveraged their purchasing power to obtain discounted workers’ compensation and group health insurance policies.

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The Company believes that the key factors driving demand for HR outsourcing services include:

Another factor affecting the HR outsourcing industry has been the increasing recognition and acceptance by regulatory authorities of PEOs and the co-employer relationship created by PEOs, with the development of licensing or registration requirements at the state level. The Company and other industry leaders, in concert with the National Association of Professional Employer Organizations (“NAPEO”), have worked with the relevant government entities for the establishment of a regulatory framework that would clarify the roles and obligations of the PEO and the client in the “co-employer” relationship. This framework generally imposes financial responsibility on the PEO in order to promote the increased acceptance and further development of the industry. See “Industry Regulation — State Regulation” beginning on page 16.

Twenty-two states, including five states where the Company has offices (Florida, New York, Texas, Colorado, Tennessee and Minnesota), have passed laws that have licensing, registration or other regulatory requirements for PEOs and several states are considering such regulation. Such laws vary from state to state, but generally codify the requirements that the PEO must reserve the right to hire, terminate and discipline worksite employees and secure workers’ compensation insurance coverage. In certain instances, the Company delegates or assigns such rights to the client. The laws also generally provide for monitoring the fiscal responsibility of PEOs and, in many cases, the licensure of the controlling officers of the PEO.

Since the late 1990’s, due to changes in the workers’ compensation and the group health insurance markets, many PEOs have encountered significant difficulties in obtaining workers’ compensation and group health benefit insurance policies. Many PEOs have exited the industry due to the lack of available workers’ compensation and group health benefit insurance programs or due to their inability to provide the financing security required by insurance companies in order to obtain insurance coverage.

Many of the surviving PEOs, especially the larger ones, are capitalizing on the co-employment model and transforming their businesses into full-service HR outsourcing companies while still offering workers’ compensation and group health benefit insurance programs.

Products and Services

The Company provides a broad range of products and services to its clients. These products and services are primarily offered to the Company’s clients on a “bundled” or all inclusive basis. Health, welfare and retirement programs may be elected to be offered to worksite employees at the option of each client. The Company provides these products and services to its clients through the following core activities:

Find the Right People.    The Company assists its clients in finding the right people for their businesses by providing:

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Develop and Manage People.    The Company assists its clients in developing and managing their people by providing:

Retain the Best Employees.    The Company assists its clients in retaining the best employees for their businesses by providing:

Manage the Paperwork.    The Company assists its clients in managing employment related paperwork by providing the following services:

Protect our clients’ business.    The Company assists its clients in protecting their businesses by providing:

Clients

Overview.    As of December 31, 2002, the Company’s customer base consisted of over 6,600 client companies with an average of 15.0 employees.

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

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The Company delivers its services through a combination of dedicated client services professionals located in the field offices and at the Company’s headquarters, as well as through the Gevity HR Central portal. In order to provide proactive client relationship management, each of the Company’s clients has been assigned a single client services professional to serve as the client relationship manager. This allows the client to interface with the Company through a single point of contact.

Client Selection and Retention Strategy.    Historically, the Company’s sales force sold its services to all businesses within an established client selection criteria. As a result, the Company’s client base has contained significant segments of businesses with fewer than five employees, start-up businesses and small construction businesses that tend to be volatile and less likely to succeed than larger businesses with longer operating histories in less cyclical industries.

During 2000, the Company modified its selection criteria for new clients to restrict the solicitation of businesses with fewer than five employees and those paying wages substantially below the average for their trade or business. At that time, the Company modified its pricing model to take into account factors such as the size of the client based on worksite employee count, competitiveness of wages and payroll volume, and the length of time the client has been in business. Additionally, the Company decided to exit certain high-risk industry segments and terminated all clients within those segments. In 2001, the Company further refined its client selection criteria for new business by targeting clients with a lower-risk profile. The Company considers industries to be high-risk if there is a likelihood of a high frequency of on-the-job accidents involving worksite employees or a likelihood that any such accidents will be severe.

By no longer selling its services to high-risk clients, the Company believes that it will reduce the volatility of its earnings that are attributable to the cost of its workers’ compensation programs. Volatility in workers’ compensation costs arises due to the complexity in projecting the number of accidents, the ultimate severity of such accidents, and the time over which claims must be paid.

As part of its current client selection strategy, the Company offers its services to businesses within specified SIC codes. All prospective clients are also evaluated individually on the basis of total predicted profitability. This analysis takes into account workers’ compensation risk and claims history, unemployment claims history, payroll adequacy, and credit status. With respect to potential clients operating in certain industries believed by the Company to present a level of risk exceeding industry norms, more rigorous approval requirements must be met before the Company agrees to provide services to the client. This process may include an on-site inspection and review of workers’ compensation and unemployment claims experience for the last three years. In addition, under the terms of the Company’s workers’ compensation agreement, prospective clients operating in certain industries or with historically high workers’ compensation insurance claims experience must also be approved by the Company’s insurance carrier before the Company enters into a contract to provide services.

The Company maintains a client review program that includes a detailed profitability and risk analysis of all its clients. Based on the results of these analyses, the Company may modify its pricing, or if necessary, terminate certain clients that the Company believes would otherwise be detrimental or not contribute to its long-term profitability. For example, in February 2002, the Company reduced its overall risk profile by terminating all clients in the roofing and trucking industries.

Due to general market increases in the costs of insurance related to workers’ compensation and health benefits, the Company implemented a general price increase as of January 1, 2002 and 2003 for most of its clients.

The Company’s client retention rate for 2002 was 74.4% The Company uses the NAPEO standard for measuring client retention, which is computed by dividing the number of clients at the end of the period by the sum of the number of clients at the beginning of the period plus the number of clients added during the period. The client retention rate is affected by a number of factors including the natural instability of the small to

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medium-sized business market and clients that were terminated by the Company for reasons that include unacceptable risk and low profitability to the Company.

In order to increase retention of desired clients, the Company implemented several client care initiatives focused on improving client service. For example, each client has been assigned a single relationship manager with proactive responsibility to enrich and broaden the client experience through a single point of contact with the Company. In addition, the Company has fully deployed the Oracle Customer Relationship Management System that allows the Company to quickly respond to and monitor client issues, track response time of client service professionals, and provide better overall client service. The Company also contracts with outside consultants to perform customer satisfaction surveys to gain a better understanding of the reasons that may cause clients to terminate their business relationship with the Company.

Professional Services Agreement.    All clients are required to enter into the Company’s Professional Services Agreement. The Professional Services Agreement provides for an initial one-year term, subject to termination by the Company or the client at any time upon 30 days prior written notice. After the initial term the contract may be renewed, terminated or continued on a month-to-month basis. Following the initial term, most contracts are continued on a month-to-month basis. Based on the results of a financial review, the Company may require the owners of client companies to personally guarantee the client’s obligations under the Professional Services Agreement.

The Company retains the ability to terminate the Professional Services Agreement as well as its co-employment relationship with the worksite employees immediately upon non-payment by a client. The Company manages its credit risk through the periodic nature of payroll, client credit checks, owner guarantees, the Company’s client selection process and its right to terminate the Professional Services Agreement and the co-employment relationship with the worksite employees.

Employment-related liabilities are generally allocated between the Company and the client pursuant to the Professional Services Agreement, with the Company assuming responsibility for worksite employee payroll obligations and for compliance with certain employment-related governmental regulations. On the other hand, the client remains responsible for compliance with the employment-related governmental regulations that are more closely related to the daily supervision, direction and control of worksite employees. In some cases, employment-related liabilities are shared between the Company and the client. The following table summarizes

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the general division of responsibilities for employment related regulatory compliance under the Professional Services Agreement:

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Sales and Marketing

The Company markets its services through a direct sales force, which as of December 31, 2002 consisted of approximately 160 sales associates. In order to exercise more control over the client selection process, the Company uses a direct sales force rather than selling through agents. The Company’s sales force is distributed throughout its branch offices. The Company plans to expand its national coverage and add sales offices in major metropolitan areas over the next few years as it targets higher wage employees in white-collar businesses. The Company’s sales associates are compensated by a combination of salary and commission that has, for top producers, generated annual earnings in excess of $250,000.

As the Company’s focus has shifted to selling its services to lower-risk, higher paying clients, an associated change has been required in the composition of the sales force. As a result, the Company has revised the profile of its targeted sales candidates and has also restructured its hiring practices.

In addition, the Company expanded and improved its training and orientation programs. For many years, the Company provided a formal one-week training program for new sales hires, together with on-the-job training. In the fourth quarter of 2002, the Company implemented a comprehensive four-week training program for all new sales associates and also designed a new one-week training program for all existing sales associates. Both training courses emphasize the benefits available to clients through the Company’s expansive technology-based service delivery model and also analyzes the Company’s sales process.

The Company also restructured the compensation system of its sales force, effective January 1, 2003. Historically, sales associates had no defined sales territory and earned commissions based entirely on their individual production levels. In certain instances, this led to internal competition as multiple sales associates competed against each other for the same potential clients. The new sales model subdivides all markets into individually assigned and identified sales territories. The new compensation structure pays a higher base salary to attract more qualified sales candidates and provides an incentive based on the output of the full market, thus facilitating a collaborative environment between sales associates.

The Company generates sales leads from various sources as well as from direct sales efforts and inquiries. Each sales associate visits his or her clients periodically in order to maintain an ongoing relationship and to seek new business referrals. The Company also generates sales leads from referral relationship partners and an information database of small businesses. The Company uses a referral incentive program with its relationship partners to encourage increased referral activity. Further, the Company generates sales leads through contacts produced by its telesales group, which makes calls to prospective clients identified from industry data, purchased lists and other sources.

Vendor Relationships

The Company provides benefits to its worksite employees under arrangements with a number of vendors. The maintenance of insurance plans including workers’ compensation plans and health benefit plans that cover worksite employees is a significant part of the Company’s business. If the Company were required to obtain replacement contracts, such replacement could cause a significant disruption to the Company’s business and possible dissatisfaction with the Company’s service offering leading to a decrease in client retention and an adverse effect on the Company’s future results of operations or financial condition.

Workers’ Compensation Plans

The Company’s workers’ compensation carrier in 2001 and 2002 was CNA. For 2000, the Company’s workers’ compensation carriers were CNA and, for coverage in the State of Texas, the Texas Workers’ Compensation Fund (the “Texas Fund”). In states where private insurance is not permitted, worksite employees are covered by state insurance funds. Commencing with the policy year which began on January 1, 2003, AIG became the Company’s workers’ compensation carrier under a one-year agreement.

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The CNA arrangement is an insured loss sensitive program that provides insurance coverage for claims incurred in each plan year but which will be paid out over future periods. Under the CNA program the Company has individual stop loss coverage at $1 million per occurrence and aggregate stop loss coverage for individual claims that in total exceed the aggregate stop loss amount of 130% of expected losses as determined by CNA. The actual premium payable to CNA is determined based on the industries serviced by the Company and the losses incurred under the program. The Company retains liability for claims paid during the first year of each program. For the 2000 and 2001 CNA programs, the Company guarantees that the premiums paid to CNA during the 2000 and 2001 plan years will earn an annual rate of return equal to seven percent. For the 2002 program the guaranteed rate of return on paid premiums is four and one-quarter percent. The Company is required to pay additional premiums to CNA if the actual return earned by the paid premiums is less than the guaranteed rate of return applicable to each CNA program. The Company has made guaranteed payments in prior years and expects to do so in the future. Additional premium calls may be made by CNA in later years if the premiums paid by the Company in the first year of each program are not sufficient to fund all claims to be paid under such program, subject to the aggregate stop loss coverage amount and the per accident stop loss coverage amount.

The Company is required to provide collateral to CNA based on CNA’s total projected claims covered under each program. The payment of first year claims by the Company and premium payments to fund claims to be paid by CNA in later years reduce the total collateral required to be provided by the Company. The required collateral can be provided in the form of deposits paid to CNA, cash and short-term investments placed into a trust account, letters of credit, and surety bond collateral provided by independent surety bond providers.

The following table summarizes the adjusted specific financial provisions related to the CNA workers’ compensation program for the 2000, 2001 and 2002 program years:

The 2002 program year is subject to final audit in 2003, and may be subject to further collateral adjustments at that time.

For 2000, the Texas Fund was the provider of workers’ compensation insurance for worksite employees based in Texas. The Texas Fund program was a guaranteed cost insurance arrangement that expired on December 31, 2000. The agreement with the Texas Fund was not renewed beyond the original one-year term. The Company has no workers’ compensation liability with respect to claims by Texas based employees that arose in 2000 for amounts in excess of those paid to the Texas Fund.

Prior to January 1, 2000, the Company’s workers’ compensation coverage was provided by Liberty Mutual Insurance on a guaranteed cost basis. Amounts due under this program were a fixed percentage of the Company’s workers’ compensation payroll and were paid on a monthly basis. The Company has no liability in excess of such amounts paid, for periods prior to January 1, 2000.

Health Benefit Plans

The Company partners with premier managed care companies to provide health insurance to its worksite employees. Blue Cross Blue Shield of Florida (“BCBS”) is the primary partner delivering health care to Florida worksite employees, although Capital Health Plans provides HMO coverage to worksite employees in the Tallahassee, Florida region. The Company’s policy with BCBS is a three-year minimum premium arrangement entered into as of January 1, 2000. The Company renewed its policy with BCBS as of January 1, 2003 for an additional three-year term. Pursuant to this arrangement, the Company is obligated to reimburse BCBS for the

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cost of the claims incurred by participants under the plan, plus the cost of plan administration. The administrative costs per covered worksite employee associated with this policy are specified by year and the stop loss coverage is provided at the level of 115% of projected claims. The Company’s obligation to BCBS is secured by letters of credit. As of December 31, 2002, the letter of credit for BCBS was $6,000,000. The $6,000,000 approximated one month’s claims payments. The new three-year policy, effective January 1, 2003 allows for an adjustment to the letter of credit amounts based on premium volume and increases claims payment factor to maximum of two months of expected claims run-out.

As of December 31, 2002, BCBS no longer covers clients based in Alabama. Worksite employees of Alabama-based clients are now covered by client sponsored plans.

In Minnesota, HealthPartners (Minnesota) provides health coverage to Minnesota worksite employees.

Aetna U. S. Healthcare (“Aetna”) is the primary health care provider for worksite employees throughout the remainder of the country. Under the Aetna health plan, worksite employees must work a minimum of 25 hours per week to be eligible for coverage. Additional eligibility criteria may be established in each client’s benefits contract. With respect to the Aetna health plan, the Company requires each client that elects health coverage to meet minimum contribution and worksite employee participation rates. The Aetna 2002 health plan is subject to a guaranteed cost contract that caps the Company’s annual liability.

The Company’s dental plans, which include both a PPO and HMO offering, are provided by Aetna for all worksite employees who elect coverage. The Aetna dental plan is subject to a guaranteed cost contract that caps the Company’s annual liability.

In addition to health and dental coverage, the Company offers various other insurance programs to worksite employees such as vision care, life, accidental death and dismemberment, short-term disability and long-term disability.

Information Technology

The Company has invested approximately $48 million and is continuing to invest capital resources in the development and enhancement of its information and technology infrastructure, including computer hardware and software and telephony. This investment is intended to better serve the Company’s client base, achieve a high level of client satisfaction and to allow the Company to improve efficiencies in its operations.

These computer systems provide the Company with the capability to promptly and accurately deliver payroll and related services and generate comprehensive management reports. The Company’s information systems manage all data relating to worksite employee enrollment, payroll processing, benefits administration, management information and other requirements of the Company’s operations. The current systems have high-volume payroll processing capabilities that allow the Company to produce and deliver weekly payrolls to its clients, each customized to the needs of such clients. In 2002, the Company processed approximately 74,000 payroll checks per week.

The Company processes payroll for all of its worksite employees using Oracle’s Human Resource Management System (“HRMS”) and payroll processing application. The Oracle system enables the Company to effectively manage its existing operations and maintain appropriate controls.

The Company provides client services through the use of the Oracle Customer Relationship Management (“CRM”) system. The CRM system allows the Company to more quickly respond to and monitor client issues, track response time of customer service representatives, and provide clients with a better overall customer service experience.

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The Company has continued its development and deployment of Gevity HR Central, an online client and employee portal. Gevity HR Central allows clients to input their payroll data directly into the Company’s payroll applications via the Internet. Clients can regularly add or delete employees, view reports, and change payroll information. Gevity HR Central provides real time access to Gevity’s entire suite of HR products and services. Gevity HR Central is fully integrated with the company’s HRMS and payroll engines, CRM solution and financial suite, as well as the Company’s comprehensive line of online products and services. This full integration results in improved client satisfaction, as well as improved operating margins. Oracle’s Portal software provides the foundation, enabling a robust, client configurable portal, while Gevity’s custom developed software provides additional ease of use and service capabilities.

Gevity HR Central allows the Company to service its clients 24 hours a day with increased accuracy and efficiency. Gevity HR Central is updated regularly to increase its functionality. Gevity HR Central is intended to serve as a human resource information portal for clients providing a variety of payroll and human resource tools, templates and information. At the end of 2002, payroll information for approximately 70% of the Company’s worksite employees was submitted over the Internet. Usage of this technology is expected to increase in 2003 as almost 80% of new clients obtained in 2002 opted to use Gevity HR Central when reporting payroll information to the Company.

The combination of the Oracle systems for access and functionality and the Gevity HR Central online capabilities, creates a unique solution capable of growing and adapting to the evolving needs of clients.

The Company’s information technology staff consisted of 57 associates at December 31, 2002. The Company believes the development of its information technology is an integral part of achieving its growth objectives and intends to continue to invest in its technology infrastructure.

Competition

The HR consulting industry is highly fragmented. The Company believes that it is one of the largest co-employers of worksite employees in the United States in terms of active worksite employees and revenues. The Company considers its primary competition to be PEOs, insurance agents, and fee-for-service providers, such as payroll processors and HR consultants. The market for human resource consulting services is expected to become increasingly competitive as larger companies, some of which have greater financial resources than the Company and which have not traditionally operated in this industry, enter the market.

The key competitive factors in the human resource consulting industry are breadth and quality of services, price, reputation, financial stability, and choice, quality and cost of benefits. The Company seeks to compete through its ability to provide a full-service HR solution to its clients through its advanced information technology solutions.

The Company believes that some smaller PEOs are exiting the PEO industry due to increased collateral required by providers of workers’ compensation and health benefits insurance. In addition, an increase in costs and a lack of available workers’ compensation and health benefits insurance programs is impacting these PEOs.

Internal Company Employees

As of December 31, 2002, the Company had 901 internal employees of whom 471 were located at the Company’s headquarters in Bradenton, Florida. The remaining employees were located in the Company’s branch offices. None of the Company’s internal employees is covered by a collective bargaining agreement.

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Industry Regulation

Numerous federal and state laws and regulations relating to employment matters, benefit plans and employment taxes affect the operations of the Company. By entering into a co-employer relationship with its clients, the Company assumes certain obligations and responsibilities as an employer under these laws. Because many of these federal and state laws were enacted before the development of non-traditional employment relationships, such as PEOs, temporary employment and other employment-related outsourcing arrangements, many of these laws do not specifically address the obligations and responsibilities of non-traditional employers. In addition, the definition of “employer” under these laws is not uniform.

Some governmental agencies that regulate employment have developed rules that specifically address issues raised by the relationship among PEOs, clients and worksite employees. Such regulations are relatively new and, therefore, their interpretation and application of these regulations by administrative agencies and Federal and state courts are limited or non-existent. The development of additional regulations and interpretation of existing regulations can be expected to evolve over time. In addition, from time to time, states have considered, and may in the future consider, imposing certain taxes on gross revenues or service fees of the Company and its competitors.

The Company believes that its operations are currently in compliance in all material respects with applicable Federal and state statutes and regulations.

Employee Benefit Plans

Effective April 1, 1997, the Company began to offer a 401(k) retirement plan, designed to be a “multiple employer” plan under the Internal Revenue Code of 1986, as amended (the “Code”) Section 413(c). This plan design enables owners of clients and highly compensated worksite employees, as well as highly compensated internal employees of the Company, to participate. These persons were excluded from the single employer 401(k) retirement plan offered by the Company prior to April 1, 1997, in order to avoid issues of discrimination in favor of highly compensated employees. Generally, employee benefit plans are subject to provisions of both the Code and the Employee Retirement Income Security Act (“ERISA”).

Employer Status.    In order to qualify for favorable tax treatment under the Code, the plans must be established and maintained by an employer for the exclusive benefit of its employees. Generally, an entity is an “employer” of certain workers for federal employment tax purposes if an employment relationship exists between the entity and the workers under the common law test of employment. In addition, the officers of a corporation are deemed to be employees of that corporation for federal employment tax purposes. The common law test of employment, as applied by the Internal Revenue Service (“IRS”) involves an examination of many factors to ascertain whether an employment relationship exists between a worker and a purported employer. Such a test is generally applied to determine whether an individual is an independent contractor or an employee for federal employment tax purposes and not to determine whether each of two or more companies is a “co-employer.” Substantial weight is typically given to the question of whether the purported employer has the right to direct and control the details of an individual’s work. The courts have provided that the common law employer test applied to determine the existence of an employer-employee relationship for federal employment tax purposes can be different than the common law test applied to determine employer status for other federal tax purposes. In addition, control and supervision have been held to be less important factors when determining employer status for ERISA purposes.

On May 13, 2002, the IRS released guidance applicable solely to the tax-qualified status of defined contribution retirement plans maintained by PEOs. In that guidance, the IRS declared that it would not assert a violation of the exclusive benefit rule under Section 401(a) of the Code if a PEO that maintains a single employer 401(k) retirement plan for worksite employees takes certain remedial action by the last day of the first plan year beginning on or after January 1, 2003.

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The Company maintains a frozen single employer 401(k) retirement plan benefiting certain worksite employees and intends to take remedial action to qualify for the relief provided under the IRS guidance within the applicable deadline. Since the plan has been frozen since April 1, 1997, and the assets in the plan are less than $4 million, this change is not expected to have a material effect on the Company’s financial condition and the future results of operations.

The status of the active multiple employer 401(k) retirement plan maintained by the Company is unaffected by the recent IRS guidance.

ERISA Requirements.    Employee pension and welfare benefit plans are also governed by ERISA. ERISA defines “employer” as “any person acting directly as an employer, or indirectly in the interest of an 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 the common law test of employment must be applied to determine whether an individual is an employee or an independent contractor under ERISA. However, in applying that test, control and supervision are less important for ERISA purposes when determining whether an employer has assumed responsibility for an individual’s benefits status. A definitive judicial interpretation of “employer” in the context of a PEO or employee leasing arrangement has not been established.

If the Company were found not to be an employer for ERISA purposes, its former 401(k) retirement plan would not comply with ERISA and could be subject to retroactive disqualification by the IRS. Further, the Company would be subject to liabilities, including penalties, with respect to its cafeteria plan for the failure to withhold and pay taxes applicable to salary deferral contributions by its worksite employees. In addition, as a result of such finding the Company and its plans would not enjoy, with respect to worksite employees, the preemption of state laws provided by ERISA and could be subject to varying state laws and regulation, as well as to claims based upon state common laws.

Federal Employment Taxes

As an employer, the Company assumes responsibility and liability for the payment of Federal and state employment taxes with respect to wages and salaries paid to worksite employees. There are essentially three types of Federal employment tax obligations:(i) withholding of income tax governed by Code Section 3401, et seq.; (ii) obligations under the Federal Income Contributions Act (“FICA”), governed by Code Section 3101, et seq.; and (iii) obligations under the Federal Unemployment Tax Act (“FUTA”), governed by Code Section 3101, et seq. Under these Code sections, employers have the obligation to withhold and remit the employer portion and, where applicable, the employee portion of these taxes.

Among other employment tax issues related to whether PEOs are employers of worksite employees are issues under the Code provisions applicable to Federal employment taxes. The issue arises as to whether the Company is responsible for payment of employment taxes on wages and salaries paid to such worksite employees. Code Section 3401(d)(1), which applies to Federal income tax withholding requirements, contains an exception to 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 this common law employer exception to apply for both FICA and FUTA tax purposes. Code Section 3401(d)(1) states that if the person for whom services are rendered does not have control of the payment of wages, the “employer” for this purpose is the person having control of the payment of wages. The Treasury Regulations issued under Code Section 3401(d)(1) state that a third party can be deemed to be the employer of workers under this Section for income tax withholding purposes where the person for whom services are rendered does not have legal control of the payment of wages. Although several courts have examined Code section 3401(d)(1) with regard to PEOs its ultimate scope has not been delineated. Moreover, the IRS has to date relied extensively on the common law test of employment in determining liability for failure to comply with Federal income tax withholding requirements.

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Accordingly, while the Company believes that it can assume the withholding obligations for worksite employees, if the Company fails to meet these obligations, the client may be held jointly and severally liable. While this interpretive issue has not, to the Company’s knowledge, discouraged clients from utilizing the Company’s services, there can be no assurance that a definitive adverse resolution of this issue would not do so in the future.

State Regulation

While many states do not explicitly regulate PEOs, 22 states including five states where the Company has offices (Florida, Colorado, Tennessee, Texas and Minnesota) have passed laws that have licensing, registration or other compliance requirements for PEOs and several states are considering such regulation. Such laws vary from state to state but generally provide for monitoring the fiscal responsibility of PEOs. The Company holds licenses, is registered or otherwise compliant in all 22 states. Whether or not a state has licensing, registration or other compliance requirements, the Company faces a number of other state and local regulations that could impact its operations.

EXECUTIVE OFFICERS OF THE REGISTRANT

The following table sets forth certain information with respect to each person who is an executive officer of the Company as indicated below.

Erik Vonk has served as Chairman of the Board of Directors and Chief Executive Officer since April 2002. He was retired from February 2001 to April 2002. Mr. Vonk was formerly President and Chief Executive Officer of Randstad North America from 1992 through 2001, a subsidiary of Randstad Holding NV, a worldwide staffing services provider, where he was responsible for organizing the North American operations. In addition, Mr. Vonk served as a member of the Executive Board of Bank Cantrade AG from 1989 to 1992.

James F. Manning served as Chairman of the Board of Directors and Chief Executive Officer from October 2001 until his resignation as Chairman and Chief Executive Officer in April 2002. He continued to provide services to the Company through June 7, 2002, when he resigned from the employment of the Company. He was retired from May 1998 through October 2001. Mr. Manning was formerly with the Company from 1995 through 1998, serving as President of the Company from July 1995 to December 1996, as Vice Chairman of the Board of Directors from January 1997 to May 1998. Mr Manning continues to serve as member of the Board of Directors of the Company.

John E. Panning has served as a director of the Company since May 1998. He has served as Chief Financial Officer since January 1997. In addition, he also served as Chief Operating Officer from May 2001 through May 2002. He served as a member of the Office of the Chairman from January 1997 until December 1999 at which time the Office of the Chairman was disbanded. Mr. Panning was then appointed as a member of the Office of Chief Executive and served until July 1, 2000. From August 1996 to December 1996, he served as Senior Vice President of Finance of the Company; and from January 1995 to July 1996 he served as Senior Vice President of Sales of the Company.

Lisa Harris has served as Senior Vice President, Client Services and Chief Information Officer since January 1999. Before joining the Company, she was Vice President, Information Services of Precision Response Corporation from March 1996 to December 1998.

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Robert Minkhorst has served as Senior Vice President, Marketing and Sales since December 2002. From October 2002 to the commencement of his full-time position with the Company, he served as a consultant to Gevity. Before joining Gevity, Mr. Minkhorst was with Royal Philips Electronics N. V. where he served from February 1994 to December 2000 as Chief Executive Officer of Philips Consumer Electronics North America. Prior to this, Mr. Minkhorst served as the Chief Executive Officer of Philips Lighting for North and South America from February 1991 to February 1994.

Gregory M. Nichols served as Senior Vice President, Human Resources and General Counsel from January 2001 through October 2002, at which time Mr. Nichols focused his role with the Company as Senior Vice President and General Counsel and continues to serve in such position. Before joining Gevity, Mr. Nichols served as Vice President of Human Resources and General Counsel of Starboard Cruise Services, Inc. from 1999 to 2000, and as Corporate Counsel for G. Neil Companies from 1994 to 1998. Mr. Nichols is a member of the Florida Bar Association.

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SEC REPORTS

The Company is subject to the informational requirements of the United States Securities Exchange Act of 1934, as amended (the “Exchange Act”), and in accordance therewith files reports and other information with the SEC. Such reports and information can be inspected and copied at the public reference facilities maintained by the SEC at 450 Fifth Street, N.W., Washington, DC 20549, and at the SEC’s regional offices in New York, New York and Chicago, Illinois. In addition, the Company’s common stock is quoted on the NASDAQ National Market (“NASDAQ”) and the aforementioned material may also be inspected at the offices of NASDAQ.

The Company’s annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act are available free of charge on the Company’s website at www.gevityhr.com, as soon as reasonably practicable after electronically filing such reports with the SEC.

ITEM 2.    PROPERTIES

The Company’s operations are conducted from its 107,511 square foot corporate headquarters located in Bradenton, Florida. The Company leases this facility under a lease which expires in November 2005, but which can be renewed, at the option of the Company, for two additional five-year periods.

As of December 31, 2002 the Company leased space for its 40 offices located in Florida, Georgia, Texas, Arizona, Minnesota, North Carolina, Tennessee, Alabama, Colorado, California and New York. The Company believes that its branch office leases, which generally have terms of one to five years, can either be renewed on acceptable terms or that other, comparable space can be located upon the expiration of any branch office lease without significant additional cost to the Company. The Company considers its facilities to be adequate for its current and prospective operations.

ITEM 3.    LEGAL PROCEEDINGS

Lawrence E. Egle v. Gevity HR, Inc., et al. On April 30, 1999, a shareholder of the Company, brought a class action in the Twelfth Judicial Division, Manatee County, Florida against the Company and certain of its directors alleging that the directors and senior officers of the Company, in order to entrench themselves in the management of the Company, breached their fiduciary duty to shareholders by failing to pursue a proposal from Paribas Principal Partners to acquire the Company. Plaintiffs seek injunctive relief and unspecified damages including attorneys’ and experts’ fees. Negotiations continue between the Company and counsel for the putative plaintiff class in an effort to finalize a definitive settlement agreement. Once finalized, any agreed upon settlement is subject to court approval following notice to the putative class. Management does not expect any settlement to have a material effect on the Company’s financial position.

The Company is a party to certain pending claims that have arisen in the normal course of business, none of which, in the opinion of management, is expected to have a material adverse effect on the consolidated financial position or results of operations if adversely resolved. However, the defense and settlement of such claims may impact the future availability and cost to the Company of applicable insurance coverage.

From time to time the Company is made a party to claims based upon the acts or omissions of its clients’ worksite employees. Some states, such as Florida, limit the liability of PEOs for the acts or omissions of worksite employees, other states do not provide a specific limitation. The Company believes that the client should retain liability and be responsible for the acts or omissions of worksite employees and vigorously defends against such claims.

ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS

None.

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Part II.

ITEM 5.    MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Market Information.    The Company’s common stock is traded on NASDAQ under the ticker symbol “GVHR.” The following table sets forth the high and low stock prices of the Common Stock as reported on NASDAQ and dividends for the last two fiscal years:

Dividends.    The Company did not pay any cash dividends prior to March 14, 2001. The Board of Directors declared a cash dividend on November 22, 2002 of $0.05 per share of common stock, payable on January 31, 2003 to holders of record on January 15, 2003. Any future determination as to the payment of dividends will be made at the discretion of the Board of Directors of the Company and will depend upon the Company’s operating results, financial condition, capital requirements, general business conditions and such other factors as the Board of Directors deems relevant.

Holders.    As of March 19, 2003, there were 392 shareholders of record of the Company’s common stock. This number does not include beneficial owners of the common stock whose shares are held in the names of various dealers, clearing agencies, banks, brokers and other fiduciaries.

SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS

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ITEM 6.    SELECTED FINANCIAL DATA

The following table sets forth certain selected historical financial and operating data of the Company as of the dates and for the periods indicated. The following selected financial data are qualified by reference to, and should be read in conjunction with, the consolidated financial statements, related notes and other financial information included as Part II, Item 8 of this Form 10-K, as well as “Management’s Discussion and Analysis of Financial Condition and Results of Operations” beginning on page 21.

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ITEM 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL  CONDITION AND RESULTS OF OPERATIONS

The following discussion contains forward-looking statements. The Company’s actual results could differ materially from those discussed in such forward-looking statements. Factors that could cause or contribute to such differences include those discussed below and elsewhere in this Form 10-K. See “Cautionary Note Regarding Forward-Looking Statements” beginning on page 1. The following discussion should be read in conjunction with the Company’s Consolidated Financial Statements and Notes thereto included elsewhere in this filing. Historical results are not necessarily indicative of trends in operating results for any future period.

Overview

The Company is a leading United States provider of human capital management solutions. The Company offers its clients, which are typically small to medium-sized businesses with between five and one hundred employees, a broad range of products and services that provide a complete solution for the clients HR outsourcing needs. As of December 31, 2002, the Company served over 6,600 clients as measured by each client’s FEIN and 7,200 as measured by separate client payroll cycles, with approximately 100,000 active, worksite employees. The company operates branch offices in Florida, Texas, Georgia, Arizona, Minnesota, North Carolina, Tennessee, Alabama, Colorado, California and New York. The Company’s products and services include assistance with recruiting, performance management, training and development, benefits administration, payroll administration, governmental compliance, risk management, unemployment administration, and health, welfare and retirement benefits.

Revenues.    Revenues consist of service fees charged by the Company to cover the costs of certain employment-related taxes, workers’ compensation insurance coverage and administrative and field services provided by the Company to its clients. The service fee charged by the Company is invoiced along with each periodic payroll delivered to the client. The client’s portion of health plan costs is charged separately and is not included in the service fee. Service revenues are recognized in the period in which the worksite employee works. Under this accrual method of accounting, service fees relating to worksite employees with earned but unpaid wages at the end of each period are recognized as unbilled revenues and the related payroll costs for such wages are accrued as a liability during the period in which the worksite employee earns wages. Subsequent to the end of each period, such wages are paid and the related service fees are billed.

Cost of Services.    Cost of services includes all direct costs associated with the Company’s revenue generating activities as well as employee benefit costs, workers’ compensation insurance and state unemployment taxes.

Employee benefit costs are comprised primarily of medical benefit costs, but also include costs of other employee benefits such as dental, disability and group life insurance. Benefit claims incurred by worksite employees under the benefit plans are expensed as incurred according to the terms of each contract. Worksite employee participation and the client’s contribution towards the cost of the Company’s health benefit plans are at an established minimum.

In certain instances, the Company opts to make a contribution toward the cost of the worksite employees’ medical benefit costs. In most small group health markets, medical benefit plan rates vary based on the medical participants’ demographics. In order to offer a competitively priced business solution, the Company may offer reduced medical benefit plan rates to worksite employees with positive risk characteristics. The addition of these selected worksite employees offsets potential adverse selection and helps to stabilize the overall medical benefit plan risk to the Company.

In addition, a medical benefit plan price subsidy may be used to mitigate medical benefit plan renewal rate increases in a particular state or region of the country.

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The amount of the Company’s contribution toward medical benefit plan costs is determined as part of the annual enrollment pricing process. A health benefit plan subsidy in excess of a planned amount may occur when medical benefit cost inflation exceeds expected inflation levels or when medical benefit plan enrollment in subsidized states is greater than anticipated.

The Company offers its medical benefit plans through partnerships with premier health care companies. See “Health Benefit Plans” beginning on page 11. These companies have extensive provider networks and strong reputations in the markets in which the Company operates.

All of the Company’s health care providers offer health maintenance organization (“HMO”) coverage. In Florida, preferred provider organization (“PPO”) coverage is also provided. In the Aetna markets, PPO coverage was offered in 2002 where an HMO offering was not reasonably available. The Company believes that managed care services provided by an HMO are more cost-effective to the Company and participants than those provided by a PPO. At the end of 2002, in excess of 70% of the Company’s health plan participants received their coverage through an HMO.

The Company’s workers’ compensation program from January 1, 2000 through December 31, 2002 was with CNA except with respect to locations in states where private insurance is not permitted and which are covered by state insurance funds. Commencing with the 2003 policy year which began on January 1, 2003, AIG became the Company’s provider of workers’ compensation insurance. The Company’s workers’ compensation program is a loss sensitive program under which workers’ compensation costs and the accrual rate are based upon payroll dollars paid to worksite employees, the specific risks associated with the work performed by worksite employees, the administrative costs of the program, the return on investment premium dollars paid as part of the program and the discount rate used in determining the present value of future payments to be made under the program. The Company reviews the current program year claims information with its independent actuaries. The current accrual rate is adjusted based on current and historical loss trends, fluctuations in the administrative costs associated with the program, actual returns on investment earned with respect to premium dollars paid and changes in the discount rate used to determine the present value of future payments to be made under the program. In addition, each year, the Company evaluates its historical accruals based on an actuarially developed estimate of the ultimate cost to the Company for each open policy year and adjusts such accruals as necessary. These adjustments could be either increases or decreases to workers’ compensation costs, depending upon the actual loss experience of the Company. The final costs of coverage will be determined by the actual claims experience over time as claims close, by the final administrative costs of the program and by the final return on investment earned with respect to premium dollars paid. See “Workers Compensation Plans” beginning on page 10.

State unemployment tax rates vary from state to state and are based upon the employer’s claims history. The Company aggressively manages its state unemployment tax exposure by contesting unwarranted claims.

Operating Expenses.    Operating expenses consist primarily of salaries, wages and commissions associated with the Company’s internal employees, and general and administrative expenses. Sales and marketing commissions and client referral fees are expensed as incurred. The Company expects that future revenue growth will result in increased operating leverage, as the Company’s fixed operating expenses are leveraged over a larger revenue base.

Income Taxes.    The Company records income tax expense using the asset and liability method of accounting for deferred income taxes. The Company’s effective tax rate for 2002 was 33.2%. Such effective tax rate differed from the statutory federal tax rate primarily because of state taxes and federal tax credits. The Company has recorded a tax benefit in 2001 primarily as a result of the loss from operations and Federal tax credits, and in 2000, the Company recorded a tax benefit primarily as a result of tax-exempt income earned and Federal tax credits.

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Profitability.    Profitability is largely dependent upon the Company’s success in generating revenues for its services and managing the costs that are within its control. Revenues and costs of service primarily relate to workers’ compensation coverage, health benefit plans and state unemployment taxes. The Company seeks to manage these costs through the use of: (i) workers’ compensation arrangements with carriers who efficiently manage claims administration, internal risk assessment and client risk management programs; (ii) appropriately designed health benefit plans that encourage worksite employee participation, high HMO enrollment and efficient risk pooling; and (iii) aggressive management of its state unemployment tax exposure.

Table of Contractual Arrangements

Off-balance Sheet Arrangements

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

Critical Accounting Policies

The accounting policies described below are those that the Company considers critical in preparing its financial statements. These policies include significant estimates made by management using information available at the time the estimates are made. However, as described below, these estimates could change materially if different information or assumptions were used. The descriptions below are summarized and have been simplified for clarity. A more detailed description of the significant accounting policies used by the Company in preparing its financial statements is included in Note 1 of Notes to the Consolidated Financial Statements and in Item 1 of this Form 10-K.

Revenue Recognition.    The gross billings that the Company charges its clients under its Professional Services Agreement include each worksite employee’s gross wages, a service fee and, to the extent elected by the clients, health and welfare benefit plan costs. The Company’s service fee, which is computed as a percentage of gross wages, is intended to yield a profit to the Company and cover the cost of certain employment-related taxes, workers’ compensation insurance coverage, and administrative and field services provided by the Company to the client, including payroll administration, record keeping, and safety, human resources, and regulatory compliance consultation. The component of the service fee related to administration varies according to the size of the client, the amount and frequency of payroll payments and the method of delivery of such payments. The component of the service fee related to workers’ compensation and unemployment insurance is based, in part, on the client’s historical claims experience. All charges by the Company are invoiced along with each periodic payroll delivered to the client.

Historically the Company reported the full amount of its gross billings, including the portion that represents the gross wages of its worksite employees, as revenue. As described below, the Company changed from gross revenue reporting to net revenue reporting for worksite employee salaries, wages and certain payroll taxes effective for the fourth quarter of 2002.

The Company reports revenues from service fees in accordance with Emerging Issues Task Force (“EITF”) No. 99-19, Reporting Revenue Gross as a Principal versus Net as an Agent. The Company reports as revenues,

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on a gross basis, the total amount billed to clients for service fees, health and welfare benefit plan fees, workers’ compensation and unemployment insurance fees. The Company reports revenues on a gross basis for these fees because the Company is the primary obligor and deemed to be the principal in these transactions under EITF No. 99-19. The Company now reports revenues on a net basis for the amount billed to clients for worksite employee salaries, wages and certain payroll-related taxes less amounts paid to worksite employees and taxing authorities for these salaries, wages and taxes. The Company accounts for its revenues using the accrual method of accounting. Under the accrual method of accounting, the Company recognizes its revenues in the period in which the worksite employee performs work. The Company accrues revenues and unbilled receivables for service fees relating to work performed by worksite employees but unpaid at the end of each period. In addition, the related costs of services are accrued as a liability for the same period. Subsequent to the end of each period, such costs are paid and the related PEO service fees are billed.

Accounting Change For Reporting Revenue.    During the quarter ended December 31, 2002, the Company changed from gross revenue reporting to net revenue reporting for worksite employee salaries, wages and payroll-related taxes. Based on the criteria established by EITF No. 99-19, the Company determined that this change better recognizes the substance of the transactions between the Company and its clients. In addition, the change will better focus the Company on, and allow investors to better understand, the financial results of the Company’s core business. This change to a more preferable accounting method resulted in no effect on net income or earnings per share. Because of the significance of this reclassification of revenue and expense components to the income statement, the Company has reflected the change as if it had occurred on January 1, 2000 in the accompanying financial statements. The table presented below reflects the effect of the change on the amounts previously reported for 2001 and 2000 and the amounts that would have been reported for 2002 under the gross revenue reporting method.

For the year ended December 31, 2002 (in thousands):

For the year ended December 31, 2001 (in thousands):

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For the year ended December 31, 2000 (in thousands):

Medical Benefit Plan Liabilities.    The Company provides medical benefit plans to its worksite employees through several medical benefits plan providers.

With respect to these medical benefit plans, the Company establishes medical benefit plan liabilities for benefit claims that have been reported but not paid and claims that have been incurred but not reported. These reserves and the related health benefit plan subsidy are developed using actuarial principles and assumptions which consider a number of factors, including historical claim payment patterns and expected rates of increase in medical care costs. The factor that has the greatest impact on the Company’s financial results is the medical cost trend, which is the rate of increase in health care costs.

In certain instances, the Company decides to make a contribution to the medical benefit plan providers toward the cost of the worksite employees medical benefit plan costs. Such contribution together with higher than anticipated medical cost trend may result in what the Company has designated to be a health benefit plan subsidy.

For each period, the Company estimates the relevant factors, based primarily on historical data and uses this information to determine the assumptions underlying the reserve calculations. An extensive degree of judgment is used in this estimation process. Due to the considerable variability of health care costs and adjustments to health reserves, the health benefit plan subsidy is paid by the Company and is sometimes significant.

The following tables provides the amount of the health benefit plan subsidy by year and the amount of the medical benefit plan liabilities for benefit claims that have been reported but not paid and claims that have been incurred but not reported:

HEALTH BENEFIT PLAN SUBSIDY

MEDICAL BENEFIT PLAN LIABILITIES

If the actual amount of the Company’s medical benefit plan liabilities at the end of each period were to increase from the estimates used by the Company, then the Company would have an increase in the amount of its future period Health Benefit Plan Subsidy.

The Company’s financial statements reflect the estimates made within the Cost Of Services on the Company’s Income Statement and within the accrued insurance premiums, health and workers’ compensation reserves on the Company’s Balance Sheet.

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In order to give recognition to the medical benefit plan liabilities that are not expected to be paid in the following year, the Company includes a portion of the obligation as a long-term liability.

Workers’ Compensation Plan Liabilities.    The Company had an insured loss sensitive workers’ compensation program with CNA for 2000, 2001 and 2002. As part of such program the Company has individual stop loss coverage at $1 million per occurrence and aggregate stop loss coverage for individual claims that in total exceed the aggregate stop loss amount of 130% of expected losses as determined by CNA.

Commencing with the policy year which began on January 1, 2003, AIG became the Company’s workers’ compensation carrier under a one-year agreement. Such workers’ compensation program is loss sensitive and will provide the Company with individual stop loss coverage at $1 million per occurrence and aggregate stop loss coverage for individual claims that in total exceed the aggregate stop loss amount of 175% of expected losses as determined by AIG.

At least annually, the Company obtains an independent actuarially determined calculation of the estimated costs of claims incurred based on the Company’s historical loss development trends. The estimated costs of the claims calculated may be subsequently revised by the independent actuary based on developments relating to the actual claims incurred. A certain amount of judgment is used in this estimation process by both the independent actuary and the Company.

The following loss reserve development table illustrates the change over time of reserves established for workers’ compensation claims and claims adjustment expenses at the end of the preceding three calendar years for the Company. This table excludes the 2000 program year for the Texas Workers’ Compensation Insurance Fund, which was a guarantee cost program. The second section, reading down, shows the number of claims reported. The third section, reading down, shows the cumulative amounts paid as of the end of successive years with respect to the originally reported reserve liability. The last section, reading down, shows re-estimates of the originally recorded reserves as of the end of each successive year, which is the result of the Company’s expanded awareness of additional facts and circumstances that pertain to the unsettled claims.

The loss reserve development table for workers’ compensation claims is cumulative and, therefore, ending balances should not be added since the amount at the end of each calendar year includes activity for both the current and prior years.

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The Company’s financial statements reflect the estimates made by the independent actuaries as well as other factors related to the CNA workers’ compensation program within the Cost of Services on the Company’s Income Statement and within the accrued insurance premiums, health and workers’ compensation insurance reserves on the Company’s Balance Sheet.

If the actual cost of the claims incurred is higher than the estimates determined by the independent actuaries, then the accrual rate used to determine workers’ compensation costs could increase. If the actual cost of the claims incurred is lower than the estimates determined by the independent actuaries, then the accrual rate used to determine workers’ compensation costs could decrease.

Such increase or decrease to the accrual rate is reflected in the accounting period that the change in the amount of workers’ compensation claims is calculated. Due to the considerable variability in the estimate of the amount of workers’ compensation claims, adjustments to workers’ compensation costs are sometimes significant.

In order to give recognition to these workers’ compensation cost obligations that are not expected to be paid in the following year, the Company includes a portion of the obligation as a long-term liability.

Deferred Taxes.    The Company recognizes deferred tax assets and liabilities based on the differences between the financial statement carrying amounts and the tax bases of assets and liabilities. The Company regularly reviews its deferred tax assets for recoverability and if necessary, establishes a valuation allowance based on historical taxable income, projected future taxable income, and the expected timing of the reversals of existing temporary differences. If the Company were to operate at a loss or is unable to generate sufficient future taxable income, or if there is a material change in the actual effective tax rates or time period within which the underlying temporary differences become taxable or deductible, then the Company could be required to establish a valuation allowance against all or a significant portion of the deferred tax assets resulting in a substantial increase in the Company’s effective tax rate.

Results of Operations

The following table presents the Company’s results of operations for the years ended December 31, 2000, 2001 and 2002, expressed as a percentage of revenues:

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SIGNIFICANT TRENDS

Client Retention— The Company decided in 2001 to target new clients with a lower risk profile and to no longer service existing clients in certain high-risk industries. During the first quarter of 2002, all existing clients in certain high-risk industries such as roofing and trucking were terminated. However, the Company will continue to service existing clients in other high-risk industries and intends to retain such clients for as long as they remain profitable to the Company. As a result, the percentage of total Company revenue earned from clients in high-risk industries is expected to decrease over time as the revenue earned from new clients added from other industries increases.

The Company considers industries to be high-risk if there is a likelihood of a high frequency of on-the-job accidents involving worksite employees or likelihood that such accidents will be severe.

By no longer selling its services to new high-risk clients, the Company believes that it will reduce the earnings volatility associated with the cost of its workers’ compensation insurance programs.

Volatility in the dollar amount of workers’ compensation costs arises when the number of accidents and the severity of such accidents cannot be easily projected, thus resulting in a wide range of possible expected dollar losses for an insurance policy year. Such volatility in the projection of expected dollar losses caused by the number of claims and the severity of such claims is more likely to be associated with industries that have a high-risk level associated with them (e.g., construction, roofing, trucking, etc.)

Since the Company has historically sold a significant amount of its services to clients in high-risk industries, there is a degree of uncertainty as to whether it can be successful in selling services to clients in industries not previously focused upon. The Company has been selling to the new target market since the first quarter of 2001 and the sales volume from new clients has been at a level that leads the Company to believe that the result of the transition is profitable.

Further, the Company has communicated to its existing clients that the comprehensive service fees, including the cost of medical benefits, will increase in 2003 to more appropriately recognize the Company’s cost of providing services and to decrease the health benefit subsidy. The repricing of the Company’s services is consistent with its strategy to charge service fees that more accurately reflect current competitive market rates for insurance and benefit related services. The Company is not able to predict the degree of client attrition that will result from the increased service fees.

Business Insurance—The Company maintains a number of corporate insurance policies, including automobile liability and general liability. For the program years of 2002 and prior, these insurance policies were on a guaranteed cost basis. For the 2003 program years, the automobile and general liability insurance policies will be subject to a deductible amount per incident. In addition, the Company will provide AIG with $2,500,000 of collateral to protect against this exposure. The Company is continuing to seek insurance coverage with lower deductible amounts for this exposure.

Surety Bonds—Through 2002, the Company used surety bonds as collateral for its workers’ compensation insurance programs. As of January 1, 2003, surety bonds will no longer be used to collateralize workers compensations programs. Collateral obligations will be met through the use of cash and cash equivalents.

Year Ended December 31, 2002 Compared to Year Ended December 31, 2001

For the year ended December 31, 2002, revenues increased 12.5% over 2001, totaling $374.7 million, compared to $332.8 million for 2001. Revenue growth was primarily due to the Company’s strategy of emphasizing its human resources consulting services that it provides to its clients in order to increase the administrative fees that it earns. In addition, revenues increased as the Company increased the charge for its health benefit plans offered to worksite employees and the number of worksite employees participating in the Company’s health benefit plans increased.

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Charges to clients for workers’ compensation coverage as a percentage of worksite employees salaries and wages for 2002 was 3.32%, compared to 4.36% for 2001, representing a decrease of 23.9%. Such decline is due to the continuing change in the risk profile of clients serviced. To the extent the Company continues to increase the number of its low-risk clients, the Company expects such charges to continue to decrease.

From December 31, 2001 to December 31, 2002, the number of clients decreased 9.7% from 8,040 to 7,258 and the number of average paid worksite employees decreased 7.7% from 104,852 to 96,741. Such declines are a result of the Company’s decision to target new clients with a lower risk profile and to no longer service existing clients in certain high-risk industries. The Company counts the number of clients based on each unique account number that the Company issues to identify each payroll cycle (e.g., weekly, bi-weekly, monthly, etc.) Accordingly, each business the Company services may have multiple payroll cycles and thereby represents more than one client. The number of unique businesses serviced by the Company as measured by individualized federal identification numbers as of December 31, 2002 was equal to 6,624.

Cost of services which includes the cost of the Company’s medical benefit plans, workers’ compensation insurance, state unemployment taxes and other costs were $284.1 million for 2002, compared to $261.8 million for 2001, representing an increase of $22.3 million, or 8.5%.

The health benefit plan subsidy was $9.5 million in 2002, compared to $9.3 million in 2001. The health benefit plan subsidy in 2002 and in 2001 was primarily attributable to an increase in medical care costs. In addition, the 2001 health benefit plan subsidy was a result of internal collection and billing issues. During 2001, changes were made to the Company’s billing practices to more closely align collection of health care benefit premiums with the worksite employees’ period of coverage. The Company’s collection processes were not adequately modified to collect on the new basis, resulting in a premium collections shortfall and therefore an increased health benefit plan subsidy.

Workers’ compensation costs were $88.0 million for 2002, as compared to $115.8 million for 2001, representing a decrease of $27.8 million or 24.0%. Workers’ compensation costs decreased in 2002 due to the Company’s decision to sell to a target market with a lower risk client profile that pays worksite employees higher wages. Included in workers’ compensation costs for 2001 was an adjustment of $19.7 million. The adjustment was primarily caused by: (i) a lower than expected rate of return on premium payments made to CNA that reflected the decrease in the overall securities market, (ii) a higher discounted present value of the unfunded portion of expected premium payments to be made to CNA which resulted from the decrease in the interest rate environment, and (iii) a change, identified in a mid-year actuarial review by the Company’s independent actuaries, in the estimate of the ultimate total workers’ compensation claims for the 2000 policy year.

State unemployment taxes were $6.2 million for 2002, compared to $6.7 million for 2001, representing a decrease of $0.5 million or 7.5%. This decrease was the result of the Company having fewer paid average worksite employees in 2002 subject to state unemployment taxes.

Gross profit was $90.5 million for 2002, compared to $71.0 million for 2001, representing an increase of $19.5 million, or 27.5%. Gross profit margin increased as a percentage of revenues primarily due to higher workers’ compensation margin from clients in low risk industries and decreased state unemployment taxes. Included in workers’ compensation costs for 2001 was an adjustment of $19.7 million. The adjustment was primarily caused by: (i) a lower than expected rate of return on premium payments made to CNA that reflected the decrease in the overall securities market, (ii) a higher discounted present value of the unfunded portion of expected premium payments to be made to CNA which resulted from the decrease in the interest rate environment, and (iii) a change, identified in a mid-year actuarial review by the Company’s independent actuaries, in the estimate of the ultimate total workers’ compensation claims for the 2000 policy year.

Operating expenses were $85.5 million for 2002, compared to $100.3 million for 2001, representing a decrease of $14.8 million, or 14.7%. The decrease in operating expenses was due to the implementation of various cost saving initiatives, including a reduction in the number of the Company’s internal employees.

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Salaries, wages and commissions were $52.3 million for 2002, compared to $61.8 million for 2001, representing a decrease of $9.5 million, or 15.2%. This decrease was due primarily to a reduction in the number of employees during the fourth quarter of 2001 and a continued decline in the number of employees throughout 2002.

Other general and administrative expenses were $25.1 million for 2002, compared to $29.3 million in 2001, representing a decrease of $4.2 million, or 14.2%. The decrease in general and administrative expenses was due to the implementation of cost savings initiatives in areas related to services and outside fees during 2002. In addition, during 2001 the Company incurred marketing and advertising expenses related to the rebranding of the company name.

Depreciation and amortization expenses were $8.1 million for 2002 compared to $9.3 million for 2001. As of January 1, 2002 the Company adopted Financial Accounting Standard (“SFAS”) No. 142 that changes the accounting for goodwill from an amortization method to an impairment-only approach. Application of the non-amortization provisions of SFAS 142 resulted in a decrease in amortization during 2002 of $0.7 million. The Company conducted an independent review of goodwill and other intangible assets as of January 1, 2002 and concluded that there was no goodwill impairment. The Company has also determined that no subsequent events have taken place to change such conclusion.

Interest income was $2.0 million for 2002, compared to $3.3 million for 2001, representing a decrease of $1.3 million due to a general decline in interest rates.

The Company had no long-term debt obligations outstanding in 2002 and 2001 and accordingly incurred no interest expense.

Income taxes of $2.4 million for 2002 represented a provision at an effective tax rate of 33.2%. Such effective tax rate differed from the statutory Federal tax rate primarily because of state taxes and Federal tax credits. Income tax benefit of $10.4 million for 2001 was primarily the result of recording the tax benefit from the loss from operations and income tax credits.

Net income was $4.7 million for 2002, compared to a net loss of $15.6 million for 2001, representing an increase of $20.3 million.

Year Ended December 31, 2001 Compared to Year Ended December 31, 2000

For the year ended December 31, 2001, revenues increased 3.3% over 2000, totaling $332.8 million, compared to $322.3 million for 2000. Revenue growth was slowed in 2001 as a result of the Company’s decision to target new clients with a lower risk profile and to terminate clients in certain high-risk industries.

Charges to clients for workers’ compensation coverage as a percentage of worksite employees salaries and wages for 2001 was 4.36%, compared to 5.33% for 2000, representing a decrease of 18.2%. Such decline is due to the continuing change in the risk profile of clients serviced. To the extent the Company continues to increase the number of its low-risk clients, the Company expects such charges to continue to decrease.

From December 31, 2000 to December 31, 2001, the number of active worksite employees decreased 9.8% from 124,014 to 111,910. This decrease was primarily due to the Company’s decision to discontinue marketing its services to certain industries, and its termination of client relationships having an aggregate of approximately 5,800 employees that were unprofitable to the Company or were running low payroll volumes per employee.

Cost of services which includes the cost of the medical benefit plans, workers’ compensation insurance, state unemployment taxes and other costs were $261.8 million for 2001, compared to $226.8 million for 2000, representing an increase of $35.0 million, or 15.5%.

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The health benefit plan subsidy was $9.3 million in 2001, compared to $3.3 million in 2000. An unfavorable experience in the maturation or run-out of prior year health benefit plan claims increased this subsidy by $1.6 million in 2001 and by $1.3 million in 2000. The increase in the health benefit plan subsidy in 2001 was primarily attributable to an increase in medical care costs as well as a result of internal collection and billing issues. During 2001, changes were made to the Company’s billing practices to align collection of health care benefit premiums with the worksite employees’ period of coverage. The Company’s collection processes were not adequately modified to collect on the new basis, resulting in a premium collections shortfall and therefore an increased health benefit plan subsidy.

Workers’ compensation costs were $115.8 million for 2001, as compared to $117.5 million for 2000, representing a decrease of $1.7 million or 1.4%. Workers’ compensation costs decreased in 2001 due to the Company’s decision to sell to a target market with a lower risk client profile and that pays higher wages to employees. Included in workers’ compensation costs for 2001 was an adjustment of $19.7 million. The adjustment was primarily caused by: (i) a lower than expected rate of return on premium payments made to CNA that reflected the decrease in the overall securities market, (ii) a higher discounted present value of the unfunded portion of expected premium payments to be made to CNA which resulted from the decrease in the interest rate environment, and (iii) a change, identified in a mid-year actuarial review by the Company’s independent actuaries, in the estimate of the ultimate total workers’ compensation claims for the 2000 policy year.

State unemployment taxes were $6.7 million for 2001, compared to $3.2 million for 2000, representing an increase of $3.5 million or 107.5%. This increase was the result of higher costs in Florida in 2001.

Gross profit was $71.0 million for 2001, compared to $95.6 million for 2000, representing a decrease of $24.6 million, or 25.7%. Gross profit margin decreased as a percentage of revenues primarily due to an adjustment of $19.7 million recorded in workers’ compensation costs in 2001, increased state unemployment taxes and an increase in the health benefit plan subsidy. The adjustment of $19.7 million to workers’ compensation costs was primarily caused by: (i) a lower than expected rate of return on premium payments made to CNA that reflected the decrease in the overall securities market, (ii) a higher discounted present value of the unfunded portion of expected premium payments to be made to CNA which resulted from the decrease in the interest rate environment, and (iii) a change, identified in a mid-year actuarial review by the Company’s independent actuaries, in the estimate of the ultimate total workers’ compensation claims for the 2000 policy year.

Operating expenses were $100.3 million for 2001, compared to $99.3 million for 2000, representing an increase of $1.0 million, or 0.9%.

Included in operating expenses were salaries, wages and commissions of $61.8 million for 2001, compared to $60.6 million for 2000, representing an increase of $1.2 million, or 2.0%. Salaries, wages and commissions for 2001 included $1.1 million related to management reorganization and severance payments related to reductions in the Company’s internal employee base.

Other general and administrative expenses were $29.3 million for 2001, compared to $30.0 million in 2000, representing a decrease of $0.7 million, or 2.3%. Other general and administrative expenses declined in 2001 primarily as a result of a reduction in the use of outside service providers.

Depreciation and amortization expenses increased by $0.5 million for 2001 compared to 2000, representing an increase of 5.7%. This increase was primarily the result of the Company’s investment in information technology systems.

Interest income was $3.3 million for 2001, compared to $4.8 million for 2000, representing a decrease of $1.5 million due to a decrease in interest rates during 2001.

The Company had no long-term debt obligations outstanding in 2001 and 2000 and accordingly incurred no interest expense.

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Other non-operating expense was $0 in 2001 and $1.4 million in 2000. Other non-operating expense in 2000 was related to the conclusion of the strategic alternative process explored by the Company and to a management reorganization of the Company.

Income tax benefit of $10.4 million for 2001 was primarily the result of recording the tax benefit from the loss from operations and income tax credits. Income tax benefit of $1.0 million for 2000 was the result of recording the tax benefit of tax-exempt income and income tax credits.

Net loss was $15.6 million for 2001, compared to net income of $0.6 million for 2000, representing a decrease of $16.2 million.

Liquidity and Capital Resources

The Company had $126.2 million in cash and cash equivalents, restricted certificates of deposit and marketable securities at December 31, 2002. The Company is required to collateralize its obligations under its workers compensation and health benefit plan coverages. The Company uses its cash and cash equivalents as well as surety bonds to collateralize these obligations as more fully described below.

At December 31, 2002, the Company had pledged $92.5 million of restricted certificates of deposit and restricted marketable securities, with original maturities of less than one year, as collateral for certain standby letters of credit or in collateral trust arrangements issued in connection with the Company’s workers’ compensation and health benefit plans. During 2002, the Company replaced $40.2 million in net surety bonds related to its 2000 and 2001 workers’ compensation programs with CNA with other forms of collateral, including cash and cash equivalents. The Company has no net surety bonds outstanding as of December 31, 2002.

The Company’s workers’ compensation programs for the 2000 through 2002 program years are subject to further collateral adjustments, depending upon the final audit of the 2002 program year and upon actual development of claims for all program years.

The Company has announced that AIG will provide workers’ compensation insurance in 2003 for all of its worksite employees. As part of the AIG program, the Company anticipates that $28.5 million of cash and cash equivalents will be used as collateral during 2003. In addition, in connection with the Company’s automobile and general liability insurance policy for 2003, $2.5 million of cash and cash equivalents will be provided as collateral to AIG. For more detailed information regarding the AIG program, please see the Company’s Current Report on Form 8-K filed on October 23, 2002.

The Company’s collateralization obligations under its medical benefit plans are funded through 2002. The Company has announced that it has renewed its medical benefit plan with Aetna for 2003. The Company anticipates that $2.0 million of cash and cash equivalents will be used to collateralize the Aetna program. The final amount of collateral is subject to determination based on the number of plan participants electing PPO coverage. The Company has also announced that it has renewed its medical benefit plan with Blue Cross Blue Shield of Florida (“BCBS”). The amount of collateral required to be provided to BCBS is expected to increase over the three-year renewal term, based in part on the increase in plan participation.

The Company had no long-term debt as of December 31, 2002. In July 1999, the Company entered into an agreement with Bank of America (formerly NationsBank) for a $10 million revolving line of credit to provide for intraday working capital needs. Borrowings under the credit facility bear interest at variable rates based on the lenders’ base rate or LIBOR. No borrowings were made against the credit line and the credit line was not renewed upon its expiration in July 2001. At December 31, 2002, the Company had working capital of $89.6 million.

The Company’s gross billings charged to its clients include: (i) each worksite employee’s gross wages; (ii) a markup which is computed as a percentage of the gross wages; (iii) related payroll taxes; and (iv) the client company’s portion of benefits, including medical and retirement benefits, provided to the worksite employees based on elected coverage levels by the client and the worksite employee. Included in the Company’s charges to its clients during 2002 were salaries, wages and payroll taxes of worksite employees of $3,106.7 million.

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The charges to clients by the Company derived from salaries, wages and payroll taxes is managed from a cash flow perspective so that a matching exists between the time that the funds are received from a client to the time that the funds are paid to the worksite employees and to the appropriate tax jurisdictions. As a co-employer, and under the terms of the Professional Services Agreement, the Company is obligated to make certain wage, tax and regulatory payments. Because of this, the objective of the Company is to minimize the credit risk associated with remitting the payroll and associated taxes before receiving from the client the service fees charged by the Company.

The Company’s primary short-term capital requirements relate to the payment of accrued payroll and payroll taxes of its internal and worksite employees, accounts payable for capital expenditures and the payment of accrued workers’ compensation expense and health benefit plan premiums.

Net cash provided from operations was $34.3 million for 2002. In 2001, the Company invested $0.6 million in its facilities and technology infrastructure. For 2003, the Company anticipates total capital expenditures of $2.2 million.

The Company periodically evaluates its liquidity requirements, capital needs and availability of capital resources in view of its plans for expansion, anticipated levels of health benefit plan subsidies, collateralization requirements for insurance coverages, and other operating cash needs. The Company believes that its current cash balances and cash flow from operations will be sufficient to meet its requirements through 2003. On March 6, 2003 the Company announced that it executed on March 5, 2003 a Letter of Intent for a private placement of $30.0 million convertible preferred stock with Frontenac Company LLC. Proceeds of the transaction will provide additional capital to the Company in order for it to pursue its growth strategy. A portion of the proceeds of the transaction will be used to repurchase 3.1 million shares of the Company from Charles S. Craig for $16.6 million. Under the terms of the agreement with Frontenac Company LLC, the preferred shares will carry a greater of 4% or common dividend of 4% and will be convertible into common shares at a per share price of $5.44. The closing of the private placement is subject to shareholder approval and other customary conditions. The closing of the private placement will occur promptly after shareholder approval is received at the Annual Meeting of Shareholders to be held on May 22, 2003. If the Company does not achieve its profitability objectives in 2003, and its cash balances and cash flow from operations are inadequate to meet its operating and collateralization requirements as well as its long-term capital needs, then the Company may explore additional external financing alternatives, including public or private debt and/or equity financing. However, there is no assurance that financing from other external sources will be available to the Company at prevailing market rates.

In 2002, the Company purchased 34,000 shares of the Company’s stock at a cost of $135,750 for the Company’s Employee Stock Purchase Plan that was approved at the Annual Shareholder’s meeting on May 24, 2001. Internal employees of the Company, who regularly work more than 20 hours per week and have been employed with the Company for at least ninety days prior to the offering period, are eligible to participate in the Plan. Participants, through payroll deduction, may purchase a maximum of five hundred shares during the offering period at a cost of 85% of the lower of the stock price as of the beginning or end of the offering period. Employees purchased 45,255 shares under this plan for the period ended December 31, 2002.

Inflation

The Company believes that inflation in salaries and wages of worksite employees has a positive impact on its results of operations as its service fee is proportional to such changes in salaries and wages.

ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company is subject to market risk from exposure to changes in interest rates based on its investing and cash management activities. The Company utilizes U.S. government agency and other corporate debt with fixed rates and maturities of less than one year to manage its exposures to interest rates. (See Note 4 to the

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Consolidated Financial Statements appearing elsewhere in this Form 10-K). The Company is also subject to market risk from exposures to changes in interest rates related to insurance premiums paid to CNA under its workers’ compensation programs for the policy years 2000 through 2002. The insurance premiums paid to CNA are invested in U. S. government agency and corporate debt instruments with fixed rates. Prior to December 31, 2001 twenty percent of the insurance premiums paid to CNA were invested in equity instruments. Such equity investments have been liquidated and reinvested in fixed income instruments. No additional investments in equity instruments with premium dollars paid to CNA were made. The Company does not expect changes in interest rates to have a material effect on income or cash flows in fiscal 2003, although there can be no assurances that interest rates will not change.

ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The information required by this Item 8 is contained in a separate section of this Annual Report. See “Index to Consolidated Financial Statements and Financial Statement Schedule” on Page F-1.

ITEM 9.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

PART III.

ITEM 10.    DIRECTORS AND EXECUTIVE OFFICES OF THE REGISTRANT

The information regarding the Company’s executive officers is included in Item 1 of Part I under “Executive Officers of the Registrant.” Other information required by this Item 10 will be contained in the Company’s Proxy Statement, relating to the 2003 Annual Meeting of Shareholders to be held on May 22, 2003 (the “Proxy Statement”) and is incorporated herein by reference.

ITEM 11.    EXECUTIVE COMPENSATION

The information required by this Item 11 will be contained in the Proxy Statement and is incorporated herein by reference, provided that the Compensation Committee Report, the Audit Committee Report, and Performance Graph contained in the Proxy Statement shall not be deemed to be incorporated herein by reference.

ITEM 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by this Item 12 will be contained in the Proxy Statement and is incorporated herein by reference.

ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this Item 13 will be contained in the Proxy Statement and is incorporated herein by reference.

ITEM 14.    CONTROLS AND PROCEDURES

Within 90 days prior to the date of this report, the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, conducted an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Rule 13a-14(c) of the Exchange Act. Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of the date of the evaluation. There have been

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no significant changes in the Company’s internal controls, or other factors that could significantly affect the Company’s internal controls, subsequent to the date the Chief Executive Officer and Chief Financial Officer carried out their evaluation, including any corrective actions taken with regard to significant deficiencies and material weaknesses.

ITEM 15.    PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required by this Item 15 will be contained in the Proxy Statement and is incorporated herein by reference.

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PART IV.

ITEM 16.    EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Gevity HR, Inc. has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

GEVITY HR, INC.

/s/    ERIK VONK

Dated: March 28, 2003

Erik Vonk

Chairman of the Board, Chief Executive Officer (Principal Executive Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

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CERTIFICATIONS

I, Erik Vonk, Chief Executive Officer of Gevity HR, Inc., certify that:

Date: March 28, 2003

/s/    ERIK VONK

Erik Vonk

Chief Executive Officer

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I, John E. Panning, Chief Financial Officer of Gevity HR, Inc., certify that:

Date: March 28, 2003

/s/    JOHN E. PANNING

John E. Panning

Chief Financial Officer

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GEVITY HR, INC. AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE

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INDEPENDENT AUDITORS’ REPORT

Board of Directors

Gevity HR, Inc.

Bradenton, Florida

We have audited the accompanying consolidated financial statements and financial statement schedule of Gevity HR, Inc., and subsidiaries (the “Company”) listed in the Index to Consolidated Financial Statements and Financial Statement Schedule on page F-1 of the Annual Report on Form 10-K of the Company for the year ended December 31, 2002. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2001 and 2002 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2002 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

As discussed in Note 1 to the consolidated financial statements, during the year ended December 31, 2002 the Company changed from gross revenue reporting to net revenue reporting for worksite employee salaries, wages and payroll-related taxes.

As discussed in Note 1 to the consolidated financial statements, as of January 1, 2002, the Company changed its method of accounting for goodwill and other intangible assets to conform to Statement of Financial Accounting Standards No. 142.

DELOITTE & TOUCHE LLP

CERTIFIED PUBLIC ACCOUNTANTS

Tampa, Florida

March 6, 2003

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