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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, 2004
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 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. __
Indicate by check mark whether the Registrant is an accelerated filer (as
indicated by Exchange Act Rule 12b-2). Yes __ No X
State the aggregate market value of the common equity held by
non-affiliates of the Registrant: $37,659,022 at June 30, 2004.
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, 2005
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Common Stock, Par Value $.01 Per Share 5,759,229 Shares
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement for the 2005 Annual Meeting of
Stockholders are hereby incorporated by reference into Part III of Form 10-K.
BARRETT BUSINESS SERVICES, INC.
2004 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 11
Executive Officers of the Registrant 12
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities 13
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
Item 9A. Controls and Procedures 25
Item 9B. Other Information 26
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 27
Item 14. Principal Accountant Fees and Services 27
PART IV
Item 15. Exhibits and Financial Statement Schedules 28
Financial Statements F-1
Signatures
Exhibit Index
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PART I
Item 1. BUSINESS
General
Barrett Business Services, Inc. ("Barrett" or the "Company"), was
incorporated in the state of Maryland in 1965. Barrett is a leading human
resource management company. The Company offers a unique blended platform of
human resource management services 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 2004, Barrett's staffing services
revenues represented 63.4% of total net revenues, compared to 36.6% for PEO
services revenues, as compared to 76.2% and 23.8%, respectively, for 2003.
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 2004, the Company provided staffing services to
approximately 2,700 customers, compared to a similar number in 2003. Although a
majority of the Company's staffing customers are small to mid-sized businesses,
during 2004 approximately 55 of the Company's customers each utilized Barrett
employees in a number ranging from at least 200 employees to as many as 2,050
employees through various staffing services arrangements. In addition, Barrett
had approximately 600 PEO clients at December 31, 2004, compared to 500 at
December 31, 2003 and Barrett employed approximately 15,500 and 11,800 employees
pursuant to PEO contracts at December 31, 2004 and 2003, respectively. The
increase in the number of PEO customers during 2004 was primarily due to PEO
growth in California attributable to the business opportunities available to the
Company as a qualified self-insured employer for workers' compensation coverage
resulting from adverse market conditions for workers' compensation insurance in
the state.
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The Company operates through a network of 30 branch offices in
Washington, Oregon, Idaho, California, Arizona, Maryland, Delaware and North
Carolina. Barrett also has several smaller recruiting offices in its general
market areas under the direction of a branch office.
See Part II, Item 7, under the heading "Forward-Looking Information"
for a discussion of risks and other factors that may cause the Company's
operating results or financial condition to vary significantly from those
implied by statements in this Item or in Item 7 that are forward-looking rather
than historical in nature. Additional specific risks are discussed in
conjunction with forward-looking statements included in this Item and in Item 7.
Operating Strategies
The Company's principal operating strategies are to: (i) provide
effective human resource management services through a 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 selective 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 operational challenges arising out of integration of
management information systems.
Effective January 1, 2004, the Company acquired certain assets of
Skills Resource Training Center ("SRTC"), a staffing services company with nine
offices in Central Washington, Eastern Oregon and Southern Idaho. The Company
paid $3,000,000 in cash for the assets of SRTC and the selling shareholders'
noncompete agreements and agreed to issue up to 135,731 shares of its common
stock ("Earnout Shares"), with the actual number of Earnout Shares to be issued
based upon the level of financial performance achieved by the SRTC offices
during calendar 2004. Certain contingencies remain unresolved precluding a final
calculation of the Earnout Shares. However, the Company has recorded an
estimated total Earnout Shares of 52,800 with a value of $778,000 on its
consolidated balance sheet as of December 31, 2004.
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:
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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 and
remitting such withholding and deductions to various parties,
handling garnishments, computing vacation and sick pay, and
preparing W-2 forms and accounting reports through centralized
operations at its headquarters in Portland, Oregon.
o Employee Benefits and Administration. As a result of its size,
Barrett is able to offer employee benefits which are typically not
available at an affordable cost to many of its customers,
particularly those with fewer than 100 employees. These benefits
include health care insurance, a 401(k) savings plan, a Section
125 cafeteria plan, life and disability insurance and claims
administration.
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. All risk managers
report directly to the Company's CEO. Each risk manager has the
authority to cancel the business relationship with any customer.
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, including
California beginning in March 1995. Through its third-party
administrators, Barrett provides claims management services for
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
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human resource administration. Short-term staffing involves employee demands
caused by such factors as seasonality, fluctuations in customer demand,
vacations, illnesses, parental leave, and special projects without incurring the
ongoing expense and administrative responsibilities associated with recruiting,
hiring and retaining additional permanent employees. As more and more companies
focus on effectively managing variable costs and reducing fixed overhead, the
use of employees on a short-term basis allows firms to utilize the
"just-in-time" approach for their personnel needs, thereby converting a portion
of their fixed personnel costs to a variable expense.
Contract staffing refers to the Company's responsibilities for the
placement of employees for a period of more than three months or an indefinite
period. This type of arrangement often involves outsourcing an entire department
in a large corporation or providing the workforce for a large project.
In an on-site management arrangement, Barrett places an experienced
manager on site at a customer's place of business. The manager is responsible
for conducting all recruiting, screening, interviewing, testing, hiring and
employee placement functions at the customer's facility for a long-term or
indefinite period.
The Company's staffing services customers operate in a broad range of
businesses, including forest products and agriculture-based companies,
electronic manufacturers, transportation and shipping companies, food
processors, professional firms and construction contractors. Such customers
range in size from small local firms to companies with international operations,
which use Barrett's services on a domestic basis. None of the Company's staffing
services customers individually accounted for more than 4% of its total 2004
revenues.
In 2004, the light industrial sector generated approximately 82% of the
Company's staffing services revenues, while clerical office staff accounted for
14% of such revenues and technical personnel represented the balance of 4%.
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 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
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liability insurance coverage, with a resulting negative effect on the Company's
financial condition.
PEO Services. Many businesses, particularly those with a limited number
of employees, find personnel administration requirements to be unduly complex
and time consuming. These businesses often cannot justify the expense of a
full-time human resource staff. In addition, the escalating costs of health and
workers' compensation insurance in recent years, coupled with the increased
complexity of laws and regulations affecting the workplace, have created a
compelling opportunity for small to mid-sized businesses to outsource these
managerial burdens. The outsourcing of non-core business functions, such as
human resource administration, enables small enterprises to devote their limited
resources to their core competencies.
In a PEO services arrangement, Barrett enters into a contract to become
a co-employer of the client company's existing workforce. Pursuant to this
contract, Barrett assumes responsibility for some or all of the human resource
management responsibilities, including payroll and payroll taxes, employee
benefits, health insurance, workers' compensation coverage, workplace safety
programs, compliance with federal and state employment laws, labor and workplace
regulatory requirements and related administrative responsibilities. Barrett has
the right to hire and fire its PEO employees, although the client company
remains responsible for day-to-day assignments, supervision and training and, in
most cases, recruiting.
The Company began offering PEO services to Oregon customers in 1990 and
subsequently expanded these services to other states. The Company has entered
into co-employer arrangements with a wide variety of clients, including
companies involved in moving and shipping, professional firms, construction,
retail, manufacturing and distribution businesses. PEO clients are typically
small to mid-sized businesses with up to several hundred employees. None of the
Company's PEO clients individually accounted for more than 4% of its total
annual revenues during 2004.
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.
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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.
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. Regulations governing self-insured employers in each jurisdiction
typically require the employer to maintain surety deposits of government
securities, letters of credit 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, 2000, such excess insurance included a self-insured retention or
deductible of $350,000. For calendar 2001, the Company's self-insured retention
was $400,000. 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, 2004, the per occurrence
retention increased to $1 million and the policy limit was increased to $25
million. The higher per occurrence retention may result in higher workers'
compensation costs to the Company with a corresponding negative effect on its
operating results.
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
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approach to claims management. The Company uses managed-care systems to reduce
medical costs and keeps time-loss costs to a minimum by assigning injured
workers, whenever possible, to short-term assignments which accommodate the
workers' physical limitations. The Company believes that these assignments
minimize both time actually lost from work and covered time-loss costs. Barrett
has also engaged third-party administrators ("TPAs") to provide additional
claims management expertise. Typical management procedures include performing
thorough and prompt on-site investigations of claims filed by employees, working
with physicians to encourage efficient medical management of cases, denying
questionable claims and attempting to negotiate early settlements to eliminate
future case development and costs. Barrett also maintains a corporate-wide
pre-employment drug screening program and a mandatory post-injury drug test. The
program is believed to have resulted in a reduction in the frequency of
fraudulent claims and in accidents in which the use of illegal drugs appears to
have been a contributing factor.
Elements of Self-Insurance Costs. The costs associated with the
Company's self-insured workers' compensation program include case reserves for
reported claims, an additional expense provision for potential future 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, 2004, 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".
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Failure to successfully manage the severity and frequency of workers'
compensation injuries results in increased workers' compensation expense and has
a negative effect, which may be substantial, on the Company's operating results
and financial condition. Management maintains clear guidelines for its branch
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. Each of the Company's risk managers has the
authority to cancel any customer at any time based upon their assessment of the
customer's safe-work practices and/or philosophies.
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, 2004, the Company had approximately 22,830 employees,
including approximately 7,100 staffing services employees, approximately 15,500
PEO employees and approximately 230 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 2004,
approximately 3% 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 health insurance premiums
and childcare expenses, and a savings plan (the "401(k) plan") under Section
401(k) of the Internal Revenue Code (the "Code") 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. Employees subject to a co-employer arrangement may participate in the
Company's benefit plans at the election of the co-employer. 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 Washington,
Oregon, California, Maryland and Delaware. 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
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imposes some additional financial risk on Barrett, particularly with respect to
those clients who breach their payment obligation to the Company, such
compliance has not had 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 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 the 401(k) plan, a cafeteria plan under Section 125 of the Code, a group
health plan, a group life insurance plan and a group disability insurance plan.
Generally, qualified employee benefit plans are subject to provisions of both
the Code and the Employee Retirement Income Security Act of 1974 ("ERISA"). In
order to qualify for favorable tax treatment under the Code, qualified plans
must be established and maintained by an employer for the exclusive benefit of
its employees. See Part II, 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 several hundred 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. During
2004, approximately 88% and 11% of the Company's PEO service fee revenues were
earned in California and Oregon, respectively.
The Company may face additional PEO competition in the future from new
entrants to the field, including other staffing services companies, payroll
processing companies and insurance companies. Certain PEO companies which
periodically compete with Barrett in the same markets have greater financial and
marketing resources than the Company, such as
-10-
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 reduce its workers' compensation
costs and to provide enhanced benefits to their employees while reducing their
overall personnel administration 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, or changes in the regulatory
environment, particularly in California. 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 30 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 51% and 21%, respectively, of its total revenues in 2004.
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 12
Idaho 1
Oregon 8
Washington 4
Maryland 2
Delaware 1
North Carolina 1
Barrett leases office space for its corporate and branch offices. At
December 31, 2004, such leases had expiration dates ranging from less than one
year to nine years, with total minimum payments through 2012 of approximately
$5,106,000.
Item 3. LEGAL PROCEEDINGS
There were no material legal proceedings pending against the Company at
December 31, 2004, or during the period beginning with that date through March
29, 2005.
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 2004.
-11-
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table identifies, as of February 28, 2005, each executive
officer of the Company. Executive officers are elected annually and serve at the
discretion of the Board of Directors.
Officer
Name Age Principal Positions and Business Experience Since
- --------------------------------------------------------------------------------
William W. Sherertz 59 President; Chief Executive Officer; Director 1980
Michael D. Mulholland 53 Vice President-Finance and Secretary; Chief 1994
Financial Officer
Gregory R. Vaughn 49 Vice President 1998
James D. Miller 41 Controller and Assistant Secretary; Principal 1994
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,
AND ISSUER PURCHASES OF EQUITY SECURITIES
The Company's common stock (the "Common Stock") trades on The Nasdaq
Stock Market's National Market(TM) tier under the symbol "BBSI." At February 28,
2005, there were 57 stockholders of record and approximately 780 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
------- -------
2003
First Quarter $ 3.75 $ 2.31
Second Quarter 3.65 2.64
Third Quarter 7.41 3.00
Fourth Quarter 15.13 7.00
2004
First Quarter $ 17.76 $ 11.49
Second Quarter 15.21 12.26
Third Quarter 17.69 12.99
Fourth Quarter 16.50 13.25
The Company did not purchase any shares of its Common Stock during the
fourth quarter of 2004. Please refer to the discussion under the heading
"Liquidity and Capital Resources" under Item 7 Management's Discussion and
Analysis of Financial Condition and Results of Operations of this report, for a
discussion of the Company's stock repurchase program.
-13-
Item 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction
with the Company's financial statements and the accompanying notes listed in
Item 15 of this Report.
Year Ended December 31,
2004 2003 2002 2001 2000
-------- -------- -------- -------- --------
(In thousands, except per share data)
Statement of operations:
Revenues:
Staffing services $123,514 $ 93,544 $ 96,750 $123,110 $188,500
Professional employer service fees 71,447 29,177 12,558 16,281 22,128
------- -------- -------- -------- --------
Total 194,961 122,721 109,308 139,391 210,628
-------- -------- -------- -------- --------
Cost of revenues:
Direct payroll costs 91,190 69,099 71,515 90,750 139,177
Payroll taxes and benefits 45,544 22,916 14,062 17,635 27,007
Workers' compensation 21,557 9,709 8,766 12,971 12,639
-------- -------- -------- -------- --------
Total 158,291 101,724 94,343 121,356 178,823
-------- -------- -------- -------- --------
Gross margin 36,670 20,997 14,965 18,035 31,805
Selling, general and administrative
expenses 23,844 16,810 16,008 18,737 24,583
Depreciation and amortization 1,008 1,058 1,162 3,277 3,192
-------- -------- -------- -------- --------
Income (loss) from operations 11,818 3,129 (2,205) (3,979) 4,030
-------- -------- -------- -------- --------
Other (expense) income:
Interest expense (101) (268) (278) (359) (830)
Interest income 343 82 217 297 341
Other, net 190 32 21 45 6
-------- -------- -------- -------- --------
Total 432 (154) (40) (17) (483)
-------- -------- -------- -------- --------
Income (loss) before income taxes 12,250 2,975 (2,245) (3,996) 3,547
Provision for (benefit from) income taxes 4,879 890 (892) (1,574) 1,446
-------- -------- -------- -------- --------
Net income (loss) $ 7,371 $ 2,085 $ (1,353) $ (2,422) $ 2,101
======== ======== ======== ======== ========
Basic earnings (loss) per share $ 1.29 $ .36 $ (.23) $ (.39) $ .29
======== ======== ======== ======== ========
Weighted average number of basic
shares outstanding 5,725 5,690 5,804 6,193 7,237
======== ======== ======== ======== ========
Diluted earnings (loss) per share $ 1.19 $ .35 $ (.23) $ (.39) $ .29
======== ======== ======== ======== ========
Weighted average number of diluted
shares outstanding 6,193 5,876 5,804 6,193 7,277
======== ======== ======== ======== ========
Selected balance sheet data:
Cash $ 12,153 $ 7,785 $ 96 $ 1,142 $ 516
Working capital 17,151 8,470 2,235 2,658 3,731
Total assets 79,985 58,834 50,825 52,787 61,062
Long-term debt, net of current portion 1,441 400 488 922 2,283
Stockholders' equity 38,753 30,634 28,785 30,534 34,917
-14-
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
The Company's revenues consist of staffing services and professional
employer organization ("PEO") 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
72% of its total net revenues in 2004. 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. Safety incentive payments are made only after closure of all
workers' compensation claims incurred during the customer's contract period. The
safety incentive expense is netted against PEO revenues on the Company's
Statements of Operations.
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-
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 help to limit 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 included 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, 2004. However, if the actual costs
of such claims and related expenses exceed the amount estimated, additional
reserves may be required, which could 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 creditworthiness, 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 acquired
-16-
assets. Management's current assessment of the carrying value of intangible
assets and goodwill indicates there is no impairment. If these estimates or
their related assumptions change in the future, the Company may be required to
record impairment charges for these assets.
Recent Accounting Pronouncements
For a discussion of recent 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 beginning at page F-11
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 and effect on revenue growth, 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 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, material deviations from expected future workers' compensation claims
experience, collectibility of accounts receivable, the carrying values of
deferred income tax assets and goodwill, which may be affected by 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, 2004, 2003 and 2002, included in Item 15 of this
report. References to the Notes to Financial Statements appearing below are to
the notes to the Company's financial statements included in Item 15 of this
Report.
-17-
Percentage of Total Net Revenues
--------------------------------
Years Ended December 31,
----------------------------
2004 2003 2002
----- ----- -----
Revenues:
Staffing services 63.4 % 76.2 % 88.5 %
Professional employer service fees 36.6 23.8 11.5
----- ----- -----
Total 100.0 100.0 100.0
----- ----- -----
Cost of revenues:
Direct payroll costs 46.8 56.3 65.4
Payroll taxes and benefits 23.4 18.7 12.9
Workers' compensation 11.0 7.9 8.0
----- ----- -----
Total 81.2 82.9 86.3
----- ----- -----
Gross margin 18.8 17.1 13.7
Selling, general and administrative expenses 12.2 13.7 14.6
Depreciation and amortization 0.5 0.9 1.1
----- ----- -----
Income (loss) from operations 6.1 2.5 (2.0)
Other (expense) income 0.2 (0.1) -
----- ----- -----
Pretax income (loss) 6.3 2.4 (2.0)
Provision for (benefit from) income taxes 2.5 0.7 (0.8)
----- ----- -----
Net income (loss) 3.8 % 1.7 % (1.2)%
===== ===== =====
The Company changed its reporting of PEO revenues from a gross basis to
a net basis in 2002 because it was determined in accordance with the
requirements of EITF 99-19, "Reporting Revenues Gross as a Principal Versus Net
as an Agent", that the Company was not the primary obligor for the services
provided by employees pursuant to its PEO contracts. The gross revenues and cost
of revenues information below, although not in accordance with generally
accepted accounting principles ("GAAP"), is presented for comparison purposes
and because management believes such information is more informative as to the
level of the Company's business activity and useful in managing its operations.
Year Ended
(in thousands) December 31,
-------------------
2004 2003
-------- --------
Revenues:
Staffing services $123,514 $ 93,544
Professional employer services 419,010 173,134
-------- --------
Total revenues 542,524 266,678
-------- --------
Cost of revenues:
Direct payroll costs 434,034 211,102
Payroll taxes and benefits 45,544 22,916
Workers' compensation 26,276 11,663
-------- --------
Total cost of revenues 505,854 245,681
-------- --------
Gross margin $ 36,670 $ 20,997
======== ========
-18-
A reconciliation of non-GAAP gross revenues to net revenues is as
follows for the years ended December 31, 2004 and 2003 (in thousands):
Gross Revenue Net Revenue
Reporting Method Reclassification Reporting Method
------------------ --------------------- -------------------
2004 2003 2004 2003 2004 2003
-------- -------- --------- --------- -------- --------
Revenues:
Staffing services $123,514 $ 93,544 $ -- $ -- $123,514 $ 93,544
Professional employer
services 419,010 173,134 (347,563) (143,957) 71,447 29,177
-------- --------- --------- --------- -------- --------
Total revenues $542,524 $266,678 $(347,563) $(143,957) $194,961 $122,721
======== ======== ========= ========= ======== ========
Cost of revenues: $505,854 $245,681 $(347,563) $(143,957) $158,291 $101,724
======== ======== ========= ========= ======== ========
Years Ended December 31, 2004 and 2003
Net income for the year ended December 31, 2004 was $7,371,000, an
improvement of $5,286,000 over the net income of $2,085,000 for 2003. The
improvement in the net income was primarily attributable to higher gross margin
dollars as a result of significant growth in professional employer ("PEO")
services business, offset in part by an increase in selling, general and
administrative ("SG&A") expenses to support the increase in business activity.
Basic income per share for 2004 was $1.29 and diluted income per share for 2004
was $1.19 as compared to basic and diluted income per share of $.36 and $.35,
respectively, for 2003. The Company's improved operating results continue to
reflect, in part, the competitive advantage of offering a broad array of human
resource management services through its PEO arrangements. This competitive
advantage has enabled the Company to significantly increase its business
opportunities in California. The Company expects this favorable trend to
continue into the foreseeable future, particularly in California.
Revenues for 2004 totaled $194,961,000, an increase of approximately
$72,240,000 or 58.9% over 2003 revenues of $122,721,000. The increase in total
revenues was due primarily to the significant growth in the Company's PEO
service fee revenue in California, combined with an increase in staffing service
revenue.
PEO service fee revenue increased $42,270,000 or 144.9%, while staffing
services revenue increased $29,970,000 or 32.0%, which resulted in an increase
in the share of PEO service fee revenue to 36.6% of total revenues for 2004, as
compared to 23.8% for 2003. The increase in PEO service fee revenue for 2004 was
primarily due to increased demand for the Company's broad array of competitively
priced human resource management services that satisfy customers' needs. The
increase in staffing services revenue for 2004 was primarily due to the
Company's acquisition of Skills Resource Training Center ("SRTC"), a staffing
services company with nine offices in Central Washington, Eastern Oregon and
Southern Idaho, effective January 1, 2004. Operations of SRTC accounted for
approximately $25,560,000 or 85.3% of the increase. Management expects demand
for the Company's staffing services will continue to reflect overall economic
conditions in its market areas. The share of staffing services revenues
decreased to 63.4% of total revenues for 2004, as compared to 76.2% for 2003.
Gross margin for 2004 totaled $36,670,000, which represented an
increase of $15,673,000 or 74.6% over 2003. The gross margin percent increased
from 17.1% of revenues for 2003 to 18.8% for 2004. The increase in the gross
margin percentage was due to lower direct payroll costs, offset in part by
higher payroll taxes and benefit costs and higher workers'
-19-
compensation costs, as a percentage of net revenues. The decrease in direct
payroll costs as a percentage of net revenues from 56.3% for 2003 to 46.8% for
2004 primarily reflects the shift in relative mix of services to the Company's
customer base from staffing to PEO services and to the effect of each customer's
unique mark-up percent. The increase in payroll taxes and benefits as a
percentage of net revenues from 18.7% for 2003 to 23.4% for 2004 was primarily
attributable to higher statutory state unemployment tax rates in various states
in which the Company operates, as well as to the effect of significant growth in
PEO services. Workers' compensation expense for 2004 totaled $21,557,000, which
compares to $9,709,000 for 2003. The increase in workers' compensation expense
was generally due to increased business activity, particularly in California
where injury claims are more costly as compared to other states in which the
Company operates, as well as to an increased provision for the future estimated
costs of existing claims. The Company expects gross margin, as a percentage of
net 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 year 2002, such policies included a self-insured retention or
deductible of $750,000 per occurrence. Effective January 1, 2004, the
self-insured retention or deductible increased to $1,000,000 per occurrence and
remained as such for the January 1, 2005 renewal with the premium cost per $100
of payroll also remaining unchanged. Management believes that the Company
obtained the most favorable terms and conditions available given current market
conditions.
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 2004 amounted to $23,844,000, an
increase of $7,034,000 or 41.8% over 2003. SG&A expenses, expressed as a
percentage of net revenues, declined from 13.7% for 2003 to 12.2% for 2004. The
increase in total SG&A dollars was primarily due to increases in branch
management personnel and related expenses as a result of the growth in the
Company's PEO business and, to a lesser extent, the incremental SG&A expenses
associated with the SRTC acquisition.
Depreciation and amortization totaled $1,008,000 for 2004, which
compares to $1,058,000 for 2003. The depreciation and amortization expense level
remained comparable to 2003 amounts due to the Company's current low level of
capital expenditures.
The Company's effective income tax rate for 2004 was 39.8%, as compared
to 29.9% for 2003. The higher 2004 effective rate was primarily attributable to
a higher federal tax rate as a result of higher taxable income, a higher
weighted-average state tax rate due to increased taxable income in the state of
California and a lower relative effect of tax credits due to higher taxable
income.
At December 31, 2004, the Company had net deferred income tax assets of
$4,682,000 primarily reflecting temporary differences between taxable income for
financial accounting and tax purposes, which will reduce taxable income in
future years. Pursuant to generally accepted accounting principles, the Company
is required to assess the realization of the deferred income tax assets as
significant changes in circumstances may require adjustments during future
periods. Although realization is not assured, management has concluded that it
is more likely than not that the remaining net deferred income tax assets will
be realized, principally based upon projected taxable income for the next two
years. The amount of the net deferred income tax assets actually realized could
vary, if there are
-20-
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, the
Company's long-term forecast may 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 Section 125 of the Code, 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, 2003 and 2002
Net income for the year ended December 31, 2003 was $2,085,000, an
improvement of $3,438,000 over the net loss of $1,353,000 for 2002. The
improvement in the net income was primarily attributable to higher gross margin
dollars, primarily due to a 12.3% increase in revenues, offset in part by an
increase in SG&A expenses to support the increase in business activity. Basic
income per share for 2003 was $.36 and diluted income per share for 2003 was
$.35 as compared to basic and diluted loss per share of $.23 for 2002.
Revenues for 2003 totaled $122,721,000, an increase of approximately
$13,413,000 or 12.3% over 2002 revenues of $109,308,000. The increase in total
revenues was due primarily to the significant growth in the Company's PEO
service fee revenue in California, partially offset by a small decline in
staffing service revenue.
PEO service fee revenue increased $16,619,000 or 132.3%, while staffing
services revenue decreased $3,206,000 or 3.3%, which resulted in an increase in
the share of PEO service fee revenue to 23.8% of total revenues for 2003, as
compared to 11.5% for 2002. The increase in PEO service fee revenue for 2003 was
primarily due to strong growth in California attributable to business
opportunities available to the Company as a qualified self-insured employer for
workers' compensation coverage resulting from the adverse market conditions for
workers' compensation insurance in the state. The decrease in staffing services
revenue for 2003 was primarily attributable to weak 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 staffing services revenues had a
corresponding decrease from 88.5% of total revenues for 2002 to 76.2% for 2003.
-21-
Gross margin for 2003 totaled $20,997,000, which represented an
increase of $6,032,000 or 40.3% over 2002. The gross margin percent increased
from 13.7% of revenues for 2002 to 17.1% for 2003. The increase in the gross
margin percentage was due to lower direct payroll costs and workers'
compensation costs, offset in part by higher payroll taxes and benefit costs, as
a percentage of net revenues. The decrease in direct payroll costs as a
percentage of net revenues from 65.4% for 2002 to 56.3% for 2003 primarily
reflects the shift in relative mix of services to the Company's customer base
and to the effect of each customer's mark-up percent. The decrease in workers'
compensation costs, as a percentage of net revenues, from 8.0% of revenues for
2002 to 7.9% for 2003, 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
payroll taxes and benefits as a percentage of net revenues from 12.9% for 2002
to 18.7% for 2003 was primarily attributable to higher state unemployment tax
rates in various states in which the Company operates, as well as to the effect
of significant growth in PEO services.
SG&A expenses for 2003 amounted to $16,810,000, an increase of $802,000
or 5.0% over 2002. SG&A expenses, expressed as a percentage of net revenues,
declined from 14.6% for 2002 to 13.7% for 2003. The increase in total SG&A
dollars was primarily due to increases in branch management personnel and
related expenses as a result of the growth in the Company's PEO business.
Depreciation and amortization totaled $1,058,000 for 2003, which
compares to $1,162,000 for 2002. The depreciation and amortization expense level
remained comparable to 2002 amounts due to the Company's current low level of
capital expenditures.
Fluctuations in Quarterly Operating Results
The Company has historically experienced significant fluctuations in
its quarterly operating results and expects such fluctuations to continue in the
future. The Company's operating results may fluctuate due to a number of factors
such as seasonality, wage limits on payroll taxes, claims experience for
workers' compensation, demand and competition for the Company's services and the
effect of acquisitions. The Company's revenue levels fluctuate from quarter to
quarter primarily due to the impact of seasonality on its staffing services
business and on certain of its PEO clients in the agriculture and forest
products-related industries. As a result, the Company may have greater revenues
and net income in the third and fourth quarters of its fiscal year. Payroll
taxes and benefits fluctuate with the level of direct payroll costs, but tend to
represent a smaller percentage of revenues and direct payroll later in the
Company's fiscal year as federal and state statutory wage limits for
unemployment and social security taxes are exceeded by some employees. Workers'
compensation expense varies with both the frequency and severity of workplace
injury claims reported during a quarter and the estimated future costs of such
claims. In addition, adverse loss development of prior period claims during a
subsequent quarter may also contribute to the volatility in the Company's
estimated workers' compensation expense.
Liquidity and Capital Resources
The Company's cash position at December 31, 2004 of $12,153,000
increased $4,368,000 over December 31, 2003. The increase in cash at December
31, 2004 was primarily generated from net income and increases in accrued
payroll, payroll taxes and related benefits and increases in workers'
compensation claim liabilities and safety incentives liabilities, offset in part
by excess cash used to purchase marketable securities for investment purposes,
cash used for the acquisition of SRTC and an increase in trade accounts
receivable.
-22-
Net cash provided by operating activities for 2004 amounted to
$12,684,000, as compared to net cash provided by operating activities of
$7,176,000 for 2003. For 2004, net cash provided by operating activities was
primarily attributable to net income of $7,371,000 together with increases in
accrued payroll and related benefits of $3,546,000 and increases in workers'
compensation claims liabilities and safety incentives liabilities totaling
$7,669,000, offset in part by an increase of $5,373,000 in trade accounts
receivable. For 2003, net cash provided by operating activities was primarily
attributable to net income of $2,085,000, a $1,923,000 decrease in income taxes
receivable as a result of the receipt of the 2002 federal income tax refund and
an increase in accrued payroll and related benefits of $8,984,000, offset in
part by a net decrease of workers' compensation claims of $1,478,000, coupled
with an increase of $7,124,000 in trade accounts receivable.
Net cash used in investing activities totaled $9,970,000 for 2004, as
compared to net cash provided by investing activities of $4,695,000 for 2003.
For 2004, the principal uses of cash for investing activities were purchases of
marketable securities for investment purposes of $4,957,000, the acquisition of
SRTC and related costs totaling $3,044,000, purchases of equipment of $1,914,000
and $2,397,000 of net purchases of restricted marketable securities, offset in
part by net proceeds totaling $2,342,000 from maturities of restricted
marketable securities. The transactions related to restricted marketable
securities were scheduled maturities and the related replacement of such
securities held for workers' compensation surety deposit purposes. For 2003, the
principal source of cash provided by investing activities was from $2,338,000 of
proceeds from the sale and leaseback of two office buildings and from net
proceeds totaling $9,914,000 from maturities and sales of marketable securities,
offset in part by $7,226,000 of net purchases of marketable securities. The
Company presently has no material long-term commitments for capital
expenditures, nor does it anticipate any in the foreseeable future.
Net cash provided by financing activities for 2004 amounted to
$1,654,000, which compares to net cash used in financing activities of
$4,182,000 in 2003. For 2004, the principal source of cash for financing
activities was $1,475,000 of debt incurred in connection with the Company's
purchase of an aircraft for use in management's travel to California to oversee
its business. For 2003, the principal use of cash for financing activities was
for $3,513,000 of net payments made on the Company's revolving credit line,
common stock repurchases totaling $446,000 pursuant to its repurchase program
and scheduled payments on long-term debt of $433,000.
The Company entered into a new Credit Agreement (the "Credit
Agreement") with its principal bank on March 23, 2004, to be effective March 31,
2004. The Credit Agreement provides for a revolving credit facility of up to
$6.0 million, which includes a subfeature under the line of credit for standby
letters of credit for not more than $4.0 million. The interest rate on advances,
if any, will be, at the Company's discretion, either (i) equal to the prime rate
or (ii) LIBOR plus 1.50%. The Credit Agreement expires July 1, 2005.
The revolving credit facility is collateralized by the Company's
assets, including, without limitation, its accounts receivable, equipment,
intellectual property and bank deposits, and may be prepaid at any time without
penalty. Pursuant to the 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 with "Current Ratio" defined as total current assets divided by
total current liabilities; (2) Tangible Net Worth not less than $8 million,
determined at each fiscal quarter end, with "Tangible Net Worth" defined as the
aggregate of total stockholders' equity plus subordinated debt less any
intangible assets; (3) Total Liabilities divided by Tangible Net Worth not
greater than 5.00 to 1.0, determined at each fiscal quarter end, with "Total
Liabilities" defined as the aggregate of current liabilities and non-current
liabilities, less subordinated debt and the deferred gain on the Company's sale
and leaseback
-23-
transaction, and with "Tangible Net Worth" as defined above; and (4) Net income
after taxes not less than $1.00 on an annual basis, determined as of each fiscal
year end, and pre-tax profit not less than $1.00 on a quarterly basis,
determined as of each fiscal quarter end.
The Company had letters of credit outstanding at December 31, 2004
totaling approximately $2.5 million primarily in connection with various deposit
requirements for its self-insured workers' compensation programs. As of December
31, 2004, the Company had approximately $3.5 million available under its $6.0
million credit facility and was in compliance with all loan covenants.
Management expects that current liquid assets, the funds anticipated to
be generated from operations, and credit available under the 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.
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 seven increases
in the total number of shares or dollars authorized to be repurchased under the
program. The stock repurchase program had $443,000 of remaining authorization
for the repurchase of additional shares at December 31, 2004. During 2004, the
Company made no repurchases of shares. Management anticipates that the capital
necessary to complete this program would be provided by existing cash balances
and other available resources.
Contractual Obligations
The Company's contractual obligations as of December 31, 2004,
including long-term debt, commitments for future payments under non-cancelable
lease arrangements and long-term workers' compensation liabilities, are
summarized below:
Payments Due by Period
--------------------------------------------
(in thousands) Less than 1 - 3 4 - 5 After
Total 1 year years years 5 years
------- ------ ------ ------ ------
Long-term debt $ 1,789 $ 348 $ 644 $ 296 $ 501
Operating leases 5,106 1,812 2,268 456 570
Long-term workers' compensation claims
liabilities for catastrophic injuries 600 24 85 67 424
Long-term workers' compensation
liabilities for insured claims 4,371 213 639 426 3,093
------- ------ ------ ------ ------
Total contractual cash obligations $11,866 $2,397 $3,636 $1,245 $4,588
======= ====== ====== ====== ======
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.
-24-
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, 2004, the Company had interest-bearing debt obligations of
approximately $1.8 million, of which approximately $1.4 million bears interest
at a variable rate and approximately $0.4 million at a fixed rate of interest.
The variable rate debt is comprised of a $1.475 million note payable, of which
approximately $1.4 million remained outstanding as of December 31, 2004 with a
10-year term, which bears interest at the three-month LIBOR rate plus 240 basis
points. Based on the Company's overall interest exposure at December 31, 2004, a
100 basis point increase 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, 2004, 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.
Item 9A. CONTROLS AND PROCEDURES
The Company's disclosure controls and procedures 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. The Company's
management has evaluated, with the participation and under the supervision of
our chief executive officer ("CEO") and chief financial officer ("CFO"), the
effectiveness of our disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) of the Exchange Act) as of the end of the period covered
by this report. Based on this evaluation, our CEO and CFO have concluded that,
as of such date, the Company's disclosure controls and procedures are effective
in ensuring that information relating to the Company required to be disclosed in
reports that it files under the Exchange Act is recorded, processed, summarized
and reported within the time periods specified in the SEC's rules and forms, and
is communicated to our management, including our CEO and CFO, as appropriate to
allow timely decisions regarding required disclosures.
No change in the Company's internal control over financial reporting
occurred during our last fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the Company's internal control over
financial reporting.
-25-
Item 9B. OTHER INFORMATION
On March 4, 2005, following approval by members of the Compensation
Committee of the Company's Board of Directors, cash bonuses were paid to the
Company's executive officers for 2004 pursuant to the Company's annual cash
incentive bonus award program as follows: William W. Sherertz, $59,236; Michael
D. Mulholland, $48,410; and Gregory R. Vaughn, $40,444. Bonuses were calculated
by multiplying the officer's actual salary paid during 2004 by the Company's
return on equity for 2004 before factoring in the bonus payments.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by this Item 10 concerning directors and executive
officers of the Company appears under the heading "Executive Officers of the
Registrant" on page 12 of this report or is incorporated into this report by
reference to the Company's definitive Proxy Statement for its 2005 Annual
Meeting of Stockholders to be filed within 120 days of the Company's fiscal year
end of December 31, 2004 (the "Proxy Statement"), in which additional required
information is included under the headings "Election of Directors," "Stock
Ownership by Principal Stockholders and Management--Section 16(a) Beneficial
Ownership Reporting Compliance," and "Code of Ethics."
Audit Committee
The Company has a separately-designated standing audit committee
established in accordance with Section 3(a)(58)(A) of the Exchange Act known as
the Audit and Compliance Committee. The members of the Audit and Compliance
Committee are Thomas J. Carley, chairman, and James B. Hicks, Ph.D., and Anthony
Meeker, each of whom is independent as that term is used in Nasdaq listing
standards applicable to the Company.
Audit Committee Financial Expert
The Company's Board of Directors has determined that Thomas J. Carley,
an audit committee member, qualifies as an "audit committee financial expert" as
defined by Item 401(h) of Regulation S-K under the Exchange Act and is
independent as that term is used in Item 7(d)(3)(iv) of Schedule 14A under the
Exchange Act.
Item 11. EXECUTIVE COMPENSATION
Information required by this Item 11 concerning executive and director
compensation is incorporated into this report by reference to the Proxy
Statement, in which required information is set forth under the headings
"Executive Compensation" and "Meetings and Committees of the Board of Directors
- - Compensation Committee Interlocks and Insider Participation."
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Information required by this Item 12 concerning the security ownership
of certain beneficial owners and management is incorporated into this report by
reference to the Proxy Statement, in which required information is set forth
under the heading "Stock Ownership of Principal Stockholders and Management -
Beneficial Ownership Table" and "Executive Compensation - Additional Equity
Compensation Plan Information."
-26-
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this Item 13 concerning certain relationships
and related transactions is incorporated into this report by reference to the
Proxy Statement, in which required information is set forth under the headings
"Meetings and Committees of the Board of Directors - Compensation Committee
Interlocks and Insider Participation" and "Transactions with Management."
Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information required by this Item 14 concerning fees paid to our
accountants is incorporated into this report by reference to the Proxy
Statement, in which required information is set forth under the heading "Matters
Relating to Our Independent Registered Public Accounting Firm."
-27-
PART IV
Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
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 Registered Public Accounting Firm F-1
Balance Sheets - December 31, 2004 and 2003 F-2
Statements of Operations for the Years Ended December 31, 2004, 2003 F-3
and 2002
Statements of Stockholders' Equity for the Years Ended December 31,
2004, 2003 and 2002 F-4
Statements of Cash Flows for the Years Ended December 31, 2004, 2003 F-5
and 2002
Notes to Financial Statements F-6
No schedules are required to be filed herewith.
Exhibits
Exhibits are listed in the Exhibit Index that follows the signature page of this
report.
-28-
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of
Barrett Business Services, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, stockholders' equity and cash flows
present fairly, in all material respects, the financial position of Barrett
Business Services, Inc. and its subsidiary (the Company) at December 31, 2004
and 2003, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 2004, 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 the
standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Portland, Oregon
March 9, 2005
F-1
Barrett Business Services, Inc.
Consolidated Balance Sheets
December 31, 2004 and 2003
(In Thousands, Except Par Value)
2004 2003
------- -------
ASSETS
Current assets:
Cash and cash equivalents $12,153 $7,785
Marketable securities 4,630 --
Trade accounts receivable, net 23,840 18,481
Prepaid expenses and other 1,364 958
Deferred income taxes 4,100 2,196
Workers' compensation receivables for insured claims 213 393
------- -------
Total current assets 46,300 29,813
Goodwill, net 22,516 18,749
Intangibles, net 25 13
Property and equipment, net 4,301 3,367
Restricted marketable securities and workers' compensation deposits 1,702 1,647
Deferred income taxes 582 1,041
Other assets 401 436
Workers' compensation receivables for insured claims 4,158 3,768
------- -------
$79,985 $58,834
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 348 $ 88
Accounts payable 994 727
Accrued payroll, payroll taxes and related benefits 17,427 13,881
Workers' compensation claims liabilities 4,946 3,886
Workers' compensation claims liabilities for insured claims 213 393
Safety incentives liability 4,807 2,007
Other accrued liabilities 414 361
------- -------
Total current liabilities 29,149 21,343
Long-term debt, net of current portion 1,441 400
Customer deposits 608 455
Long-term workers' compensation claims liabilities 4,840 1,031
Long-term workers' compensation claims liabilities for insured claims 4,158 3,768
Other long-term liabilities -- 45
Deferred gain on sale and leaseback 1,036 1,158
Commitments and contingencies (Notes 11 and 17)
Stockholders' equity:
Common stock, $.01 par value; 20,500 shares authorized, 5,741 and 5,701
shares issued and outstanding 63 62
Additional paid-in capital 3,897 2,903
Employee loan -- (107)
Other comprehensive loss (354) --
Retained earnings 35,147 27,776
------- -------
38,753 30,634
------- -------
$79,985 $58,834
======= =======
The accompanying notes are an integral part of these financial statements.
F-2
Barrett Business Services, Inc.
Consolidated Statements of Operations
Years Ended December 31, 2004, 2003 and 2002
(In Thousands, Except Per Share Amounts)
2004 2003 2002
-------- -------- --------
Revenues:
Staffing services $123,514 $ 93,544 $ 96,750
Professional employer service fees 71,447 29,177 12,558
-------- -------- --------
194,961 122,721 109,308
-------- -------- --------
Cost of revenues:
Direct payroll costs 91,190 69,099 71,515
Payroll taxes and benefits 45,544 22,916 14,062
Workers' compensation 21,557 9,709 8,766
-------- -------- --------
158,291 101,724 94,343
-------- -------- --------
Gross margin 36,670 20,997 14,965
Selling, general and administrative expenses 23,844 16,810 16,008
Depreciation and amortization 1,008 1,058 1,162
-------- -------- --------
Income (loss) from operations 11,818 3,129 (2,205)
-------- -------- --------
Other income (expense):
Interest expense (101) (268) (278)
Interest income 343 82 217
Other, net 190 32 21
-------- -------- --------
432 (154) (40)
-------- -------- --------
Income (loss) before income taxes 12,250 2,975 (2,245)
Provision for (benefit from) income taxes 4,879 890 (892)
-------- -------- --------
Net income (loss) $ 7,371 $ 2,085 $ (1,353)
======== ======== ========
Basic earnings (loss) per share $ 1.29 $ .36 $ (.23)
======== ======== ========
Weighted average number of basic shares outstanding 5,725 5,690 5,804
======== ======== ========
Diluted earnings (loss) per share $ 1.19 $ .35 $ (.23)
======== ======== ========
Weighted average number of diluted shares outstanding 6,193 5,876 5,804
======== ======== ========
The accompanying notes are an integral part of these financial statements.
F-3
Barrett Business Services, Inc.
Consolidated Statements of Stockholders' Equity
Years Ended December 31, 2004, 2003 and 2002
(In Thousands)
Common Stock Additional Other
--------------- Paid-in Employee Comprehensive Retained
Shares Amount Capital Loan Loss Earnings Total
------ ------ ------- ----- ----- -------- -------
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
Common stock issued on
exercise of options 63 6 67 -- -- -- 73
Repurchase of common stock (113) (1) (445) -- -- -- (446)
Tax benefit of stock option
exercises -- -- 137 -- -- -- 137
Net income -- -- -- -- -- 2,085 2,085
----- ---- ------ ----- ---- ------- -------
Balance, December 31, 2003 5,701 62 2,903 (107) -- 27,776 30,634
Common stock issued for
acquisition 778 778
Common stock issued on
exercise of options 48 1 165 -- -- -- 166
Repayment of employee loan (8) -- (136) 107 -- -- (29)
Tax benefit of stock option
exercises -- -- 187 -- -- -- 187
Unrealized holding losses on
marketable securities, net of tax -- -- -- -- (354) -- (354)
Net income -- -- -- -- -- 7,371 7,371
----- ---- ------ ----- ---- ------- -------
Balance, December 31, 2004 5,741 $ 63 $3,897 $ -- $(354) $35,147 $38,753
===== ==== ====== ===== ===== ======= =======
The accompanying notes are an integral part of these financial statements.
F-4
Barrett Business Services, Inc.
Consolidated Statements of Cash Flows
Years Ended December 31, 2004, 2003 and 2002
(In Thousands)
2004 2003 2002
------- ------- -------
Cash flows from operating activities:
Net income (loss) $ 7,371 $ 2,085 $(1,353)
Reconciliations of net income (loss) to net cash provided by (used in)
operating activities:
Depreciation and amortization 1,008 1,058 1,162
Gains recognized on marketable securities (158) (49) (24)
Purchase of marketable securities (139) -- --
Proceeds from sales of marketable securities 104 -- --
Gain recognized on sale and leaseback (122) (61) --
Deferred income taxes (1,279) 319 1,553
Changes in certain assets and liabilities, net of amounts purchased
in acquisitions:
Trade accounts receivable, net (5,373) (7,124) 2,403
Income taxes receivable -- 1,923 (1,923)
Prepaid expenses and other (406) 82 (18)
Accounts payable 267 (107) 148
Accrued payroll, payroll taxes and related benefits 3,546 8,984 (155)
Other accrued liabilities 53 56 (84)
Workers' compensation claims liabilities 4,869 (1,478) (2,475)
Safety incentives liability 2,800 1,601 26
Customer deposits and other assets, net 188 639 5
Other long-term liabilities (45) (752) (171)
------- ------- -------
Net cash provided by (used in) operating activities 12,684 7,176 (906)
------- ------- -------
Cash flows from investing activities:
Proceeds from sale and leaseback of buildings -- 2,338 --
Cash paid for acquisition, including other direct costs (3,044) -- --
Purchase of marketable securities (4,957) -- --
Purchase of equipment, net of amounts purchased in aquisitions (1,914) (331) (175)
Proceeds from maturities of restricted marketable securities 2,342 7,642 3,472
Proceeds from sales of restricted marketable securities -- 2,272 807
Purchase of restricted marketable securities (2,397) (7,226) (3,116)
------- ------- -------
Net cash (used in) provided by investing activities (9,970) 4,695 988
------- ------- -------
Cash flows from financing activities:
Proceeds from issuance of debt 1,475 -- --
Proceeds from credit-line borrowings 148 46,042 48,629
Payments on credit-line borrowings (148) (49,555) (48,540)
Payments on long-term debt (174) (433) (708)
Payment to shareholder -- -- (28)
Purchase of option rights -- -- (31)
Loan to employee -- -- (78)
Repurchase of common stock -- (446) (386)
Proceeds from the exercise of stock options 166 73 14
Tax benefit of stock option exercises 187 137 --
------- -------- --------
Net cash provided by (used in) financing activities 1,654 (4,182) (1,128)
------- -------- --------
Net increase (decrease) in cash and cash equivalents 4,368 7,689 (1,046)
Cash and cash equivalents, beginning of year 7,785 96 1,142
------- ------- -------
Cash and cash equivalents, end of year $12,153 $ 7,785 $ 96
======= ======= =======
Supplemental schedule of noncash investing activities: Acquisition of other
businesses:
Cost of acquisition in excess of fair market value of net assets
acquired $ 3,807 $ -- $ --
Tangible assets acquired 15 -- --
Less stock issued in connection with acquisition (778) -- --
------- ------- -------
Net cash paid for acquisition $ 3,044 $ -- $ --
======= ======= =======
The accompanying notes are an integral part of these financial statements.
F-5
Barrett Business Services, Inc.
Notes to Consolidated 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 Washington, Oregon, California, Arizona, Maryland,
Delaware and North Carolina. Approximately 72%, 78% and 74%, respectively, of
the Company's revenues during 2004, 2003 and 2002 were attributable to its
Oregon and California operations.
During May 2004, the Company formed a wholly-owned subsidiary which acquired
an aircraft. The subsidiary incurred debt of $1,475,000 to finance the
purchase of the aircraft. The consolidated financial statements include the
accounts of the subsidiary, after elimination of intercompany accounts and
transactions.
Revenue recognition
The Company recognizes revenue as services are rendered by its workforce.
Staffing services are engaged by customers to meet short-term and long-term
personnel needs. Professional employer services ("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'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 unemploy-ment 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.
F-6
Barrett Business Services, Inc.
Notes to Consolidated Financial Statements (Continued)
1. Summary of Operations and Significant Accounting Policies (Continued)
Marketable securities
At December 31, 2004, marketable securities consisted of publicly-traded
corporate stocks and bonds. The Company determines the appropriate
classification pursuant to Statement of Financial Accounting Standard No.
("SFAS") 115, "Accounting for Certain Investments in Debt and Equity
Securities," of its marketable securities as trading, available-for-sale or
held-to-maturity at the time of purchase and re-evaluates such classification
as of each balance sheet date. At December 31, 2004, the Company's
investments in marketable securities were classified as trading and
available-for-sale, and as a result, were reported at fair value. Unrealized
gains and losses for trading securities are reported in other income
(expense) in the Company's consolidated statements of operations. Unrealized
gains and losses for available-for-sale securities are reported as a
component of other comprehensive income (loss) in stockholders' equity.
Realized gains and losses on sales of marketable securities are included in
other income (expense) on the Company's consolidated statements of
operations.
Allowance for doubtful accounts The Company had an allowance for doubtful
accounts of $273,000 and $146,000 at December 31, 2004 and 2003,
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.
Restricted marketable securities
At December 31, 2004 and 2003, restricted marketable securities consisted
primarily of governmental debt instruments with maturities generally from 90
days to 20 years (see Note 7). At December 31, 2004 and 2003, the approximate
fair value of restricted marketable securities equaled their approximate
amortized cost. Restricted 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 restricted marketable securities are included in
other income (expense) on the Company's consolidated statements of
operations. During the year ended December 31, 2003, 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
F-7
Barrett Business Services, Inc.
Notes to Consolidated Financial Statements (Continued)
1. Summary of Operations and Significant Accounting Policies (Continued)
Intangibles (Continued)
SFAS 142, the Company performed a goodwill impairment test as of the adoption
date and at December 31, 2002, 2003 and 2004 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. The Company's
intangible assets are comprised of covenants not to compete arising from
acquisitions and have contractual lives principally ranging from three to
five years.
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 10 years.
Safety incentives liability
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 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.
Comprehensive income (loss)
Comprehensive income (loss) includes all changes in equity during a period
except those that resulted from investments by or distributions to a
company's stockholders. Comprehensive income (loss) totaled $7,017,000,
$2,085,000 and $(1,353,000) for the years ended December 31, 2004, 2003 and
2002, respectively. Other comprehensive income (loss) refers to revenues,
expenses, gains and losses that under generally accepted accounting
principles are included in comprehensive income (loss), but excluded from net
income as these amounts are recorded directly as an adjustment to
stockholders' equity. Barrett's other comprehensive income (loss) is
comprised of unrealized holding gains and losses on its publicly traded
marketable securities, net of realized gains included in net income.
F-8
Barrett Business Services, Inc.
Notes to Consolidated Financial Statements (Continued)
1. Summary of Operations and Significant Accounting Policies (Continued)
Statements of cash flows
Interest paid during 2004, 2003 and 2002 did not materially differ from
interest expense. Income taxes paid by the Company in 2004 and 2003 totaled
$6,541,000 and $567,000, respectively. The Company paid no income taxes in
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,
-------------------------------
2004 2003 2002
--------- --------- ---------
Weighted average number of basic shares outstanding 5,724,607 5,690,261 5,804,231
Acquisition earnout shares 52,800 -- --
Stock option plan shares to be issued at prices ranging from
$1.45 to $17.75 per share 592,449 586,674 --
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 (177,344) (400,808) --
--------- --------- ---------
Weighted average number of diluted shares outstanding 6,192,512 5,876,127 5,804,231
========= ========= =========
As a result of the net loss reported for the year ended December 31, 2002,
23,978 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. If compensation
expense for the Company's stock-based compensation plan had been determined
based on the fair market value at the grant date for awards under the Plan
consistent with the method of Statement of Financial Accounting Standards
("SFAS") No. 123, the Company's net income (loss) and earnings (loss) per
share would have been adjusted to the pro forma amounts indicated below:
F-9
Barrett Business Services, Inc.
Notes to Consolidated Financial Statements (Continued)
1. Summary of Operations and Significant Accounting Policies (Continued)
Stock option compensation (Continued)
2004 2003 2002
------ ------ -------
(in thousands, except per share amounts)
Net income (loss), as reported $7,371 $2,085 $(1,353)
Add back compensation expense recognized under
APB No. 25 -- -- --
Deduct: Total stock-based compensation expense
determined under fair value based method for all awards,
net of related tax effects (207) (176) (168)
------ ------ -------
Net income (loss), pro forma $7,164 $1,909 $(1,521)
====== ====== =======
Basic earnings (loss) per share, as reported $ 1.29 $ .36 $ (.23)
Basic earnings (loss) per share, pro forma 1.25 .34 (.26)
Diluted earnings (loss) per share, as reported 1.19 .35 (.23)
Diluted earnings (loss) per share, pro forma 1.16 .33 (.26)
The effects of applying SFAS No. 123 for providing pro forma disclosures for
2004, 2003 and 2002 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 2004
presentation. Such reclassifications had no impact on the Company's financial
condition, operating results, cash flows, working capital or shareholder
equity.
Revision in classification
The Company recently reviewed its accounting practices with respect to
balance sheet classification of assets and liabilities relating to workers'
compensation claims that are in excess of the deductible limits of insurance
coverage purchased from insurance companies. As a result, the Company has
determined that the liabilities for workers' compensation claims should be
reported on a gross basis along with the corresponding receivables from
insurers. This revision in classification had no effect on previously
reported results of operations, cash flows or working capital.
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 Consolidated Financial Statements (Continued)
1. Summary of Operations and Significant Accounting Policies (Continued)
Recent accounting pronouncements
In January 2003, the FASB issued Interpretation No. 46 "Consolidation of
Variable Interest Entities" (FIN 46). FIN 46 clarifies the application of
Accounting Research Bulletin No. 51, "Consolidated Financial Statements," to
certain entities in which equity investors do not have the characteristics of
a controlling financial interest or do not have sufficient equity at risk for
the entity to finance its activities without additional subordinated
financial support from other parties. In December 2003, the FASB published a
revision of FIN 46 (FIN 46R), in part to clarify certain of the provisions
and implementation issues of FIN 46. Fin 46 applies immediately to variable
interest entities (VIEs created after January 31, 2003, and to VIEs in which
an enterprise obtains an interest after that date). It applies in the first
fiscal year or interim period ending after December 15, 2003, to VIEs in
which an enterprise holds a variable interest that it acquired before
February 1, 2003. The adoption of FIN 46 did not have a material impact on
the Company's results of operations or financial position.
In April 2003, the FASB issued SFAS 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS 149 amends and clarifies
financial accounting and reporting for derivative instruments, including
certain derivative instruments embedded in other contracts (collectively
referred to as derivatives) and for hedging activities under SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS 149 is
generally effective for contracts entered into or modified after June 30,
2003. The adoption of SFAS 149 did not have a material impact on the
Company's results of operations or financial position.
In May 2003, the FASB issued SFAS 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." SFAS 150
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity.
SFAS 150 requires that an issuer classify a financial instrument that is
within its scope as a liability if that financial instrument embodies an
obligation to the issuer. SFAS 150 is effective for financial instruments
entered into or modified after May 31, 2003, and otherwise is effective at
the beginning of the first interim period beginning after June 15, 2003,
except for mandatorily redeemable financial instruments of nonpublic
entities. The adoption of SFAS 150 did not have a material impact on the
Company's results of operations or financial position.
On December 16, 2004, the FASB issued SFAS 123(R), "Share-Based Payment,"
which is a revision of SFAS 123, "Accounting for Stock-Based Compensation."
SFAS 123(R) supersedes APB Opinion No. 25, "Accounting for Stock Issued to
Employees," and amends SFAS No. 95, "Statement of Cash Flows." Generally, the
approach in SFAS 123(R) is similar to the approach described in SFAS 123,
however, SFAS 123(R) requires all share-based payments to employees,
including grants of employee stock options, to be expensed in the income
statement over the requisite service period based on their grant-date fair
values. Pro forma disclosure is no longer an alternative. SFAS 123(R) allows
for either prospective or retrospective adoption and requires that the
unvested portion of all outstanding awards upon adoption be recognized using
the same fair value and attribution methodologies previously determined under
SFAS 123. The Company is currently evaluating transition alternatives and
valuation methodologies for future grants. As a result, proforma compensation
expense, as described in Note 1, may not be indicative of future
F-11
Barrett Business Services, Inc.
Notes to Consolidated Financial Statements (Continued)
1. Summary of Operations and Significant Accounting Policies (Continued)
Recent accounting pronouncements (Continued)
expense to be recognized under SFAS 123(R). The effect of adoption of SFAS
123(R) on the Company's financial position or results of operations has not
yet been determined.
SFAS 123(R) must be adopted no later than July 1, 2005 and the Company
expects to adopt SFAS 123(R) by such date.
2. Acquisition
Effective January 1, 2004, the Company acquired certain assets of Skills
Resource Training Center ("SRTC"), a staffing services company with offices
in Central Washington, Eastern Oregon and Southern Idaho. The acquisition
provides the Company with the opportunity to geographically expand and
diversify its business, particularly in the agricultural, food packing and
processing industries. The Company paid $3,000,000 in cash for the assets of
SRTC and the selling shareholders' noncompete agreements and agreed to issue
up to 135,731 shares of its common stock ("Earnout Shares"), with the actual
number of Earnout Shares to be issued based upon the level of financial
performance achieved by the SRTC offices during calendar 2004. Certain
contingencies remain unresolved precluding a final calculation of the Earnout
Shares. However, the Company has recorded an estimated total Earnout Shares
of 52,800 with a value of $778,000 on its consolidated balance sheet as of
December 31, 2004. The transaction resulted in $3,767,000 of goodwill
(including $44,000 for acquisition-related costs), $40,000 of intangible
assets and $15,000 of fixed assets.
Pro Forma Results of Operations (Unaudited)
The operating results of the SRTC acquisition are included in the Company's
results of operations since January 1, 2004. The following unaudited summary
presents the combined results of operations as if the SRTC acquisition had
occurred at the beginning of 2003, after giving effect to certain adjustments
for the amortization of intangible assets, taxation and cost of capital.
(in thousands, except per share amounts) Year ended
December 31,
2003
---------
Revenue $ 138,212
=========
Net income $ 2,439
=========
Basic earnings per share $ .43
=========
Diluted earnings per share $ .41
=========
The unaudited pro forma results above have been prepared for comparative
purposes only and do not purport to be indicative of what would have occurred
had the acquisition been made as of January 1, 2003, or of results which may
occur in the future.
F-12
Barrett Business Services, Inc.
Notes to Consolidated Financial Statements (Continued)
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:
- Restricted marketable securities - Restricted marketable securities
primarily consist of U.S. Treasury bills and municipal bonds. The interest
rates on the Company's restricted marketable security investments
approximate current market rates for these types of investments;
therefore, the recorded value of the restricted 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, restricted 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, 2004, the Company had significant
concentrations of credit risk as follows:
- Marketable securities - All investments are held in publicly-traded
securities, which includes $1,923,000, at fair value, in a closed end bond
fund principally comprised of U.S. Treasury inflation protected
securities.
- Restricted marketable securities - $1,414,000 of restricted marketable
securities at December 31, 2004 consisted of U.S. Treasury bills and U.S.
Treasury notes.
- Trade receivables - Trade receivables from two customers aggregated
$1,627,000 at December 31, 2004 (7% of trade receivables outstanding at
December 31, 2004).
4. Marketable Securities
The components of the Company's investments, as of December 31, 2004, are as
follows (in thousands):
Cost Unrealized Unrealized Market
Basis Gains (Losses) Value
------ ------ ------- ------
Trading:
Common stocks $ 96 $ 97 $ -- $ 193
------ ------ ------- ------
Available-for-sale:
Bond funds 4,457 24 (521) 3,960
Corporate bond 500 -- (23) 477
------ ------ ------- ------
4,957 24 (544) 4,437
------ ------ ------- ------
$5,053 $ 121 $ (544) $4,630
====== ====== ======= ======
F-13
Barrett Business Services, Inc.
Notes to Consolidated Financial Statements (Continued)
4. Marketable Securities (Continued)
Investments in securities classified as available-for-sale are reported at
fair value, with unrealized gains or losses reported net of tax in other
comprehensive income (loss). The Company considers available evidence in
evaluating potential impairment of its investments, including the duration
and extent to which fair value is less than cost and the Company's ability
and intent to hold the investment. The unrealized losses at December 31, 2004
relate to investments held less than twelve months. A majority of the
unrealized losses from the bond funds were generated by a bond fund which is
principally comprised of U.S. Treasury inflation protected securities.
Management believes that as a result of the current unique environment of
rising interest rates and the market's benign expectations for inflation,
such decline in fair value is considered to be temporary at December 31,
2004.
5. Intangibles
Intangibles consist of the following (in thousands):
December 31,
----------------
2004 2003
------ ------
Covenants not to compete $3,749 $3,709
Less accumulated amortization 3,724 3,696
------ ------
$ 25 $ 13
====== ======
6. Property and Equipment
Property and equipment consist of the following (in thousands):
December 31,
----------------
2004 2003
------ --------
Office furniture and fixtures $3,836 $4,443
Computer hardware and software 4,594 4,582
Aircraft 1,487 --
------ ------
9,917 9,025
Less accumulated depreciation and amortization 5,616 5,658
------ ------
$4,301 $3,367
====== ======
Effective June 30, 2003, the Company completed a sale and leaseback
transaction involving two office buildings owned by the Company providing net
cash proceeds of approximately $2.0 million (after payment of the outstanding
mortgage balance). The gains resulting from the sale and lease back
transactions have been deferred and are being amortized over the term of the
leases.
F-14
Barrett Business Services, Inc.
Notes to Consolidated Financial Statements (Continued)
7. Workers' Compensation Claims
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 has provided a total of $14,157,000 and $9,078,000 at December
31, 2004 and 2003, 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 assist management to estimate the total
future costs of 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 2004, the Company
maintained excess workers' compensation insurance to limit its self-insurance
exposure to $1,000,000 per occurrence in all states. The excess insurance
provided statutory coverage above the aforementioned exposures. During the
year ended December 31, 2004, the Company determined that it should present
its accrued liabilities for workers' compensation claims on a gross basis
along with a corresponding receivable from its insurers, as the Company is
the primary obligor for payment of the related insured claims. As a result of
this revision in classification, the Company has increased its accrued
workers' compensation claims liabilities as of December 31, 2004 by $4.4
million (of which $0.2 million is estimated to be currently payable and the
balance a long-term liability) and has also recorded corresponding
receivables for these insured claims from its prior excess workers'
compensation insurer, CNA Financial Corporation. In order to conform the
Company's prior financial statements for this revision in classification, the
Company has increased its accrued workers' compensation claims liabilities as
of December 31, 2003 by $4.2 million (of which $0.4 million was estimated to
be currently payable and the balance a long-term liability) and has recorded
corresponding receivables for these insured claims from its prior excess
workers' compensation insurer, CNA Financial Corporation. The Company will
continue its past practice of evaluating the financial capacity of its
insurers to assess the recoverability of the related insurer receivables.
F-15
Barrett Business Services, Inc.
Notes to Consolidated Financial Statements (Continued)
7. Workers' Compensation Claims (Continued)
At December 31, 2004, the Company's long-term workers' compensation claims
liabilities in the accompanying balance sheet included $600,000 for
work-related fatalities. The aggregate undiscounted pay-out amount related to
the catastrophic injuries and fatalities is $1,234,000. 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 6 to 37 years. As a result, the
five-year cash requirements related to these claims are immaterial.
The states of Oregon, Maryland, Washington, Delaware and the United States
Department of Labor require the Company to maintain specified investment
balances or other financial instruments, totaling $4,042,000 at December 31,
2004 and $4,737,000 at December 31, 2003, to cover potential claims losses.
In partial satisfaction of these requirements, at December 31, 2004, the
Company has provided standby letters of credit in the amount of $2,390,000
and surety bonds totaling $907,000. The investments are included in
restricted marketable securities and workers' compensation deposits in the
accompanying balance sheets. Prior to July 1, 2003, the state of California
required the Company to maintain a $4,036,000 letter of credit to cover
potential claims losses. Effective July 1, 2003, the Company became a
participant in California's new alternative security program and paid the
state an annual fee of $234,000, which was determined by several factors,
including the amount of a future security deposit and the Company's overall
credit rating. Upon payment of the alternative security program fee, the
state of California agreed to allow the Company's letter of credit to be
terminated. The annual fee paid to the state of California for 2004 was
$115,000.
8. Credit Facility
The Company entered into a Credit Agreement (the "Credit Agreement") with its
principal bank on March 23, 2004, effective March 31, 2004. The Credit
Agreement provides for a revolving credit facility of up to $6.0 million,
which includes a subfeature under the line of credit for standby letters of
credit for not more than $4.0 million. The interest rate options on advances,
if any, will be, at the Company's discretion, either (i) equal to the prime
rate or (ii) LIBOR plus 1.50%. The Credit Agreement expires July 1, 2005.
The revolving credit facility is collateralized by the Company's assets,
including, without limitation, its accounts receivable, equipment,
intellectual property and bank deposits, and may be prepaid at any time
without penalty. Pursuant to the 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 with "Current Ratio" defined as total current
assets divided by total current liabilities; (2) Tangible Net Worth not less
than $8.0 million, determined at each fiscal quarter end, with "Tangible Net
Worth" defined as the aggregate of total stockholders' equity plus
subordinated debt less any intangible assets; (3) Total Liabilities divided
by Tangible Net Worth not greater than 5.00 to 1.0, determined at each fiscal
quarter end, with "Total Liabilities" defined as the aggregate of current
liabilities and non-current liabilities, less subordinated debt and the
current and long-term portion of the
F-16
Barrett Business Services, Inc.
Notes to Consolidated Financial Statements (Continued)
8. Credit Facility (Continued)
Deferred Gain on Sale and Leaseback, and with "Tangible Net Worth" as defined
above; and (4) Net income after taxes not less than $1.00 on an annual basis,
determined as of each fiscal year end, and pre-tax profit not less than $1.00
on a quarterly basis, determined as of each fiscal quarter end. The Company
was in compliance with these covenants as of December 31, 2004.
The Company had letters of credit totaling approximately $2.5 million
outstanding at December 31, 2004, primarily in connection with various
deposit requirements for its self-insured workers' compensation programs. As
of December 31, 2004, the Company had approximately $3.5 million available
under its $6.0 million credit facility and was in compliance with all loan
covenants.
During the year ended December 31, 2004, the maximum balance outstanding
under the revolving credit facility was $148,000 and the weighted average
interest rate during the period was 4.5%. The weighted average interest rate
during 2004 was calculated using daily weighted averages.
9. Long-Term Debt
Long-term debt consists of the following:
December 31,
--------------
2004 2003
------ -----
(in thousands)
Note payable in monthly installments of $12,292 plus interest at a rate
indexed to the London interbank offered rate for deposits plus 2.40% $1,389 $ --
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 400 488
------ -----
1,789 488
Less portion due within one year 348 88
------ -----
$1,441 $ 400
====== =====
Maturities on long-term debt are summarized as follows at December 31, 2004
(in thousands):
Year ending
December 31,
------------
2005 $ 348
2006 348
2007 148
2008 148
2009 148
Thereafter 649
------
$1,789
======
F-17
Barrett Business Services, Inc.
Notes to Consolidated Financial Statements (Continued)
10. 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. No discretionary company contributions were made to the
plan for the years ended December 31, 2004, 2003 and 2002.
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".
11. 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,
----------------
2005 $1,812
2006 1,117
2007 858
2008 293
2009 228
2010 and thereafter 798
------
$5,106
======
Rent expense for the years ended December 31, 2004, 2003 and 2002 was
approximately $1,752,000, $1,499,000 and $1,741,000, respectively.
F-18
Barrett Business Services, Inc.
Notes to Consolidated Financial Statements (Continued)
12. 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, 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 rate as Mr. Sherertz's personal loan from
the bank. As of December 31, 2003, the note receivable from Mr. Sherertz
totaled approximately $107,000 and is shown as contra equity in the
Statements of Stockholders' Equity. During 2004, pursuant to the approval of
a majority of the Company's independent directors, Mr. Sherertz tendered to
the Company for cancellation and retirement 8,095 shares of common stock
valued at $16.835 per share. This transaction discharged Mr. Sherertz's
obligations to the Company totaling $136,274, including the principal and
interest on the employee loan of $107,000.
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 2002, the Company paid annual life
insurance premiums of approximately $56,000. In addition, during 2002, 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. During 2004 and 2003, the Company paid no insurance
premiums in connection with this split dollar life insurance agreement.
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 2004, 2003 and 2002, the Company
paid Mr. Sherertz $102,000, $99,000 and $97,000, respectively, for rental of
the property.
F-19
Barrett Business Services, Inc.
Notes to Consolidated Financial Statements (Continued)
13. Income Taxes
The provisions for (benefit from) income taxes are as follows (in thousands):
Year ended December 31,
2004 2003 2002
------- ------ -------
Current:
Federal $ 5,096 $ 500 $ (2,452)
State 1,062 52 7
------- ------ --------
6,158 552 (2,445)
------- ------ --------
Deferred:
Federal (1,185) 210 1,592
State (94) 128 (39)
------- ------ --------
(1,279) 338 1,553
------- ------ --------
Total provision (benefit) $ 4,879 $ 890 $ (892)
======= ====== ========
Deferred income tax assets (liabilities) are comprised of the following
components (in thousands):
2004 2003
------- -------
Gross deferred income tax assets:
Workers' compensation claims liabilities $ 3,829 $ 1,913
Safety incentives payable 1,844 722
Allowance for doubtful accounts 108 57
Fixed assets -- 474
Deferred compensation 31 101
Net operating losses and tax credits -- 562
Tax effect of unrealized losses, net 166 --
Other 67 94
------- -------
6,045 3,923
------- -------
Gross deferred income tax liabilities:
Tax depreciation in excess of book depreciation (185) (54)
Amortization of intangibles (1,178) (632)
------- -------
(1,363) (686)
------- -------
Net deferred income tax assets $ 4,682 $ 3,237
======= =======
F-20
Barrett Business Services, Inc.
Notes to Consolidated Financial Statements (Continued)
13. Income Taxes (Continued)
The effective tax rate differed from the U.S. statutory federal tax rate due
to the following:
Year ended December 31,
2004 2003 2002
----- ----- -----
Statutory federal tax rate 35.0 % 34.0 % (34.0)%
State taxes, net of federal benefit 5.0 4.0 (1.0)
Nondeductible expenses and other, net .9 (2.4) 5.9
Federal tax-exempt interest income (.2) (.5) (2.6)
Federal tax credits (.9) (5.2) (8.0)
----- ----- -----
39.8 % 29.9 % (39.7)%
===== ===== =====
At December 31, 2003, the Company had state tax loss carryforwards of
$5,403,000, which expire in varying amounts between 2008 and 2023. These
state tax loss carryforwards were fully utilized during 2004.
In the tax year ended December 31, 2003, the Company generated and utilized
$177,000 and $56,000 in U.S. Federal Work Opportunity Tax Credits and Welfare
to Work Tax Credits, respectively. At December 31, 2003, the Company had
$304,000 and $88,000 of unused U.S. Federal Work Opportunity Tax Credits and
Welfare to Work Tax Credits. These unused tax credits were fully utilized in
2004. The nondeductible expenses pertain to meals, certain entertainment
expenses and life insurance premiums.
14. Stock Incentive Plans
The Company's 2003 Stock Incentive Plan (the "2003 Plan") which provides for
stock-based awards to Company employees, non-employee directors and outside
consultants or advisors, was approved by shareholders on May 14, 2003. No
options have been issued to outside consultants or advisors. The number of
shares of common stock reserved for issuance under the 2003 Plan is 400,000.
No new grants of stock options may be made under the Company's 1993 Stock
Incentive Plan (the "1993 Plan"). At December 31, 2004, there were option
awards covering 375,923 shares outstanding under the 1993 Plan, which, to the
extent they are terminated unexercised, are carried over to the 2003 Plan as
shares authorized to be issued under the 2003 Plan. Outstanding options under
both plans 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. 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.
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,
F-21
Barrett Business Services, Inc.
Notes to Consolidated Financial Statements (Continued)
14. Stock Incentive Plans (Continued)
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 options covering a total of
357,000 shares to then-current employees.
A summary of the status of the Company's stock options at December 31, 2004,
2003 and 2002, together with changes during the periods then ended, are
presented below:
Weighted
Number average
of exercise
options price
------- -------
Outstanding at December 31, 2001 252,206
Options granted at market price 372,719 3.16
Options exercised (16,556) 3.67
Options canceled or expired (88,174) 3.58
-------
Outstanding at December 31, 2002 520,195
Options granted at market price 170,549 3.98
Options exercised (75,719) 3.59
Options canceled or expired (29,566) 4.02
-------
Outstanding at December 31, 2003 585,459
Options granted at market price 51,597 13.74
Options exercised (48,237) 3.46
Options canceled or expired (10,750) 5.40
-------
Outstanding at December 31, 2004 578,069
=======
Available for grant at December 31, 2004 218,070
=======
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 2004, 2003 and 2002:
2004 2003 2002
---- ---- ----
Expected volatility 61% 62% 58%
Risk free rate of return 3.63% 3.22% 2.94%
Expected dividend yield 0% 0% 0%
Expected life (years) 5.0 5.0 5.0
Total fair value of options granted at market price was computed to be
$379,000, $369,000 and $571,000 for the years ended December 31, 2004, 2003
and 2002, respectively. There were no options granted during 2004, 2003 and
2002 below market price. The weighted average fair value per share of all
options granted in 2004, 2003 and 2002 was $7.35, $2.16 and $1.53,
respectively.
F-22
Barrett Business Services, Inc.
Notes to Consolidated Financial Statements (Continued)
14. Stock Incentive Plans (Continued)
The following table summarizes information about stock options outstanding at
December 31, 2004:
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) 2004 price
- --------------------- --------- --------- --------- ------------ --------
$ 1.45 - $ 3.58 430,743 $ 3.08 7.8 141,493 $ 3.03
3.63 7.75 77,680 4.25 6.1 51,364 4.51
11.50 17.75 69,646 13.95 8.6 20,549 14.38
------- -------
578,069 213,406
======= =======
At December 31, 2004, 2003 and 2002, 213,406, 103,528 and 84,778 options were
exercisable at weighted average exercise prices of $4.48, $4.32 and $4.79,
respectively.
15. Stockholders' Equity
During 2002, the Company reclassified accrued stock option compensation from
current liabilities to equity related to stock options previously issued at a
60% discount to market price. The compensation cost associated with the
options was previously recognized as an expense by the Company in the year of
grant.
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.
During 2004 and 2003, the Company recognized a tax benefit of $187,000 and
$137,000, respectively, resulting from disqualifying dispositions of stock
option exercises. The Company recorded this tax benefit in additional paid-in
capital.
F-23
Barrett Business Services, Inc.
Notes to Consolidated Financial Statements (Continued)
16. 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 seven increases in the total number
of shares or dollars authorized to be repurchased under the program. The
repurchase program currently allows for $444,000 to be used for the
repurchase of additional shares as of December 31, 2004. The Company made no
share repurchases during 2004. During 2003, the Company repurchased 112,700
shares at an aggregate price of $446,000. During 2002, the Company
repurchased 100,900 shares at an aggregate price of $386,000. In accordance
with Maryland corporation law, all repurchased shares are immediately
cancelled.
17. 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-24
Barrett Business Services, Inc.
Notes to Consolidated Financial Statements (Continued)
18. Quarterly Financial Information (Unaudited)
(in thousands, except per share amounts and market price per share)
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
Year ended December 31, 2002
Revenues $25,738 $27,766 $30,090 $25,714
Cost of revenues 21,951 23,414 25,717 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
Year ended December 31, 2003
Revenues $23,397 $27,902 $34,773 $36,649
Cost of revenues 20,028 23,446 28,543 29,707
Net (loss) income (343) 167 943 1,318
Basic (loss) earnings per share (.06) .03 .17 .23
Diluted (loss) earnings per share (.06) .03 .16 .22
Common stock market prices:
High $ 3.75 $ 3.65 $ 7.41 $ 15.13
Low 2.31 2.64 3.00 7.00
Year ended December 31, 2004
Revenues $40,610 $47,704 $54,679 $51,968
Cost of revenues 33,887 38,844 43,906 41,654
Net income 606 1,840 2,448 2,477
Basic earnings per share .11 .32 .43 .43
Diluted earnings per share .10 .30 .40 .40
Common stock market prices:
High $ 17.76 $ 15.21 $ 17.69 $ 16.50
Low 11.49 12.26 12.99 13.25
F-25
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
BARRETT BUSINESS SERVICES, INC.
Registrant
Date: March 30, 2005 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 30th day of March, 2005.
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
Majority of Directors:
* THOMAS J. CARLEY Director
* JAMES B. HICKS Director
* JON L. JUSTESEN Director
* ANTHONY MEEKER Director
* NANCY B. SHERERTZ Director
* By /s/ Michael D. Mulholland
-------------------------
Michael D. Mulholland
Attorney-in-Fact
EXHIBIT INDEX
3.1 Charter of the Registrant, as amended. Incorporated by reference to
Exhibit 3 to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1994.
3.2 Bylaws of the Registrant, as amended. Incorporated by reference to Exhibit
3.2 to the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1996.
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 Summary of annual cash incentive bonus award program for executive
officers of the Registrant.*
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 Summary of compensation arrangements for non-employee directors of the
Registrant.*
10.6 Credit Agreement dated as of March 31, 2004, between the Registrant and
Wells Fargo Bank, N.A. Incorporated by reference to Exhibit 10.6 to the
Registrant's Annual Report on Form 10-K for the year ended December 31,
2003 (the "2003 10-K").
10.7 Revolving Line of Credit Note dated as of March 31, 2004, in the amount of
$6,000,000 issued to Wells Fargo Bank, N.A. Incorporated by reference to
Exhibit 10.7 to the 2003 10-K.
10.8 Continuing Security Agreement Equipment dated as of May 22, 2003.
Incorporated by reference to Exhibit 10.3 to the Registrant's Current
Report on Form 8-K filed June 12, 2003.
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 Current Report on Form 8-K
filed on September 4, 2002.
10.10 2003 Stock Incentive Plan of the Registrant (the "2003 Plan").
Incorporated by reference to Exhibit 10.1 to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended March 31, 2003.*
10.11 Form of Incentive Stock Option Agreement under the 2003 Plan. Incorporated
by reference to Exhibit 10.11 to the 2003 10-K.*
10.12 Form of Nonqualified Stock Option Agreement under the 2003 Plan.
Incorporated by reference to Exhibit 10.12 to the 2003 10-K.*
10.13 Form of Annual Director Option Agreement under the 2003 Plan. Incorporated
by reference to Exhibit 10.13 to the 2003 10-K.*
10.14 Summary of Compensatory Arrangement with William W. Sherertz. Incorporated
by reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form
10-Q for the quarter ended September 30, 2004.*
14 Code of Business Conduct. Incorporated by reference to Exhibit 14 to the
2003 10-K.
23 Consent of PricewaterhouseCoopers LLP, Independent Registered Public
Accounting Firm.
24 Power of attorney of certain officers and directors.
31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a).
31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a).
32 Certification pursuant to 18 U.S.C. Section 1350.
* Denotes a management contract or a compensatory plan or arrangement.