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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
X Annual Report Pursuant to Section 13 or 15(d) of
--- The Securities Exchange Act of 1934
For the fiscal year ended December 31, 1999
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 (I.R.S. Employer
incorporation or organization) Identification No.)
4724 SW Macadam Avenue
Portland, Oregon 97201
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (503) 220-0988
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: $28,817,711 at February 29, 2000.
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 29, 2000
----- --------------------------------
Common Stock, Par Value $.01 Per Share 7,458,998 Shares
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement for the 2000 Annual Meeting
of Stockholders are hereby incorporated by reference into Part III of Form 10-K.
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BARRETT BUSINESS SERVICES, INC.
1999 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
Page
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PART I
Item 1. Business 2
Item 2. Properties 12
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 Stockholder Matters 14
Item 6. Selected Financial Data 15
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 16
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 22
Item 8. Financial Statements and Supplementary Data 23
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure 23
PART III
Item 10. Directors and Executive Officers of the Registrant 24
Item 11. Executive Compensation 24
Item 12. Security Ownership of Certain Beneficial Owners and Management 24
Item 13. Certain Relationships and Related Transactions 24
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 25
Signatures 26
Financial Statements F-1
Exhibit Index
1
PART I
ITEM 1. BUSINESS
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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, aggressive 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 1999, Barrett's staffing services
revenues represented 56.1% of total revenues, compared to 43.9% 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 1999, the Company provided staffing services to
approximately 6,800 customers. Although a majority of the Company's staffing
customers are small to mid-sized businesses, during 1999 approximately 50 of the
Company's customers each utilized Barrett employees in a number ranging from at
least 200 employees to as many as 1,600 employees through various staffing
services arrangements. In addition, Barrett had approximately 637 PEO clients at
December 31, 1999, compared to 612 at December 31, 1998.
The Company operates through a network of 37 branch offices in Oregon,
California, Washington, Maryland, Delaware, Idaho, Arizona, North Carolina and
South Carolina. Barrett also has several smaller recruiting offices in its
general market areas under the direction of a branch office.
2
OPERATING STRATEGIES
The Company's principal operating strategies are to: (i) provide a
unique and efficient blend of staffing and PEO services, (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) expand through
acquisitions of human resource-related businesses in new and existing geographic
markets, (ii) utilize a zone management structure to strengthen and expand
operations and (iii) enhance management information systems to support continued
growth and to improve customer services.
RECENT ACQUISITIONS
On January 1, 1999, the Company acquired all of the outstanding common
stock of Temporary Staffing Systems, Inc. ("TSS"), a staffing services company
with eight branch offices in North Carolina and one in South Carolina. The
Company paid $2,000,000 in cash and issued a note payable for $950,000 due
January 31, 2000 (the "Note"), payment of which is 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. TSS's revenues for the fiscal year ended March 29, 1998
were approximately $12.9 million (audited). The Company has provided notice to
the former shareholder of TSS of the Company's intent to reduce the amount
payable on the Note due to certain shortfalls. The parties have agreed to extend
the due date of the Note until the former shareholder of TSS has completed a
review of the proposed reductions as provided for in the Stock Purchase
Agreement. See Note 17 of the Notes to Financial Statements following Item 14 of
this report.
On February 15, 1999, the Company acquired certain assets of TPM
Staffing Services, Inc. ("TPM"), a staffing services company with three offices
in Southern California - Lake Forest, Santa Ana and Anaheim. The Company paid
$1,200,000 in cash for the assets of TPM and the selling shareholder's
noncompete agreement. TPM's revenues for the year ended December 31, 1998 were
approximately $5.7 million (unaudited).
Effective May 31, 1999, the Company acquired certain assets of
Temporary Skills Unlimited, Inc., d.b.a. TSU Staffing ("TSU"), a staffing
services company with nine branch offices in Northern California. The Company
paid $9,558,000 in cash and issued a note for $864,500, due one year from the
date of acquisition. The Company also paid $100,000 for noncompete agreements.
TSU's revenues for the year ended December 27, 1998 were approximately $25.0
million (audited).
The Company reviews acquisition opportunities on an ongoing basis.
While growth through acquisition is 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.
3
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:
- 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.
- Employee Benefits and Administration. As a result of its size,
Barrett is able to offer employee benefits which are 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.
- Safety Services. Barrett offers safety services to both its
staffing services and PEO customers in keeping with its corporate
philosophy of "making the workplace safer." The Company has at
least one risk manager available at each branch office to perform
workplace safety assessments for each of its customers and to
recommend actions to achieve safer operations. The Company's
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.
- Workers' Compensation Coverage. Beginning in 1987, the Company
obtained self-insured employer status for workers' compensation
coverage in Oregon and is currently a qualified self-insured
employer in many of the state and federal jurisdictions in which
it operates. Through its third-party administrators, Barrett
provides claims management services to its PEO customers. As
discussed under "Self-Insured Workers' Compensation Program"
below, the Company aggressively manages job injury claims,
including identifying fraudulent claims and utilizing its staffing
services to return workers to active employment earlier. As a
result of its ability to manage workers' compensation costs, the
Company is often able to reduce its clients' overall expenses
arising out of job-related injuries and insurance.
- 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
4
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 overhead, the use of employees on a short-term basis allows firms to
utilize the "just-in-time" approach for their personnel needs, thereby
converting a portion of their fixed personnel costs to a variable expense.
Contract staffing refers to the Company's responsibilities for the
placement of employees for a period of more than three months or an indefinite
period. This type of arrangement often involves outsourcing an entire department
in a large corporation or providing the workforce for a large project.
In an on-site management arrangement, Barrett places an experienced
manager on site at a customer's place of business. The manager is responsible
for conducting all recruiting, screening, interviewing, testing, hiring and
employee placement functions at the customer's facility for a long-term or
indefinite period.
The Company's staffing services customers operate in a broad range of
businesses, including forest products and agriculture-based companies,
electronic manufacturers, transportation and shipping companies, food
processors, professional firms and construction contractors. Such customers
range in size from small local firms to companies with international operations,
which use Barrett's services on a domestic basis. None of the Company's staffing
services customers individually accounted for more than 5% of its total 1999
revenues.
In 1999, the light industrial sector generated approximately 72% of the
Company's staffing services revenues, while clerical office staff accounted for
16% of such revenues and technical personnel represented the balance of 12%.
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.
5
Barrett's staffing services employees are not under its direct control
while placed at a customer's worksite. 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 resources 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
also hires and fires its PEO employees, although the client company remains
responsible for day-to-day assignments, supervision and training and, in most
cases, recruiting.
The Company began offering PEO services to Oregon customers in 1990 and
subsequently expanded these services to other states. The Company has entered
into co-employer arrangements with a wide variety of clients, including
companies involved in moving and shipping, professional firms, construction,
retail, manufacturing and distribution businesses. 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 10% of its total annual
revenues during 1999.
Prior to entering into a co-employer arrangement, the Company performs
an analysis of the potential client's actual personnel and workers' compensation
costs based on information provided by the customer. Barrett introduces its
workplace safety program and recommends improvements in procedures and equipment
following a safety inspection of the customer's facilities which the potential
client must agree to implement as part of the co-employer arrangement. Barrett
also offers significant financial incentives to PEO clients to maintain a
safe-work environment.
The Company's standard PEO services agreement provides for services for
an indefinite term, until notice of termination is given by either party. The
agreement permits cancellation by either party upon 30 days written notice. In
addition, the Company may terminate the agreement at any time for specified
reasons, including nonpayment or failure to follow Barrett's workplace safety
program.
The form of agreement also provides for indemnification of the Company
by the client against losses arising out of any default by the client under the
agreement, including failure to comply with any employment-related, health and
safety or immigration laws or regulations. The Company also requires the PEO
client to maintain comprehensive liability coverage in the amount of $1,000,000
for acts of its worksite 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.
6
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. The Company requires a
deposit from most of its PEO clients. Payment terms for all PEO clients are due
on the invoice date by way of electronic funds transfer.
SELF-INSURED WORKERS' COMPENSATION PROGRAM
A principal service provided by Barrett to its customers, particularly
its PEO clients, is workers' compensation coverage. As the employer of record,
Barrett is responsible for complying with applicable statutory requirements for
workers' compensation coverage. The Company's workplace safety services, also
described under "Overview of Services," are closely tied to its approach to the
management of workers' compensation risk.
Elements of Workers' Compensation System. State law (and, for certain
types of employees, federal law) generally mandates that an employer reimburse
its employees for the costs of medical care and other specified benefits for
injuries or illnesses incurred in the course and scope of employment. The
benefits payable for various categories of claims are determined by state
regulation and vary with the severity and nature of the injury or illness and
other specified factors. In return for this guaranteed protection, workers'
compensation is an exclusive remedy and employees are generally precluded from
seeking other damages from their employer for workplace injuries. Most states
require employers to maintain workers' compensation insurance or otherwise
demonstrate financial responsibility to meet workers' compensation obligations
to employees. In many states, employers who meet certain financial and other
requirements are permitted to self-insure.
Self Insurance for Workers' Compensation. In August 1987, Barrett
became a self-insured employer for workers' compensation coverage in Oregon. The
Company subsequently obtained self-insured employer status for workers'
compensation in four additional states, Maryland, Washington, Delaware and
California. In addition, in May 1995, the Company was granted self-insured
employer status by the U.S. Department of Labor for longshore and harbor
("USL&H") workers' compensation coverage. Regulations governing self-insured
employers in each jurisdiction typically require the employer to maintain surety
deposits of cash, government securities or other financial instruments to cover
workers' claims in the event the employer is unable to pay for such claims.
Barrett also maintains excess workers' compensation insurance for
single occurrences exceeding $350,000 (except for $500,000 for USL&H coverage)
with statutory limits (i.e., in unlimited amounts) pursuant to annual policies
with major insurance companies. The excess-insurance policies contain standard
exclusions from coverage, including punitive damages, fines or penalties in
connection with violation of any statute or regulation and losses covered by
other insurance or indemnity provisions.
In addition, the Company maintains an insured large-deductible program
which allows it to become insured for workers' compensation coverage in nearly
all states where the extent of the Company's operations does not yet warrant the
investment to become a self-insured employer.
7
Claims Management. Pursuant to its self-insured status, the Company's
workers' compensation expense is tied directly to the incidence and severity of
workplace injuries to its employees. Barrett seeks to contain its workers'
compensation costs through an aggressive approach to claims management. The
Company uses managed-care systems to reduce medical costs and keeps time-loss
costs to a minimum by assigning injured workers, whenever possible, to
short-term assignments which accommodate the workers' physical limitations. The
Company believes that these assignments minimize both time actually lost from
work and covered time-loss costs. Barrett has also engaged third-party
administrators ("TPAs") to provide additional claims management expertise.
Typical management procedures include performing thorough and prompt on-site
investigations of claims filed by employees, working with physicians to
encourage efficient medical management of cases, denying questionable claims and
negotiating early settlements to eliminate future case development and costs.
Barrett also maintains a mandatory corporate-wide pre-employment drug screening
program and a mandatory post-injury drug test. The program is believed to have
resulted in a reduction in the frequency of fraudulent claims and in accidents
in which the use of illegal drugs appears to have been a contributing factor.
Elements of Self-Insurance Costs. The costs associated with the
Company's self-insured workers' compensation program include case reserves for
reported claims, an additional expense provision (referred to as the "IBNR
reserve") for unanticipated increases in the cost of open injury claims (known
as "adverse loss development") and for claims incurred in prior periods but not
reported, fees payable to the Company's TPAs, additional claims administration
expenses, administrative fees payable to state and federal workers' compensation
regulatory agencies, premiums for excess workers' compensation insurance, legal
fees and safety incentive payments. Although not directly related to the size of
the Company's payroll, the number of claims and correlative loss payments may be
expected to increase with growth in the total number of employees. The state
assessments are typically based on payroll amounts and, 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 periodically review the Company's
total workers' compensation claims liability and reserving practices. Based in
part on such review, the Company believes its total accrued workers'
compensation claims liabilities are adequate. It is possible, however, that the
Company's actual future
8
workers' compensation obligations may exceed the amount of its accrued
liabilities, with a corresponding negative effect on future earnings, due to
such factors as unanticipated adverse loss development of known claims, and the
effect, if any, of claims incurred but not reported.
Approximately one-fifth of the Company's total payroll exposure is in
relatively high-risk industries with respect to workplace injuries, including
trucking, construction and certain warehousing activities. A failure to
successfully manage the severity and frequency of workers' compensation injuries
will have a negative impact on the Company. Management maintains clear
guidelines for its branch managers, account managers, and loss control
specialists directly tying their continued employment with the Company to their
diligence in understanding and addressing the risks of accident or injury
associated with the industries in which client companies operate and in
monitoring the compliance by clients with workplace safety requirements. The
Company has a policy of "zero tolerance" for avoidable workplace injuries.
MANAGEMENT INFORMATION SYSTEMS
The Company performs all functions associated with payroll
administration through its internal management information system. Each branch
office performs payroll data entry functions and maintains an independent
database of employees and customers, as well as payroll and invoicing records.
All processing functions are centralized at Barrett's corporate headquarters in
Portland, Oregon. As the Company has previously reported, management initiated a
project in mid-1997 to convert its information systems to new technologies which
are expected to enable the Company to more effectively accommodate its
anticipated growth. This hardware and software upgrade was completed and
implemented on March 1, 2000. The Company estimates its total capital
expenditures for this project to be approximately $4.3 million.
EMPLOYEES AND EMPLOYEE BENEFITS
At December 31, 1999, the Company had approximately 23,590 employees,
including approximately 16,100 staffing services employees, approximately 7,100
PEO employees and approximately 390 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 1999,
approximately 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
9
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, California and the U.S. Department of Labor for
USL&H workers. An Oregon PEO company, such as Barrett, is required to be
licensed as a worker-leasing company by the Workers' Compensation Division of
the Oregon Department of Consumer and Business Services. Temporary staffing
companies are expressly exempt from the Oregon licensing requirement. Oregon PEO
companies are also required to ensure that each PEO client provides adequate
training and supervision for its employees to comply with statutory requirements
for workplace safety and to give 30 days written notice in the event of a
termination of its obligation to provide workers' compensation coverage for PEO
employees and other subject employees of a PEO client. Although compliance with
these requirements imposes some additional financial risk on Barrett,
particularly with respect to those clients who breach their payment obligation
to the Company, such compliance has not had an adverse impact on Barrett's
business to date.
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 "worksite 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 worksite 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, a group disability insurance plan and
an employee assistance plan. In addition, the Company offers a nonqualified
deferred compensation plan, which is available to highly compensated employees
who are not eligible to participate in the Company's 401(k) plan. Generally,
qualified employee benefit plans are subject to provisions of both the Code and
the Employee Retirement Income Security Act of 1974 ("ERISA"). In order to
qualify for favorable tax treatment under the Code, qualified plans must be
established and maintained by an employer for the exclusive benefit of its
employees. See Item 7 of this report for a discussion of issues regarding
qualification of the Company's employee benefit plans arising out of
participation by the Company's PEO employees.
10
COMPETITION
The staffing services and PEO businesses are characterized by rapid
growth and intense competition. The staffing services market includes
competitors of all sizes, including several, such as Manpower, Inc., Kelly
Services, Inc., RemedyTemp, Inc., Westaff, Inc. and Interim Services, 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 1999,
approximately 57% and 22% 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
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.
11
ITEM 2. PROPERTIES
The Company provides staffing and PEO services through all 37 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 40% and 39%, respectively, of its total revenues in 1999.
The Company also leases office space in other locations in its market areas
which it uses to recruit and place employees.
Number of
Branch
State Offices
------------------------- -----------------
Arizona 1
California 17
Idaho 2
Oregon 9
Washington 2
Maryland 2
Delaware 1
North Carolina 2
South 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
$491,000 at December 31, 1999.
The Company also owns another office building in Portland, Oregon,
which houses its Portland/Bridgeport branch office. The building has
approximately 7,000 square feet of office space.
Barrett leases office space for its other branch offices. At December
31, 1999, such leases had expiration dates ranging from less than one year to
five years, with total minimum payments through 2004 of approximately
$3,288,000.
ITEM 3. LEGAL PROCEEDINGS
- -------------------------------
There were no material legal proceedings pending against the Company at
December 31, 1999, or during the period beginning with that date through March
28, 2000.
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 1999.
12
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table identifies, as of February 29, 2000, each executive
officer of the Company. Executive officers are elected annually and serve at the
discretion of the Board of Directors.
Officer
Name Age Principal Positions and Business Experience Since
---------------------------------------------------------------------------------------
William W. Sherertz 54 President; Chief Executive Officer; Director 1980
Michael D. Mulholland 48 Vice President-Finance and Secretary; Chief 1994
Financial Officer
Gregory R. Vaughn 44 Vice President 1998
James D. Miller 36 Controller and Assistant Secretary; 1994
Principal Accounting Officer
- -------------------------------
William W. Sherertz has acted as Chief Executive Officer of the Company
since 1980. He has also been a director of the Company since 1980, and was
appointed President of the Company in March 1993. Mr. Sherertz also serves as
Chairman of the Board of Directors.
Michael D. Mulholland joined the Company in August 1994 as Vice
President-Finance and Secretary. From 1988 to 1994, Mr. Mulholland was employed
by Sprouse-Reitz Stores Inc., 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.
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 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 under the symbol "BBSI." At February 29, 2000, there were 68
stockholders of record and approximately 630 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:
1998 High Low
---- ---- ---
First Quarter $ 12.00 $ 10.25
Second Quarter 13.38 9.13
Third Quarter 10.88 7.88
Fourth Quarter 9.38 6.00
1999 High Low
---- ---- ---
First Quarter $ 9.06 $ 5.25
Second Quarter 9.25 5.88
Third Quarter 10.25 7.75
Fourth Quarter 8.38 5.50
14
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
-----------------------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- --------- ----------
(In thousands, except per share data)
Statement of Operations Data:
Revenues:
Staffing services............................... $ 194,991 $ 165,443 $ 177,263 $ 130,746 $ 113,437
Professional employer services.................. 152,859 137,586 128,268 101,206 79,480
---------- ---------- --------- --------- ---------
Total....................................... 347,850 303,029 305,531 231,952 192,917
---------- ---------- --------- --------- ---------
Cost of revenues:
Direct payroll costs............................ 270,049 235,265 236,307 176,686 146,490
Payroll taxes and benefits...................... 28,603 25,550 27,226 20,414 16,139
Workers' compensation........................... 11,702 10,190 10,584 8,173 7,710
---------- ---------- --------- --------- ---------
Total....................................... 310,354 271,005 274,117 205,273 170,339
---------- ---------- --------- --------- ---------
Gross margin....................................... 37,496 32,024 31,414 26,679 22,578
Selling, general, and administrative expenses...... 26,551 23,481 24,011 18,534 15,496
Merger expenses.................................... -- 750 -- -- --
Amortization of intangibles........................ 1,867 1,316 1,332 860 606
---------- ---------- --------- --------- ---------
Income from operations............................. 9,078 6,477 6,071 7,285 6,476
---------- ---------- --------- --------- ---------
Other (expense) income:
Interest expense................................ (634) (173) (247) (122) (154)
Interest income................................. 357 441 362 554 400
Other, net...................................... 32 (1) 1 -- 32
---------- ---------- --------- --------- ---------
Total....................................... (245) 267 116 432 278
---------- ---------- --------- --------- ---------
Income before provision for income taxes........... 8,833 6,744 6,187 7,717 6,754
Provision for income taxes......................... 3,684 2,923 2,342 2,749 2,566
---------- ---------- --------- --------- ---------
Net income.................................. $ 5,149 $ 3,821 $ 3,845 $ 4,968 $ 4,188
========== ========== ========= ========= =========
Basic net income per share......................... $ .68 $ .50 $ .50 $ .65 $ .57
========== ========== ========= ========= =========
Weighted average basic shares...................... 7,581 7,664 7,646 7,602 7,358
========== ========== ========= ========= =========
Diluted net income per share....................... $ .68 $ .50 $ .49 $ .64 $ .55
========== ========== ========= ========= =========
Weighted average diluted shares.................... 7,627 7,711 7,780 7,823 7,564
========== ========== ========= ========= =========
As of December 31
------------------------------------------------------------------
1999 1998 1997 1996 1995
------------ ------------ ------------- ------------ ----------
(In thousands)
Selected Balance Sheet Data:
Working capital.................................... $ 7,688 $ 13,272 $ 10,201 $ 11,489 $ 8,387
Total assets....................................... 70,740 52,770 50,815 44,063 32,450
Long-term debt, net of current portion............. 4,232 503 573 1,107 875
Stockholders' equity............................... 37,329 33,702 30,231 25,629 20,139
15
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 billed 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 79% of its total revenues in 1999.
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, workers' compensation and safety
incentives. Direct payroll costs represent the gross payroll earned by employees
based on salary or hourly wages. Payroll taxes and employee benefits consist of
the employer's portion of Social Security and Medicare taxes, federal
unemployment taxes, state unemployment taxes and employee reimbursements for
materials, supplies and other expenses, which are paid by the customer. Workers'
compensation expense consists primarily of the costs associated with the
Company's self-insured workers' compensation program, such as claims reserves,
claims administration fees, legal fees, state and federal administrative agency
fees and reinsurance costs for catastrophic injuries. The Company also maintains
a large-deductible workers' compensation insurance policy for employees working
in states where the Company is not currently self-insured. Safety incentives
represent cash incentives paid to certain PEO client companies for maintaining
safe-work practices in order to minimize workplace injuries. The incentive is
based on a percentage of annual payroll and is paid annually to customers who
meet predetermined workers' compensation claims cost objectives.
The largest portion of workers' compensation expense is the cost of
workplace injury claims. When an injury occurs and is reported to the Company,
the Company's respective independent third-party claims administrator ("TPA")
analyzes the details of the injury and develops a case reserve, which is the
TPA's estimate of the cost of the claim based on similar injuries and its
professional judgment. The Company then records, or accrues, an expense and a
corresponding liability based upon the TPA's estimates for claims reserves. As
cash payments are made by the Company's TPA against specific case reserves, the
accrued liability is reduced by the corresponding payment amount. The TPA also
reviews existing injury claims on an on-going basis and adjusts the case
reserves as new or additional information for each claim becomes available. The
Company has established additional reserves to provide for future unanticipated
increases in expenses ("adverse loss development") of the claims reserves for
open injury claims and for claims incurred but not reported related to prior and
current periods. Management believes that the Company's internal claims
reporting system minimizes the occurrence of unreported incurred claims.
Selling, general and administrative expenses represent both branch
office and corporate-level operating expenses. Branch operating expenses consist
primarily of branch office staff payroll and payroll related costs, advertising,
rent, office supplies, depreciation and branch incentive compensation. Branch
incentive compensation represents a combined 15% of branch pretax profits, of
which 10% is paid to the branch manager and 5% is shared among the office staff.
Corporate-level operating expenses consist primarily of executive and office
staff payroll and payroll related costs, professional and legal fees, travel,
depreciation, occupancy costs, information systems costs and executive and
corporate staff incentive bonuses.
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
16
the useful life of goodwill, as compared to the 40-year maximum permitted by
generally accepted accounting principles, and amortizes such cost using the
straight-line method. Other intangible assets, such as software costs, customer
lists and covenants not to compete, are amortized using the straight-line method
over their estimated useful lives, which range from two to 15 years.
FORWARD-LOOKING INFORMATION
Statements in this Item or in Item 1 of this report which are not
historical in nature, including discussion of economic conditions in the
Company's market areas, the potential for and effect of recent and future
acquisitions, the effect of changes in the Company's mix of services on gross
margin, the adequacy of the Company's workers' compensation reserves and
allowance for doubtful accounts, the 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, 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, 1999, 1998 and 1997, listed in Item 14 of this report.
The Company's merger with Western Industrial Management, Inc. and a related
company (together, "WIMI"), in June 1998 was accounted for as a
pooling-of-interests and, accordingly, the Company's financial statements have
been restated for prior periods to give effect to the merger. Certain 1998 and
1997 cost of revenue amounts have been reclassified to conform with the 1999
presentation. Such reclassifications had no impact on gross margin, net income
or stockholders' equity. References to the Notes to Financial Statements
appearing below are to the notes to the Company's financial statements listed in
Item 14 of this report.
17
Percentage of Total Revenues
------------------------------------------
Years Ended December 31,
1999 1998 1997
------ ------ ------
Revenues:
Staffing services................................................. 56.1% 54.6% 58.0%
Professional employer services.................................... 43.9 45.4 42.0
----- ----- -----
Total revenues................................................ 100.0 100.0 100.0
----- ----- -----
Cost of revenues:
Direct payroll costs.............................................. 77.6 77.6 77.3
Payroll taxes and benefits........................................ 8.2 8.4 8.9
Workers' compensation............................................. 3.4 3.4 3.5
----- ----- -----
Total cost of revenues........................................ 89.2 89.4 89.7
----- ----- -----
Gross margin........................................................... 10.8 10.6 10.3
Selling, general and administrative expenses........................... 7.6 7.8 7.9
Merger expenses........................................................ - 0.2 -
Amortization of intangibles............................................ 0.5 0.4 0.4
----- ----- -----
Income from operations................................................. 2.7 2.2 2.0
Other(expense)income................................................... (0.1) 0.1 -
----- ----- -----
Pretax income.......................................................... 2.6 2.3 2.0
Provision for income taxes............................................. 1.1 1.0 0.7
----- ----- -----
Net income............................................................. 1.5% 1.3% 1.3%
===== ===== =====
YEARS ENDED DECEMBER 31, 1999 AND 1998
Net income for 1999 amounted to $5,149,000, an increase of $1,328,000
or 34.8% over 1998 net income of $3,821,000. The increase in net income was
attributable to a higher gross margin percent owing to lower payroll taxes and
benefits, as well as lower selling, general and administrative expenses,
expressed as a percentage of revenues. In addition, 1998 included $750,000 of
merger expenses related to the Company's June 1998 pooling-of-interests merger
with Western Industrial Management, Inc. Basic and diluted earnings per share
for 1999 were $.68 as compared to $.50 for both basic and diluted earnings per
share for 1998.
Revenues for 1999 totaled $347,850,000, an increase of approximately
$44,821,000 or 14.8% over 1998 revenues of $303,029,000. The increase in total
revenues was primarily due to the TSS, TPM and TSU acquisitions, which were
consummated in the first half of 1999. The internal growth rate for revenues was
3.3% for 1999, although it improved to 11.5% for the fourth quarter of 1999.
Staffing services revenue increased $29,548,000 or 17.9%, while
professional employer services revenue increased $15,273,000 or 11.1%, which
resulted in an increase in the share of staffing services to 56.1% of total
revenues for 1999, as compared to 54.6% for 1998. The increase in staffing
services revenue for 1999 was primarily attributable to the three acquisitions
made during 1999. The share of professional employer services revenues had a
corresponding decrease from 45.4% of total revenues for 1998 to 43.9% for 1999.
Gross margin for 1999 totaled $37,496,000, which represented an
increase of $5,472,000 or 17.1% over 1998. The gross margin percent increased
from 10.6% of revenues for 1998 to 10.8% for 1999. The increase in the gross
margin percentage was due to lower payroll taxes and benefits for 1999,
primarily attributable to lower state unemployment tax rates in certain states
in which the Company does business. 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, as well as the adequacy of its estimates for
workers' compensation liabilities, which may be negatively affected by
unanticipated adverse loss development of claims reserves.
Selling, general and administrative ("SG&A") expenses consist of
compensation and other expenses incident to the operation of the Company's
headquarters and the branch offices and the marketing of its services. SG&A
expenses (excluding the amortization of intangibles) for 1999 amounted to
$26,551,000, an increase of $3,070,000 or 13.1% over 1998. SG&A expenses,
18
expressed as a percentage of revenues, decreased from 7.8% for 1998 to 7.6% for
1999. The increase in total SG&A dollars was primarily due to management
payroll, advertising expense, rent expense and increased profit sharing and
related taxes in connection with the 21 additional branch offices acquired in
the TSS, TPM and TSU acquisitions.
Amortization of intangibles totaled $1,867,000 or 0.5% of revenues for
1999, which compares to $1,316,000 or 0.4% of revenues for 1998. The increased
amortization expense was primarily due to the amortization of intangibles
recognized in the 1999 acquisitions of TSS, TPM and TSU.
The Company's effective income tax rate for 1999 was 41.7%, as compared
to 43.3% for 1998. The higher 1998 effective rate was primarily attributable to
the nondeductibility of certain merger expenses.
The Company offers various qualified employee benefit plans to its
employees, including its worksite 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, a group disability insurance
plan and an employee assistance 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 worksite employees under their coverage has not yet been resolved. If
the worksite 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 worksite employees under the Code provisions applicable to
employee benefit plans and are, therefore, able to offer to worksite 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 four 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 worksite 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 draft 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 worksite
employees who are not employees of the PEO company.
The timing and nature of the issuance and contents of any TAM regarding
the worksite 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
19
possibility that the Treasury Department may propose some form of administrative
relief or that Congress may provide legislative resolution or clarification
regarding this issue.
In the event the tax exempt status of the Company's benefit plans were
to be discontinued and the benefit plans were to be disqualified, such actions
could have a material adverse effect on the Company's business, financial
condition and results of operations. The Company is not presently able to
predict the likelihood of disqualification nor the resulting range of loss, in
light of the lack of public direction from the IRS or Congress.
YEARS ENDED DECEMBER 31, 1998 AND 1997
Net income for 1998 amounted to $3,821,000, a decrease of $24,000 or
0.6% from 1997 net income of $3,845,000. The small decrease in 1998 net income
from 1997 was primarily due to $750,000 of merger expenses in connection with
the WIMI transaction and a higher income tax rate, offset in part by the effect
of a higher gross margin percent and lower SG&A expenses. Diluted net income per
share for 1998 was $0.50 compared to $0.49 for 1997.
Revenues for 1998 totaled $303,029,000 which represented a decrease of
$2,502,000 or 0.8% from 1997 revenues of $305,531,000. Staffing services revenue
decreased $11,820,000 or 6.7%, while professional employer services revenue
increased $9,318,000 or 7.3%, which resulted in a decrease in the share of
staffing services to 54.6% of total revenues for 1998, as compared to 58.0% for
1997. The decline in staffing services revenue for 1998 was primarily
attributable to two factors: (1) management's decision not to renew a business
relationship with a large seasonal customer which was anticipated to provide an
unacceptable profit margin and (2) a moderation in the demand for the Company's
services by a limited number of large staffing customers that were affected by
various economic conditions. The share of professional employer services
revenues had a corresponding increase from 42.0% of total revenues for 1997 to
45.4% for 1998.
Gross margin for 1998 totaled $32,024,000, representing an increase of
$610,000 or 1.9% over 1997. The gross margin rate of 10.6% of revenues
represents a 30 basis point increase from 1997 due primarily to lower payroll
taxes and benefits and workers' compensation expenses as a percentage of
revenues, offset in part by higher direct payroll costs as a percentage of
revenues. The decline in payroll taxes and benefits, in total dollars and as a
percent of revenues, for 1998 was primarily due to lower state unemployment tax
rates. The increase in direct payroll costs, as a percentage of revenues, was
primarily attributable to the increased share of professional employer services
business, where payroll costs typically represent a higher percentage of
revenues as compared to staffing services.
Workers' compensation expense decreased from 3.5% of revenues for 1997
to 3.4% of revenues for 1998. The decrease in workers' compensation expense for
1998 was generally attributable to a lower incidence of injuries during 1998, as
compared to 1997.
SG&A expenses (excluding the amortization of intangibles) for 1998
amounted to $23,481,000, a decrease of $530,000 or 2.2% from 1997. SG&A expenses
expressed as a percentage of revenues also decreased from 7.9% for 1997 to 7.8%
for 1998. The decrease in total SG&A expenses for 1998 from 1997 was primarily
attributable to lower management payroll and bad debt expense. During the first
quarter of 1998, management implemented specific performance criteria for all
branch offices to align operating expenses more closely with growth in gross
margin dollars rather than growth in revenues. For 1998, improvement in SG&A
expense was achieved by reducing SG&A expenses as a percent of gross margin
dollars from 76.4% in 1997 to 73.3% in 1998.
20
Amortization of intangibles totaled $1,316,000 for 1998 or 0.4% of
revenues, which compares to $1,332,000 or 0.4% of revenues for 1997.
The Company's effective income tax rate for 1998 was 43.3%, as compared
to 37.9% for 1997. The increase in the effective rate was primarily attributable
to the nondeductibility of certain merger expenses and an increase in
nondeductible amortization expense.
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 later in the Company's fiscal year as
federal and state statutory wage limits for unemployment and social security
taxes are exceeded by some employees. Workers' compensation expense varies with
both the frequency and severity of workplace injury claims reported during a
quarter, as well as adverse loss development of prior period claims during a
subsequent quarter.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash position at December 31, 1999 decreased by
$3,479,000 from December 31, 1998. The decrease in cash at December 31, 1999 was
primarily due to cash used in investing activities of $15,437,000, principally
in connection with three acquisitions made since January 1, 1999, offset in part
by proceeds from operating activities of $3,433,000 and financing activities of
$8,525,000 arising from the Company's bank term loan and borrowings on its
unsecured credit line.
Net cash provided by operating activities for 1999 amounted to
$3,433,000, as compared to $4,246,000 for 1998. For 1999, cash flow was
primarily generated by net income and depreciation and amortization, coupled
with an increase of $2,030,000 in accrued payroll and benefits, offset in part
by an increase in accounts receivable of $5,568,000.
Net cash used in investing activities totaled $15,437,000 for 1999, as
compared to $1,679,000 for 1998. For 1999, cash used in investing activities was
primarily for the acquisitions of TSS, TPM and TSU totaling $13,157,000 and for
capital expenditures of $2,024,000. Approximately $1,400,000 of the total
capital expenditures was related to new computer hardware and software for the
Company's new management information system, which was implemented on March 1,
2000. The Company presently has no material long-term capital commitments.
Net cash provided by financing activities for 1999 amounted to
$8,525,000, which compares to $1,977,000 of net cash used in financing
activities in 1998. For 1999, the primary source of cash provided by financing
activities was an $8,000,000 term loan obtained from the Company's principal
bank and $4,882,000 of net borrowings on the Company's credit line, offset in
part by payments on long-term debt of $1,772,000 and common stock repurchases of
$1,498,000. The term loan was obtained to provide financing for the TSU
acquisition and, at December 31, 1999, had an outstanding principal balance of
$6,444,000.
The Company renegotiated its loan agreement with its principal bank
which provides for an unsecured revolving credit facility of $12.0 million and
an $8.0 million 3-year term loan. This loan agreement, which expires May 31,
2000, also includes a subfeature for standby letters of credit in
21
connection with certain workers' compensation surety arrangements, as to which
approximately $2.0 million was outstanding as of December 31, 1999. The Company
had an outstanding balance of $4,882,000 on the revolving credit facility at
December 31, 1999. See Note 7 of the Notes to Financial Statements. Effective
December 31, 1999, the Company negotiated a minor modification to the quarterly
financial covenants of its loan agreement with its principal bank. The Company
requested that the minimum working capital requirement be replaced by a minimum
current ratio. In exchange for this accommodation, the Company agreed to an
increase in the trailing four-quarter EBITDA requirement. The Company was in
compliance with the financial covenants in the loan agreement at December 31,
1999. Management expects that the funds anticipated to be generated from
operations, together with the bank-provided credit facility and other potential
sources of financing, will be sufficient in the aggregate to fund the Company's
working capital needs for the foreseeable future.
On February 26, 1999, the Company's Board of Directors authorized a
stock repurchase program to purchase up to 250,000 common shares from time to
time in open market purchases. On November 10, 1999, the Company's Board of
Directors authorized the repurchase of an additional 200,000 shares, thereby
increasing the total number of common shares authorized for repurchase to
450,000. During 1999, the Company repurchased 219,000 shares at an aggregate
price of $1,498,000. Management anticipates that the capital necessary to
execute this program will be provided by existing cash balances and other
available resources.
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.
YEAR 2000 READINESS
As the Company previously reported, its mission-critical legacy systems
were believed to be Year 2000 compliant prior to December 31, 1999. Such
compliance was achieved through minor reprogramming by internal staff at no
incremental cost to the Company. The Company's non-mission critical systems were
also brought into compliance in a timely fashion at a very minimal cost.
As discussed above in Part I, Item 1, "Management Information Systems,"
the Company implemented its new information system on March 1, 2000. The new
information system project was initiated in mid-1997 to accommodate the
anticipated growth of the Company and was unrelated to the Year 2000 compliance
issue.
Subsequent to December 31, 1999, the Company has not experienced any
significant problems with any of its internal information systems or any
interruption of products or services from any vendors.
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, 1999, the Company had interest-bearing debt obligations of
approximately $13.8 million, of which approximately $11.3 million bears interest
at a variable rate and approximately $2.5 million at a fixed rate of interest.
The variable rate debt is comprised of approximately $4.9 million outstanding
under an unsecured revolving credit facility, which bears interest at the
Federal Funds rate plus 1.25%. The Company also has an unsecured three-year term
note with its principal bank, which bears interest at LIBOR plus 1.35%. Based on
the Company's overall interest exposure at December 31, 1999, 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, 1999, the Company had not entered into any interest rate
instruments to reduce its exposure to interest rate risk.
22
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.
23
PART III
ITEM 10. INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
- -------------------------------------------------------------
The information required by Item 10, Directors and Executive Officers
of the Registrant, is incorporated herein by reference to the Company's
definitive Proxy Statement for the 2000 Annual Meeting of Stockholders ("Proxy
Statement"), under the headings "Election of Directors" and "Stock Ownership by
Principal Stockholders and Management--Section 16(a) Beneficial Ownership
Reporting Compliance" or appears under the heading "Executive Officers of the
Registrant" on page 13 of this report. The information required by Item 11,
Executive Compensation, is incorporated herein by reference to the Proxy
Statement, under the headings "Executive Compensation" and "Election of
Directors--Compensation Committee Interlocks and Insider Participation." The
information required by Item 12, Security Ownership of Certain Beneficial Owners
and Management, is incorporated herein by reference to the Proxy Statement,
under the heading "Stock Ownership by Principal Stockholders and
Management--Beneficial Ownership Table." The information required by Item 13,
Certain Relationships and Related Transactions, is incorporated herein by
reference to the Proxy Statement, under the heading "Election of
Directors--Compensation Committee Interlocks and Insider Participation."
24
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, 1999 and 1998 F-2
Statements of Operations for the Years Ended December 31,
1999, 1998 and 1997 F-3
Statements of Redeemable Common Stock and Nonredeemable
Stockholders' Equity - December 31, 1999, 1998 and 1997 F-4
Statements of Cash Flows for the Years Ended December 31,
1999, 1998 and 1997 F-5
Notes to Financial Statements F-6
No schedules are required to be filed herewith.
REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the quarter ended December 31, 1999.
EXHIBITS
Exhibits are listed in the Exhibit Index that follows the Financial Statements
included in this report. Each management contract or compensatory plan or
arrangement required to be filed as an exhibit to this report is listed under
Item 10, "Executive Compensation Plans and Arrangements and Other Management
Contracts" in the Exhibit Index.
25
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
BARRETT BUSINESS SERVICES, INC.
Registrant
Date: March 28, 2000 By: /s/ Michael D. Mulholland
---------------------------------
Michael D. Mulholland
Vice President - Finance and Secretary
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities indicated on the 28th day of March, 2000.
Principal Executive Officer and Director:
*WILLIAM W. SHERERTZ President and Chief Executive Officer
and Director
Principal Financial Officer:
/s/ Michael D. Mulholland Vice President-Finance and Secretary
- ----------------------------------
Michael D. Mulholland
Principal Accounting Officer:
/s/ James D. Miller Controller and Assistant Secretary
- ----------------------------------
James D. Miller
Other Directors:
* ROBERT R. AMES Director
* HERBERT L. HOCHBERG Director
* ANTHONY MEEKER Director
* STANLEY G. RENECKER Director
* NANCY B. SHERERTZ Director
* By /s/ Michael D. Mulholland
---------------------------
Michael D. Mulholland
Attorney-in-Fact
26
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of
Barrett Business Services, Inc.
In our opinion, the accompanying balance sheets and the related statements of
operations, of redeemable common stock and nonredeemable stockholder' equity
and of cash flows present fairly, in all material respects, the financial
position of Barrett Business Services, Inc. at December 31, 1999 and 1998, and
the results of its operations and its cash flows for each of the three years in
the period ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States. These financial statements are the
responsibility of the Company' 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 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 the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
February 9, 2000
F-1
BARRETT BUSINESS SERVICES, INC.
BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
(IN THOUSANDS, EXCEPT PAR VALUE)
1999 1998
-------- --------
ASSETS
Current assets:
Cash and cash equivalents $ 550 $ 4,029
Trade accounts receivable, net 30,216 21,907
Prepaid expenses and other 1,219 1,103
Deferred tax assets (Note 12) 1,658 1,857
-------- --------
Total current assets 33,643 28,896
Intangibles, net (Note 4) 21,945 11,508
Property and equipment, net (Notes 5 and 8) 7,027 5,184
Restricted marketable securities and workers' compensation deposits (Note 6) 6,281 6,004
Deferred tax assets (Note 12) 712 552
Other assets 1,132 626
-------- --------
$ 70,740 $ 52,770
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable (Note 2) $ 865 $ -
Current portion of long-term debt (Note 8) 2,783 61
Line of credit (Note 7) 4,882 -
Income taxes payable (Note 12) - 438
Accounts payable 1,356 948
Accrued payroll, payroll taxes and related benefits 11,437 9,246
Workers' compensation claim and safety incentive liabilities (Note 6) 4,219 4,417
Other accrued liabilities 413 514
-------- --------
Total current liabilities 25,955 15,624
Long-term debt, net of current portion (Note 8) 4,232 503
Customer deposits 815 829
Long-term workers' compensation claim liabilities (Note 6) 699 714
Other long-term liabilities (Note 2) 1,710 1,398
-------- --------
33,411 19,068
-------- --------
Commitments and contingencies (Notes 9, 10, 15 and 17)
Stockholders' equity:
Common stock, $.01 par value; 20,500 shares authorized, 7,461 and 7,676
shares issued and outstanding (Notes 13 and 14) 75 77
Additional paid-in capital 9,889 11,409
Retained earnings 27,365 22,216
-------- --------
37,329 33,702
-------- --------
$ 70,740 $ 52,770
======== ========
The accompanying notes are an integral part of these financial statements.
F-2
BARRETT BUSINESS SERVICES, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1999 1998 1997
------------ ------------- -------------
Revenues:
Staffing services $ 194,991 $ 165,443 $ 177,263
Professional employer services 152,859 137,586 128,268
----------- ------------- -------------
347,850 303,029 305,531
------------ ------------- -------------
Cost of revenues:
Direct payroll costs 270,049 235,265 236,307
Payroll taxes and benefits 28,603 25,550 27,226
Workers' compensation (Note 6) 11,702 10,190 10,584
------------ ------------- -------------
310,354 271,005 274,117
------------ ------------- -------------
Gross margin 37,496 32,024 31,414
Selling, general and administrative expenses 26,551 23,481 24,011
Merger expenses - 750 -
Amortization of intangibles (Note 4) 1,867 1,316 1,332
------------ ------------- -------------
Income from operations 9,078 6,477 6,071
------------ ------------- -------------
Other (expense) income:
Interest expense (634) (173) (247)
Interest income 357 441 362
Other, net 32 (1) 1
------------ ------------- ------------
(245) 267 116
------------ ------------- ------------
Income before provision for income taxes 8,833 6,744 6,187
Provision for income taxes (Note 12) 3,684 2,923 2,342
------------ ------------ ------------
Net income $ 5,149 $ 3,821 $ 3,845
============ ============ ============
Basic earnings per share $ .68 $ .50 $ .50
============ ============ ============
Weighted average number of basic shares outstanding 7,581 7,664 7,646
============ ============ ============
Diluted earnings per share $ .68 $ .50 $ .49
============ ============ ============
Weighted average number of diluted shares outstanding 7,627 7,711 7,780
============ ============ ============
The accompanying notes are an integral part of these financial statements.
F-3
BARRETT BUSINESS SERVICES, INC.
STATEMENTS OF REDEEMABLE COMMON STOCK AND NONREDEEMABLE STOCKHOLDERS' EQUITY
DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS)
Nonredeemable Stockholders' Equity
Redeemable ----------------------------------------------
Common Stock Common Stock Additional
-------------------- ------------------- Paid-in Retained
Shares Amount Shares Amount Capital Earnings Total
-------- -------- -------- -------- ---------- ---------- ----------
Balance, December 31, 1996 159 $ 2,825 7,520 $ 75 $ 11,004 $ 14,550 $ 25,629
Common stock issued on exercise of options
and warrants - - 118 1 756 - 757
Redemption of redeemable common stock (159) (2,825) - - - - -
Net income - - - - - 3,845 3,845
-------- -------- -------- -------- ---------- ---------- ----------
Balance, December 31, 1997 - - 7,638 76 11,760 18,395 30,231
Common stock issued on exercise of options
and warrants - - 38 1 168 - 169
Distribution to dissenting shareholder in
connection with merger (Note 2) - - - - (519) - (519)
Net income - - - - - 3,821 3,821
-------- -------- -------- -------- ---------- ---------- ----------
Balance, December 31, 1998 - - 7,676 77 11,409 22,216 33,702
Common stock issued on exercise of options
and warrants - - 9 - 34 - 34
Repurchase of common stock - - (219) (2) (1,496) - (1,498)
Payment to shareholder - - - - (58) - (58)
Common stock cancelled (Note 2) - - (5) - - - -
Net income - - - - - 5,149 5,149
-------- -------- -------- -------- ---------- ---------- ----------
Balance, December 31, 1999 - $ - 7,461 $ 75 $ 9,889 $ 27,365 $ 37,329
======== ======== ======== ======== ========= ========== ==========
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, 1999, 1998 AND 1997
(IN THOUSANDS)
1999 1998 1997
----------- ---------- ---------
Cash flows from operating activities:
Net income $ 5,149 $ 3,821 $ 3,845
Reconciliations of net income to net cash provided by operating activities:
Depreciation and amortization 2,461 1,785 1,765
Deferred taxes 156 (323) (727)
Changes in certain assets and liabilities, net of amounts purchased in
acquisitions:
Trade accounts receivable, net (5,568) (856) (332)
Prepaid expenses and other (57) 128 (179)
Income taxes payable (438) 438 -
Accounts payable 261 (188) 73
Accrued payroll, payroll taxes and related benefits 2,030 (788) 2,180
Other accrued liabilities (153) 100 (316)
Workers' compensation claim and safety incentive liabilities (198) 204 958
Customer deposits, other liabilities and other assets, net (522) (443) (16)
Other long-term liabilities 312 368 30
----------- ---------- ---------
Net cash provided by operating activities 3,433 4,246 7,281
----------- ---------- ---------
Cash flows from investing activities:
Cash paid for acquisitions, including other direct costs (13,157) (693) (2,227)
Purchase of property and equipment, net of amounts purchased in
acquisitions (2,024) (1,077) (1,497)
Proceeds from maturities of marketable securities 2,415 5,532 5,343
Purchase of marketable securities (2,671) (5,441) (5,731)
----------- ---------- ---------
Net cash used in investing activities (15,437) (1,679) (4,112)
----------- ---------- ---------
Cash flows from financing activities:
Payment of credit line assumed in acquisition (1,113) - (401)
Net proceeds from (payments on) credit-line borrowings 4,882 (887) 701
Proceeds from collection of note receivable - - 324
Proceeds from issuance of long-term debt 8,000 - 180
Payments on long-term debt (1,722) (740) (89)
Distribution to dissenting shareholder - (519) -
Payment to shareholder (58) - -
Repurchase of common stock (1,498) - -
Redemption of common stock - - (2,825)
Proceeds from the exercise of stock options and warrants 34 169 757
----------- ---------- ---------
Net cash provided by (used in) financing activities 8,525 (1,977) (1,353)
----------- ---------- ---------
Net (decrease) increase in cash and cash equivalents (3,479) 590 1,816
Cash and cash equivalents, beginning of year 4,029 3,439 1,623
----------- ---------- ---------
Cash and cash equivalents, end of year $ 550 $ 4,029 $ 3,439
=========== ========= =========
Supplemental schedule of noncash activities:
Acquisition of other businesses:
Cost of acquisitions in excess of fair market value of net assets acquired $ 12,304 $ 683 $ 3,160
Tangible assets acquired 3,364 10 674
Liabilities assumed 1,646 - 1,607
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 79%,
81% and 85%, respectively, of the Company's revenues during 1999, 1998, and
1997 were attributable to its Oregon and California operations. On June 29,
1998, the Company merged with Western Industrial Management, Inc. and Catch
55, Inc. (collectively "WIMI"). The transaction was accounted for as a
pooling-of-interests pursuant to Accounting Principles Board ("APB")
Opinion No. 16 and, accordingly, the Company's financial statements have
been restated for all prior periods to give effect to the merger, as more
fully described in Note 2.
REVENUE RECOGNITION
The Company recognizes revenue as services are rendered by its workforce.
Staffing services are engaged by customers to meet short-term and long-term
personnel needs. Professional employer services are normally used by
organizations to satisfy ongoing human resource management needs and
typically involve contracts with a minimum term of one year, renewable
annually, which cover all employees at a particular worksite.
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 $335,000 and $262,000
at December 31, 1999 and 1998, respectively.
MARKETABLE SECURITIES
At December 31, 1999 and 1998, marketable securities consisted primarily of
governmental debt instruments with maturities generally from 90 days to 30
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 acquisition 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.
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.)
F-6
BARRETT BUSINESS SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INTANGIBLES (CONTINUED)
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, 1999, 1998 and 1997.
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 1999, 1998 and 1997 did not materially differ from
interest expense.
Income taxes paid by the Company in 1999, 1998 and 1997 totaled $4,181,000,
$2,623,000 and $3,224,000, respectively.
NET INCOME PER SHARE
Basic earnings per share are computed based on the weighted average number
of common shares outstanding for each year. Diluted earnings per share
reflect the potential effects of the exercise of outstanding stock options
and warrants.
F-7
BARRETT BUSINESS SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with the 1999
presentation. Such reclassifications had no impact on gross margin, net
income or stockholders' equity.
ACCOUNTING ESTIMATES
The preparation of the Company's financial statements in conformity with
generally accepted accounting principles 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 those
estimates.
2. BUSINESS COMBINATIONS
HR ONLY
Effective February 1, 1997, the Company acquired D&L Personnel Department
Specialists, Inc., dba HR Only, a staffing services company which
specializes in human resource professionals, with offices in Los Angeles
and Garden Grove, California. The Company paid $1,800,000 in cash for all
of the outstanding common stock of HR Only and $1,200,000 in cash for
noncompete agreements with certain individuals, of which $1,000,000 was
deferred with simple interest at 5% per annum for five years and then to be
paid ratably over the succeeding five-year period. The deferred portion of
the noncompete agreement is presented on the balance sheet in other
long-term liabilities. HR Only's revenues for the fiscal year ended January
31, 1997 were approximately $4.3 million (audited). The transaction was
accounted for under the purchase method of accounting, which resulted in
$3,027,000 of intangible assets, including $92,000 for acquisition-related
costs, and $65,000 of net tangible assets.
TLC STAFFING
Effective April 13, 1997, the Company purchased certain assets of JRL
Services, Inc., dba TLC Staffing, a provider of clerical staffing services
located in Tucson, Arizona. TLC Staffing had revenues of approximately
$800,000 (unaudited) for the year ended December 31, 1996. The Company paid
$150,000 in cash for the assets, assumed an $18,000 office lease liability
and incurred $4,000 in acquisition related costs. The transaction was
accounted for under the purchase method of accounting, which resulted in
$152,000 of intangible assets and $2,000 of fixed assets.
BOLT STAFFING
On April 13, 1998, the Company acquired certain assets of BOLT Staffing
Services, Inc., a provider of staffing services located in Pocatello,
Idaho. BOLT Staffing had revenues of approximately $2.4 million (unaudited)
for the year ended December 31, 1997. The Company paid $675,000 in cash for
the assets, assumed a $6,000 office lease liability and incurred
approximately $18,000 in acquisition related costs. The transaction was
accounted for under the purchase method of accounting, which resulted in
$683,000 of intangible assets and $10,000 of fixed assets.
F-8
BARRETT BUSINESS SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
2. BUSINESS COMBINATIONS (CONTINUED)
TEMPORARY STAFFING SYSTEMS, INC.
Effective January 1, 1999, the Company acquired all of the outstanding
common stock of Temporary Staffing Systems, Inc. ("TSS"), a staffing
services company with eight branch offices in North Carolina and one in
South Carolina. The Company paid $2,000,000 in cash and issued a note
payable for $950,000 due January 31, 2000, payment of which is contingent
upon a minimum equity requirement for 1998 and certain financial
performance criteria for 1999. The note will be recorded when the
contingencies are resolved (Note 17). The Company also paid $50,000 in cash
for a noncompete agreement with the selling shareholder. TSS's revenues for
the fiscal year ended March 29, 1998 were approximately $12.9 million
(audited). The transaction has been 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, to date, the recognition of an
additional $2,099,000 of intangible assets, which includes $51,000 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 - Lake Forest, Santa Ana and Anaheim. The
Company paid $1,125,000 in cash for the assets of TPM. The Company also
paid $75,000 for noncompete agreements. TPM's revenues for the year ended
December 31, 1998 were approximately $5.7 million (unaudited). The
transaction was accounted for under the purchase method of accounting,
which resulted in $1,190,000 of intangible assets, including $15,000 for
acquisition-related costs, and $25,000 of fixed assets.
TEMPORARY SKILLS UNLIMITED, INC.
Effective May 31, 1999, the Company acquired certain assets of Temporary
Skills Unlimited, Inc., dba TSU Staffing ("TSU"), a staffing services
company with nine branch offices in northern California. The Company paid
$9,558,000 in cash and issued a note for $864,500, due one year from the
date of acquisition. The Company also paid $100,000 for noncompete
agreements. TSU's revenues for the year ended December 27, 1998 were
approximately $25.0 million (audited). The transaction was accounted for
under the purchase method of accounting, which resulted in $8,622,000 of
intangible assets, including $184,000 for acquisition-related costs,
$1,797,000 of accounts receivable and $287,000 of fixed assets.
PRO FORMA RESULTS OF OPERATIONS (UNAUDITED)
The operating results of each of the above acquisitions are included in the
Company's results of operations from the respective date of acquisition.
The following unaudited summary presents the combined results of operations
as if the TSS, TPM and TSU acquisitions had occurred at the beginning of
1998, after giving effect to certain adjustments for the
F-9
BARRETT BUSINESS SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
2. BUSINESS COMBINATIONS (CONTINUED)
PRO FORMA RESULTS OF OPERATIONS (UNAUDITED) (CONTINUED)
amortization of intangible assets, taxation and cost of capital. The other
acquisitions made since January 1, 1998 are not included in the pro forma
information as their effect is not material.
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) YEAR ENDED
DECEMBER 31,
1999 1998
----------- -----------
Revenue $ 362,297 $ 347,429
=========== ===========
Net income $ 5,497 $ 4,611
=========== ===========
Basic earnings per share $ .73 $ .60
=========== ===========
Diluted earnings per share $ .72 $ .60
=========== ===========
The unaudited pro forma results above have been prepared for comparative
purposes only and do not purport to be indicative of what would have
occurred had the acquisitions been made as of January 1, 1998, or of
results which may occur in the future.
WESTERN INDUSTRIAL MANAGEMENT, INC.
On June 29, 1998, the Company completed a merger with WIMI, whereby WIMI
was merged directly with and into Barrett. The transaction qualified as a
tax-free merger and has been accounted for as a pooling-of-interests. As a
result of the merger, the former shareholders of WIMI initially received a
total of 894,642 shares of the Company's common stock, which included
10,497 shares issued in exchange for real property consisting of an office
condominium in which WIMI's main office was located. A dissenting WIMI
shareholder received cash in the amount of $519,095, based on the value of
$11.375 per share of Barrett's common stock. The Acquisition and Merger
Agreement provided for a holdback of 10% of the total consideration paid by
Barrett pending the final determination of the required minimum net worth
of WIMI as of June 28, 1998. As a consequence of this final determination,
total consideration paid by Barrett was reduced in 1999 by $52,811, which
resulted in the cancellation of 4,417 shares previously issued to certain
WIMI shareholders and a reduction in cash paid to the dissenting WIMI
shareholder of $2,563. WIMI was a privately-held staffing services company
headquartered in San Bernardino, California.
F-10
BARRETT BUSINESS SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
3. FAIR VALUE OF FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK
All of the Company's significant financial instruments are recognized in
its balance sheet. Carrying values approximate fair market value of most
financial assets and liabilities. The fair market value of certain
financial instruments was estimated as follows:
- Marketable securities - Marketable securities primarily consist of U.S.
Treasury bills and municipal bonds. The interest rates on the Company's
marketable security investments approximate current market rates for
these types of investments; therefore, the recorded value of the
marketable securities approximates fair market value.
- Long-term debt - The interest rates on the Company's long-term debt
approximate current market rates, based upon similar obligations with
like maturities; therefore, the recorded value of long-term debt
approximates the fair market value.
Financial instruments that potentially subject the Company to concentration
of credit risk consist primarily of temporary cash investments, marketable
securities and trade accounts receivable. The Company restricts investment
of temporary cash investments and marketable securities to financial
institutions with high credit ratings and to investments in governmental
debt instruments. Credit risk on trade receivables is minimized as a result
of the large and diverse nature of the Company's customer base. At December
31, 1999, the Company had significant concentrations of credit risk as
follows:
- Marketable securities - $2,275,000 of marketable securities at December
31, 1999 consisted of Oregon State Housing & Community Service Bonds.
- Trade receivables - $1,930,000 of trade receivables were with two
customers at December 31, 1999 (6% of trade receivables outstanding at
December 31, 1999).
4. INTANGIBLES
Intangibles consist of the following (in thousands):
1999 1998
--------- ----------
Covenants not to compete $ 3,709 $ 3,484
Goodwill 25,674 13,595
Customer lists 358 358
--------- ---------
29,741 17,437
Less accumulated amortization 7,796 5,929
--------- ---------
$ 21,945 $ 11,508
========= =========
F-11
BARRETT BUSINESS SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
1999 1998
---------- ---------
Office furniture and fixtures $ 4,087 $ 3,066
Computer hardware and software 3,630 2,225
Buildings 1,474 1,463
---------- ---------
9,191 6,754
Less accumulated depreciation 2,472 1,878
---------- ---------
6,719 4,876
308 308
---------- ---------
$ 7,027 $ 5,184
========== =========
6. WORKERS' COMPENSATION CLAIM AND SAFETY INCENTIVE LIABILITIES
The Company is a self-insured employer with respect to workers'
compensation coverage for all its employees working in Oregon, Maryland,
Washington, Delaware, and selected parts of California. The Company also is
self-insured for workers' compensation purposes as granted by the United
States Department of Labor for longshore and harbor ("USL&H") workers'
coverage.
The Company has provided $4,219,000 and $4,417,000 at December 31, 1999 and
1998, 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 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 operations
as they become known. The Company believes that the difference between
amounts recorded for its estimated liabilities and the possible range of
costs of settling related claims is not material to results of operations;
nevertheless, it is reasonably possible that adjustments required in future
periods may be material to results of operations.
F-12
BARRETT BUSINESS SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
6. WORKERS' COMPENSATION CLAIM AND SAFETY INCENTIVE LIABILITIES (CONTINUED)
Liabilities incurred for work-related employee fatalities are recorded
either at an agreed lump-sum settlement amount or the net present value of
future fixed and determinable payments over the actuarially determined
remaining life of the beneficiary, discounted at a rate that approximates a
long-term, high-quality corporate bond rate. The Company has obtained
excess workers' compensation insurance to limit its self-insurance exposure
to $350,000 per occurrence in all states, except $500,000 per occurrence
for USL&H exposure. The excess insurance provides unlimited coverage above
the aforementioned exposures.
At December 31, 1999, the Company's long-term workers' compensation claim
liabilities in the accompanying balance sheet include $699,000 for
work-related catastrophic injuries and fatalities. The aggregate
undiscounted pay-out amount of the catastrophic injuries and fatalities is
$1,585,000. The actuarially determined pay-out periods to the beneficiaries
range from 7 to 42 years. As a result, the five-year cash requirements
related to these claims are immaterial.
The United States Department of Labor and the states of Oregon, Maryland,
Washington, and California require the Company to maintain specified
investment balances or other financial instruments, totaling $7,735,000 at
December 31, 1999 and $7,651,000 at December 31, 1998, to cover potential
claims losses. In partial satisfaction of these requirements, at December
31, 1999, the Company has provided letters of credit in the amount of
$1,553,000 and surety bonds totaling $457,000. The investments are included
in restricted marketable securities and workers' compensation deposits in
the accompanying balance sheets.
7. CREDIT FACILITY
Effective May 31, 1999, the Company renewed its loan agreement (the
"Agreement") with its principal bank, which provides for (a) an unsecured
revolving credit facility for working capital purposes and standby letters
of credit up to $12,000,000, (b) a term real estate loan (Note 8) and (c) a
three-year term loan (Note 8) in the amount of $8,000,000. The Agreement
expires on May 31, 2000. The interest rate options available on outstanding
balances under the revolving credit facility include (i) prime rate, (ii)
Federal Funds Rate plus 1.25% or (iii) LIBOR plus 1.25%. 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, earnings before interest, taxes, depreciation and amortization
("EBITDA"), and ratio of borrowed funds plus capitalized lease obligations
to EBITDA. The Company was in compliance with all such covenants at
December 31, 1999.
During the year ended December 31, 1999, the maximum balance outstanding
under the revolving credit facility was $8,284,000, the average balance
outstanding was $4,262,000, and the weighted average interest rate during
the period was 6.8%. The weighted average interest rate during 1999 was
calculated using daily weighted averages.
F-13
BARRETT BUSINESS SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
7. CREDIT FACILITY (CONTINUED)
The Company had an additional revolving credit facility which was paid off
in 1998. Such prior credit facility was in connection with the WIMI merger.
8. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
1999 1998
----------- ----------
Term loan payable in monthly installments of $222,222 plus interest
at LIBOR plus 1.35% through 2002 (Note 7) $ 6,444 $ -
Mortgage note payable in monthly installments of $6,408, including
interest at 7.40% per annum through 2003, with a principal payment
of $325,000 due in 2003, secured by land and building (Note 7) 491 530
Note payable, assumed in acquisition, payable in monthly installments of
$5,116, including interest at 8.25% per annum through 2001 64 -
Capitalized equipment leases, assumed in acquisition, with variable monthly
installments, including interest at 11.5% per annum through 2000,
secured by equipment 16 34
----------- ----------
7,015 564
Less portion due within one year 2,783 61
----------- ----------
$ 4,232 $ 503
=========== ==========
Maturities on long-term debt are summarized as follows at December 31, 1999
(in thousands):
YEAR ENDING
DECEMBER 31,
-----------
2000 $ $2,783
2001 2,717
2002 1,160
2003 355
2004 -
-----------
$ 7,015
===========
F-14
BARRETT BUSINESS SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
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 were $125,000,
$104,000 and $111,000 for the years ended December 31, 1999, 1998 and 1997,
respectively.
Recent attention has been placed by the Internal Revenue Service (the
"IRS") and the staff leasing industry on Internal Revenue Code Section
401(k) plans sponsored by staff leasing companies. As such, the tax-exempt
status of the Company's plan is subject to continuing scrutiny and approval
by the IRS and to the Company's ability to support to the IRS the Company's
employer-employee relationship with leased employees. In the event the
tax-exempt status were to be discontinued and the plan were to be
disqualified, the operations of the Company could be adversely affected.
The Company has not recorded any provision for this potential contingency,
as the Company and its legal counsel cannot presently estimate either the
likelihood of disqualification or the resulting range of loss, if any.
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,
------------
2000 $ 1,656
2001 958
2002 501
2003 158
2004 15
---------
$ 3,288
=========
Rent expense for the years ended December 31, 1999, 1998 and 1997 was
approximately $1,780,000, $1,369,000 and $1,188,000, respectively.
F-15
BARRETT BUSINESS SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
11. RELATED PARTY TRANSACTIONS
During 1997, the Company recorded revenues of $4,047,000 and cost of
revenues of $3,719,000 for providing services to a company of which a
former director of the Company is president and majority stockholder. At
December 31, 1997, Barrett had trade receivables from this company of
$188,000.
On December 31, 1997, the Company borrowed $122,100 from a shareholder. The
note bore interest at 10% per annum and was repaid in full on June 29,
1998. This was a transaction between WIMI and its former majority
shareholder.
12. INCOME TAXES
The provisions for income taxes are as follows (in thousands):
YEAR ENDED DECEMBER 31,
1999 1998 1997
------------- -------------- --------------
Current:
Federal $ 2,796 $ 2,571 $ 2,566
State 732 675 503
------------- -------------- --------------
3,528 3,246 3,069
------------- -------------- --------------
Deferred:
Federal 135 (255) (600)
State 21 (68) (127)
------------- -------------- --------------
156 (323) (727)
------------- -------------- --------------
Total provision $ 3,684 $ 2,923 $ 2,342
============= ============== ==============
Deferred tax assets (liabilities) are comprised of the following components (in thousands):
1999 1998
-------------- --------------
Current:
Workers' compensation claim and safety incentive liabilities $ 1,368 $ 1,542
Allowance for doubtful accounts 130 102
Other accruals 160 213
-------------- --------------
$ 1,658 $ 1,857
============== ==============
Noncurrent:
Tax depreciation in excess of book depreciation $ (94) $ (101)
Workers' compensation claim liabilities 272 278
Amortization of intangibles 380 289
Deferred compensation 44 62
Other 110 24
-------------- --------------
$ 712 $ 552
============== ==============
F-16
BARRETT BUSINESS SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
12. INCOME TAXES (CONTINUED)
The effective tax rate differed from the U.S. statutory federal tax rate due to the following:
Year ended December 31,
1999 1998 1997
------------- -------------- --------------
Statutory federal tax rate 34.0 % 34.0 % 34.0 %
State taxes, net of federal benefit 5.6 6.1 3.5
Nondeductible expenses 0.8 3.4 -
Nondeductible amortization of intangibles 1.9 2.5 1.3
Federal tax-exempt interest income (0.9) (1.0) (1.0)
Other, net 0.3 (1.7) 0.1
------------- -------------- --------------
41.7 % 43.3 % 37.9 %
============= ============== ==============
During 1997, the Company recognized a State of Oregon tax credit of
approximately $121,000 related to the 1996 tax year.
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. Effective May 14, 1997, the Company's stockholders
approved an increase in the number of shares of common stock reserved for
issuance under the Plan from 800,000 to 1,300,000.
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 1999, the Company awarded deferred compensation stock options
for 38,613 shares at an average exercise price of $3.11 per share. During
1998, the Company awarded deferred compensation stock options for 51,417
shares at an average exercise price of $4.26 per share. No such stock
options were awarded in 1997. Total fair value of options granted at 60%
below market price was computed to be $231,941 and $422,743 for the years
ended December 31, 1999 and 1998, respectively. In accordance with APB No.
25, the Company recognized compensation expense of $180,238 and $212,941
for the years ended December 31, 1999 and 1998, respectively, in connection
with the issuance of these discounted options.
F-17
BARRETT BUSINESS SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
13. STOCK INCENTIVE PLAN (CONTINUED)
A summary of the status of the Company's stock options at December 31,
1999, 1998 and 1997, together with changes during the periods then ended,
are presented below.
WEIGHTED
NUMBER AVERAGE
OF EXERCISE
OPTIONS PRICE
------------ -------------
Outstanding at December 31, 1996 491,998 $ 12.27
Options granted at market price 219,871 14.54
Options exercised (77,375) 9.46
Options canceled or expired (39,375) 13.87
------------
Outstanding at December 31, 1997 595,119 13.50
Options granted at market price 217,601 10.91
Options granted below market price 51,417 4.26
Options exercised (7,250) 5.91
Options canceled or expired (71,592) 14.50
------------
Outstanding at December 31, 1998 785,295 12.15
Options granted at market price 152,971 8.79
Options granted below market price 38,613 3.11
Options exercised (9,059) 3.74
Options canceled or expired (74,102) 13.60
------------
Outstanding at December 31, 1999 893,718 11.16
============
Available for grant at December 31, 1999 188,848
============
F-18
BARRETT BUSINESS SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
13. STOCK INCENTIVE PLAN (CONTINUED)
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. If
compensation expense for the Company's stock-based compensation plan had
been determined based on the fair market value at the grant date for awards
under the Plan, consistent with the method of Statement of Financial
Accounting Standards ("SFAS") No. 123, the Company's net income and
earnings per share would have been reduced to the pro forma amounts
indicated below:
1999 1998 1997
--------- ---------- ---------
(in thousands, except per share amounts)
Net income, as reported $ 5,149 $ 3,821 $ 3,845
Net income, pro forma 4,265 3,117 3,364
Basic earnings per share, as reported .68 .50 .50
Basic earnings per share, pro forma .56 .41 .43
Diluted earnings per share, as reported .68 .50 .49
Diluted earnings per share, pro forma .56 .41 .42
The effects of applying SFAS No. 123 for providing pro forma disclosures
for 1999, 1998 and 1997 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 1999, 1998 and 1997:
1999 1998 1997
--------- ---------- ---------
Expected volatility 46% 43% 42%
Risk free rate of return 5.75% 5.50% 6.25%
Expected dividend yield 0% 0% 0%
Expected life (years) 7.0 8.0 7.5
Total fair value of options granted at market price was computed to be
$768,863, $1,364,155 and $1,809,662 for the years ended December 31, 1999,
1998 and 1997, respectively. The weighted average value of all options
granted in 1999, 1998 and 1997 was $5.22, $6.64 and $8.23, respectively.
F-19
BARRETT BUSINESS SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
13. STOCK INCENTIVE PLAN (CONTINUED)
The following table summarizes information about stock options outstanding
at December 31, 1999:
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) 1999 price
-------------------------- -------------- -------------- --------------- -------------- -------------
$ 2.80 - 5.23 101,345 $ 3.64 7.7 92,414 $ 3.57
7.06 - 9.50 208,695 8.97 7.7 61,250 9.41
10.13 - 12.50 277,419 11.09 7.9 111,999 11.27
13.38 - 14.88 161,500 14.40 6.6 116,250 14.41
15.00 - 17.94 144,759 16.11 5.9 127,921 16.02
-------------- --------------
893,718 509,834
============== ==============
At December 31, 1999, 1998 and 1997, 509,834, 363,295 and 211,958 options
were exercisable at weighted average exercise prices of $11.56, $11.97 and
$12.02, respectively.
14. STOCK REPURCHASE PROGRAM
Effective February 26, 1999, the Company's Board of Directors authorized a
stock repurchase program to purchase up to 250,000 common shares from time
to time in open market purchases. On November 10, 1999, the Company's Board
of Directors authorized the repurchase of an additional 200,000 shares,
thereby increasing the total number of common shares authorized for
repurchase to 450,000. 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.
F-20
BARRETT BUSINESS SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
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, 1997
Revenues $ 67,011 $ 75,660 $ 85,995 $ 76,865
Cost of revenues 60,296 67,686 77,258 68,877
Net income 823 1,254 976 792
Basic earnings per share .11 .16 .13 .10
Diluted earnings per share .10 .16 .13 .10
Common stock market prices:
High $ 19.00 $ 15.00 $ 17.50 $ 17.25
Low 12.75 11.50 13.63 11.00
Year ended December 31, 1998
Revenues $ 69,241 $ 76,651 $ 81,969 $ 75,168
Cost of revenues 62,467 68,524 73,002 67,012
Net income 387 600 1,599 1,235
Basic earnings per share .05 .08 .21 .16
Diluted earnings per share .05 .08 .21 .16
Common stock market prices:
High $ 12.00 $ 13.38 $ 10.88 $ 9.38
Low 10.25 9.13 7.88 6.00
Year ended December 31, 1999
Revenues $ 71,015 $ 84,707 $ 95,875 $ 96,253
Cost of revenues 63,700 75,565 84,927 86,159
Net income 740 1,216 1,835 1,359
Basic earnings per share .10 .16 .24 .18
Diluted earnings per share .10 .16 .24 .18
Common stock market prices:
High $ 9.06 $ 9.25 $ 10.25 $ 8.38
Low 5.25 5.88 7.75 5.50
17. SUBSEQUENT EVENT
Pursuant to the Stock Purchase Agreement (the "Agreement") between the
Company and TSS (see Note 2), the Company has provided notice to the former
shareholder of TSS of the Company's intent to reduce the amount payable on
the $950,000 note due on January 31, 2000, as a consequence of certain
shortfalls from TSS's minimum equity requirement for 1998 and financial
performance criteria for 1999 EBITDA. As a consequence of the Company's
notice to TSS's former shareholder, the parties have agreed to extend the
due date of the note until TSS's former shareholder has completed a review
of the Company's reductions against the note, as provided for in the
Agreement.
F-21
EXHIBIT INDEX
2 Acquisition and Merger Agreement dated June 29, 1998, among the
registrant, Western Industrial Management, Inc., Catch 55, Inc., and
the other parties listed therein. Incorporated by reference to Exhibit
2 to the registrant's Current Report on Form 8-K filed July 13, 1998.
3.1 Charter of the registrant, as amended. Incorporated by reference to 1
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, 1998. Incorporated by reference to Exhibit 4.1 to the
registrant's Quarterly Report on Form 10-Q for the quarter ended June
30, 1998.
4.2 Amendment, dated February 8, 1999, to Loan Agreement between the
registrant and Wells Fargo Bank, N.A., dated May 31, 1998. Incorporated
by reference to Exhibit 4.2 to the registrant's Annual Report on Form
10-K for the year ended December 31, 1998.
4.3 Amendment, dated December 31, 1999, to Loan Agreement between the
registrant and Wells Fargo Bank, N.A., dated May 31, 1998.
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 Executive Compensation Plans and Arrangements and Other Management
Contracts.
10.1 1993 Stock Incentive Plan of the registrant, as amended.
10.2 Form of Indemnification Agreement with each director of the registrant.
Incorporated by reference to Exhibit 10.8 to the registrant's
Registration Statement on Form S-1 (No. 33-61804).
10.3 Deferred Compensation Plan for Management Employees of the registrant.
Incorporated by reference to Exhibit 10.3 to the registrant's Annual
Report on Form 10-K for the year ended December 31, 1997.
10.4 Employment Agreement between the registrant and Michael D. Mulholland,
dated January 26, 1999. Incorporated by reference to Exhibit 10.4 to
the registrant's Annual Report on Form 10-K for the year ended December
31, 1998.
11 Statement of calculation of Basic and Diluted shares outstanding.
23 Consent of PricewaterhouseCoopers LLP, independent accountants.
24 Power of attorney of certain officers and directors.
27 Financial Data Schedule, fiscal year end 1999.