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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
X Annual Report Pursuant to Section 13 or 15(d) of
--- The Securities Exchange Act of 1934
For the fiscal year ended December 31, 1999
Commission File Number 0-21886
BARRETT BUSINESS SERVICES, INC.
(Exact name of registrant as specified in its charter)
Maryland 52-0812977
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4724 SW Macadam Avenue
Portland, Oregon 97201
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (503) 220-0988
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $.01 Per Share
(Title of class)
Indicate by check mark whether the Registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. X
---
State the aggregate market value of the voting stock held by
non-affiliates of the Registrant: $28,817,711 at February 29, 2000.
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of the latest practicable date:
Class Outstanding at February 29, 2000
----- --------------------------------
Common Stock, Par Value $.01 Per Share 7,458,998 Shares
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement for the 2000 Annual Meeting
of Stockholders are hereby incorporated by reference into Part III of Form 10-K.
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BARRETT BUSINESS SERVICES, INC.
1999 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
Page
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PART I
Item 1. Business 2
Item 2. Properties 12
Item 3. Legal Proceedings 12
Item 4. Submission of Matters to a Vote of Security Holders 12
Executive Officers of the Registrant 13
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 14
Item 6. Selected Financial Data 15
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 16
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 22
Item 8. Financial Statements and Supplementary Data 23
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure 23
PART III
Item 10. Directors and Executive Officers of the Registrant 24
Item 11. Executive Compensation 24
Item 12. Security Ownership of Certain Beneficial Owners and Management 24
Item 13. Certain Relationships and Related Transactions 24
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 25
Signatures 26
Financial Statements F-1
Exhibit Index
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PART I
ITEM 1. BUSINESS
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GENERAL
Barrett Business Services, Inc. ("Barrett" or the "Company"), was
incorporated in the state of Maryland in 1965. Barrett is a leading human
resource management company. The Company provides comprehensive outsourced
solutions addressing the costs and complexities of a broad array of
employment-related issues for businesses of all sizes. Employers are faced with
increasing complexities in employment laws and regulations, employee benefits
and administration, federal, state and local payroll tax compliance and
mandatory workers' compensation coverage, as well as the recruitment and
retention of quality employees. The Company believes that outsourcing the
management of various employer and human resource responsibilities, which are
typically considered non-core functions, enables organizations to focus on their
core competencies, thereby improving operating efficiencies.
Barrett's range of services and expertise in human resource management
encompasses five major categories: payroll processing, employee benefits and
administration, workers' compensation coverage, aggressive risk management and
workplace safety programs, and human resource administration, which includes
functions such as recruiting, interviewing, drug testing, hiring, placement,
training and regulatory compliance. These services are typically provided
through a variety of contractual arrangements, as part of either a traditional
staffing service or a professional employer organization ("PEO") service.
Staffing services include on-demand or short-term staffing assignments,
long-term or indefinite-term contract staffing, and comprehensive on-site
personnel management responsibilities. In a PEO arrangement, the Company enters
into a contract to become a co-employer of the client company's existing
workforce and assumes responsibility for some or all of the human resource
management responsibilities. The Company's target PEO clients typically have
limited resources available to effectively manage these matters. The Company
believes that its ability to offer clients a broad mix of staffing and PEO
services differentiates it from its competitors and benefits its clients through
(i) lower recruiting and personnel administration costs, (ii) decreases in
payroll expenses due to lower workers' compensation and health insurance costs,
(iii) improvements in workplace safety and employee benefits, (iv) lower
employee turnover and (v) reductions in management resources expended in
employment-related regulatory compliance. For 1999, Barrett's staffing services
revenues represented 56.1% of total revenues, compared to 43.9% for PEO services
revenues.
Barrett provides services to a diverse array of customers, including,
among others, electronics manufacturers, various light-manufacturing industries,
forest products and agriculture-based companies, transportation and shipping
enterprises, food processing, telecommunications, public utilities, general
contractors in numerous construction-related fields and various professional
services firms. During 1999, the Company provided staffing services to
approximately 6,800 customers. Although a majority of the Company's staffing
customers are small to mid-sized businesses, during 1999 approximately 50 of the
Company's customers each utilized Barrett employees in a number ranging from at
least 200 employees to as many as 1,600 employees through various staffing
services arrangements. In addition, Barrett had approximately 637 PEO clients at
December 31, 1999, compared to 612 at December 31, 1998.
The Company operates through a network of 37 branch offices in Oregon,
California, Washington, Maryland, Delaware, Idaho, Arizona, North Carolina and
South Carolina. Barrett also has several smaller recruiting offices in its
general market areas under the direction of a branch office.
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OPERATING STRATEGIES
The Company's principal operating strategies are to: (i) provide a
unique and efficient blend of staffing and PEO services, (ii) promote a
decentralized and autonomous management philosophy and structure, (iii) leverage
zone and branch level economies of scale, (iv) motivate employees through wealth
sharing and (v) control workers' compensation costs through effective risk
management.
GROWTH STRATEGIES
The Company's principal growth strategies are to: (i) expand through
acquisitions of human resource-related businesses in new and existing geographic
markets, (ii) utilize a zone management structure to strengthen and expand
operations and (iii) enhance management information systems to support continued
growth and to improve customer services.
RECENT ACQUISITIONS
On January 1, 1999, the Company acquired all of the outstanding common
stock of Temporary Staffing Systems, Inc. ("TSS"), a staffing services company
with eight branch offices in North Carolina and one in South Carolina. The
Company paid $2,000,000 in cash and issued a note payable for $950,000 due
January 31, 2000 (the "Note"), payment of which is contingent upon a minimum
equity requirement for 1998 and certain financial performance criteria for 1999.
The Company also paid $50,000 in cash for a noncompete agreement with the
selling shareholder. TSS's revenues for the fiscal year ended March 29, 1998
were approximately $12.9 million (audited). The Company has provided notice to
the former shareholder of TSS of the Company's intent to reduce the amount
payable on the Note due to certain shortfalls. The parties have agreed to extend
the due date of the Note until the former shareholder of TSS has completed a
review of the proposed reductions as provided for in the Stock Purchase
Agreement. See Note 17 of the Notes to Financial Statements following Item 14 of
this report.
On February 15, 1999, the Company acquired certain assets of TPM
Staffing Services, Inc. ("TPM"), a staffing services company with three offices
in Southern California - Lake Forest, Santa Ana and Anaheim. The Company paid
$1,200,000 in cash for the assets of TPM and the selling shareholder's
noncompete agreement. TPM's revenues for the year ended December 31, 1998 were
approximately $5.7 million (unaudited).
Effective May 31, 1999, the Company acquired certain assets of
Temporary Skills Unlimited, Inc., d.b.a. TSU Staffing ("TSU"), a staffing
services company with nine branch offices in Northern California. The Company
paid $9,558,000 in cash and issued a note for $864,500, due one year from the
date of acquisition. The Company also paid $100,000 for noncompete agreements.
TSU's revenues for the year ended December 27, 1998 were approximately $25.0
million (audited).
The Company reviews acquisition opportunities on an ongoing basis.
While growth through acquisition is a major element of the Company's overall
strategic growth plan, there can be no assurance that any additional
acquisitions will be completed in the foreseeable future, or that any future
acquisitions will have a positive effect on the Company's performance.
Acquisitions involve a number of potential risks, including the diversion of
management's attention to the assimilation of the operations and personnel of
the acquired companies, exposure to workers' compensation and other costs in
differing regulatory environments, adverse short-term effects on the Company's
operating results, integration of management information systems and the
amortization of acquired intangible assets.
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THE COMPANY'S SERVICES
Overview of Services. Barrett's services are typically provided through
a variety of contractual arrangements, as part of either a traditional staffing
service or a PEO service. These contractual arrangements also provide a
continuum of human resource management services. While some services are more
frequently associated with Barrett's co-employer arrangements, the Company's
expertise in such areas as safety services and personnel-related regulatory
compliance may also be utilized by its staffing services customers through the
Company's human resource management services. The Company's range of services
and expertise in human resource management encompasses five major categories:
- Payroll Processing. For both the Company's staffing services and
PEO employees, the Company performs all functions associated with
payroll administration, including preparing and delivering
paychecks, computing tax withholding and payroll deductions,
handling garnishments, computing vacation and sick pay, and
preparing W-2 forms and accounting reports through centralized
operations at its headquarters in Portland, Oregon.
- Employee Benefits and Administration. As a result of its size,
Barrett is able to offer employee benefits which are not available
at an affordable cost to many of its customers, particularly those
with fewer than 100 employees. These benefits include health care
insurance, a 401(k) savings plan, a Section 125 cafeteria plan,
life and disability insurance, claims administration and a
nonqualified deferred compensation plan.
- Safety Services. Barrett offers safety services to both its
staffing services and PEO customers in keeping with its corporate
philosophy of "making the workplace safer." The Company has at
least one risk manager available at each branch office to perform
workplace safety assessments for each of its customers and to
recommend actions to achieve safer operations. The Company's
services include safety training and safety manuals for both
workers and supervisors, job-site visits and meetings,
improvements in workplace procedures and equipment to further
reduce the risk of injury, compliance with OSHA requirements,
environmental regulations, workplace regulation by the U.S.
Department of Labor and state agencies and accident
investigations. As discussed under "Self-Insured Workers'
Compensation Program" below, the Company also pays safety
incentives to its customers who achieve improvements in workplace
safety.
- Workers' Compensation Coverage. Beginning in 1987, the Company
obtained self-insured employer status for workers' compensation
coverage in Oregon and is currently a qualified self-insured
employer in many of the state and federal jurisdictions in which
it operates. Through its third-party administrators, Barrett
provides claims management services to its PEO customers. As
discussed under "Self-Insured Workers' Compensation Program"
below, the Company aggressively manages job injury claims,
including identifying fraudulent claims and utilizing its staffing
services to return workers to active employment earlier. As a
result of its ability to manage workers' compensation costs, the
Company is often able to reduce its clients' overall expenses
arising out of job-related injuries and insurance.
- Human Resource Administration. Barrett offers its clients the
opportunity to leverage the Company's experience in
personnel-related regulatory compliance. For both its staffing
services employees and PEO clients, the Company handles the
burdens of advertising, recruitment, skills testing, evaluating
job applications and references, drug screening, criminal and
motor vehicle records reviews, hiring, and compliance with such
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employment regulatory areas as immigration, the Americans with
Disabilities Act, and federal and state labor regulations.
Staffing Services. Barrett's staffing services include on-demand or
short-term staffing assignments, contract staffing, long-term or indefinite-term
on-site management and human resource administration. Short-term staffing
involves employee demands caused by such factors as seasonality, fluctuations in
customer demand, vacations, illnesses, parental leave, and special projects
without incurring the ongoing expense and administrative responsibilities
associated with recruiting, hiring and retaining additional permanent employees.
As more and more companies focus on effectively managing variable costs and
reducing overhead, the use of employees on a short-term basis allows firms to
utilize the "just-in-time" approach for their personnel needs, thereby
converting a portion of their fixed personnel costs to a variable expense.
Contract staffing refers to the Company's responsibilities for the
placement of employees for a period of more than three months or an indefinite
period. This type of arrangement often involves outsourcing an entire department
in a large corporation or providing the workforce for a large project.
In an on-site management arrangement, Barrett places an experienced
manager on site at a customer's place of business. The manager is responsible
for conducting all recruiting, screening, interviewing, testing, hiring and
employee placement functions at the customer's facility for a long-term or
indefinite period.
The Company's staffing services customers operate in a broad range of
businesses, including forest products and agriculture-based companies,
electronic manufacturers, transportation and shipping companies, food
processors, professional firms and construction contractors. Such customers
range in size from small local firms to companies with international operations,
which use Barrett's services on a domestic basis. None of the Company's staffing
services customers individually accounted for more than 5% of its total 1999
revenues.
In 1999, the light industrial sector generated approximately 72% of the
Company's staffing services revenues, while clerical office staff accounted for
16% of such revenues and technical personnel represented the balance of 12%.
Light industrial workers in the Company's employ perform such tasks as operation
of machinery, manufacturing, loading and shipping, site preparation for special
events, construction-site cleanup and janitorial services. Technical personnel
include electronic parts assembly workers and designers and drafters of
electronic parts.
Barrett emphasizes prompt, personalized service in assigning quality,
trained, drug-free personnel at competitive rates to its staffing services
customers. The Company uses internally developed computer databases of employee
skills and availability at each of its branches to match customer needs with
available qualified employees. The Company emphasizes the development of an
understanding of the unique requirements of its clientele by its account
managers. Customers are offered a "money-back" guarantee if dissatisfied with
staffing employees placed by Barrett.
The Company utilizes a variety of methods to recruit its work force for
staffing services, including among others, referrals by existing employees,
newspaper advertising and marketing brochures distributed at colleges and
vocational schools. The employee application process includes an interview,
skills assessment test, reference verification and drug screening. The
recruiting of qualified employees requires more effort when unemployment rates
are low.
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Barrett's staffing services employees are not under its direct control
while placed at a customer's worksite. Barrett has not experienced any
significant liability due to claims arising out of negligent acts or misconduct
by its staffing services employees. The possibility exists, however, of claims
being asserted against the Company which may exceed the Company's liability
insurance coverage, with a resulting negative effect on the Company's financial
condition.
PEO Services. Many businesses, particularly those with a limited number
of employees, find personnel administration requirements to be unduly complex
and time consuming. These businesses often cannot justify the expense of a
full-time human resources staff. In addition, the escalating costs of health and
workers' compensation insurance in recent years, coupled with the increased
complexity of laws and regulations affecting the workplace, have created a
compelling opportunity for small to mid-sized businesses to outsource these
managerial burdens. The outsourcing of non-core business functions, such as
human resource administration, enables small enterprises to devote their limited
resources to their core competencies.
In a PEO services arrangement, Barrett enters into a contract to become
a co-employer of the client company's existing workforce. Pursuant to this
contract, Barrett assumes responsibility for some or all of the human resource
management responsibilities, including payroll and payroll taxes, employee
benefits, health insurance, workers' compensation coverage, workplace safety
programs, compliance with federal and state employment laws, labor and workplace
regulatory requirements and related administrative responsibilities. Barrett
also hires and fires its PEO employees, although the client company remains
responsible for day-to-day assignments, supervision and training and, in most
cases, recruiting.
The Company began offering PEO services to Oregon customers in 1990 and
subsequently expanded these services to other states. The Company has entered
into co-employer arrangements with a wide variety of clients, including
companies involved in moving and shipping, professional firms, construction,
retail, manufacturing and distribution businesses. PEO clients are typically
small to mid-sized businesses with up to 100 employees. None of the Company's
PEO clients individually accounted for more than 10% of its total annual
revenues during 1999.
Prior to entering into a co-employer arrangement, the Company performs
an analysis of the potential client's actual personnel and workers' compensation
costs based on information provided by the customer. Barrett introduces its
workplace safety program and recommends improvements in procedures and equipment
following a safety inspection of the customer's facilities which the potential
client must agree to implement as part of the co-employer arrangement. Barrett
also offers significant financial incentives to PEO clients to maintain a
safe-work environment.
The Company's standard PEO services agreement provides for services for
an indefinite term, until notice of termination is given by either party. The
agreement permits cancellation by either party upon 30 days written notice. In
addition, the Company may terminate the agreement at any time for specified
reasons, including nonpayment or failure to follow Barrett's workplace safety
program.
The form of agreement also provides for indemnification of the Company
by the client against losses arising out of any default by the client under the
agreement, including failure to comply with any employment-related, health and
safety or immigration laws or regulations. The Company also requires the PEO
client to maintain comprehensive liability coverage in the amount of $1,000,000
for acts of its worksite employees. In addition, the Company has excess
liability insurance coverage. Although no claims exceeding such policy limits
have been paid by the Company to date, the possibility exists that claims for
amounts in excess of sums available to the Company through indemnification or
insurance may be asserted in the future, which could adversely affect the
Company's profitability.
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SALES AND MARKETING
The Company markets its services primarily through direct sales
presentations by its branch office account managers. Barrett develops customer
prospects through the utilization of state-of-the-art customer contact
management software, which incorporates tailored databases of businesses
purchased from a third-party vendor. The Company also obtains referrals from
existing clients and other third parties, and places radio commercials and
advertisements in various publications, including local newspapers, business
magazines and the Yellow Pages.
BILLING
Through centralized operations at the Company's headquarters in
Portland, Oregon, the Company prepares invoices weekly for its staffing services
customers and following the end of each payroll period for PEO clients. Health
insurance premiums are passed through to PEO clients. The Company requires a
deposit from most of its PEO clients. Payment terms for all PEO clients are due
on the invoice date by way of electronic funds transfer.
SELF-INSURED WORKERS' COMPENSATION PROGRAM
A principal service provided by Barrett to its customers, particularly
its PEO clients, is workers' compensation coverage. As the employer of record,
Barrett is responsible for complying with applicable statutory requirements for
workers' compensation coverage. The Company's workplace safety services, also
described under "Overview of Services," are closely tied to its approach to the
management of workers' compensation risk.
Elements of Workers' Compensation System. State law (and, for certain
types of employees, federal law) generally mandates that an employer reimburse
its employees for the costs of medical care and other specified benefits for
injuries or illnesses incurred in the course and scope of employment. The
benefits payable for various categories of claims are determined by state
regulation and vary with the severity and nature of the injury or illness and
other specified factors. In return for this guaranteed protection, workers'
compensation is an exclusive remedy and employees are generally precluded from
seeking other damages from their employer for workplace injuries. Most states
require employers to maintain workers' compensation insurance or otherwise
demonstrate financial responsibility to meet workers' compensation obligations
to employees. In many states, employers who meet certain financial and other
requirements are permitted to self-insure.
Self Insurance for Workers' Compensation. In August 1987, Barrett
became a self-insured employer for workers' compensation coverage in Oregon. The
Company subsequently obtained self-insured employer status for workers'
compensation in four additional states, Maryland, Washington, Delaware and
California. In addition, in May 1995, the Company was granted self-insured
employer status by the U.S. Department of Labor for longshore and harbor
("USL&H") workers' compensation coverage. Regulations governing self-insured
employers in each jurisdiction typically require the employer to maintain surety
deposits of cash, government securities or other financial instruments to cover
workers' claims in the event the employer is unable to pay for such claims.
Barrett also maintains excess workers' compensation insurance for
single occurrences exceeding $350,000 (except for $500,000 for USL&H coverage)
with statutory limits (i.e., in unlimited amounts) pursuant to annual policies
with major insurance companies. The excess-insurance policies contain standard
exclusions from coverage, including punitive damages, fines or penalties in
connection with violation of any statute or regulation and losses covered by
other insurance or indemnity provisions.
In addition, the Company maintains an insured large-deductible program
which allows it to become insured for workers' compensation coverage in nearly
all states where the extent of the Company's operations does not yet warrant the
investment to become a self-insured employer.
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Claims Management. Pursuant to its self-insured status, the Company's
workers' compensation expense is tied directly to the incidence and severity of
workplace injuries to its employees. Barrett seeks to contain its workers'
compensation costs through an aggressive approach to claims management. The
Company uses managed-care systems to reduce medical costs and keeps time-loss
costs to a minimum by assigning injured workers, whenever possible, to
short-term assignments which accommodate the workers' physical limitations. The
Company believes that these assignments minimize both time actually lost from
work and covered time-loss costs. Barrett has also engaged third-party
administrators ("TPAs") to provide additional claims management expertise.
Typical management procedures include performing thorough and prompt on-site
investigations of claims filed by employees, working with physicians to
encourage efficient medical management of cases, denying questionable claims and
negotiating early settlements to eliminate future case development and costs.
Barrett also maintains a mandatory corporate-wide pre-employment drug screening
program and a mandatory post-injury drug test. The program is believed to have
resulted in a reduction in the frequency of fraudulent claims and in accidents
in which the use of illegal drugs appears to have been a contributing factor.
Elements of Self-Insurance Costs. The costs associated with the
Company's self-insured workers' compensation program include case reserves for
reported claims, an additional expense provision (referred to as the "IBNR
reserve") for unanticipated increases in the cost of open injury claims (known
as "adverse loss development") and for claims incurred in prior periods but not
reported, fees payable to the Company's TPAs, additional claims administration
expenses, administrative fees payable to state and federal workers' compensation
regulatory agencies, premiums for excess workers' compensation insurance, legal
fees and safety incentive payments. Although not directly related to the size of
the Company's payroll, the number of claims and correlative loss payments may be
expected to increase with growth in the total number of employees. The state
assessments are typically based on payroll amounts and, to a limited extent, the
amount of permanent disability awards during the previous year. Excess insurance
premiums are also based in part on the size of the Company's payroll. Safety
incentives expense may increase as the number of the Company's PEO employees
rises, although increases will only occur for any given PEO client if such
client's claims costs are below agreed-upon amounts.
WORKERS' COMPENSATION CLAIMS EXPERIENCE AND RESERVES
The Company recognizes its liability for the ultimate payment of
incurred claims and claims adjustment expenses by accruing liabilities which
represent estimates of future amounts necessary to pay claims and related
expenses with respect to covered events that have occurred. When a claim
involving a probable loss is reported, the Company's TPA establishes a case
reserve for the estimated amount of ultimate loss. The estimate reflects an
informed judgment based on established case reserving practices and the
experience and knowledge of the TPA regarding the nature and expected value of
the claim, as well as the estimated expense of settling the claim, including
legal and other fees and expenses of administering claims. The adequacy of such
case reserves depends on the professional judgment of each TPA to properly and
comprehensively evaluate the economic consequences of each claim. Additionally,
on an aggregate basis, the Company has established an additional expense reserve
for both future adverse loss development in excess of initial case reserves on
open claims and for claims incurred but not reported, referred to as the IBNR
reserve.
As part of the case reserving process, historical data is reviewed and
consideration is given to the anticipated effect of various factors, including
known and anticipated legal developments, inflation and economic conditions.
Reserve amounts are necessarily based on management's estimates, and as other
data becomes available, these estimates are revised, which may result in
increases or decreases in existing case reserves. Barrett has engaged a
nationally-recognized, independent actuary to periodically review the Company's
total workers' compensation claims liability and reserving practices. Based in
part on such review, the Company believes its total accrued workers'
compensation claims liabilities are adequate. It is possible, however, that the
Company's actual future
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workers' compensation obligations may exceed the amount of its accrued
liabilities, with a corresponding negative effect on future earnings, due to
such factors as unanticipated adverse loss development of known claims, and the
effect, if any, of claims incurred but not reported.
Approximately one-fifth of the Company's total payroll exposure is in
relatively high-risk industries with respect to workplace injuries, including
trucking, construction and certain warehousing activities. A failure to
successfully manage the severity and frequency of workers' compensation injuries
will have a negative impact on the Company. Management maintains clear
guidelines for its branch managers, account managers, and loss control
specialists directly tying their continued employment with the Company to their
diligence in understanding and addressing the risks of accident or injury
associated with the industries in which client companies operate and in
monitoring the compliance by clients with workplace safety requirements. The
Company has a policy of "zero tolerance" for avoidable workplace injuries.
MANAGEMENT INFORMATION SYSTEMS
The Company performs all functions associated with payroll
administration through its internal management information system. Each branch
office performs payroll data entry functions and maintains an independent
database of employees and customers, as well as payroll and invoicing records.
All processing functions are centralized at Barrett's corporate headquarters in
Portland, Oregon. As the Company has previously reported, management initiated a
project in mid-1997 to convert its information systems to new technologies which
are expected to enable the Company to more effectively accommodate its
anticipated growth. This hardware and software upgrade was completed and
implemented on March 1, 2000. The Company estimates its total capital
expenditures for this project to be approximately $4.3 million.
EMPLOYEES AND EMPLOYEE BENEFITS
At December 31, 1999, the Company had approximately 23,590 employees,
including approximately 16,100 staffing services employees, approximately 7,100
PEO employees and approximately 390 managerial, sales and administrative
employees. The number of employees at any given time may vary significantly due
to business conditions at customer or client companies. During 1999,
approximately 1% of the Company's employees were covered by a collective
bargaining agreement. Each of Barrett's managerial, sales and administrative
employees has entered into a standard form of employment agreement which, among
other things, contains covenants not to engage in certain activities in
competition with the Company for 18 months following termination of employment
and to maintain the confidentiality of certain proprietary information. Barrett
believes its employee relations are good.
The Company's decentralized management structure relies heavily on its
zone managers, each responsible for overseeing the operations of several branch
offices. The Company believes that its zone managers possess the requisite
business acumen and experience comparable to senior management of many of the
Company's larger competitors. Accordingly, the efficiency of Barrett's
operations is dependent upon its ability to attract and retain highly qualified,
motivated individuals to serve as zone managers. This ability is also central to
the Company's plans to expand through acquiring human resources related
businesses in existing and new geographic areas. If the Company is unable to
continue to recruit and retain individuals with the skills and experience
required of zone managers, its operations may be adversely affected.
Benefits offered to Barrett's staffing services employees include group
health insurance, a Section 125 cafeteria plan which permits employees to use
pretax earnings to fund various services, including medical, dental and
childcare, and a Section 401(k) savings plan pursuant to which employees may
begin making contributions upon reaching 21 years of age and completing 1,000
hours of service in any consecutive 12-month period. The Company may also make
contributions to the savings plan, which vest over seven years and are subject
to certain legal limits, at the sole discretion
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of the Company's Board of Directors. In addition, the Company offers a
nonqualified deferred compensation plan for highly compensated employees who are
precluded from participation in the 401(k) plan. Employees subject to a
co-employer arrangement may participate in the Company's benefit plans, provided
that the group health insurance premiums may, at the client's option, be paid by
payroll deduction. See "Regulatory and Legislative Issues--Employee Benefit
Plans."
REGULATORY AND LEGISLATIVE ISSUES
Business Operations. The Company is subject to the laws and regulations
of the jurisdictions within which it operates, including those governing
self-insured employers under the workers' compensation systems in Oregon,
Washington, Maryland, Delaware, California and the U.S. Department of Labor for
USL&H workers. An Oregon PEO company, such as Barrett, is required to be
licensed as a worker-leasing company by the Workers' Compensation Division of
the Oregon Department of Consumer and Business Services. Temporary staffing
companies are expressly exempt from the Oregon licensing requirement. Oregon PEO
companies are also required to ensure that each PEO client provides adequate
training and supervision for its employees to comply with statutory requirements
for workplace safety and to give 30 days written notice in the event of a
termination of its obligation to provide workers' compensation coverage for PEO
employees and other subject employees of a PEO client. Although compliance with
these requirements imposes some additional financial risk on Barrett,
particularly with respect to those clients who breach their payment obligation
to the Company, such compliance has not had an adverse impact on Barrett's
business to date.
Employee Benefit Plans. The Company's operations are affected by
numerous federal and state laws relating to labor, tax and employment matters.
By entering into a co-employer relationship with employees who are assigned to
work at client locations (sometimes referred to as "worksite employees"), the
Company assumes certain obligations and responsibilities of an employer under
these federal and state laws. Because many of these federal and state laws were
enacted prior to the development of nontraditional employment relationships,
such as professional employer, temporary employment, and outsourcing
arrangements, many of these laws do not specifically address the obligations and
responsibilities of nontraditional employers. In addition, the definition of
"employer" under these laws is not uniform.
As an employer, the Company is subject to all federal statutes and
regulations governing its employer-employee relationships. Subject to the issues
discussed below, the Company believes that its operations are in compliance in
all material respects with all applicable federal statutes and regulations.
The Company offers various qualified employee benefit plans to its
employees, including its worksite employees. These employee benefit plans
include a savings plan (the "401(k) plan") under Section 401(k) of the Internal
Revenue Code (the "Code"), a cafeteria plan under Code Section 125, a group
health plan, a group life insurance plan, a group disability insurance plan and
an employee assistance plan. In addition, the Company offers a nonqualified
deferred compensation plan, which is available to highly compensated employees
who are not eligible to participate in the Company's 401(k) plan. Generally,
qualified employee benefit plans are subject to provisions of both the Code and
the Employee Retirement Income Security Act of 1974 ("ERISA"). In order to
qualify for favorable tax treatment under the Code, qualified plans must be
established and maintained by an employer for the exclusive benefit of its
employees. See Item 7 of this report for a discussion of issues regarding
qualification of the Company's employee benefit plans arising out of
participation by the Company's PEO employees.
10
<PAGE>
COMPETITION
The staffing services and PEO businesses are characterized by rapid
growth and intense competition. The staffing services market includes
competitors of all sizes, including several, such as Manpower, Inc., Kelly
Services, Inc., RemedyTemp, Inc., Westaff, Inc. and Interim Services, Inc., that
are national in scope and have substantially greater financial, marketing and
other resources than the Company. In addition to national companies, Barrett
competes with numerous regional and local firms for both customers and
employees. There are relatively few barriers to entry into the staffing services
business. The principal competitive factors in the staffing services industry
are price, the ability to provide qualified workers in a timely manner and the
monitoring of job performance. The Company attributes its internal growth in
staffing services revenues to the cost-efficiency of its operations which
permits the Company to price its services competitively, and to its ability
through its branch office network to understand and satisfy the needs of its
customers with competent personnel.
Although there are believed to be at least 2,000 companies currently
offering PEO services in the U.S., many of these potential competitors are
located in states in which the Company presently does not operate. Barrett
believes that there are approximately 60 firms offering PEO services in Oregon,
but the Company has the largest presence in the state. During 1999,
approximately 57% and 22% of the Company's PEO revenues were earned in Oregon
and California, respectively.
The Company may face additional PEO competition in the future from new
entrants to the field, including other staffing services companies, payroll
processing companies and insurance companies. Certain PEO companies operating in
areas in which Barrett does not now, but may in the future, offer its services
have greater financial and marketing resources than the Company, such as
Administaff, Inc., Staff Leasing, Inc. and Paychex, Inc., among others.
Competition in the PEO industry is based largely on price, although service and
quality can also provide competitive advantages. Barrett believes that its
growth in PEO services revenues is attributable to its ability to provide small
and mid-sized companies with the opportunity to provide enhanced benefits to
their employees while reducing their overall personnel administration and
workers' compensation costs. The Company's competitive advantage may be
adversely affected by a substantial increase in the costs of maintaining its
self-insured workers' compensation program. A general market decrease in the
level of workers' compensation insurance premiums may also decrease demand for
PEO services.
11
<PAGE>
ITEM 2. PROPERTIES
The Company provides staffing and PEO services through all 37 of its
branch offices. The following table shows the number of branch offices located
in each state in which the Company operates. The Company's California and Oregon
offices accounted for 40% and 39%, respectively, of its total revenues in 1999.
The Company also leases office space in other locations in its market areas
which it uses to recruit and place employees.
Number of
Branch
State Offices
------------------------- -----------------
Arizona 1
California 17
Idaho 2
Oregon 9
Washington 2
Maryland 2
Delaware 1
North Carolina 2
South Carolina 1
The Company's corporate headquarters are located in an office building
in Portland, Oregon, with approximately 9,200 square feet of office space. The
building is subject to a mortgage loan with a principal balance of approximately
$491,000 at December 31, 1999.
The Company also owns another office building in Portland, Oregon,
which houses its Portland/Bridgeport branch office. The building has
approximately 7,000 square feet of office space.
Barrett leases office space for its other branch offices. At December
31, 1999, such leases had expiration dates ranging from less than one year to
five years, with total minimum payments through 2004 of approximately
$3,288,000.
ITEM 3. LEGAL PROCEEDINGS
- -------------------------------
There were no material legal proceedings pending against the Company at
December 31, 1999, or during the period beginning with that date through March
28, 2000.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- -----------------------------------------------------------------
No matters were submitted to a vote of the Company's stockholders
during the fourth quarter of 1999.
12
<PAGE>
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table identifies, as of February 29, 2000, each executive
officer of the Company. Executive officers are elected annually and serve at the
discretion of the Board of Directors.
<TABLE>
<S> <C> <C> <C>
Officer
Name Age Principal Positions and Business Experience Since
---------------------------------------------------------------------------------------
William W. Sherertz 54 President; Chief Executive Officer; Director 1980
Michael D. Mulholland 48 Vice President-Finance and Secretary; Chief 1994
Financial Officer
Gregory R. Vaughn 44 Vice President 1998
James D. Miller 36 Controller and Assistant Secretary; 1994
Principal Accounting Officer
- -------------------------------
</TABLE>
William W. Sherertz has acted as Chief Executive Officer of the Company
since 1980. He has also been a director of the Company since 1980, and was
appointed President of the Company in March 1993. Mr. Sherertz also serves as
Chairman of the Board of Directors.
Michael D. Mulholland joined the Company in August 1994 as Vice
President-Finance and Secretary. From 1988 to 1994, Mr. Mulholland was employed
by Sprouse-Reitz Stores Inc., a former Nasdaq-listed retail company, serving as
its Executive Vice President, Chief Financial Officer and Secretary. Prior to
Sprouse, Mr. Mulholland held senior management positions with Lamb-Weston, Inc.,
a food processing company from 1985 to 1988, and Keil, Inc., a regional retail
company, from 1978 to 1985. Mr. Mulholland, a certified public accountant on
inactive status, was also employed by Touche Ross & Co., now known as Deloitte &
Touche LLP.
Gregory R. Vaughn joined the Company in July 1997 as Operations
Manager. Mr. Vaughn was appointed Vice President in January 1998. Prior to
joining Barrett, Mr. Vaughn was Chief Executive Officer of Insource America,
Inc., a privately-held human resource management company headquartered in
Portland, Oregon, since 1996. Mr. Vaughn has also held senior management
positions with Sundial Time Systems, Inc. from 1995 to 1996 and Continental
Information Systems, Inc. from 1990 to 1994. Previously, Mr. Vaughn was employed
as a technology consultant by Price Waterhouse LLP.
James D. Miller joined the Company in January 1994 as Controller. From
1991 to 1994, he was the Corporate Accounting Manager for Christensen Motor
Yacht Corporation. Mr. Miller, a certified public accountant on inactive status,
was employed by Price Waterhouse LLP from 1987 to 1991.
13
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
- ---------------------------------------------------------------------------
The Company's common stock (the "Common Stock") trades on The Nasdaq
Stock Market under the symbol "BBSI." At February 29, 2000, there were 68
stockholders of record and approximately 630 beneficial owners of the Common
Stock. The Company has not declared or paid any cash dividends since the closing
of its initial public offering of Common Stock on June 18, 1993, and has no
present plan to pay any cash dividends in the foreseeable future. The following
table presents the high and low sales prices of the Common Stock for each
quarterly period during the last two fiscal years, as reported by The Nasdaq
Stock Market:
1998 High Low
---- ---- ---
First Quarter $ 12.00 $ 10.25
Second Quarter 13.38 9.13
Third Quarter 10.88 7.88
Fourth Quarter 9.38 6.00
1999 High Low
---- ---- ---
First Quarter $ 9.06 $ 5.25
Second Quarter 9.25 5.88
Third Quarter 10.25 7.75
Fourth Quarter 8.38 5.50
14
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
- -------------------------------------
The following selected financial data should be read in conjunction
with the Company's financial statements and the accompanying notes listed in
Item 14 of this report.
<TABLE>
<S> <C> <C> <C> <C> <C>
Year Ended December 31
-----------------------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- --------- ----------
(In thousands, except per share data)
Statement of Operations Data:
Revenues:
Staffing services............................... $ 194,991 $ 165,443 $ 177,263 $ 130,746 $ 113,437
Professional employer services.................. 152,859 137,586 128,268 101,206 79,480
---------- ---------- --------- --------- ---------
Total....................................... 347,850 303,029 305,531 231,952 192,917
---------- ---------- --------- --------- ---------
Cost of revenues:
Direct payroll costs............................ 270,049 235,265 236,307 176,686 146,490
Payroll taxes and benefits...................... 28,603 25,550 27,226 20,414 16,139
Workers' compensation........................... 11,702 10,190 10,584 8,173 7,710
---------- ---------- --------- --------- ---------
Total....................................... 310,354 271,005 274,117 205,273 170,339
---------- ---------- --------- --------- ---------
Gross margin....................................... 37,496 32,024 31,414 26,679 22,578
Selling, general, and administrative expenses...... 26,551 23,481 24,011 18,534 15,496
Merger expenses.................................... -- 750 -- -- --
Amortization of intangibles........................ 1,867 1,316 1,332 860 606
---------- ---------- --------- --------- ---------
Income from operations............................. 9,078 6,477 6,071 7,285 6,476
---------- ---------- --------- --------- ---------
Other (expense) income:
Interest expense................................ (634) (173) (247) (122) (154)
Interest income................................. 357 441 362 554 400
Other, net...................................... 32 (1) 1 -- 32
---------- ---------- --------- --------- ---------
Total....................................... (245) 267 116 432 278
---------- ---------- --------- --------- ---------
Income before provision for income taxes........... 8,833 6,744 6,187 7,717 6,754
Provision for income taxes......................... 3,684 2,923 2,342 2,749 2,566
---------- ---------- --------- --------- ---------
Net income.................................. $ 5,149 $ 3,821 $ 3,845 $ 4,968 $ 4,188
========== ========== ========= ========= =========
Basic net income per share......................... $ .68 $ .50 $ .50 $ .65 $ .57
========== ========== ========= ========= =========
Weighted average basic shares...................... 7,581 7,664 7,646 7,602 7,358
========== ========== ========= ========= =========
Diluted net income per share....................... $ .68 $ .50 $ .49 $ .64 $ .55
========== ========== ========= ========= =========
Weighted average diluted shares.................... 7,627 7,711 7,780 7,823 7,564
========== ========== ========= ========= =========
As of December 31
------------------------------------------------------------------
1999 1998 1997 1996 1995
------------ ------------ ------------- ------------ ----------
(In thousands)
Selected Balance Sheet Data:
Working capital.................................... $ 7,688 $ 13,272 $ 10,201 $ 11,489 $ 8,387
Total assets....................................... 70,740 52,770 50,815 44,063 32,450
Long-term debt, net of current portion............. 4,232 503 573 1,107 875
Stockholders' equity............................... 37,329 33,702 30,231 25,629 20,139
</TABLE>
15
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
OVERVIEW
The Company's revenues consist of staffing services and professional
employer organization ("PEO") services. Staffing services revenues consist of
short-term staffing, contract staffing and on-site management. PEO services
refer exclusively to co-employer contractual agreements with PEO clients. The
Company's revenues represent all amounts billed to customers for direct payroll,
related employment taxes, workers' compensation coverage and a service fee
(equivalent to a mark-up percentage). The Company's Oregon and California
offices accounted for approximately 79% of its total revenues in 1999.
Consequently, weakness in economic conditions in these regions could have a
material adverse effect on the Company's financial results.
The Company's cost of revenues is comprised of direct payroll costs,
payroll taxes and employee benefits, workers' compensation and safety
incentives. Direct payroll costs represent the gross payroll earned by employees
based on salary or hourly wages. Payroll taxes and employee benefits consist of
the employer's portion of Social Security and Medicare taxes, federal
unemployment taxes, state unemployment taxes and employee reimbursements for
materials, supplies and other expenses, which are paid by the customer. Workers'
compensation expense consists primarily of the costs associated with the
Company's self-insured workers' compensation program, such as claims reserves,
claims administration fees, legal fees, state and federal administrative agency
fees and reinsurance costs for catastrophic injuries. The Company also maintains
a large-deductible workers' compensation insurance policy for employees working
in states where the Company is not currently self-insured. Safety incentives
represent cash incentives paid to certain PEO client companies for maintaining
safe-work practices in order to minimize workplace injuries. The incentive is
based on a percentage of annual payroll and is paid annually to customers who
meet predetermined workers' compensation claims cost objectives.
The largest portion of workers' compensation expense is the cost of
workplace injury claims. When an injury occurs and is reported to the Company,
the Company's respective independent third-party claims administrator ("TPA")
analyzes the details of the injury and develops a case reserve, which is the
TPA's estimate of the cost of the claim based on similar injuries and its
professional judgment. The Company then records, or accrues, an expense and a
corresponding liability based upon the TPA's estimates for claims reserves. As
cash payments are made by the Company's TPA against specific case reserves, the
accrued liability is reduced by the corresponding payment amount. The TPA also
reviews existing injury claims on an on-going basis and adjusts the case
reserves as new or additional information for each claim becomes available. The
Company has established additional reserves to provide for future unanticipated
increases in expenses ("adverse loss development") of the claims reserves for
open injury claims and for claims incurred but not reported related to prior and
current periods. Management believes that the Company's internal claims
reporting system minimizes the occurrence of unreported incurred claims.
Selling, general and administrative expenses represent both branch
office and corporate-level operating expenses. Branch operating expenses consist
primarily of branch office staff payroll and payroll related costs, advertising,
rent, office supplies, depreciation and branch incentive compensation. Branch
incentive compensation represents a combined 15% of branch pretax profits, of
which 10% is paid to the branch manager and 5% is shared among the office staff.
Corporate-level operating expenses consist primarily of executive and office
staff payroll and payroll related costs, professional and legal fees, travel,
depreciation, occupancy costs, information systems costs and executive and
corporate staff incentive bonuses.
Amortization of intangibles consists primarily of the amortization of
the costs of acquisitions in excess of the fair value of net assets acquired
(goodwill). The Company uses a 15-year estimate as
16
<PAGE>
the useful life of goodwill, as compared to the 40-year maximum permitted by
generally accepted accounting principles, and amortizes such cost using the
straight-line method. Other intangible assets, such as software costs, customer
lists and covenants not to compete, are amortized using the straight-line method
over their estimated useful lives, which range from two to 15 years.
FORWARD-LOOKING INFORMATION
Statements in this Item or in Item 1 of this report which are not
historical in nature, including discussion of economic conditions in the
Company's market areas, the potential for and effect of recent and future
acquisitions, the effect of changes in the Company's mix of services on gross
margin, the adequacy of the Company's workers' compensation reserves and
allowance for doubtful accounts, the tax-qualified status of the Company's
401(k) savings plan and the availability of financing and working capital to
meet the Company's funding requirements, are forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements of
the Company or industry results to be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements. Such factors with respect to the Company include
difficulties associated with integrating acquired businesses and clients into
the Company's operations, economic trends in the Company's service areas,
uncertainties regarding government regulation of PEOs, including the possible
adoption by the IRS of an unfavorable position as to the tax-qualified status of
employee benefit plans maintained by PEOs, future workers' compensation claims
experience, and the availability of and costs associated with potential sources
of financing. The Company disclaims any obligation to update any such factors or
to publicly announce the result of any revisions to any of the forward-looking
statements contained herein to reflect future events or developments.
RESULTS OF OPERATIONS
The following table sets forth the percentages of total revenues
represented by selected items in the Company's Statements of Operations for the
years ended December 31, 1999, 1998 and 1997, listed in Item 14 of this report.
The Company's merger with Western Industrial Management, Inc. and a related
company (together, "WIMI"), in June 1998 was accounted for as a
pooling-of-interests and, accordingly, the Company's financial statements have
been restated for prior periods to give effect to the merger. Certain 1998 and
1997 cost of revenue amounts have been reclassified to conform with the 1999
presentation. Such reclassifications had no impact on gross margin, net income
or stockholders' equity. References to the Notes to Financial Statements
appearing below are to the notes to the Company's financial statements listed in
Item 14 of this report.
17
<PAGE>
<TABLE>
<S> <C> <C> <C>
Percentage of Total Revenues
------------------------------------------
Years Ended December 31,
1999 1998 1997
------ ------ ------
Revenues:
Staffing services................................................. 56.1% 54.6% 58.0%
Professional employer services.................................... 43.9 45.4 42.0
----- ----- -----
Total revenues................................................ 100.0 100.0 100.0
----- ----- -----
Cost of revenues:
Direct payroll costs.............................................. 77.6 77.6 77.3
Payroll taxes and benefits........................................ 8.2 8.4 8.9
Workers' compensation............................................. 3.4 3.4 3.5
----- ----- -----
Total cost of revenues........................................ 89.2 89.4 89.7
----- ----- -----
Gross margin........................................................... 10.8 10.6 10.3
Selling, general and administrative expenses........................... 7.6 7.8 7.9
Merger expenses........................................................ - 0.2 -
Amortization of intangibles............................................ 0.5 0.4 0.4
----- ----- -----
Income from operations................................................. 2.7 2.2 2.0
Other(expense)income................................................... (0.1) 0.1 -
----- ----- -----
Pretax income.......................................................... 2.6 2.3 2.0
Provision for income taxes............................................. 1.1 1.0 0.7
----- ----- -----
Net income............................................................. 1.5% 1.3% 1.3%
===== ===== =====
</TABLE>
YEARS ENDED DECEMBER 31, 1999 AND 1998
Net income for 1999 amounted to $5,149,000, an increase of $1,328,000
or 34.8% over 1998 net income of $3,821,000. The increase in net income was
attributable to a higher gross margin percent owing to lower payroll taxes and
benefits, as well as lower selling, general and administrative expenses,
expressed as a percentage of revenues. In addition, 1998 included $750,000 of
merger expenses related to the Company's June 1998 pooling-of-interests merger
with Western Industrial Management, Inc. Basic and diluted earnings per share
for 1999 were $.68 as compared to $.50 for both basic and diluted earnings per
share for 1998.
Revenues for 1999 totaled $347,850,000, an increase of approximately
$44,821,000 or 14.8% over 1998 revenues of $303,029,000. The increase in total
revenues was primarily due to the TSS, TPM and TSU acquisitions, which were
consummated in the first half of 1999. The internal growth rate for revenues was
3.3% for 1999, although it improved to 11.5% for the fourth quarter of 1999.
Staffing services revenue increased $29,548,000 or 17.9%, while
professional employer services revenue increased $15,273,000 or 11.1%, which
resulted in an increase in the share of staffing services to 56.1% of total
revenues for 1999, as compared to 54.6% for 1998. The increase in staffing
services revenue for 1999 was primarily attributable to the three acquisitions
made during 1999. The share of professional employer services revenues had a
corresponding decrease from 45.4% of total revenues for 1998 to 43.9% for 1999.
Gross margin for 1999 totaled $37,496,000, which represented an
increase of $5,472,000 or 17.1% over 1998. The gross margin percent increased
from 10.6% of revenues for 1998 to 10.8% for 1999. The increase in the gross
margin percentage was due to lower payroll taxes and benefits for 1999,
primarily attributable to lower state unemployment tax rates in certain states
in which the Company does business. The Company expects gross margin, as a
percentage of revenues, to continue to be influenced by fluctuations in the mix
between staffing and PEO services, as well as the adequacy of its estimates for
workers' compensation liabilities, which may be negatively affected by
unanticipated adverse loss development of claims reserves.
Selling, general and administrative ("SG&A") expenses consist of
compensation and other expenses incident to the operation of the Company's
headquarters and the branch offices and the marketing of its services. SG&A
expenses (excluding the amortization of intangibles) for 1999 amounted to
$26,551,000, an increase of $3,070,000 or 13.1% over 1998. SG&A expenses,
18
<PAGE>
expressed as a percentage of revenues, decreased from 7.8% for 1998 to 7.6% for
1999. The increase in total SG&A dollars was primarily due to management
payroll, advertising expense, rent expense and increased profit sharing and
related taxes in connection with the 21 additional branch offices acquired in
the TSS, TPM and TSU acquisitions.
Amortization of intangibles totaled $1,867,000 or 0.5% of revenues for
1999, which compares to $1,316,000 or 0.4% of revenues for 1998. The increased
amortization expense was primarily due to the amortization of intangibles
recognized in the 1999 acquisitions of TSS, TPM and TSU.
The Company's effective income tax rate for 1999 was 41.7%, as compared
to 43.3% for 1998. The higher 1998 effective rate was primarily attributable to
the nondeductibility of certain merger expenses.
The Company offers various qualified employee benefit plans to its
employees, including its worksite employees. These qualified employee benefit
plans include a savings plan (the "401(k) plan") under Section 401(k) of the
Internal Revenue Code (the "Code"), a cafeteria plan under Code Section 125, a
group health plan, a group life insurance plan, a group disability insurance
plan and an employee assistance plan. Generally, qualified employee benefit
plans are subject to provisions of both the Code and the Employee Retirement
Income Security Act of 1974 ("ERISA"). In order to qualify for favorable tax
treatment under the Code, qualified plans must be established and maintained by
an employer for the exclusive benefit of its employees.
A definitive judicial interpretation of "employer" in the context of a
PEO arrangement has not been established. The tax-exempt status of the Company's
401(k) plan and cafeteria plan is subject to continuing scrutiny and approval by
the Internal Revenue Service (the "IRS") and depends upon the Company's ability
to establish the Company's employer-employee relationship with PEO employees.
The issue of whether the Company's tax-qualified benefit plans can legally
include worksite employees under their coverage has not yet been resolved. If
the worksite employees cannot be covered by the plans, then the exclusive
benefit requirement imposed by the Code would not be met by the plans as
currently administered and the plans could be disqualified.
The IRS has established a Market Segment Study Group regarding Employee
Leasing for the stated purpose of examining whether PEOs, such as the Company,
are the employers of worksite employees under the Code provisions applicable to
employee benefit plans and are, therefore, able to offer to worksite employees
benefit plans that qualify for favorable tax treatment. The IRS Study Group is
reportedly also examining whether the owners of client companies are employees
of PEO companies under Code provisions applicable to employee benefit plans. To
the best of the Company's knowledge, the Market Segment Study Group has not
issued a report.
A PEO company headquartered in Texas stated publicly over four years
ago that the IRS National Office was being requested by the IRS Houston District
to issue a Technical Advice Memorandum ("TAM") on the PEO worksite employee
issue in connection with an ongoing audit of a plan of the Texas PEO company.
The stated purpose of TAMs is to help IRS personnel in closing cases and to
establish and maintain consistent holdings. The IRS's position is that TAMs are
not precedential; that is, they are limited to the particular taxpayer involved
and that taxpayer's set of facts.
The draft request for a TAM by the IRS Houston District reportedly
stated its determination that the Texas PEO company's Code Section 401(k) plan
should be disqualified for the reason, among others, that it covers worksite
employees who are not employees of the PEO company.
The timing and nature of the issuance and contents of any TAM regarding
the worksite employee issue or any report of the Market Segment Study Group
regarding Employee Leasing is unknown at this time. There has also been public
discussion for the past several years of the
19
<PAGE>
possibility that the Treasury Department may propose some form of administrative
relief or that Congress may provide legislative resolution or clarification
regarding this issue.
In the event the tax exempt status of the Company's benefit plans were
to be discontinued and the benefit plans were to be disqualified, such actions
could have a material adverse effect on the Company's business, financial
condition and results of operations. The Company is not presently able to
predict the likelihood of disqualification nor the resulting range of loss, in
light of the lack of public direction from the IRS or Congress.
YEARS ENDED DECEMBER 31, 1998 AND 1997
Net income for 1998 amounted to $3,821,000, a decrease of $24,000 or
0.6% from 1997 net income of $3,845,000. The small decrease in 1998 net income
from 1997 was primarily due to $750,000 of merger expenses in connection with
the WIMI transaction and a higher income tax rate, offset in part by the effect
of a higher gross margin percent and lower SG&A expenses. Diluted net income per
share for 1998 was $0.50 compared to $0.49 for 1997.
Revenues for 1998 totaled $303,029,000 which represented a decrease of
$2,502,000 or 0.8% from 1997 revenues of $305,531,000. Staffing services revenue
decreased $11,820,000 or 6.7%, while professional employer services revenue
increased $9,318,000 or 7.3%, which resulted in a decrease in the share of
staffing services to 54.6% of total revenues for 1998, as compared to 58.0% for
1997. The decline in staffing services revenue for 1998 was primarily
attributable to two factors: (1) management's decision not to renew a business
relationship with a large seasonal customer which was anticipated to provide an
unacceptable profit margin and (2) a moderation in the demand for the Company's
services by a limited number of large staffing customers that were affected by
various economic conditions. The share of professional employer services
revenues had a corresponding increase from 42.0% of total revenues for 1997 to
45.4% for 1998.
Gross margin for 1998 totaled $32,024,000, representing an increase of
$610,000 or 1.9% over 1997. The gross margin rate of 10.6% of revenues
represents a 30 basis point increase from 1997 due primarily to lower payroll
taxes and benefits and workers' compensation expenses as a percentage of
revenues, offset in part by higher direct payroll costs as a percentage of
revenues. The decline in payroll taxes and benefits, in total dollars and as a
percent of revenues, for 1998 was primarily due to lower state unemployment tax
rates. The increase in direct payroll costs, as a percentage of revenues, was
primarily attributable to the increased share of professional employer services
business, where payroll costs typically represent a higher percentage of
revenues as compared to staffing services.
Workers' compensation expense decreased from 3.5% of revenues for 1997
to 3.4% of revenues for 1998. The decrease in workers' compensation expense for
1998 was generally attributable to a lower incidence of injuries during 1998, as
compared to 1997.
SG&A expenses (excluding the amortization of intangibles) for 1998
amounted to $23,481,000, a decrease of $530,000 or 2.2% from 1997. SG&A expenses
expressed as a percentage of revenues also decreased from 7.9% for 1997 to 7.8%
for 1998. The decrease in total SG&A expenses for 1998 from 1997 was primarily
attributable to lower management payroll and bad debt expense. During the first
quarter of 1998, management implemented specific performance criteria for all
branch offices to align operating expenses more closely with growth in gross
margin dollars rather than growth in revenues. For 1998, improvement in SG&A
expense was achieved by reducing SG&A expenses as a percent of gross margin
dollars from 76.4% in 1997 to 73.3% in 1998.
20
<PAGE>
Amortization of intangibles totaled $1,316,000 for 1998 or 0.4% of
revenues, which compares to $1,332,000 or 0.4% of revenues for 1997.
The Company's effective income tax rate for 1998 was 43.3%, as compared
to 37.9% for 1997. The increase in the effective rate was primarily attributable
to the nondeductibility of certain merger expenses and an increase in
nondeductible amortization expense.
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
The Company has historically experienced significant fluctuations in
its quarterly operating results and expects such fluctuations to continue in the
future. The Company's operating results may fluctuate due to a number of factors
such as seasonality, wage limits on payroll taxes, claims experience for
workers' compensation, demand and competition for the Company's services and the
effect of acquisitions. The Company's revenue levels fluctuate from quarter to
quarter primarily due to the impact of seasonality on its staffing services
business and on certain of its PEO clients in the agriculture and forest
products-related industries. As a result, the Company may have greater revenues
and net income in the third and fourth quarters of its fiscal year. Payroll
taxes and benefits fluctuate with the level of direct payroll costs, but tend to
represent a smaller percentage of revenues later in the Company's fiscal year as
federal and state statutory wage limits for unemployment and social security
taxes are exceeded by some employees. Workers' compensation expense varies with
both the frequency and severity of workplace injury claims reported during a
quarter, as well as adverse loss development of prior period claims during a
subsequent quarter.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash position at December 31, 1999 decreased by
$3,479,000 from December 31, 1998. The decrease in cash at December 31, 1999 was
primarily due to cash used in investing activities of $15,437,000, principally
in connection with three acquisitions made since January 1, 1999, offset in part
by proceeds from operating activities of $3,433,000 and financing activities of
$8,525,000 arising from the Company's bank term loan and borrowings on its
unsecured credit line.
Net cash provided by operating activities for 1999 amounted to
$3,433,000, as compared to $4,246,000 for 1998. For 1999, cash flow was
primarily generated by net income and depreciation and amortization, coupled
with an increase of $2,030,000 in accrued payroll and benefits, offset in part
by an increase in accounts receivable of $5,568,000.
Net cash used in investing activities totaled $15,437,000 for 1999, as
compared to $1,679,000 for 1998. For 1999, cash used in investing activities was
primarily for the acquisitions of TSS, TPM and TSU totaling $13,157,000 and for
capital expenditures of $2,024,000. Approximately $1,400,000 of the total
capital expenditures was related to new computer hardware and software for the
Company's new management information system, which was implemented on March 1,
2000. The Company presently has no material long-term capital commitments.
Net cash provided by financing activities for 1999 amounted to
$8,525,000, which compares to $1,977,000 of net cash used in financing
activities in 1998. For 1999, the primary source of cash provided by financing
activities was an $8,000,000 term loan obtained from the Company's principal
bank and $4,882,000 of net borrowings on the Company's credit line, offset in
part by payments on long-term debt of $1,772,000 and common stock repurchases of
$1,498,000. The term loan was obtained to provide financing for the TSU
acquisition and, at December 31, 1999, had an outstanding principal balance of
$6,444,000.
The Company renegotiated its loan agreement with its principal bank
which provides for an unsecured revolving credit facility of $12.0 million and
an $8.0 million 3-year term loan. This loan agreement, which expires May 31,
2000, also includes a subfeature for standby letters of credit in
21
<PAGE>
connection with certain workers' compensation surety arrangements, as to which
approximately $2.0 million was outstanding as of December 31, 1999. The Company
had an outstanding balance of $4,882,000 on the revolving credit facility at
December 31, 1999. See Note 7 of the Notes to Financial Statements. Effective
December 31, 1999, the Company negotiated a minor modification to the quarterly
financial covenants of its loan agreement with its principal bank. The Company
requested that the minimum working capital requirement be replaced by a minimum
current ratio. In exchange for this accommodation, the Company agreed to an
increase in the trailing four-quarter EBITDA requirement. The Company was in
compliance with the financial covenants in the loan agreement at December 31,
1999. Management expects that the funds anticipated to be generated from
operations, together with the bank-provided credit facility and other potential
sources of financing, will be sufficient in the aggregate to fund the Company's
working capital needs for the foreseeable future.
On February 26, 1999, the Company's Board of Directors authorized a
stock repurchase program to purchase up to 250,000 common shares from time to
time in open market purchases. On November 10, 1999, the Company's Board of
Directors authorized the repurchase of an additional 200,000 shares, thereby
increasing the total number of common shares authorized for repurchase to
450,000. During 1999, the Company repurchased 219,000 shares at an aggregate
price of $1,498,000. Management anticipates that the capital necessary to
execute this program will be provided by existing cash balances and other
available resources.
INFLATION
Inflation generally has not been a significant factor in the Company's
operations during the periods discussed above. The Company has taken into
account the impact of escalating medical and other costs in establishing
reserves for future expenses for self-insured workers' compensation claims.
YEAR 2000 READINESS
As the Company previously reported, its mission-critical legacy systems
were believed to be Year 2000 compliant prior to December 31, 1999. Such
compliance was achieved through minor reprogramming by internal staff at no
incremental cost to the Company. The Company's non-mission critical systems were
also brought into compliance in a timely fashion at a very minimal cost.
As discussed above in Part I, Item 1, "Management Information Systems,"
the Company implemented its new information system on March 1, 2000. The new
information system project was initiated in mid-1997 to accommodate the
anticipated growth of the Company and was unrelated to the Year 2000 compliance
issue.
Subsequent to December 31, 1999, the Company has not experienced any
significant problems with any of its internal information systems or any
interruption of products or services from any vendors.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- ------------------------------------------------------------------------
The Company's exposure to market risk for changes in interest rates
primarily relates to the Company's short-term and long-term debt obligations. As
of December 31, 1999, the Company had interest-bearing debt obligations of
approximately $13.8 million, of which approximately $11.3 million bears interest
at a variable rate and approximately $2.5 million at a fixed rate of interest.
The variable rate debt is comprised of approximately $4.9 million outstanding
under an unsecured revolving credit facility, which bears interest at the
Federal Funds rate plus 1.25%. The Company also has an unsecured three-year term
note with its principal bank, which bears interest at LIBOR plus 1.35%. Based on
the Company's overall interest exposure at December 31, 1999, a 10 percent
change in market interest rates would not have a material effect on the fair
value of the Company's long-term debt or its results of operations. As of
December 31, 1999, the Company had not entered into any interest rate
instruments to reduce its exposure to interest rate risk.
22
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ---------------------------------------------------------
The financial statements and notes thereto required by this item begin
on page F-1 of this report, as listed in Item 14.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
- --------------------------------------------------------------------------------
None.
23
<PAGE>
PART III
ITEM 10. INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
- -------------------------------------------------------------
The information required by Item 10, Directors and Executive Officers
of the Registrant, is incorporated herein by reference to the Company's
definitive Proxy Statement for the 2000 Annual Meeting of Stockholders ("Proxy
Statement"), under the headings "Election of Directors" and "Stock Ownership by
Principal Stockholders and Management--Section 16(a) Beneficial Ownership
Reporting Compliance" or appears under the heading "Executive Officers of the
Registrant" on page 13 of this report. The information required by Item 11,
Executive Compensation, is incorporated herein by reference to the Proxy
Statement, under the headings "Executive Compensation" and "Election of
Directors--Compensation Committee Interlocks and Insider Participation." The
information required by Item 12, Security Ownership of Certain Beneficial Owners
and Management, is incorporated herein by reference to the Proxy Statement,
under the heading "Stock Ownership by Principal Stockholders and
Management--Beneficial Ownership Table." The information required by Item 13,
Certain Relationships and Related Transactions, is incorporated herein by
reference to the Proxy Statement, under the heading "Election of
Directors--Compensation Committee Interlocks and Insider Participation."
24
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
- ---------------------------------------------------------------------
FINANCIAL STATEMENTS AND SCHEDULES
The Financial Statements, together with the report thereon of
PricewaterhouseCoopers LLP, are included on the pages indicated below:
Page
----
Report of Independent Accountants F-1
Balance Sheets - December 31, 1999 and 1998 F-2
Statements of Operations for the Years Ended December 31,
1999, 1998 and 1997 F-3
Statements of Redeemable Common Stock and Nonredeemable
Stockholders' Equity - December 31, 1999, 1998 and 1997 F-4
Statements of Cash Flows for the Years Ended December 31,
1999, 1998 and 1997 F-5
Notes to Financial Statements F-6
No schedules are required to be filed herewith.
REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the quarter ended December 31, 1999.
EXHIBITS
Exhibits are listed in the Exhibit Index that follows the Financial Statements
included in this report. Each management contract or compensatory plan or
arrangement required to be filed as an exhibit to this report is listed under
Item 10, "Executive Compensation Plans and Arrangements and Other Management
Contracts" in the Exhibit Index.
25
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
BARRETT BUSINESS SERVICES, INC.
Registrant
Date: March 28, 2000 By: /s/ Michael D. Mulholland
---------------------------------
Michael D. Mulholland
Vice President - Finance and Secretary
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities indicated on the 28th day of March, 2000.
Principal Executive Officer and Director:
*WILLIAM W. SHERERTZ President and Chief Executive Officer
and Director
Principal Financial Officer:
/s/ Michael D. Mulholland Vice President-Finance and Secretary
- ----------------------------------
Michael D. Mulholland
Principal Accounting Officer:
/s/ James D. Miller Controller and Assistant Secretary
- ----------------------------------
James D. Miller
Other Directors:
* ROBERT R. AMES Director
* HERBERT L. HOCHBERG Director
* ANTHONY MEEKER Director
* STANLEY G. RENECKER Director
* NANCY B. SHERERTZ Director
* By /s/ Michael D. Mulholland
---------------------------
Michael D. Mulholland
Attorney-in-Fact
26
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of
Barrett Business Services, Inc.
In our opinion, the accompanying balance sheets and the related statements of
operations, of redeemable common stock and nonredeemable stockholder' equity
and of cash flows present fairly, in all material respects, the financial
position of Barrett Business Services, Inc. at December 31, 1999 and 1998, and
the results of its operations and its cash flows for each of the three years in
the period ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States. These financial statements are the
responsibility of the Company' management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with auditing standards generally
accepted in the United States which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
February 9, 2000
F-1
<PAGE>
BARRETT BUSINESS SERVICES, INC.
BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
(IN THOUSANDS, EXCEPT PAR VALUE)
<TABLE>
<S> <C> <C>
1999 1998
-------- --------
ASSETS
Current assets:
Cash and cash equivalents $ 550 $ 4,029
Trade accounts receivable, net 30,216 21,907
Prepaid expenses and other 1,219 1,103
Deferred tax assets (Note 12) 1,658 1,857
-------- --------
Total current assets 33,643 28,896
Intangibles, net (Note 4) 21,945 11,508
Property and equipment, net (Notes 5 and 8) 7,027 5,184
Restricted marketable securities and workers' compensation deposits (Note 6) 6,281 6,004
Deferred tax assets (Note 12) 712 552
Other assets 1,132 626
-------- --------
$ 70,740 $ 52,770
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable (Note 2) $ 865 $ -
Current portion of long-term debt (Note 8) 2,783 61
Line of credit (Note 7) 4,882 -
Income taxes payable (Note 12) - 438
Accounts payable 1,356 948
Accrued payroll, payroll taxes and related benefits 11,437 9,246
Workers' compensation claim and safety incentive liabilities (Note 6) 4,219 4,417
Other accrued liabilities 413 514
-------- --------
Total current liabilities 25,955 15,624
Long-term debt, net of current portion (Note 8) 4,232 503
Customer deposits 815 829
Long-term workers' compensation claim liabilities (Note 6) 699 714
Other long-term liabilities (Note 2) 1,710 1,398
-------- --------
33,411 19,068
-------- --------
Commitments and contingencies (Notes 9, 10, 15 and 17)
Stockholders' equity:
Common stock, $.01 par value; 20,500 shares authorized, 7,461 and 7,676
shares issued and outstanding (Notes 13 and 14) 75 77
Additional paid-in capital 9,889 11,409
Retained earnings 27,365 22,216
-------- --------
37,329 33,702
-------- --------
$ 70,740 $ 52,770
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE>
BARRETT BUSINESS SERVICES, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<S> <C> <C> <C>
1999 1998 1997
------------ ------------- -------------
Revenues:
Staffing services $ 194,991 $ 165,443 $ 177,263
Professional employer services 152,859 137,586 128,268
----------- ------------- -------------
347,850 303,029 305,531
------------ ------------- -------------
Cost of revenues:
Direct payroll costs 270,049 235,265 236,307
Payroll taxes and benefits 28,603 25,550 27,226
Workers' compensation (Note 6) 11,702 10,190 10,584
------------ ------------- -------------
310,354 271,005 274,117
------------ ------------- -------------
Gross margin 37,496 32,024 31,414
Selling, general and administrative expenses 26,551 23,481 24,011
Merger expenses - 750 -
Amortization of intangibles (Note 4) 1,867 1,316 1,332
------------ ------------- -------------
Income from operations 9,078 6,477 6,071
------------ ------------- -------------
Other (expense) income:
Interest expense (634) (173) (247)
Interest income 357 441 362
Other, net 32 (1) 1
------------ ------------- ------------
(245) 267 116
------------ ------------- ------------
Income before provision for income taxes 8,833 6,744 6,187
Provision for income taxes (Note 12) 3,684 2,923 2,342
------------ ------------ ------------
Net income $ 5,149 $ 3,821 $ 3,845
============ ============ ============
Basic earnings per share $ .68 $ .50 $ .50
============ ============ ============
Weighted average number of basic shares outstanding 7,581 7,664 7,646
============ ============ ============
Diluted earnings per share $ .68 $ .50 $ .49
============ ============ ============
Weighted average number of diluted shares outstanding 7,627 7,711 7,780
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
BARRETT BUSINESS SERVICES, INC.
STATEMENTS OF REDEEMABLE COMMON STOCK AND NONREDEEMABLE STOCKHOLDERS' EQUITY
DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS)
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
Nonredeemable Stockholders' Equity
Redeemable ----------------------------------------------
Common Stock Common Stock Additional
-------------------- ------------------- Paid-in Retained
Shares Amount Shares Amount Capital Earnings Total
-------- -------- -------- -------- ---------- ---------- ----------
Balance, December 31, 1996 159 $ 2,825 7,520 $ 75 $ 11,004 $ 14,550 $ 25,629
Common stock issued on exercise of options
and warrants - - 118 1 756 - 757
Redemption of redeemable common stock (159) (2,825) - - - - -
Net income - - - - - 3,845 3,845
-------- -------- -------- -------- ---------- ---------- ----------
Balance, December 31, 1997 - - 7,638 76 11,760 18,395 30,231
Common stock issued on exercise of options
and warrants - - 38 1 168 - 169
Distribution to dissenting shareholder in
connection with merger (Note 2) - - - - (519) - (519)
Net income - - - - - 3,821 3,821
-------- -------- -------- -------- ---------- ---------- ----------
Balance, December 31, 1998 - - 7,676 77 11,409 22,216 33,702
Common stock issued on exercise of options
and warrants - - 9 - 34 - 34
Repurchase of common stock - - (219) (2) (1,496) - (1,498)
Payment to shareholder - - - - (58) - (58)
Common stock cancelled (Note 2) - - (5) - - - -
Net income - - - - - 5,149 5,149
-------- -------- -------- -------- ---------- ---------- ----------
Balance, December 31, 1999 - $ - 7,461 $ 75 $ 9,889 $ 27,365 $ 37,329
======== ======== ======== ======== ========= ========== ==========
The accompanying notes are an integral part of these financial statements.
F-4
</TABLE>
<PAGE>
BARRETT BUSINESS SERVICES, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS)
<TABLE>
<S> <C> <C> <C>
1999 1998 1997
----------- ---------- ---------
Cash flows from operating activities:
Net income $ 5,149 $ 3,821 $ 3,845
Reconciliations of net income to net cash provided by operating activities:
Depreciation and amortization 2,461 1,785 1,765
Deferred taxes 156 (323) (727)
Changes in certain assets and liabilities, net of amounts purchased in
acquisitions:
Trade accounts receivable, net (5,568) (856) (332)
Prepaid expenses and other (57) 128 (179)
Income taxes payable (438) 438 -
Accounts payable 261 (188) 73
Accrued payroll, payroll taxes and related benefits 2,030 (788) 2,180
Other accrued liabilities (153) 100 (316)
Workers' compensation claim and safety incentive liabilities (198) 204 958
Customer deposits, other liabilities and other assets, net (522) (443) (16)
Other long-term liabilities 312 368 30
----------- ---------- ---------
Net cash provided by operating activities 3,433 4,246 7,281
----------- ---------- ---------
Cash flows from investing activities:
Cash paid for acquisitions, including other direct costs (13,157) (693) (2,227)
Purchase of property and equipment, net of amounts purchased in
acquisitions (2,024) (1,077) (1,497)
Proceeds from maturities of marketable securities 2,415 5,532 5,343
Purchase of marketable securities (2,671) (5,441) (5,731)
----------- ---------- ---------
Net cash used in investing activities (15,437) (1,679) (4,112)
----------- ---------- ---------
Cash flows from financing activities:
Payment of credit line assumed in acquisition (1,113) - (401)
Net proceeds from (payments on) credit-line borrowings 4,882 (887) 701
Proceeds from collection of note receivable - - 324
Proceeds from issuance of long-term debt 8,000 - 180
Payments on long-term debt (1,722) (740) (89)
Distribution to dissenting shareholder - (519) -
Payment to shareholder (58) - -
Repurchase of common stock (1,498) - -
Redemption of common stock - - (2,825)
Proceeds from the exercise of stock options and warrants 34 169 757
----------- ---------- ---------
Net cash provided by (used in) financing activities 8,525 (1,977) (1,353)
----------- ---------- ---------
Net (decrease) increase in cash and cash equivalents (3,479) 590 1,816
Cash and cash equivalents, beginning of year 4,029 3,439 1,623
----------- ---------- ---------
Cash and cash equivalents, end of year $ 550 $ 4,029 $ 3,439
=========== ========= =========
Supplemental schedule of noncash activities:
Acquisition of other businesses:
Cost of acquisitions in excess of fair market value of net assets acquired $ 12,304 $ 683 $ 3,160
Tangible assets acquired 3,364 10 674
Liabilities assumed 1,646 - 1,607
Note payable issued in connection with acquisition 865 - -
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
BARRETT BUSINESS SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Barrett Business Services, Inc. ("Barrett" or the "Company"), a Maryland
corporation, is engaged in providing staffing and professional employer
services to a diversified group of customers through a network of branch
offices throughout Oregon, Washington, Idaho, California, Arizona,
Maryland, Delaware, North Carolina and South Carolina. Approximately 79%,
81% and 85%, respectively, of the Company's revenues during 1999, 1998, and
1997 were attributable to its Oregon and California operations. On June 29,
1998, the Company merged with Western Industrial Management, Inc. and Catch
55, Inc. (collectively "WIMI"). The transaction was accounted for as a
pooling-of-interests pursuant to Accounting Principles Board ("APB")
Opinion No. 16 and, accordingly, the Company's financial statements have
been restated for all prior periods to give effect to the merger, as more
fully described in Note 2.
REVENUE RECOGNITION
The Company recognizes revenue as services are rendered by its workforce.
Staffing services are engaged by customers to meet short-term and long-term
personnel needs. Professional employer services are normally used by
organizations to satisfy ongoing human resource management needs and
typically involve contracts with a minimum term of one year, renewable
annually, which cover all employees at a particular worksite.
CASH AND CASH EQUIVALENTS
The Company considers non-restricted short-term investments, which are
highly liquid, readily convertible into cash, and have original maturities
of less than three months, to be cash equivalents for purposes of the
statements of cash flows.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company had an allowance for doubtful accounts of $335,000 and $262,000
at December 31, 1999 and 1998, respectively.
MARKETABLE SECURITIES
At December 31, 1999 and 1998, marketable securities consisted primarily of
governmental debt instruments with maturities generally from 90 days to 30
years (see Note 6). Marketable securities have been categorized as
held-to-maturity and, as a result, are stated at amortized cost. Realized
gains and losses on sales of marketable securities are included in other
(expense) income on the Company's statements of operations.
INTANGIBLES
Intangible assets consist primarily of identifiable intangible assets
acquired and the cost of acquisition in excess of the fair value of net
assets acquired (goodwill). Intangible assets acquired are recorded at
their estimated fair value at the acquisition date.
The Company uses a 15-year estimate as the estimated economic useful life
of goodwill. This life is based on an analysis of industry practice and the
factors influencing the acquisition decision. Other intangible assets are
amortized on the straight-line method over their estimated useful lives,
ranging from 2 to 15 years. (See Note 4.)
F-6
<PAGE>
BARRETT BUSINESS SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INTANGIBLES (CONTINUED)
The Company reviews for asset impairment when events or changes in
circumstances indicate that the carrying amount of intangible assets may
not be recoverable. To perform that review, the Company estimates the sum
of expected future undiscounted net cash flows from the intangible assets.
If the estimated net cash flows are less than the carrying amount of the
intangible asset, the Company recognizes an impairment loss in an amount
necessary to write down the intangible asset to a fair value as determined
from expected future discounted cash flows. No write-down for impairment
loss was recorded for the years ended December 31, 1999, 1998 and 1997.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Expenditures for maintenance and
repairs are charged to operating expense as incurred, and expenditures for
additions and betterments are capitalized. The cost of assets sold or
otherwise disposed of and the related accumulated depreciation are
eliminated from the accounts, and any resulting gain or loss is reflected
in the statements of operations.
Depreciation of property and equipment is calculated using either
straight-line or accelerated methods over estimated useful lives, which
range from 3 years to 31.5 years.
CUSTOMER DEPOSITS
The Company requires deposits from certain professional employer services
customers to cover a portion of its accounts receivable due from such
customers in the event of default of payment.
STATEMENTS OF CASH FLOWS
Interest paid during 1999, 1998 and 1997 did not materially differ from
interest expense.
Income taxes paid by the Company in 1999, 1998 and 1997 totaled $4,181,000,
$2,623,000 and $3,224,000, respectively.
NET INCOME PER SHARE
Basic earnings per share are computed based on the weighted average number
of common shares outstanding for each year. Diluted earnings per share
reflect the potential effects of the exercise of outstanding stock options
and warrants.
F-7
<PAGE>
BARRETT BUSINESS SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with the 1999
presentation. Such reclassifications had no impact on gross margin, net
income or stockholders' equity.
ACCOUNTING ESTIMATES
The preparation of the Company's financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reporting periods. Actual results may differ from those
estimates.
2. BUSINESS COMBINATIONS
HR ONLY
Effective February 1, 1997, the Company acquired D&L Personnel Department
Specialists, Inc., dba HR Only, a staffing services company which
specializes in human resource professionals, with offices in Los Angeles
and Garden Grove, California. The Company paid $1,800,000 in cash for all
of the outstanding common stock of HR Only and $1,200,000 in cash for
noncompete agreements with certain individuals, of which $1,000,000 was
deferred with simple interest at 5% per annum for five years and then to be
paid ratably over the succeeding five-year period. The deferred portion of
the noncompete agreement is presented on the balance sheet in other
long-term liabilities. HR Only's revenues for the fiscal year ended January
31, 1997 were approximately $4.3 million (audited). The transaction was
accounted for under the purchase method of accounting, which resulted in
$3,027,000 of intangible assets, including $92,000 for acquisition-related
costs, and $65,000 of net tangible assets.
TLC STAFFING
Effective April 13, 1997, the Company purchased certain assets of JRL
Services, Inc., dba TLC Staffing, a provider of clerical staffing services
located in Tucson, Arizona. TLC Staffing had revenues of approximately
$800,000 (unaudited) for the year ended December 31, 1996. The Company paid
$150,000 in cash for the assets, assumed an $18,000 office lease liability
and incurred $4,000 in acquisition related costs. The transaction was
accounted for under the purchase method of accounting, which resulted in
$152,000 of intangible assets and $2,000 of fixed assets.
BOLT STAFFING
On April 13, 1998, the Company acquired certain assets of BOLT Staffing
Services, Inc., a provider of staffing services located in Pocatello,
Idaho. BOLT Staffing had revenues of approximately $2.4 million (unaudited)
for the year ended December 31, 1997. The Company paid $675,000 in cash for
the assets, assumed a $6,000 office lease liability and incurred
approximately $18,000 in acquisition related costs. The transaction was
accounted for under the purchase method of accounting, which resulted in
$683,000 of intangible assets and $10,000 of fixed assets.
F-8
<PAGE>
BARRETT BUSINESS SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
2. BUSINESS COMBINATIONS (CONTINUED)
TEMPORARY STAFFING SYSTEMS, INC.
Effective January 1, 1999, the Company acquired all of the outstanding
common stock of Temporary Staffing Systems, Inc. ("TSS"), a staffing
services company with eight branch offices in North Carolina and one in
South Carolina. The Company paid $2,000,000 in cash and issued a note
payable for $950,000 due January 31, 2000, payment of which is contingent
upon a minimum equity requirement for 1998 and certain financial
performance criteria for 1999. The note will be recorded when the
contingencies are resolved (Note 17). The Company also paid $50,000 in cash
for a noncompete agreement with the selling shareholder. TSS's revenues for
the fiscal year ended March 29, 1998 were approximately $12.9 million
(audited). The transaction has been accounted for under the purchase method
of accounting. The effect of this transaction resulted in the recording of
$1,255,000 of tangible assets, $393,000 of existing intangible assets, the
assumption of $1,646,000 of liabilities and, to date, the recognition of an
additional $2,099,000 of intangible assets, which includes $51,000 for
acquisition-related costs.
TPM STAFFING SERVICES, INC.
Effective February 15, 1999, the Company acquired certain assets of TPM
Staffing Services, Inc. ("TPM"), a staffing services company with three
offices in southern California - Lake Forest, Santa Ana and Anaheim. The
Company paid $1,125,000 in cash for the assets of TPM. The Company also
paid $75,000 for noncompete agreements. TPM's revenues for the year ended
December 31, 1998 were approximately $5.7 million (unaudited). The
transaction was accounted for under the purchase method of accounting,
which resulted in $1,190,000 of intangible assets, including $15,000 for
acquisition-related costs, and $25,000 of fixed assets.
TEMPORARY SKILLS UNLIMITED, INC.
Effective May 31, 1999, the Company acquired certain assets of Temporary
Skills Unlimited, Inc., dba TSU Staffing ("TSU"), a staffing services
company with nine branch offices in northern California. The Company paid
$9,558,000 in cash and issued a note for $864,500, due one year from the
date of acquisition. The Company also paid $100,000 for noncompete
agreements. TSU's revenues for the year ended December 27, 1998 were
approximately $25.0 million (audited). The transaction was accounted for
under the purchase method of accounting, which resulted in $8,622,000 of
intangible assets, including $184,000 for acquisition-related costs,
$1,797,000 of accounts receivable and $287,000 of fixed assets.
PRO FORMA RESULTS OF OPERATIONS (UNAUDITED)
The operating results of each of the above acquisitions are included in the
Company's results of operations from the respective date of acquisition.
The following unaudited summary presents the combined results of operations
as if the TSS, TPM and TSU acquisitions had occurred at the beginning of
1998, after giving effect to certain adjustments for the
F-9
<PAGE>
BARRETT BUSINESS SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
2. BUSINESS COMBINATIONS (CONTINUED)
PRO FORMA RESULTS OF OPERATIONS (UNAUDITED) (CONTINUED)
amortization of intangible assets, taxation and cost of capital. The other
acquisitions made since January 1, 1998 are not included in the pro forma
information as their effect is not material.
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) YEAR ENDED
DECEMBER 31,
1999 1998
----------- -----------
Revenue $ 362,297 $ 347,429
=========== ===========
Net income $ 5,497 $ 4,611
=========== ===========
Basic earnings per share $ .73 $ .60
=========== ===========
Diluted earnings per share $ .72 $ .60
=========== ===========
The unaudited pro forma results above have been prepared for comparative
purposes only and do not purport to be indicative of what would have
occurred had the acquisitions been made as of January 1, 1998, or of
results which may occur in the future.
WESTERN INDUSTRIAL MANAGEMENT, INC.
On June 29, 1998, the Company completed a merger with WIMI, whereby WIMI
was merged directly with and into Barrett. The transaction qualified as a
tax-free merger and has been accounted for as a pooling-of-interests. As a
result of the merger, the former shareholders of WIMI initially received a
total of 894,642 shares of the Company's common stock, which included
10,497 shares issued in exchange for real property consisting of an office
condominium in which WIMI's main office was located. A dissenting WIMI
shareholder received cash in the amount of $519,095, based on the value of
$11.375 per share of Barrett's common stock. The Acquisition and Merger
Agreement provided for a holdback of 10% of the total consideration paid by
Barrett pending the final determination of the required minimum net worth
of WIMI as of June 28, 1998. As a consequence of this final determination,
total consideration paid by Barrett was reduced in 1999 by $52,811, which
resulted in the cancellation of 4,417 shares previously issued to certain
WIMI shareholders and a reduction in cash paid to the dissenting WIMI
shareholder of $2,563. WIMI was a privately-held staffing services company
headquartered in San Bernardino, California.
F-10
<PAGE>
BARRETT BUSINESS SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
3. FAIR VALUE OF FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK
All of the Company's significant financial instruments are recognized in
its balance sheet. Carrying values approximate fair market value of most
financial assets and liabilities. The fair market value of certain
financial instruments was estimated as follows:
- Marketable securities - Marketable securities primarily consist of U.S.
Treasury bills and municipal bonds. The interest rates on the Company's
marketable security investments approximate current market rates for
these types of investments; therefore, the recorded value of the
marketable securities approximates fair market value.
- Long-term debt - The interest rates on the Company's long-term debt
approximate current market rates, based upon similar obligations with
like maturities; therefore, the recorded value of long-term debt
approximates the fair market value.
Financial instruments that potentially subject the Company to concentration
of credit risk consist primarily of temporary cash investments, marketable
securities and trade accounts receivable. The Company restricts investment
of temporary cash investments and marketable securities to financial
institutions with high credit ratings and to investments in governmental
debt instruments. Credit risk on trade receivables is minimized as a result
of the large and diverse nature of the Company's customer base. At December
31, 1999, the Company had significant concentrations of credit risk as
follows:
- Marketable securities - $2,275,000 of marketable securities at December
31, 1999 consisted of Oregon State Housing & Community Service Bonds.
- Trade receivables - $1,930,000 of trade receivables were with two
customers at December 31, 1999 (6% of trade receivables outstanding at
December 31, 1999).
4. INTANGIBLES
Intangibles consist of the following (in thousands):
1999 1998
--------- ----------
Covenants not to compete $ 3,709 $ 3,484
Goodwill 25,674 13,595
Customer lists 358 358
--------- ---------
29,741 17,437
Less accumulated amortization 7,796 5,929
--------- ---------
$ 21,945 $ 11,508
========= =========
F-11
<PAGE>
BARRETT BUSINESS SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
1999 1998
---------- ---------
Office furniture and fixtures $ 4,087 $ 3,066
Computer hardware and software 3,630 2,225
Buildings 1,474 1,463
---------- ---------
9,191 6,754
Less accumulated depreciation 2,472 1,878
---------- ---------
6,719 4,876
308 308
---------- ---------
$ 7,027 $ 5,184
========== =========
6. WORKERS' COMPENSATION CLAIM AND SAFETY INCENTIVE LIABILITIES
The Company is a self-insured employer with respect to workers'
compensation coverage for all its employees working in Oregon, Maryland,
Washington, Delaware, and selected parts of California. The Company also is
self-insured for workers' compensation purposes as granted by the United
States Department of Labor for longshore and harbor ("USL&H") workers'
coverage.
The Company has provided $4,219,000 and $4,417,000 at December 31, 1999 and
1998, respectively, as an estimated liability for unsettled workers'
compensation claims and safety incentive liabilities. The estimated
liability for unsettled workers' compensation claims represents
management's best estimate which includes, in part, an evaluation of
information provided by the Company's third-party administrators and its
independent actuary. Included in the claims liabilities are case reserve
estimates for reported losses, plus additional amounts based on projections
for incurred but not reported claims, anticipated increases in case reserve
estimates and additional claims administration expenses. The estimated
liability for safety incentives represents management's best estimate for
future amounts owed to PEO client companies as a result of maintaining
workers' compensation claims costs below certain agreed-upon amounts, which
are based on a percentage of payroll. These estimates are continually
reviewed and adjustments to liabilities are reflected in current operations
as they become known. The Company believes that the difference between
amounts recorded for its estimated liabilities and the possible range of
costs of settling related claims is not material to results of operations;
nevertheless, it is reasonably possible that adjustments required in future
periods may be material to results of operations.
F-12
<PAGE>
BARRETT BUSINESS SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
6. WORKERS' COMPENSATION CLAIM AND SAFETY INCENTIVE LIABILITIES (CONTINUED)
Liabilities incurred for work-related employee fatalities are recorded
either at an agreed lump-sum settlement amount or the net present value of
future fixed and determinable payments over the actuarially determined
remaining life of the beneficiary, discounted at a rate that approximates a
long-term, high-quality corporate bond rate. The Company has obtained
excess workers' compensation insurance to limit its self-insurance exposure
to $350,000 per occurrence in all states, except $500,000 per occurrence
for USL&H exposure. The excess insurance provides unlimited coverage above
the aforementioned exposures.
At December 31, 1999, the Company's long-term workers' compensation claim
liabilities in the accompanying balance sheet include $699,000 for
work-related catastrophic injuries and fatalities. The aggregate
undiscounted pay-out amount of the catastrophic injuries and fatalities is
$1,585,000. The actuarially determined pay-out periods to the beneficiaries
range from 7 to 42 years. As a result, the five-year cash requirements
related to these claims are immaterial.
The United States Department of Labor and the states of Oregon, Maryland,
Washington, and California require the Company to maintain specified
investment balances or other financial instruments, totaling $7,735,000 at
December 31, 1999 and $7,651,000 at December 31, 1998, to cover potential
claims losses. In partial satisfaction of these requirements, at December
31, 1999, the Company has provided letters of credit in the amount of
$1,553,000 and surety bonds totaling $457,000. The investments are included
in restricted marketable securities and workers' compensation deposits in
the accompanying balance sheets.
7. CREDIT FACILITY
Effective May 31, 1999, the Company renewed its loan agreement (the
"Agreement") with its principal bank, which provides for (a) an unsecured
revolving credit facility for working capital purposes and standby letters
of credit up to $12,000,000, (b) a term real estate loan (Note 8) and (c) a
three-year term loan (Note 8) in the amount of $8,000,000. The Agreement
expires on May 31, 2000. The interest rate options available on outstanding
balances under the revolving credit facility include (i) prime rate, (ii)
Federal Funds Rate plus 1.25% or (iii) LIBOR plus 1.25%. The interest rate
options available under the three-year term loan include (i) prime rate or
(ii) LIBOR plus 1.35%.
Terms and conditions of the Agreement include, among others, certain
restrictive quarterly financial covenants relating to the Company's current
ratio, earnings before interest, taxes, depreciation and amortization
("EBITDA"), and ratio of borrowed funds plus capitalized lease obligations
to EBITDA. The Company was in compliance with all such covenants at
December 31, 1999.
During the year ended December 31, 1999, the maximum balance outstanding
under the revolving credit facility was $8,284,000, the average balance
outstanding was $4,262,000, and the weighted average interest rate during
the period was 6.8%. The weighted average interest rate during 1999 was
calculated using daily weighted averages.
F-13
<PAGE>
BARRETT BUSINESS SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
7. CREDIT FACILITY (CONTINUED)
The Company had an additional revolving credit facility which was paid off
in 1998. Such prior credit facility was in connection with the WIMI merger.
8. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
<TABLE>
<S> <C> <C>
1999 1998
----------- ----------
Term loan payable in monthly installments of $222,222 plus interest
at LIBOR plus 1.35% through 2002 (Note 7) $ 6,444 $ -
Mortgage note payable in monthly installments of $6,408, including
interest at 7.40% per annum through 2003, with a principal payment
of $325,000 due in 2003, secured by land and building (Note 7) 491 530
Note payable, assumed in acquisition, payable in monthly installments of
$5,116, including interest at 8.25% per annum through 2001 64 -
Capitalized equipment leases, assumed in acquisition, with variable monthly
installments, including interest at 11.5% per annum through 2000,
secured by equipment 16 34
----------- ----------
7,015 564
Less portion due within one year 2,783 61
----------- ----------
$ 4,232 $ 503
=========== ==========
Maturities on long-term debt are summarized as follows at December 31, 1999
(in thousands):
YEAR ENDING
DECEMBER 31,
-----------
2000 $ $2,783
2001 2,717
2002 1,160
2003 355
2004 -
-----------
$ 7,015
===========
</TABLE>
F-14
<PAGE>
BARRETT BUSINESS SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
9. SAVINGS PLAN
The Company has a Section 401(k) employee savings plan for the benefit of
its eligible employees. All employees 21 years of age or older become
eligible to participate in the savings plan upon completion of 1,000 hours
of service in any consecutive 12-month period following the initial date of
employment. Employees covered under a co-employer ("PEO") contract receive
credit for prior employment with the PEO client for purposes of meeting
savings plan service eligibility. The determination of Company
contributions to the plan, if any, is subject to the sole discretion of the
Company.
Participants' interests in Company contributions to the plan vest over a
seven-year period. Company contributions to the plan were $125,000,
$104,000 and $111,000 for the years ended December 31, 1999, 1998 and 1997,
respectively.
Recent attention has been placed by the Internal Revenue Service (the
"IRS") and the staff leasing industry on Internal Revenue Code Section
401(k) plans sponsored by staff leasing companies. As such, the tax-exempt
status of the Company's plan is subject to continuing scrutiny and approval
by the IRS and to the Company's ability to support to the IRS the Company's
employer-employee relationship with leased employees. In the event the
tax-exempt status were to be discontinued and the plan were to be
disqualified, the operations of the Company could be adversely affected.
The Company has not recorded any provision for this potential contingency,
as the Company and its legal counsel cannot presently estimate either the
likelihood of disqualification or the resulting range of loss, if any.
10. COMMITMENTS
LEASE COMMITMENTS
The Company leases its offices under operating lease agreements that
require minimum annual payments as follows (in thousands):
YEAR ENDING
DECEMBER 31,
------------
2000 $ 1,656
2001 958
2002 501
2003 158
2004 15
---------
$ 3,288
=========
Rent expense for the years ended December 31, 1999, 1998 and 1997 was
approximately $1,780,000, $1,369,000 and $1,188,000, respectively.
F-15
<PAGE>
BARRETT BUSINESS SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
11. RELATED PARTY TRANSACTIONS
During 1997, the Company recorded revenues of $4,047,000 and cost of
revenues of $3,719,000 for providing services to a company of which a
former director of the Company is president and majority stockholder. At
December 31, 1997, Barrett had trade receivables from this company of
$188,000.
On December 31, 1997, the Company borrowed $122,100 from a shareholder. The
note bore interest at 10% per annum and was repaid in full on June 29,
1998. This was a transaction between WIMI and its former majority
shareholder.
12. INCOME TAXES
The provisions for income taxes are as follows (in thousands):
<TABLE>
<S> <C> <C> <C>
YEAR ENDED DECEMBER 31,
1999 1998 1997
------------- -------------- --------------
Current:
Federal $ 2,796 $ 2,571 $ 2,566
State 732 675 503
------------- -------------- --------------
3,528 3,246 3,069
------------- -------------- --------------
Deferred:
Federal 135 (255) (600)
State 21 (68) (127)
------------- -------------- --------------
156 (323) (727)
------------- -------------- --------------
Total provision $ 3,684 $ 2,923 $ 2,342
============= ============== ==============
Deferred tax assets (liabilities) are comprised of the following components (in thousands):
1999 1998
-------------- --------------
Current:
Workers' compensation claim and safety incentive liabilities $ 1,368 $ 1,542
Allowance for doubtful accounts 130 102
Other accruals 160 213
-------------- --------------
$ 1,658 $ 1,857
============== ==============
Noncurrent:
Tax depreciation in excess of book depreciation $ (94) $ (101)
Workers' compensation claim liabilities 272 278
Amortization of intangibles 380 289
Deferred compensation 44 62
Other 110 24
-------------- --------------
$ 712 $ 552
============== ==============
F-16
</TABLE>
<PAGE>
BARRETT BUSINESS SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
12. INCOME TAXES (CONTINUED)
<TABLE>
The effective tax rate differed from the U.S. statutory federal tax rate due to the following:
<S> <C> <C> <C>
Year ended December 31,
1999 1998 1997
------------- -------------- --------------
Statutory federal tax rate 34.0 % 34.0 % 34.0 %
State taxes, net of federal benefit 5.6 6.1 3.5
Nondeductible expenses 0.8 3.4 -
Nondeductible amortization of intangibles 1.9 2.5 1.3
Federal tax-exempt interest income (0.9) (1.0) (1.0)
Other, net 0.3 (1.7) 0.1
------------- -------------- --------------
41.7 % 43.3 % 37.9 %
============= ============== ==============
</TABLE>
During 1997, the Company recognized a State of Oregon tax credit of
approximately $121,000 related to the 1996 tax year.
13. STOCK INCENTIVE PLAN
The Company has a Stock Incentive Plan (the "Plan") which provides for
stock-based awards to Company employees, non-employee directors and outside
consultants or advisors. Effective May 14, 1997, the Company's stockholders
approved an increase in the number of shares of common stock reserved for
issuance under the Plan from 800,000 to 1,300,000.
The options generally become exercisable in four equal annual installments
beginning one year after the date of grant, and expire ten years after the
date of grant. Under the terms of the Plan, the exercise price of incentive
stock options must not be less than the fair market value of the Company's
stock on the date of grant.
In addition, certain of the Company's zone and branch management employees
have elected to receive a portion of their quarterly cash bonus in the form
of nonqualified deferred compensation stock options. Such options are
awarded at a sixty percent discount from the then-fair market value of the
Company's stock and are fully vested and immediately exercisable upon
grant. During 1999, the Company awarded deferred compensation stock options
for 38,613 shares at an average exercise price of $3.11 per share. During
1998, the Company awarded deferred compensation stock options for 51,417
shares at an average exercise price of $4.26 per share. No such stock
options were awarded in 1997. Total fair value of options granted at 60%
below market price was computed to be $231,941 and $422,743 for the years
ended December 31, 1999 and 1998, respectively. In accordance with APB No.
25, the Company recognized compensation expense of $180,238 and $212,941
for the years ended December 31, 1999 and 1998, respectively, in connection
with the issuance of these discounted options.
F-17
<PAGE>
BARRETT BUSINESS SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
13. STOCK INCENTIVE PLAN (CONTINUED)
A summary of the status of the Company's stock options at December 31,
1999, 1998 and 1997, together with changes during the periods then ended,
are presented below.
WEIGHTED
NUMBER AVERAGE
OF EXERCISE
OPTIONS PRICE
------------ -------------
Outstanding at December 31, 1996 491,998 $ 12.27
Options granted at market price 219,871 14.54
Options exercised (77,375) 9.46
Options canceled or expired (39,375) 13.87
------------
Outstanding at December 31, 1997 595,119 13.50
Options granted at market price 217,601 10.91
Options granted below market price 51,417 4.26
Options exercised (7,250) 5.91
Options canceled or expired (71,592) 14.50
------------
Outstanding at December 31, 1998 785,295 12.15
Options granted at market price 152,971 8.79
Options granted below market price 38,613 3.11
Options exercised (9,059) 3.74
Options canceled or expired (74,102) 13.60
------------
Outstanding at December 31, 1999 893,718 11.16
============
Available for grant at December 31, 1999 188,848
============
F-18
<PAGE>
BARRETT BUSINESS SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
13. STOCK INCENTIVE PLAN (CONTINUED)
The Company applies APB Opinion No. 25 and related interpretations in
accounting for the Plan. Accordingly, no compensation expense has been
recognized for its stock option grants issued at market price. If
compensation expense for the Company's stock-based compensation plan had
been determined based on the fair market value at the grant date for awards
under the Plan, consistent with the method of Statement of Financial
Accounting Standards ("SFAS") No. 123, the Company's net income and
earnings per share would have been reduced to the pro forma amounts
indicated below:
<TABLE>
<S> <C> <C> <C>
1999 1998 1997
--------- ---------- ---------
(in thousands, except per share amounts)
Net income, as reported $ 5,149 $ 3,821 $ 3,845
Net income, pro forma 4,265 3,117 3,364
Basic earnings per share, as reported .68 .50 .50
Basic earnings per share, pro forma .56 .41 .43
Diluted earnings per share, as reported .68 .50 .49
Diluted earnings per share, pro forma .56 .41 .42
The effects of applying SFAS No. 123 for providing pro forma disclosures
for 1999, 1998 and 1997 are not likely to be representative of the effects
on reported net income for future years, because options vest over several
years and additional awards generally are made each year.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model, with the following weighted-average
assumptions used for grants in 1999, 1998 and 1997:
1999 1998 1997
--------- ---------- ---------
Expected volatility 46% 43% 42%
Risk free rate of return 5.75% 5.50% 6.25%
Expected dividend yield 0% 0% 0%
Expected life (years) 7.0 8.0 7.5
</TABLE>
Total fair value of options granted at market price was computed to be
$768,863, $1,364,155 and $1,809,662 for the years ended December 31, 1999,
1998 and 1997, respectively. The weighted average value of all options
granted in 1999, 1998 and 1997 was $5.22, $6.64 and $8.23, respectively.
F-19
<PAGE>
BARRETT BUSINESS SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
13. STOCK INCENTIVE PLAN (CONTINUED)
The following table summarizes information about stock options outstanding
at December 31, 1999:
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------------------------------------- -----------------------------
Weighted-
Weighted- average Exercisable Weighted-
average remaining at average
Number exercise contractual December 31, exercise
Exercise price range of shares price life (years) 1999 price
-------------------------- -------------- -------------- --------------- -------------- -------------
$ 2.80 - 5.23 101,345 $ 3.64 7.7 92,414 $ 3.57
7.06 - 9.50 208,695 8.97 7.7 61,250 9.41
10.13 - 12.50 277,419 11.09 7.9 111,999 11.27
13.38 - 14.88 161,500 14.40 6.6 116,250 14.41
15.00 - 17.94 144,759 16.11 5.9 127,921 16.02
-------------- --------------
893,718 509,834
============== ==============
</TABLE>
At December 31, 1999, 1998 and 1997, 509,834, 363,295 and 211,958 options
were exercisable at weighted average exercise prices of $11.56, $11.97 and
$12.02, respectively.
14. STOCK REPURCHASE PROGRAM
Effective February 26, 1999, the Company's Board of Directors authorized a
stock repurchase program to purchase up to 250,000 common shares from time
to time in open market purchases. On November 10, 1999, the Company's Board
of Directors authorized the repurchase of an additional 200,000 shares,
thereby increasing the total number of common shares authorized for
repurchase to 450,000. During 1999, the Company repurchased 219,000 shares
at an aggregate price of $1,498,000.
15. LITIGATION
The Company is subject to legal proceedings and claims, which arise in the
ordinary course of its business. In the opinion of management, the amount
of ultimate liability with respect to currently pending or threatened
actions is not expected to materially affect the financial position or
results of operations of the Company.
F-20
<PAGE>
BARRETT BUSINESS SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
16. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
(in thousands, except per share amounts and market price per share)
<TABLE>
<S> <C> <C> <C> <C>
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------------- ------------- -------------- -------------
Year ended December 31, 1997
Revenues $ 67,011 $ 75,660 $ 85,995 $ 76,865
Cost of revenues 60,296 67,686 77,258 68,877
Net income 823 1,254 976 792
Basic earnings per share .11 .16 .13 .10
Diluted earnings per share .10 .16 .13 .10
Common stock market prices:
High $ 19.00 $ 15.00 $ 17.50 $ 17.25
Low 12.75 11.50 13.63 11.00
Year ended December 31, 1998
Revenues $ 69,241 $ 76,651 $ 81,969 $ 75,168
Cost of revenues 62,467 68,524 73,002 67,012
Net income 387 600 1,599 1,235
Basic earnings per share .05 .08 .21 .16
Diluted earnings per share .05 .08 .21 .16
Common stock market prices:
High $ 12.00 $ 13.38 $ 10.88 $ 9.38
Low 10.25 9.13 7.88 6.00
Year ended December 31, 1999
Revenues $ 71,015 $ 84,707 $ 95,875 $ 96,253
Cost of revenues 63,700 75,565 84,927 86,159
Net income 740 1,216 1,835 1,359
Basic earnings per share .10 .16 .24 .18
Diluted earnings per share .10 .16 .24 .18
Common stock market prices:
High $ 9.06 $ 9.25 $ 10.25 $ 8.38
Low 5.25 5.88 7.75 5.50
</TABLE>
17. SUBSEQUENT EVENT
Pursuant to the Stock Purchase Agreement (the "Agreement") between the
Company and TSS (see Note 2), the Company has provided notice to the former
shareholder of TSS of the Company's intent to reduce the amount payable on
the $950,000 note due on January 31, 2000, as a consequence of certain
shortfalls from TSS's minimum equity requirement for 1998 and financial
performance criteria for 1999 EBITDA. As a consequence of the Company's
notice to TSS's former shareholder, the parties have agreed to extend the
due date of the note until TSS's former shareholder has completed a review
of the Company's reductions against the note, as provided for in the
Agreement.
F-21
<PAGE>
EXHIBIT INDEX
2 Acquisition and Merger Agreement dated June 29, 1998, among the
registrant, Western Industrial Management, Inc., Catch 55, Inc., and
the other parties listed therein. Incorporated by reference to Exhibit
2 to the registrant's Current Report on Form 8-K filed July 13, 1998.
3.1 Charter of the registrant, as amended. Incorporated by reference to 1
Exhibit 3 to the registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1994.
3.2 Bylaws of the registrant, as amended.Incorporated by reference to
Exhibit 3.2 to the registrant's Annual Report on Form 10-K for the year
ended December 31, 1996.
4.1 Loan Agreement between the registrant and Wells Fargo Bank, N.A., dated
May 31, 1998. Incorporated by reference to Exhibit 4.1 to the
registrant's Quarterly Report on Form 10-Q for the quarter ended June
30, 1998.
4.2 Amendment, dated February 8, 1999, to Loan Agreement between the
registrant and Wells Fargo Bank, N.A., dated May 31, 1998. Incorporated
by reference to Exhibit 4.2 to the registrant's Annual Report on Form
10-K for the year ended December 31, 1998.
4.3 Amendment, dated December 31, 1999, to Loan Agreement between the
registrant and Wells Fargo Bank, N.A., dated May 31, 1998.
The registrant has incurred other long-term indebtedness as to which
the amount involved is less than 10 percent of the registrant's total
assets. The registrant agrees to furnish copies of the instruments
relating to such indebtedness to the Commission upon request.
10 Executive Compensation Plans and Arrangements and Other Management
Contracts.
10.1 1993 Stock Incentive Plan of the registrant, as amended.
10.2 Form of Indemnification Agreement with each director of the registrant.
Incorporated by reference to Exhibit 10.8 to the registrant's
Registration Statement on Form S-1 (No. 33-61804).
10.3 Deferred Compensation Plan for Management Employees of the registrant.
Incorporated by reference to Exhibit 10.3 to the registrant's Annual
Report on Form 10-K for the year ended December 31, 1997.
10.4 Employment Agreement between the registrant and Michael D. Mulholland,
dated January 26, 1999. Incorporated by reference to Exhibit 10.4 to
the registrant's Annual Report on Form 10-K for the year ended December
31, 1998.
11 Statement of calculation of Basic and Diluted shares outstanding.
23 Consent of PricewaterhouseCoopers LLP, independent accountants.
24 Power of attorney of certain officers and directors.
27 Financial Data Schedule, fiscal year end 1999.
December 31, 1999
William W. Sherertz, President
BARRETT BUSINESS SERVICES, INC.
4724 SW Macadam Avenue
Portland, OR 97201
Dear Mr. Sherertz:
This letter amendment (this "Amendment") is to confirm the changes
agreed upon between Wells Fargo Bank, National Association ("Bank") and BARRETT
BUSINESS SERVICES, INC. ("Borrower") to the terms and conditions of that certain
letter agreement between Bank and Borrower dated as of May 31, 1998, as amended
from time to time (the "Agreement"). For valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, Bank and Borrower hereby agree
that the Agreement shall be amended as follows to reflect said changes.
1. Paragraph V.8. is hereby deleted in its entirety, and the
following substituted therefor:
"8. Financial Condition. Maintain Borrower's financial
condition as follows using generally accepted accounting
principles consistently applied and used consistently with prior
practices (except to the extent modified by the definitions
herein):
(a) Current Ratio as of the end of each fiscal quarter not at
any time less than 1.15 to 1.0, with "Current Ratio" defined as
total current assets divided by total current liabilities.
(b) EBITDA not less than $10,000,000.00 as of each fiscal
quarter end, on a trailing four-quarters basis including the
current quarter then ended, with "EBITDA" defined as net profit
before tax plus interest expense (net of capitalized interest
expense), depreciation expense and amortization expense.
(c) Funded Debt to EBITDA Ratio as of the end of each fiscal
quarter not more than 2.25 to 1.0, with "Funded Debt" defined as
all borrowed funds plus the amount of all capitalized lease
obligations of Borrower."
2. Except as specifically provided herein, all terms and conditions
of the Agreement remain in full force and effect, without waiver or
modification. All terms defined in the Agreement shall have the same meaning
when used herein. This Amendment and the Agreement shall be read together, as
one document.
3. Borrower hereby remakes all representations and warranties
contained in the Agreement and reaffirms all covenants set forth therein.
Borrower further certifies that as of the date of Borrower's acknowledgment set
forth below there exists no default or defined event of default under the
Agreement or any promissory note or other contract, instrument or document
executed in connection therewith, nor any condition, act or event which with the
giving of notice or the passage of time or both would constitute such a default
or defined event of default.
<PAGE>
BARRETT BUSINESS SERVICES, INC.
December 31, 1999
Page 2
UNDER OREGON LAW, MOST AGREEMENTS, PROMISES AND COMMITMENTS MADE BY BANK AFTER
OCTOBER 3, 1989 CONCERNING LOANS AND OTHER CREDIT EXTENSIONS WHICH ARE NOT FOR
PERSONAL, FAMILY OR HOUSEHOLD PURPOSES OR SECURED SOLELY BY THE BORROWER'S
RESIDENCE MUST BE IN WRITING, EXPRESS CONSIDERATION AND BE SIGNED BY BANK TO BE
ENFORCEABLE.
Your acknowledgment of this Amendment shall constitute acceptance of
the foregoing terms and conditions.
Sincerely,
WELLS FARGO BANK,
NATIONAL ASSOCIATION
By: /s/ Julie Wilson
----------------------
Julie Wilson
Vice President
Acknowledged and accepted as of 1/26/00:
--------
BARRETT BUSINESS SERVICES, INC.
By: /s/ William W. Sherertz
--------------------------
William W. Sherertz
President
BARRETT BUSINESS SERVICES, INC.
AMENDED AND RESTATED
1993 STOCK INCENTIVE PLAN
Effective March 1, 1993
(as amended March 16, 2000)
<PAGE>
TABLE OF CONTENTS
PAGE
ARTICLE 1 ESTABLISHMENT AND PURPOSE................................1
1.1 Establishment................................................1
1.2 Purpose......................................................1
ARTICLE 2 DEFINITIONS..............................................1
2.1 Defined Terms................................................1
2.2 Gender and Number............................................5
ARTICLE 3 ADMINISTRATION...........................................5
3.1 General......................................................5
3.2 Composition of the Committee.................................5
3.3 Authority of the Committee...................................5
3.4 Action by the Committee......................................6
3.5 Delegation...................................................6
3.6 Liability of Committee Members...............................6
3.7 Costs of Plan................................................6
ARTICLE 4 DURATION OF THE PLAN AND SHARES SUBJECT TO THE PLAN......6
4.1 Duration of the Plan.........................................6
4.2 Shares Subject to the Plan...................................6
ARTICLE 5 ELIGIBILITY..............................................6
5.1 Employees and Non-Employee Subsidiary Directors..............6
5.2 Non-Employee Board Directors.................................7
ARTICLE 6 AWARDS...................................................7
6.1 Types of Awards..............................................7
6.2 General......................................................7
6.3 Nonuniform Determinations....................................7
6.4 Award Agreements.............................................7
6.5 Provisions Governing All Awards..............................7
ARTICLE 7 OPTIONS.................................................10
7.1 Types of Options............................................10
7.2 General.....................................................10
7.3 Option Price................................................10
7.4 Option Term.................................................11
7.5 Time of Exercise............................................11
7.6 Special Rules for Incentive Stock Options...................11
7.7 Restricted Shares...........................................11
7.8 Deferred Compensation Options...............................12
7.9 Reload Options..............................................12
7.10 Limitation on Number of Shares Subject to Options...........12
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TABLE OF CONTENTS
(continued) PAGE
ARTICLE 8 STOCK APPRECIATION RIGHTS...............................12
8.1 General.....................................................12
8.2 Nature of Stock Appreciation Right..........................12
8.3 Exercise....................................................12
8.4 Form of Payment.............................................13
8.5 Limitation on Number of Stock Appreciation Rights...........13
ARTICLE 9 RESTRICTED AWARDS.......................................13
9.1 Types of Restricted Awards..................................13
9.2 General.....................................................13
9.3 Restriction Period..........................................13
9.4 Forfeiture..................................................14
9.5 Settlement of Restricted Awards.............................14
9.6 Rights as a Shareholder.....................................14
ARTICLE 10 PERFORMANCE AWARDS......................................15
10.1 General.....................................................15
10.2 Nature of Performance Awards................................15
10.3 Performance Cycles..........................................15
10.4 Performance Goals...........................................15
10.5 Determination of Awards.....................................15
10.6 Timing and Form of Payment..................................15
ARTICLE 11 OTHER STOCK BASED AND COMBINATION AWARDS................16
11.1 Other Stock-Based Awards....................................16
11.2 Combination Awards..........................................16
ARTICLE 12 DEFERRAL ELECTIONS......................................16
ARTICLE 13 DIVIDEND EQUIVALENTS....................................16
ARTICLE 14 NON-EMPLOYEE BOARD DIRECTORS............................16
14.1 General.....................................................16
14.2 Eligibility.................................................17
14.3 Definitions.................................................17
14.4 Initial Director Options....................................17
14.5 Annual Director Options.....................................17
ARTICLE 15 ADJUSTMENTS UPON CHANGES IN CAPITALIZATION, ETC.........17
15.1 Plan Does Not Restrict Corporation..........................17
15.2 Adjustments by the Committee................................18
ARTICLE 16 AMENDMENT AND TERMINATION...............................18
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<PAGE>
TABLE OF CONTENTS
(continued) PAGE
ARTICLE 17 MISCELLANEOUS...........................................18
17.1 Tax Withholding.............................................18
17.2 Unfunded Plan...............................................19
17.3 Payments to Trust...........................................19
17.4 Annulment of Awards.........................................19
17.5 Engaging in Competition With the Corporation................19
17.6 Other Corporation Benefit and Compensation Programs.........19
17.7 Securities Law Restrictions.................................20
17.8 Governing Law...............................................20
ARTICLE 18 SHAREHOLDER APPROVAL....................................20
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<PAGE>
BARRETT BUSINESS SERVICES, INC.
AMENDED AND RESTATED 1993 STOCK INCENTIVE PLAN
ARTICLE 1
ESTABLISHMENT AND PURPOSE
1.1 Establishment. Barrett Business Services, Inc. ("Corporation"),
hereby establishes the Barrett Business Services, Inc., 1993 Stock Incentive
Plan (the "Plan"), effective as of March 1, 1993, subject to shareholder
approval as provided in Article 18. The Plan was previously amended effective
March 8, 1994, and March 12, 1997, and is further amended and restated as set
forth herein effective March 16, 2000, subject to shareholder approval as
provided in Article 16.
1.2 Purpose. The purpose of the Plan is to promote and advance the
interests of Corporation and its shareholders by enabling Corporation to
attract, retain, and reward key employees, directors, and outside consultants of
Corporation and its subsidiaries. It is also intended to strengthen the
mutuality of interests between such employees, directors, and consultants and
Corporation's shareholders. The Plan is designed to serve these purposes by
offering stock options and other equity-based incentive awards, thereby
providing a proprietary interest in pursuing the long-term growth,
profitability, and financial success of Corporation.
ARTICLE 2
DEFINITIONS
2.1 Defined Terms. For purposes of the Plan, the following terms shall
have the meanings set forth below:
"AWARD" means an award or grant made to a Participant of Options, Stock
Appreciation Rights, Restricted Awards, Performance Awards, or Other
Stock-Based Awards pursuant to the Plan.
"AWARD AGREEMENT" means an agreement as described in Section 6.4.
"BOARD" means the Board of Directors of Corporation.
"CODE" means the Internal Revenue Code of 1986, as amended and in
effect from time to time, or any successor thereto, together with rules,
regulations, and interpretations promulgated thereunder. Where the context
so requires, any reference to a particular Code section shall be construed
to refer to the successor provision to such Code section.
"COMMITTEE" means the committee appointed by the Board to administer
the Plan as provided in Article 3 of the Plan.
"COMMON STOCK" means the $.01 par value Common Stock of Corporation or
any security of Corporation issued in substitution, exchange, or lieu
thereof.
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<PAGE>
"CONSULTANT" means any consultant or adviser to Corporation or a
Subsidiary selected by the Committee, who is not an employee of Corporation
or a Subsidiary.
"CONTINUING RESTRICTION" means a Restriction contained in Sections
6.5(h), 17.5, 17.5, and 17.7 of the Plan and any other Restrictions
expressly designated by the Committee in an Award Agreement as a Continuing
Restriction.
"CORPORATION" means Barrett Business Services, Inc., a Maryland
corporation, or any successor corporation.
"DEFERRED COMPENSATION OPTION" means a Nonqualified Option granted in
lieu of a specified amount of other compensation pursuant to Section 7.8 of
the Plan.
"DIRECTOR OPTIONS" means options granted to Non-Employee Board
Directors pursuant to Article 14 of the Plan, including Initial Director
Options and Annual Director Options.
"DISABILITY" means the condition of being permanently "disabled" within
the meaning of Section 22(e)(3) of the Code, namely being unable to engage
in any substantial gainful activity by reason of any medically determinable
physical or mental impairment which can be expected to result in death or
which has lasted or can be expected to last for a continuous period of not
less than 12 months. However, the Committee may change the foregoing
definition of "Disability" or may adopt a different definition for purposes
of specific Awards.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended
and in effect from time to time, or any successor statute. Where the context
so requires, any reference to a particular section of the Exchange Act, or
to any rule promulgated under the Exchange Act, shall be construed to refer
to successor provisions to such section or rule.
"FAIR MARKET VALUE" means on any given date, the fair market value per
share of the Common Stock determined as follows:
(a) If the Common Stock is traded on an established securities
exchange, the mean between the reported high and low sale prices of Common
Stock as reported for such day by the principal exchange on which Common
Stock is traded (as determined by the Committee) or, if Common Stock was not
traded on such date, on the next preceding day on which Common Stock was
traded;
(b) If trading activity in Common Stock is reported in the NASDAQ
National Market System, the mean between the reported high and low sale
prices of Common Stock as reported for such day by the NASDAQ or, if Common
Stock trades were not reported on such date, on the next preceding day on
which Common Stock trades were reported by the NASDAQ;
(c) If trading activity in Common Stock is reported in the NASDAQ Bid
and Asked Quotations, the mean between the bid price and asked price quote
for such day as
- 2 -
<PAGE>
reported by the NASDAQ or, if there are no such quotes for Common Stock for
such date, on the next preceding day for which bid and asked price quotes
for Common Stock were reported by NASDAQ; or
(d) If there is no market for Common Stock or if trading activities
for Common Stock are not reported in one of the manners described above, the
fair market value shall be as determined by the Committee.
"INCENTIVE STOCK OPTION" or "ISO" means any Option granted pursuant to
the Plan that is intended to be and is specifically designated in its Award
Agreement as an "incentive stock option" within the meaning of Section 422
of the Code.
"NON-EMPLOYEE BOARD DIRECTOR" means a member of the Board who is not an
employee of Corporation or any Subsidiary.
"NON-EMPLOYEE SUBSIDIARY DIRECTOR" means a member of the board of
directors of a Subsidiary who is neither an employee of Corporation or a
Subsidiary nor a member of the Board.
"NONQUALIFIED OPTION" or "NQO" means any Option, including a Deferred
Compensation Option, granted pursuant to the Plan that is not an Incentive
Stock Option.
"OPTION" means an ISO, an NQO, a Deferred Compensation Option, or a
Director Option.
"OTHER STOCK-BASED AWARD" means an Award as defined in Section 11.1.
"PARTICIPANT" means an employee or a Consultant of Corporation or a
Subsidiary, a Non-Employee Board Director, or a Non-Employee Subsidiary
Director who is granted an Award under the Plan.
"PERFORMANCE AWARD" means an Award granted pursuant to the provisions
of Article 10 of the Plan, the Vesting of which is contingent on performance
attainment.
"PERFORMANCE CYCLE" means a designated performance period pursuant to
the provisions of Section 10.3 of the Plan.
"PERFORMANCE GOAL" means a designated performance objective pursuant to
the provisions of Section 10.4 of the Plan.
"PLAN" means this Barrett Business Services, Inc., 1993 Stock Incentive
Plan, as set forth herein and as it may be hereafter amended and from time
to time.
"REPORTING PERSON" means a Participant who is subject to the reporting
requirements of Section 16(a) of the Exchange Act.
"RESTRICTED AWARD" means a Restricted Share or a Restricted Unit
granted pursuant to Article 9 of the Plan.
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<PAGE>
"RESTRICTED SHARE" means an Award described in Section 9.1(a) of the
Plan.
"RESTRICTED UNIT" means an Award of units representing Shares described
in Section 9.1(b) of the Plan.
"RESTRICTION" means a provision in the Plan or in an Award Agreement
which limits the exercisability or transferability, or which governs the
forfeiture, of an Award or the Shares, cash, or other property payable
pursuant to an Award.
"RETIREMENT" means:
(a) For Participants who are employees, retirement from active
employment with Corporation and its Subsidiaries on or after age 65, or such
earlier retirement date as approved by the Committee for purposes of the
Plan;
(b) For Participants who are Non-Employee Board Directors or
Non-Employee Subsidiary Directors, retirement from the applicable board of
directors after attaining the maximum age (if any) specified in the articles
of incorporation or bylaws of the applicable corporation; or
(c) For Participants who are Consultants, termination of service as a
Consultant after attaining a retirement age specified by the Committee for
purposes of an Award to such Consultant.
However, the Committee may change the foregoing definition of
"Retirement" or may adopt a different definition for purposes of specific
Awards.
"SHARE" means a share of Common Stock.
"STOCK APPRECIATION RIGHT" or "SAR" means an Award to benefit from the
appreciation of Common Stock granted pursuant to the provisions of Article 8
of the Plan.
"SUBSIDIARY" means a "subsidiary corporation" of Corporation, within
the meaning of Section 425 of the Code, namely any corporation in which
Corporation directly or indirectly controls 50 percent or more of the total
combined voting power of all classes of stock having voting power.
"VEST" or "VESTED" means:
(a) In the case of an Award that requires exercise, to be or to become
immediately and fully exercisable and free of all Restrictions (other than
Continuing Restrictions);
(b) In the case of an Award that is subject to forfeiture, to be or to
become nonforfeitable, freely transferable, and free of all Restrictions
(other than Continuing Restrictions);
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<PAGE>
(c) In the case of an Award that is required to be earned by attaining
specified Performance Goals, to be or to become earned and nonforfeitable,
freely transferable, and free of all Restrictions (other than Continuing
Restrictions); or
(d) In the case of any other Award as to which payment is not
dependent solely upon the exercise of a right, election, exercise, or
option, to be or to become immediately payable and free of all Restrictions
(except Continuing Restrictions).
2.2 Gender and Number. Except where otherwise indicated by the
context, any masculine or feminine terminology used in the Plan shall also
include the opposite gender; and the definition of any term in Section 2.1 in
the singular shall also include the plural, and vice versa.
ARTICLE 3
ADMINISTRATION
3.1 General. The Plan shall be administered by a Committee composed as
described in Section 3.2.
3.2 Composition of the Committee. The Committee shall be appointed by
the Board and shall consist of not less than a sufficient number of Non-Employee
Board Directors so as to qualify the Committee to administer the Plan as
contemplated by Rule 16b-3 under the Exchange Act. The Board may from time to
time remove members from, or add members to, the Committee. Vacancies on the
Committee, however caused, shall be filled by the Board. In the event that the
Committee shall cease to satisfy the requirements of Rule 16b-3, the Board shall
appoint another Committee satisfying such requirements.
3.3 Authority of the Committee. The Committee shall have full power
and authority (subject to such orders or resolutions as may be issued or adopted
from time to time by the Board) to administer the Plan in its sole discretion,
including the authority to:
(a) Construe and interpret the Plan and any Award Agreement;
(b) Promulgate, amend, and rescind rules and procedures relating to
the implementation of the Plan;
(c) Select the employees, Non-Employee Subsidiary Directors, and
Consultants who shall be granted Awards;
(d) Determine the number and types of Awards to be granted to each
such Participant;
(e) Determine the number of Shares, or Share equivalents, to be
subject to each Award;
(f) Determine the option price, purchase price, base price, or similar
feature for any Award; and
- 5 -
<PAGE>
(g) Determine all the terms and conditions of all Award Agreements,
consistent with the requirements of the Plan.
Decisions of the Committee, or any delegate as permitted by the Plan,
shall be final, conclusive, and binding on all Participants.
3.4 Action by the Committee. A majority of the members of the
Committee shall constitute a quorum for the transaction of business. Action
approved by a majority of the members present at any meeting at which a quorum
is present, or action in writing by a majority of the members of the Committee,
shall be the valid acts of the Committee.
3.5 Delegation. Notwithstanding the foregoing, the Committee may
delegate to one or more officers of Corporation the authority to determine the
recipients, types, amounts, and terms of Awards granted to Participants who are
not Reporting Persons.
3.6 Liability of Committee Members. No member of the Committee shall
be liable for any action or determination made in good faith with respect to the
Plan, any Award, or any Participant.
3.7 Costs of Plan. The costs and expenses of administering the Plan
shall be borne by Corporation.
ARTICLE 4
DURATION OF THE PLAN AND SHARES SUBJECT TO THE PLAN
4.1 Duration of the Plan. The Plan is effective March 1, 1993, subject
to approval by Corporation's shareholders as provided in Article 18. The Plan
shall remain in effect until Awards have been granted covering all the available
Shares or the Plan is otherwise terminated by the Board. Termination of the Plan
shall not affect outstanding Awards.
4.2 Shares Subject to the Plan. The shares which may be made subject
to Awards under the Plan shall be Shares of Common Stock, which may be either
authorized and unissued Shares or reacquired Shares. No fractional Shares shall
be issued under the Plan. Subject to adjustment pursuant to Article 15, the
maximum number of Shares for which Awards may be granted under the Plan shall be
1,550,000. If an Award under the Plan is canceled or expires for any reason
prior to having been fully Vested or exercised by a Participant or is settled in
cash in lieu of Shares or is exchanged for other Awards, all Shares covered by
such Awards shall be made available for future Awards under the Plan.
ARTICLE 5
ELIGIBILITY
5.1 Employees and Non-Employee Subsidiary Directors. Officers and
other key employees of Corporation and its Subsidiaries (including employees who
may also be directors of Corporation or a Subsidiary), Consultants, and
Non-Employee Subsidiary Directors who, in the Committee's judgment, are or will
be contributors to the long-term success of Corporation shall be eligible to
receive Awards under the Plan.
- 6 -
<PAGE>
5.2 Non-Employee Board Directors. All Non-Employee Board Directors
shall be eligible to receive Director Options pursuant to Article 14 of the
Plan.
ARTICLE 6
AWARDS
6.1 Types of Awards. The types of Awards that may be granted under the
Plan are:
(a) Options governed by Article 7 of the Plan;
(b) Stock Appreciation Rights governed by Article 8 of the Plan;
(c) Restricted Awards governed by Article 9 of the Plan;
(d) Performance Awards governed by Article 10 of the Plan;
(e) Other Stock-Based Awards or combination awards governed by Article
11 of the Plan; and
(f) Director Options governed by Article 14 of the Plan.
In the discretion of the Committee, any Award (other than a Director
Option) may be granted alone, in addition to, or in tandem with other Awards
under the Plan.
6.2 General. Subject to the limitations of the Plan, the Committee may
cause Corporation to grant Awards to such Participants, at such times, of such
types, in such amounts, for such periods, with such option prices, purchase
prices, or base prices, and subject to such terms, conditions, limitations, and
restrictions as the Committee, in its discretion, shall deem appropriate. Awards
may be granted as additional compensation to a Participant or in lieu of other
compensation to such Participant. A Participant may receive more than one Award
and more than one type of Award under the Plan.
6.3 Nonuniform Determinations. The Committee's determinations under
the Plan or under one or more Award Agreements, including without limitation,
(a) the selection of Participants to receive Awards, (b) the type, form, amount,
and timing of Awards, (c) the terms of specific Award Agreements, and (d)
elections and determinations made by the Committee with respect to exercise or
payments of Awards, need not be uniform and may be made by the Committee
selectively among Participants and Awards, whether or not Participants are
similarly situated.
6.4 Award Agreements. Each Award shall be evidenced by a written Award
Agreement between Corporation and the Participant. Award Agreements may, subject
to the provisions of the Plan, contain any provision approved by the Committee.
6.5 Provisions Governing All Awards. All Awards shall be subject to
the following provisions:
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<PAGE>
(a) Alternative Awards. If any Awards are designated in their Award
Agreements as alternative to each other, the exercise of all or part of one
Award automatically shall cause an immediate equal (or pro rata)
corresponding termination of the other alternative Award or Awards.
(b) Rights as Shareholders. No Participant shall have any rights of a
shareholder with respect to Shares subject to an Award until such Shares are
issued in the name of the Participant.
(c) Employment Rights. Neither the adoption of the Plan nor the
granting of any Award shall confer on any person the right to continued
employment with Corporation or any Subsidiary or the right to remain as a
director of or a Consultant to Corporation or any Subsidiary, as the case
may be, nor shall it interfere in any way with the right of Corporation or a
Subsidiary to terminate such person's employment or to remove such person as
a Consultant or as a director at any time for any reason, with or without
cause.
(d) Nontransferable. Each Award (other than Restricted Shares after
they Vest) shall not be transferable otherwise than by will or the laws of
descent and distribution and shall be exercisable (if exercise is required)
during the lifetime of the Participant, only by the Participant or, in the
event the Participant becomes legally incompetent, by the Participant's
guardian or legal representative.
(e) Termination Of Employment. The terms and conditions under which an
Award may be exercised, if at all, after a Participant's termination of
employment or service as a Non-Employee Subsidiary Director or a Consultant
shall be determined by the Committee and specified in the applicable Award
Agreement.
(f) Change in Control. The Committee, in its discretion, may provide
in any Award Agreement that in the event of a change in control of
Corporation (as the Committee may define such term in the Award Agreement),
as of the date of such change in control:
(i) All, or a specified portion of, Awards requiring exercise
shall become fully and immediately exercisable, notwithstanding any
other limitations on exercise;
(ii) All, or a specified portion of, Awards subject to
Restrictions shall become fully Vested; and
(iii) All, or a specified portion of, Awards subject to
Performance Goals shall be deemed to have been fully earned.
Unless the Committee specifically provides otherwise in the change in
control provision for a specific Award Agreement, Awards shall become
exercisable, become Vested, or become earned as of a change in control date
only if, or to the extent, such acceleration in the exercisability, Vesting,
or becoming earned of the Awards does not result in an "excess parachute
payment" within the meaning of Section 280G(b) of the
- 8 -
<PAGE>
Code. The Committee, in its discretion, may include change in control
provisions in some Award Agreements and not in others, may include different
change in control provisions in different Award Agreements, and may include
change in control provisions for some Awards or some Participants and not
for others.
(g) Conditioning or Accelerating Benefits. The Committee, in its
discretion, may include in any Award Agreement a provision conditioning or
accelerating the Vesting of an Award or the receipt of benefits pursuant to
an Award, either automatically or in the discretion of the Committee, upon
the occurrence of specified events including, without limitation, a change
in control of Corporation (subject to the foregoing paragraph (f)), a sale
of all or substantially all the property and assets of Corporation, or an
event of the type described in Section Article 15 of this Plan.
(h) Payment of Purchase Price and Withholding. The Committee, in its
discretion, may include in any Award Agreement a provision permitting the
Participant to pay the purchase or option price, if any, for the Shares or
other property issuable pursuant to the Award, or the Participant's federal,
state, or local tax, or tax withholding, obligation with respect to such
issuance in whole or in part by any one or more of the following:
(i) By delivering previously owned Shares (including Restricted
Shares, whether or not vested);
(ii) By surrendering outstanding other Vested Awards under the
Plan denominated in Shares or in Share equivalent units;
(iii) By reducing the number of Shares or other property otherwise
Vested and issuable pursuant to the Award;
(iv) By delivering to Corporation a promissory note payable on
such terms and over such period as the Committee shall determine;
(v) By delivery (in a form approved by the Committee) of an
irrevocable direction to a securities broker acceptable to the
Committee:
(A) To sell Shares subject to the Option and to deliver all
or a part of the sales proceeds to Corporation in payment of all
or a part of the option price and taxes or withholding taxes
attributable to the issuance; or
(B) To pledge Shares subject to the Option to the broker as
security for a loan and to deliver all or a part of the loan
proceeds to Corporation in payment of all or a part of the option
price and taxes or withholding taxes attributable to the issuance;
or
(vi) In any combination of the foregoing or in any other form
approved by the Committee.
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<PAGE>
If Restricted Shares are surrendered in full or partial payment of
the purchase or option price of Shares issuable under an Award, a
corresponding number of the Shares issued upon exercise of the Award
shall be Restricted Shares subject to the same Restrictions as the
surrendered Restricted Shares. Shares withheld or surrendered as
described above shall be valued based on their Fair Market Value on the
date of the transaction. Any Shares withheld or surrendered with
respect to a Reporting Person shall be subject to such additional
conditions and limitations as the Committee may impose to comply with
the requirements of the Exchange Act.
(i) Reporting Persons. With respect to all Awards granted to
Reporting Persons:
(i) Awards requiring exercise shall not be exercisable
until at least six months after the date the Award was granted,
except in the case of the death or Disability of the Participant;
and
(ii) Shares issued pursuant to any other Award may not be
sold by the Participant for at least six months after acquisition,
except in the case of the death or Disability of the Participant;
provided, however, that (unless an Award Agreement provides otherwise)
the limitation of this Section 6.5(i) shall apply only if or to the
extent required by Rule 16b-3 under the Exchange Act. Award Agreements
for Awards to Reporting Persons shall also comply with any future
restrictions imposed by such Rule 16b-3.
(j) Service Periods. At the time of granting Awards, the
Committee may specify, by resolution or in the Award Agreement, the
period or periods of service performed or to be performed by the
Participant in connection with the grant of the Award.
ARTICLE 7
OPTIONS
7.1 Types of Options. Options granted under the Plan may be in the
form of Incentive Stock Options or Nonqualified Options (including Deferred
Compensation Options and Director Options). The grant of each Option and the
Award Agreement governing each Option shall identify the Option as an ISO or an
NQO. In the event the Code is amended to provide for tax-favored forms of stock
options other than or in addition to Incentive Stock Options, the Committee may
grant Options under the Plan meeting the requirements of such forms of options.
7.2 General. Options shall be subject to the terms and conditions set
forth in Article 6 and this Article 7 and Award Agreements governing Options
shall contain such additional terms and conditions, not inconsistent with the
express provisions of the Plan, as the Committee shall deem desirable.
7.3 Option Price. Each Award Agreement for Options shall state the
option exercise price per Share of Common Stock purchasable under the Option,
which shall not be less than:
- 10 -
<PAGE>
(a) $.01 per share in the case of a Deferred Compensation
Option;
(b) 75 percent of the Fair Market Value of a Share on the date
of grant for all other Nonqualified Options (except Director Options);
or
(c) 100 percent of the Fair Market Value of a Share on the date
of grant for all Incentive Stock Options.
7.4 Option Term. The Award Agreement for each Option shall specify the
term of each Option, which may be unlimited or may have a specified period
during which the Option may be exercised, as determined by the Committee.
7.5 Time of Exercise. The Award Agreement for each Option shall
specify, as determined by the Committee:
(a) The time or times when the Option shall become exercisable
and whether the Option shall become exercisable in full or in graduated
amounts based on: (i) continuation of employment over a period
specified in the Award Agreement, (ii) satisfaction of performance
goals or criteria specified in the Award Agreement, or (iii) a
combination of continuation of employment and satisfaction of
performance goals or criteria;
(b) Such other terms, conditions, and restrictions as to when
the Option may be exercised as shall be determined by the Committee;
and
(c) The extent, if any, that the Option shall remain exercisable
after the Participant ceases to be an employee, Consultant, or director
of Corporation or a Subsidiary.
An Award Agreement for an Option may, in the discretion of the
Committee, provide whether, and to what extent, the time when an Option becomes
exercisable shall be accelerated or otherwise modified (i) in the event of the
death, Disability, or Retirement of the Participant, or (ii) upon the occurrence
of a change in control of Corporation. The Committee may, at any time in its
discretion, accelerate the time when all or any portion of an outstanding Option
becomes exercisable.
7.6 Special Rules for Incentive Stock Options. In the case of an
Option designated as an Incentive Stock Option, the terms of the Option and the
Award Agreement shall conform with the statutory and regulatory requirements
specified pursuant to Section 422 of the Code, as in effect on the date such ISO
is granted. ISOs may be granted only to employees of Corporation or a
Subsidiary. ISOs may not be granted under the Plan after ten years following the
date specified in Section 4.1, unless the ten-year limitation of Section
422(b)(2) of the Code is removed or extended.
7.7 Restricted Shares. In the discretion of the Committee, the Shares
issuable upon exercise of an Option may be Restricted Shares if so provided in
the Award Agreement for the Option.
- 11 -
<PAGE>
7.8 Deferred Compensation Options. The Committee may, in its
discretion, grant Deferred Compensation Options with an option price less than
Fair Market Value to provide a means for deferral to future dates of
compensation otherwise payable to a Participant. The option price shall be
determined by the Committee subject to Section 7.3(a)) of the Plan. The number
of Shares subject to a Deferred Compensation Option shall be determined by the
Committee, in its discretion, by dividing the amount of compensation to be
deferred by the difference between the Fair Market Value of a Share on the date
of grant and the option price of the Deferred Compensation Option. Amounts of
compensation deferred with Deferred Compensation Options may include amounts
payable under Awards granted under the Plan or under any other compensation
program or arrangement of Corporation as permitted by the Committee. The
Committee shall grant Deferred Compensation Options only if it reasonably
determines that the recipient of such an Option is not likely to be deemed to be
in constructive receipt for income tax purposes of the income being deferred.
7.9 Reload Options. The Committee, in its discretion, may provide in
an Award Agreement for an Option that in the event all or a portion of the
Option is exercised by the Participant using previously acquired Shares, the
Participant shall automatically be granted (subject to the available pool of
Shares subject to grants of Awards as specified in Section 4.2 of the Plan) a
replacement Option (with an option price equal to the Fair Market Value of a
Share on the date of such exercise) for a number of Shares equal to (or equal to
a portion of) the number of shares surrendered upon exercise of the Option. Such
reload Option features may be subject to such terms and conditions as the
Committee shall determine, including without limitation, a condition that the
Participant retain the Shares issued upon exercise of the Option for a specified
period of time.
7.10 Limitation on Number of Shares Subject to Options. In no event may
Options for more than 200,000 Shares be granted to any individual under the Plan
during any calendar year.
ARTICLE 8
STOCK APPRECIATION RIGHTS
8.1 General. Stock Appreciation Rights shall be subject to the terms
and conditions set forth in Article 6 and this Article 8 and Award Agreements
governing Stock Appreciation Rights shall contain such additional terms and
conditions, not inconsistent with the express terms of the Plan, as the
Committee shall deem desirable.
8.2 Nature of Stock Appreciation Right. A Stock Appreciation Right is
an Award entitling a Participant to receive an amount equal to the excess (or,
if the Committee shall determine at the time of grant, a portion of the excess)
of the Fair Market Value of a Share of Common Stock on the date of exercise of
the SAR over the base price, as described below, on the date of grant of the
SAR, multiplied by the number of Shares with respect to which the SAR shall have
been exercised. The base price shall be designated by the Committee in the Award
Agreement for the SAR and may be the Fair Market Value of a Share on the grant
date of the SAR or such other higher or lower price as the Committee shall
determine.
8.3 Exercise. A Stock Appreciation Right may be exercised by a
Participant in accordance with procedures established by the Committee. The
Committee may also provide
- 12 -
<PAGE>
that a SAR shall be automatically exercised on one or more specified dates or
upon the satisfaction of one or more specified conditions. In the case of SARs
granted to Reporting Persons, exercise of the SAR shall be limited by the
Committee to the extent required to comply with the applicable requirements of
Rule 16b-3 under the Exchange Act.
8.4 Form of Payment. Payment upon exercise of a Stock Appreciation
Right may be made in cash, in installments, in Shares, by issuance of a Deferred
Compensation Option, or in any combination of the foregoing, or in any other
form as the Committee shall determine.
8.5 Limitation on Number of Stock Appreciation Rights. In no event may
more than 200,000 Stock Appreciation Rights be granted to any individual under
the Plan during any calendar year.
ARTICLE 9
RESTRICTED AWARDS
9.1 Types of Restricted Awards. Restricted Awards granted under the
Plan may be in the form of either Restricted Shares or Restricted Units.
(a) Restricted Shares. A Restricted Share is an Award of Shares
transferred to a Participant subject to such terms and conditions as
the Committee deems appropriate, including, without limitation,
restrictions on the sale, assignment, transfer, or other disposition of
such Restricted Shares and may include a requirement that the
Participant forfeit such Restricted Shares back to Corporation upon
termination of Participant's employment (or service as a Non-Employee
Subsidiary Director or a Consultant) for specified reasons within a
specified period of time or upon other conditions, as set forth in the
Award Agreement for such Restricted Shares. Each Participant receiving
a Restricted Share shall be issued a stock certificate in respect of
such Shares, registered in the name of such Participant, and shall
execute a stock power in blank with respect to the Shares evidenced by
such certificate. The certificate evidencing such Restricted Shares and
the stock power shall be held in custody by Corporation until the
Restrictions thereon shall have lapsed.
(b) Restricted Units. A Restricted Unit is an Award of units
(with each unit having a value equivalent to one Share) granted to a
Participant subject to such terms and conditions as the Committee deems
appropriate, and may include a requirement that the Participant forfeit
such Restricted Units upon termination of Participant's employment (or
service as a Non-Employee Subsidiary Director or a Consultant) for
specified reasons within a specified period of time or upon other
conditions, as set forth in the Award Agreement for such Restricted
Units.
9.2 General. Restricted Awards shall be subject to the terms and
conditions of Article 6 and this Article 9 and Award Agreements governing
Restricted Awards shall contain such additional terms and conditions, not
inconsistent with the express provisions of the Plan, as the Committee shall
deem desirable.
9.3 Restriction Period. Award Agreements for Restricted Awards shall
provide that Restricted Awards, and the Shares subject to Restricted Awards, may
not be transferred, and may
- 13 -
<PAGE>
provide that, in order for a Participant to Vest in such Restricted Awards, the
Participant must remain in the employment (or remain as a Non-Employee
Subsidiary Director or a Consultant) of Corporation or its Subsidiaries, subject
to relief for reasons specified in the Award Agreement, for a period commencing
on the grant date of the Award and ending on such later date or dates as the
Committee may designate at the time of the Award (the "Restriction Period").
During the Restriction Period, a Participant may not sell, assign, transfer,
pledge, encumber, or otherwise dispose of Shares received under or governed by a
Restricted Award grant. The Committee, in its sole discretion, may provide for
the lapse of restrictions in installments during the Restriction Period. Upon
expiration of the applicable Restriction Period (or lapse of Restrictions during
the Restriction Period where the Restrictions lapse in installments) the
Participant shall be entitled to settlement of the Restricted Award or portion
thereof, as the case may be. Although Restricted Awards shall usually Vest based
on continued employment (or service as a Non-Employee Subsidiary Director or a
Consultant) and Performance Awards under Article 10 shall usually Vest based on
attainment of Performance Goals, the Committee, in its discretion, may condition
Vesting of Restricted Awards on attainment of Performance Goals as well as
continued employment (or service as a Non-Employee Subsidiary Director or a
Consultant). In such case, the Restriction Period for such a Restricted Award
shall include the period prior to satisfaction of the Performance Goals.
9.4 Forfeiture. If a Participant ceases to be an employee (or
Consultant or Non-Employee Subsidiary Director) of Corporation or a Subsidiary
during the Restriction Period for any reason other than reasons which may be
specified in an Award Agreement (such as death, Disability, or Retirement) the
Award Agreement may require that all non-Vested Restricted Awards previously
granted to the Participant be forfeited and returned to Corporation.
9.5 Settlement of Restricted Awards.
(a) Restricted Shares. Upon Vesting of a Restricted Share Award,
the legend on such Shares will be removed and the Participant's stock
power will be returned and the Shares will no longer be Restricted
Shares. The Committee may also, in its discretion, permit a Participant
to receive, in lieu of unrestricted Shares at the conclusion of the
Restriction Period, payment in cash, installments, or by issuance of a
Deferred Compensation Option equal to the Fair Market Value of the
Restricted Shares as of the date the Restrictions lapse.
(b) Restricted Units. Upon Vesting of a Restricted Unit Award, a
Participant shall be entitled to receive payment for Restricted Units
in an amount equal to the aggregate Fair Market Value of the Shares
covered by such Restricted Units at the expiration of the Applicable
Restriction Period. Payment in settlement of a Restricted Unit shall be
made as soon as practicable following the conclusion of the applicable
Restriction Period in cash, in installments, in Shares equal to the
number of Restricted Units, by issuance of a Deferred Compensation
Option, or in any other manner or combination of such methods as the
Committee, in its sole discretion, shall determine.
9.6 Rights as a Shareholder. A Participant shall have, with respect to
unforfeited Shares received under a grant of Restricted Shares, all the rights
of a shareholder of Corporation, including the right to vote the shares, and the
right to receive any cash dividends. Stock
- 14 -
<PAGE>
dividends issued with respect to Restricted Shares shall be treated as
additional Shares covered by the grant of Restricted Shares and shall be subject
to the same Restrictions.
ARTICLE 10
PERFORMANCE AWARDS
10.1 General. Performance Awards shall be subject to the terms and
conditions set forth in Article 6 and this Article 10 and Award Agreements
governing Performance Awards shall contain such other terms and conditions not
inconsistent with the express provisions of the Plan, as the Committee shall
deem desirable.
10.2 Nature of Performance Awards. A Performance Award is an Award of
units (with each unit having a value equivalent to one Share) granted to a
Participant subject to such terms and conditions as the Committee deems
appropriate, including, without limitation, the requirement that the Participant
forfeit such Performance Award or a portion thereof in the event specified
performance criteria are not met within a designated period of time.
10.3 Performance Cycles. For each Performance Award, the Committee
shall designate a performance period (the "Performance Cycle") with a duration
to be determined by the Committee in its discretion within which specified
Performance Goals are to be attained. There may be several Performance Cycles in
existence at any one time and the duration of Performance Cycles may differ from
each other.
10.4 Performance Goals. The Committee shall establish Performance Goals
for each Performance Cycle on the basis of such criteria and to accomplish such
objectives as the Committee may from time to time select. Performance Goals may
be based on (i) performance criteria for Corporation, a Subsidiary, or an
operating group, (ii) a Participant's individual performance, or (iii) a
combination of both. Performance Goals may include objective and subjective
criteria. During any Performance Cycle, the Committee may adjust the Performance
Goals for such Performance Cycle as it deems equitable in recognition of unusual
or nonrecurring events affecting Corporation, changes in applicable tax laws or
accounting principles, or such other factors as the Committee may determine.
10.5 Determination of Awards. As soon as practicable after the end of a
Performance Cycle, the Committee shall determine the extent to which Performance
Awards have been earned on the basis of performance in relation to the
established Performance Goals.
10.6 Timing and Form of Payment. Settlement of earned Performance
Awards shall be made to the Participant as soon as practicable after the
expiration of the Performance Cycle and the Committee's determination under
Section 10.5, in the form of cash, installments, Shares, Deferred Compensation
Options, or any combination of the foregoing or in any other form as the
Committee shall determine.
- 15 -
<PAGE>
ARTICLE 11
OTHER STOCK BASED AND COMBINATION AWARDS
11.1 Other Stock-Based Awards. The Committee may grant other Awards
under the Plan pursuant to which Shares are or may in the future be acquired, or
Awards denominated in or measured by Share equivalent units, including Awards
valued using measures other than the market value of Shares. Other Stock-Based
Awards are not restricted to any specified form or structure and may include,
without limitation, Share purchase warrants, other rights to acquire Shares, and
securities convertible into or redeemable for Shares. Such Other Stock-Based
Awards may be granted either alone, in addition to, or in tandem with, any other
type of Award granted under the Plan.
11.2 Combination Awards. The Committee may also grant Awards under the
Plan in tandem or combination with other Awards or in exchange of Awards, or in
tandem or combination with, or as alternatives to, grants or rights under any
other employee plan of Corporation, including the plan of any acquired entity.
No action authorized by this section shall reduce the amount of any existing
benefits or change the terms and conditions thereof without the Participant's
consent.
ARTICLE 12
DEFERRAL ELECTIONS
The Committee may permit a Participant to elect to defer receipt of the
payment of cash or the delivery of Shares that would otherwise be due to such
Participant by virtue of the exercise, earn out, or Vesting of an Award made
under the Plan. If any such election is permitted, the Committee shall establish
rules and procedures for such payment deferrals, including, but not limited to:
(a) payment or crediting of reasonable interest or other growth or earnings
factor on such deferred amounts credited in cash, (b) the payment or crediting
of dividend equivalents in respect of deferrals credited in Share equivalent
units, or (c) granting of Deferred Compensation Options.
ARTICLE 13
DIVIDEND EQUIVALENTS
Any Awards may, at the discretion of the Committee, earn dividend
equivalents. In respect of any such Award which is outstanding on a dividend
record date for Common Stock, the Participant may be credited with an amount
equal to the amount of cash or stock dividends that would have been paid on the
Shares covered by such Award, had such covered Shares been issued and
outstanding on such dividend record date. The Committee shall establish such
rules and procedures governing the crediting of dividend equivalents, including
the timing, form of payment, and payment contingencies of such dividend
equivalents, as it deems are appropriate or necessary.
ARTICLE 14
NON-EMPLOYEE BOARD DIRECTORS
14.1 General. Awards shall be made to Non-Employee Board Directors only
pursuant to this Article 14. All Non-Employee Board Directors shall receive
Initial Director Options and
- 16 -
<PAGE>
Annual Director Options. No person, including the members of the Board or the
Committee, shall have any discretion as to the selection of eligible recipients
or the determination of the type, amount, or terms of Awards pursuant to this
Article 14.
14.2 Eligibility. The persons eligible to receive Awards pursuant to
this Article 14 are all Non-Employee Board Directors of Corporation.
14.3 Definitions. For purposes of this Article 14, the following terms
shall have the meanings set forth below:
"ANNUAL MEETING DATE" means the date of Corporation's regular annual
meeting of shareholders.
"OFFERING DATE" means the closing date of Corporation's initial public
offering of Shares pursuant to a registration statement which has become
effective under the Securities Act of 1933.
14.4 Initial Director Options.
(a) Grant of Initial Director Options. As of the Offering Date,
each Non-Employee Board Director who is a member of the Board on the
Offering Date shall be granted automatically an Initial Director Option
to purchase 1,500 Shares.
(b) Option Price. The option purchase price for each Initial
Director Option shall be equal to the public offering price of a Share.
(c) Terms of Initial Director Option. Each Initial Director
Option shall have the terms and conditions specified in the form of
Award Agreement attached to this Plan as Appendix A.
14.5 Annual Director Options.
(a) Grant of Annual Director Options. As of each Annual Meeting
Date, each Non-Employee Board Director whose term begins on or
continues after that Annual Meeting Date shall be granted automatically
an Annual Director Option to purchase 1,000 Shares.
(b) Option Price. The option exercise price for each Annual
Director Option shall be equal to the Fair Market Value of a Share as
of the Annual Meeting Date.
(c) Terms of Annual Director Options. Each Annual Director
Option shall have the terms and conditions specified in the form of
Award Agreement attached to this Plan as Appendix A.
ARTICLE 15
ADJUSTMENTS UPON CHANGES IN CAPITALIZATION, ETC.
15.1 Plan Does Not Restrict Corporation. The existence of the Plan and
the Awards granted under the Plan shall not affect or restrict in any way the
right or power of the Board or
- 17 -
<PAGE>
the shareholders of Corporation to make or authorize any adjustment,
recapitalization, reorganization, or other change in Corporation's capital
structure or its business, any merger or consolidation of the Corporation, any
issue of bonds, debentures, preferred or prior preference stocks ahead of or
affecting Corporation's capital stock or the rights thereof, the dissolution or
liquidation of Corporation or any sale or transfer of all or any part of its
assets or business, or any other corporate act or proceeding.
15.2 Adjustments by the Committee. In the event of any change in
capitalization affecting the Common Stock of Corporation, such as a stock
dividend, stock split, recapitalization, merger, consolidation, split-up,
combination or exchange of shares or other form of reorganization, or any other
change affecting the Common Stock, such proportionate adjustments, if any, as
the Committee, in its sole discretion, may deem appropriate to reflect such
change, shall be made with respect to the aggregate number of Shares for which
Awards in respect thereof may be granted under the Plan, the maximum number of
Shares which may be sold or awarded to any Participant, the number of Shares
covered by each outstanding Award, and the base price or purchase price per
Share in respect of outstanding Awards. The Committee may also make such
adjustments in the number of Shares covered by, and price or other value of any
outstanding Awards in the event of a spin-off or other distribution (other than
normal cash dividends), of Corporation assets to shareholders.
ARTICLE 16
AMENDMENT AND TERMINATION
Without further approval of Corporation's shareholders, the Board may
at any time terminate the Plan, or may amend it from time to time in such
respects as the Board may deem advisable, except that the Board may not, without
approval of the shareholders, make any amendment which would (i) materially
increase the benefits accruing to Participants under the Plan, (ii) materially
increase the aggregate number of shares of Common Stock which may be issued
under the Plan (except for adjustments pursuant to Article 15 of the Plan), or
(iii) materially modify the requirements as to eligibility for participation in
the Plan. Without further shareholder approval, the Board may amend the Plan to
take into account changes in applicable securities, federal income tax laws, and
other applicable laws. Further, should the provisions of Rule 16b-3, or any
successor rule, under the Exchange Act be amended, the Board, without further
shareholder approval, may amend the Plan as necessary to comply with any
modifications to such rule. The provisions of Article 14 may not be amended more
than once every six months, other than to conform with changes in the Code or in
Rule 16b-3 under the Exchange Act.
ARTICLE 17
MISCELLANEOUS
17.1 Tax Withholding. Corporation shall have the right to deduct from
any settlement of any Award under the Plan, including the delivery or vesting of
Shares, any federal, state, or local taxes of any kind required by law to be
withheld with respect to such payments or to take such other action as may be
necessary in the opinion of Corporation to satisfy all obligations for the
payment of such taxes. The recipient of any payment or distribution under the
Plan shall make arrangements satisfactory to Corporation for the satisfaction of
any such withholding tax
- 18 -
<PAGE>
obligations. Corporation shall not be required to make
any such payment or distribution under the Plan until such obligations are
satisfied.
17.2 Unfunded Plan. The Plan shall be unfunded and Corporation shall
not be required to segregate any assets that may at any time be represented by
Awards under the Plan. Any liability of Corporation to any person with respect
to any Award under the Plan shall be based solely upon any contractual
obligations that may be effected pursuant to the Plan. No such obligation of
Corporation shall be deemed to be secured by any pledge of, or other encumbrance
on, any property of Corporation.
17.3 Payments to Trust. The Committee is authorized to cause to be
established a trust agreement or several trust agreements whereunder the
Committee may make payments of amounts due or to become due to Participants in
the Plan.
17.4 Annulment of Awards. Any Award Agreement may provide that the
grant of an Award payable in cash is revocable until cash is paid in settlement
thereof or that grant of an Award payable in Shares is revocable until the
Participant becomes entitled to the certificate in settlement thereof. In the
event the employment (or service as a Non-Employee Subsidiary Director or a
Consultant) of a Participant is terminated for cause (as defined below), any
Award which is revocable shall be annulled as of the date of such termination
for cause. For the purpose of this Section 17.4, the term "for cause" shall have
the meaning set forth in the Participant's employment agreement, if any, or
otherwise means any discharge (or removal) for material or flagrant violation of
the policies and procedures of Corporation or for other job performance or
conduct which is materially detrimental to the best interests of Corporation, as
determined by the Committee.
17.5 Engaging in Competition With the Corporation. Any Award Agreement
may provide that, if a Participant terminates employment (or service as a
Non-Employee Subsidiary Director or a Consultant) with Corporation or a
Subsidiary for any reason whatsoever, and within a period of time (as specified
in the Award Agreement) after the date thereof accepts employment with any
competitor of (or otherwise engages in competition with) Corporation, the
Committee, in its sole discretion, may require such Participant to return to
Corporation the economic value of any Award that is realized or obtained
(measured at the date of exercise, Vesting, or payment) by such Participant at
any time during the period beginning on the date that is six months prior to the
date of such Participant's termination of employment (or service as a
Non-Employee Subsidiary Director or a Consultant) with Corporation.
17.6 Other Corporation Benefit and Compensation Programs. Payments and
other benefits received by a Participant under an Award made pursuant to the
Plan shall not be deemed a part of a Participant's regular, recurring
compensation for purposes of the termination indemnity or severance pay law of
any state or country and shall not be included in, nor have any effect on, the
determination of benefits under any other employee benefit plan or similar
arrangement provided by Corporation or a Subsidiary unless expressly so provided
by such other plan or arrangements, or except where the Committee expressly
determines that an Award or portion of an Award should be included to accurately
reflect competitive compensation practices or to recognize that an Award has
been made in lieu of a portion of cash compensation. Awards under the Plan may
be made in combination with or in tandem with, or as alternatives to, grants,
- 19 -
<PAGE>
awards, or payments under any other Corporation or Subsidiary plans,
arrangements, or programs. The Plan notwithstanding, Corporation or any
Subsidiary may adopt such other compensation programs and additional
compensation arrangements as it deems necessary to attract, retain, and reward
employees and directors for their service with Corporation and its Subsidiaries.
17.7 Securities Law Restrictions. No Shares shall be issued under the
Plan unless counsel for Corporation shall be satisfied that such issuance will
be in compliance with applicable federal and state securities laws. Certificates
for Shares delivered under the Plan may be subject to such stop-transfer orders
and other restrictions as the Committee may deem advisable under the rules,
regulations, and other requirements of the Securities and Exchange Commission,
any stock exchange upon which the Common Stock is then listed, and any
applicable federal or state securities law. The Committee may cause a legend or
legends to be put on any such certificates to make appropriate reference to such
restrictions.
17.8 Governing Law. Except with respect to references to the Code or
federal securities laws, the Plan and all actions taken thereunder shall be
governed by and construed in accordance with the laws of the state of Maryland.
ARTICLE 18
SHAREHOLDER APPROVAL
The adoption of the Plan and the grant of Awards under the Plan are
expressly subject to the approval of the Plan by Corporation's shareholders
holding a majority of Corporation's outstanding Shares.
BARRETT BUSINESS SERVICES, INC.
STATEMENT OF CALCULATION OF BASIC
AND DILUTED COMMON SHARES OUTSTANDING
<TABLE>
<S> <C>
Year Ended
December 31, 1999
-----------------
Weighted average number of basic shares outstanding 7,580,741
Stock option plan shares to be issued at prices ranging
from $2.80 to $17.94 per share 877,916
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 (831,980)
---------
Weighted average number of diluted shares outstanding 7,626,677
=========
</TABLE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 33-71792, 33-55117, 33-52871 and 333-33487) and in
the Prospectus constituting part of the Registration Statements on Form S-3
(Nos. 333-24449 and 333-62041) of Barrett Business Services, Inc. of our report
dated February 9, 2000.
PRICEWATERHOUSECOOPERS LLP
Portland, Oregon
March 27, 2000
POWER OF ATTORNEY
Each person whose signature appears below designates and appoints WILLIAM W.
SHERERTZ and MICHAEL D. MULHOLLAND, and either of them, true and lawful
attorneys-in-fact and agents, to sign the Annual Report on Form 10-K for the
year ended December 31, 1999, of Barrett Business Services, Inc., a Maryland
corporation, and to file said report, with all exhibits thereto, with the
Securities and Exchange Commission under the Securities Exchange Act of 1934.
Each person whose signature appears below also grants to these attorneys-in-fact
and agents full power and authority to perform every act and execute any
instruments that they deem necessary or desirable in connection with said
report, as fully as he could do in person, hereby ratifying and confirming all
that the attorneys-in-fact and agents or their substitutes may lawfully do or
cause to be done.
IN WITNESS WHEREOF, this power of attorney has been executed by each of the
undersigned as of this 28th day of March, 2000.
Signature Title
--------- -----
/s/ William W. Sherertz President and Chief Executive Officer and
- --------------------------- Director (Principal Executive Officer)
William W. Sherertz
/s/ Michael D. Mulholland Vice President-Finance and Secretary
- --------------------------- (Principal Financial Officer)
Michael D. Mulholland
/s/ James D. Miller Controller (Principal Accounting Officer)
- ---------------------------
James D. Miller
/s/ Robert R. Ames
- --------------------------- Director
Robert R. Ames
/s/ Herbert L. Hochberg
- --------------------------- Director
Herbert L. Hochberg
/s/ Anthony Meeker
- --------------------------- Director
Anthony Meeker
/s/ Stanley G. Renecker
- --------------------------- Director
Stanley G. Renecker
/s/ Nancy B. Sherertz
- --------------------------- Director
Nancy B. Sherertz
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
BARRETT BUSINESS SERVICES, INC.
FINANCIAL DATA SCHEDULE
This schedule contains summary financial information extracted from the
Company's balance sheets and related statements of operations for the
year ended December 31, 1999 and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 550
<SECURITIES> 0
<RECEIVABLES> 30,216
<INVENTORY> 0
<ALLOWANCES> 0
<CURRENT-ASSETS> 33,643
<PP&E> 7,027
<DEPRECIATION> 0
<TOTAL-ASSETS> 70,740
<CURRENT-LIABILITIES> 25,955
<BONDS> 0
0
0
<COMMON> 75
<OTHER-SE> 37,254
<TOTAL-LIABILITY-AND-EQUITY> 0
<SALES> 0
<TOTAL-REVENUES> 347,850
<CGS> 0
<TOTAL-COSTS> 310,354
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 633
<INCOME-PRETAX> 8,833
<INCOME-TAX> 3,684
<INCOME-CONTINUING> 5,149
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,149
<EPS-BASIC> .68
<EPS-DILUTED> .68
</TABLE>
