10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on November 13, 2002
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2002
Commission File No. 0-21886
BARRETT BUSINESS SERVICES, INC.
(Exact name of registrant as specified in its charter)
Maryland 52-0812977
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
4724 SW Macadam Avenue
Portland, Oregon 97239
(Address of principal executive offices) (Zip Code)
(503) 220-0988
(Registrant's telephone number, including area code)
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 [ ]
Number of shares of Common Stock, $.01 par value, outstanding at October 31,
2002 was 5,804,335 shares.
BARRETT BUSINESS SERVICES, INC.
INDEX
Part I - Financial Information Page
----
Item 1. Financial Statements
Balance Sheets - September 30, 2002 and
December 31, 2001............................................3
Statements of Operations - Three Months
Ended September 30, 2002 and 2001............................4
Statements of Operations - Nine Months
Ended September 30, 2002 and 2001............................5
Statements of Cash Flows - Nine Months
Ended September 30, 2002 and 2001............................6
Notes to Financial Statements................................7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations..................................................11
Item 3. Quantitative and Qualitative Disclosure About
Market Risk.................................................19
Item 4. Controls and Procedures.....................................19
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K............................20
Signatures ............................................................21
Exhibit Index ............................................................24
2
Part I - Financial Information
Item 1. Financial Statements
BARRETT BUSINESS SERVICES, INC.
Balance Sheets
(Unaudited)
(In thousands, except per share amounts)
The accompanying notes are an integral part of these financial statements.
3
BARRETT BUSINESS SERVICES, INC.
Statements of Operations
(Unaudited)
(In thousands, except per share amounts)
The accompanying notes are an integral part of these financial statements.
4
BARRETT BUSINESS SERVICES, INC.
Statements of Operations
(Unaudited)
(In thousands, except per share amounts)
The accompanying notes are an integral part of these financial statements.
5
BARRETT BUSINESS SERVICES, INC.
Statements of Cash Flows
(Unaudited)
(In thousands)
The accompanying notes are an integral part of these financial statements.
6
BARRETT BUSINESS SERVICES, INC.
Notes to Financial Statements
Note 1 - Basis Of Presentation Of Interim Period Statements:
The accompanying financial statements are unaudited and have been prepared
by Barrett Business Services, Inc. (the "Company") pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
note disclosures typically included in financial statements prepared in
accordance with accounting principles generally accepted in the United States of
America have been condensed or omitted pursuant to such rules and regulations.
In the opinion of management, the financial statements include all adjustments,
consisting only of normal recurring adjustments, necessary for a fair statement
of the results for the interim periods presented. The preparation of financial
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Actual results may differ from
such estimates and assumptions. The financial statements should be read in
conjunction with the audited financial statements and notes thereto included in
the Company's 2001 Annual Report on Form 10-K at pages F1 - F20. The results of
operations for an interim period are not necessarily indicative of the results
of operations for a full year. Certain prior year amounts have been reclassified
to conform with the current year presentation. Such reclassifications had no
impact on gross margin, net income or stockholders' equity.
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard No. 141 ("SFAS 141") "Business
Combinations" and No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets."
The Company's adoption date for SFAS 141 was immediate and the adoption date for
SFAS 142 was January 1, 2002. With respect to SFAS 142, the Company performed a
goodwill impairment test as of the adoption date and has determined there was no
impairment to its recorded goodwill. The Company will perform a goodwill
impairment test annually and whenever events or circumstances occur indicating
that goodwill might be impaired. Effective January 1, 2002, amortization of
goodwill, including goodwill recorded in past business combinations, ceased.
Pro forma net income, without the amortization of goodwill of $446,000, for
the three months ended September 30, 2001 was $574,000. Pro forma net income,
without the amortization of goodwill of $1,328,000, for the nine months ended
September 30, 2001 was $834,000. Pro forma basic and diluted earnings per share
for the three and nine months ended September 30, 2001 were $.09 and $.13,
respectively.
The Company's intangible assets are comprised of covenants not to compete
resulting from prior year acquisitions and have contractual lives principally
ranging from three to five years. The Company's intangible assets are summarized
as follows (in thousands):
September 30, December 31,
2002 2001
----------------- ----------------
Covenants not to compete $ 3,709 $ 3,709
Less accumulated amortization 3,638 3,580
----------------- ----------------
Intangibles, net $ 71 $ 129
================= ================
7
BARRETT BUSINESS SERVICES, INC.
Notes to Financial Statements (Continued)
Note 1 - Basis Of Presentation Of Interim Period Statements (Continued):
Effective January 1, 2002, the Company adopted Statement of Financial
Accounting Standard No. 144 ("SFAS 144") "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS 144 supersedes FASB Statement No. 121
"Accounting for the Impairment of Long-Lived Assets to be Disposed Of" and
certain provisions of Accounting Principles Board Opinion No. 30 "Reporting the
Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions" related to the disposal of a segment of a business. The adoption
of SFAS 144 had no effect on the Company's results of operations or its
financial position.
Note 2 - Recent Accounting Pronouncements:
In July 2002, the FASB issued SFAS 146, "Accounting for the Costs
Associated with Exit or Disposal Activities." SFAS 146 requires companies to
recognize liabilities and costs associated with exit or disposal activities
initiated after December 31, 2002 when they are incurred, rather than when
management commits to a plan to exit an activity. This Statement will affect
only the timing of the recognition of future restructuring costs and is not
expected to have a material effect on the Company's results of operations or
financial position.
In October 2002, the FASB issued SFAS 147, "Acquisitions of Certain
Financial Institutions." SFAS 147 amends SFAS 72 "Accounting for Certain
Acquisitions of Banking or Thrift Institutions" and SFAS 144 and FASB
Interpretation No 9. "Applying APB Opinions No. 16 and 17 When a Savings and
Loan Association or a Similar Institution is Acquired in a Business Combination
Accounted for by the Purchase Method." Except for transactions between two or
more mutual enterprises, SFAS 147 removes acquisitions of financial institutions
from the scope of both SFAS 72 and Interpretation 9 and requires that those
transactions be accounted for in accordance with SFAS 141 and SFAS 142.
Additionally, SFAS 147 amends SFAS 144 to include in its scope long-term
customer-relationship intangible assets of financial institutions. The effective
date of SFAS 147 is October 1, 2002, with earlier application permitted.
Management believes that the adoption of this statement will not have a material
impact on its results of operations or financial position.
8
BARRETT BUSINESS SERVICES, INC.
Notes to Financial Statements (Continued)
Note 3 - Provision For Income Taxes:
Deferred tax assets (liabilities) are comprised of the following components
(in thousands):
The (benefit from) provision for income taxes for the nine months ended
September 30, 2002 and 2001 is as follows (in thousands):
Nine Months Ended
September 30,
------------------------------------
2002 2001
----------------- -----------------
Current:
Federal $ (364) $ (2)
State (85) (1)
----------------- -----------------
(449) (3)
----------------- -----------------
Deferred:
Federal 128 (88)
State 62 (23)
----------------- -----------------
190 (111)
----------------- -----------------
Total benefit $ (259) $ (114)
================= =================
Note 4 - Stock Incentive Plan:
The Company has a Stock Incentive Plan (the "Plan") which provides for
stock-based awards to the Company's employees, directors and outside consultants
or advisers. The number of shares of common stock reserved for issuance under
the Plan is 1,550,000.
9
BARRETT BUSINESS SERVICES, INC.
Notes to Financial Statements (Continued)
Note 4 - Stock Incentive Plan (Continued):
The following table summarizes options granted under the Plan in 2002:
The options listed in the table generally become exercisable in four equal
annual installments beginning one year after the date of grant.
On August 22, 2001, the Company offered to all employee optionees who held
options with an exercise price of more than $5.85 per share (covering a total of
812,329 shares), the opportunity to voluntarily return for cancellation without
payment any stock option award with an exercise price above that price. At the
close of the offer period on September 20, 2001, stock options for a total of
797,229 shares were voluntarily surrendered for cancellation. On August 20,
2002, the Compensation Committee of the Company's board of directors approved
the issuance of 357,000 options to current employees.
10
BARRETT BUSINESS SERVICES, INC.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
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
three and nine months ended September 30, 2002 and 2001.
Three months ended September 30, 2002 and 2001
Net income for the third quarter of 2002 was $56,000, a decrease of
$186,000 from net income of $242,000 for the third quarter of 2001. The decline
for the third quarter of 2002 was attributable to lower gross margin dollars, as
a result of a 21.8% decline in revenues, offset in part by lower selling,
general and administrative expenses and lower depreciation and amortization.
Basic and diluted earnings per share for the third quarter of 2002 were $.01 as
compared to basic and diluted earnings per share of $.04 for the 2001 third
quarter. Cash flow per share (defined as net income plus depreciation and
amortization divided by weighted average diluted shares outstanding) for the
2002 third quarter totaled a positive $.06 as compared to a positive $.17 for
the 2001 third quarter.
11
BARRETT BUSINESS SERVICES, INC.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
Results of Operations (Continued)
Revenues for the third quarter of 2002 totaled approximately $45.6 million,
a decrease of approximately $12.7 million or 21.8% from the third quarter of
2001. The decrease in revenues reflects the general downturn in business
conditions in the Company's market areas, particularly in the Company's Northern
California operations, which accounted for approximately 49.7% of the decline in
total revenues. The Company's Northern California operations continue to be
adversely affected by the continued downturn in the "high-tech" industry and
related sectors. On a sequential basis, revenues for the third quarter of 2002
increased 6.5% over the 2002 second quarter, as three of the Company's five
geographic markets generated higher revenues for the 2002 third quarter as
compared to the second quarter of 2002. Management attributes the sequential
growth in revenues to seasonality and to a lesser extent to several new branch
office managers hired by the Company over the past several months. Management
expects that continued revenue growth in the future will be difficult to achieve
for the foreseeable future in view of generally soft economic conditions.
Staffing services revenue decreased approximately $6.6 million or 19.7%
primarily due to a decline in demand for personnel in the majority of areas in
which the Company does business. Professional employer ("PEO") services revenue
decreased approximately $6.0 million or 24.4%, which was primarily due to a
48.6% decline in the Company's Northern California operations resulting from a
softening in demand from existing customers, coupled with management's decision
to discontinue the Company's business relationship with customers who generated
insufficient margins or demonstrated an inability to adhere consistently to
credit terms. The larger percentage decline in PEO services revenue resulted in
a decrease in the share of PEO services from 42.7% of total revenues for the
third quarter of 2001 to 41.0% for the third quarter of 2002. The share of
revenues for staffing services had a corresponding increase from 57.3% of total
revenues for the third quarter of 2001 to 59.0% for the third quarter of 2002.
Gross margin for the third quarter of 2002 totaled approximately $4.4
million, which represented a decrease of $1.6 million or 26.8% from the third
quarter of 2001 primarily resulting from the 21.8% decline in revenues
experienced in the third quarter of 2002. The gross margin percent decreased
from 10.2% of revenues for the third quarter of 2001 to 9.6% for the third
quarter of 2002. The decrease in the gross margin percentage was due to higher
direct payroll costs and higher workers' compensation expense, as a percentage
of revenues. The increase in direct payroll costs, as a percentage of revenues,
for the third quarter of 2002 reflects the current mix of services to the
current customer base rather than an erosion of the Company's mark-up rates for
its services. Workers' compensation expense for the third quarter of 2002
totaled $2.1 million or 4.5% of revenues, which compares to $2.4 million or 4.2%
of revenues for the third quarter of 2001. The decline in workers' compensation
expense, in terms of total dollars, was primarily due to a decrease in the
number of injury claims in the 2002 third quarter compared to the same period in
2001, which is consistent with the downturn in the Company's business.
Selling, general and administrative ("SG&A") expenses for the 2002 third
quarter amounted to approximately $4.0 million, a decrease of $757,000 or 16.0%
from the comparable period in 2001. SG&A expenses, expressed as a percentage of
revenues, increased from 8.1%
12
BARRETT BUSINESS SERVICES, INC.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
Results of Operations (Continued)
for the third quarter of 2001 to 8.8% for the third quarter of 2002. The
decrease in total dollars from 2001 was primarily attributable to reductions in
branch office management personnel and related expenses as a result of the
downturn in business.
Depreciation and amortization totaled $282,000 or 0.6% of revenues for the
third quarter of 2002, as compared to $818,000 or 1.4% of revenues for the same
period in 2001. The decrease of $536,000 was principally due to the Company's
adoption of SFAS 142 effective January 1, 2002, whereby the Company ceased the
amortization of its recorded goodwill. The third quarter of 2001 included
$446,000 of goodwill amortization. (See Note 1 to the financial statements.)
Other expense totaled $14,000 for the third quarter of 2002, which compares
to $15,000 of other expense for the third quarter of 2001. The increase in
other, net was offset in part by a small increase in net interest expense and by
lower interest income.
The Company has historically experienced significant fluctuations in its
quarterly operating results and expects such fluctuations to continue in the
future. The Company's operating results may fluctuate due to a number of factors
such as seasonality, wage limits on payroll taxes, claims experience for
workers' compensation, demand and competition for the Company's services and the
effect of acquisitions. The Company's revenue levels fluctuate from quarter to
quarter primarily due to the impact of seasonality on its staffing services
business and on certain of its PEO clients in the agriculture and forest
products-related industries. As a result, the Company may have greater revenues
and net income in the third and fourth quarters of its fiscal year. Payroll
taxes and benefits fluctuate with the level of direct payroll costs, but tend to
represent a smaller percentage of revenues and direct payroll later in the
Company's fiscal year as federal and state statutory wage limits for
unemployment and social security taxes are exceeded by some employees. Workers'
compensation expense varies with both the frequency and severity of workplace
injury claims reported during a quarter, as well as adverse loss development of
prior period claims during a subsequent quarter.
The Company offers various qualified employee benefit plans to its
employees, including its worksite employees. These qualified employee benefit
plans include a savings 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
("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. 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. Reference is made to
pages 20-21 of the Company's 2001 Annual Report on Form 10-K for a more detailed
discussion of this issue.
13
BARRETT BUSINESS SERVICES, INC.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
Results of Operations (Continued)
After several years of study, on April 24, 2002, the Internal Revenue
Service ("IRS") issued Revenue Procedure 2002-21 ("Rev Proc") to provide relief
with respect to certain defined contribution retirement plans maintained by a
PEO that benefit worksite employees. The Rev Proc outlines the steps necessary
for a PEO to avoid plan disqualification for violating the exclusive benefit
rule. Essentially, a PEO must either (1) terminate its plan; (2) convert its
plan to a "multiple employer plan" by December 31, 2003; or (3) transfer the
plan assets and liabilities to a customer plan. Although management has not
fully evaluated the Rev Proc to determine which alternatives the Company will
pursue to maintain the qualified status of its plans, it believes that the
Company has adequate time to fully evaluate the Rev Proc and to develop a
comprehensive timetable to ensure compliance with the new law. Under the Rev
Proc, the Company must file a notice with the IRS by May 2, 2003, indicating the
actions the Company intends to take.
Nine Months Ended September 30, 2002 and 2001
Net loss for the nine months ended September 30, 2002 was $360,000, a
decline of $207,000 from the net loss of $153,000 for the same period in 2001.
The increased loss was attributable to lower gross margin dollars primarily due
to a 22.0% decrease in revenue, partially offset by a 14.1% reduction in SG&A
expenses and a 64.3% reduction in depreciation and amortization expenses. Basic
and diluted loss per share for the first nine months of 2002 were $.06 as
compared to basic and diluted loss per share of $.02 for the same period of
2001. Cash flow per share (defined as net income (loss) plus depreciation and
amortization divided by weighted average diluted shares outstanding) for the
first nine months of 2002 totaled a positive $.09 as compared to a positive $.37
for the 2001 comparable period.
Revenues for the nine months ended September 30, 2002 totaled approximately
$129.5 million, a decrease of approximately $36.5 million or 22.0% from the
similar period in 2001. The decrease in total revenues was primarily due to the
continued softening of business conditions in the Company's market areas,
particularly in the Company's Northern California operations, which accounted
for approximately 45.0% of the decline in total revenues for the first nine
months of 2002.
Gross margin for the nine months ended September 30, 2002 totaled
approximately $12.5 million, which represented a decrease of $4.0 million or
24.1% from the similar period of 2001. The gross margin percent decreased from
9.9% of revenues for the nine-month period of 2001 to 9.7% for the same period
of 2002. The small decrease in the gross margin percentage was primarily due to
higher direct payroll costs and slightly higher payroll taxes and benefits,
offset in part by lower workers' compensation expense. The increase in direct
payroll costs, as a percentage of revenues, from 77.5% to 77.8%, primarily
reflects to the current mix of services to the current customer base. The small
increase in payroll taxes and benefits for the nine-month period of 2002 was
primarily attributable to slightly higher state unemployment tax rates in
various states in which the Company operates as compared to the nine-month
period of 2001. Workers' compensation expense for the nine months ended
September 30, 2002 totaled $5.4 million or 4.1% of revenues, which compares to
$7.0 million or 4.3% of revenues for the
14
BARRETT BUSINESS SERVICES, INC.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
Results of Operations (Continued)
similar period of 2001. The decline in workers' compensation expense, in terms
of total dollars and as a percentage of revenues, for the 2002 period was
primarily due to a decrease in the number of injury claims for the nine month
period of 2002 compared to the same period in 2001.
SG&A expenses for the nine months ended September 30, 2002 amounted to
approximately $12.3 million, a decrease of $2.0 million or 14.1% from the
similar period of 2001. SG&A expenses, expressed as a percentage of revenues,
increased from 8.6% for the nine-month period of 2001 to 9.5% for the same
period of 2002. The decrease in total SG&A dollars was primarily due to
reductions in branch management personnel and related expenses as a result of
the downturn in business.
Depreciation and amortization totaled $882,000 or 0.7% of revenues for the
nine months ended September 30, 2002, which compares to $2.5 million or 1.5% of
revenues for the same period of 2001. The decreased expense was primarily due to
the Company's adoption of SFAS 142 effective January 1, 2002, whereby the
Company ceased the amortization of its recorded goodwill. The first nine months
of 2001 included $1,328,000 of goodwill amortization. (See Note 1 to the
financial statements.)
Other income totaled $6,000 for the nine-month period ended September 30,
2002, which compares to $23,000 of other expense for the comparable 2001 period.
The increase in income was primarily due to a reduction in net interest expense
attributable to lower debt levels during the first nine months of 2002 as
compared to the similar period of 2001 offset, in part, by lower interest income
and other, net.
Liquidity and Capital Resources
The Company's cash position of $720,000 at September 30, 2002 decreased by
$422,000 from December 31, 2001, which compares to an increase of $268,000 for
the comparable period in 2001. The decrease in cash at September 30, 2002, as
compared to December 31, 2001, was primarily attributable to payments on
workers' compensation claims liabilities and long-term debt offset in part by
cash provided by proceeds from maturities of marketable securities, net of
purchases.
Net cash used in operating activities for the nine months ended September
30, 2002 amounted to $635,000, as compared to $3,741,000 of net cash provided by
operating activities for the comparable 2001 period. For the nine months ended
September 30, 2002, net cash used in operating activities was primarily for
payments on workers' compensation claims and safety incentive liabilities of
$2,837,000, offset in part by decreases in trade accounts receivable and
increases in accrued payroll and related benefits totaling $1,693,000.
Net cash provided by investing activities totaled $1,032,000 for the nine
months ended September 30, 2002, as compared to $239,000 net cash provided by
investing activities for the similar 2001 period. For the 2002 period, the
principal source of cash provided by investing
15
BARRETT BUSINESS SERVICES, INC.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
Liquidity and Capital Resources (Continued)
activities was from net proceeds of $3,515,000 from maturities and sales of
marketable securities, offset in part by $2,384,000 of net purchases of
marketable securities. The Company presently has no material long-term capital
commitments.
Net cash used in financing activities for the nine-month period ended
September 30, 2002 was $819,000, compared to $3,712,000 net cash used in
financing activities for the similar 2001 period. For the 2002 period, the
principal use of cash for financing activities was $696,000 of payments made on
long-term debt, primarily related to the $8,000,000 three-year term loan in
connection with the Company's 1999 acquisition of Temporary Skills Unlimited,
Inc., and $183,000 used to repurchase the Company's common stock, offset in part
by $152,000 of net borrowings on the Company's revolving credit line. The
Company's three-year term loan was paid in full on schedule as of May 31, 2002.
The Company's business strategy continues to focus on growth through the
expansion of operations at existing offices, together with the selective
acquisition of additional personnel-related businesses, both in its existing
markets and other strategic geographic markets. The Company periodically
evaluates proposals for various acquisition opportunities, but there can be no
assurance that any additional transactions will be consummated.
Effective September 2, 2002, the Company entered into an Amended and
Restated Credit Agreement with its principal bank. The Agreement provides for a
revolving credit facility of up to $11.0 million, which includes a subfeature
under the line of credit for standby letters of credit for not more than $5.5
million, as to which approximately $5.47 million were outstanding as of
September 30, 2002, and a term loan in the original amount of $693,750 bearing
interest at an annual rate 7.4%, as to which the outstanding principal balance
was approximately $360,000 as of September 30, 2002.
Under the terms of the Agreement, the Company's total outstanding
borrowings, to a maximum of $11.0 million, may not at any time exceed an
aggregate of (i) 85% of the Company's eligible billed accounts receivable, plus
(ii) 65% of the Company's eligible unbilled accounts receivable (not to exceed
$2.5 million), plus (iii) 75% of the appraised value of the Company's real
property mortgaged to the bank, minus amounts outstanding under the term loan.
Advances will bear interest at an annual rate of prime rate plus one percent.
The Agreement expires April 30, 2003. The revolving credit facility is secured
by the Company's assets, including, without limitation, its accounts receivable,
equipment, intellectual property, real property and bank deposits, and may be
prepaid at anytime without penalty. Pursuant to the Agreement, the Company is
required to maintain compliance with the following financial covenants: (1) a
Current Ratio not less than 1.10 to 1.0 prior to December 31, 2002, and not less
than 1.15 to 1.0 as of December 31, 2002 and thereafter, with "Current Ratio"
defined as total current assets divided by total current liabilities; (2) EBITDA
not less than negative $2,750,000 as of the quarter ending September 30, 2002,
not less than $850,000 as of the quarter ending December 31, 2002, and not less
than $1,500,000 as of the quarter ending March 31, 2003, measured on a trailing
four-quarter basis, with "EBITDA" defined as net profit before taxes, interest
expense (net of capitalized interest expense), depreciation expense and
16
BARRETT BUSINESS SERVICES, INC.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
Liquidity and Capital Resources (Continued)
amortization expense; (3) Funded Debt to EBITDA Ratio not more than 7.0 to 1.0
as of December 31, 2002 and not more than 3.25 to 1.0 as of March 31, 2003, with
"Funded Debt" defined as all borrowed funds plus the amount of all capitalized
lease obligations of the Company and "Funded Debt to EBITDA Ratio" defined as
Funded Debt divided by EBITDA; and (4) EBITDA Coverage Ratio not less than 0.75
to 1.0 as of December 31, 2002 and not less than 1.50 to 1.0 as of March 31,
2003, with "EBITDA Coverage Ratio" defined as EBITDA divided by the aggregate of
total interest expense plus the prior period current maturity of long-term debt
and the prior period current maturity of subordinated debt. The Company was in
full compliance with the foregoing financial covenants as of September 30, 2002.
In addition, under the Agreement, the Company may not, without the Bank's
prior consent, among other things, use proceeds from the revolving credit
facility other than for working capital, incur additional indebtedness, merge or
consolidate with any other entity, sell or otherwise dispose of a substantial
portion of the Company's assets, acquire all or substantially all of the assets
of any other entity in any transaction involving a purchase price of $5,000,000
or more, make any substantial change in the nature of the Company's business,
make any guaranty of, or otherwise become liable for, the indebtedness of
others, make any loans or other investments in other persons or entities, or
grant a security interest in its assets. 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.
In February 1999, the Company's board of directors authorized a stock
repurchase program to repurchase common shares from time to time in open market
purchases. Since inception, the board of directors has approved six increases in
the total number of shares or dollars authorized to be repurchased under the
program. As of November 12, 2002, the repurchase program had remaining
authorized availability of $41,400 for the repurchase of additional shares.
During the first nine months of 2002, the Company repurchased 47,600 shares at
an aggregate price of $183,200. Since the inception of the repurchase program
through November 12, 2002, the Company has repurchased 1,900,900 shares for an
aggregate price of $8,589,600. Management anticipates that the capital necessary
to continue 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.
Forward-Looking Information
Statements in this report which are not historical in nature, including
discussion of economic conditions in the Company's market areas and effect on
revenue growth, the potential
17
BARRETT BUSINESS SERVICES, INC.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
Forward-Looking Information (Continued)
for and effect of recent and future acquisitions, the effect of changes in the
Company's mix of services on gross margin, the adequacy of the Company's
workers' compensation reserves and allowance for doubtful accounts, the
effectiveness of the Company's management information systems, the tax-qualified
status of the Company's 401(k) savings plan and the availability of financing
and working capital to meet the Company's funding requirements, are
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements involve known and
unknown risks, uncertainties and other factors that may cause the actual
results, performance or achievements of the Company or industry results to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Such factors with
respect to the Company include difficulties associated with integrating acquired
businesses and clients into the Company's operations, economic trends in the
Company's service areas, uncertainties regarding government regulation of PEOs,
including the ability of the Company to meet the new IRS requirements to retain
the tax-qualified status of employee benefit plans offered by PEOs, material
deviations from expected future workers' compensation claims experience, the
availability of capital or letters of credit necessary to meet state-mandated
surety deposit requirements for maintaining the Company's status as a qualified
self-insured employer for workers' compensation coverage, collectibility of
accounts receivable, 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.
18
BARRETT BUSINESS SERVICES, INC.
Item 3. 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 September 30, 2002, the Company had interest-bearing debt obligations of
approximately $4.5 million, of which approximately $3.6 million bears interest
at a variable rate and approximately $0.9 million at a fixed rate of interest.
The variable rate debt is comprised of approximately $3.6 million outstanding
under a secured revolving credit facility, which bears interest at the prime
rate plus 1.0%. Based on the Company's overall interest exposure at September
30, 2002, a 10 percent change in market interest rates would not have a material
effect on the fair value of the Company's long-term debt or its results of
operations. As of September 30, 2002, the Company had not entered into any
interest rate instruments to reduce its exposure to interest rate risk.
Item 4. Controls and Procedures
(a) Evaluation of disclosure controls and procedures. The Company's
chief executive officer and its chief financial officer evaluated
the effectiveness of the Company's disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14(c) and
15d-14(c)), which are designed to ensure that information the
Company must disclose in its reports filed or submitted under the
Securities Exchange Act of 1934, as amended (the "Exchange Act")
is recorded, processed, summarized, and reported on a timely
basis, on November 12, 2002 and have concluded that, as of such
date, the Company's disclosure controls and procedures were
adequate and effective to ensure that information required to be
disclosed by the Company in reports that it files or submits under
the Exchange Act is brought to their attention on a timely basis.
(b) Changes in internal controls. There were no significant changes in
the Company's internal controls or in other factors that could
significantly affect these controls subsequent to the date of
their evaluation, nor were there any significant deficiencies or
material weaknesses identified in the Company's internal controls.
As a result, no corrective actions were undertaken.
19
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) The exhibits filed herewith are listed in the Exhibit Index
following the signature page of this report.
(b) The following Current Report on Form 8-K was filed by the
Registrant during the quarter ended September 30, 2002:
The Company filed on September 4, 2002 a Current Report on
Form 8-K dated as of August 28, 2002, to report that the
Company entered into an Amended and Restated Credit
Agreement, effective September 2, 2002, with Wells Fargo
Bank, N.A.
20
SIGNATURES
Pursuant to the requirements 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: November 12, 2002 /s/ Michael D. Mulholland
--------------------------------------
Michael D. Mulholland
Vice President - Finance
(Principal Financial Officer)
21
CERTIFICATIONS
I, William W. Sherertz certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Barrett Business
Services, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the Registrant as of, and for, the periods presented in
this quarterly report;
4. The Registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and
we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the Registrant is made known to
us by others within the Company, particularly during the period
in which this quarterly report is being prepared;
b. evaluated the effectiveness of the Registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date");
and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The Registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the Registrant's auditors and the
audit committee of Registrant's board of directors:
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the Registrant's
ability to record, process, summarize and report financial data
and have identified for the Registrant's auditors any material
weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the Registrant's
internal controls; and
6. The Registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 12, 2002 /s/ William W. Sherertz
-------------------------------------
William W. Sherertz
Chief Executive Officer
22
I, Michael D. Mulholland certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Barrett Business
Services, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the Registrant as of, and for, the periods presented in
this quarterly report;
4. The Registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and
we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the Registrant is made known to
us by others within the Company, particularly during the period
in which this quarterly report is being prepared;
b. evaluated the effectiveness of the Registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date");
and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The Registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the Registrant's auditors and the
audit committee of Registrant's board of directors:
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the Registrant's
ability to record, process, summarize and report financial data
and have identified for the Registrant's auditors any material
weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the Registrant's
internal controls; and
6. The Registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 12, 2002 /s/ Michael D. Mulholland
----------------------------------
Michael D. Mulholland
Chief Financial Officer
23
EXHIBIT INDEX
Exhibit
11 Statement of Calculation of Basic and Diluted Common Shares Outstanding.
99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
24