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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2000
Commission File Number 0-21886
BARRETT BUSINESS SERVICES, INC.
(Exact name of registrant as specified in its charter)
Maryland 52-0812977
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
4724 SW Macadam Avenue
Portland, Oregon 97201
(Address of principal executive offices) (Zip Code)
(503) 220-0988
(Registrant's telephone number, including area code)
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 $.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
---
State the aggregate market value of the voting stock held by non-affiliates
of the Registrant: $11,143,264 at February 28, 2001 (based on a market price as
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of February 12, 2001).
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of the latest practicable date:
Class Outstanding at February 28, 2001
------- --------------------------------
Common Stock, Par Value $.01 Per Share 6,427,898 Shares
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement for the 2001 Annual Meeting of
Stockholders are hereby incorporated by reference into Part III of Form 10-K.
BARRETT BUSINESS SERVICES, INC.
2000 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
Page
PART I
Item 1. Business 2
Item 2. Properties 11
Item 3. Legal Proceedings 11
Item 4. Submission of Matters to a Vote of Security Holders 11
Executive Officers of the Registrant 12
PART II
Item 5. Market for Registrant's Common Equity and Related 13
Stockholder Matters
Item 6. Selected Financial Data 14
Item 7. Management's Discussion and Analysis of Financial 15
Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 22
Item 8. Financial Statements and Supplementary Data 22
Item 9. Changes in and Disagreements With Accountants on 22
Accounting and Financial Disclosure
PART III
Item 10. Directors and Executive Officers of the Registrant 23
Item 11. Executive Compensation 23
Item 12. Security Ownership of Certain Beneficial Owners and 23
Management
Item 13. Certain Relationships and Related Transactions 23
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on 24
Form 8-K
Signatures 25
Financial Statements F-1
Exhibit Index
PART I
ITEM 1. BUSINESS
GENERAL
Barrett Business Services, Inc. ("Barrett" or the "Company"), was
incorporated in the state of Maryland in 1965. Barrett is a leading human
resource management company. The Company provides comprehensive outsourced
solutions addressing the costs and complexities of a broad array of
employment-related issues for businesses of all sizes. Employers are faced with
increasing complexities in employment laws and regulations, employee benefits
and administration, federal, state and local payroll tax compliance and
mandatory workers' compensation coverage, as well as the recruitment and
retention of quality employees. The Company believes that outsourcing the
management of various employer and human resource responsibilities, which are
typically considered non-core functions, enables organizations to focus on their
core competencies, thereby improving operating efficiencies.
Barrett's range of services and expertise in human resource management
encompasses five major categories: payroll processing, employee benefits and
administration, workers' compensation coverage, effective risk management and
workplace safety programs, and human resource administration, which includes
functions such as recruiting, interviewing, drug testing, hiring, placement,
training and regulatory compliance. These services are typically provided
through a variety of contractual arrangements, as part of either a traditional
staffing service or a professional employer organization ("PEO") service.
Staffing services include on-demand or short-term staffing assignments,
long-term or indefinite-term contract staffing, and comprehensive on-site
personnel management responsibilities. In a PEO arrangement, the Company enters
into a contract to become a co-employer of the client company's existing
workforce and assumes responsibility for some or all of the human resource
management responsibilities. The Company's target PEO clients typically have
limited resources available to effectively manage these matters. The Company
believes that its ability to offer clients a broad mix of staffing and PEO
services differentiates it from its competitors and benefits its clients through
(i) lower recruiting and personnel administration costs, (ii) decreases in
payroll expenses due to lower workers' compensation and health insurance costs,
(iii) improvements in workplace safety and employee benefits, (iv) lower
employee turnover and (v) reductions in management resources expended in
employment-related regulatory compliance. For 2000, Barrett's staffing services
revenues represented 58.5% of total revenues, compared to 41.5% for PEO services
revenues.
Barrett provides services to a diverse array of customers, including,
among others, electronics manufacturers, various light-manufacturing industries,
forest products and agriculture-based companies, transportation and shipping
enterprises, food processing, telecommunications, public utilities, general
contractors in numerous construction-related fields and various professional
services firms. During 2000, the Company provided staffing services to
approximately 4,600 customers, down from 6,800 in 1999. Although a majority of
the Company's staffing customers are small to mid-sized businesses, during 2000
approximately 45 of the Company's customers each utilized Barrett employees in a
number ranging from at least 200 employees to as many as 1,000 employees through
various staffing services arrangements. In addition, Barrett had approximately
465 PEO clients at December 31, 2000, compared to 637 at December 31, 1999. The
decrease in the number of PEO customers at December 31, 2000 was primarily due
to the Company's decision in mid-2000 to discontinue doing business with
customers who were not providing adequate profit margins or represented
unacceptable levels of risk associated with credit or workplace safety.
The Company operates through a network of 27 branch offices in Oregon,
California, Washington, Maryland, Delaware, Idaho, Arizona and North Carolina.
Barrett also has several smaller recruiting offices in its general market areas
under the direction of a branch office.
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OPERATING STRATEGIES
The Company's principal operating strategies are to: (i) provide effective
human resource management services through a unique and efficient blend of
staffing and PEO arrangements, (ii) promote a decentralized and autonomous
management philosophy and structure, (iii) leverage zone and branch level
economies of scale, (iv) motivate employees through wealth sharing and (v)
control workers' compensation costs through effective risk management.
GROWTH STRATEGIES
The Company's principal growth strategies are to: (i) utilize a zone
management structure to strengthen and expand operations, (ii) enhance
management information systems to support continued growth and to improve
customer services and (iii) expand through acquisitions of human
resource-related businesses in new and existing geographic markets.
ACQUISITIONS
The Company reviews acquisition opportunities on an ongoing basis. While
growth through acquisition has been a major element of the Company's overall
strategic growth plan, there can be no assurance that any additional
acquisitions will be completed in the foreseeable future, or that any future
acquisitions will have a positive effect on the Company's performance.
Acquisitions involve a number of potential risks, including the diversion of
management's attention to the assimilation of the operations and personnel of
the acquired companies, exposure to workers' compensation and other costs in
differing regulatory environments, adverse short-term effects on the Company's
operating results, integration of management information systems and the
amortization of acquired intangible assets.
THE COMPANY'S SERVICES
Overview of Services. Barrett's services are typically provided through a
variety of contractual arrangements, as part of either a traditional staffing
service or a PEO service. These contractual arrangements also provide a
continuum of human resource management services. While some services are more
frequently associated with Barrett's co-employer arrangements, the Company's
expertise in such areas as safety services and personnel-related regulatory
compliance may also be utilized by its staffing services customers through the
Company's human resource management services. The Company's range of services
and expertise in human resource management encompasses five major categories:
o Payroll Processing. For both the Company's staffing services and PEO
employees, the Company performs all functions associated with
payroll administration, including preparing and delivering
paychecks, computing tax withholding and payroll deductions,
handling garnishments, computing vacation and sick pay, and
preparing W-2 forms and accounting reports through centralized
operations at its headquarters in Portland, Oregon.
o Employee Benefits and Administration. As a result of its size,
Barrett is able to offer employee benefits which are typically not
available at an affordable cost to many of its customers,
particularly those with fewer than 100 employees. These benefits
include health care insurance, a 401(k) savings plan, a Section 125
cafeteria plan, life and disability insurance, claims administration
and a nonqualified deferred compensation plan.
o Safety Services. Barrett offers safety services to both its staffing
services and PEO customers in keeping with its corporate philosophy
of "making the workplace safer." The Company has at least one risk
manager available at each branch office to perform workplace safety
assessments for each of its customers and to recommend actions to
achieve safer operations. The Company's
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services include safety training and safety manuals for both workers
and supervisors, job-site visits and meetings, improvements in
workplace procedures and equipment to further reduce the risk of
injury, compliance with OSHA requirements, environmental
regulations, workplace regulation by the U.S. Department of Labor
and state agencies and accident investigations. As discussed under
"Self-Insured Workers' Compensation Program" below, the Company also
pays safety incentives to its customers who achieve improvements in
workplace safety.
o Workers' Compensation Coverage. Beginning in 1987, the Company
obtained self-insured employer status for workers' compensation
coverage in Oregon and is currently a qualified self-insured
employer in many of the state and federal jurisdictions in which it
operates. Through its third-party administrators, Barrett provides
claims management services to its PEO customers. As discussed under
"Self-Insured Workers' Compensation Program" below, the Company
aggressively manages job injury claims, including identifying
fraudulent claims and utilizing its staffing services to return
workers to active employment earlier. As a result of its ability to
manage workers' compensation costs, the Company is often able to
reduce its clients' overall expenses arising out of job-related
injuries and insurance.
o Human Resource Administration. Barrett offers its clients the
opportunity to leverage the Company's experience in
personnel-related regulatory compliance. For both its staffing
services employees and PEO clients, the Company handles the burdens
of advertising, recruitment, skills testing, evaluating job
applications and references, drug screening, criminal and motor
vehicle records reviews, hiring, and compliance with such employment
regulatory areas as immigration, the Americans with Disabilities
Act, and federal and state labor regulations.
Staffing Services. Barrett's staffing services include on-demand or
------------------
short-term staffing assignments, contract staffing, long-term or indefinite-term
on-site management and human resource administration. Short-term staffing
involves employee demands caused by such factors as seasonality, fluctuations in
customer demand, vacations, illnesses, parental leave, and special projects
without incurring the ongoing expense and administrative responsibilities
associated with recruiting, hiring and retaining additional permanent employees.
As more and more companies focus on effectively managing variable costs and
reducing fixed overhead, the use of employees on a short-term basis allows firms
to utilize the "just-in-time" approach for their personnel needs, thereby
converting a portion of their fixed personnel costs to a variable expense.
Contract staffing refers to the Company's responsibilities for the
placement of employees for a period of more than three months or an indefinite
period. This type of arrangement often involves outsourcing an entire department
in a large corporation or providing the workforce for a large project.
In an on-site management arrangement, Barrett places an experienced
manager on site at a customer's place of business. The manager is responsible
for conducting all recruiting, screening, interviewing, testing, hiring and
employee placement functions at the customer's facility for a long-term or
indefinite period.
The Company's staffing services customers operate in a broad range of
businesses, including forest products and agriculture-based companies,
electronic manufacturers, transportation and shipping companies, food
processors, professional firms and construction contractors. Such customers
range in size from small local firms to companies with international operations,
which use Barrett's services on a domestic basis. None of the Company's staffing
services customers individually accounted for more than 5% of its total 2000
revenues.
4
In 2000, the light industrial sector generated approximately 73% of the
Company's staffing services revenues, while clerical office staff accounted for
17% of such revenues and technical personnel represented the balance of 10%.
Light industrial workers in the Company's employ perform such tasks as operation
of machinery, manufacturing, loading and shipping, site preparation for special
events, construction-site cleanup and janitorial services. Technical personnel
include electronic parts assembly workers and designers and drafters of
electronic parts.
Barrett emphasizes prompt, personalized service in assigning quality,
trained, drug-free personnel at competitive rates to its staffing services
customers. The Company uses internally developed computer databases of employee
skills and availability at each of its branches to match customer needs with
available qualified employees. The Company emphasizes the development of an
understanding of the unique requirements of its clientele by its account
managers. Customers are offered a "money-back" guarantee if dissatisfied with
staffing employees placed by Barrett.
The Company utilizes a variety of methods to recruit its work force for
staffing services, including among others, referrals by existing employees,
newspaper advertising and marketing brochures distributed at colleges and
vocational schools. The employee application process includes an interview,
skills assessment test, reference verification and drug screening. The
recruiting of qualified employees requires more effort when unemployment rates
are low. In mid-2000, the Company implemented a new, comprehensive
pre-employment screening test to further ensure that applicants are
appropriately qualified for employment.
Barrett's staffing services employees are not under its direct control
while working at a customer's business. Barrett has not experienced any
significant liability due to claims arising out of negligent acts or misconduct
by its staffing services employees. The possibility exists, however, of claims
being asserted against the Company which may exceed the Company's liability
insurance coverage, with a resulting negative effect on the Company's financial
condition.
PEO Services. Many businesses, particularly those with a limited number of
employees, find personnel administration requirements to be unduly complex and
time consuming. These businesses often cannot justify the expense of a full-time
human resource staff. In addition, the escalating costs of health and workers'
compensation insurance in recent years, coupled with the increased complexity of
laws and regulations affecting the workplace, have created a compelling
opportunity for small to mid-sized businesses to outsource these managerial
burdens. The outsourcing of non-core business functions, such as human resource
administration, enables small enterprises to devote their limited resources to
their core competencies.
In a PEO services arrangement, Barrett enters into a contract to become a
co-employer of the client company's existing workforce. Pursuant to this
contract, Barrett assumes responsibility for some or all of the human resource
management responsibilities, including payroll and payroll taxes, employee
benefits, health insurance, workers' compensation coverage, workplace safety
programs, compliance with federal and state employment laws, labor and workplace
regulatory requirements and related administrative responsibilities. Barrett has
the right to hire and fire its PEO employees, although the client company
remains responsible for day-to-day assignments, supervision and training and, in
most cases, recruiting.
The Company began offering PEO services to Oregon customers in 1990 and
subsequently expanded these services to other states. The Company has entered
into co-employer arrangements with a wide variety of clients, including
companies involved in moving and shipping, professional firms, construction,
retail, manufacturing and distribution businesses.
5
PEO clients are typically small to mid-sized businesses with up to 100
employees. None of the Company's PEO clients individually accounted for more
than 5% of its total annual revenues during 2000.
Prior to entering into a co-employer arrangement, the Company performs an
analysis of the potential client's actual personnel and workers' compensation
costs based on information provided by the customer. Barrett introduces its
workplace safety program and recommends improvements in procedures and equipment
following a safety inspection of the customer's facilities which the potential
client must agree to implement as part of the co-employer arrangement. Barrett
also offers significant financial incentives to PEO clients to maintain a
safe-work environment.
The Company's standard PEO services agreement provides for services for an
indefinite term, until notice of termination is given by either party. The
agreement permits cancellation by either party upon 30 days written notice. In
addition, the Company may terminate the agreement at any time for specified
reasons, including nonpayment or failure to follow Barrett's workplace safety
program.
The form of agreement also provides for indemnification of the Company by
the client against losses arising out of any default by the client under the
agreement, including failure to comply with any employment-related, health and
safety or immigration laws or regulations. The Company also requires the PEO
client to maintain comprehensive liability coverage in the amount of $1,000,000
for acts of its work-site employees. In addition, the Company has excess
liability insurance coverage. Although no claims exceeding such policy limits
have been paid by the Company to date, the possibility exists that claims for
amounts in excess of sums available to the Company through indemnification or
insurance may be asserted in the future, which could adversely affect the
Company's profitability.
SALES AND MARKETING
The Company markets its services primarily through direct sales
presentations by its branch office account managers. Barrett develops customer
prospects through the utilization of state-of-the-art customer contact
management software, which incorporates tailored databases of businesses
purchased from a third-party vendor. The Company also obtains referrals from
existing clients and other third parties, and places radio commercials and
advertisements in various publications, including local newspapers, business
magazines and the Yellow Pages.
BILLING
Through centralized operations at the Company's headquarters in Portland,
Oregon, the Company prepares invoices weekly for its staffing services customers
and following the end of each payroll period for PEO clients. Health insurance
premiums are passed through to PEO clients. Payment terms for most PEO clients
are due on the invoice date.
SELF-INSURED WORKERS' COMPENSATION PROGRAM
A principal service provided by Barrett to its customers, particularly its
PEO clients, is workers' compensation coverage. As the employer of record,
Barrett is responsible for complying with applicable statutory requirements for
workers' compensation coverage. The Company's workplace safety services, also
described under "Overview of Services," are closely tied to its approach to the
management of workers' compensation risk.
Elements of Workers' Compensation System. State law (and, for certain
-------------------------------------------
types of employees, federal law) generally mandates that an employer reimburse
its employees for the costs of medical care and other specified benefits for
injuries or illnesses incurred in the course and scope of employment. The
benefits payable for various categories of claims are determined by state
regulation and vary with the severity and nature of the injury or illness and
other specified factors. In return for this guaranteed protection, workers'
compensation is an exclusive
6
remedy and employees are generally precluded from seeking other damages from
their employer for workplace injuries. Most states require employers to maintain
workers' compensation insurance or otherwise demonstrate financial
responsibility to meet workers' compensation obligations to employees. In many
states, employers who meet certain financial and other requirements are
permitted to self-insure.
Self Insurance for Workers' Compensation. In August 1987, Barrett became a
----------------------------------------
self-insured employer for workers' compensation coverage in Oregon. The Company
subsequently obtained self-insured employer status for workers' compensation in
four additional states, Maryland, Washington, Delaware and California. In
addition, in May 1995, the Company was granted self-insured employer status by
the U.S. Department of Labor for longshore and harbor ("USL&H") workers'
compensation coverage. Regulations governing self-insured employers in each
jurisdiction typically require the employer to maintain surety deposits of cash,
government securities or other financial instruments to cover workers' claims in
the event the employer is unable to pay for such claims.
Through December 31, 2000, Barrett maintained excess workers' compensation
insurance for single occurrences exceeding $350,000 (except for $500,000 for
USL&H coverage) with statutory limits (i.e., in unlimited amounts) pursuant to
annual policies with major insurance companies. The excess-insurance policies
contain standard exclusions from coverage, including punitive damages, fines or
penalties in connection with violation of any statute or regulation and losses
covered by other insurance or indemnity provisions.
In addition, the Company maintains an insured large-deductible program
which allows it to become insured for workers' compensation coverage in nearly
all states where the extent of the Company's operations does not yet warrant the
investment to become a self-insured employer.
Claims Management. As a self-insured employer, the Company's workers'
------------------
compensation expense is tied directly to the incidence and severity of workplace
injuries to its employees. Barrett seeks to contain its workers' compensation
costs through an aggressive approach to claims management. The Company uses
managed-care systems to reduce medical costs and keeps time-loss costs to a
minimum by assigning injured workers, whenever possible, to short-term
assignments which accommodate the workers' physical limitations. The Company
believes that these assignments minimize both time actually lost from work and
covered time-loss costs. Barrett has also engaged third-party administrators
("TPAs") to provide additional claims management expertise. Typical management
procedures include performing thorough and prompt on-site investigations of
claims filed by employees, working with physicians to encourage efficient
medical management of cases, denying questionable claims and negotiating early
settlements to eliminate future case development and costs. Barrett also
maintains a corporate-wide pre-employment drug screening program and a mandatory
post-injury drug test. The program is believed to have resulted in a reduction
in the frequency of fraudulent claims and in accidents in which the use of
illegal drugs appears to have been a contributing factor.
Elements of Self-Insurance Costs. The costs associated with the Company's
---------------------------------
self-insured workers' compensation program include case reserves for reported
claims, an additional expense provision (referred to as the "IBNR reserve") for
unanticipated increases in the cost of open injury claims (known as "adverse
loss development") and for claims incurred in prior periods but not reported,
fees payable to the Company's TPAs, additional claims administration expenses,
administrative fees payable to state and federal workers' compensation
regulatory agencies, premiums for excess workers' compensation insurance, legal
fees and safety incentive payments. Although not directly related to the size of
the Company's payroll, the number of claims and correlative loss payments may be
expected to increase with growth in the total number of employees. The state
assessments are typically based on payroll amounts and,
7
to a limited extent, the amount of permanent disability awards during the
previous year. Excess insurance premiums are also based in part on the size of
the Company's payroll. Safety incentives expense may increase as the number of
the Company's PEO employees rises, although increases will only occur for any
given PEO client if such client's claims costs are below agreed-upon amounts.
WORKERS' COMPENSATION CLAIMS EXPERIENCE AND RESERVES
The Company recognizes its liability for the ultimate payment of
incurred claims and claims adjustment expenses by accruing liabilities which
represent estimates of future amounts necessary to pay claims and related
expenses with respect to covered events that have occurred. When a claim
involving a probable loss is reported, the Company's TPA establishes a case
reserve for the estimated amount of ultimate loss. The estimate reflects an
informed judgment based on established case reserving practices and the
experience and knowledge of the TPA regarding the nature and expected value of
the claim, as well as the estimated expense of settling the claim, including
legal and other fees and expenses of administering claims. The adequacy of such
case reserves depends on the professional judgment of each TPA to properly and
comprehensively evaluate the economic consequences of each claim. Additionally,
on an aggregate basis, the Company has established an additional expense reserve
for both future adverse loss development in excess of initial case reserves on
open claims and for claims incurred but not reported, referred to as the IBNR
reserve.
As part of the case reserving process, historical data is reviewed and
consideration is given to the anticipated effect of various factors, including
known and anticipated legal developments, inflation and economic conditions.
Reserve amounts are necessarily based on management's estimates, and as other
data becomes available, these estimates are revised, which may result in
increases or decreases in existing case reserves. Barrett has engaged a
nationally-recognized, independent actuary to review annually the Company's
total workers' compensation claims liability and reserving practices. Based in
part on such review, the Company believes its total accrued workers'
compensation claims liabilities are adequate. It is possible, however, that the
Company's actual future workers' compensation obligations may exceed the amount
of its accrued liabilities, with a corresponding negative effect on future
earnings, due to such factors as unanticipated adverse loss development of known
claims, and the effect, if any, of claims incurred but not reported.
Approximately one-fifth of the Company's total payroll exposure is in
relatively high-risk industries with respect to workplace injuries, including
trucking, construction and certain warehousing activities. A failure to
successfully manage the severity and frequency of workers' compensation injuries
will have a negative impact on the Company. Management maintains clear
guidelines for its branch managers, account managers, and loss control
specialists directly tying their continued employment with the Company to their
diligence in understanding and addressing the risks of accident or injury
associated with the industries in which client companies operate and in
monitoring the compliance by clients with workplace safety requirements. The
Company has a policy of "zero tolerance" for avoidable workplace injuries.
MANAGEMENT INFORMATION SYSTEMS
The Company performs all functions associated with payroll administration
through its internal management information system. Each branch office performs
payroll data entry functions and maintains an independent database of employees
and customers, as well as payroll and invoicing records. All processing
functions are centralized at Barrett's corporate headquarters in Portland,
Oregon. As the Company has previously reported, management initiated a project
in mid-1997 to convert its information systems to new technologies which are
expected to enable the Company to more effectively accommodate its anticipated
growth. This hardware and software upgrade was completed and implemented on
March 1, 2000. Total capital expenditures for this project were approximately
4.5 million.
8
EMPLOYEES AND EMPLOYEE BENEFITS
At December 31, 2000, the Company had approximately 13,425 employees,
including approximately 8,800 staffing services employees, approximately 4,400
PEO employees and approximately 225 managerial, sales and administrative
employees. The number of employees at any given time may vary significantly due
to business conditions at customer or client companies. During 2000, less than
1% of the Company's employees were covered by a collective bargaining agreement.
Each of Barrett's managerial, sales and administrative employees has entered
into a standard form of employment agreement which, among other things, contains
covenants not to engage in certain activities in competition with the Company
for 18 months following termination of employment and to maintain the
confidentiality of certain proprietary information. Barrett believes its
employee relations are good.
The Company's decentralized management structure relies heavily on its
zone managers, each responsible for overseeing the operations of several branch
offices. The Company believes that its zone managers possess the requisite
business acumen and experience comparable to senior management of many of the
Company's larger competitors. Accordingly, the efficiency of Barrett's
operations is dependent upon its ability to attract and retain highly qualified,
motivated individuals to serve as zone managers. This ability is also central to
the Company's plans to expand through acquiring human resources related
businesses in existing and new geographic areas. If the Company is unable to
continue to recruit and retain individuals with the skills and experience
required of zone managers, its operations may be adversely affected.
Benefits offered to Barrett's staffing services employees include group
health insurance, a Section 125 cafeteria plan which permits employees to use
pretax earnings to fund various services, including medical, dental and
childcare, and a Section 401(k) savings plan pursuant to which employees may
begin making contributions upon reaching 21 years of age and completing 1,000
hours of service in any consecutive 12-month period. The Company may also make
contributions to the savings plan, which vest over seven years and are subject
to certain legal limits, at the sole discretion of the Company's Board of
Directors. In addition, the Company offers a nonqualified deferred compensation
plan for highly compensated employees who are precluded from participation in
the 401(k) plan. Employees subject to a co-employer arrangement may participate
in the Company's benefit plans, provided that the group health insurance
premiums may, at the client's option, be paid by payroll deduction. See
"Regulatory and Legislative Issues--Employee Benefit Plans."
REGULATORY AND LEGISLATIVE ISSUES
Business Operations. The Company is subject to the laws and regulations of
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the jurisdictions within which it operates, including those governing
self-insured employers under the workers' compensation systems in Oregon,
Washington, Maryland, Delaware, California and the U.S. Department of Labor for
USL&H workers. An Oregon PEO company, such as Barrett, is required to be
licensed as a worker-leasing company by the Workers' Compensation Division of
the Oregon Department of Consumer and Business Services. Temporary staffing
companies are expressly exempt from the Oregon licensing requirement. Oregon PEO
companies are also required to ensure that each PEO client provides adequate
training and supervision for its employees to comply with statutory requirements
for workplace safety and to give 30 days written notice in the event of a
termination of its obligation to provide workers' compensation coverage for PEO
employees and other subject employees of a PEO client. Although compliance with
these requirements imposes some additional financial risk on Barrett,
particularly with respect to those clients who breach their payment obligation
to the Company, such compliance has not had an adverse impact on Barrett's
business to date.
9
Employee Benefit Plans. The Company's operations are affected by numerous
----------------------
federal and state laws relating to labor, tax and employment matters. By
entering into a co-employer relationship with employees who are assigned to work
at client locations (sometimes referred to as "work-site employees"), the
Company assumes certain obligations and responsibilities of an employer under
these federal and state laws. Because many of these federal and state laws were
enacted prior to the development of nontraditional employment relationships,
such as professional employer, temporary employment, and outsourcing
arrangements, many of these laws do not specifically address the obligations and
responsibilities of nontraditional employers. In addition, the definition of
"employer" under these laws is not uniform.
As an employer, the Company is subject to all federal statutes and
regulations governing its employer-employee relationships. Subject to the issues
discussed below, the Company believes that its operations are in compliance in
all material respects with all applicable federal statutes and regulations.
The Company offers various qualified employee benefit plans to its
employees, including its work-site employees. These employee benefit plans
include a savings plan (the "401(k) plan") under Section 401(k) of the Internal
Revenue Code (the "Code"), a cafeteria plan under Code Section 125, a group
health plan, a group life insurance plan and a group disability insurance plan.
In addition, the Company offers a nonqualified deferred compensation plan, which
is available to highly compensated employees who are not eligible to participate
in the Company's 401(k) plan. Generally, qualified employee benefit plans are
subject to provisions of both the Code and the Employee Retirement Income
Security Act of 1974 ("ERISA"). In order to qualify for favorable tax treatment
under the Code, qualified plans must be established and maintained by an
employer for the exclusive benefit of its employees. See Item 7 of this report
for a discussion of issues regarding qualification of the Company's employee
benefit plans arising out of participation by the Company's PEO employees.
COMPETITION
The staffing services and PEO businesses are characterized by rapid growth
and intense competition. The staffing services market includes competitors of
all sizes, including several, such as Manpower, Inc., Kelly Services, Inc. and
RemedyTemp, Inc. that are national in scope and have substantially greater
financial, marketing and other resources than the Company. In addition to
national companies, Barrett competes with numerous regional and local firms for
both customers and employees. There are relatively few barriers to entry into
the staffing services business. The principal competitive factors in the
staffing services industry are price, the ability to provide qualified workers
in a timely manner and the monitoring of job performance. The Company attributes
its internal growth in staffing services revenues to the cost-efficiency of its
operations which permits the Company to price its services competitively, and to
its ability through its branch office network to understand and satisfy the
needs of its customers with competent personnel.
Although there are believed to be at least 2,000 companies currently
offering PEO services in the U.S., many of these potential competitors are
located in states in which the Company presently does not operate. Barrett
believes that there are approximately 60 firms offering PEO services in Oregon,
but the Company has the largest presence in the state. During 2000,
approximately 61% and 33% of the Company's PEO revenues were earned in Oregon
and California, respectively.
The Company may face additional PEO competition in the future from new
entrants to the field, including other staffing services companies, payroll
processing companies and insurance companies. Certain PEO companies operating in
areas in which Barrett does not now, but may in the future, offer its services
have greater financial and marketing resources than the Company, such as
Administaff, Inc., Staff Leasing, Inc. and Paychex, Inc., among others.
Competition in the PEO industry is based largely on price, although service and
quality can also
10
provide competitive advantages. Barrett believes that its growth in PEO services
revenues is attributable to its ability to provide small and mid-sized companies
with the opportunity to provide enhanced benefits to their employees while
reducing their overall personnel administration and workers' compensation costs.
The Company's competitive advantage may be adversely affected by a substantial
increase in the costs of maintaining its self-insured workers' compensation
program. A general market decrease in the level of workers' compensation
insurance premiums may also decrease demand for PEO services.
ITEM 2. PROPERTIES
The Company provides staffing and PEO services through all 27 of its
branch offices. The following table shows the number of branch offices located
in each state in which the Company operates. The Company's California and Oregon
offices accounted for 44% and 37%, respectively, of its total revenues in 2000.
The Company also leases office space in other locations in its market areas
which it uses to recruit and place employees.
Number of
Branch
State Offices
------------------ -----------
Arizona 1
California 9
Idaho 2
Oregon 9
Washington 1
Maryland 3
Delaware 1
North Carolina 1
The Company's corporate headquarters are located in an office building in
Portland, Oregon, with approximately 9,200 square feet of office space. The
building is subject to a mortgage loan with a principal balance of approximately
$442,000 at December 31, 2000.
The Company also owns two other office buildings, one in Portland, Oregon
with approximately 7,000 square feet of office space, which houses its
Portland/Bridgeport branch office, and the second, a small office condominium in
San Bernardino, California, which is currently offered for sale.
Barrett leases office space for its other branch offices. At December 31,
2000, such leases had expiration dates ranging from less than one year to five
years, with total minimum payments through 2005 of approximately $2,956,000.
ITEM 3. LEGAL PROCEEDINGS
There were no material legal proceedings pending against the Company at
December 31, 2000, or during the period beginning with that date through March
23, 2001.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's stockholders during
the fourth quarter of 2000.
11
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table identifies, as of February 28, 2001, each executive
officer of the Company. Executive officers are elected annually and serve at the
discretion of the Board of Directors.
Officer
Name Age Principal Positions and Business Experience Since
- -------------------------------------------------------------------------------------------
William W. Sherertz 55 President; Chief Executive Officer; Director 1980
Michael D. Mulholland 49 Vice President-Finance and Secretary; Chief 1994
Financial Officer
Gregory R. Vaughn 45 Vice President 1998
James D. Miller 37 Controller and Assistant Secretary; 1994
Principal Accounting Officer
- -------------------------------
William W. Sherertz has acted as Chief Executive Officer of the Company
since 1980. He has also been a director of the Company since 1980, and was
appointed President of the Company in March 1993. Mr. Sherertz also serves
as Chairman of the Board of Directors.
Michael D. Mulholland joined the Company in August 1994 as Vice
President-Finance and Secretary. From 1988 to 1994, Mr. Mulholland was
employed by Sprouse-Reitz Stores Inc. ("Sprouse"), a former Nasdaq-listed
retail company, serving as its Executive Vice President, Chief Financial
Officer and Secretary. Prior to Sprouse, Mr. Mulholland held senior
management positions with Lamb-Weston, Inc., a food processing company from
1985 to 1988, and Keil, Inc., a regional retail company, from 1978 to 1985.
Mr. Mulholland, a certified public accountant on inactive status, was also
employed by Touche Ross & Co., now known as Deloitte & Touche LLP.
Gregory R. Vaughn joined the Company in July 1997 as Operations
Manager. Mr. Vaughn was appointed Vice President in January 1998. Prior to
joining Barrett, Mr. Vaughn was Chief Executive Officer of Insource America,
Inc., a privately-held human resource management company headquartered in
Portland, Oregon, since 1996. Mr. Vaughn has also held senior management
positions with Sundial Time Systems, Inc. from 1995 to 1996 and Continental
Information Systems, Inc. from 1990 to 1994. Previously, Mr. Vaughn was
employed as a technology consultant by Price Waterhouse LLP, now known as
PricewaterhouseCoopers LLP.
James D. Miller joined the Company in January 1994 as Controller. From
1991 to 1994, he was the Corporate Accounting Manager for Christensen Motor
Yacht Corporation. Mr. Miller, a certified public accountant on inactive
status, was employed by Price Waterhouse LLP, now known as
PricewaterhouseCoopers LLP, from 1987 to 1991.
12
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock (the "Common Stock") trades on The Nasdaq Stock
Market under the symbol "BBSI." At February 28, 2001, there were 66 stockholders
of record and approximately 466 beneficial owners of the Common Stock. The
Company has not declared or paid any cash dividends since the closing of its
initial public offering of Common Stock on June 18, 1993, and has no present
plan to pay any cash dividends in the foreseeable future. The following table
presents the high and low sales prices of the Common Stock for each quarterly
period during the last two fiscal years, as reported by The Nasdaq Stock Market:
High Low
---------- ----------
1999
----
First Quarter $ 9.06 $ 5.25
Second Quarter 9.25 5.88
Third Quarter 10.25 7.75
Fourth Quarter 8.38 5.50
2000
----
First Quarter $ 7.63 $ 5.00
Second Quarter 7.50 5.00
Third Quarter 6.44 5.00
Fourth Quarter 5.25 2.50
13
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
the Company's financial statements and the accompanying notes listed in Item 14
of this report.
Year Ended December 31,
2000 1999 1998 1997 1996
------ ------ ------ ------ ------
(In thousands, except per share data)
Statement of operations Data:
Revenues:
Staffing services $188,500 $194,991 $165,443 $177,263 $130,746
Professional employer services 133,966 152,859 137,586 128,268 101,206
-------- -------- -------- -------- --------
Total 322,466 347,850 303,029 305,531 231,952
-------- -------- -------- -------- --------
Cost of revenues:
Direct payroll costs 251,015 270,049 235,265 236,307 176,686
Payroll taxes and benefits 27,007 28,603 25,550 27,226 20,414
Workers' compensation 12,639 11,702 10,190 10,584 8,173
-------- -------- -------- -------- --------
Total 290,661 310,354 271,005 274,117 205,273
-------- -------- -------- -------- --------
Gross margin 31,805 37,496 32,024 31,414 26,679
Selling, general and administrative
expenses 24,583 25,957 23,012 23,573 18,205
Merger expenses - - 750 - -
Depreciation and amortization 3,192 2,461 1,785 1,770 1,189
-------- -------- -------- -------- --------
Income from operations 4,030 9,078 6,477 6,071 7,285
-------- -------- -------- -------- --------
Other (expense) income:
Interest expense (830) (634) (173) (247) (122)
Interest income 341 357 441 362 554
Other, net 6 32 (1) 1 -
-------- -------- -------- -------- --------
Total (483) (245) 267 116 432
-------- -------- -------- -------- --------
Income before provision for income
taxes 3,547 8,833 6,744 6,187 7,717
Provision for income taxes 1,446 3,684 2,923 2,342 2,749
-------- -------- -------- -------- --------
Net income $ 2,101 $ 5,149 $ 3,821 $ 3,845 $ 4,968
======== ======== ======== ======== ========
Basic earnings per share $ 0.29 $ 0.68 $ 0.50 $ 0.50 $ 0.65
======== ======== ======== ======== ========
Weighted average number of basic
shares outstanding 7,237 7,581 7,664 7,646 7,602
======== ======== ======== ======== ========
Diluted earnings per share $ 0.29 $ 0.68 $ 0.50 $ 0.49 $ 0.64
======== ======== ======== ======== ========
Weighted average number of
diluted shares outstanding 7,277 7,627 7,711 7,780 7,823
======== ======== ======== ======== ========
Selected balance sheet data:
Working capital $ 3,731 $ 7,688 $13,272 $10,201 $11,489
Total assets 61,112 70,740 52,770 50,815 44,063
Long-term debt, net of
current portion 1,508 4,232 503 573 1,107
Stockholders' equity 34,917 37,329 33,702 30,231 25,629
14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The Company's revenues consist of staffing services and professional
employer organization ("PEO") services. Staffing services revenues consist of
short-term staffing, contract staffing and on-site management. PEO services
refer exclusively to co-employer contractual agreements with PEO clients. The
Company's revenues represent all amounts invoiced to customers for direct
payroll, related employment taxes, workers' compensation coverage and a service
fee (equivalent to a mark-up percentage). The Company's Oregon and California
offices accounted for approximately 81% of its total revenues in 2000.
Consequently, weakness in economic conditions in these regions could have a
material adverse effect on the Company's financial results.
The Company's cost of revenues is comprised of direct payroll costs,
payroll taxes and employee benefits and workers' compensation, which includes
safety incentives. Direct payroll costs represent the gross payroll earned by
employees based on salary or hourly wages. Payroll taxes and employee benefits
consist of the employer's portion of Social Security and Medicare taxes, federal
unemployment taxes, state unemployment taxes and employee reimbursements for
materials, supplies and other expenses, which are paid by the customer. Workers'
compensation expense consists primarily of the costs associated with the
Company's self-insured workers' compensation program, such as claims reserves,
claims administration fees, legal fees, state and federal administrative agency
fees and reinsurance costs for catastrophic injuries. The Company also maintains
a large-deductible workers' compensation insurance policy for employees working
in states where the Company is not currently self-insured. Safety incentives, a
component of workers' compensation, represent cash incentives paid to certain
PEO client companies for maintaining safe-work practices in order to minimize
workplace injuries. The incentive is based on a percentage of annual payroll and
is paid annually to customers who meet predetermined workers' compensation
claims cost objectives.
The largest portion of workers' compensation expense is the cost of
workplace injury claims. When an injury occurs and is reported to the Company,
the Company's respective independent third-party claims administrator ("TPA")
analyzes the details of the injury and develops a case reserve, which is the
TPA's estimate of the cost of the claim based on similar injuries and its
professional judgment. The Company then records, or accrues, an expense and a
corresponding liability based upon the TPA's estimates for claims reserves. As
cash payments are made by the Company's TPA against specific case reserves, the
accrued liability is reduced by the corresponding payment amount. The TPA also
reviews existing injury claims on an on-going basis and adjusts the case
reserves as new or additional information for each claim becomes available. The
Company has established additional reserves to provide for future unanticipated
increases in expenses ("adverse loss development") of the claims reserves for
open injury claims and for claims incurred but not reported related to prior and
current periods. Management believes that the Company's internal claims
reporting system minimizes the occurrence of unreported incurred claims.
Selling, general and administrative expenses represent both branch office
and corporate-level operating expenses. Branch operating expenses consist
primarily of branch office staff payroll and payroll related costs, advertising,
rent, office supplies, depreciation and branch incentive compensation. Branch
incentive compensation represents a combined 15% of branch pretax profits, of
which 10% is paid to the branch manager and 5% is shared among the office staff.
Corporate-level operating expenses consist primarily of executive and office
staff payroll and payroll related costs, professional and legal fees, travel,
depreciation, occupancy costs, information systems costs and executive and
corporate staff incentive bonuses.
15
Amortization of intangibles consists primarily of the amortization of the
costs of acquisitions in excess of the fair value of net assets acquired
(goodwill). The Company uses a 15-year estimate as the useful life of goodwill,
as compared to the 40-year maximum permitted by generally accepted accounting
principles, and amortizes such cost using the straight-line method. Other
intangible assets, such as software costs, customer lists and covenants not to
compete, are amortized using the straight-line method over their estimated
useful lives, which range from two to 15 years.
FORWARD-LOOKING INFORMATION
Statements in this Item or in Item 1 of this report which are not
historical in nature, including discussion of economic conditions in the
Company's market areas, the potential for and effect of recent and future
acquisitions, the effect of changes in the Company's mix of services on gross
margin, the adequacy of the Company's workers' compensation reserves and
allowance for doubtful accounts, the effectiveness of the Company's management
information systems, the tax-qualified status of the Company's 401(k) savings
plan and the availability of financing and working capital to meet the Company's
funding requirements, are forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. Such forward-looking
statements involve known and unknown risks, uncertainties and other factors that
may cause the actual results, performance or achievements of the Company or
industry results to be materially different from any future results, performance
or achievements expressed or implied by such forward-looking statements. Such
factors with respect to the Company include difficulties associated with
integrating acquired businesses and clients into the Company's operations,
economic trends in the Company's service areas, the effect of power shortages in
California and the Pacific Northwest on the Company's customers, uncertainties
regarding government regulation of PEOs, including the possible adoption by the
IRS of an unfavorable position as to the tax-qualified status of employee
benefit plans maintained by PEOs, future workers' compensation claims
experience, and the availability of and costs associated with potential sources
of financing. The Company disclaims any obligation to update any such factors or
to publicly announce the result of any revisions to any of the forward-looking
statements contained herein to reflect future events or developments.
RESULTS OF OPERATIONS
The following table sets forth the percentages of total revenues
represented by selected items in the Company's Statements of Operations for the
years ended December 31, 2000, 1999 and 1998, listed in Item 14 of this report.
The Company's merger with Western Industrial Management, Inc. and a related
company (together, "WIMI"), in June 1998 was accounted for as a
pooling-of-interests and, accordingly, the Company's financial statements have
been restated for prior periods to give effect to the merger. Certain 1999 and
1998 amounts have been reclassified to conform with the 2000 presentation. Such
reclassifications had no impact on gross margin, net income or stockholders'
equity. References to the Notes to Financial Statements appearing below are to
the notes to the Company's financial statements listed in Item 14 of this
report.
16
Percentage of Total Revenues
-------------------------------
Years Ended December 31,
-------------------------------
2000 1999 1998
------- ------- -------
Revenues:
Staffing services 58.5 % 56.1 % 54.6%
Professional employer services 41.5 43.9 45.4
------- ------- -------
Total 100.0 100.0 100.0
------- ------- -------
Cost of revenues:
Direct payroll costs 77.8 77.6 77.6
Payroll taxes and benefits 8.4 8.2 8.4
Workers' compensation 3.9 3.4 3.4
------- ------- -------
Total 90.1 89.2 89.4
------- ------- -------
Gross margin 9.9 10.8 10.6
Selling, general and administrative expenses 7.6 7.5 7.6
Merger expenses - - 0.2
Depreciation and amortization 1.0 0.6 0.6
------- ------- -------
Income from operations 1.3 2.7 2.2
Other (expense) income (0.2) (0.1) 0.1
------- ------- -------
Pretax income 1.1 2.6 2.3
Provision for income taxes 0.4 1.1 1.0
------- ------- -------
Net income 0.7 % 1.5 % 1.3%
======= ======= =======
YEARS ENDED DECEMBER 31, 2000 AND 1999
Net income for 2000 amounted to $2,101,000, a decrease of $3,048,000 or
59.2% from 1999 net income of $5,149,000. The decrease in net income was
primarily attributable to a lower gross margin percent as a result of higher
workers' compensation expense and slightly higher direct payroll costs and
payroll taxes and benefits, expressed as a percentage of revenues, coupled with
higher depreciation and amortization and interest expense. Basic and diluted
earnings per share for 2000 were $.29 as compared to $.68 for both basic and
diluted earnings per share for 1999.
Revenues for 2000 totaled $322,466,000, a decrease of approximately
$25,384,000 or 7.3% from 1999 revenues of $347,850,000. The decrease in total
revenues was primarily due to the shortage of available qualified personnel in a
low unemployment economy, to management's decision to discontinue services to
certain customers due to unacceptable profit margins or risks associated with
credit or workplace safety and to a softening in demand for the Company's
services in the fourth quarter of 2000 owing to general economic conditions.
Staffing services revenue decreased $6,491,000 or 3.3%, while professional
employer services revenue decreased $18,893,000 or 12.4%, which resulted in an
increase in the share of staffing services to 58.5% of total revenues for 2000,
as compared to 56.1% for 1999. The decrease in staffing services revenue for
2000 was primarily attributable to a shortage in supply of qualified people and
to general economic conditions in the fourth quarter of 2000. The share of
professional employer services revenues had a corresponding decrease from 43.9%
of total revenues for 1999 to 41.5% for 2000. The decrease in professional
employer services for 2000 was primarily due to the Company's decision to
terminate several marginally profitable or higher risk customers.
Gross margin for 2000 totaled $31,805,000, which represented a decrease of
$5,691,000 or 15.2% from 1999. The gross margin percent decreased from 10.8% of
revenues for 1999 to 9.9% for 2000. The decrease in the gross margin percentage
was due to higher workers' compensation expenses and slightly higher direct
payroll costs and payroll taxes and benefits. The increase in workers'
compensation expense, in total dollars and as a percentage of revenues, was
primarily due to an increase in the average cost per claim. The increase in
17
direct payroll costs, as a percentage of revenues, was attributable to increases
in contract staffing and on-site management, of which payroll costs generally
represent a higher percentage of revenues. The increase in payroll taxes and
benefits for 2000 was primarily attributable to increased direct payroll in
California, which has a higher state unemployment tax rate as compared to other
states in which the Company operates. The Company expects gross margin, as a
percentage of revenues, to continue to be influenced by fluctuations in the mix
between staffing and PEO services, including the mix within the staffing
segment, as well as the adequacy of its estimates for workers' compensation
liabilities, which may be negatively affected by unanticipated adverse loss
development of claims reserves.
Selling, general and administrative ("SG&A") expenses consist of
compensation and other expenses incident to the operation of the Company's
headquarters and the branch offices and the marketing of its services. SG&A
expenses for 2000 amounted to $24,583,000, a decrease of $1,374,000 or 5.3% from
1999. SG&A expenses, expressed as a percentage of revenues, increased from 7.5%
for 1999 to 7.6% for 2000. The decrease in total SG&A dollars was primarily due
to decreases in management payroll and related payroll tax expense, and profit
sharing and related taxes.
Depreciation and amortization totaled $3,192,000 or 1.0% of revenues for
2000, which compares to $2,461,000 or 0.6% of revenues for 1999. The increased
depreciation and amortization expense was primarily due to a full year of
amortization in 2000 compared to seven months of amortization in 1999 of
intangibles recognized in the mid-1999 acquisition of TSU Staffing and to
increased depreciation and amortization expense arising from the March 1, 2000
implementation of the Company's new information system.
Other expense totaled $483,000 or 0.2% of revenues for 2000, which
compares to $245,000 or 0.1% of revenues for 1999. The increase in expense was
primarily due to higher net interest expense related to new debt incurred to
finance the 1999 acquisition of TSU Staffing.
The Company's effective income tax rate for 2000 was 40.8%, as compared to
41.7% for 1999. The lower 2000 effective rate was primarily attributable to
increased federal tax credits earned by the Company.
The Company offers various qualified employee benefit plans to its
employees, including its work-site employees. These qualified employee benefit
plans include a savings plan (the "401(k) plan") under Section 401(k) of the
Internal Revenue Code (the "Code"), a cafeteria plan under Code Section 125, a
group health plan, a group life insurance plan, and a group disability insurance
plan. Generally, qualified employee benefit plans are subject to provisions of
both the Code and the Employee Retirement Income Security Act of 1974 ("ERISA").
In order to qualify for favorable tax treatment under the Code, qualified plans
must be established and maintained by an employer for the exclusive benefit of
its employees.
A definitive judicial interpretation of "employer" in the context of a PEO
arrangement has not been established. The tax-exempt status of the Company's
401(k) plan and cafeteria plan is subject to continuing scrutiny and approval by
the Internal Revenue Service (the "IRS") and depends upon the Company's ability
to establish the Company's employer-employee relationship with PEO employees.
The issue of whether the Company's tax-qualified benefit plans can legally
include work-site employees under their coverage has not yet been resolved. If
the work-site employees cannot be covered by the plans, then the exclusive
benefit requirement imposed by the Code would not be met by the plans as
currently administered and the plans could be disqualified.
18
The IRS has established a Market Segment Study Group regarding Employee
Leasing for the stated purpose of examining whether PEOs, such as the Company,
are the employers of work-site employees under the Code provisions applicable to
employee benefit plans and are, therefore, able to offer to work-site employees
benefit plans that qualify for favorable tax treatment. The IRS Study Group is
reportedly also examining whether the owners of client companies are employees
of PEO companies under Code provisions applicable to employee benefit plans. To
the best of the Company's knowledge, the Market Segment Study Group has not
issued a report.
A PEO company headquartered in Texas stated publicly over five years ago
that the IRS National Office was being requested by the IRS Houston District to
issue a Technical Advice Memorandum ("TAM") on the PEO work-site employee issue
in connection with an ongoing audit of a plan of the Texas PEO company. The
stated purpose of TAMs is to help IRS personnel in closing cases and to
establish and maintain consistent holdings. The IRS's position is that TAMs are
not precedential; that is, they are limited to the particular taxpayer involved
and that taxpayer's set of facts.
The request for a TAM by the IRS Houston District reportedly stated its
determination that the Texas PEO company's Code Section 401(k) plan should be
disqualified for the reason, among others, that it covers work-site employees
who are not employees of the PEO company.
The timing and nature of the issuance and contents of any TAM regarding
the work-site employee issue or any report of the Market Segment Study Group
regarding Employee Leasing is unknown at this time. There has also been public
discussion for the past several years of the possibility that the Treasury
Department may propose some form of administrative relief or that Congress may
provide legislative resolution or clarification regarding this issue.
In the event the tax exempt status of the Company's benefit plans were to
be discontinued and the benefit plans were to be disqualified, such actions
could have a material adverse effect on the Company's business, financial
condition and results of operations. The Company is not presently able to
predict the likelihood of disqualification nor the resulting range of loss, in
light of the lack of public direction from the IRS or Congress.
YEARS ENDED DECEMBER 31, 1999 AND 1998
Net income for 1999 amounted to $5,149,000, an increase of $1,328,000 or
34.8% over 1998 net income of $3,821,000. The increase in net income was
attributable to a higher gross margin percent owing to lower payroll taxes and
benefits, as well as lower selling, general and administrative expenses,
expressed as a percentage of revenues. In addition, 1998 included $750,000 of
merger expenses related to the Company's June 1998 pooling-of-interests
transaction with Western Industrial Management, Inc. Basic and diluted earnings
per share for 1999 were $.68 as compared to $.50 for both basic and diluted
earnings per share for 1998.
Revenues for 1999 totaled $347,850,000, an increase of approximately
$44,821,000 or 14.8% over 1998 revenues of $303,029,000. The increase in total
revenues was primarily due to three acquisitions, which were consummated in the
first half of 1999. (Refer to Note 2 of the Notes to Financial Statements.) The
internal growth rate for revenues was 3.3% for 1999.
Staffing services revenue increased $29,548,000 or 17.9%, while
professional employer services revenue increased $15,273,000 or 11.1%, which
resulted in an increase in the share of staffing services to 56.1% of total
revenues for 1999, as compared to 54.6% for 1998. The increase in staffing
services revenue for 1999 was primarily attributable to the three 1999
acquisitions. The share of professional employer services revenues had a
corresponding decrease from 45.4% of total revenues for 1998 to 43.9% for 1999.
19
Gross margin for 1999 totaled $37,496,000, which represented an increase
of $5,472,000 or 17.1% over 1998. The gross margin percent increased from 10.6%
of revenues for 1998 to 10.8% for 1999. The increase in the gross margin
percentage was due to lower payroll taxes and benefits for 1999, primarily
attributable to lower state unemployment tax rates in certain states in which
the Company does business.
SG&A expenses for 1999 amounted to $25,957,000, an increase of $2,945,000
or 12.8% over 1998. SG&A expenses, expressed as a percentage of revenues,
decreased from 7.6% for 1998 to 7.5% for 1999. The increase in total SG&A
dollars was primarily due to higher management payroll, advertising expense,
rent expense and increased profit sharing and related taxes in connection with
the additional offices acquired in the TSS, TPM and TSU acquisitions.
Depreciation and amortization totaled $2,461,000 or 0.6% of revenues for
1999, which compares to $1,785,000 or 0.6% of revenues for 1998. The increased
amortization expense was primarily due to the amortization of intangibles
recognized in the 1999 acquisitions of TSS, TPM and TSU.
The Company's effective income tax rate for 1999 was 41.7%, as compared to
43.3% for 1998. The higher 1998 effective rate was primarily attributable to the
nondeductibility of certain merger expenses.
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
The Company has historically experienced significant fluctuations in its
quarterly operating results and expects such fluctuations to continue in the
future. The Company's operating results may fluctuate due to a number of factors
such as seasonality, wage limits on payroll taxes, claims experience for
workers' compensation, demand and competition for the Company's services and the
effect of acquisitions. The Company's revenue levels fluctuate from quarter to
quarter primarily due to the impact of seasonality on its staffing services
business and on certain of its PEO clients in the agriculture and forest
products-related industries. As a result, the Company may have greater revenues
and net income in the third and fourth quarters of its fiscal year. Payroll
taxes and benefits fluctuate with the level of direct payroll costs, but tend to
represent a smaller percentage of revenues and direct payroll later in the
Company's fiscal year as federal and state statutory wage limits for
unemployment and social security taxes are exceeded by some employees. Workers'
compensation expense varies with both the frequency and severity of workplace
injury claims reported during a quarter, as well as adverse loss development of
prior period claims during a subsequent quarter.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash position at December 31, 2000 decreased by $34,000 from
December 31, 1999. The slight decrease in cash at December 31, 2000 was
primarily due to cash used in financing activities of $10,200,000, principally
in connection with common stock repurchases, payments on long term debt and net
payments on credit-line borrowings and cash used in investing activities of
$1,738,000, offset in part by cash provided by operating activities of
$11,904,000.
Net cash provided by operating activities for 2000 amounted to
$11,904,000, as compared to $3,433,000 for 1999. For 2000, cash flow was
primarily generated by net income and depreciation and amortization, coupled
with a decrease in accounts receivable of $9,556,000, offset in part by a
decrease of $3,544,000 in accrued payroll and benefits.
Net cash used in investing activities totaled $1,738,000 for 2000, as
compared to $15,437,000 for 1999. For 2000, the principal use of cash for
investing activities was for capital expenditures of $1,257,000 primarily
related to new computer hardware and software for the Company's new management
information system, which was implemented on March 1, 2000.
20
Additionally, during 2000, the Company paid $1,122,000 representing the final
contingent payment and acquisition costs related to the TSS acquisition. For
1999, cash used in investing activities was primarily for the acquisitions of
TSS, TPM and TSU totaling $13,157,000 and for capital expenditures of
$2,024,000. The Company presently has no material long-term capital commitments.
Net cash used in financing activities for 2000 amounted to $10,200,000,
which compares to $8,525,000 of net cash provided by financing activities in
1999. For 2000, the principal use of cash for financing activities was for
common stock repurchases totaling $4,541,000, scheduled payments on long-term
debt of $2,568,000 and net repayments on the Company's credit-line totaling
$2,254,000. For 1999, the primary source of cash provided by financing
activities was an $8,000,000 term loan obtained from the Company's principal
bank and $4,882,000 of net borrowings on the Company's credit-line, offset in
part by payments on long-term debt of $1,722,000 and common stock repurchases of
$1,498,000. The term loan was obtained to provide financing for the TSU
acquisition and, at December 31, 2000, had an outstanding principal balance of
$4,000,000.
The Company renewed its loan agreement (the "Agreement") with its
principal bank in May 2000, which provided for an unsecured revolving credit
facility of $15.0 million and an $8.0 million 3-year term loan. This Agreement,
which expires May 31, 2001, also includes a subfeature for standby letters of
credit in connection with certain workers' compensation surety arrangements, as
to which approximately $2.6 million were outstanding as of December 31, 2000.
The Company had an outstanding balance of $2,628,000 on the revolving credit
facility at December 31, 2000. (See Note 7 of the Notes to Financial
Statements.) Effective September 30, 2000, the Company negotiated an
accommodation to reduce the restrictiveness of one of the quarterly financial
covenants and, in consideration, agreed to the imposition of an additional
financial covenant. As a result of a financial covenant violation as of December
31, 2000, the Company, subsequent to year end, renegotiated with its bank
several material amendments to the provisions of the Agreement in consideration
for the banks' agreement to waive the covenant violation. Effective, March 12,
2001, the principal terms and conditions of the Agreement, as amended, include
(1) a reduction in the total amount available under the revolving credit
facility from $15 million to the lesser of (i) $13 million or (ii) 65 percent of
total trade accounts receivable at the end of any fiscal quarter, and (2) a
security interest in all trade accounts receivable. Due to the bank's secured
position, the bank agreed to reduce the restrictiveness of certain financial
covenants. It is management's belief that these new terms and conditions will
not be restrictive in the Company's normal course of operation. As a result of
the bank-provided waiver, the Company was in compliance with the financial
covenants of the Agreement, as amended, at December 31, 2000. Management expects
that the funds anticipated to be generated from operations, together with the
bank-provided credit facility and other potential sources of financing, will be
sufficient in the aggregate to fund the Company's working capital needs for the
foreseeable future. Although the Agreement, as amended, expires on May 31, 2001,
management expects this arrangement to be renewed with its current principal
bank on terms and conditions which will not be materially less favorable to the
Company than the present terms. If, however, the terms and conditions for
renewal are unacceptable to the Company, management will seek the most favorable
terms available in the market.
During 1999, the Company's Board of Directors authorized a stock
repurchase program to repurchase common shares from time to time in open market
purchases. Since inception, the Board of Directors have approved four increases
in the total number of shares or dollars authorized to be repurchased under the
program. The repurchase program currently provides $1,584,000 to be used for the
repurchase of additional shares at December 31, 2000. During 2000, the Company
repurchased 1,017,300 shares at an aggregate price of $4,541,000. Management
anticipates that the capital necessary to execute this program will be provided
by existing cash balances and other available resources.
21
INFLATION
Inflation generally has not been a significant factor in the Company's
operations during the periods discussed above. The Company has taken into
account the impact of escalating medical and other costs in establishing
reserves for future expenses for self-insured workers' compensation claims.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's exposure to market risk for changes in interest rates
primarily relates to the Company's short-term and long-term debt obligations. As
of December 31, 2000, the Company had interest-bearing debt obligations of
approximately $8.2 million, of which approximately $6.6 million bears interest
at a variable rate and approximately $1.6 million at a fixed rate of interest.
The variable rate debt is comprised of approximately $2.6 million outstanding
under a revolving credit facility, which bears interest at the Federal Funds
rate plus 1.25% and effective March 12, 2001, such revolving credit facility
bears interest at prime less 1.70%. The Company also has an unsecured three-year
term note with its principal bank, which bears interest at LIBOR plus 1.35%.
Based on the Company's overall interest exposure at December 31, 2000, a 10
percent change in market interest rates would not have a material effect on the
fair value of the Company's long-term debt or its results of operations. As of
December 31, 2000, the Company had not entered into any interest rate
instruments to reduce its exposure to interest rate risk.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and notes thereto required by this item begin on
page F-1 of this report, as listed in Item 14.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
22
PART III
ITEM 10. INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The information required by Item 10, Directors and Executive Officers of
the Registrant, is incorporated herein by reference to the Company's definitive
Proxy Statement for the 2000 Annual Meeting of Stockholders ("Proxy Statement"),
under the headings "Election of Directors" and "Stock Ownership by Principal
Stockholders and Management--Section 16(a) Beneficial Ownership Reporting
Compliance" or appears under the heading "Executive Officers of the Registrant"
on page 12 of this report. The information required by Item 11, Executive
Compensation, is incorporated herein by reference to the Proxy Statement, under
the headings "Executive Compensation" and "Election of Directors--Compensation
Committee Interlocks and Insider Participation." The information required by
Item 12, Security Ownership of Certain Beneficial Owners and Management, is
incorporated herein by reference to the Proxy Statement, under the heading
"Stock Ownership by Principal Stockholders and Management--Beneficial Ownership
Table." The information required by Item 13, Certain Relationships and Related
Transactions, is incorporated herein by reference to the Proxy Statement, under
the heading "Election of Directors--Compensation Committee Interlocks and
Insider Participation."
23
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
FINANCIAL STATEMENTS AND SCHEDULES
The Financial Statements, together with the report thereon of
PricewaterhouseCoopers LLP, are included on the pages indicated below:
Page
----
Report of Independent Accountants F-1
Balance Sheets - December 31, 2000 and 1999 F-2
Statements of Operations for the Years Ended December 31,
2000, 1999 and 1998 F-3
Statements of Stockholders' Equity - December 31, 2000,
1999 and 1998 F-4
Statements of Cash Flows for the Years Ended December 31,
2000, 1999 and 1998 F-5
Notes to Financial Statements F-6
No schedules are required to be filed herewith.
REPORTS ON FORM 8-K
No Current Reports on Form 8-K were filed during the quarter ended December 31,
2000.
EXHIBITS
Exhibits are listed in the Exhibit Index that follows the Financial Statements
included in this report. Each management contract or compensatory plan or
arrangement required to be filed as an exhibit to this report is listed under
Item 10, "Executive Compensation Plans and Arrangements and Other Management
Contracts" in the Exhibit Index.
24
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
BARRETT BUSINESS SERVICES, INC.
Registrant
Date: March 28, 2001 By: /s/ Michael D. Mulholland
-------------------------
Michael D. Mulholland
Vice President-Finance
and Secretary
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 indicated on the 28th day of March, 2001.
Principal Executive Officer and Director:
* WILLIAM W. SHERERTZ President and Chief
Executive Officer and
Director
Principal Financial Officer:
/s/ Michael D. Mulholland Vice President-Finance
- --------------------------------------- and Secretary
Michael D. Mulholland
Principal Accounting Officer:
/s/ James D. Miller Controller and Assistant
- --------------------------------------- Secretary
James D. Miller
Other Directors:
* ROBERT R. AMES Director
* THOMAS J. CARLEY Director
* RICHARD W. GODARD Director
* ANTHONY MEEKER Director
* NANCY B. SHERERTZ Director
* By /s/ Michael D. Mulholland
-----------------------------------------
Michael D. Mulholland
Attorney-in-Fact
25
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Barrett Business Services, Inc.
In our opinion, the accompanying balance sheets and the related statements of
operations, of stockholders' equity and of cash flows present fairly, in all
material respects, the financial position of Barrett Business Services, Inc.
(the Company) at December 31, 2000 and 1999, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
2000, in conformity with accounting principles generally accepted in the United
States of America. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States of America, which 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, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Portland, Oregon
February 6, 2001, except for the second paragraph of Note 7, as to which the
date is March 12, 2001.
F-1
BARRETT BUSINESS SERVICES, INC.
Balance Sheets
December 31, 2000 and 1999
(In Thousands, Except Par Value)
2000 1999
-------- --------
ASSETS
Current assets:
Cash and cash equivalents $ 516 $ 550
Trade accounts receivable, net 20,660 30,216
Prepaid expenses and other 1,222 1,219
Deferred tax assets 2,702 1,658
-------- --------
Total current assets 25,100 33,643
Intangibles, net 20,982 21,945
Property and equipment, net 7,177 7,027
Restricted marketable securities and
workers' compensation deposits 4,254 6,281
Unrestricted marketable securities 1,386 -
Deferred tax assets 839 712
Other assets 1,374 1,132
-------- --------
$61,112 $70,740
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ - $ 865
Current portion of long-term debt 2,939 2,783
Line of credit 2,628 4,882
Accounts payable 1,013 1,356
Accrued payroll, payroll taxes and related benefits 7,893 11,437
Workers' compensation claims and safety
incentive liabilities 5,274 4,219
Other accrued liabilities 1,622 413
-------- --------
Total current liabilities 21,369 25,955
Long-term debt, net of current portion 1,508 4,232
Customer deposits 614 815
Long-term workers' compensation claims liabilities 682 699
Other long-term liabilities 2,022 1,710
-------- --------
26,195 33,411
-------- --------
Commitments and contingencies (Notes 9, 10 and 14)
Stockholders' equity:
Common stock, $.01 par value; 20,500 shares authorized,
6,451 and 7,461
shares issued and outstanding 64 75
Additional paid-in capital 5,387 9,889
Retained earnings 29,466 27,365
-------- --------
34,917 37,329
-------- --------
$61,112 $70,740
======== ========
The accompanying notes are an integral part of these financial statements.
F-2
BARRETT BUSINESS SERVICES, INC.
Statements of Operations
Years Ended December 31, 2000, 1999 and 1998
(In Thousands, Except Per Share Amounts)
2000 1999 1998
---------- --------- ---------
Revenues:
Staffing services $ 188,500 $194,991 $165,443
Professional employer services 133,966 152,859 137,586
---------- --------- ---------
322,466 347,850 303,029
---------- --------- ---------
Cost of revenues:
Direct payroll costs 251,015 270,049 235,265
Payroll taxes and benefits 27,007 28,603 25,550
Workers' compensation 12,639 11,702 10,190
---------- --------- ---------
290,661 310,354 271,005
---------- --------- ---------
Gross margin 31,805 37,496 32,024
Selling, general and administrative expenses 24,583 25,957 23,012
Merger expenses - - 750
Depreciation and amortization 3,192 2,461 1,785
---------- --------- ---------
Income from operations 4,030 9,078 6,477
---------- --------- ---------
Other (expense) income:
Interest expense (830) (634) (173)
Interest income 341 357 441
Other, net 6 32 (1)
---------- --------- ---------
(483) (245) 267
---------- --------- ---------
Income before provision for income taxes 3,547 8,833 6,744
Provision for income taxes 1,446 3,684 2,923
---------- --------- ---------
Net income $ 2,101 $ 5,149 $ 3,821
========= ========= =========
Basic earnings per share $ .29 $ .68 $ .50
========= ========= =========
Weighted average number of basic
shares outstanding 7,237 7,581 7,664
========= ========= =========
Diluted earnings per share $ .29 $ .68 $ .50
========= ========= =========
Weighted average number of diluted
shares outstanding 7,277 7,627 7,711
========= ========= =========
The accompanying notes are an integral part of these financial statements.
F-3
BARRETT BUSINESS SERVICES, INC.
Statements of Stockholders' Equity
December 31, 2000, 1999 and 1998
(In Thousands)
Common Stock Additional
------------------- Paid-in Retained
Shares Amount Capital Earnings Total
--------- --------- --------- --------- ---------
Balance, December 31, 1997 7,638 $ 76 $ 11,760 $ 18,395 $ 30,231
Common stock issued on exercise of options
and warrants 38 1 168 - 169
Distribution to dissenting shareholder in
connection with merger - - (519) - (519)
Net income - - - 3,821 3,821
--------- --------- --------- --------- ---------
Balance, December 31, 1998 7,676 77 11,409 22,216 33,702
Common stock issued on exercise of options
and warrants 9 - 34 - 34
Repurchase of common stock (219) (2) (1,496) - (1,498)
Payment to shareholder - - (58) - (58)
Common stock cancelled (5) - - - -
Net income - - - 5,149 5,149
--------- --------- --------- --------- ---------
Balance, December 31, 1999 7,461 75 9,889 27,365 37,329
Common stock issued on exercise of options
and warrants 7 - 28 - 28
Repurchase of common stock (1,017) (11) (4,530) - (4,541)
Net income - - - 2,101 2,101
--------- --------- --------- --------- ---------
Balance, December 31, 2000 6,451 $ 64 $ 5,387 $ 29,466 $ 34,917
========= ========= ========= ========= =========
The accompanying notes are an integral part of these financial statements.
F-4
BARRETT BUSINESS SERVICES, INC.
Statements of Cash Flows
Years Ended December 31, 2000, 1999 and 1998
(In Thousands)
2000 1999 1998
------- ------- -------
Cash flows from operating activities:
Net income $2,101 $5,149 $3,821
Reconciliations of net income to net
cash provided by operating activities:
Depreciation and amortization 3,192 2,461 1,785
Deferred taxes (1,171) 156 (323)
Changes in certain assets and liabilities,
net of amounts purchased in
acquisitions:
Trade accounts receivable, net 9,556 (5,568) (856)
Prepaid expenses and other (3) (57) 128
Income taxes payable - (438) 438
Accounts payable (343) 261 (188)
Accrued payroll, payroll taxes and
related benefits (3,544) 2,030 (788)
Other accrued liabilities 1,209 (153) 100
Workers' compensation claims and safety
incentive liabilities 1,038 (198) 204
Customer deposits, other liabilities
and other assets, net (443) (522) (443)
Other long-term liabilities 312 312 368
------- ------- -------
Net cash provided by operating activities 11,904 3,433 4,246
------- ------- -------
Cash flows from investing activities:
Cash paid for acquisitions, including other
direct costs (1,122)(13,157) (693)
Purchase of property and equipment, net
of amounts purchased in acquisitions (1,257) (2,024) (1,077)
Proceeds from maturities of marketable securities 1,329 2,415 5,532
Purchase of marketable securities (688) (2,671) (5,441)
------- ------- -------
Net cash used in investing activities (1,738) (15,437)(1,679)
------- ------- -------
Cash flows from financing activities:
Payment of credit line assumed in acquisition - (1,113) -
Net (payments on) proceeds from credit-line
borrowings (2,254) 4,882 (887)
Proceeds from issuance of long-term debt - 8,000 -
Payments on long-term debt (2,568) (1,722) (740)
Payment of notes payable (865) - -
Distribution to dissenting shareholder - - (519)
Payment to shareholder - (58) -
Repurchase of common stock (4,541) (1,498) -
Proceeds from the exercise of stock
options and warrants 28 34 169
------- ------- -------
Net cash (used in) provided by financing activities (10,200) 8,525 (1,977)
------- ------- -------
Net (decrease) increase in cash and cash equivalents (34) (3,479) 590
Cash and cash equivalents, beginning of year 550 4,029 3,439
------- ------- -------
Cash and cash equivalents, end of year $ 516 $ 550 $4,029
======= ======= =======
Supplemental schedule of noncash activities:
Acquisition of other businesses:
Cost of acquisitions in excess of fair
market value of net assets acquired $1,122 $12,304 $ 683
Tangible assets acquired - 3,364 10
Liabilities assumed - 1,646 -
Note payable issued in connection with acquisition - 865 -
The accompanying notes are an integral part of these financial statements.
F-5
BARRETT BUSINESS SERVICES, INC.
Notes to Financial Statements
1. SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Barrett Business Services, Inc. ("Barrett" or the "Company"), a Maryland
corporation, is engaged in providing staffing and professional employer
services to a diversified group of customers through a network of branch
offices throughout Oregon, Washington, Idaho, California, Arizona, Maryland,
Delaware and North Carolina. Approximately 81%, 79% and 81%, respectively, of
the Company's revenues during 2000, 1999 and 1998 were attributable to its
Oregon and California operations. On June 29, 1998, the Company merged with
Western Industrial Management, Inc. and Catch 55, Inc. (collectively "WIMI").
The transaction was accounted for as a pooling-of-interests pursuant to
Accounting Principles Board ("APB") Opinion No. 16 and, accordingly, the
Company's financial statements have been restated for all prior periods to
give effect to the merger, as more fully described in Note 2.
REVENUE RECOGNITION
The Company recognizes revenue as services are rendered by its workforce.
Staffing services are engaged by customers to meet short-term and long-term
personnel needs. Professional employer services are normally used by
organizations to satisfy ongoing human resource management needs and
typically involve contracts with a minimum term of one year, renewable
annually, which cover all employees at a particular work site.
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements,"
("SAB 101"), and further amended it to defer the effective date. This
pronouncement summarizes certain of the SEC staff's views on applying
generally accepted accounting principles to revenue recognition. The Company
was required to adopt the provisions of SAB 101 no later than December 31,
2000. The adoption of SAB 101 has had no effect on the Company's financial
statements.
CASH AND CASH EQUIVALENTS
The Company considers non-restricted short-term investments, which are highly
liquid, readily convertible into cash, and have original maturities of less
than three months, to be cash equivalents for purposes of the statements of
cash flows.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company had an allowance for doubtful accounts of $528,000 and $335,000
at December 31, 2000 and 1999, respectively.
MARKETABLE SECURITIES
At December 31, 2000 and 1999, marketable securities consisted primarily of
governmental debt instruments with maturities generally from 90 days to 28
years (see Note 6). Marketable securities have been categorized as
held-to-maturity and, as a result, are stated at amortized cost. Realized
gains and losses on sales of marketable securities are included in other
(expense) income on the Company's statements of operations.
INTANGIBLES
Intangible assets consist primarily of identifiable intangible assets
acquired and the cost of acquisitions in excess of the fair value of net
assets acquired (goodwill). Intangible assets acquired are recorded at their
estimated fair value at the acquisition date.
F-6
BARRETT BUSINESS SERVICES, INC.
Notes to Financial Statements (Continued)
1. SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INTANGIBLES (CONTINUED)
The Company uses a 15-year estimate as the estimated economic useful life of
goodwill. This life is based on an analysis of industry practice and the
factors influencing the acquisition decision. Other intangible assets are
amortized on the straight-line method over their estimated useful lives,
ranging from 2 to 15 years. (See Note 4.)
The Company reviews for asset impairment when events or changes in
circumstances indicate that the carrying amount of intangible assets may not
be recoverable. To perform that review, the Company estimates the sum of
expected future undiscounted net cash flows from the intangible assets. If
the estimated net cash flows are less than the carrying amount of the
intangible asset, the Company recognizes an impairment loss in an amount
necessary to write down the intangible asset to a fair value as determined
from expected future discounted cash flows. No write-down for impairment loss
was recorded for the years ended December 31, 2000, 1999 and 1998.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Expenditures for maintenance and
repairs are charged to operating expense as incurred, and expenditures for
additions and betterments are capitalized. The cost of assets sold or
otherwise disposed of and the related accumulated depreciation are eliminated
from the accounts, and any resulting gain or loss is reflected in the
statements of operations.
Depreciation of property and equipment is calculated using either
straight-line or accelerated methods over estimated useful lives, which range
from 3 years to 31.5 years.
CUSTOMER DEPOSITS
The Company requires deposits from certain professional employer services
customers to cover a portion of its accounts receivable due from such
customers in the event of default of payment.
STATEMENTS OF CASH FLOWS
Interest paid during 2000, 1999 and 1998 did not materially differ from
interest expense.
Income taxes paid by the Company in 2000, 1999 and 1998 totaled $2,331,000,
$4,181,000 and $2,623,000, respectively.
NET INCOME PER SHARE
Basic earnings per share are computed based on the weighted average number of
common shares outstanding for each year. Diluted earnings per share reflect
the potential effects of the exercise of outstanding stock options and
warrants.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with the 2000
presentation. Such reclassifications had no impact on gross margin, net
income or stockholders' equity.
ACCOUNTING ESTIMATES
The preparation of the Company's financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make
F-7
1. SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ACCOUNTING ESTIMATES (CONTINUED)
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting periods. Actual results may differ from those estimates.
RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board ("FASB") has issued Statement of
Financial Accounting Standard ("SFAS") No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133." This statement amends SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities" to be effective for all fiscal
quarters of all fiscal years beginning after June 15, 2000. SFAS No. 133
requires that every derivative instrument be recorded in the balance sheet as
either an asset or liability measured at its fair value. The statement
requires that changes in the derivative's fair value be recognized in
earnings unless specific hedge accounting criteria are met. The Company
believes that the effect of adoption of SFAS No. 133 will not have a material
effect on the Company's financial statements.
The FASB has issued SFAS No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities - an Amendment of FASB Statement
No. 133." This statement amends SFAS No. 133 for specified transactions. SFAS
No. 138 was effective concurrently with SFAS No. 133, if SFAS No. 133 was not
adopted prior to June 15, 2000. If SFAS No. 133 was adopted prior to June 15,
2000, SFAS No. 138 is effective for quarters beginning after June 15, 2000.
The Company believes that the effect of adoption of SFAS No. 138 will not
have a material effect on the Company's financial statements.
2. BUSINESS COMBINATIONS
BOLT STAFFING
On April 13, 1998, the Company acquired certain assets of BOLT Staffing
Services, Inc., a provider of staffing services located in Pocatello, Idaho.
BOLT Staffing had revenues of approximately $2.4 million (unaudited) for the
year ended December 31, 1997. The Company paid $675,000 in cash for the
assets, assumed a $6,000 office lease liability and incurred approximately
$18,000 in acquisition related costs. The transaction was accounted for under
the purchase method of accounting, which resulted in $683,000 of intangible
assets and $10,000 of fixed assets.
TEMPORARY STAFFING SYSTEMS, INC.
Effective January 1, 1999, the Company acquired all of the outstanding common
stock of Temporary Staffing Systems, Inc. ("TSS"), a staffing services
company with eight branch offices in North Carolina and one in South
Carolina. The Company paid $2,000,000 in cash and agreed to make an
additional payment contingent upon a minimum equity requirement for 1998 and
certain financial performance criteria for 1999. The Company also paid
$50,000 in cash for a noncompete agreement with the selling shareholder.
During 2000, as a result of the aforementioned minimum equity requirement and
certain financial performance criteria, the Company paid additional
consideration aggregating $960,000.
F-8
2. BUSINESS COMBINATIONS (CONTINUED)
TEMPORARY STAFFING SYSTEMS, INC. (CONTINUED)
TSS's revenues for transaction was accounted for under the purchase method of
accounting. The effect of this transaction resulted in the recording of
$1,255,000 of tangible assets, $393,000 of existing intangible assets, the
assumption of $1,646,000 of liabilities and the recognition of an additional
$3,221,000 of intangible assets, which includes $86,000 for
acquisition-related costs.
TPM STAFFING SERVICES, INC.
Effective February 15, 1999, the Company acquired certain assets of TPM
Staffing Services, Inc. ("TPM"), a staffing services company with three
offices in southern California. The Company paid $1,125,000 in cash for the
assets of TPM. The Company also paid $75,000 for noncompete agreements. TPM's
revenues for the year ended December 31, 1998 were approximately $5.7 million
(unaudited). The transaction was accounted for under the purchase method of
accounting, which resulted in $1,190,000 of intangible assets, including
$15,000 for acquisition-related costs, and $25,000 of fixed assets.
TEMPORARY SKILLS UNLIMITED, INC.
Effective May 31, 1999, the Company acquired certain assets of Temporary
Skills Unlimited, Inc., dba TSU Staffing ("TSU"), a staffing services company
with nine branch offices in northern California. The Company paid $9,558,000
in cash and issued a note for $864,500, due one year from the date of
acquisition. The Company also paid $100,000 for noncompete agreements. TSU's
revenues for the year ended December 27, 1998 were approximately $25.0
million (audited). The transaction was accounted for under the purchase
method of accounting, which resulted in $8,622,000 of intangible assets,
including $184,000 for acquisition-related costs, $1,797,000 of accounts
receivable and $287,000 of fixed assets.
PRO FORMA RESULTS OF OPERATIONS (UNAUDITED)
The operating results of each of the above acquisitions are included in the
Company's results of operations from the respective date of acquisition. The
following unaudited summary presents the combined results of operations as if
the TPM and TSU acquisitions had occurred at the beginning of 1999, after
giving effect to certain adjustments for the amortization of intangible
assets, taxation and cost of capital.
(in thousands, except per share amounts) Year ended
December 31,
1999
-----------
Revenue $ 362,297
===========
Net income $ 5,497
===========
Basic earnings per share $ .73
===========
Diluted earnings per share $ .72
===========
The unaudited pro forma results above have been prepared for comparative
purposes only and do not purport to be indicative of what would have occurred
had the acquisitions been made as of January 1, 1999, or of results which may
occur in the future.
F-9
2. BUSINESS COMBINATIONS (CONTINUED)
WESTERN INDUSTRIAL MANAGEMENT, INC.
On June 29, 1998, the Company completed a merger with WIMI, whereby WIMI was
merged directly with and into Barrett. The transaction qualified as a
tax-free merger and was accounted for as a pooling-of-interests. As a result
of the merger, the former shareholders of WIMI initially received a total of
894,642 shares of the Company's common stock, which included 10,497 shares
issued in exchange for real property consisting of an office condominium in
which WIMI's main office was located. A dissenting WIMI shareholder received
cash in the amount of $519,095, based on the value of $11.375 per share of
Barrett's common stock. The Acquisition and Merger Agreement provided for a
holdback of 10% of the total consideration paid by Barrett pending the final
determination of the required minimum net worth of WIMI as of June 28, 1998.
As a consequence of this final determination, total consideration paid by
Barrett was reduced in 1999 by $52,811, which resulted in the cancellation of
4,417 shares previously issued to certain WIMI shareholders and a reduction
in cash paid to the dissenting WIMI shareholder of $2,563. WIMI was a
privately-held staffing services company headquartered in San Bernardino,
California.
3. FAIR VALUE OF FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK
All of the Company's significant financial instruments are recognized in its
balance sheet. Carrying values approximate fair market value of most
financial assets and liabilities. The fair market value of certain financial
instruments was estimated as follows:
- Marketable securities - Marketable securities primarily consist of U.S.
Treasury bills and municipal bonds. The interest rates on the Company's
marketable security investments approximate current market rates for these
types of investments; therefore, the recorded value of the marketable
securities approximates fair market value.
- Long-term debt - The interest rates on the Company's long-term debt
approximate current market rates, based upon similar obligations with like
maturities; therefore, the recorded value of long-term debt approximates
the fair market value.
Financial instruments that potentially subject the Company to concentration
of credit risk consist primarily of temporary cash investments, marketable
securities and trade accounts receivable. The Company restricts investment of
temporary cash investments and marketable securities to financial
institutions with high credit ratings and to investments in governmental debt
instruments. Credit risk on trade receivables is minimized as a result of the
large and diverse nature of the Company's customer base. At December 31,
2000, the Company had significant concentrations of credit risk as follows:
- Marketable securities - $2,148,000 of marketable securities at December
31, 2000 consisted of Oregon State Housing & Community Service Bonds.
- Trade receivables - $2,155,000 of trade receivables were with two
customers at December 31, 2000 (10% of trade receivables outstanding at
December 31, 2000).
F-10
4. INTANGIBLES
Intangibles consist of the following (in thousands):
2000 1999
--------- ---------
Covenants not to compete $ 3,709 $ 3,709
Goodwill 26,796 25,674
Customer lists 358 358
--------- ---------
30,863 29,741
Less accumulated amortization 9,881 7,796
--------- ---------
$20,982 $21,945
========= =========
5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
2000 1999
--------- ---------
Office furniture and fixtures $ 4,465 $ 4,087
Computer hardware and software 4,451 3,630
Buildings 1,474 1,474
--------- ---------
10,390 9,191
Less accumulated depreciation 3,521 2,472
--------- ---------
6,869 6,719
Land 308 308
--------- ---------
$ 7,177 $ 7,027
========= =========
6. WORKERS' COMPENSATION CLAIMS AND SAFETY INCENTIVE LIABILITIES
The Company is a self-insured employer with respect to workers' compensation
coverage for all its employees working in Oregon, Maryland, Washington,
Delaware, and selected parts of California. The Company also is self-insured
for workers' compensation purposes as granted by the United States Department
of Labor for longshore and harbor ("USL&H") workers' coverage.
The Company has provided $5,274,000 and $4,219,000 at December 31, 2000 and
1999, respectively, as an estimated liability for unsettled workers'
compensation claims and safety incentive liabilities. The estimated liability
for unsettled workers' compensation claims represents management's best
estimate, which includes, in part, an evaluation of information actuary.
Included in the claims liabilities are case reserve estimates for reported
losses, plus additional amounts based on projections for incurred but not
reported claims, anticipated increases in case reserve estimates and
additional claims administration
F-11
6. WORKERS' COMPENSATION CLAIMS AND SAFETY INCENTIVE LIABILITIES (CONTINUED)
expenses. The estimated liability for safety incentives represents
management's best estimate for future amounts owed to PEO client companies as
a result of maintaining workers' compensation claims costs below certain
agreed-upon amounts, which are based on a percentage of payroll. These
estimates are continually reviewed and adjustments to liabilities are
reflected in current operating results as they become known. The Company
believes that the difference between amounts recorded for its estimated
liabilities and the possible range of costs of settling related claims is not
material to results of operations; nevertheless, it is reasonably possible
that adjustments required in future periods may be material to results of
operations.
Liabilities incurred for work-related employee fatalities are recorded either
at an agreed lump-sum settlement amount or the net present value of future
fixed and determinable payments over the actuarially determined remaining
life of the beneficiary, discounted at a rate that approximates a long-term,
high-quality corporate bond rate. The Company has obtained excess workers'
compensation insurance to limit its self-insurance exposure to $350,000 per
occurrence in all states, except $500,000 per occurrence for USL&H exposure.
The excess insurance provides unlimited coverage above the aforementioned
exposures.
At December 31, 2000, the Company's long-term workers' compensation claim
liabilities in the accompanying balance sheet include $682,000 for
work-related catastrophic injuries and fatalities. The aggregate undiscounted
pay-out amount of the catastrophic injuries and fatalities is $1,515,000. The
actuarially determined pay-out periods to the beneficiaries range from 6 to
41 years. As a result, the five-year cash requirements related to these
claims are immaterial.
The United States Department of Labor and the states of Oregon, Maryland,
Washington, and California require the Company to maintain specified
investment balances or other financial instruments, totaling $6,241,000 at
December 31, 2000 and $7,735,000 at December 31, 1999, to cover potential
claims losses. In partial satisfaction of these requirements, at December 31,
2000, the Company has provided standby letters of credit in the amount of
$1,952,000 and surety bonds totaling $457,000. The investments are included
in restricted marketable securities and workers' compensation deposits in the
accompanying balance sheets.
7. CREDIT FACILITY
Effective May 31, 2000, the Company renewed its loan agreement (the
"Agreement") with its principal bank, which provided for (a) an unsecured
revolving credit facility for working capital purposes and standby letters of
credit up to $15,000,000, (b) a term real estate loan (Note 8) and (c) a
three-year term loan (Note 8) in the amount of $8,000,000. The Agree-ment
expires on May 31, 2001. The interest rate options available on outstanding
balances under the revolving credit facility at December 31, 2000, included
(i) prime rate, (ii) Federal Funds Rate plus 1.25% or (iii) LIBOR plus 1.00%.
The interest rate options available under the three-year term loan include
(i) prime rate or (ii) LIBOR plus 1.35%.
F-12
7. CREDIT FACILITY (CONTINUED)
Terms and conditions of the Agreement included, among others, certain
restrictive quarterly financial covenants relating to the Company's current
ratio, earnings before interest, taxes, depreciation and amortization
("EBITDA"), a ratio of borrowed funds plus capitalized lease obligations to
EBITDA and an EBITDA coverage ratio. Effective September 30, 2000, the
Company negotiated an accommodation to reduce the restrictiveness of one
quarterly financial covenant and, in consideration, agreed to the imposition
of an additional financial covenant. As a result of a financial covenant
violation as of December 31, 2000, the Company, subsequent to year end,
renegotiated with its bank several amendments to the provisions of the
Agreement in exchange for the bank's agreement to waive the covenant
violation. Effective March 12, 2001, the principal terms and conditions of
the Agreement, as amended, include a reduction in the total amount available
under the revolving credit facility from $15 million to the lesser of (i) $13
million or (ii) 65 percent of total trade accounts receivable at the end of
any fiscal quarter, a security interest in all trade accounts receivable, and
the conversion of an interest rate option from Federal Funds Rate plus 1.25%
to prime rate less 1.70%, which management believes should not be materially
adverse to the Company. Due to the bank's secured position, the bank agreed
to reduce the restrictiveness of certain financial covenants. As a result of
the bank-provided waiver, the Company was in compliance with all financial
covenants as of December 31, 2000.
During the year ended December 31, 2000, the maximum balance outstanding
under the revolving credit facility was $8,754,000, the average balance
outstanding was $3,404,000, and the weighted average interest rate during the
period was 7.70%. The weighted average interest rate during 2000 was
calculated using daily weighted averages.
8. LONG-TERM DEBT
Long-term debt consists of the following:
2000 1999
------- -------
(in thousands)
Term loan payable in monthly installments of $222,222
plus interest at LIBOR plus 1.35% through
2002 (Note 7) $4,000 $6,444
Mortgage note payable in monthly installments of $6,408,
including interest at 7.40% per annum through
2003, with a principal payment of $325,000 due
in 2003, secured by land and building (Note 7) 442 491
Note payable, assumed in acquisition, payable
in monthly installments of $5,116, including
interest at 8.25% per annum through 2001 5 64
Capitalized equipment leases, assumed in acquisition,
with variable monthly installments, including
interest at 11.5% per annum through 2000,
secured by equipment - 16
------- -------
4,447 7,015
Less portion due within one year 2,939 2,783
------- -------
$1,508 $4,232
======= =======
8. LONG-TERM DEBT (CONTINUED)
Maturities on long-term debt are summarized as follows at December 31, 2000
(in thousands):
Year ending
December 31,
--------------
2001 $ 2,939
2002 1,160
2003 348
2004 -
2005 -
--------
$ 4,447
========
9. SAVINGS PLAN
The Company has a Section 401(k) employee savings plan for the benefit of its
eligible employees. All employees 21 years of age or older become eligible to
participate in the savings plan upon completion of 1,000 hours of service in
any consecutive 12-month period following the initial date of employment.
Employees covered under a co-employer ("PEO") contract receive credit for
prior employment with the PEO client for purposes of meeting savings plan
service eligibility. The determination of Company contributions to the plan,
if any, is subject to the sole discretion of the Company.
Participants' interests in Company contributions to the plan vest over a
seven-year period. Company contributions to the plan, before participants'
forfeitures, were $102,000, $125,000 and $104,000 for the years ended
December 31, 2000, 1999 and 1998, respectively.
Recent attention has been placed by the Internal Revenue Service (the "IRS")
and the staff leasing industry on Internal Revenue Code Section 401(k) plans
sponsored by staff leasing companies. As such, the tax-exempt status of the
Company's plan is subject to continuing scrutiny and approval by the IRS and
to the Company's ability to support to the IRS the Company's
employer-employee relationship with leased employees. In the event the
tax-exempt status were to be discontinued and the plan were to be
disqualified, the operations of the Company could be adversely affected. The
Company has not recorded any provision for this potential contingency, as the
Company and its legal counsel cannot presently estimate either the likelihood
of disqualification or the resulting range of loss, if any.
F-14
10. COMMITMENTS
LEASE COMMITMENTS
The Company leases its offices under operating lease agreements that require
minimum annual payments as follows (in thousands):
Year ending
December 31,
--------------
2001 $ 1,515
2002 964
2003 307
2004 88
2005 82
-------
$ 2,956
=======
Rent expense for the years ended December 31, 2000, 1999 and 1998 was
approximately $1,871,000, $1,780,000 and $1,369,000, respectively.
11. INCOME TAXES
The provisions for income taxes are as follows (in thousands):
Year ended December 31,
2000 1999 1998
--------- --------- ---------
Current:
Federal $ 2,019 $ 2,796 $ 2,571
State 598 732 675
--------- --------- ---------
2,617 3,528 3,246
--------- --------- ---------
Deferred:
Federal (965) 135 (255)
State (206) 21 (68)
--------- --------- ---------
(1,171) 156 (323)
--------- --------- ---------
Total provision $ 1,446 $ 3,684 $ 2,923
========= ========= =========
F-15
11. INCOME TAXES (CONTINUED)
Deferred tax assets (liabilities) are comprised of the following components
(in thousands):
2000 1999
--------- ---------
Gross deferred tax assets:
Workers' compensation claims and
safety incentive libilities $ 2,206 $ 1,640
Allowance for doubtful accounts 205 130
Amortization of intangibles 519 380
Deferred compensation 408 167
Other 289 147
--------- ---------
3,627 2,464
--------- ---------
Gross deferred tax liabilities:
Tax depreciation in excess of book depreciation (86) (94)
--------- ---------
Net deferred tax assets $ 3,541 $ 2,370
========= =========
The effective tax rate differed from the U.S.statutory federal tax rate due
to the following:
Year ended December 31,
2000 1999 1998
--------- --------- ---------
Statutory federal tax rate 34.0 % 34.0 % 34.0%
State taxes, net of federal benefit 7.2 5.6 6.1
Nondeductible expenses 1.6 0.8 3.4
Nondeductible amortization of intangibles 5.0 1.9 2.5
Federal tax-exempt interest income (2.3) (0.9) (1.0)
Federal tax credits (4.0) (1.4) -
Other, net (0.7) 1.7 (1.7)
--------- --------- ---------
40.8 % 41.7 % 43.3%
========= ========= =========
12. STOCK INCENTIVE PLAN
The Company has a Stock Incentive Plan (the "Plan") which provides for
stock-based awards to Company employees, non-employee directors and outside
consultants or advisors. Since inception, the Company's stockholders have
approved two increases in the total number of shares of common stock reserved
for issuance under the Plan. Currently, the total shares of common stock
reserved for issuance under the Plan is 1,550,000.
The options generally become exercisable in four equal annual installments
beginning one year after the date of grant and expire ten years after the
date of grant. Under the terms of the Plan, the exercise price of incentive
stock options must not be less than the fair market value of the Company's
stock on the date of grant.
In addition, certain of the Company's zone and branch management employees
have elected to receive a portion of their quarterly cash bonus in the form
of nonqualified deferred
F-16
12. STOCK INCENTIVE PLAN (CONTINUED)
compensation stock options. Such options are awarded at a sixty percent
discount from the then-fair market value of the Company's stock and are fully
vested and immediately exercisable upon grant. During 2000, the Company
awarded deferred compensation stock options for 25,466 shares at an average
exercise price of $2.22 per share. During 1999, the Company awarded deferred
compensation stock options for 38,613 shares at an average exercise price of
$3.11 per share. During 1998, the Company awarded deferred compensation stock
options for 51,417 shares at an average exercise price of $4.26 per share. In
accordance with Accounting Principles Board ("APB") Opinion No. 25, the
Company recognized compensation expense of $85,000, $180,000 and $213,000
for the years ended December 31, 2000, 1999 and 1998, respectively, in
connection with the issuance of these discounted options.
A summary of the status of the Company's stock options at December 31, 2000,
1999 and 1998, together with changes during the periods then ended, are
presented below.
Weighted
Number average
of exercise
options price
--------- ---------
Outstanding at December 31, 1997 595,119 $ 13.50
Options granted at market price 217,601 10.91
Options granted below market price 51,417 4.26
Options exercised (7,250) 5.91
Options canceled or expired (71,592) 14.50
---------
Outstanding at December 31, 1998 785,295 12.15
Options granted at market price 152,971 8.79
Options granted below market price 38,613 3.11
Options exercised (9,059) 3.74
Options canceled or expired (74,102) 13.60
---------
Outstanding at December 31, 1999 893,718 11.16
Options granted at market price 171,056 6.57
Options granted below market price 25,466 2.22
Options exercised (7,000) 4.01
Options canceled or expired (127,578) 9.03
---------
Outstanding at December 31, 2000 955,662 10.44
=========
Available for grant at December 31, 2000 369,904
=========
The Company applies APB Opinion No. 25 and related interpretations in
accounting for the Plan. Accordingly, no compensation expense has been
recognized for its stock option grants issued at market price because the
exercise price of the Company's employee stock options equals the market
price of the underlying stock on the date of grant. If compensation expense
for the Company's stock-based compensation plan had been determined based on
the fair market value at the grant date for awards under the Plan,
F-17
12. STOCK INCENTIVE PLAN (CONTINUED)
consistent with the method of Statement of Financial Accounting Standards
("SFAS") No. 123, the Company's net income and earnings per share would have
been reduced to the pro forma amounts indicated below:
2000 1999 1998
-------- -------- --------
(in thousands, except per share amounts)
Net income, as reported $2,101 $5,149 $3,821
Net income, pro forma 1,332 4,265 3,117
Basic earnings per share, as reported .29 .68 .50
Basic earnings per share, pro forma .18 .56 .41
Diluted earnings per share, as reported .29 .68 .50
Diluted earnings per share, pro forma .18 .56 .41
The effects of applying SFAS No. 123 for providing pro forma disclosures for
2000, 1999 and 1998 are not likely to be representative of the effects on
reported net income for future years, because options vest over several years
and additional awards generally are made each year.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model, with the following weighted-average
assumptions used for grants in 2000, 1999 and 1998:
2000 1999 1998
-------- -------- --------
Expected volatility 50% 46% 43%
Risk free rate of return 6.20% 5.75% 5.50%
Expected dividend yield 0% 0% 0%
Expected life (years) 7.0 7.0 8.0
Total fair value of options granted at market price was computed to be
$673,921, $768,863 and $1,364,155 for the years ended December 31, 2000, 1999
and 1998, respectively. Total fair value of options granted at 60% below
market price was computed to be approximately $111,000, $232,000 and $423,000
for the years ended December 31, 2000, 1999 and 1998 respectively. The
weighted average value of all options granted in 2000, 1999 and 1998 was
$3.94, $5.22 and $6.64, respectively.
F-18
12. STOCK INCENTIVE PLAN (CONTINUED)
The following table summarizes information about stock options outstanding at
December 31, 2000:
Options outstanding Options exercisable
- ---------------------------------------------------- --------------------
Weighted-
Weighted- average Exercisable Weighted-
average remaining at average
Number exercise contractual December 31 exercise
Exercise price range of shares price life (years) 2000 price
- -------------------- ---------- ---------- ---------- ---------- ---------
$ 1.93 - 6.00 128,833 $ 3.68 7.7 109,733 $ 3.30
6.50 - 9.50 298,151 7.88 7.7 90,360 9.18
10.13 - 12.50 225,419 11.29 6.8 143,139 11.36
13.38 - 14.88 159,500 14.40 5.6 137,750 14.40
15.00 - 17.94 143,759 16.10 5.0 138,027 16.05
---------- ----------
955,662 619,009
========== ==========
At December 31, 2000, 1999 and 1998, 619,009, 509,834 and 363,295 options
were exercisable at weighted average exercise prices of $11.33, $11.56 and
$11.97, respectively.
In March 2000, the FASB issued FASB Interpretation No. 44 ("FIN 44"),
"Accounting for Certain Transactions Involving Stock Compensation - an
Interpretation of APB Opinion No. 25" which provides interpretive guidance on
several implementation issues related to APB Opinion No. 25 "Accounting for
Stock Issued to Employees." FIN 44 was effective July 1, 2000, but certain
conclusions must be applied earlier. The adoption of FIN 44 had no effect on
the Company's financial statements.
13. STOCK REPURCHASE PROGRAM
During 1999, the Company's Board of Directors authorized a stock repurchase
program to purchase common shares from time to time in open market purchases.
Since inception, the Board has approved four increases in the total number of
shares or dollars authorized to be repurchased under the program. The
repurchase program currently allows for $1,584,000 to be used for the
repurchase of additional shares as of December 31, 2000. During 2000, the
Company repurchased 1,017,300 shares at an aggregate price of $4,541,000.
During 1999, the Company repurchased 219,000 shares at an aggregate price of
$1,498,000.
14. LITIGATION
The Company is subject to legal proceedings and claims, which arise in the
ordinary course of its business. In the opinion of management, the amount of
ultimate liability with respect to currently pending or threatened actions is
not expected to materially affect the financial position or results of
operations of the Company.
F-19
15. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
(in thousands, except per share amounts and market price per share)
First Second Third Fourth
Quarter Quarter Quarter Quarter
---------- --------- --------- ---------
Year ended December 31, 1998
Revenues $ 69,241 $ 76,651 $ 81,969 $ 75,168
Cost of revenues 62,467 68,524 73,002 67,012
Net income 387 600 1,599 1,235
Basic earnings per share .05 .08 .21 .16
Diluted earnings per share .05 .08 .21 .16
Common stock market prices:
High $ 12.00 $ 13.38 $ 10.88 $ 9.38
Low 10.25 9.13 7.88 6.00
Year ended December 31, 1999
Revenues $ 71,015 $ 84,707 $ 95,875 $ 96,253
Cost of revenues 63,700 75,565 84,927 86,159
Net income 740 1,216 1,835 1,359
Basic earnings per share .10 .16 .24 .18
Diluted earnings per share .10 .16 .24 .18
Common stock market prices:
High $ 9.06 $ 9.25 $ 10.25 $ 8.38
Low 5.25 5.88 7.75 5.50
Year ended December 31, 2000
Revenues $ 87,122 $ 86,502 $ 80,744 $ 68,098
Cost of revenues 78,519 77,724 72,830 61,588
Net income 744 794 500 63
Basic earnings per share .10 .11 .07 .01
Diluted earnings per share .10 .11 .07 .01
Common stock market prices:
High $ 7.63 $ 7.50 $ 6.44 $ 5.25
Low 5.00 5.00 5.00 2.50
F-20
EXHIBIT INDEX
3.1 Charter of the registrant, as amended. Incorporated by reference to
Exhibit 3 to the registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1994.
3.2 Bylaws of the registrant, as amended. Incorporated by reference to Exhibit
3.2 to the registrant's Annual Report on Form 10-K for the year ended
December 31, 1996.
4.1 Loan Agreement between the registrant and Wells Fargo Bank, N.A., dated
May 31, 2000. Incorporated by reference to Exhibit 4.1 to the registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 2000.
4.2 Amendment, dated September 30, 2000, to Loan Agreement between the
Registrant and Wells Fargo Bank, N.A., dated May 31, 2000. Incorporated by
reference on Exhibit 4.1 to the registrant's Quarterly Report on Form 10-Q
for the quarter ended September 30, 2000.
4.3 Amendment, dated March 12, 2001, to Loan Agreement between the Registrant
and Wells Fargo Bank, N.A., dated May 31, 2000.
The registrant has incurred other long-term indebtedness as to which the
amount involved is less than 10 percent of the registrant's total assets.
The registrant agrees to furnish copies of the instruments relating to
such indebtedness to the Commission upon request.
10.0 Executive Compensation Plans and Arrangements and Other Management
Contracts.
10.1 1993 Stock Incentive Plan of the registrant, as amended. Incorporated by
reference to Exhibit 10.1 to the registrant's Annual Report on Form 10-K
for the year ended December 31, 1999.
10.2 Form of Indemnification Agreement with each director of the
registrant. Incorporated by reference to Exhibit 10.8 to the
registrant's Registration Statement on Form S-1 (No. 33-61804).
10.3 Deferred Compensation Plan for Management Employees of the registrant.
Incorporated by reference to Exhibit 10.3 to the registrant's Annual
Report on Form 10-K for the year ended December 31, 1997.
10.4 Employment Agreement between the registrant and Michael D. Mulholland,
dated January 26, 1999. Incorporated by reference to Exhibit 10.4 to the
registrant's Annual Report on Form 10-K for the year ended December 31,
1998.
11 Statement of calculation of Basic and Diluted shares outstanding.
23 Consent of PricewaterhouseCoopers LLP, independent accountants.
24 Power of attorney of certain officers and directors.