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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002
Commission File Number 0-21886
BARRETT BUSINESS SERVICES, INC.
(Exact name of registrant as specified in its charter)
Maryland 52-0812977
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
4724 SW Macadam Avenue
Portland, Oregon 97239
(Address of principal executive offices) (Zip Code)
(503) 220-0988 (Registrant's telephone
number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $.01 Per Share
(Title of class)
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No __
Indicate by check mark whether the Registrant is an accelerated filer (as
indicated by Exchange Act Rule 12 b-2) Yes _ No X
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.
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State the aggregate market value of the common equity held by
non-affiliates of the Registrant: $8,164,615 at June 28, 2002.
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of the latest practicable date:
Class Outstanding at February 28, 2003
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Common Stock, Par Value $.01 Per Share 5,751,035 Shares
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement for the 2003 Annual Meeting of
Stockholders are hereby incorporated by reference into Part III of Form 10-K.
BARRETT BUSINESS SERVICES, INC.
2002 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PART I Page
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Item 1. Business 2
Item 2. Properties 11
Item 3. Legal Proceedings 11
Item 4. Submission of Matters to a Vote of Security Holders 12
Executive Officers of the Registrant 12
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder 13
Matters
Item 6. Selected Financial Data 14
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations 15
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 25
Item 8. Financial Statements and Supplementary Data 25
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure 25
PART III
Item 10. Directors and Executive Officers of the Registrant 26
Item 11. Executive Compensation 26
Item 12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters 26
Item 13. Certain Relationships and Related Transactions 26
Item 14. Controls and Procedures 27
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 28
Financial Statements F-1
Signatures and Certifications
Exhibit Index
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PART I
Item 1. BUSINESS
GENERAL
Barrett Business Services, Inc. ("Barrett" or the "Company"), was
incorporated in the state of Maryland in 1965. Barrett is a leading human
resource management company. The Company provides comprehensive outsourced
solutions addressing the costs and complexities of a broad array of
employment-related issues for businesses of all sizes. Employers are faced with
increasing complexities in employment laws and regulations, employee benefits
and administration, federal, state and local payroll tax compliance and
mandatory workers' compensation coverage, as well as the recruitment and
retention of quality employees. The Company believes that outsourcing the
management of various employer and human resource responsibilities, which are
typically considered non-core functions, enables organizations to focus on their
core competencies, thereby improving operating efficiencies.
Barrett's range of services and expertise in human resource management
encompasses five major categories: payroll processing, employee benefits and
administration, workers' compensation coverage, effective risk management and
workplace safety programs, and human resource administration, which includes
functions such as recruiting, interviewing, drug testing, hiring, placement,
training and regulatory compliance. These services are typically provided
through a variety of contractual arrangements, as part of either a traditional
staffing service or a professional employer organization ("PEO") service.
Staffing services include on-demand or short-term staffing assignments,
long-term or indefinite-term contract staffing, and comprehensive on-site
personnel management responsibilities. In a PEO arrangement, the Company enters
into a contract to become a co-employer of the client company's existing
workforce and assumes responsibility for some or all of the human resource
management responsibilities. The Company's target PEO clients typically have
limited resources available to effectively manage these matters. The Company
believes that its ability to offer clients a broad mix of staffing and PEO
services differentiates it from its competitors and benefits its clients through
(i) lower recruiting and personnel administration costs, (ii) decreases in
payroll expenses due to lower workers' compensation and health insurance costs,
(iii) improvements in workplace safety and employee benefits, (iv) lower
employee turnover and (v) reductions in management resources expended in
employment-related regulatory compliance. For 2002, Barrett's staffing services
revenues represented 88.5% of total revenues, compared to 11.5% for PEO services
revenues.
Barrett provides services to a diverse array of customers, including, among
others, electronics manufacturers, various light-manufacturing industries,
forest products and agriculture-based companies, transportation and shipping
enterprises, food processing, telecommunications, public utilities, general
contractors in numerous construction-related fields and various professional
services firms. During 2002, the Company provided staffing services to
approximately 2,900 customers, down from 3,300 in 2001. Although a majority of
the Company's staffing customers are small to mid-sized businesses, during 2002
approximately 20 of the Company's customers each utilized Barrett employees in a
number ranging from at least 200 employees to as many as 425 employees through
various staffing services arrangements. In addition, Barrett had approximately
300 PEO clients at December 31, 2002, compared to 380 at December 31, 2001 and
Barrett employed approximately 3,100 and 3,500 employees pursuant to PEO
contracts at December 31, 2002 and 2001, respectively. The decrease in the
number of PEO customers at December 31, 2002 was primarily due to the Company's
decision to discontinue doing business with customers who were not providing
adequate profit margins or represented unacceptable levels of risk associated
with credit or workplace safety.
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PART I
The Company operates through a network of 26 branch offices in Oregon,
California, Washington, Maryland, Delaware, Arizona and North Carolina. Barrett
also has several smaller recruiting offices in its general market areas under
the direction of a branch office.
OPERATING STRATEGIES
The Company's principal operating strategies are to: (i) provide effective
human resource management services through a unique and efficient blend of
staffing and PEO arrangements, (ii) promote a decentralized and autonomous
management philosophy and structure, (iii) leverage branch office economies of
scale, (iv) motivate employees through regular profit sharing and (v) control
workers' compensation costs through effective risk management.
GROWTH STRATEGIES
The Company's principal growth strategies are to: (i) support, strengthen
and expand branch office operations, (ii) enhance management information systems
to support continued growth and to improve customer services and (iii) expand
through acquisitions of human resource-related businesses in new and existing
geographic markets.
ACQUISITIONS
The Company reviews acquisition opportunities on a periodic basis. While
growth through acquisition has historically been a major element of the
Company's overall strategic growth plan, there can be no assurance that any
additional acquisitions will be completed in the foreseeable future, or that any
future acquisitions will have a positive effect on the Company's performance.
Acquisitions involve a number of potential risks, including the diversion of
management's attention to the assimilation of the operations and personnel of
the acquired companies, exposure to workers' compensation and other costs in
differing regulatory environments, adverse short-term effects on the Company's
operating results and integration of management information systems.
Management's current focus is on returning the Company to profitability rather
than pursuing acquisition opportunities.
THE COMPANY'S SERVICES
Overview of Services. Barrett's services are typically provided through a
variety of contractual arrangements, as part of either a traditional staffing
service or a PEO service. These contractual arrangements also provide a
continuum of human resource management services. While some services are more
frequently associated with Barrett's co-employer arrangements, the Company's
expertise in such areas as safety services and personnel-related regulatory
compliance may also be utilized by its staffing services customers through the
Company's human resource management services. The Company's range of services
and expertise in human resource management encompasses five major categories:
o Payroll Processing. For both the Company's staffing services and
PEO employees, the Company performs all functions associated with
payroll administration, including preparing and delivering
paychecks, computing tax withholding and payroll deductions,
handling garnishments, computing vacation and sick pay, and
preparing W-2 forms and accounting reports through centralized
operations at its headquarters in Portland, Oregon.
o Employee Benefits and Administration. As a result of its size,
Barrett is able to offer employee benefits which are typically not
available at an affordable cost to many of its customers,
particularly those with fewer than 100 employees. These benefits
include health care insurance, a 401(k) savings plan, a Section
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PART I
125 cafeteria plan, life and disability insurance, claims
administration and a nonqualified deferred compensation plan.
o Safety Services. Barrett offers safety services to both its
staffing services and PEO customers in keeping with its corporate
philosophy of "making the workplace safer." The Company has at
least one risk manager available at each branch office to perform
workplace safety assessments for each of its customers and to
recommend actions to achieve safer operations. The Company's
services include safety training and safety manuals for both
workers and supervisors, job-site visits and meetings,
improvements in workplace procedures and equipment to further
reduce the risk of injury, compliance with OSHA requirements,
environmental regulations, workplace regulation by the U.S.
Department of Labor and state agencies and accident
investigations. As discussed under "Self-Insured Workers'
Compensation Program" below, the Company also pays safety
incentives to its customers who achieve improvements in workplace
safety.
o Workers' Compensation Coverage. Beginning in 1987, the Company
obtained self-insured employer status for workers' compensation
coverage in Oregon and is currently a qualified self-insured
employer in many of the states in which it operates. Through its
third-party administrators, Barrett provides claims management
services to its PEO customers. As discussed under "Self-Insured
Workers' Compensation Program" below, the Company works
aggressively at managing job injury claims, including identifying
fraudulent claims and utilizing its staffing services to return
workers to active employment earlier. As a result of its efforts
to manage workers' compensation costs, the Company is often able
to reduce its clients' overall expenses arising out of job-related
injuries and insurance.
o Human Resource Administration. Barrett offers its clients the
opportunity to leverage the Company's experience in
personnel-related regulatory compliance. For both its staffing
services employees and PEO clients, the Company handles the
burdens of advertising, recruitment, skills testing, evaluating
job applications and references, drug screening, criminal and
motor vehicle records reviews, hiring, and compliance with such
employment regulatory areas as immigration, the Americans with
Disabilities Act, and federal and state labor regulations.
STAFFING SERVICES. Barrett's staffing services include on-demand or
short-term staffing assignments, contract staffing, long-term or indefinite-term
on-site management and human resource administration. Short-term staffing
involves employee demands caused by such factors as seasonality, fluctuations in
customer demand, vacations, illnesses, parental leave, and special projects
without incurring the ongoing expense and administrative responsibilities
associated with recruiting, hiring and retaining additional permanent employees.
As more and more companies focus on effectively managing variable costs and
reducing fixed overhead, the use of employees on a short-term basis allows firms
to utilize the "just-in-time" approach for their personnel needs, thereby
converting a portion of their fixed personnel costs to a variable expense.
Contract staffing refers to the Company's responsibilities for the
placement of employees for a period of more than three months or an indefinite
period. This type of arrangement often involves outsourcing an entire department
in a large corporation or providing the workforce for a large project.
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PART I
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 3% of its total 2002
revenues.
In 2002, the light industrial sector generated approximately 73% of the
Company's staffing services revenues, while clerical office staff accounted for
21% of such revenues and technical personnel represented the balance of 6%.
Light industrial workers in the Company's employ perform such tasks as operation
of machinery, manufacturing, loading and shipping, site preparation for special
events, construction-site cleanup and janitorial services. Technical personnel
include electronic parts assembly workers and designers and drafters of
electronic parts.
Barrett emphasizes prompt, personalized service in assigning quality,
trained, drug-free personnel at competitive rates to its staffing services
customers. The Company uses internally developed computer databases of employee
skills and availability at each of its branches to match customer needs with
available qualified employees. The Company emphasizes the development of an
understanding of the unique requirements of its clientele by its account
managers. Customers are offered a "money-back" guarantee if dissatisfied with
staffing employees placed by Barrett.
The Company utilizes a variety of methods to recruit its work force for
staffing services, including among others, referrals by existing employees,
newspaper advertising and marketing brochures distributed at colleges and
vocational schools. The employee application process includes an interview,
skills assessment test, reference verification and drug screening. The
recruiting of qualified employees requires more effort when unemployment rates
are low. In mid-2000, the Company implemented a new, comprehensive
pre-employment screening test to further ensure that applicants are
appropriately qualified for employment.
Barrett's staffing services employees are not under its direct control
while working at a customer's business. Barrett has not experienced any
significant liability due to claims arising out of negligent acts or misconduct
by its staffing services employees. The possibility exists, however, of claims
being asserted against the Company which may exceed the Company's liability
insurance coverage, with a resulting negative effect on the Company's financial
condition.
PEO SERVICES. Many businesses, particularly those with a limited number of
employees, find personnel administration requirements to be unduly complex and
time consuming. These businesses often cannot justify the expense of a full-time
human resource staff. In addition, the escalating costs of health and workers'
compensation insurance in recent years, coupled with the increased complexity of
laws and regulations affecting the workplace, have created a compelling
opportunity for small to mid-sized businesses to outsource these managerial
burdens. The outsourcing of non-core business functions, such as human resource
administration, enables small enterprises to devote their limited resources to
their core competencies.
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PART I
In a PEO services arrangement, Barrett enters into a contract to become a
co-employer of the client company's existing workforce. Pursuant to this
contract, Barrett assumes responsibility for some or all of the human resource
management responsibilities, including payroll and payroll taxes, employee
benefits, health insurance, workers' compensation coverage, workplace safety
programs, compliance with federal and state employment laws, labor and workplace
regulatory requirements and related administrative responsibilities. Barrett has
the right to hire and fire its PEO employees, although the client company
remains responsible for day-to-day assignments, supervision and training and, in
most cases, recruiting.
The Company began offering PEO services to Oregon customers in 1990 and
subsequently expanded these services to other states. The Company has entered
into co-employer arrangements with a wide variety of clients, including
companies involved in moving and shipping, professional firms, construction,
retail, manufacturing and distribution businesses. PEO clients are typically
small to mid-sized businesses with up to 100 employees. None of the Company's
PEO clients individually accounted for more than 3% of its total annual revenues
during 2002.
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 financial incentives to PEO clients to maintain a safe-work
environment.
The Company's standard PEO services agreement provides for services for an
indefinite term, until notice of termination is given by either party. The
agreement permits cancellation by either party upon 30 days written notice. In
addition, the Company may terminate the agreement at any time for specified
reasons, including nonpayment or failure to follow Barrett's workplace safety
program.
The form of agreement also provides for indemnification of the Company by
the client against losses arising out of any default by the client under the
agreement, including failure to comply with any employment-related, health and
safety or immigration laws or regulations. The Company also requires the PEO
client to maintain comprehensive liability coverage in the amount of $1 million
for acts of its work-site employees. In addition, the Company has excess
liability insurance coverage. Although no claims exceeding such policy limits
have been paid by the Company to date, the possibility exists that claims for
amounts in excess of sums available to the Company through indemnification or
insurance may be asserted in the future, which could adversely affect the
Company's profitability.
SALES AND MARKETING
The Company's marketing efforts are principally focused on branch-level
development of local business relationships. On a regional and national level,
efforts are made to expand and align the Company's services to fulfill the needs
of local customers with multiple locations, which may include using on-site
Barrett personnel and the opening of additional offices to better serve a
customer's broader geographic needs.
BILLING
Through centralized operations at the Company's headquarters in Portland,
Oregon, the Company prepares invoices weekly for its staffing services customers
and following the end of each payroll period for PEO clients. Health insurance
premiums are passed through to PEO clients. Payment terms for most PEO clients
are due on the invoice date.
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PART I
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, including catastrophic injuries and fatalities, incurred
in the course and scope of employment. The benefits payable for various
categories of claims are determined by state regulation and vary with the
severity and nature of the injury or illness and other specified factors. In
return for this guaranteed protection, workers' compensation is an exclusive
remedy and employees are generally precluded from seeking other damages from
their employer for workplace injuries. Most states require employers to maintain
workers' compensation insurance or otherwise demonstrate financial
responsibility to meet workers' compensation obligations to employees. In many
states, employers who meet certain financial and other requirements are
permitted to self-insure.
SELF INSURANCE FOR WORKERS' COMPENSATION. In August 1987, Barrett became a
self-insured employer for workers' compensation coverage in Oregon. The Company
subsequently obtained self-insured employer status for workers' compensation in
four additional states, Maryland, Washington, Delaware and California. In
addition, in May 1995, the Company was granted self-insured employer status by
the U.S. Department of Labor for longshore and harbor ("USL&H") workers'
compensation coverage. Effective April 16, 2001, the Company voluntarily elected
to terminate its USL&H self-insured status. Regulations governing self-insured
employers in each jurisdiction typically require the employer to maintain surety
deposits of cash, government securities or other financial instruments to cover
workers' claims in the event the employer is unable to pay for such claims.
To manage its financial exposure from the incidence of catastrophic
injuries and fatalities, the Company maintains excess workers' compensation
insurance pursuant to an annual policy with a major insurance company. Through
December 31, 2001, such excess insurance included a self-insured retention or
deductible of $350,000. Beginning January 1, 2002, the Company's excess workers'
compensation insurance policy provided coverage for single occurrences exceeding
$750,000 with statutory limits. Effective January 1, 2003, the per occurrence
retention remained at $750,000, but the policy limit was changed to $20 million.
The excess-insurance policy contains standard exclusions from coverage,
including punitive damages, fines or penalties in connection with violation of
any statute or regulation and losses covered by other insurance or indemnity
provisions.
CLAIMS MANAGEMENT. As a self-insured employer, the Company's workers'
compensation expense is tied directly to the incidence and severity of workplace
injuries to its employees. Barrett seeks to contain its workers' compensation
costs through an aggressive approach to claims management. The Company uses
managed-care systems to reduce medical costs and keeps time-loss costs to a
minimum by assigning injured workers, whenever possible, to short-term
assignments which accommodate the workers' physical limitations. The Company
believes that these assignments minimize both time actually lost from work and
covered time-loss costs. Barrett has also engaged third-party administrators
("TPAs") to provide additional claims management expertise. Typical management
procedures include performing thorough and prompt on-site investigations of
claims filed by employees, working
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PART I
with physicians to encourage efficient medical management of cases, denying
questionable claims and attempting to negotiate early settlements to eliminate
future case development and costs. Barrett also maintains a corporate-wide
pre-employment drug screening program and a mandatory post-injury drug test. The
program is believed to have resulted in a reduction in the frequency of
fraudulent claims and in accidents in which the use of illegal drugs appears to
have been a contributing factor.
ELEMENTS OF SELF-INSURANCE COSTS. The costs associated with the Company's
self-insured workers' compensation program include case reserves for reported
claims, an additional expense provision 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 (referred to as "IBNR"), 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 and legal fees. 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 and risk profile of the Company's payroll and loss experience.
WORKERS' COMPENSATION CLAIMS EXPERIENCE AND RESERVES
The Company recognizes its liability for the ultimate payment of incurred
claims and claims adjustment expenses by accruing liabilities which represent
estimates of future amounts necessary to pay claims and related expenses with
respect to covered events that have occurred. When a claim involving a probable
loss is reported, the Company's TPA establishes a case reserve for the estimated
amount of ultimate loss. The estimate reflects an informed judgment based on
established case reserving practices and the experience and knowledge of the TPA
regarding the nature and expected value of the claim, as well as the estimated
expense of settling the claim, including legal and other fees and expenses of
administering claims. The adequacy of such case reserves depends on the
professional judgment of each TPA to properly and comprehensively evaluate the
economic consequences of each claim. Additionally, on an aggregate basis, the
Company has established an additional expense reserve for both future adverse
loss development in excess of initial case reserves on open claims and for
claims incurred but not reported, referred to as the IBNR reserve.
As part of the case reserving process, historical data is reviewed and
consideration is given to the anticipated effect of various factors, including
known and anticipated legal developments, inflation and economic conditions.
Reserve amounts are necessarily based on management's estimates, and as other
data becomes available, these estimates are revised, which may result in
increases or decreases in existing case reserves. Barrett has engaged a
nationally-recognized, independent actuary to review annually the Company's
total workers' compensation claims liability and reserving practices. Based in
part on such review, the Company believes its total accrued workers'
compensation claims liabilities at December 31, 2002, are adequate. It is
possible, however, that the Company's actual future workers' compensation
obligations may exceed the amount of its accrued liabilities, with a
corresponding negative effect on future earnings, due to such factors as
unanticipated adverse loss development of known claims, and the effect, if any,
of claims incurred but not reported. Refer to Part II, Item 7, under the heading
"Critical Accounting Policies".
Approximately one-fifth of the Company's total payroll exposure was in
relatively high-risk industries with respect to workplace injuries, including
trucking, construction and certain warehousing activities. Failure to
successfully manage the severity and frequency of workers' compensation injuries
results in increased workers' compensation expense and has a
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PART I
negative effect, which may be substantial, on the Company's operating results
and financial condition. Management maintains clear guidelines for its branch
office managers, account managers, and risk managers 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.
EMPLOYEES AND EMPLOYEE BENEFITS
At December 31, 2002, the Company had approximately 8,380 employees,
including approximately 5,100 staffing services employees, approximately 3,100
PEO employees and approximately 180 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 2002, less than
1% of the Company's employees were covered by a collective bargaining agreement.
Each of Barrett's managerial, sales and administrative employees has entered
into a standard form of employment agreement which, among other provisions,
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.
Benefits offered to Barrett's staffing services employees include group
health insurance, a Section 125 cafeteria plan which permits employees to use
pretax earnings to fund various services, including medical, dental and
childcare, and a Section 401(k) savings plan pursuant to which employees may
begin making contributions upon reaching 21 years of age and completing 1,000
hours of service in any consecutive 12-month period. The Company may also make
contributions to the savings plan, which vest over seven years and are subject
to certain legal limits, at the sole discretion of the Company's Board of
Directors. In addition, the Company offers a nonqualified deferred compensation
plan for highly compensated employees who are precluded from participation in
the 401(k) plan. Employees subject to a co-employer arrangement may participate
in the Company's benefit plans, provided that the group health insurance
premiums may, at the client's option, be paid by payroll deduction. See
"Regulatory and Legislative Issues--Employee Benefit Plans."
REGULATORY AND LEGISLATIVE ISSUES
BUSINESS OPERATIONS. The Company is subject to the laws and regulations of
the jurisdictions within which it operates, including those governing
self-insured employers under the workers' compensation systems in Oregon,
Washington, Maryland, Delaware and California. An Oregon PEO company, such as
Barrett, is required to be licensed as a worker-leasing company by the Workers'
Compensation Division of the Oregon Department of Consumer and Business
Services. Temporary staffing companies are expressly exempt from the Oregon
licensing requirement. Oregon PEO companies are also required to ensure that
each PEO client provides adequate training and supervision for its employees to
comply with statutory requirements for workplace safety and to give 30 days
written notice in the event of a termination of its obligation to provide
workers' compensation coverage for PEO employees and other subject employees of
a PEO client. Although compliance with these requirements imposes some
additional financial risk on Barrett, particularly with respect to those clients
who
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PART I
breach their payment obligation to the Company, such compliance has not had a
significant adverse impact on Barrett's business to date.
EMPLOYEE BENEFIT PLANS. The Company's operations are affected by numerous
federal and state laws relating to labor, tax and employment matters. By
entering into a co-employer relationship with employees who are assigned to work
at client locations (sometimes referred to as "work-site employees"), the
Company assumes certain obligations and responsibilities of an employer under
these federal and state laws. Because many of these federal and state laws were
enacted prior to the development of nontraditional employment relationships,
such as professional employer, temporary employment, and outsourcing
arrangements, many of these laws do not specifically address the obligations and
responsibilities of nontraditional employers. In addition, the definition of
"employer" under these laws is not uniform.
As an employer, the Company is subject to all federal statutes and
regulations governing its employer-employee relationships. Subject to the issues
discussed below, the Company believes that its operations are in compliance in
all material respects with all applicable federal statutes and regulations.
The Company offers various qualified employee benefit plans to its
employees, including its work-site employees. These employee benefit plans
include a savings plan (the "401(k) plan") under Section 401(k) of the Internal
Revenue Code (the "Code"), a cafeteria plan under Code Section 125, a group
health plan, a group life insurance plan and a group disability insurance plan.
In addition, the Company offers a nonqualified deferred compensation plan, which
is available to highly compensated employees who are not eligible to participate
in the Company's 401(k) plan. Generally, qualified employee benefit plans are
subject to provisions of both the Code and the Employee Retirement Income
Security Act of 1974 ("ERISA"). In order to qualify for favorable tax treatment
under the Code, qualified plans must be established and maintained by an
employer for the exclusive benefit of its employees. See Item 7 of this report
for a discussion of issues regarding qualification of the Company's employee
benefit plans arising out of participation by the Company's PEO employees.
COMPETITION
The staffing services and PEO businesses are characterized by intense
competition. The staffing services market includes competitors of all sizes,
including several, such as Manpower, Inc., Kelly Services, Inc. and RemedyTemp,
Inc., that are national in scope and have substantially greater financial,
marketing and other resources than the Company. In addition to national
companies, Barrett competes with numerous regional and local firms for both
customers and employees. There are relatively few barriers to entry into the
staffing services business. The principal competitive factors in the staffing
services industry are price, the ability to provide qualified workers in a
timely manner and the monitoring of job performance. The Company attributes its
internal growth in staffing services revenues to the cost-efficiency of its
operations which permits the Company to price its services competitively, and to
its ability through its branch office network to understand and satisfy the
needs of its customers with competent personnel.
Although there are believed to be at least 800 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 2002, approximately 63%
and 31% of the Company's PEO service fee revenues were earned in Oregon and
California, respectively.
-10-
PART I
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., Gevity HR, Inc. and Paychex, Inc., among others. Competition
in the PEO industry is based largely on price, although service and quality can
also provide competitive advantages. Barrett believes that its past growth in
PEO service fee revenues is attributable to its ability to provide small and
mid-sized companies with the opportunity to provide enhanced benefits to their
employees while reducing their overall personnel administration and workers'
compensation costs. The Company's competitive advantage may be adversely
affected by a substantial increase in the costs of maintaining its self-insured
workers' compensation program. A general market decrease in the level of
workers' compensation insurance premiums may also decrease demand for PEO
services.
Item 2. PROPERTIES
The Company provides staffing and PEO services through all 26 of its branch
offices. The following table shows the number of branch offices located in each
state in which the Company operates. The Company's California and Oregon offices
accounted for 44% and 30%, respectively, of its total revenues in 2002. 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 10
Oregon 9
Washington 1
Maryland 3
Delaware 1
North Carolina 1
The Company's corporate headquarters are located in an office building in
Portland, Oregon, with approximately 9,500 square feet of office space. The
building is subject to a mortgage loan with a principal balance of approximately
$347,000 at December 31, 2002. The Company also owns one other office building,
in Portland, Oregon with approximately 8,200 square feet of office space, which
houses its Portland/Bridgeport branch office. The Company recently entered into
a definitive agreement with a third party for the sale and leaseback of both
properties to the Company pursuant to long-term leases. Refer to Part II, Item
7, under the heading "Liquidity and Capital Resources" below.
Barrett leases office space for its other branch offices. At December 31,
2002, such leases had expiration dates ranging from less than one year to five
years, with total minimum payments through 2007 of approximately $2,747,000.
Item 3. LEGAL PROCEEDINGS
There were no material legal proceedings pending against the Company at
December 31, 2002, or during the period beginning with that date through March
31, 2003.
-11-
PART I
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 2002.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table identifies, as of February 28, 2003, 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 Since
Business Experience
- --------------------------------------------------------------------------------
William W. 57 President; Chief Executive 1980
Sherertz Officer; Director
Michael D. 51 Vice President-Finance and 1994
Mulholland Secretary; Chief Financial
Officer
Gregory R. Vaughn 47 Vice President 1998
James D. Miller 39 Controller and Assistant 1994
Secretary; Principal Accounting
Officer
- -------------------------------
William W. Sherertz has acted as Chief Executive Officer of the Company
since 1980. He has also been a director of the Company since 1980, and was
appointed President of the Company in March 1993. Mr. Sherertz also serves as
Chairman of the Board of Directors.
Michael D. Mulholland joined the Company in August 1994 as Vice
President-Finance and Secretary. From 1988 to 1994, Mr. Mulholland was employed
by Sprouse-Reitz Stores Inc. ("Sprouse"), a former Nasdaq-listed retail company,
serving as its Executive Vice President, Chief Financial Officer and Secretary.
Prior to Sprouse, Mr. Mulholland held senior management positions with
Lamb-Weston, Inc., a food processing company, from 1985 to 1988, and Keil, Inc.,
a regional retail company, from 1978 to 1985. Mr. Mulholland, a certified public
accountant on inactive status, was also employed by Touche Ross & Co., now known
as Deloitte & Touche LLP.
Gregory R. Vaughn joined the Company in July 1997 as Operations Manager.
Mr. Vaughn was appointed Vice President in January 1998. Prior to joining
Barrett, Mr. Vaughn was Chief Executive Officer of Insource America, Inc., a
privately-held human resource management company headquartered in Portland,
Oregon, since 1996. Mr. Vaughn has also held senior management positions with
Sundial Time Systems, Inc. from 1995 to 1996 and Continental Information
Systems, Inc. from 1990 to 1994. Previously, Mr. Vaughn was employed as a
technology consultant by Price Waterhouse LLP, now known as
PricewaterhouseCoopers LLP.
James D. Miller joined the Company in January 1994 as Controller. From 1991
to 1994, he was the Corporate Accounting Manager for Christensen Motor Yacht
Corporation. Mr. Miller, a certified public accountant on inactive status, was
employed by Price Waterhouse LLP, now known as PricewaterhouseCoopers LLP, from
1987 to 1991.
-12-
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock (the "Common Stock") trades on The Nasdaq Stock
Market's SmallCap(TM) tier under the symbol "BBSI." At February 28, 2003, there
were 61 stockholders of record and approximately 500 beneficial owners of the
Common Stock. The Company has not declared or paid any cash dividends since the
closing of its initial public offering of Common Stock on June 18, 1993, and has
no present plan to pay any cash dividends in the foreseeable future. The
following table presents the high and low sales prices of the Common Stock for
each quarterly period during the last two fiscal years, as reported by The
Nasdaq Stock Market:
High Low
----------- ---------
2001
----
First Quarter $ 4.00 $ 3.38
Second Quarter 3.97 3.30
Third Quarter 4.25 3.05
Fourth Quarter 5.06 3.04
2002
----
First Quarter $ 4.00 $ 3.15
Second Quarter 4.00 2.74
Third Quarter 3.50 2.01
Fourth Quarter 4.00 2.67
-13-
PART II
Item 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
the Company's financial statements and the accompanying notes listed in Item 15
of this report. The Company's financial statements for the years ended December
31, 2001, 2000, 1999 and 1998 have been restated because the Company has
determined that it is not the primary obligor for the services provided by
employees pursuant to its PEO arrangements. Accordingly, the requirements of
EITF 99-19, "Reporting Revenues Gross as a Principal Versus Net as an Agent",
require that it not reflect the direct payroll costs paid to such employees and
its PEO customers in both revenues and cost of revenues. Professional employer
service fees and direct payroll costs were both reduced by $77,272, $111,838,
$128,426 and $113,710 (in thousands) for the years ended December 31, 2001,
2000, 1999 and 1998, respectively. Quarterly amounts appearing in Note 17 have
been restated for the first, second, and third quarters of 2002 and all quarters
for the years ended December 31, 2001 and 2000.
Year Ended December 31,
2002 2001 2000 1999 1998
------------- ------------- ------------- ------------- -------------
(In thousands, except per share data) As Restated, see Note 1 of
Notes to Financial Statements
-------------------------------------------------------
Statement of operations:
Revenues:
Staffing services $ 96,750 $ 123,110 $ 188,500 $ 194,991 $ 165,443
Professional employer service fees 12,558 16,281 22,128 24,433 23,876
------------- ------------- ------------- ------------- -------------
Total 109,308 139,391 210,628 219,424 189,319
------------- ------------- ------------- ------------- -------------
Cost of revenues:
Direct payroll costs 71,515 90,750 139,177 141,623 121,555
Payroll taxes and benefits 14,062 17,635 27,007 28,603 25,550
Workers' compensation 8,766 12,971 12,639 11,702 10,190
------------- ------------- ------------- ------------- -------------
Total 94,343 121,356 178,823 181,928 157,295
------------- ------------- ------------- ------------- -------------
Gross margin 14,965 18,035 31,805 37,496 32,024
Selling, general and administrative expenses 16,008 18,737 24,583 25,957 23,012
Merger expenses - - - - 750
Depreciation and amortization 1,162 3,277 3,192 2,461 1,785
------------- ------------- ------------- ------------- -------------
(Loss) income from operations (2,205) (3,979) 4,030 9,078 6,477
------------- ------------- ------------- ------------- -------------
Other (expense) income:
Interest expense (278) (359) (830) (634) (173)
Interest income 217 297 341 357 441
Other, net 21 45 6 32 (1)
------------- ------------- ------------- ------------- -------------
Total (40) (17) (483) (245) 267
------------- ------------- ------------- ------------- -------------
(Loss) income before income taxes (2,245) (3,996) 3,547 8,833 6,744
(Benefit from) provision for income taxes (892) (1,574) 1,446 3,684 2,923
------------- ------------- ------------- ------------- -------------
Net (loss) income $ (1,353) $ (2,422) $ 2,101 $ 5,149 $ 3,821
============= ============= ============= ============= =============
Basic (loss) earnings per share $ (.23) $ (.39) $ .29 $ .68 $ .50
============= ============= ============= ============= =============
Weighted average number of basic shares
outstanding 5,804 6,193 7,237 7,581 7,664
============= ============= ============= ============= =============
Diluted (loss) earnings per share $ (.23) $ (.39) $ .29 $ .68 $ .50
============= ============= ============= ============= =============
Weighted average number of diluted shares
outstanding 5,804 6,193 7,277 7,627 7,711
============= ============= ============= ============= =============
Selected balance sheet data:
Working capital $ 2,235 $ 2,658 $ 3,731 $ 7,688 $ 13,272
Total assets 47,297 52,566 60,865 70,504 52,770
Long-term debt, net of current portion 488 922 2,283 5,007 1,503
Stockholders' equity 28,785 30,534 34,917 37,329 33,702
-14-
PART II
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
The Company's revenues consist of staffing services and professional
employer organization ("PEO") service fees. Staffing services revenues are
derived from services performed for short-term staffing, contract staffing and
on-site management. PEO service fees refer exclusively to co-employer
contractual agreements with PEO clients. The Company's revenues from staffing
services represent all amounts invoiced to customers for direct payroll,
employer payroll related taxes, workers' compensation coverage and a service fee
(equivalent to a mark-up percentage). PEO service fee revenues are recognized in
accordance with EITF 99-19, "Reporting Revenues Gross as a Principal Versus Net
as an Agent." As such, the Company's PEO service fee revenues include amounts
invoiced to PEO customers for employer payroll related taxes, workers'
compensation coverage and a gross profit. Thus, amounts invoiced to PEO
customers for salaries, wages, health insurance and employee out-of-pocket
expenses incurred incidental to employment are excluded from PEO service fee
revenues and cost of revenues. The Company's Oregon and California offices
accounted for approximately 74% of its total revenues in 2002. Consequently,
weakness in economic conditions in these regions could have a material adverse
effect on the Company's financial results. 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 Company's cost of revenues is comprised of direct payroll costs for
staffing services, employer payroll related taxes and employee benefits and
workers' compensation. Direct payroll costs represent the gross payroll earned
by staffing services 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
staffing services employee reimbursements for materials, supplies and other
expenses, which are paid by the customer. Workers' compensation expense consists
primarily of the costs associated with the Company's self-insured workers'
compensation program, such as claims reserves, claims administration fees, legal
fees, state and federal administrative agency fees and reinsurance costs for
catastrophic injuries. The Company also maintains separate workers' compensation
insurance policies for employees working in states where the Company is not
self-insured.
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
-15-
PART II
for open injury claims and for claims incurred but not reported related to prior
and current periods. Management believes that the Company's operational policies
and internal claims reporting system minimizes the occurrence of unreported
incurred claims.
Selling, general and administrative ("SG&A") expenses represent both branch
office and corporate-level operating expenses. Branch operating expenses consist
primarily of branch office staff payroll and personnel related costs,
advertising, rent, office supplies, depreciation and branch incentive
compensation. Corporate-level operating expenses consist primarily of executive
and office staff payroll and personnel related costs, professional and legal
fees, travel, depreciation, occupancy costs, information systems costs and
executive and corporate staff incentive bonuses.
Amortization of intangible assets consists of the amortization of software
costs, and covenants not to compete, which are amortized using the straight-line
method over their estimated useful lives, which range from two to 10 years.
CRITICAL ACCOUNTING POLICIES
The Company has identified the following policies as critical to the
Company's business and the understanding of its results of operations. For a
detailed discussion of the application of these and other accounting policies,
see Note 1 in the Notes to the Financial Statements in Item 15 of this Annual
Report on Form 10-K. Note that the preparation of this Annual Report on Form
10-K requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities at the date of the financial
statements, and the reported amounts of revenue and expenses during the
reporting period. Management bases its estimates on historical experience and on
various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions.
SELF-INSURED WORKERS' COMPENSATION RESERVES. The Company is self-insured
for workers' compensation coverage in a majority of its employee work sites.
Accruals for workers' compensation expense are made based upon the Company's
claims experience and an annual independent actuarial analysis, utilizing
Company experience, as well as claim cost development trends and current
workers' compensation industry loss information. As such, a majority of the
Company's recorded expense for workers' compensation is management's best
estimate. Management believes that the amount accrued is adequate to cover all
known and unreported claims at December 31, 2002. However, if the actual costs
of such claims and related expenses exceeds the amount estimated, additional
reserves may be required, which would have a material negative effect on
operating results.
ALLOWANCE FOR DOUBTFUL ACCOUNTS. The Company must make estimates of the
collectibility of accounts receivables. Management analyzes historical bad
debts, customer concentrations, customer credit-worthiness, current economic
trends and changes in the customers' payment tendencies when evaluating the
adequacy of the allowance for doubtful accounts. If the financial condition of
the Company's customers were to deteriorate, resulting in an impairment of their
ability to make payments, additional allowances may be required.
INTANGIBLE ASSETS AND GOODWILL. The Company assesses the recoverability of
intangible assets and goodwill annually and whenever events or changes in
circumstances indicate that the carrying value might be impaired. Factors that
are considered include significant underperformance relative to expected
historical or projected future operating results, significant negative industry
trends and significant change in the manner of use of the
-16-
PART II
acquired assets. Management's current assessment of the carrying value of
intangible assets and goodwill indicates there is no impairment based upon
projected future cash flows and is predicated, in part, on the Company's
operating results returning to historical levels within the next few years. If
these estimates or their related assumptions change in the future, the Company
may be required to record impairment charges for these assets not previously
recorded.
NEW ACCOUNTING PRONOUNCEMENTS
For a discussion of new accounting pronouncements and their potential
effect on the Company's results of operations and financial condition, refer to
Note 1 in the Notes to the Financial Statements in Item 15 of this Annual Report
on Form 10-K.
FORWARD-LOOKING INFORMATION
Statements in this Item or in Item 1 of this report which are not
historical in nature, including discussion of economic conditions in the
Company's market areas, the potential for and effect of past and future
acquisitions, the effect of changes in the Company's mix of services on gross
margin, the adequacy of the Company's workers' compensation reserves and
allowance for doubtful accounts, the effectiveness of the Company's management
information systems, 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, future
workers' compensation claims experience, the carrying values of deferred income
tax assets and goodwill, which are subject to the improvement in the Company's
future operating results, the availability of capital or letters of credit
necessary to meet state-mandated surety deposit requirements for maintaining the
Company's status as a qualified self-insured employer for workers' compensation
coverage, and the availability of and costs associated with potential sources of
financing. The Company disclaims any obligation to update any such factors or to
publicly announce the result of any revisions to any of the forward-looking
statements contained herein to reflect future events or developments.
RESULTS OF OPERATIONS
The following table sets forth the percentages of total revenues
represented by selected items in the Company's Statements of Operations for the
years ended December 31, 2002, 2001 and 2000, listed in Item 15 of this report.
The Company has restated its financial statements for the years ended December
31, 2001 and 2000 because the Company has determined that it is not the primary
obligor for the services provided by employees pursuant to its PEO arrangements.
Accordingly, the requirements of EITF 99-19, "Reporting Revenues Gross as a
Principal Versus Net as an Agent", require that it not reflect the direct
payroll costs paid to such employees and its PEO customers in both revenues and
cost of revenues. References to the Notes to Financial Statements appearing
below are to the notes to the Company's financial statements listed in Item 15
of this Report.
-17-
PART II
Percentage of Total Revenues
---------------------------------------------------
Years Ended December 31,
---------------------------------------------------
2002 2001 2000
------------- ------------- -------------
As Restated, see Note 1 of
Notes to Financial Statements
--------------------------------
Revenues:
Staffing services 88.5 % 88.3 % 89.5 %
Professional employer service fees 11.5 11.7 10.5
------------- ------------- -------------
Total 100.0 100.0 100.0
------------- ------------- -------------
Cost of revenues:
Direct payroll costs 65.4 65.1 66.1
Payroll taxes and benefits 12.9 12.7 12.8
Workers' compensation 8.0 9.3 6.0
------------- ------------- -------------
Total 86.3 87.1 84.9
------------- ------------- -------------
Gross margin 13.7 12.9 15.1
Selling, general and administrative expenses 14.6 13.4 11.7
Depreciation and amortization 1.1 2.4 1.5
------------- ------------- -------------
(Loss) income from operations (2.0) (2.9) 1.9
Other (expense) income - - (0.2)
------------- ------------- -------------
Pretax (loss) income (2.0) (2.9) 1.7
(Benefit from) provision for income taxes (0.8) (1.2) 0.7
------------- ------------- -------------
Net (loss) income (1.2) % (1.7) % 1.0 %
============= ============= =============
YEARS ENDED DECEMBER 31, 2002 AND 2001
Net loss for the year ended December 31, 2002 was $1,353,000, an
improvement of $1,069,000 over the net loss of $2,422,000 for 2001. The
improvement in the net loss was attributable to a 14.6% reduction in SG&A
expenses and a 64.5% reduction in depreciation and amortization expenses,
partially offset by a 17.0% decline in gross margin dollars, primarily resulting
from a 21.6% decrease in revenues. Basic and diluted loss per share for 2002
were $.23 as compared to basic and diluted loss per share of $.39 for 2001.
Revenues for 2002 totaled $109,308,000, a decrease of approximately
$30,083,000 or 21.6% from 2001 revenues of $139,391,000. The decrease in total
revenues was due, in part, to the continued softening of business conditions in
the Company's market areas, particularly in the Company's Northern California
operations, which accounted for approximately 46.0% of the decline in total
revenues for 2002, as well as to management's decision to terminate the
Company's relationship with certain customers who provided insufficient gross
margin in relation to such risk factors as workplace safety and credit. The
Company has recently hired several new branch office managers throughout its
operating regions, which management believes will have a positive effect on the
Company's business prospects in the future.
Staffing services revenue decreased $26,360,000 or 21.4%, while
professional employer service fee revenue decreased $3,723,000 or 22.9%, which
resulted in an increase in the share of staffing services to 88.5% of total
revenues for 2002, as compared to 88.3% for 2001. The decrease in staffing
services revenue for 2002 was primarily attributable to a continued decrease in
demand for the Company's services in the majority of areas in which the Company
does business owing to general weak economic conditions. The share of
professional employer service fee revenues had a corresponding decrease from
11.7% of total
-18-
PART II
revenues for 2001 to 11.5% for 2002. The decrease in professional employer
service fee revenue for 2002 was primarily due to management's decision to
discontinue its services to certain PEO customers which provided insufficient
gross margin or represented unacceptable levels of risk associated with credit
or workplace safety.
Gross margin for 2002 totaled $14,965,000, which represented a decrease of
$3,070,000 or 17.0% from 2001. The gross margin percent increased from 12.9% of
revenues for 2001 to 13.7% for 2002. The increase in the gross margin percentage
was due to lower workers' compensation costs offset in part by higher direct
payroll costs and payroll taxes and benefits, as a percentage of revenues. The
decrease in workers' compensation costs, as a percentage or revenues, from 9.3%
of revenues for 2001 to 8.0% for 2002, was principally due to a lessening of the
increase in the adverse development of estimated future costs of workers'
compensation claims primarily concentrated in the Company's California
operations. The increase in direct payroll costs as a percentage of revenues
from 65.1% for 2001 to 65.4% for 2002 primarily reflects the current mix of
services to the current customer base. The increase in payroll taxes and
benefits as a percentage of revenues from 12.7% for 2001 to 12.9% for 2002 was
primarily attributable to slightly higher state unemployment tax rates in
various states in which the Company operates. The Company expects gross margin,
as a percentage of revenues, to continue to be influenced by fluctuations in the
mix between staffing and PEO services, including the mix within the staffing
segment, as well as the adequacy of its estimates for workers' compensation
liabilities, which may be negatively affected by unanticipated adverse loss
development of claims reserves.
In connection with the Company's self-insured workers' compensation
program, the Company has maintained an excess workers' compensation policy which
limits the financial effect of costly workers' compensation claims. For the
calendar years 2000 and 2001, such policies included a self-insured retention or
deductible of $350,000 and $400,000 per occurrence, respectively. Effective
January 1, 2002, the self-insured retention or deductible on the Company's
excess workers' compensation policy increased to $750,000 per occurrence.
Management believes that the Company obtained the most favorable terms and
conditions available in the market, in view of the effect of the events of
September 11, 2001, on the insurance industry and the Company's size and scope
of operations. Management believes that the increased self-insured retention has
not had a material adverse effect on the Company.
SG&A expenses consist of compensation and other expenses incident to the
operation of the Company's headquarters and the branch offices and the marketing
of its services. SG&A expenses for 2002 amounted to $16,008,000, a decrease of
$2,729,000 or 14.6% from 2001. SG&A expenses, expressed as a percentage of
revenues, increased from 13.4% for 2001 to 14.6% for 2002. The decrease in total
SG&A dollars was primarily due to reductions in branch management personnel and
related expenses as a result of the continued downturn in the Company's
business.
Depreciation and amortization totaled $1,162,000 for 2002, which compares
to $3,277,000 for 2001. The decreased expense was primarily due the Company's
adoption of Statement of Financial Accounting Standard No. 142 "Goodwill and
Other Intangible Assets" effective January 1, 2002, whereby the Company ceased
the amortization of its recorded goodwill. 2001 included $1,783,000 of goodwill
amortization. (See Note 1 in the Notes to the Financial Statements in Item 15 of
this Annual Report on Form 10-K.)
At December 31, 2002, the Company had net deferred income tax assets of
$3,556,000, primarily reflecting temporary differences between taxable income
for "book" and tax purposes and tax credit carryforwards, which will reduce
taxable income in future years. Pursuant to generally accepted accounting
principles, the Company is required to assess the
-19-
PART II
realization of the deferred income tax assets as significant changes in
circumstances may require adjustments during future periods. Although
realization is not assured in view of losses incurred by the Company during the
past two years, management has concluded that it is more likely than not that
the remaining net deferred income tax assets will be realized, principally based
upon forecasted taxable income for the next two years and the gain expected to
be recognized from the pending sale-leaseback transaction involving two office
buildings owned by the Company. The amount of the net deferred income tax assets
actually realized could vary, if there are differences in the timing or amount
of future reversals of existing deferred income tax assets or changes in the
actual amounts of future taxable income as compared to operating forecasts. If
the Company's operating forecast is determined to no longer be reliable due to
uncertain market conditions or improvement in the Company's results of
operations does not occur, the Company's long-term forecast will require
reassessment. As a result, in the future, a valuation allowance may be required
to be established for all or a portion of the net deferred income tax assets.
Such a valuation allowance could have a significant effect on the Company's
future results of operations and financial position.
The Company offers various qualified employee benefit plans to its
employees, including its PEO employees. These qualified employee benefit plans
include a savings plan (the "401(k) plan") under Section 401(k) of the Internal
Revenue Code (the "Code"), a cafeteria plan under Code Section 125, a group
health plan, a group life insurance plan and group disability insurance plan.
Generally, qualified employee benefit plans are subject to provisions of both
the Code and the Employee Retirement Income Security Act of 1974 ("ERISA"). In
order to qualify for favorable tax treatment under the Code, qualified plans
must be established and maintained by an employer for the exclusive benefit of
its employees.
After several years of study, on April 24, 2002, the Internal Revenue
Service ("IRS") issued Revenue Procedure 2002-21 ("Rev Proc") to provide relief
with respect to certain defined contribution retirement plans maintained by a
PEO that benefit worksite employees. The Rev Proc outlines the steps necessary
for a PEO to avoid plan disqualification for violating the exclusive benefit
rule. Essentially, a PEO must either (1) terminate the plan; (2) convert its
plan to a "multiple employer plan" by December 31, 2003; or (3) transfer the
plan assets and liabilities to a customer plan. Effective December 1, 2002, the
Company converted its 401(k) plan to a "multiple employer plan".
YEARS ENDED DECEMBER 31, 2001 AND 2000
Net loss for the year ended December 31, 2001 was $2,422,000, a decline of
$4,523,000 from net income of $2,101,000 for 2000. The decrease was attributable
to lower gross margin dollars primarily resulting from a 33.8% decrease in
revenues coupled with a 330 basis point increase in workers' compensation
expense, as a percent of revenues, partially offset by a $5,846,000 or 23.8%
reduction in SG&A expenses and a $466,000 reduction in other expense. Basic and
diluted loss per share for 2001 were $.39 as compared to basic and diluted
earnings per share of $.29 for 2000.
Revenues for 2001 totaled $139,391,000, a decrease of approximately
$71,237,000 or 33.8% from 2000 revenues of $210,628,000. The decrease in total
revenues was due, in part, to the continued softening of business conditions in
the Company's market areas, particularly in the Company's Northern California
operations, and to competition, as well as to management's decision to terminate
the Company's relationship with certain customers who provided insufficient
gross margin in relation to such risk factors as workplace safety and credit.
-20-
PAGE II
Staffing services revenue decreased $65,390,000 or 34.7%, while
professional employer service fee revenue decreased $5,847,000 or 26.4%, which
resulted in a decrease in the share of staffing services to 88.3% of total
revenues for 2001, as compared to 89.5% for 2000. The decrease in staffing
services revenue for 2001 was primarily attributable to a decrease in demand for
the Company's services in the majority of areas in which the Company operates
owing to general economic conditions. The share of professional employer service
fee revenue to total revenues had a corresponding increase from 10.5% of total
revenues for 2000 to 11.7% for 2001. The decrease in professional employer
service fee revenue for 2001 was primarily due to a decline in the Company's
Northern California region, as a result of management's decision to discontinue
its services to a few high volume, low margin PEO customers.
Gross margin for 2001 totaled $18,035,000, which represented a decrease of
$13,770,000 or 43.3% from 2000. The gross margin percent decreased from 15.1% of
revenues for 2000 to 12.9% for 2001. The decrease in the gross margin percentage
was due to higher workers' compensation costs offset in part by lower direct
payroll costs and payroll taxes and benefits, as a percentage of revenues. The
increase in workers' compensation expense, as a percentage of revenues, from
6.0% of revenues for 2000 to 9.3% for 2001, was primarily due to an increase in
the adverse development of estimated future costs of workers' compensation
claims primarily related to 1999 and 2000 injuries concentrated in the Company's
California operations. The decrease in direct payroll costs, in total dollars
and as a percentage of revenues, was attributable to decreases in contract
staffing and on-site management, of which direct payroll costs generally
represent a higher percentage of revenues, and to a lesser extent to increases
in the rates the Company invoices customers for its services. The decrease in
payroll taxes and benefits for 2001, as a percentage of revenues, was primarily
attributable to lower state unemployment tax rates in various states in which
the Company operates, as compared to 2000.
SG&A expenses for 2001 amounted to $18,737,000, a decrease of $5,846,000 or
23.8% from 2000. SG&A expenses, expressed as a percentage of revenues, increased
from 11.7% for 2000 to 13.4% for 2001. The decrease in total SG&A dollars was
primarily due to decreases in branch management personnel and related expenses
as a result of the downturn in the Company's business.
Depreciation and amortization totaled $3,277,000 or 2.4% of revenues for
2001, which compares to $3,192,000 or 1.5% of revenues for 2000. The increased
depreciation and amortization expense was primarily due to a full year of
amortization in 2001 compared to ten months of amortization in 2000 arising from
the March 1, 2000 implementation of the Company's management information system.
Other expense totaled $17,000 for 2001, which compares to $483,000 for
2000. The decrease in expense was primarily due to lower net interest expense as
a result of lower debt levels and a decline in interest rates in 2001 compared
to 2000.
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
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PART II
payroll costs, but tend to represent a smaller percentage of revenues and direct
payroll later in the Company's fiscal year as federal and state statutory wage
limits for unemployment and social security taxes are exceeded by some
employees. Workers' compensation expense varies with both the frequency and
severity of workplace injury claims reported during a quarter and the estimated
future costs of such claims. In addition, adverse loss development of prior
period claims during a subsequent quarter may also contribute to the volatility
in the Company's estimated workers' compensation expense.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash position at December 31, 2002 of $96,000 decreased
$1,046,000 from December 31, 2001, which compares to an increase of $626,000 for
the year ended December 31, 2001. The decrease in cash at December 31, 2002 was
primarily due to cash used in operating activities of $906,000 and financing
activities of $1,128,000. The primary use of cash in operating activities was a
net reduction in workers' compensa-tion liabilities of $2,475,000. The primary
uses of cash for financing activities were payments on long-term debt and common
stock repurchases.
Net cash used in operating activities for 2002 amounted to $906,000, as
compared to net cash provided by operating activities of $5,577,000 for 2001.
For 2002, net cash used in operating activities was primarily attributable to a
$1,353,000 net loss, a $2,475,000 decrease in workers' compensation claims
liabilities and a $1,923,000 increase in income taxes receivable, partially
offset by a $2,403,000 decrease in accounts receivable, a $1,553,000 decrease in
deferred income tax assets and depreciation and amortization of $1,162,000. For
2001, cash provided by operating activities included $3,277,000 of depreciation
and amortization, coupled with a decrease in accounts receivable of $6,900,000
and an increase in workers' compensation claims liabilities of $3,343,000,
offset in part by decreases of $2,353,000 in accrued payroll and benefits and
$1,233,000 in other accrued liabilities and an increase of $1,568,000 in
deferred income taxes.
Net cash provided by investing activities totaled $988,000 for 2002, as
compared to net cash provided by investing activities of $181,000 for 2001. For
2002, the principal source of cash provided by investing activities was from
proceeds of $4,279,000 from maturities and sales of marketable securities,
offset, in part, by $3,116,000 of purchases of marketable securities. For 2001,
the principal source of cash provided by investing activities was from proceeds
of $2,436,000 from maturities of marketable securities and $266,000 of proceeds
associated with the sale of a company-owned office condominium, offset in part
by $2,221,000 of purchases of marketable securities and purchases of $269,000
for equipment. The Company presently has no material long-term commitments for
capital expenditures.
Net cash used in financing activities for 2002 amounted to $1,128,000,
which compares to $5,132,000 in 2001. For 2002, the principal use of cash for
financing activities was for scheduled payments on long-term debt of $708,000
and common stock repurchases totaling $386,000. For 2001, the principal use of
cash in financing activities was for scheduled payments on long-term debt of
$3,592,000 and common stock repurchases totaling $2,307,000, offset in part by
net proceeds from the Company's revolving credit-line totaling $796,000.
Effective September 2, 2002, the Company entered into an Amended and
Restated Credit Agreement (the "Agreement") with its principal bank. The
Agreement, which expires on April 30, 2003, provides for a revolving credit
facility of up to $11.0 million, which includes a subfeature under the line of
credit for standby letters of credit for not more than $5.5 million, as to which
approximately $5.47 million were outstanding as of December 31, 2002, and a term
loan in the original amount of $693,750 bearing interest at an annual rate of
7.4%, as to which the outstanding principal balance was approximately $347,000
as of December 31, 2002. The Company had an outstanding balance of $3.5 million
-22-
PART II
on the revolving credit facility as of December 31, 2002. The term loan will be
paid in full upon the closing of the Company's pending sale-leaseback
transaction on its two office buildings.
Under the terms of the Agreement, the Company's total outstanding
borrowings, to a maximum of $11.0 million, may not at any time exceed an
aggregate of (i) 85% of the Company's eligible billed accounts receivable, plus
(ii) 65% of the Company's eligible unbilled accounts receivable (not to exceed
$2.5 million), plus (iii) 75% of the appraised value of the Company's real
property mortgaged to the bank, minus amounts outstanding under the term loan.
Advances bear interest at an annual rate of prime rate plus one percent. The
revolving credit facility is secured by the Company's assets, including, without
limitation, its accounts receivable, equipment, intellectual property, real
property and bank deposits, and may be prepaid at anytime without penalty. The
Agreement requires compliance with the following financial covenants: (1) a
Current Ratio not less than 1.10 to 1.0 prior to December 31, 2002, and not less
than 1.15 to 1.0 as of December 31, 2002 and thereafter, with "Current Ratio"
defined as total current assets divided by total current liabilities; (2) EBITDA
not less than negative $2,750,000 as of the quarter ended September 30, 2002,
not less than $850,000 as of the quarter ended December 31, 2002, and not less
than $1,500,000 as of the quarter ended March 31, 2003, measured on a trailing
four-quarter basis, with "EBITDA" defined as net profit before taxes, interest
expense (net of capitalized interest expense), depreciation expense and
amortization expense; (3) Funded Debt to EBITDA Ratio not more than 7.0 to 1.0
as of December 31, 2002 and not more than 3.25 to 1.0 as of March 31, 2003, with
"Funded Debt" defined as all borrowed funds plus the amount of all capitalized
lease obligations of the Company and "Funded Debt to EBITDA Ratio" defined as
Funded Debt divided by EBITDA; and (4) EBITDA Coverage Ratio not less than 0.75
to 1.0 as of December 31, 2002 and not less than 1.50 to 1.0 as of March 31,
2003, with "EBITDA Coverage Ratio" defined as EBITDA divided by the aggregate of
total interest expense plus the prior period current maturity of long-term debt
and the prior period current maturity of subordinated debt. (See Note 7 of the
Notes to Financial Statements.)
As a result of violation of certain of the above financial covenants as of
December 31, 2002, the Company obtained the bank's agreement to waive those
covenant violations as of December 31, 2002. In view of management's expectation
that additional covenant violations would likely occur as of March 31, 2003, the
Company renegotiated certain terms of its loan agreement with its principal bank
effective March 21, 2003. Such amendments to the terms and conditions included
an increase in the interest rate on the revolving credit facility to prime plus
two percent, the easing of the restrictiveness of the Current Ratio and trailing
four-quarter EBITDA covenants and the suspension of the covenants regarding the
Funded Debt to EBITDA Ratio and EBITDA Coverage Ratio. Management executed on
April 11, 2003 a second amendment to the Agreement (the "New Credit Agreement")
which, among other things, extends the term from April 30, 2003 to March 31,
2004.
Under the terms of the New Credit Agreement, the Company's total
outstanding borrowings, to a maximum of $8.0 million, including a subfeature
under the line of credit for standby letters of credit totaling not more than
$5.0 million, may not at any time exceed an aggregate of (i)85% of the Company's
eligible billed accounts receivable, plus (ii) 65% of the Company's eligible
unbilled accounts receivable (not to exceed $1.5 million), plus (iii) only to
June 30, 2003, 75% of the appraised value of the Company's real property
collateral granted to the bank, minus the amount outstanding under the term
loan. Advances bear interest at an annual rate of prime rate plus two percent.
The New Credit Agreement expires March 31, 2004. The
-23-
PART II
revolving credit facility is secured by the Company's assets, including, without
limitation, its accounts receivable, equipment, intellectual property, real
property and bank deposits, and may be prepaid at anytime without penalty.
Purusant to the New Credit Agreement, the Company is required to maintain
compliance with the following financial covenants: (1) a Current Ratio not less
than 1.10 to 1.0 through June 29, 2003, and not less than 1.15 to 1.0 from and
after June 30, 2003, with "Current Ratio" defined as total current assets
divided by total current liabilities; (2) EBITDA not less than negative $700,000
as of the quarter ended March 31, 2003, not less than negative $350,000 as of
the quarter ending June 30, 2003, not less than $250,000 as of the quarter
ending September 30, 2003, and not less than $1,500,000 as of the quarter ending
December 31, 2003 and thereafter, measured on a trailing four-quarter basis,
with "EBITDA" defined as net profit before taxes, interest expense (net of
capitalized interest expense), depreciation expense and amortization expense;
(3) Funded Debt to EBITDA Ratio not more than 4.0 to 1.0 as of September 30,
2003 and not more than 2.25 to 1.0 as of December 31, 2003 and thereafter, with
"Funded Debt" defined as all borrowed funds plus the amount of all capitalized
lease obligations of the Company and "Funded Debt to EBITDA Ratio" defined as
Funded Debt divided by EBITDA; and (4) EBITDA Coverage Ratio not less than 1.0
to 1.0 as of September 30, 2003 and not less than 1.75 to 1.0 as of December 31,
2003, with "EBITDA Coverage Ratio" defined as EBITDA divided by the aggregate of
total interest expense plus the prior period current maturity of long-term debt
and the prior period current maturity of subordinated debt. (See Note 7 of the
Notes to Financial Statements.) Management expects that the funds anticipated to
be generated from operations, together with the New Credit Agreement and other
potential sources of financing, will be sufficient in the aggregate to fund the
Company's working capital needs for the foreseeable future.
The outstanding balance on the revolving credit facility is expected to be
paid in full in the second quarter of 2003. The Company received, on March 24,
2003, a $2.2 million federal income tax refund generated by a net operating loss
carryback from the tax year ended December 31, 2002. The Company used this tax
refund to reduce the outstanding balance to $1.2 million at March 27, 2003. The
remainder of the outstanding balance on the credit facility is expected to be
paid from the proceeds of a pending sale-leaseback transaction involving the two
office buildings owned by the Company. The sale-leaseback transaction, which is
expected to close during the second quarter of 2003, is projected to provide net
cash proceeds of approximately $2.0 million.
In connection with the Company's ability to continue its self-insured
workers' compensation program in the state of California, it is anticipated that
the Company will be required to increase its existing surety deposit with the
state, which is in the form of a letter of credit, by approximately $819,000
effective August 1, 2003. California, however, has recently adopted a new
"Alternative Security Program" ("ASP") to allow qualified self-insurers to meet
their surety deposit requirements through the establishment of a single
composite security deposit on a pooled basis. Management is uncertain as to the
financial benefits, if any, to the Company of the new ASP. The Company has,
however, recently been successful in reducing certain other workers'
compensation deposits and related letters of credit by approximately $740,000.
The continued ability of the Company to meet surety deposit requirements is
among the risk factors discussed above under "Forward Looking Information".
Management believes that its principal bank will accommodate the Company's
request to provide the potential increase to the existing letter of credit for
California on a timely basis, in light of the fact that the outstanding balance
on the revolving credit facility is expected to be paid in full in the second
quarter of 2003, coupled with the other surety deposit reductions achieved by
the Company.
During 1999, the Company's Board of Directors authorized a stock repurchase
program to repurchase common shares from time to time in open market purchases.
Since inception, the Board of Directors has approved six increases in the total
number of shares or
-24-
PART II
dollars authorized to be repurchased under the program. The stock repurchase
program had $390,000 of remaining authorization for the repurchase of additional
shares at December 31, 2002. During 2002, the Company repurchased 100,900 shares
at an aggregate price of $386,000. Management anticipates that the capital
necessary to execute this program will be provided by existing cash balances and
other available resources.
CONTRACTUAL OBLIGATIONS
The Company's contractual obligations as of December 31, 2002, including
long-term debt, commitments for future payments under non-cancelable lease
arrangements and long-term workers' compensation claims liabilities for
catastrophic injuries, are summarized below:
Payments Due by Period
-------------------------------------------------------------
Less than 1 - 3 4 - 5 After
Total 1 year years years 5 years
---------- ----------- ----------- ---------- ----------
Long-term debt $ 922 $ 434 $ 288 $ 200 $ -
Operating leases 2,747 1,209 1,401 137 -
Long-term workers' compensation claims
liabilities for catastrophic injuries 646 21 46 54 525
---------- ----------- ----------- ---------- ----------
Total contractual cash obligations $4,315 $1,664 $1,735 $ 391 $ 525
========== =========== =========== ========== ==========
INFLATION
Inflation generally has not been a significant factor in the Company's
operations during the periods discussed above. The Company has taken into
account the impact of escalating medical and other costs in establishing
reserves for future expenses for self-insured workers' compensation claims.
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, 2002, the Company had interest-bearing debt obligations of
approximately $4.4 million, of which approximately $3.5 million bears interest
at a variable rate and approximately $0.9 million at a fixed rate of interest.
The variable rate debt is comprised of approximately $3.5 million outstanding
under a revolving credit facility, which bears interest at the prime rate plus
one percent through March 20, 2003 and then prime rate plus two percent through
March 31, 2004. Based on the Company's overall interest rate exposure at
December 31, 2002, 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, 2002, the Company had not entered into any
interest rate instruments to reduce its exposure to interest rate risk.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and notes thereto required by this item begin on
page F-1 of this report, as listed in Item 15.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
-25-
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 2003 Annual Meeting of Stockholders ("Proxy Statement"),
under the headings "Election of Directors" and "Stock Ownership by Principal
Stockholders and Management--Section 16(a) Beneficial Ownership Reporting
Compliance" or appears under the heading "Executive Officers of the Registrant"
on page 12 of this report. The information required by Item 11, Executive
Compensation, is incorporated herein by reference to the Proxy Statement, under
the headings "Executive Compensation" and "Election of Directors--Compensation
Committee Interlocks and Insider Participation." The information required by
Item 12, Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters, is incorporated herein by reference to the Proxy
Statement, under the heading "Stock Ownership by Principal Stockholders and
Management--Beneficial Ownership Table" and "Equity Compensation Plan
Information." The information required by Item 13, Certain Relationships and
Related Transactions, is incorporated herein by reference to the Proxy
Statement, under the headings "Election of Directors--Compensation Committee
Interlocks and Insider Participation" and "Executive Compensation--Transactions
with Management".
-26-
PART III
Item 14. Controls and Procedures
(a) Evaluation of disclosure controls and procedures. The Company's
chief executive officer and its chief financial officer evaluated
the effectiveness of the Company's disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14(c) and
15d-14(c)), which are designed to ensure that information the
Company must disclose in its reports filed or submitted under the
Securities Exchange Act of 1934, as amended (the "Exchange Act")
is recorded, processed, summarized, and reported on a timely
basis, on March 31, 2003 and have concluded that, as of such date,
the Company's disclosure controls and procedures were adequate and
effective to ensure that information required to be disclosed by
the Company in reports that it files or submits under the Exchange
Act is brought to their attention on a timely basis.
(b) Changes in internal controls. There were no significant changes in
the Company's internal controls or in other factors that could
significantly affect these controls subsequent to the date of
their evaluation, nor were there any significant deficiencies or
material weaknesses identified in the Company's internal controls.
As a result, no corrective actions were undertaken.
-27-
PART IV
Item 15. 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, 2002 and 2001 F-2
Statements of Operations for the Years Ended December 31,
2002, 2001 and 2000 F-3
Statements of Stockholders' Equity - December 31, 2002,
2001 and 2000 F-4
Statements of Cash Flows for the Years Ended December 31,
2002, 2001 and 2000 F-5
Notes to Financial Statements F-6
No schedules are required to be filed herewith.
REPORTS ON FORM 8-K
The Company filed on November 18, 2002 a Current Report on Form 8-K dated as of
November 12, 2002, to report under Item 5 that the Company's board of directors
increased the amount of authorization by $500,000 for the repurchase of shares
of the Company's common stock.
The Company filed on March 20, 2003 a Current Report on Form 8-K dated as of
March 19, 2003, to report under Items 5, 7 and 9 its decision to restate its
professional employer services ("PEO") revenues to reflect the accounting
requirements of Emerging Issues Task Force Issue No. 99-19, "Reporting Revenues
Gross as a Principal Versus Net as an Agent," by reducing both revenues and cost
of revenues for the salaries and wages of the PEO employees, for which the
Company is not the primary obligor of the services performed by such employees.
The Company also reported that it had entered into a definitive agreement
relating to a sale-leaseback transaction with respect to its two office
buildings in Portland, Oregon, and furnished a press release announcing its
earnings results for the quarter and year ended December 31, 2002, and the
agreement in principle by its principal bank lender to renew the Company's
revolving credit facility in April 2003.
EXHIBITS
Exhibits are listed in the Exhibit Index that follows the Financial Statements
included in this report.
-28-
Report of Independent Accountants
To the Board of Directors and Stockholders of
Barrett Business Services, Inc.
In our opinion, the accompanying balance sheets and the related statements of
operations, of stockholders' equity and of cash flows present fairly, in all
material respects, the financial position of Barrett Business Services, Inc.
(the Company) at December 31, 2002 and 2001, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
2002, in conformity with accounting principles generally accepted in the United
States of America. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
As discussed in Note 1 to the financial statements, the Company adopted the
provisions of Statement of Financial Accounting Standards No. 142, Goodwill and
Other Intangible Assets, effective January 1, 2002.
As discussed in Note 1 to the financial statements, the Company has restated its
professional employer organization revenues and related direct payroll costs for
the years ended December 31, 2001 and 2000.
/s/ PricewaterhouseCoopers LLP
Portland, Oregon
March 31, 2003, except as to Note 7, which is as of April 11, 2003
F-1
Barrett Business Services, Inc.
Balance Sheets
December 31, 2002 and 2001
(In Thousands, Except Par Value)
2002 2001
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 96 $1,142
Income taxes receivable 1,923 -
Trade accounts receivable, net 11,357 13,760
Prepaid expenses and other 1,040 1,022
Deferred income taxes 2,111 2,841
----------- -----------
Total current assets 16,527 18,765
Goodwill, net 18,749 18,749
Intangibles, net 59 129
Property and equipment, net 5,167 6,084
Restricted marketable securities and workers' compensation deposits 4,286 5,425
Deferred income taxes 1,445 2,268
Other assets 1,064 1,146
----------- -----------
$47,297 $52,566
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 434 $ 708
Line of credit 3,513 3,424
Accounts payable 834 686
Accrued payroll, payroll taxes and related benefits 4,897 5,165
Workers' compensation claims liabilities 3,903 5,355
Safety incentives payable 406 380
Other accrued liabilities 305 389
----------- -----------
Total current liabilities 14,292 16,107
Long-term debt, net of current portion 488 922
Customer deposits 443 520
Long-term workers' compensation claims liabilities 2,492 3,515
Other long-term liabilities 797 968
----------- -----------
18,512 22,032
----------- -----------
Commitments and contingencies (Notes 9, 10 and 16)
Stockholders' equity:
Common stock, $.01 par value; 20,500 shares authorized, 5,751 and 5,847
shares issued and outstanding 57 58
Additional paid-in capital 3,144 3,461
Employee loan (107) (29)
Retained earnings 25,691 27,044
----------- -----------
28,785 30,534
----------- -----------
$47,297 $52,566
=========== ===========
The accompanying notes are an integral part of these financial statements.
F-2
Barrett Business Services, Inc.
Statements of Operations
Years Ended December 31, 2002, 2001 and 2000
(In Thousands, Except Per Share Amounts)
2002 2001 2000
--------------- -------------- --------------
As Restated, see Note 1
------------------------------
Revenues:
Staffing services $ 96,750 $ 123,110 $ 188,500
Professional employer service fees 12,558 16,281 22,128
--------------- --------------- --------------
109,308 139,391 210,628
--------------- --------------- --------------
Cost of revenues:
Direct payroll costs 71,515 90,750 139,177
Payroll taxes and benefits 14,062 17,635 27,007
Workers' compensation 8,766 12,971 12,639
--------------- --------------- --------------
94,343 121,356 178,823
--------------- --------------- --------------
Gross margin 14,965 18,035 31,805
Selling, general and administrative expenses 16,008 18,737 24,583
Depreciation and amortization 1,162 3,277 3,192
--------------- --------------- --------------
(Loss) income from operations (2,205) (3,979) 4,030
--------------- --------------- --------------
Other (expense) income:
Interest expense (278) (359) (830)
Interest income 217 297 341
Other, net 21 45 6
--------------- --------------- --------------
(40) (17) (483)
--------------- --------------- --------------
(Loss) income before income taxes (2,245) (3,996) 3,547
(Benefit from) provision for income taxes (892) (1,574) 1,446
--------------- --------------- --------------
Net (loss) income $ (1,353) $ (2,422) $ 2,101
=============== =============== ==============
Basic (loss) earnings per share $ (.23) $ (.39) $ .29
=============== =============== ==============
Weighted average number of basic shares outstanding 5,804 6,193 7,237
=============== =============== ==============
Diluted (loss) earnings per share $ (.23) $ (.39) $ .29
=============== =============== ==============
Weighted average number of diluted shares outstanding 5,804 6,193 7,277
=============== =============== ==============
The accompanying notes are an integral part of these financial statements.
F-3
Barrett Business Services, Inc.
Statements of Stockholders' Equity
Years Ended December 31, 2002, 2001 and 2000
(In Thousands)
Common Stock Additional
------------------------- Paid-in Retained
Shares Amount Capital Other Earnings Total
------------ ----------- ------------- ------------ ------------- ------------
Balance, December 31, 1999 7,461 $ 75 $ 9,889 $ - $ 27,365 $ 37,329
Common stock issued on exercise of
options 7 - 28 - - 28
Repurchase of common stock (1,017) (11) (4,530) - - (4,541)
Net income - - - - 2,101 2,101
------------ ----------- ------------- ------------ ------------- ---------
Balance, December 31, 2000 6,451 64 5,387 - 29,466 34,917
Repurchase of common stock (604) (6) (2,301) - - (2,307)
Stock option compensation - - 17 - - 17
Reclassification of accrued stock
option compensation to equity - - 358 - - 358
Employee loan - - - (29) - (29)
Net loss - - - - (2,422) (2,422)
------------ ----------- ------------- ------------ ------------- ---------
Balance, December 31, 2001 5,847 58 3,461 (29) 27,044 30,534
Common stock issued on exercise of
options 5 - 14 - - 14
Repurchase of common stock (101) (1) (385) - - (386)
Payment to shareholder - - (28) - - (28)
Purchase of option rights - - (31) - - (31)
Reclassification of accrued stock
option compensation to equity - - 113 - - 113
Employee loan - - - (78) - (78)
Net loss - - - - (1,353) (1,353)
------------ ----------- ------------- ------------ ------------- -------------
Balance, December 31, 2002 5,751 $ 57 $ 3,144 $ (107) $ 25,691 $ 28,785
============ =========== ============= ============ ============= =============
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, 2002, 2001 and 2000
(In Thousands)
2002 2001 2000
----------- ----------- -----------
Cash flows from operating activities:
Net (loss) income $ (1,353) $ (2,422) $ 2,101
Reconciliations of net (loss) income to net cash provided by operating
activities:
Depreciation and amortization 1,162 3,277 3,192
Gain on sale of property - (46) -
Gain on sale of marketable securities (24) - -
Deferred income taxes 1,553 (1,568) (1,171)
Changes in certain assets and liabilities, net of amounts purchased
in acquisitions:
Trade accounts receivable, net 2,403 6,900 9,556
Income taxes receivable (1,923) - -
Prepaid expenses and other (18) 200 (3)
Accounts payable 148 (327) (343)
Accrued payroll, payroll taxes and related benefits (155) (2,353) (3,544)
Other accrued liabilities (84) (1,233) 1,209
Workers' compensation claims liabilities (2,475) 3,343 1,333
Safety incentives payable 26 (49) (295)
Customer deposits and other assets, net 5 (113) (432)
Other long-term liabilities (171) (32) 301
----------- ----------- -----------
Net cash (used in) provided by operating activities (906) 5,577 11,904
----------- ----------- -----------
Cash flows from investing activities:
Cash paid for acquisitions, including other direct costs - (31) (1,122)
Proceeds from sale of property - 266 -
Purchase of equipment, net of amounts purchased in
acquisitions (175) (269) (1,257)
Proceeds from maturities of marketable securities 3,472 2,436 1,329
Proceeds from sales of marketable securities 807 - -
Purchase of marketable securities (3,116) (2,221) (688)
----------- ----------- -----------
Net cash provided by (used in) investing activities 988 181 (1,738)
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from credit-line borrowings 48,629 62,638 84,722
Payments on credit-line borrowings (48,540) (61,842) (86,976)
Payments on long-term debt (708) (3,592) (2,568)
Payment of notes payable - - (865)
Payment to shareholder (28) - -
Purchase of option rights (31) - -
Loan to employee (78) (29) -
Repurchase of common stock (386) (2,307) (4,541)
Proceeds from the exercise of stock options 14 - 28
----------- ----------- -----------
Net cash used in financing activities (1,128) (5,132) (10,200)
----------- ----------- -----------
Net (decrease) increase in cash and cash equivalents (1,046) 626 (34)
Cash and cash equivalents, beginning of year 1,142 516 550
----------- ----------- -----------
Cash and cash equivalents, end of year $ 96 $ 1,142 $ 516
=========== =========== ===========
Supplemental schedule of noncash activities:
Acquisition of other businesses:
Cost of acquisitions in excess of fair market value of net assets
acquired $ - $ 31 $ 1,122
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 both staffing and professional
employer services to a diversified group of customers through a network of
branch offices throughout Oregon, Washington, California, Arizona,
Maryland, Delaware and North Carolina. Approximately 74%, 79% and 78%,
respectively, of the Company's revenues (as restated) during 2002, 2001 and
2000 were attributable to its Oregon and California operations.
REVENUE RECOGNITION, AS RESTATED
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 ("PEO") are normally used
by organizations to satisfy ongoing human resource management needs and
typically involve contracts with a minimum term of one year, renewable
annually, which cover all employees at a particular work site.
The Company has determined it is not the primary obligor for the services
provided by employees pursuant to its PEO arrangements. Accordingly, the
requirements of EITF 99-19, "Reporting Revenues Gross as a Principal Versus
Net as an Agent", require that it not reflect the direct payroll costs paid
to such employees and billed to its PEO customers in both revenues and cost
of revenues, i.e., reporting such activity on a "gross" basis. As a result,
the Company has restated amounts previously reported in its Statements of
Operations for the years ended December 31, 2001 and 2000 to remove a like
amount of professional employer service fees and direct payroll costs
resulting in reporting such activity on a "net" basis. The change to a
"net" reporting basis had no effect on previously reported amounts for
gross margin dollars, operating results, cash flows, working capital and
stockholders equity.
A reconciliation of the restated amounts to amounts previously reported is
as follows:
Year ended December 31,
2001 2000
---------------- ---------------
Revenues:
Restated professional employer service fees $ 16,281 $ 22,128
Adjustment to eliminate PEO salaries and wages 77,272 111,838
---------------- ---------------
Professional employer services, as previously reported $ 93,553 $ 133,966
================ ===============
Cost of revenues:
Restated direct payroll costs $ 90,750 $ 139,177
Adjustment to eliminate PEO salaries and wages 77,272 111,838
---------------- ---------------
Direct payroll costs, as previously reported $ 168,022 $ 251,015
================ ===============
F-6
Barrett Business Services, Inc.
Notes to Financial Statements (Continued)
1. Summary of Operations and Significant Accounting Policies (Continued)
REVENUE RECOGNITION (Continued)
The Company's cost of revenues for staffing services is comprised of direct
payroll costs, employer payroll related taxes and employee benefits and
workers' compensation. The Company's cost of revenues for PEO services
includes employer payroll related taxes and workers' compensation. Direct
payroll costs represent the gross payroll earned by staffing services
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 staffing
services employee reimbursements for materials, supplies and other
expenses, which are paid by the customer. Workers' compensation costs
consists primarily of the costs associated with the Company's self-insured
workers' compensation program, such as claims reserves, claims
administration fees, legal fees, state and federal administrative agency
fees and reinsurance costs for catastrophic injuries. The Company also
maintains separate workers' compensation insurance policies for employees
working in states where the Company is not self-insured. Safety incentives
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.
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 $41,000 and $410,000
at December 31, 2002 and 2001, respectively. The Company must make
estimates of the collectibility of accounts receivables. Management
analyzes historical bad debts, customer concentrations, customer
credit-worthiness, current economic conditions and changes in customers'
payment trends when evaluating the adequacy of the allowance for doubtful
accounts.
DEFERRED INCOME TAXES
The Company calculates income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes", which requires recognition of deferred
income tax assets and liabilities for the expected tax consequences of
events that have been included in the financial statements and income tax
returns. Valuation allowances are established when necessary to reduce
deferred income tax assets to the amount expected to be realized.
MARKETABLE SECURITIES
At December 31, 2002 and 2001, marketable securities consisted primarily of
governmental debt instruments with maturities generally from 90 days to 26
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
F-7
Barrett Business Services, Inc.
Notes to Financial Statements (Continued)
1. Summary of Operations and Significant Accounting Policies (Continued)
MARKETABLE SECURITIES (Continued)
in other (expense) income on the Company's statements of operations. During
the year ended December 31, 2002, the Company sold certain restricted
marketable securities due to a decrease in the statutory surety
requirements established by the State of Oregon Workers' Compensation
Division.
INTANGIBLES
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard No. ("SFAS") 141 "Business
Combinations" and SFAS 142, "Goodwill and Other Intangible Assets." The
Company's adoption date for SFAS 141 was July 1, 2001 and the adoption date
for SFAS 142 was January 1, 2002. With respect to SFAS 142, the Company
performed a goodwill impairment test as of the adoption date and at
December 31, 2002 and has determined there was no impairment to its
recorded goodwill. The Company will perform a goodwill impairment test
annually during the fourth quarter and whenever events or circumstances
occur indicating that goodwill might be impaired. Effective January 1,
2002, amortization of all goodwill ceased. There were no changes in
goodwill from December 31, 2001 to December 31, 2002. The impact of this
change is summarized as follows (in thousands):
Year ended December 31,
2002 2001 2000
------------- -------------- -------------
Reported net (loss) income $ (1,353) $ (2,422) $ 2,101
Add back: goodwill amortization, net of tax - 1,327 1,250
------------- -------------- -------------
Adjusted net (loss) income $ (1,353) $ (1,095) $ 3,351
============= ============== =============
Reported net (loss) income per share $ (.23) $ (.39) $ .29
Adjusted net (loss) income per share (.23) (.18) .46
The Company's intangible assets are comprised of covenants not to compete
arising from prior year acquisitions and have contractual lives principally
ranging from three to five years. (See Note 4.)
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.
SAFETY INCENTIVES PAYABLE
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. Safety incentive payments
F-8
Barrett Business Services, Inc.
Notes to Financial Statements (Continued)
1. Summary of Operations and Significant Accounting Policies (Continued)
SAFETY INCENTIVES PAYABLE (Continued)
are made only after closure of all workers' compensation claims incurred
during the customer's contract period. The liability is estimated and
accrued each month based upon the then-current amount of the customer's
estimated workers' compensation claims reserves as established by the
Company's third party administrator.
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 2002, 2001 and 2000 did not materially differ from
interest expense.
Income taxes paid by the Company in 2000 totaled $2,331,000. The Company
paid no income taxes in 2001 and 2002.
BASIC AND DILUTED EARNINGS 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.
Basic and diluted shares outstanding are summarized as follows:
Year Ended
December 31,
------------------------------------------------
2002 2001 2000
--------------- --------------- --------------
Weighted average number of basic shares outstanding 5,804,231 6,193,119 7,237,262
Stock option plan shares to be issued at prices ranging from
$1.45 to $17.75 per share - - 985,797
Less: Assumed purchase at average market price during the
period using proceeds received upon exercise of
options and purchase of stock, and using tax benefits
of compensation due to premature dispositions - - (946,200)
--------------- --------------- --------------
Weighted average number of diluted shares outstanding 5,804,231 6,193,119 7,276,859
=============== =============== ==============
As a result of the net loss reported for the years ended December 31, 2002
and 2001, 23,978 and 25,779, respectively, of potential common shares have
been excluded from the calculation of diluted loss per share because their
effect would be anti-dilutive.
STOCK OPTION COMPENSATION
The Company applies APB Opinion No. 25 and related interpretations in
accounting for its stock incentive plan. Accordingly, no compensation
expense has been recognized for its stock option grants issued at market
price because the exercise price of the Company's employee stock options
equals the market price of the underlying stock on the date of grant.
F-9
Barrett Business Services, Inc.
Notes to Financial Statements (Continued)
1. Summary of Operations and Significant Accounting Policies (Continued)
STOCK OPTION COMPENSATION (Continued)
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 (loss) income and
(loss) earnings per share would have been adjusted to the pro forma amounts
indicated below:
2002 2001 2000
----------- ----------- -----------
(in thousands, except per share amounts)
Net (loss) income, as reported $ (1,353) $ (2,422) $2,101
Add back compensation expense recognized under
APB No. 25 - 17 85
Deduct: Total stock-based compensation expense
determined under fair value based method for all awards,
net of related tax effects (168) (237) (769)
----------- ----------- -----------
Net (loss) income, pro forma $ (1,521) $ (2,642) $1,417
=========== =========== ===========
Basic (loss) earnings per share, as reported $ (.23) $ (.39) $ .29
Basic (loss) earnings per share, pro forma (.26) (.43) .20
Diluted (loss) earnings per share, as reported (.23) (.39) .29
Diluted (loss) earnings per share, pro forma (.26) (.43) .19
The effects of applying SFAS No. 123 for providing pro forma disclosures
for 2002, 2001 and 2000 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.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with the 2002
presentation. Such reclassifications had no impact on gross margin,
operating results or shareholder equity. See restatement of PEO revenues
and cost of revenues under the heading "Revenue recognition" in Note 1.
ACCOUNTING ESTIMATES
The preparation of the Company's financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting periods.
Management bases its estimates on historical experience and on various
other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments
about the carrying values of assets and liabilities that are not readily
apparent from other sources. Actual results may differ from such estimates.
F-10
Barrett Business Services, Inc.
Notes to Financial Statements (Continued)
1. Summary of Operations and Significant Accounting Policies (Continued)
RECENT ACCOUNTING PRONOUNCEMENTS
In May 2002, the FASB issued SFAS 145, "Rescission of FAS Nos. 4, 44 and
64, Amendment of FAS 13, and Technical Corrections." Among other things,
SFAS 145 rescinds various pronouncements regarding early extinguishment of
debt and allows extraordinary accounting treatment for early extinguishment
only when the provisions of Accounting Principles Board Opinion No. 30,
"Reporting the Results of Operations - Reporting the Effects of Disposal of
a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions" are met. SFAS 145 provisions regarding
early extinguishment of debt are generally effective for fiscal years
beginning after May 15, 2002. Management does not believe that the adoption
of these statements will have a material impact on its results of
operations or financial position.
In July 2002, the FASB issued SFAS 146, "Accounting for the Costs
Associated with Exit or Disposal Activities." SFAS 146 requires companies
to recognize liabilities and costs associated with exit or disposal
activities initiated after December 31, 2002 when they are incurred, rather
than when management commits to a plan to exit an activity. This Statement
will affect only the timing of the recognition of future restructuring
costs and is not expected to have a material effect on the Company's
results of operations or financial position.
In December 2002, the FASB issued SFAS 148, "Accounting for Stock Based
Compensation - Transition and Disclosure." SFAS 148 provides alternative
methods of transition for a voluntary change to the fair value based method
of accounting for stock-based employee compensation and requires fair value
method pro forma disclosures to be displayed more prominently and in a
tabular format. Additionally, SFAS 148 requires similar disclosures in
interim financial statements. The transition and disclosure requirements of
SFAS 148 were adopted by the Company in the fourth quarter of 2002.
In November 2002, the FASB issued Interpretation No. 45 ("Interpretation")
"Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others." Interpretation
No. 45 addresses the disclosures to be made by a guarantor in its interim
and annual financial statements about its obligations under guarantees. The
Interpretation also clarifies the requirements related to the recognition
of a liability by a guarantor at the inception of a guarantee for the
obligations the guarantor has undertaken in issuing that guarantee. The
Interpretation does not specify the subsequent measurement of the
guarantor's recognized liability for either the noncontingent aspect of the
guarantee or the contingent aspect of the guarantee. The accounting for the
contingent aspect of the guarantee, if it is not accounted for as a
derivative under SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," is covered by SFAS No. 5, "Accounting for
Contingencies." The provisions in SFAS No. 5 about disclosure of a loss
that is reasonably possible are not affected by this Interpretation.
Management does not believe that the Company has entered into any such
guarantor arrangements and does not believe that the adoption of this
Statement will have a material impact on its results of operations or
financial position.
F-11
Barrett Business Services, Inc.
Notes to Financial Statements (Continued)
2. Business Combinations
TEMPORARY STAFFING SYSTEMS, INC.
Effective January 1, 1999, the Company acquired all of the outstanding
common stock of Temporary Staffing Systems, Inc. ("TSS"), a staffing
services company with eight offices in North Carolina and one in South
Carolina. The Company paid $2,000,000 in cash and agreed to make an
additional payment contingent upon a minimum equity requirement for 1998
and certain financial performance criteria for 1999. The Company also paid
$50,000 in cash for a noncompete agreement with the selling shareholder.
During 2000, as a result of the aforementioned minimum equity requirement
and certain financial performance criteria, the Company paid additional
consideration aggregating $960,000 plus accrued interest, which was
recognized as additional goodwill.
3. Fair Value of Financial Instruments and Concentration of Credit Risk
All of the Company's 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, 2002, the Company had significant concentrations of credit risk as
follows:
- Marketable securities - $2,170,000 of marketable securities at December
31, 2002 consisted of Oregon State Department of Administrative
Services Bonds and Oregon State Housing & Community Services Bonds.
- Trade receivables - Trade receivables from two customers aggregated
$816,000 at December 31, 2002 (7% of trade receivables outstanding at
December 31, 2002).
F-12
Barrett Business Services, Inc.
Notes to Financial Statements (Continued)
4. Intangibles
Intangibles consist of the following (in thousands):
December 31,
---------------------------
2002 2001
------------ ------------
Covenants not to compete $ 3,709 $ 3,709
Less accumulated amortization 3,650 3,580
------------ ------------
$ 59 $ 129
============ ============
5. Property and Equipment
Property and equipment consist of the following (in thousands):
December 31,
---------------------------
2002 2001
------------- ------------
Office furniture and fixtures $ 4,474 $ 4,563
Computer hardware and software 4,581 4,534
Buildings 1,272 1,239
------------- ------------
10,327 10,336
Less accumulated depreciation and amortization 5,468 4,560
------------- ------------
4,859 5,776
Land 308 308
------------- ------------
$ 5,167 $ 6,084
============= ============
6. Workers' Compensation Claims Liabilities
The Company is a self-insured employer with respect to workers'
compensation coverage for all its employees (including employees subject to
PEO contracts) working in Oregon, Maryland, Delaware and California. In the
state of Washington, state law allows only the Company's staffing services
and management employees to be covered under the Company's self-insured
workers' compensation program. The Company also was self-insured for
workers' compensation purposes, as granted by the United States Department
of Labor, for longshore and harbor workers' coverage through April 16,
2001.
The Company has provided a total of $6,395,000 and $8,870,000 at December
31, 2002 and 2001, respectively, as an estimated liability for unsettled
workers' compensation claims liabilities. The estimated liability for
unsettled workers' compensation claims represents management's best
estimate, which includes, in part, an evaluation of information provided by
the Company's third-party administrators for workers' compensation claims
and its independent actuary, who annually assists management to estimate
the total future costs of
F-13
Barrett Business Services, Inc.
Notes to Financial Statements (Continued)
6. Workers' Compensation Claims Liabilities (Continued)
all claims, including potential future adverse loss development. 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. These estimates are continually reviewed
and adjustments to liabilities are reflected in current operating results
as they become known. The Company believes that the difference between
amounts recorded for its estimated liabilities and the possible range of
costs to settle related claims is not material to results of operations;
nevertheless, it is reasonably possible that adjustments required in future
periods may be material to results of operations.
Liabilities incurred for work-related employee fatalities, as determined by
the state in which the accident occurred, 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
expectancy of the beneficiary, discounted at a rate that approximates a
long-term, high-quality corporate bond rate. During 2002, the Company
maintained excess workers' compensation insurance to limit its
self-insurance exposure to $750,000 per occurrence in all states. The
excess insurance provided statutory coverage above the aforementioned
exposures.
At December 31, 2002, the Company's long-term workers' compensation claims
liabilities in the accompanying balance sheet included $646,000 for
work-related fatalities. The aggregate undiscounted pay-out amount related
to the catastrophic injuries and fatalities is $1,374,000. The discount
rates applied to the discounted liabilities range from 7.05% to 9.00%.
These rates represented the then-current rates for high quality long-term
debt securities available at the date of loss with maturities equal to the
length of the pay-out period to the beneficiaries. The actuarially
determined pay-out periods to the beneficiaries range from 8 to 39 years.
As a result, the five-year cash requirements related to these claims are
immaterial.
The states of Oregon, Maryland, Washington, Delaware, California and the
United States Department of Labor require the Company to maintain specified
investment balances or other financial instruments, totaling $8,968,000 at
December 31, 2002 and $7,418,000 at December 31, 2001, to cover potential
claims losses. In partial satisfaction of these requirements, at December
31, 2002, the Company has provided standby letters of credit in the amount
of $4,786,000 and surety bonds totaling $907,000. The investments are
included in restricted marketable securities and workers' compensation
deposits in the accompanying balance sheets. For the period May 1, 1996
through July 1, 2001, the Company maintained a multi-state workers'
compensation insurance policy with a retention level of $350,000 per
occurrence. This policy provided workers' compensation coverage for most of
the states in which the Company operated for which the Company was not
self-insured for workers' compensation purposes. Pursuant to this
arrangement, the Company provided standby letters of credit to the
insurance company totaling $685,000. Subsequent to year end, the insurance
company agreed to reduce its letters of credit requirement by $540,000 to a
total of $145,000.
F-14
Barrett Business Services, Inc.
Notes to Financial Statements (Continued)
7. Credit Facility
Effective September 2, 2002, the Company entered into an Amended and
Restated Credit Agreement with its principal bank. The Agreement, which
expires on April 30, 2003, provides for a revolving credit facility of up
to $11.0 million, which includes a subfeature under the line of credit for
standby letters of credit totaling not more than $5.5 million, as to which
approximately $5.47 million were outstanding as of December 31, 2002, and a
term loan in the original amount of $693,750 bearing interest at an annual
rate of 7.4%, as to which the outstanding principal balance was
approximately $347,000 as of December 31, 2002.
Under the terms of the Agreement, the Company's total outstanding
borrowings, to a maximum of $11.0 million, may not at any time exceed an
aggregate of (i) 85% of the Company's eligible billed accounts receivable,
plus (ii) 65% of the Company's eligible unbilled accounts receivable (not
to exceed $2.5 million), plus (iii) 75% of the appraised value of the
Company's real property mortgaged to the bank, minus amounts outstanding
under the term loan. Advances bear interest at an annual rate of prime rate
plus one percent. The revolving credit facility is collateralized by the
Company's assets, including, without limitation, its accounts receivable,
equipment, intellectual property, real property and bank deposits, and may
be prepaid at anytime without penalty. The Agreement requires compliance
with the following financial covenants: (1) a Current Ratio not less than
1.10 to 1.0 prior to December 31, 2002, and not less than 1.15 to 1.0 as of
December 31, 2002 and thereafter, with "Current Ratio" defined as total
current assets divided by total current liabilities; (2) EBITDA not less
than negative $2,750,000 as of the quarter ended September 30, 2002, not
less than $850,000 as of the quarter ended March 31, 2003, measured on a
trailing four-quarter basis, with "EBITDA" defined as net profit before
taxes, interest expense (net of capitalized interest expense), depreciation
expense and amortization expense; (3) Funded Debt to EBITDA Ratio not more
than 7.0 to 1.0 as of December 31, 2002 and not more than 3.25 to 1.0 as of
March 31, 2003, with "Funded Debt" defined as all borrowed funds plus the
amount of all capitalized lease obligations of the Company and "Funded Debt
to EBITDA Ratio" defined as Funded Debt divided by EBITDA; and (4) EBITDA
Coverage Ratio not less than 0.75 to 1.0 as of December 31, 2002 and not
less than 1.50 to 1.0 as of March 31, 2003, with "EBITDA Coverage Ratio"
defined as EBITDA divided by the aggregate of total interest expense plus
the prior period current maturity of long-term debt and the prior period
current maturity of subordinated debt.
As a result of violation of certain of the above financial covenants as of
December 31, 2002, the Company obtained the bank's agreement to waive those
covenant violations. In addition, the bank agreed to ease the
restrictiveness of the Current Ratio and trailing four-quarter EBITDA
covenants and suspend the application of the Funded Debt to EBITDA Ratio
and the EBITDA Coverage Ratio covenants as of March 31, 2003. Management
executed on April 11, 2003 a second amendment to the Agreement (the "New
Credit Agreement") which, among other things, extends the term from April
30, 2003 to March 31, 2004.
Under the terms of the New Credit Agreement, the Company's total
outstanding borrowings, to a maximum of $8.0 million, including a
subfeature under the line of credit for standby letters of credit totaling
not more than $5.0 million, may not at any time exceed an
F-15
Barrett Business Services, Inc.
Notes to Financial Statements (Continued)
7. Credit Facility (Continued)
aggregate of (i)85% of the Company's eligible billed accounts receivable,
plus (ii) 65% of the Company's eligible unbilled accounts receivable (not
to exceed $1.5 million), plus (iii) only to June 30, 2003, 75% of the
appraised value of the Company's real property collateral granted to the
bank, minus the amount outstanding under the term loan. Advances bear
interest at an annual rate of prime rate plus two percent. The New Credit
Agreement expires March 31, 2004. The revolving credit facility is secured
by the Company's assets, including, without limitation, its accounts
receivable, equipment, intellectual property, real property and bank
deposits, and may be prepaid at anytime without penalty. Purusant to the
New Credit Agreement, the Company is required to maintain compliance with
the following financial covenants: (1) a Current Ratio not less than 1.10
to 1.0 through June 29, 2003, and not less than 1.15 to 1.0 from and after
June 30, 2003, with "Current Ratio" defined as total current assets divided
by total current liabilities; (2) EBITDA not less than negative $700,000 as
of the quarter ended March 31, 2003, not less than negative $350,000 as of
the quarter ending June 30, 2003, not less than $250,000 as of the quarter
ending September 30, 2003, and not less than $1,500,000 as of the quarter
ending December 31, 2003 and thereafter, measured on a trailing
four-quarter basis, with "EBITDA" defined as net profit before taxes,
interest expense (net of capitalized interest expense), depreciation
expense and amortization expense; (3) Funded Debt to EBITDA Ratio not more
than 4.0 to 1.0 as of September 30, 2003 and not more than 2.25 to 1.0 as
of December 31, 2003 and thereafter, with "Funded Debt" defined as all
borrowed funds plus the amount of all capitalized lease obligations of the
Company and "Funded Debt to EBITDA Ratio" defined as Funded Debt divided by
EBITDA; and (4) EBITDA Coverage Ratio not less than 1.0 to 1.0 as of
September 30, 2003 and not less than 1.75 to 1.0 as of December 31, 2003,
with "EBITDA Coverage Ratio" defined as EBITDA divided by the aggregate of
total interest expense plus the prior period current maturity of long-term
debt and the prior period current maturity of subordinated debt.
During the year ended December 31, 2002, the maximum balance outstanding
under the revolving credit facility was $4,929,000, the average balance
outstanding was $3,274,000, and the weighted average interest rate during
the period was 4.51%. The weighted average interest rate during 2002 was
calculated using daily weighted averages.
F-16
Barrett Business Services, Inc.
Notes to Financial Statements (Continued)
8. Long-Term Debt
Long-term debt consists of the following:
December 31,
------------------------
2002 2001
---------- -----------
(in thousands)
Term loan payable in monthly installments of $91,667 plus interest
at LIBOR plus 1.35%, paid in full in 2002 $ - $ 458
Note payable in annual installments of $200,000 for years 2002, 2005 and
2006 and $87,500 for years 2003 and 2004, plus simple interest at 5.00%
per annum through 2006 575 775
Mortgage note payable in monthly installments of $6,408, including
interest at 7.40% per annum through 2003, with a principal payment
of $325,000 due in 2003, secured by land and building (Note 7) 347 397
---------- -----------
922 1,630
Less portion due within one year 434 708
---------- -----------
$ 488 $ 922
========== ===========
Maturities on long-term debt are summarized as follows at December 31, 2002
(in thousands):
Year ending
December 31,
------------------
2003 $ 434
2004 88
2005 200
2006 200
--------------
$ 922
==============
9. Savings Plan
The Company has a Section 401(k) employee savings plan for the benefit of
its eligible employees. All employees 21 years of age or older become
eligible to participate in the savings plan upon completion of 1,000 hours
of service in any consecutive 12-month period following the initial date of
employment. Employees covered under a co-employer ("PEO")contract receive
credit for prior employment with the PEO client for purposes of meeting
savings plan service eligibility. The determination of Company
contributions to the plan, if any, is subject to the sole discretion of the
Company.
Participants' interests in Company contributions to the plan vest over a
seven-year period. Company contributions to the plan, before participants'
forfeitures, were $102,000 for the year ended December 31, 2000. No
discretionary company contributions were made to the plan for the years
ended December 31, 2002 and 2001.
F-17
Barrett Business Services, Inc.
Notes to Financial Statements (Continued)
9. Savings Plan (Continued)
After several years of study, on April 24, 2002, the Internal Revenue
Service ("IRS") issued Revenue Procedure 2002-21 ("Rev Proc") to provide
relief with respect to certain defined contribution retirement plans
maintained by a PEO that benefit worksite employees. The Rev Proc outlines
the steps necessary for a PEO to avoid plan disqualification for violating
the exclusive benefit rule. Essentially, a PEO must either (1) terminate
its plan; (2) convert its plan to a "multiple employer plan" by December
31, 2003; or (3) transfer the plan assets and liabilities to a customer
plan. Effective December 1, 2002, the Company converted its 401(k) plan to
a "multiple employer plan".
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,
-------------------
2003 $ 1,209
2004 876
2005 525
2006 96
2007 41
-------------
$ 2,747
=============
Rent expense for the years ended December 31, 2002, 2001 and 2000 was
approximately $1,741,000, $1,811,000 and $1,871,000, respectively.
11. Related Party Transactions
During the period from January 1, 2002 to May 1, 2002, the Company recorded
revenues of $138,000 and cost of revenues of $132,000 for providing
services to a company owned by Barrett's President and Chief Executive
Officer, Mr. William W. Sherertz. Effective May 1, 2002, this company was
sold to an unrelated third-party. During 2001, the Company recorded
revenues of $26,000 and cost of revenues of $25,000 to this company and at
December 31, 2001, Barrett had trade receivables due from this company of
$19,000.
During 2001, pursuant to the approval of all disinterested outside
directors, the Company agreed to loan Mr. Sherertz up to $60,000 between
December 2001 and June 2002 to assist Mr. Sherertz in meeting his debt
service obligations of interest only on a personal loan from the Company's
principal bank, which is secured by his holdings of Company stock. In the
Spring of 2002, with the approval of all disinterested outside directors,
the Company agreed to extend its financial commitment to lend to Mr.
Sherertz amounts equal to an additional two quarterly interest-only
payments in July and September 2002. The Company's note receivable from Mr.
Sherertz bears interest at prime less 50 basis points, which is the same
F-18
Barrett Business Services, Inc.
Notes to Financial Statements (Continued)
11. Related Party Transactions (Continued)
rate as Mr. Sherertz's personal loan from the bank. As of December 31,
2002, the note receivable from Mr. Sherertz totaled approximately $107,000
and is shown as contra equity in the Statements of Stockholders' Equity.
During 2001, pursuant to the approval of all disinterested outside
directors, the Company entered into a split dollar life insurance agreement
with Mr. Sherertz's personal trust. Terms of the agreement provide that
upon Mr. Sherertz's death, the Company will recoup from his trust all
insurance premiums paid by the Company. During each of 2002 and 2001, the
Company paid annual life insurance premiums of approximately $56,000. In
addition, during each of 2002 and 2001, the Company paid a cash bonus of
approximately $39,000 to Mr. Sherertz in connection with his personal
expenses related to the split dollar life insurance program.
In October 2001, the Company entered into an agreement with Mr. Sherertz to
rent a residence in La Quinta, California owned by Mr. Sherertz for use in
entertaining the Company's customers. During 2002 and 2001, the Company
paid Mr. Sherertz $97,000 and $23,000, respectively, for rental of the
property.
12. Income Taxes
The (benefit from) provisions for income taxes are as follows (in
thousands):
Year ended December 31,
2002 2001 2000
------------- -------------- -------------
Current:
Federal $ (2,452) $ 24 $ 2,019
State 7 2 598
------------- -------------- -------------
(2,445) 26 2,617
------------- -------------- -------------
Deferred:
Federal 1,592 (1,356) (965)
State (39) (244) (206)
------------- -------------- -------------
1,553 (1,600) (1,171)
------------- -------------- -------------
Total (benefit) provision $ (892) $ (1,574) $ 1,446
============= ============== =============
-19-
Barrett Business Services, Inc.
Notes to Financial Statements (Continued)
12. Income Taxes (Continued)
Deferred income tax assets (liabilities) are comprised of the following
components (in thousands):
2002 2001
------------- -------------
Gross deferred income tax assets:
Workers' compensation claims liabilities $ 2,488 $ 3,413
Safety incentives payable 99 104
Allowance for doubtful accounts 16 159
Amortization of intangibles - 634
Deferred compensation 510 447
Net operating losses and tax credits 542 146
Other 63 303
------------- -------------
3,718 5,206
------------- -------------
Gross deferred income tax liabilities:
Tax depreciation in excess of book depreciation (93) (97)
Amortization of intangibles (69) -
------------- -------------
(162) (97)
------------- -------------
Net deferred income tax assets $ 3,556 $ 5,109
============= =============
The effective tax rate differed from the U.S. statutory federal tax rate
due to the following:
Year ended December 31,
2002 2001 2000
------------- -------------- -------------
Statutory federal tax rate (34.0)% (34.0)% 34.0 %
State taxes, net of federal benefit (1.0) (4.0) 7.2
Nondeductible expenses 5.8 - 1.6
Nondeductible amortization of intangibles - 2.2 5.0
Federal tax-exempt interest income (2.6) (1.8) (2.3)
Federal tax credits (8.0) (2.0) (4.0)
Other, net 0.1 0.2 (0.7)
------------- -------------- -------------
(39.7)% (39.4)% 40.8 %
============= ============== =============
At December 31, 2002, the Company had federal net operating tax losses of
$6,456,000, which will be carried back against taxable income for the year
1997 and will provide a federal income tax refund in 2003. The Company also
had state tax loss carryforwards of $6,484,000, which expire in varying
amounts between 2007 and 2022.
At December 31, 2002, the Company had $304,000 and $88,000 of unused U.S.
federal Work Opportunity Tax Credits and Welfare to Work Tax Credits,
respectively. These credits may be carried forward until expiration between
2021 and 2022. Additionally, the Company had unused U.S. federal
Alternative Minimum Tax Credits of $24,000 which may be carried forward
without expiration.
F-20
Barrett Business Services, Inc.
Notes to Financial Statements (Continued)
13. Stock Incentive Plan
The Company has a Stock Incentive Plan (the "Plan") which provides for
stock-based awards to Company employees, non-employee directors and outside
consultants or advisors. Since inception, the Company's stockholders have
approved two increases in the total number of shares of common stock
reserved for issuance under the Plan. Currently, the total shares of common
stock reserved for issuance under the Plan is 1,550,000. The options
generally become exercisable in four equal annual installments beginning
one year after the date of grant and expire ten years after the date of
grant. Under the terms of the Plan, the exercise price of incentive stock
options must not be less than the fair market value of the Company's stock
on the date of grant.
In addition, certain of the Company's branch management employees have
elected to receive a portion of their quarterly cash bonus in the form of
nonqualified deferred compensation stock options. Such options are awarded
at a sixty percent discount from the then-fair market value of the
Company's stock and are fully vested and immediately exercisable upon
grant. During 2001, the Company awarded deferred compensation stock options
for 7,811 shares at an average exercise price of $1.45 per share. During
2000, the Company awarded deferred compensation stock options for 25,466
shares at an average exercise price of $2.22 per share. During 2002, the
Company made no awards of deferred compensation stock options. In
accordance with Accounting Principles Board ("APB") Opinion No. 25, the
Company recognized compensation expense of $17,000 and $85,000 for the
years ended December 31, 2001 and 2000, respectively, in connection with
the issuance of these discounted options.
On August 22, 2001, the Company offered to all employee optionees who held
options with an exercise price of more than $5.85 per share (covering a
total of 812,329 shares), the opportunity to voluntarily return for
cancellation without payment any stock option award with an exercise price
above that price. At the close of the offer period on September 20, 2001,
stock options for a total of 797,229 shares were voluntarily surrendered
for cancellation. On August 20, 2002, the Compensation Committee of the
Company's board of directors approved the issuance of a total of 357,000
options to then-current employees.
F-21
13. Stock Incentive Plan (Continued)
A summary of the status of the Company's stock options at December 31,
2002, 2001 and 2000, together with changes during the periods then ended,
are presented below:
Weighted
Number average
of exercise
options price
-------------- -------------
Outstanding at December 31, 1999 893,718 $ 11.16
Options granted at market price 171,056 6.57
Options granted below market price 25,466 2.22
Options exercised (7,000) 4.01
Options canceled or expired (127,578) 9.03
--------------
Outstanding at December 31, 2000 955,662 10.44
Options granted at market price 99,562 3.74
Options granted below market price 7,811 1.45
Options exercised - -
Options voluntarily surrendered (797,229) 11.53
Options canceled or expired (13,600) 8.72
--------------
Outstanding at December 31, 2001 252,206
Options granted at market price 372,719 3.16
Options granted below market price - -
Options exercised (16,556) 3.67
Options canceled or expired (88,174) 3.58
--------------
Outstanding at December 31, 2002 520,195
==============
Available for grant at December 31, 2002 788,815
==============
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 2002, 2001 and 2000:
2002 2001 2000
----------- ----------- -----------
Expected volatility 58% 56% 50%
Risk free rate of return 2.94% 4.59% 6.20%
Expected dividend yield 0% 0% 0%
Expected life (years) 5.0 5.0 7.0
Total fair value of options granted at market price was computed to be
$571,000, $197,000 and $674,000 for the years ended December 31, 2002, 2001
and 2000, respectively. Total fair value of options granted at 60% discount
to market price was computed to be approximately $21,000 and $111,000 for
the years ended December 31, 2001 and 2000 respectively. There were no
options granted during 2002 below market price. The weighted average
fair-value per share of all options granted in 2002, 2001 and 2000 was
$1.53, $2.03 and $3.94, respectively.
F-22
13. Stock Incentive Plan (Continued)
The following table summarizes information about stock options outstanding
at December 31, 2002:
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) 2002 price
- ---------------------------- --------------- -------------- -------------- ------------------ --------------
$ 1.45 - $ 3.58 367,776 $ 3.12 9.2 30,776 $ 3.00
3.63 - 7.75 145,419 4.21 7.8 47,002 4.66
11.50 - 17.75 7,000 13.58 3.9 7,000 13.58
--------------- ------------------
520,195 84,778
=============== ==================
At December 31, 2002, 2001 and 2000, 84,778, 135,344 and 619,009 options
were exercisable at weighted average exercise prices of $4.79, $4.21 and
$11.33, respectively.
14. Stockholders' Equity
During 2002, the Company received a final liquidating distribution from a
former insolvent customer. The customer's receivable was personally
guaranteed by the Company's President and Chief Executive Officer, who had
previously satisfied the guarantee to the Company in full. As such, the
payment by the Company of approximately $28,000 to the Company's President
represented a partial recovery for the guarantor of the guaranteed
receivable.
15. Stock Repurchase Program
During 1999, the Company's Board of Directors authorized a stock repurchase
program to purchase common shares from time to time in open market
purchases. Since inception, the Board has approved six increases in the
total number of shares or dollars authorized to be repurchased under the
program. The repurchase program currently allows for $390,000 to be used
for the repurchase of additional shares as of December 31, 2002. During
2002, the Company repurchased 100,900 shares at an aggregate price of
$386,000. During 2001, the Company repurchased 603,600 shares at an
aggregate price of $2,307,000. During 2000, the Company repurchased
1,017,300 shares at an aggregate price of $4,541,000. In accordance with
Maryland corporation law, all repurchased shares are immediately cancelled.
16. 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-23
Barrett Business Services, Inc.
Notes to Financial Statements (Continued)
17. Quarterly Financial Information (Unaudited)
The Company's financial statements have been restated for the first, second
and third quarters of 2002 and as noted in Note 1 to the financial
statements, all quarters for the year ended December 31, 2001 and 2000 have
been restated.
(in thousands, except per share amounts and market price per share)
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------------- ------------- -------------- -------------
Year ended December 31, 2000
Restated revenues $ 53,681 $ 57,597 $ 55,233 $ 44,117
Adjustment 33,441 28,905 25,511 23,981
-------------- ------------- -------------- -------------
Revenues, as previously reported 87,122 86,502 80,744 68,098
============== ============= ============== =============
Restated cost of revenues 45,078 48,819 47,319 37,607
Adjustment 33,441 28,905 25,511 23,981
-------------- ------------- -------------- -------------
Cost of revenues, as previously reported 78,519 77,724 72,830 61,588
============== ============= ============== =============
Net income 744 794 500 63
Basic earnings per share .10 .11 .07 .01
Diluted earnings per share .10 .11 .07 .01
Common stock market prices:
High $ 7.63 $ 7.50 $ 6.44 $ 5.25
Low 5.00 5.00 5.00 2.50
Year ended December 31, 2001
Restated revenues $ 35,397 $ 33,853 $ 37,901 $ 32,240
Adjustment 19,756 18,698 20,381 18,437
-------------- ------------- -------------- -------------
Revenues, as previously reported 55,153 52,551 58,282 50,677
============== ============= ============== =============
Restated cost of revenues 30,055 28,675 31,927 30,699
Adjustment 19,756 18,698 20,381 18,437
-------------- ------------- -------------- -------------
Cost of revenues, as previously reported 49,811 47,373 52,308 49,136
============== ============= ============== =============
Net (loss) income (211) (184) 242 (2,269)
Basic (loss) earnings per share (.03) (.03) .04 (.38)
Diluted (loss) earnings per share (.03) (.03) .04 (.38)
Common stock market prices:
High $ 4.00 $ 3.97 $ 4.25 $ 5.06
Low 3.38 3.30 3.05 3.04
Year ended December 31, 2002
Restated revenues $ 25,738 $ 27,766 $ 30,090 $ 25,714
Adjustment 15,227 15,082 15,555 -
-------------- ------------- -------------- -------------
Revenues, as previously reported 40,965 42,848 45,645 25,714
============== ============= ============== =============
Restated cost of revenues 21,951 23,414 25,717 23,261
Adjustment 15,227 15,082 15,555 -
-------------- ------------- -------------- -------------
Cost of revenues, as previously reported 37,178 38,496 41,272 23,261
============== ============= ============== =============
Net (loss) income (417) 1 56 (993)
Basic (loss) earnings per share (.07) - .01 (.17)
Diluted (loss) earnings per share (.07) - .01 (.17)
Common stock market prices:
High $ 4.00 $ 4.00 $ 3.50 $ 4.00
Low 3.15 2.74 2.01 2.67
F-24
PART IV
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
BARRETT BUSINESS SERVICES, INC.
- -------------------------------
Registrant
Date: April 11, 2003 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 11th day of April, 2003.
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
A Majority of Other Directors:
* THOMAS J. CARLEY Director
* JAMES B. HICKS Director
* ANTHONY MEEKER Director
* By /s/ Michael D. Mulholland
-----------------------------------------
Michael D. Mulholland
Attorney-in-Fact
CERTIFICATIONS
I, William W. Sherertz, certify that:
1. I have reviewed this Annual Report on Form 10-K of Barrett Business
Services, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the Registrant as of, and for, the periods presented in this annual report;
4. The Registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the Registrant is made known to us by
others within the Company, particularly during the period in which this
annual report is being prepared;
b. evaluated the effectiveness of the Registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c. presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;
5. The Registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the Registrant's auditors and the audit
committee of Registrant's board of directors:
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the Registrant's ability to
record, process, summarize and report financial data and have
identified for the Registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal
controls; and
6. The Registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: April 11, 2003 /s/ William W. Sherertz
---------------------------------
William W. Sherertz
Chief Executive Officer
I, Michael D. Mulholland, certify that:
1. I have reviewed this Annual Report on Form 10-K of Barrett Business
Services, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the Registrant as of, and for, the periods presented in this annual report;
4. The Registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the Registrant is made known to us by
others within the Company, particularly during the period in which this
annual report is being prepared;
b. evaluated the effectiveness of the Registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c. presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;
5. The Registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the Registrant's auditors and the audit
committee of Registrant's board of directors:
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the Registrant's ability to
record, process, summarize and report financial data and have
identified for the Registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal
controls; and
6. The Registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: April 11, 2003 /s/ Michael D. Mulholland
---------------------------------
Michael D. Mulholland
Chief Financial Officer
EXHIBIT INDEX
3.1 Charter of the Registrant, as amended. Incorporated by reference to
Exhibit 3 to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1994.
3.2 Bylaws of the Registrant, as amended. Incorporated by reference to Exhibit
3.2 to the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1996.
The Registrant has incurred 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.
10.1 Second Amended and Restated 1993 Stock Incentive Plan of the Registrant.
Incorporated by reference to Exhibit 10.1 to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 2001.*
10.2 Form of Indemnification Agreement with each director of the Registrant.
Incorporated by reference to Exhibit 10.8 to the Registrant's Registration
Statement on Form S-1 (No. 33-61804).*
10.3 Deferred Compensation Plan for Management Employees of the Registrant.
Incorporated by reference to Exhibit 10.3 to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1997.*
10.4 Employment Agreement between the Registrant and Michael D. Mulholland,
dated January 26, 1999. Incorporated by reference to Exhibit 10.4 to the
Registrant's Annual Report on Form 10-K for the year ended December 31,
1998.*
10.5 Promissory note of William W. Sherertz dated December 10, 2001.
Incorporated by reference to Exhibit 10.5 to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 2001.*
10.6 Amended and Restated Credit Agreement dated as of September 2, 2002,
between the Registrant and Wells Fargo Bank, N.A. Incorporated by
reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K
filed on September 4, 2002 (the "Form 8-K").
10.7 Revolving Line of Credit Note dated as of September 2, 2002, in the amount
of $11,000,000 issued to Wells Fargo Bank, N.A. Incorporated by reference
to Exhibit 10.2 to the Registrant's Form 8-K.
10.8 Security Agreement Equipment dated as of September 2, 2002, executed in
favor of Wells Fargo Bank, N.A. Incorporated by reference to Exhibit 10.3
to the Registrant's Form 8-K.
10.9 Continuing Security Agreement Rights to Payment dated as of September 2,
2002, executed in favor of Wells Fargo Bank, N.A. Incorporated by
reference to Exhibit 10.4 to the Registrant's Form 8-K.
10.10 First Amendment, dated March 21, 2003, to Amended and Restated Credit
Agreement between the Registrant and Wells Fargo Bank, N.A. dated
September 2, 2002.
10.11 First Modification to Promissory Note entered into as of March 21, 2003,
by and between the Registrant and Wells Fargo Bank, N.A.
10.12 Second Amendment, dated April 30, 2003, to Amended and Restated Credit
Agreement between the Registrant and Wells Fargo Bank, N.A., dated
September 2, 2002.
10.13 Revolving Line of Credit Note dated as of April 30, 2003, in the amount of
$8,000,000 issued to Wells Fargo Bank, N.A.
23 Consent of PricewaterhouseCoopers LLP, independent accountants.
24 Power of attorney of certain officers and directors.
99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
* Denotes a management contract or a compensatory plan or arrangement.