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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, 2001
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: $9,371,564 at February 28, 2002 (based on
market price as of February 28, 2002).
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, 2002
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Common Stock, Par Value $.01 Per Share 5,813,298 Shares
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement for the 2002 Annual Meeting of
Stockholders are hereby incorporated by reference into Part III of Form 10-K.
BARRETT BUSINESS SERVICES, INC.
2001 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PART I Page
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Item 1. Business 2
Item 2. Properties 11
Item 3. Legal Proceedings 12
Item 4. Submission of Matters to a Vote of Security Holders 12
Executive Officers of the Registrant 13
PART II
Item 5. Market for Registrant's Common Equity and Related 14
Stockholder Matters
Item 6. Selected Financial Data 15
Item 7. Management's Discussion and Analysis of Financial 16
Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 26
Item 8. Financial Statements and Supplementary Data 26
Item 9. Changes in and Disagreements With Accountants on 26
Accounting and Financial Disclosure
PART III
Item 10. Directors and Executive Officers of the Registrant 27
Item 11. Executive Compensation 27
Item 12. Security Ownership of Certain Beneficial Owners and 27
Management
Item 13. Certain Relationships and Related Transactions 27
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on 28
Form 8-K
Financial Statements F-1
Signatures
Exhibit Index
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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 2001, Barrett's staffing services
revenues represented 56.8% of total revenues, compared to 43.2% 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 2001, the Company provided staffing services to
approximately 3,300 customers, down from 4,600 in 2000. Although a majority of
the Company's staffing customers are small to mid-sized businesses, during 2001
approximately 25 of the Company's customers each utilized Barrett employees in a
number ranging from at least 200 employees to as many as 750 employees through
various staffing services arrangements. In addition, Barrett had approximately
380 PEO clients at December 31, 2001, compared to 465 at December 31, 2000. The
decrease in the number of PEO customers at December 31, 2001 was primarily due
to the Company's decision 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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PART I
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
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PART I
Company's 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 states 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 works
aggressively at managing job injury claims, including identifying
fraudulent claims and utilizing its staffing services to return
workers to active employment earlier. As a result of its efforts
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
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PART I
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 3% of its total 2001 revenues.
In 2001, the light industrial sector generated approximately 74% of the
Company's staffing services revenues, while clerical office staff accounted for
18% of such revenues and technical personnel represented the balance of 8%.
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.
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PART I
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. 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 3% of its total annual revenues
during 2001.
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 million
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.
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PART I
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 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. Effective April 16, 2001, the Company voluntarily elected
to terminate its USL&H self-insured status. 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, 2001, Barrett maintained excess workers' compensation
insurance for single occurrences exceeding $400,000 (except for $500,000 for
USL&H coverage through April 16, 2001) 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.
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 attempting to
negotiate 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'
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PART I
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, 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, at least 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 at December 31, 2001, 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. Refer to Part II, Item 7, "Critical
Accounting Policies".
Approximately one-fifth of the Company's total payroll exposure was in
relatively high-risk industries with respect to workplace injuries, including
trucking, construction and certain warehousing activities. Failure to
successfully manage the severity and frequency of workers' compensation injuries
results in increased workers' compensation expense and has a negative effect,
which may be substantial, on the Company's operating results and financial
condition. 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
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PART I
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.
Employees and Employee Benefits
At December 31, 2001, the Company had approximately 10,425 employees,
including approximately 6,700 staffing services employees, approximately 3,500
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 2001, 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
the jurisdictions within which it operates, including those governing
self-insured employers under the workers' compensation systems in Oregon,
Washington, Maryland, Delaware and California. 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
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PART I
breach their payment obligation to the Company, such compliance has not had a
significant adverse impact on Barrett's business to date.
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
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PART I
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 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 2001,
approximately 60% and 32% 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 provide competitive advantages. Barrett believes that its past
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 42% and 40%, respectively, of its total revenues in 2001.
The Company also leases office space in other locations in its market areas
which it uses to recruit and place employees.
-11-
PART I
Number of
Branch
State Offices
------------------ -----------
Arizona 1
California 9
Idaho 1
Oregon 9
Washington 2
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
$397,000 at December 31, 2001.
The Company also owns one other office building, in Portland, Oregon with
approximately 7,000 square feet of office space, which houses its
Portland/Bridgeport branch office.
Barrett leases office space for its other branch offices. At December 31,
2001, such leases had expiration dates ranging from less than one year to four
years, with total minimum payments through 2005 of approximately $2,254,000.
Item 3. LEGAL PROCEEDINGS
There were no material legal proceedings pending against the Company at
December 31, 2001, or during the period beginning with that date through April
10, 2002.
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 2001.
-12-
PART I
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table identifies, as of February 28, 2002, each executive
officer of the Company. Executive officers are elected annually and serve at the
discretion of the Board of Directors.
Principal Positions and Officer
Name Age Business Experience Since
- --------------------------------------------------------------------------------
William W. Sherertz 56 President; Chief Executive 1980
Officer; Director
Michael D. Mulholland 50 Vice President-Finance and 1994
Secretary; Chief Financial
Officer
Gregory R. Vaughn 46 Vice President 1998
James D. Miller 38 Controller and Assistant 1994
Secretary; 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.
-13-
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's SmallCap(TM) tier under the symbol "BBSI." At February 28, 2002, there
were 66 stockholders of record and approximately 372 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
------------------ ------------------
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
2001
- ----
First Quarter $ 4.00 $ 3.38
Second Quarter 3.97 3.30
Third Quarter 4.25 3.05
Fourth Quarter 5.06 3.04
-14-
PART II
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,
2001 2000 1999 1998 1997
------------- ---------------- --------------- --------------- ---------------
(In thousands, except per share data)
Statement of operations:
Revenues:
Staffing services $123,110 $ 188,500 $194,991 $165,443 $ 177,263
Professional employer services 93,553 133,966 152,859 137,586 128,268
------------- ---------------- --------------- --------------- ---------------
Total 216,663 322,466 347,850 303,029 305,531
------------- ---------------- --------------- --------------- ---------------
Cost of revenues:
Direct payroll costs 168,022 251,015 270,049 235,265 236,307
Payroll taxes and benefits 17,635 27,007 28,603 25,550 27,226
Workers' compensation 12,971 12,639 11,702 10,190 10,584
------------- ---------------- --------------- --------------- ---------------
Total 198,628 290,661 310,354 271,005 274,117
------------- ---------------- --------------- --------------- ---------------
Gross margin 18,035 31,805 37,496 32,024 31,414
Selling, general and administrative expense 18,737 24,583 25,957 23,012 23,573
Merger expenses - - - 750 -
Depreciation and amortization 3,277 3,192 2,461 1,785 1,770
------------- ---------------- --------------- --------------- ---------------
(Loss) income from operations (3,979) 4,030 9,078 6,477 6,071
------------- ---------------- --------------- --------------- ---------------
Other (expense) income:
Interest expense (359) (830) (634) (173) (247)
Interest income 297 341 357 441 362
Other, net 45 6 32 (1) 1
------------- ---------------- --------------- --------------- ---------------
Total (17) (483) (245) 267 116
------------- ---------------- --------------- --------------- ---------------
(Loss) income before income taxes (3,996) 3,547 8,833 6,744 6,187
(Benefit from) provision for income taxes (1,574) 1,446 3,684 2,923 2,342
------------- ---------------- --------------- --------------- ---------------
Net (loss) income $ (2,422) $ 2,101 $ 5,149 $ 3,821 $ 3,845
============= ================ =============== =============== ===============
Basic (loss) earnings per share $ (.39) $ .29 $ .68 $ .50 $ .50
============= ================ =============== =============== ===============
Weighted average number of basic shares
outstanding 6,193 7,237 7,581 7,664 7,646
============= ================ =============== =============== ===============
Diluted (loss) earnings per share $ (.39) $ .29 $ .68 $ .50 $ .49
============= ================ =============== =============== ===============
Weighted average number of diluted shares
outstanding 6,193 7,277 7,627 7,711 7,780
============= ================ =============== =============== ===============
Operating cash flow $ 855 $ 5,293 $ 7,610 $ 5,606 $ 5,615
============= ================ =============== =============== ===============
Operating cash flow per diluted share $ .14 $ .73 $ 1.00 $ .73 $ .72
============= ================ =============== =============== ===============
Selected balance sheet data:
Working capital $ 2,658 $ 3,731 $ 7,688 $ 13,272 $ 10,201
Total assets 52,566 60,865 70,504 52,770 50,815
Long-term debt, net of current portion 922 2,283 5,007 1,503 1,573
Stockholders' equity 30,534 34,917 37,329 33,702 30,231
-15-
PART II
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 82% of its total revenues in 2001.
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
separate workers' compensation insurance policies for employees working in
states where the Company is not self-insured. Safety incentives, a component of
workers' compensation expense, 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 operational policies and
internal claims reporting system minimizes the occurrence of unreported incurred
claims.
Selling, general and administrative ("SG&A") expenses represent both
branch office and corporate-level operating expenses. Branch operating expenses
consist primarily of branch office staff payroll and personnel related costs,
advertising, rent, office supplies, depreciation and branch incentive
compensation. Corporate-level operating expenses consist primarily of executive
and office staff payroll and personnel related costs, professional and legal
fees, travel, depreciation, occupancy costs, information systems costs and
executive and corporate staff incentive bonuses.
-16-
PART II
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 maximum 40-year life 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.
Critical Accounting Policies
The Company has identified the following policies as critical to the
Company's business and the understanding of its results of operations. For a
detailed discussion of the application of these and other accounting policies,
see Note 1 in the Notes to the Financial Statements in Item 14 of this Annual
Report on Form 10-K. Note that the preparation of this Annual Report on Form
10-K requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities at the date of the financial
statements, and the reported amounts of revenue and expenses during the
reporting period. Management bases its estimates on historical experience and on
various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions.
Self-insured workers' compensation reserves. The Company is self-insured
for workers' compensation coverage in a majority of its employee work sites.
Accruals for workers' compensation expense are made based upon the Company's
claims experience and an independent actuarial analysis performed at least once
per year, utilizing Company experience, as well as claim cost development trends
and current workers' compensation industry loss information. As such, a majority
of the Company's recorded expense for workers' compensation is management's best
estimate. Management believes that the amount accrued is adequate to cover all
known and unreported claims at December 31, 2001. However, if the actual costs
of such claims and related expenses exceeds the amount estimated, additional
reserves may be required, which would have a material negative effect on
operating results.
Allowance for doubtful accounts. The Company must make estimates of the
collectibility of accounts receivables. Management analyzes historical bad
debts, customer concentrations, customer credit-worthiness, current economic
trends and changes in the customers' payment tendencies when evaluating the
adequacy of the allowance for doubtful accounts. If the financial condition of
the Company's customers were to deteriorate, resulting in an impairment of their
ability to make payments, additional allowances may be required.
Intangible assets. The Company assesses the impairment of intangible
assets whenever events or changes in circumstances indicate that the carrying
value may not be recoverable. Factors that are considered include significant
underperformance relative to expected historical or projected future operating
results, significant negative industry trends and significant change in the
manner of use of the acquired assets. Management's current assessment of the
carrying value of intangible assets indicates there is no impairment based upon
projected future cash flows and is predicated, in part, on the Company's
operating results
-17-
PART II
returning to recent historical levels within the next few years. If these
estimates or their related assumptions change in the future, the Company may be
required to record impairment charges for these assets not previously recorded.
New Accounting Pronouncements
For a discussion of new accounting pronouncements and their potential
effect on the Company's results of operations and financial position, refer to
Note 1 in the Notes to the Financial Statements in Item 14 of this Annual Report
on Form 10-K.
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, 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, the
availability of capital or letters of credit necessary to meet state-mandated
surety deposit requirements for maintaining the Company's status as a qualified
self-insured employer for workers' compensation coverage, 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, 2001, 2000 and 1999, listed in Item 14 of this report.
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.
-18-
PART II
Percentage of Total Revenues
-------------------------------------------------------
Years Ended December 31,
-------------------------------------------------------
2001 2000 1999
------------ ------------ -------------
Revenues:
Staffing services 56.8 % 58.5 % 56.1 %
Professional employer services 43.2 41.5 43.9
------------ ------------ -------------
Total 100.0 100.0 100.0
------------ ------------ -------------
Cost of revenues:
Direct payroll costs 77.6 77.8 77.6
Payroll taxes and benefits 8.1 8.4 8.2
Workers' compensation 6.0 3.9 3.4
------------ ------------ -------------
Total 91.7 90.1 89.2
------------ ------------ -------------
Gross margin 8.3 9.9 10.8
Selling, general and administrative expenses 8.6 7.6 7.5
Depreciation and amortization 1.5 1.0 0.6
------------ ------------ -------------
(Loss) income from operations
(1.8) 1.3 2.7
Other (expense) income
- (0.2) (0.1)
------------ ------------ -------------
Pretax (loss) income (1.8) 1.1 2.6
(Benefit from) provision for income taxes (0.7) 0.4 1.1
------------ ------------ -------------
Net (loss) income (1.1) % 0.7 % 1.5 %
============ ============ =============
Years Ended December 31, 2001 and 2000
Net loss for the year ended December 31, 2001 was $2,422,000, a decline of
$4,523,000 from net income of $2,101,000 for 2000. The decrease in net income
was attributable to lower gross margin dollars primarily resulting from a 32.8%
decrease in revenues coupled with a 210 basis point increase in workers'
compensation expense, which represents an increase of 53.8%, as a percent of
revenues, partially offset by a 23.8% reduction in SG&A expenses and a 96.5%
reduction in other expense. Basic and diluted loss per share for 2001 were $.39
as compared to basic and diluted earnings per share of $.29 for 2000. Cash flow
per share (defined as net (loss) income plus depreciation and amortization
divided by weighted average diluted shares outstanding) for 2001 was a positive
$.14 as compared to a positive $.73 for 2000.
Revenues for 2001 totaled $216,663,000, a decrease of approximately
$105,803,000 or 32.8% from 2000 revenues of $322,466,000. The decrease in total
revenues was due, in part, to the continued softening of business conditions in
the Company's market areas, particularly in the Company's Northern California
operations, which accounted for approximately 48.6% of the decline in total
revenues for 2001, to competition, as well as to management's decision to
terminate the Company's relationship with certain customers who provided
insufficient gross margin in relation to such risk factors as workers'
compensation coverage and credit. As of the date of this filing, revenue trends
continue to be negatively affected by weak overall economic conditions. The
Company has recently hired several new managers throughout its operating
regions, which management believes will have a positive effect on the Company's
business prospects in the future.
Staffing services revenue decreased $65,390,000 or 34.7%, while
professional employer services revenue decreased $40,413,000 or 30.2%, which
resulted in a decrease in the share of staffing services to 56.8% of total
revenues for 2001, as compared to 58.5% for 2000. The decrease in staffing
services revenue for 2001 was primarily attributable to a decrease in demand for
the Company's services in the majority of areas in which the Company does
business owing to general economic conditions. The share of professional
employer
-19-
PART II
services revenues had a corresponding increase from 41.5% of total revenues for
2000 to 43.2% for 2001. The decrease in professional employer services revenue
for 2001 was primarily due to a 46.9% decline in the Company's Northern
California region as a result of management's decision to discontinue its
services to a few high volume, low margin customers.
Gross margin for 2001 totaled $18,035,000, which represented a decrease of
$13,770,000 or 43.3% from 2000. The gross margin percent decreased from 9.9% of
revenues for 2000 to 8.3% for 2001. The decrease in the gross margin percentage
was due to higher workers' compensation expenses offset in part by lower direct
payroll costs and payroll taxes and benefits, as a percentage of revenues. The
increase in workers' compensation expense, as a percentage of revenues, from
3.9% of revenues for 2000 to 6.0% for 2001, was primarily due to an increase in
the adverse development of estimated future costs of workers' compensation
claims primarily related to 1999 and 2000 injuries concentrated in the Company's
California operations. The decrease in direct payroll costs, in total dollars
and as a percentage of revenues, was attributable to decreases in contract
staffing and on-site management, of which direct payroll costs generally
represent a higher percentage of revenues, and to a lesser extent to increases
in the rates the Company invoices customers for its services. The decrease in
payroll taxes and benefits for 2001, in total dollars and as a percentage of
revenues, was primarily attributable to lower state unemployment tax rates in
various states in which the Company operates as compared to 2000. 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.
In connection with the Company's self-insured workers' compensation
program, the Company has maintained an excess workers' compensation policy which
limits the financial effect of costly workers' compensation claims. For the
calendar years 2000 and 2001, such policies included a self-insured retention or
deductible of $350,000 and $400,000 per occurrence, respectively. Effective
January 1, 2002, the self-insured retention or deductible on the Company's
excess workers' compensation policy increased to $750,000 per occurrence.
Management believes that the Company obtained the most favorable terms and
conditions available in the market, in view of the effect of the events of
September 11, 2001, on the insurance industry and the Company's size and scope
of operations. Management believes that the increased self-insured retention
will not have a material adverse effect on the Company.
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 2001 amounted to $18,737,000, a decrease of
$5,846,000 or 23.8% from 2000. SG&A expenses, expressed as a percentage of
revenues, increased from 7.6% for 2000 to 8.6% for 2001. The decrease in total
SG&A dollars was primarily due to decreases in branch management personnel and
related expenses as a result of the downturn in the Company's business.
Depreciation and amortization totaled $3,277,000 or 1.5% of revenues for
2001, which compares to $3,192,000 or 1.0% of revenues for 2000. The increased
depreciation and amortization expense was primarily due to a full year of
amortization in 2001 compared to ten months of amortization in 2000 arising from
the March 1, 2000 implementation of the Company's management information system.
-20-
PART II
Other expense totaled $17,000 for 2001, which compares to $483,000 or 0.2%
of revenues for 2000. The decrease in expense was primarily due to lower net
interest expense as a result of lower debt levels and a decline in interest
rates in 2001 compared to 2000.
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 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.
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 six 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.
-21-
PART II
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 or the resulting range of loss, in
light of the lack of public direction from the IRS or Congress.
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
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.
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.
-22-
PART II
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.
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 and the estimated future costs of such
claims. In addition, adverse loss development of prior period claims during a
subsequent quarter may also contribute to the volatility in the Company's
estimated workers' compensation expense.
Liquidity and Capital Resources
The Company's cash position at December 31, 2001 of $1,142,000 increased
by $626,000 from December 31, 2000, which compares to a decrease of $34,000 for
the year ended December 31, 2000. The increase in cash at December 31, 2001 was
primarily due to cash provided by operating activities of $5,577,000, offset in
part by payments on long term debt and common stock repurchases.
Net cash provided by operating activities for 2001 amounted to $5,577,000,
as compared to $11,904,000 for 2001. For 2001, cash flow included $3,277,000 of
depreciation and amortization, coupled with a decrease in accounts receivable of
$6,900,000 and an increase in workers' compensation claims and safety incentive
liabilities of $3,294,000, offset in part by decreases of $2,353,000 in accrued
payroll and benefits and $1,233,000 in other accrued liabilities and an increase
of $1,568,000 in deferred taxes.
Net cash provided by investing activities totaled $181,000 for 2001, as
compared to net cash used in investing activities of $1,738,000 for 2000. For
2001, the principal source of cash for investing activities was from net
proceeds of $2,436,000 from maturities of marketable securities and $266,000 of
proceeds associated with the sale of a company-owned office condominium, offset
in part by $2,221,000 of net purchases of marketable securities and purchases of
office equipment. For 2000, the principal use of cash for investing activities
was
-23-
PART II
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. Additionally, during 2000, the Company paid
$1,122,000 representing the final contingent payment and acquisition costs
related to the TSS acquisition. The Company presently has no material long-term
capital commitments.
Net cash used in financing activities for 2001 amounted to $5,132,000,
which compares to $10,200,000 in 2000. For 2001, the principal use of cash for
financing activities was for scheduled payments on long-term debt of $3,592,000
and common stock repurchases totaling $2,307,000, offset in part by net proceeds
from the Company's revolving credit-line totaling $796,000. 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 revolving credit-line totaling $2,254,000. The term
loan was obtained in May 1999 to provide financing for the TSU acquisition and,
at December 31, 2001, had an outstanding principal balance of $458,000.
The Company renewed its loan agreement (the "Agreement") with its
principal bank in May 2001, which provided for a secured revolving credit
facility of the lesser of $13.0 million or 65 percent of trade accounts
receivable and the then-unamortized balance of $1.1 million of a 3-year term
loan. This Agreement, which expires July 1, 2002, also includes a subfeature for
standby letters of credit in connection with certain workers' compensation
surety arrangements, as to which approximately $3.9 million were outstanding as
of December 31, 2001. The Company had an outstanding balance of $3.4 million on
the revolving credit facility at December 31, 2001. (See Note 7 of the Notes to
Financial Statements.) As a result of financial covenant violations as of
December 31, 2001, the Company, subsequent to year end, obtained the bank's
agreement to waive the covenant violations as of December 31, 2001. In view of
management's expectations that additional covenant violations will likely occur
as of March 31, 2002 and June 30, 2002, the Company is currently renegotiating
certain terms of its loan agreement with its principal bank. Management believes
that such negotiations will result in amendments which will not be materially
adverse to the Company's future operating results. Such amendments to the terms
and conditions will likely include an increase in the interest rate, monthly
financial reporting and a monthly determination of an available borrowing base,
as defined by eligible accounts receivable balances. Management expects that the
funds anticipated to be generated from operations, together with the amended
bank 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 July 1, 2002,
management presently expects to renew this arrangement with its current
principal bank or to obtain a new credit facility with an affiliate of the same
bank on terms and conditions which will reflect the then-current credit market
conditions and the Company's projected operating performance. If, however, the
terms and conditions for renewal with its current principal bank or an affiliate
of the bank are unacceptable to the Company, management will seek the most
favorable terms available in the market. It is management's further belief that
a new credit facility from alternative sources in the market will be available
and that, while the financial effect of new terms and conditions may increase
the Company's overall borrowing costs, such increased expenses would not be
materially adverse to the Company.
-24-
PART II
In connection with the Company's ability to continue its self-insured
workers' compensation program in the state of California, the Company must
increase its existing surety deposit with the state, which is in the form of a
letter of credit, by approximately $1,567,000 effective May 1, 2002. Refer to a
discussion of risk factors above under "Forward Looking Information". Management
believes that its principal bank will accommodate the Company's request to
provide the increase to the existing letter of credit on a timely basis.
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 has approved five increases
in the total number of shares or dollars authorized to be repurchased under the
program. The stock repurchase program had $276,000 of remaining authorization
for the repurchase of additional shares at December 31, 2001. During 2001, the
Company repurchased 603,600 shares at an aggregate price of $2,307,000.
Management anticipates that the capital necessary to execute this program will
be provided by existing cash balances and other available resources.
Contractual Obligations
The Company's contractual obligations as of December 31, 2001, including
long-term debt, commitments for future payments under non-cancelable lease
arrangements and long-term workers' compensation claims liabilities for
catastrophic injuries, are summarized below:
Payments Due by Period
------------------------------------------------------------------------
Less than 1 - 3 4 - 5 After
Total 1 year years years 5 years
------------ ------------ ------------ ------------ ------------
Long-term debt $1,630 $ 708 $ 722 $ 200 $ -
Operating leases 2,254 1,320 934 - -
Long-term workers' compensation claims
liabilities for catastrophic injuries 665 19 67 54 525
------------ ------------ ------------ ------------ ------------
Total contractual cash obligations $4,549 $2,047 $1,723 $ 254 $ 525
============ ============ ============ ============ ============
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.
-25-
PART II
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, 2001, the Company had interest-bearing debt obligations of
approximately $5.1 million, of which approximately $3.9 million bears interest
at a variable rate and approximately $1.2 million at a fixed rate of interest.
The variable rate debt is comprised of approximately $3.4 million outstanding
under a revolving credit facility, which bears interest at prime less 1.70%. The
Company also has a secured term note due May 31, 2002 with its principal bank,
which bears interest at LIBOR plus 1.35%. Based on the Company's overall
interest exposure at December 31, 2001, 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, 2001, 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.
-26-
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 2002 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 headings "Election of Directors--Compensation Committee Interlocks and
Insider Participation" and "Executive Compensation--Transactions with
Management".
-27-
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, 2001 and 2000 F-2
Statements of Operations for the Years Ended December 31,
2001, 2000 and 1999 F-3
Statements of Stockholders' Equity - December 31, 2001,
2000 and 1999 F-4
Statements of Cash Flows for the Years Ended December 31,
2001, 2000 and 1999 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,
2001.
Subsequent to the end of the year, the Company filed on April 4, 2002 a Current
Report on Form 8-K dated as of April 3, 2002, to report that the Company had
amended its previously announced operating results for the fourth quarter and 12
months ended December 31, 2001 due to adverse developments related to estimated
future costs of workers' compensation claims and, to a lesser extent, an
increased estimate for bad debt expense.
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 10.0, "Executive Compensation Plans and Arrangements and Other Management
Contracts" in the Exhibit Index.
-28-
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, 2001 and 2000, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
2001, 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
April 10, 2002
F-1
Barrett Business Services, Inc.
Balance Sheets
December 31, 2001 and 2000
(In Thousands, Except Par Value)
2001 2000
------------- -------------
ASSETS
Current assets:
Cash and cash equivalents $1,142 $ 516
Trade accounts receivable, net 13,760 20,660
Prepaid expenses and other 1,022 1,222
Deferred tax assets 2,841 2,702
------------- -------------
Total current assets 18,765 25,100
Intangibles, net 18,878 20,982
Property and equipment, net 6,084 7,177
Restricted marketable securities and workers' compensation deposits 5,425 4,254
Unrestricted marketable securities - 1,386
Deferred tax assets 2,268 839
Other assets 1,146 1,127
------------- -------------
$52,566 $60,865
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 708 $2,939
Line of credit 3,424 2,628
Accounts payable 686 1,013
Accrued payroll, payroll taxes and related benefits 5,165 7,893
Workers' compensation claims and safety incentive liabilities 5,735 5,274
Other accrued liabilities 389 1,622
------------- -------------
Total current liabilities 16,107 21,369
Long-term debt, net of current portion 922 2,283
Customer deposits 520 614
Long-term workers' compensation claims liabilities 3,515 682
Other long-term liabilities 968 1,000
------------- -------------
22,032 25,948
------------- -------------
Commitments and contingencies (Notes 9, 10 and 15)
Stockholders' equity:
Common stock, $.01 par value; 20,500 shares authorized, 5,847 and 6,451
shares issued and outstanding 58 64
Additional paid-in capital 3,461 5,387
Employee loan (29) -
Retained earnings 27,044 29,466
------------- ------------
30,534 34,917
------------- ------------
$52,566 $60,865
============= ============
The accompanying notes are an integral part of these financial statements.
F-2
Barrett Business Services, Inc.
Statements of Operations
Years Ended December 31, 2001, 2000 and 1999
(In Thousands, Except Per Share Amounts)
2001 2000 1999
----------------- ----------------- ---------------
Revenues:
Staffing services $ 123,110 $ 188,500 $ 194,991
Professional employer services 93,553 133,966 152,859
----------------- ----------------- ---------------
216,663 322,466 347,850
----------------- ----------------- ---------------
Cost of revenues:
Direct payroll costs 168,022 251,015 270,049
Payroll taxes and benefits 17,635 27,007 28,603
Workers' compensation 12,971 12,639 11,702
----------------- ----------------- ---------------
198,628 290,661 310,354
----------------- ----------------- ---------------
Gross margin 18,035 31,805 37,496
Selling, general and administrative expenses 18,737 24,583 25,957
Depreciation and amortization 3,277 3,192 2,461
----------------- ----------------- ---------------
(Loss) income from operations (3,979) 4,030 9,078
----------------- ----------------- ---------------
Other (expense) income:
Interest expense (359) (830) (634)
Interest income 297 341 357
Other, net 45 6 32
----------------- ----------------- ---------------
(17) (483) (245)
----------------- ----------------- ---------------
(Loss) income before income taxes (3,996) 3,547 8,833
(Benefit from) provision for income taxes (1,574) 1,446 3,684
----------------- ----------------- ---------------
Net (loss) income $ (2,422) $ 2,101 $ 5,149
================= ================= ===============
Basic (loss) earnings per share $ (.39) $ .29 $ .68
================= ================= ===============
Weighted average number of basic shares outstanding 6,193 7,237 7,581
================= ================= ===============
Diluted (loss) earnings per share $ (.39) $ .29 $ .68
================= ================= ===============
Weighted average number of diluted shares outstanding 6,193 7,277 7,627
================= ================= ===============
The accompanying notes are an integral part of these financial statements.
F-3
Barrett Business Services, Inc.
Statements of Stockholders' Equity
Years Ended December 31, 2001, 2000 and 1999
(In Thousands)
Common Stock Additional
--------------------------- Paid-in Retained
Shares Amount Capital Other Earnings Total
----------- -------------- ---------------- -------------- --------------- ---------------
Balance, December 31, 1998 7,676 $ 77 $ 11,409 $ - $ 22,216 $ 33,702
Common stock issued on exercise of
options 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 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
Repurchase of common stock (604) (6) (2,301) - - (2,307)
Stock option compensation - - 17 - - 17
Reclassification of accrued stock
option compensation to equity - - 358 - - 358
Employee loan - - - (29) - (29)
Net loss - - - - (2,422) (2,422)
------------ -------------- ---------------- -------------- --------------- --------------
Balance, December 31, 2001 5,847 $ 58 $ 3,461 $ (29) $ 27,044 $ 30,534
============ ============== ================ ============== =============== ==============
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, 2001, 2000 and 1999
(In Thousands)
2001 2000 1999
------------ ------------ ------------
Cash flows from operating activities:
Net (loss) income $ (2,422) $ 2,101 $ 5,149
Reconciliations of net income to net cash provided by operating
activities:
Depreciation and amortization 3,277 3,192 2,461
Gain on sale of property (46) - -
Deferred taxes (1,568) (1,171) 156
Changes in certain assets and liabilities, net of amounts purchased
in acquisitions:
Trade accounts receivable, net 6,900 9,556 (5,568)
Prepaid expenses and other 200 (3) (57)
Income taxes payable - - (438)
Accounts payable (327) (343) 261
Accrued payroll, payroll taxes and related benefits (2,353) (3,544) 2,030
Other accrued liabilities (1,233) 1,209 (153)
Workers' compensation claims and safety incentive liabilities 3,294 1,038 (198)
Customer deposits and other assets, net (113) (432) (286)
Other long-term liabilities (32) 301 301
------------ ------------ ------------
Net cash provided by operating activities 5,577 11,904 3,658
------------ ------------ ------------
Cash flows from investing activities:
Cash paid for acquisitions, including other direct costs (31) (1,122) (13,157)
Proceeds from sale of property 266 - -
Purchase of equipment, net of amounts purchased in
acquisitions (269) (1,257) (2,024)
Proceeds from maturities of marketable securities 2,436 1,329 2,415
Purchase of marketable securities (2,221) (688) (2,671)
------------ ------------ ------------
Net cash provided by (used in) investing activities 181 (1,738) (15,437)
------------ ------------ ------------
Cash flows from financing activities:
Payment of credit line assumed in acquisition - - (1,113)
Net proceeds (payments on) from credit-line borrowings 796 (2,254) 4,882
Proceeds from issuance of long-term debt - - 8,000
Payments on long-term debt (3,592) (2,568) (1,947)
Payment of notes payable - (865) -
Payment to shareholder - - (58)
Loan to employee (29) - -
Repurchase of common stock (2,307) (4,541) (1,498)
Proceeds from the exercise of stock options - 28 34
------------ ------------ ------------
Net cash (used in) provided by financing activities (5,132) (10,200) 8,300
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 626 (34) (3,479)
Cash and cash equivalents, beginning of year 516 550 4,029
------------ ------------ ------------
Cash and cash equivalents, end of year $1,142 $ 516 $ 550
============ ============ ============
Supplemental schedule of noncash activities:
Acquisition of other businesses:
Cost of acquisitions in excess of fair market value of net assets
acquired $ 31 $1,122 $ 12,304
Tangible assets acquired - - 3,364
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, North Carolina and South Carolina. Approximately 82%,
81% and 79%, respectively, of the Company's revenues during 2001, 2000 and
1999 were attributable to its Oregon and California operations.
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"). 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 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 $410,000 and $528,000
at December 31, 2001 and 2000, respectively.
Marketable securities
At December 31, 2001 and 2000, marketable securities consisted primarily of
governmental debt instruments with maturities generally from 90 days to 27
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, 2001, 2000 and 1999.
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 2001, 2000 and 1999 did not materially differ from
interest expense.
Income taxes paid by the Company in 2000 and 1999 totaled $2,331,000 and
$4,181,000, respectively. The Company paid no income taxes in 2001.
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.
Reclassifications
Certain prior year amounts have been reclassified to conform with the 2001
presentation. Such reclassifications had no impact on gross margin or net
income.
F-7
Barrett Business Services, Inc.
Notes to Financial Statements (Continued)
1. Summary of Operations and Significant Accounting Policies (Continued)
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 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 such estimates.
Recent accounting pronouncements
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard No. 141 ("SFAS 141") "Business
Combinations" and No. 142 ("SFAS 142") "Goodwill and Intangible Assets."
The Company's adoption date for SFAS 141 was immediate the adoption date
for SFAS 142 is January 1, 2002. With respect to SFAS 142, the Company will
perform a goodwill impairment test as of the adoption date, as required.
Thereafter, the Company will perform a goodwill impairment test annually
and whenever events or circumstances occur indicating that goodwill might
be impaired. The Company has not yet determined what the impact from SFAS
142 will be on its results of operations and financial position, if any.
Effective January 1, 2002, amortization of goodwill, including goodwill
recorded in connection with prior business combinations, will cease.
In July 2001, the FASB issued Statement of Financial Accounting Standard
No. 143 ("SFAS 143") "Accounting for Asset Retirement Obligations". SFAS
143 is effective for fiscal years beginning after June 15, 2002, although
earlier application is encouraged. SFAS 143 relates to the recognition in
financial statements of legal obligations associated with the retirement of
fixed assets. Management does not believe that the Company has any assets
that require the accrual of a retirement obligation.
In October 2001, the FASB issued Statement of Financial Accounting Standard
No. 144 ("SFAS 144") "Accounting for the Impairment or Disposal of
Long-Lived Assets". SFAS 144 is effective for fiscal years beginning after
December 15, 2001, and supersedes FASB Statement No. 121 "Accounting for
the Impairment of Long-Lived Assets to be Disposed Of" and certain
provisions of Accounting Principles Board Opinion No. 30 "Reporting the
Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions" related to the disposal of a segment of a business. Earlier
application is permitted. Management does not believe the adoption of this
statement will have a material effect on the Company's results of
operations or its financial position.
2. Business Combinations
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 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
F-8
Barrett Business Services, Inc.
Notes to Financial Statements (Continued)
2. Business Combinations (Continued)
Temporary Staffing Systems, Inc. (Continued)
the aforementioned minimum equity requirement and certain financial
performance criteria, the Company paid additional consideration aggregating
$960,000. TSS's revenues for the fiscal year ended March 29, 1998 were
approximately $12.9 million (audited). The 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 $3,252,000 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 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.
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.
F-9
Barrett Business Services, Inc.
Notes to Financial Statements (Continued)
3. Fair Value of Financial Instruments and Concentration of Credit Risk
(Continued)
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, 2001, the Company had significant concentrations of credit risk as
follows:
- Marketable securities - $1,988,000 of marketable securities at December
31, 2001 consisted of Oregon State Housing & Community Service Bonds.
- Trade receivables - $1,120,000 of trade receivables were with two
customers at December 31, 2001 (8% of trade receivables outstanding at
December 31, 2001).
4. Intangibles
Intangibles consist of the following (in thousands):
December 31,
--------------------------------
2001 2000
--------------- ---------------
Covenants not to compete $ 3,709 $ 3,709
Goodwill 26,828 26,796
Customer lists 358 358
--------------- ---------------
30,895 30,863
Less accumulated amortization 12,017 9,881
--------------- ---------------
$18,878 $20,982
=============== ===============
F-10
Barrett Business Services, Inc.
Notes to Financial Statements (Continued)
5. Property and Equipment
Property and equipment consist of the following (in thousands):
December 31,
--------------------------------
2001 2000
--------------- ---------------
Office furniture and fixtures $ 4,563 $ 4,465
Computer hardware and software 4,534 4,451
Buildings 1,239 1,474
--------------- ---------------
10,336 10,390
Less accumulated depreciation 4,560 3,521
--------------- ---------------
5,776 6,869
Land 308 308
--------------- ---------------
$ 6,084 $ 7,177
=============== ===============
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,
Delaware and California. In the state of Washington, state law allows only
the Company's staffing services and management employees to be covered
under the Company's self-insured workers' compensation program. The Company
also was self-insured for workers' compensation purposes, as granted by the
United States Department of Labor, for longshore and harbor workers'
coverage through April 16, 2001.
The Company has provided a total of $9,250,000 and $5,956,000 at December
31, 2001 and 2000, 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 provided by the Company's third-party administrators for
workers' compensation claims and its independent 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 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 to
settle 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
F-11
Barrett Business Services, Inc.
Notes to Financial Statements (Continued)
6. Workers' Compensation Claims and Safety Incentive Liabilities (Continued)
payments over the actuarially determined remaining life of the beneficiary,
discounted at a rate that approximates a long-term, high-quality corporate
bond rate. During 2001, the Company maintained excess workers' compensation
insurance to limit its self-insurance exposure to $400,000 per occurrence
in all states. The excess insurance provided unlimited coverage above the
aforementioned exposures.
At December 31, 2001, the Company's long-term workers' compensation claims
liabilities in the accompanying balance sheet included $665,000 for
work-related catastrophic injuries and fatalities. The aggregate
undiscounted pay-out amount related to the catastrophic injuries and
fatalities is $1,444,000. The actuarially determined pay-out periods to the
beneficiaries range from 5 to 40 years. As a result, the five-year cash
requirements related to these claims are immaterial.
The states of Oregon, Maryland, Washington, Delaware, California and the
United States Department of Labor require the Company to maintain specified
investment balances or other financial instruments, totaling $7,418,000 at
December 31, 2001 and $6,241,000 at December 31, 2000, to cover potential
claims losses. In partial satisfaction of these requirements, at December
31, 2001, the Company has provided standby letters of credit in the amount
of $3,218,000 and surety bonds totaling $1,207,000. The investments are
included in restricted marketable securities and workers' compensation
deposits in the accompanying balance sheets.
7. Credit Facility
Effective May 31, 2001, the Company renewed its loan agreement (the
"Agreement") with its principal bank, which provided for (a) a revolving
credit facility for working capital purposes and standby letters of credit
up to the lesser of (i) $13,000,000 or (ii) 65 percent of total trade
accounts receivable at the end of any fiscal quarter, and a security
interest in all trade accounts receivable, (b) a term real estate loan
(Note 8) and (c) a three-year term loan (Note 8) with a remaining term of
one year and a then-outstanding balance of $1.1 million. The Agreement
expires on July 1, 2002. The interest rate on outstanding balances under
the revolving credit facility at December 31, 2001 was prime rate less
1.70%. The interest rate options available under the three-year term loan
include (i) prime rate or (ii) LIBOR plus 1.35%. Terms and conditions of
the Agreement include, among others, certain restrictive quarterly
financial covenants relating to the Company's current ratio, a ratio of
borrowed funds to EBITDA (earnings before interest, taxes, depreciation and
amortization) and an EBITDA coverage ratio. Additionally, in connection
with the loan agreement renewal, the three-year term loan related to the
Company's 1999 acquisition of TSU was restructured whereby approximately
$1,600,000 of the outstanding principal balance transferred to the
revolving credit facility. The term loan was then collateralized by the
Company's previously unrestricted marketable securities with a par value of
$1,275,000 at December 31, 2001. In addition, the monthly debt service on
the term loan was reduced from $222,222 per month to $91,667 per month. The
maturity date of the term loan, May 31, 2002, remained unchanged.
As a result of financial covenant violations as of December 31, 2001, the
Company, subsequent to year end, obtained the bank's agreement to waive the
covenant violations.
F-12
Barrett Business Services, Inc.
Notes to Financial Statements (Continued)
7. Credit Facility (Continued)
During the year ended December 31, 2001, the maximum balance outstanding
under the revolving credit facility was $6,254,000, the average balance
outstanding was $3,094,000, and the weighted average interest rate during
the period was 5.4%. The weighted average interest rate during 2001 was
calculated using daily weighted averages.
8. Long-Term Debt
Long-term debt consists of the following:
December 31,
----------------------------
2001 2000
----------------------------
(in thousands)
Term loan payable in monthly installments of $91,667 plus interest
at LIBOR plus 1.35% through 2002 (Note 7) $ 458 $4,000
Note payable in annual installments of $200,000 for years 2002, 2005 and
2006 and $87,500 for years 2003 and 2004, plus simple interest at 5.00%
per annum through 2006 775 775
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) 397 442
Note payable, assumed in acquisition, payable in monthly installments of
$5,116, including interest at 8.25% per annum through 2001 - 5
------------ -------------
1,630 5,222
Less portion due within one year 708 2,939
------------ -------------
$ 922 $2,283
============ =============
Maturities on long-term debt are summarized as follows at December 31, 2001
(in thousands):
Year ending
December 31,
----------------------
2002 $ 708
2003 434
2004 88
2005 200
2006 200
----------------
$ 1,630
================
F-13
Barrett Business Services, Inc.
Notes to Financial Statements (Continued)
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 and $125,000 for the years ended December 31,
2000 and 1999, respectively. No discretionary company contribution was made
to the plan for the year ended December 31, 2001.
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.
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,
---------------------
2002 $ 1,320
2003 614
2004 238
2005 82
----------------
$ 2,254
================
Rent expense for the years ended December 31, 2001, 2000 and 1999 was
approximately $1,811,000, $1,871,000 and $1,780,000, respectively.
F-14
Barrett Business Services, Inc.
Notes to Financial Statements (Continued)
11. Related Party Transactions
During 2001, the Company recorded revenues of $26,000 and cost of revenues
of $25,000 for providing services to a company owned by Barrett's President
and Chief Executive Officer, Mr. Sherertz. At December 31, 2001, Barrett
had trade receivables from this company of $19,000, all of which were
current.
During 2001, pursuant to the approval of all disinterested outside
directors, the Company agreed to loan Mr. Sherertz up to $60,000 between
December 2001 and June 2002 to assist Mr. Sherertz in meeting his debt
service obligations of interest only on a personal loan from the Company's
principal bank, which is secured by his holdings of Company stock. The
Company's note receivable from Mr. Sherertz bears interest at prime less
1.50%, which is the same rate as Mr. Sherertz's personal loan from the
bank. As of December 31, 2001, the note receivable from Mr. Sherertz
totaled approximately $29,000 and is shown as contra equity in the
Statements of Stockholders' Equity.
During 2001, pursuant to the approval of all disinterested outside
directors, the Company entered into a split dollar life insurance agreement
with Mr. Sherertz's personal trust. Terms of the agreement provide that
upon Mr. Sherertz's death, the Company will recoup from his trust all
insurance premiums paid by the Company. During 2001, the Company paid life
insurance premiums of approximately $56,000. In addition, the Company paid
Mr. Sherertz a cash bonus of approximately $39,000 in connection with his
personal expenses related to the split dollar life insurance plan.
12. Income Taxes
The (benefit from) provisions for income taxes are as follows (in
thousands):
Year ended December 31,
2001 2000 1999
---------------- ---------------- ---------------
Current:
Federal $ 24 $ 2,019 $ 2,796
State 2 598 732
---------------- ---------------- --------------
26 2,617 3,528
---------------- ---------------- --------------
Deferred:
Federal (1,356) (965) 135
State (244) (206) 21
---------------- ---------------- ---------------
(1,600) (1,171) 156
---------------- ---------------- ---------------
Total (benefit) provision $ (1,574) $ 1,446 $ 3,684
================ ================ ===============
F-15
Barrett Business Services, Inc.
Notes to Financial Statements (Continued)
12. Income Taxes (Continued)
Deferred tax assets (liabilities) are comprised of the following components
(in thousands):
2001 2000
---------------- ----------------
Gross deferred tax assets:
Workers' compensation claims and safety incentive liabilities $ 3,517 $ 2,206
Allowance for doubtful accounts 159 205
Amortization of intangibles 634 519
Deferred compensation 447 408
Net operating losses and tax credits 146 46
Other 303 243
---------------- ----------------
5,206 3,627
Gross deferred tax liabilities:
Tax depreciation in excess of book depreciation (97) (86)
---------------- ----------------
Net deferred tax assets $ 5,109 $ 3,541
================ ================
The effective tax rate differed from the U.S. statutory federal tax rate
due to the following:
Year ended December 31,
2001 2000 1999
---------------- ---------------- ---------------
Statutory federal tax rate (34.0) % 34.0 % 34.0 %
State taxes, net of federal benefit (4.0) 7.2 5.6
Nondeductible expenses 1.6 0.8
-
Nondeductible amortization of intangibles 2.2 5.0 1.9
Federal tax-exempt interest income (1.8) (2.3) (0.9)
Federal tax credits (2.0) (4.0) (1.4)
Other, net 0.2 (0.7) 1.7
---------------- ---------------- ---------------
(39.4) % 40.8 % 41.7 %
================ ================ ===============
At December 31, 2001, the Company had $88,000 and $34,000 of unused U.S.
federal Work Opportunity Tax Credits and Welfare to Work Tax Credits,
respectively. These credits may be carried back one year and carried
forward until expiration in 2021. Additionally, the Company had unused U.S.
federal Alternative Minimum Tax Credits of $24,000 which may be carried
forward without expiration.
F-16
Barrett Business Services, Inc.
Notes to Financial Statements (Continued)
13. 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 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 2001, the Company awarded deferred compensation stock options
for 7,811 shares at an average exercise price of $1.45 per share. 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. In accordance with Accounting
Principles Board ("APB") Opinion No. 25, the Company recognized
compensation expense of $17,000, $85,000 and $180,000 for the years ended
December 31, 2001, 2000 and 1999, respectively, in connection with the
issuance of these discounted options.
On August 22, 2001, the Company offered to all optionees who held options
with an exercise price of more than $5.85 per share (covering a total of
812,329 shares), the opportunity to voluntarily return for cancellation
without payment any stock option award with an exercise price above that
price. At the close of the offer period on September 20, 2001, stock
options for a total of 797,229 shares were voluntarily surrendered for
cancellation. The Compensation Committee of the Company's board of
directors may consider whether or not to grant stock-based awards under the
Plan to optionees who surrendered stock options during the above offer
period after March 21, 2002.
F-17
Barrett Business Services, Inc.
Notes to Financial Statements (Continued)
13. Stock Incentive Plan (Continued)
A summary of the status of the Company's stock options at December 31,
2001, 2000 and 1999, together with changes during the periods then ended,
are presented below:
Weighted
Number average
of exercise
options price
---------------- ----------------
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
Options granted at market price 99,562 3.74
Options granted below market price 7,811 1.45
Options exercised - -
Options voluntarily surrendered (797,229) 11.53
Options canceled or expired (13,600) 8.72
----------------
Outstanding at December 31, 2001 252,206
================
Available for grant at December 31, 2001 1,073,360
================
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 comp-ensation
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
consistent with the method of Statement of Financial Accounting Standards
("SFAS") No. 123, the Company's net (loss) income and (loss) earnings per
share would have been adjusted to the pro forma amounts indicated below:
2001 2000 1999
-------------- ------------- -------------
(in thousands, except per share amounts)
Net (loss) income, as reported $ (2,422) $2,101 $5,149
Net (loss) income, pro forma (2,659) 1,332 4,265
Basic (loss) earnings per share, as reported (.39) .29 .68
Basic (loss) earnings per share, pro forma (.43) .18 .56
Diluted (loss) earnings per share, as reported (.39) .29 .68
Diluted (loss) earnings per share, pro forma (.43) .18 .56
F-18
Barrett Business Services, Inc.
Notes to Financial Statements (Continued)
13. Stock Incentive Plan (Continued)
The effects of applying SFAS No. 123 for providing pro forma disclosures
for 2001, 2000 and 1999 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 2001, 2000 and 1999:
2001 2000 1999
-------------- ------------- -------------
Expected volatility 56% 50% 46%
Risk free rate of return 4.59% 6.20% 5.75%
Expected dividend yield 0% 0% 0%
Expected life (years) 5.0 7.0 7.0
Total fair value of options granted at market price was computed to be
$197,000, $674,000 and $769,000 for the years ended December 31, 2001, 2000
and 1999, respectively. Total fair value of options granted at 60% below
market price was computed to be approximately $21,000, $111,000 and
$232,000 for the years ended December 31, 2001, 2000 and 1999 respectively.
The weighted average value of all options granted in 2001, 2000 and 1999
was $2.03, $3.94 and $5.22, respectively.
The following table summarizes information about stock options outstanding
at December 31, 2001:
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) 2001 price
- ------------------------------ ----------------- ----------------- ----------------- --------------------- ----------------
$ 1.45 - $ 5.91 236,106 $ 3.63 7.9 122,294 $ 3.28
7.06 - 17.75 16,100 12.23 5.4 13,050 12.91
----------------- ---------------------
252,206 135,344
================= =====================
At December 31, 2001, 2000 and 1999, 135,344, 619,009 and 509,834 options
were exercisable at weighted average exercise prices of $4.21, $11.33 and
$11.56, respectively.
14. 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 five increases in the
total number of shares or dollars authorized to be repurchased under the
program. The repurchase program currently allows for $276,000 to
F-19
Barrett Business Services, Inc.
Notes to Financial Statements (Continued)
14. Stock Repurchase Program (Continued)
be used for the repurchase of additional shares as of December 31, 2001.
During 2001, the Company repurchased 603,600 shares at an aggregate price
of $2,307,000. 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.
15. 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.
16. 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, 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
Year ended December 31, 2001
Revenues $ 55,153 $ 52,551 $ 58,282 $ 50,677
Cost of revenues 49,811 47,373 52,308 49,136
Net (loss) income (211) (184) 242 (2,269)
Basic (loss) earnings per share (.03) (.03) .04 (.38)
Diluted (loss) earnings per share (.03) (.03) .04 (.38)
Common stock market prices:
High $ 4.00 $ 3.97 $ 4.25 $ 5.06
Low 3.38 3.30 3.05 3.04
F-20
PART IV
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: April 10, 2002 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 10th day of April, 2002.
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:
* THOMAS J. CARLEY Director
* JAMES B. HICKS Director
* ANTHONY MEEKER Director
* By /s/ Michael D. Mulholland
-------------------------------
Michael D. Mulholland
Attorney-in-Fact
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 March 12, 2001, to Loan Agreement between the Registrant
and Wells Fargo Bank, N.A., dated May 31, 2000. Incorporated by reference
to Exhibit 4.3 to the Registrant's Annual Report on Form 10-K for the year
ended December 31, 2000.
4.3 Amendment, dated May 31, 2001, to Loan Agreement between the Registrant
and Wells Fargo Bank, N.A., dated May 31, 2000, Revolving Line of Credit
Note in the amount of $13,000,000 dated May 31, 2001, and related loan
documents. Incorporated by reference to Exhibit 4.1 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 2001.
4.4 Amendment, dated December 19, 2001, to Loan Agreement between 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 Second Amended and Restated 1993 Stock Incentive Plan of the Registrant.
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.
10.5 Promissory note of William W. Sherertz dated December 10, 2001.
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.