2.	Restatement of Previously Issued Financial Statements

Items requiring restatement:

1. Unsupported Non-GAAP Journal Entries

On March 3, 2016, the Audit Committee was informed by the Company’s then Chief Financial Officer that he had made unsupported journal entries in the Company’s financial records during each calendar quarter of 2013. On March 11, 2016, the Audit Committee formally engaged an independent public accounting firm to conduct an independent forensic accounting investigation of the Company’s financial records for the five years ended December 31, 2015, as well as the first quarter of 2016, to evaluate the unsupported journal entries identified by our former Chief Financial Officer. The independent public accounting firm also performed other procedures within the scope of their engagement. On April 19, 2016, the Audit Committee received the final report of the investigation, which confirmed that the previously identified journal entries, as well as additional journal entries, were not made in accordance with GAAP.

Based on information provided by the Company’s former Chief Financial Officer and additional analysis by and under the direction of the Company, the Company determined in April 2016 that the unsupported non-GAAP journal entries identified in the investigation described above had resulted primarily in the understatement of workers’ compensation expense and revenue (based on net reported revenue under GAAP) and an overstatement of payroll and payroll related expenses, during the years ended December 31, 2014, 2013 and 2012, along with the first two quarters of the year ended December 31, 2015.

2. Workers’ compensation

After the completion of a thorough review of our claims handling practices and other work performed by our new actuary and our actuarial consultant in the third quarter of 2014, management concluded in October 2014 that a significant increase in the estimate of workers’ compensation liability was needed to reflect the potential adverse development of prior period claims. The Company recorded total workers’ compensation claims expense of $115.6 million (unaudited) during the third quarter of 2014, including a $61.3 million (unaudited) increase in estimate relating to prior period claims.

In March 2016 after further interpretation and analysis of actuarial data available in July 2014, management concluded that the large workers’ compensation charge taken in the third quarter of 2014 should have been recorded in the second quarter of 2014. The restatement increased workers’ compensation expense for the second quarter of 2014 by approximately $84.7 million (unaudited) with a corresponding decrease in workers’ compensation expense for the third quarter of 2014. The restatement also increased workers’ compensation claims liabilities at June 30, 2014 by $84.7 million (unaudited).

The Company separately discovered errors resulting from the omission of MCC expense information from Company generated data utilized by its independent actuaries from 2011 to 2015. These errors resulted in the understatement of workers’ compensation claims liabilities and the related workers’ compensation expense during the years ended December 31, 2014, 2013 and 2012 along with the first two quarters of the year ended December 31, 2015 and beginning retained earnings as of January 1, 2013.

In addition, the Company discovered that in the third quarter of 2014 it had inadvertently omitted a workers’ compensation reserve that had been previously established to cover unallocated loss adjustment expenses. This error resulted in an increase in workers’ compensation expense in the third quarter of 2014, with a corresponding decrease in workers’ compensation expense for the fourth quarter of 2014. The restatement also increased workers’ compensation claims liabilities at September 30, 2014.

3. Payroll taxes

In March 2016, the Company discovered errors in its calculation of accrued payroll taxes liabilities and the related payroll tax expense. These errors resulted in both understatements and overstatements of accrued payroll taxes liabilities and the related payroll taxes and benefits expense from 2011 to 2015.

As a result of the foregoing, the Company has restated its consolidated financial statements for the years ended December 31, 2014 and 2013, respectively, as well as for the first two quarters of the year ended December 31, 2015. The restatement also affects periods prior to the year ended December 31, 2013, with the cumulative effect of the errors reflected as an adjustment to the beginning retained earnings as of January 1, 2013.

The Company has restated its income tax accounts as of and for the years ended December 31, 2014 and 2013 to reflect the tax effect of the adjustments described above.

Impact on Consolidated Balance Sheet (in thousands, except per share amounts)


	December 31, 2014
				Adjustments
	As Previously Reported			Unsupported Non-GAAP Journal Entry Corrections		Workers’ Compensation Corrections			Payroll Tax Corrections		As Restated
ASSETS
Current assets:
Cash and cash equivalents	$	11,544		$	0	$	0		$	0	$	11,544
Marketable securities		29,957			0		0			0		29,957
Trade accounts receivable, net		102,627			0		0			0		102,627
Income taxes receivable		11,421			0		0			526		11,947
Prepaid expenses and other		3,813			0		0			0		3,813
Restricted marketable securities and workers’ compensation deposits		3,776			0		0			0		3,776
Deferred income taxes		15,791			0		3,347			0		19,138

Total current assets		178,929			0		3,347			526		182,802
Marketable securities		20,930			0		0			0		20,930
Property, equipment and software, net		22,675			0		0			0		22,675
Restricted certificates of deposit		114,335			0		0			0		114,335
Restricted marketable securities and workers’ compensation deposits		58,533			0		0			0		58,533
Other assets		5,306			0		0			0		5,306
Goodwill		47,820			0		0			0		47,820

	$	448,528		$	0	$	3,347		$	526	$	452,401

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt	$	25,220		$	0	$	0		$	0	$	25,220
Accounts payable		2,719			0		0			0		2,719
Accrued payroll, payroll taxes and related benefits		115,820			0		0			17		115,837
Other accrued liabilities		6,230			0		0			0		6,230
Workers’ compensation claims liabilities		54,049			0		7,015			0		61,064
Safety incentives liability		14,232			0		0			0		14,232

Total current liabilities		218,270			0		7,015			17		225,302
Long-term workers’ compensation claims liabilities		161,933			0		2,281			0		164,214
Long-term debt		19,833			0		0			0		19,833
Deferred income taxes		8,159			0		398			0		8,557
Customer deposits and other long-term liabilities		1,675			0		0			0		1,675

Total liabilities		409,870			0		9,694			17		419,581

Commitments and contingencies (Notes 7, 9 and 13)
Stockholders’ equity:
Common stock, $.01 par value; 20,500 shares authorized, 7,126 shares issued and outstanding		71			0		0			0		71
Additional paid-in capital		4,410			0		0			0		4,410
Accumulated other comprehensive loss		(23	)		0		0			0		(23	)
Retained earnings		34,200			0		(6,347	)		509		28,362

		38,658			0		(6,347	)		509		32,820

	$	448,528		$	0	$	3,347		$	526	$	452,401

Impact on Consolidated Statements of Operations (in thousands, except per share amounts)


	For the year ended December 31, 2014
				Adjustments
	As Previously Reported			Unsupported Non-GAAP Journal Entry Corrections			Workers’ Compensation Corrections			Payroll Tax Corrections			As Restated
Revenues:
Professional employer service fees	$	470,351		$	171		$	0		$	0		$	470,522
Staffing services		165,833			0			0			0			165,833

Total revenues		636,184			171			0			0			636,355

Cost of revenues:
Direct payroll costs		126,399			0			0			0			126,399
Payroll taxes and benefits		266,844			(3,312	)		0			(432	)		263,100
Workers’ compensation		212,524			242			685			0			213,451

Total cost of revenues		605,767			(3,070	)		685			(432	)		602,950

Gross margin		30,417			3,241			(685	)		432			33,405
Selling, general and administrative expenses		73,821			244			0			0			74,065
Depreciation and amortization		2,506			0			0			0			2,506

Loss from operations		(45,910	)		2,997			(685	)		432			(43,166	)

Other income (expense):
Investment income		594			(51	)		0			0			543
Interest expense		(173	)		0			0			0			(173	)
Other, net		152			0			0			0			152

Other income (expense), net		573			(51	)		0			0			522

Loss before income taxes		(45,337	)		2,946			(685	)		432			(42,644	)
Benefit from for income taxes		(18,253	)		1,218			(241	)		178			(17,098	)

Net loss	$	(27,084	)	$	1,728		$	(444	)	$	254		$	(25,546	)

Basic loss per common share	$	(3.78	)	$	0		$	0		$	0		$	(3.57	)

Weighted average number of basic common shares outstanding		7,160			0			0			0			7,160

Diluted loss per common share	$	(3.78	)	$	0		$	0		$	0		$	(3.57	)

Weighted average number of diluted common shares outstanding		7,160			0			0			0			7,160

Cash dividends per common share	$	0.76											$	0.76

Impact on Consolidated Statements of Operations (in thousands, except per share amounts)


	For the year ended December 31, 2013
				Adjustments
	As Previously Reported			Unsupported Non-GAAP Journal Entry Corrections			Workers’ Compensation Corrections			Payroll Tax Corrections			As Restated
Revenues:
Professional employer service fees	$	388,963		$	4,122		$	0		$	0		$	393,085
Staffing services		143,881			0			0			0			143,881

Total revenues		532,844			4,122			0			0			536,966

Cost of revenues:
Direct payroll costs		108,800			75			0			0			108,875
Payroll taxes and benefits		228,903			(6,715	)		0			(25	)		222,163
Workers’ compensation		108,617			14,146			664			0			123,427

Total cost of revenues		446,320			7,506			664			(25	)		454,465

Gross margin		86,524			(3,384	)		(664	)		25			82,501
Selling, general and administrative expenses		60,061			(622	)		0			0			59,439
Depreciation and amortization		2,037			0			0			0			2,037

Income from operations		24,426			(2,762	)		(664	)		25			21,025

Other income (expense):
Investment income		723			(184	)		0			0			539
Interest expense		(238	)		0			0			0			(238	)
Other, net		(9	)		0			0			0			(9	)

Other income (expense), net		476			(184	)		0			0			292

Income before income taxes		24,902			(2,946	)		(664	)		25			21,317
Provision for income taxes		7,010			(1,142	)		(234	)		10			5,644

Net income	$	17,892		$	(1,804	)	$	(430	)	$	15		$	15,673

Basic earnings per common share	$	2.52		$	0		$	0		$	0		$	2.21

Weighted average number of basic common shares outstanding		7,105			0			0			0			7,105

Diluted earnings per common share	$	2.42		$	0		$	0		$	0		$	2.12

Weighted average number of diluted common shares outstanding		7,397			0			0			0			7,397

Cash dividends per common share	$	0.57											$	0.57

Impact on Consolidated Statements of Comprehensive (Loss) Income (In thousands)


	For the year ended December 31, 2014
	As Previously Reported			Unsupported Non-GAAP Journal Entry Corrections		Workers’ Compensation Corrections			Payroll Tax Corrections		As Restated
Net loss	$	(27,084	)	$	1,728	$	(444	)	$	254	$	(25,546	)
Unrealized gains on marketable securities, net of tax of $3		3			0		0			0		3

Comprehensive loss	$	(27,081	)	$	1,728	$	(444	)	$	254	$	(25,543	)


	For the year ended December 31, 2013
	As Previously Reported			Unsupported Non-GAAP Journal Entry Corrections			Workers’ Compensation Corrections			Payroll Tax Corrections		As Restated
Net income	$	17,892		$	(1,804	)	$	(430	)	$	15	$	15,673
Unrealized losses on marketable securities, net of tax of ($31)		(49	)		0			0			0		(49	)

Comprehensive income	$	17,843		$	(1,804	)	$	(430	)	$	15	$	15,624

Cumulative Effect of Prior Period Adjustments (In thousands)

The following table presents the impact of the restatement to the Company’s beginning retained earnings and other stockholders’ equity balances, cumulatively to reflect adjustments booked to all periods prior to January 1, 2013:


					Additional Paid-In Capital		Accumulated Other Comprehensive (Loss) Income		Retained Earnings			Total
	Common Stock
	Shares		Amount
Stockholders’ equity,
December 31, 2012 (as previously reported)		7,017	$	70	$	913	$	23	$	52,890		$	53,896
Adjustments:
Workers’ Compensation Corrections		0		0		0		0		(7,947	)		(7,947	)
Payroll Tax Corrections		0		0		0		0		(474	)		(474	)
Income Tax Adjustments		0		0		0		0		3,265			3,265

Total adjustments		0		0		0		0		(5,156	)		(5,156	)
Stockholders’ equity,

December 31, 2012 (as restated)		7,017	$	70	$	913	$	23	$	47,734		$	48,740

Impact on Consolidated Statements of Cash Flows (In thousands)


	For the year ended December 31, 2014
	As Previously Reported			Restatement Adjustments			As Restated
Cash flows from operating activities:
Net loss	$	(27,084	)	$	1,538		$	(25,546	)
Reconciliations of net loss to net cash provided by operating activities:
Depreciation and amortization		2,506			0			2,506
Losses recognized on marketable securities		3			0			3
Deferred income taxes		(9,487	)		(305	)		(9,792	)
Share based compensation		1,699			0			1,699
Excess tax benefit from share-based compensation		(578	)		0			(578	)
Changes in certain assets and liabilities:
Trade accounts receivable		(17,041	)		0			(17,041	)
Income taxes receivable		(11,421	)		0			(11,421	)
Prepaid expenses and other		(387	)		0			(387	)
Accounts payable		(533	)		0			(533	)
Accrued payroll, payroll taxes and related benefits		25,328			(3,378	)		21,950
Other accrued liabilities		3,893			0			3,893
Income taxes payable		(658	)		1,069			411
Workers’ compensation claims liabilities		103,538			685			104,223
Safety incentives liability		1,146			0			1,146
Customer deposits, long-term liabilities and other assets, net		(1,328	)		391			(937	)

Net cash provided by operating activities		69,596			0			69,596

Cash flows from investing activities:
Purchase of property and equipment		(4,632	)		0			(4,632	)
Proceeds from sales and maturities of marketable securities		13,241			0			13,241
Purchase of marketable securities		(38,434	)		0			(38,434	)
Purchase of restricted certificates of deposit		(101,546	)		0			(101,546	)
Proceeds from maturities of restricted marketable securities		10,524			0			10,524
Purchase of restricted marketable securities		(61,628	)		0			(61,628	)

Net cash used in investing activities		(182,475	)		0			(182,475	)

Cash flows from financing activities:
Proceeds from credit-line borrowings		6,242			0			6,242
Payments on credit-line borrowings		(6,242	)		0			(6,242	)
Proceeds from the issuance of long-term debt		40,000			0			40,000
Commitment fee from the issuance of long-term debt		(400	)		0			(400	)
Payments on long-term debt		(220	)		0			(220	)
Repurchase of common stock		(3,676	)		0			(3,676	)
Common stock repurchased on vesting of restricted stock units		(407	)		0			(407	)
Dividends paid		(5,443	)		0			(5,443	)
Proceeds from the exercise of stock options and vesting of restricted stock units		434			0			434
Excess tax benefit from share-based compensation		578			0			578

Net cash provided by financing activities		30,866			0			30,866

Net decrease in cash and cash equivalents		(82,013	)		0			(82,013	)
Cash and cash equivalents, beginning of year		93,557			0			93,557

Cash and cash equivalents, end of year	$	11,544		$	0		$	11,544

Impact on Consolidated Statements of Cash Flows (In thousands)


	For the year ended December 31, 2013
	As Previously Reported			Restatement Adjustments			As Restated
Cash flows from operating activities:
Net income	$	17,892		$	(2,219	)	$	15,673
Reconciliations of net income to net cash provided by operating activities:
Depreciation and amortization		2,037			0			2,037
Gains recognized on marketable securities		(1	)		0			(1	)
Gain recognized on sale and lease back		(60	)		0			(60	)
Deferred income taxes		(632	)		(237	)		(869	)
Share based compensation		1,016			0			1,016
Excess tax benefit from share-based compensation		(2,083	)		0			(2,083	)
Changes in certain assets and liabilities:
Trade accounts receivable		(21,665	)		0			(21,665	)
Income taxes receivable		0			(165	)		(165	)
Prepaid expenses and other		1,828			0			1,828
Accounts payable		1,257			0			1,257
Accrued payroll, payroll taxes and related benefits		21,534			2,921			24,455
Other accrued liabilities		1,421			0			1,421
Income taxes payable		3,047			(964	)		2,083
Workers’ compensation claims liabilities		41,880			664			42,544
Safety incentives liability		3,244			0			3,244
Customer deposits, long-term liabilities and other assets, net		(519	)		0			(519	)

Net cash provided by operating activities		70,196			0			70,196

Cash flows from investing activities:
Purchase of property and equipment		(4,097	)		0			(4,097	)
Proceeds from sales and maturities of marketable securities		60,850			0			60,850
Purchase of marketable securities		(59,917	)		0			(59,917	)
Proceeds from maturities of restricted certificates of deposit		63,944			0			63,944
Purchase of restricted certificates of deposit		(76,733	)		0			(76,733	)
Proceeds from maturities of restricted marketable securities		9,918			0			9,918
Purchase of restricted marketable securities		(11,397	)		0			(11,397	)

Net cash used in investing activities		(17,432	)		0			(17,432	)

Cash flows from financing activities:
Proceeds from credit-line borrowings		132,664			0			132,664
Payments on credit-line borrowings		(137,196	)		0			(137,196	)
Payments on long-term debt		(220	)		0			(220	)
Common stock repurchased on vesting of restricted stock units		(89	)		0			(89	)
Dividends paid		(4,056	)		0			(4,056	)
Proceeds from the exercise of stock options and vesting of restricted stock units		1,860			0			1,860
Excess tax benefit from share-based compensation		2,083			0			2,083

Net cash used in financing activities		(4,954	)		0			(4,954	)

Net increase in cash and cash equivalents		47,810			0			47,810
Cash and cash equivalents, beginning of year		45,747			0			45,747

Cash and cash equivalents, end of year	$	93,557		$	0		$	93,557

Quarterly Financial Information (Unaudited)

The effect of the restatement on the Company’s previously issued consolidated financial statements for each of the unaudited quarterly periods during the years ended December 31, 2014 and 2013, respectively, along with the first two quarters of the year ended December 31, 2015, can be found in Note 14.