UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
☒
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2021
Commission File Number 0-21886
BARRETT BUSINESS SERVICES, INC.
(Exact name of registrant as specified in its charter)
Maryland
(State or other jurisdiction of
incorporation or organization)
8100 NE Parkway Drive, Suite 200
Vancouver, Washington
(Address of principal executive offices)
52-0812977
(IRS Employer
Identification No.)
98662
(Zip Code)
(360) 828-0700
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, Par Value $0.01 Per
Share
Trading Symbol(s)
BBSI
Name of each exchange on which registered
The NASDAQ Stock Market LLC
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Securities registered pursuant to Section 12(g) of the Act: None
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 ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of
this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company.
See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐
Emerging growth company ☐
Accelerated filer ☒
Non-accelerated filer ☐
Smaller reporting company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial
accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting
under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
State the aggregate market value of the common equity held by non-affiliates of the registrant: $534,958,957 at June 30, 2021
Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date:
Class
Common Stock, Par Value $.01 Per Share
Outstanding at February 21, 2022
7,422,523 Shares
Portions of the definitive Proxy Statement for the 2022 Annual Meeting of Stockholders are hereby incorporated by reference in Part III of Form 10-K.
DOCUMENTS INCORPORATED BY REFERENCE
BARRETT BUSINESS SERVICES, INC.
2021 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PART I
Item 1.
Business
Item 1A.
Risk Factors
Item 1B.
Unresolved Staff Comments
Item 2.
Properties
Item 3.
Legal Proceedings
Item 4.
Mine Safety Disclosures
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
PART II
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Financial Statements and Supplementary Data
Item 9.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Item 9A.
Controls and Procedures
Item 9B.
Other Information
Item 9C.
Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Item 10.
Directors, Executive Officers and Corporate Governance
PART III
Item 11.
Executive Compensation
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13.
Certain Relationships and Related Transactions, and Director Independence
Item 14.
Principal Accountant Fees and Services
Item 15.
Exhibits and Financial Statement Schedules
PART IV
Item 16.
Form 10-K Summary
Signatures
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Item 1.
BUSINESS
General
Company Background
PART I
Barrett Business Services, Inc. (“BBSI,” the “Company,” “our” or “we”), is a leading provider of business management solutions for small and mid-sized
companies. The Company has developed a management platform that integrates a knowledge-based approach from the management consulting industry with
tools from the human resource outsourcing industry. This platform, through the effective leveraging of human capital, helps our business owner clients run their
businesses more effectively. We believe this platform, delivered through a decentralized organizational structure, differentiates BBSI from our competitors. BBSI
was incorporated in Maryland in 1965.
Certain statements below contain forward-looking information that is subject to risks and uncertainties. See “Forward-Looking Information” in Item 7 of Part II of
this report and “Risk Factors” in Item 1A of Part I of this report.
Business Strategy
Our strategy is to align local operations teams with the mission of small and mid-sized business owners, driving value to their business. To do so, BBSI:
•
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partners with business owners to leverage their investment in human capital through a high-touch, results-oriented approach;
brings predictability to each client organization through a three-tiered management platform; and
enables business owners to focus on their core business by reducing organizational complexity and maximizing productivity.
Business Organization
We operate a decentralized delivery model using operationally-focused business teams, typically located within 50 miles of our client companies. These teams
are led by senior level business generalists and include senior level professionals with expertise in human resources, organizational development, risk mitigation
and workplace safety, and various types of administration, including payroll. These teams are responsible for growth and profitability of their operations, and for
providing strategic leadership, guidance and expert consultation to our client companies. The decentralized structure fosters autonomous decision-making in
which business teams deliver plans that closely align with the objectives of each business owner client. This structure also provides a means of incubating talent
to support increased growth and capacity. We support clients with employees located in 47 states and the District of Columbia through a network of 50 branch
locations in Arizona, California, Colorado, Delaware, Idaho, Maryland, Nevada, New Mexico, North Carolina, Oregon, Pennsylvania, Tennessee, Utah, Virginia
and Washington. We also have several smaller recruiting locations in our general market areas, which are under the direction of a branch office.
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Services Overview
BBSI’s core purpose is to advocate for business owners, particularly in the small and mid-sized business segment. Our evolution from an entrepreneurially run
company to a professionally managed organization has helped to form our view that all businesses experience inflection points at key stages of growth. The
insights gained through our own growth, along with the trends we see in working with more than 7,600 companies each day, define our approach to guiding
business owners through the challenges associated with being an employer. BBSI’s business teams align with each business owner client through a structured
three-tiered progression. In doing so, business teams focus on the objectives of each business owner and deliver planning, guidance and resources in support
of those objectives.
Tier 1: Tactical Alignment
The first stage focuses on the mutual setting of expectations and is essential to a successful client relationship. It begins with a process of assessment and
discovery in which the business owner’s business objectives, attitudes, and culture are aligned with BBSI’s processes, controls and culture. This stage includes
an implementation process, which addresses the administrative components of employment.
Tier 2: Dynamic Relationship
The second stage of the relationship emphasizes organizational development as a means of achieving each client’s business objectives. There is a focus on
process improvement, development of best practices, supervisor training and leadership development.
Tier 3: Strategic Counsel
With an emphasis on advocacy on behalf of the business owner, the third stage of the relationship is more strategic and forward-looking with a goal of cultivating
an environment in which all efforts are directed by the mission and long-term objectives of the business owner.
In addition to serving as a resource and guide, BBSI has the ability to provide workers’ compensation coverage as a means of meeting statutory requirements
and protecting our clients from employment-related injury claims. Through our third-party administrators, we provide claims management services for our clients.
We work to manage and reduce job injury claims, identify fraudulent claims and structure optimal work programs, including modified duty.
Categories of Services
We report financial results in two categories of services: Professional Employer Services (“PEO”) and Staffing. See Item 7 of Part II of this Report for
information regarding the percentages of total net revenues provided by our PEO and staffing services for each of the last three fiscal years, and our
consolidated financial statements in Item 8 of Part II of this Report for information regarding revenues, net income and total assets in our single reportable
segment.
PEO
We enter into a client services agreement to establish a co-employment relationship with each client company, assuming responsibility for payroll, payroll taxes,
workers’ compensation coverage (if elected) and certain other administrative functions for the client’s existing workforce. We refer to employees of our PEO
clients as worksite employees (“WSEs”). The client maintains physical care, custody and control of the WSEs, including the authority to hire and terminate
employees. During 2021, we supported in excess of 7,600 PEO clients with total average WSEs of 112,928. This compares to more than 7,500 PEO clients with
an average of 108,249 total WSEs during 2020.
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Staffing and Recruiting
Our staffing services include on-demand or short-term staffing assignments, contract staffing, direct placement, and long-term or indefinite-term on-site
management. On-site management employees are BBSI management employees who are based on the client-site and whose jobs are to assist BBSI staffing
employees. Our recruiting experts maintain a deep network of professionals from which we source candidates. Through an assessment process, we gain an
understanding of the short and long-term needs of our clients, allowing us to identify and source the right talent for each position. We then conduct a rigorous
screening process to help ensure a successful hire.
Clients and Client Contracts
Our PEO business is typically characterized by long-term relationships that result in recurring revenue. The terms and conditions applicable to our client
relationships are set forth in a client services agreement, which typically provides for an initial term of one year with renewal for additional one-year periods, but
generally permits cancellation by either party upon 30 days’ written notice. In addition, in most cases we may terminate the agreement at any time for certain
breaches of contract, including nonpayment or failure to follow our workplace safety recommendations.
The PEO client services agreement also provides for indemnification 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. Our client service agreement requires that clients
enter into a co-employment arrangement and maintain comprehensive liability coverage in the amount of $1.0 million for acts of their employees. It is
nevertheless possible that claims not satisfied or covered through indemnification or insurance may be asserted against us, which could adversely affect our
results of operations.
We have PEO client services agreements with a diverse array of customers, including electronics manufacturers, various light-manufacturing industries,
agriculture-based companies, transportation and shipping enterprises, food processors, telecommunications companies, public utilities, general contractors in
various construction-related fields, and professional services firms. None of our clients individually represented more than 1% of our total revenues in 2021.
Market Opportunity
As a PEO that aligns with the mission of business owners by providing resources and guidance to small and mid-size businesses, BBSI believes its growth is
driven by the desire of business owners to focus on mission-critical functions, reduce complexity associated with the employment function, mitigate costs and
maximize their investment in human capital. Our integrated management platform has enabled us to capitalize on these needs within the small to mid-size
business sector.
The small and mid‑sized business segment is particularly attractive because:
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it is large, continues to offer significant growth opportunity and remains underserved by professional services companies;
it typically has fewer in-house resources than larger businesses and, as a result, is generally more dependent on external resources;
we generally experience a relatively high client retention rate and lower client acquisition costs within this market segment; and
we have found that small to mid-sized businesses are responsive to quality of service when selecting a PEO or staffing services provider.
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Competition
The business environment in which we operate is characterized by intense competition and fragmentation. BBSI is not aware of reliable statistics regarding the
number of its competitors, but certain large, well-known companies typically compete with us in the same markets and also have greater financial and marketing
resources than we do, including Automatic Data Processing, Inc., ManpowerGroup, Inc., Kelly Services, Inc., Insperity, Inc., TriNet Group, Inc., Robert Half
International Inc. and Paychex, Inc. We face additional competition from regional providers and we may in the future also face competition from new entrants to
the field, including other staffing services companies, payroll processing companies and insurance companies. The principal competitive factors in the business
environment in which we operate are price and level of service.
We believe that our growth is attributable to our ability to provide small and mid-sized companies with the resources and knowledge base of a large employer
delivered through a local operations team. Our level of integration with each client business provides us an additional competitive advantage.
Technology Platform
Our client-facing technology platform, myBBSI, includes both internally developed and licensed software which gives our clients a wide range of tools, including
the ability to process payroll, collect and process time and attendance information, manage human resource information including employee onboarding and
termination, as well as compensation and payroll tax reporting.
Growth Strategy
We believe our clients are one of our best advocates and powerful drivers of referral-based growth. In each market, operations teams provide expertise,
consultation and support to our clients, driving growth and supporting retention. We anticipate that by adding business teams to existing branches, we can
achieve incremental growth in those markets, driven by our reputation and by client referrals. In most markets business development efforts are led by area
managers and are further supported by business development managers.
Our business growth has three primary sources: referrals from existing clients, direct business-to-business sales efforts by our area managers and business
development managers, and an extensive referral network. Partners in our referral network include insurance brokers, financial advisors, attorneys, CPA’s, and
other business professionals who can facilitate an introduction to prospective clients. These referral partners facilitate introductions to business owners on our
behalf, typically in exchange for a fee equal to a small percentage of payroll.
We see two key drivers to our growth:
•
•
Increase market share in existing markets. We seek to support, strengthen and expand branch office operations through the ongoing
development of business teams. We believe that strengthening and expanding the operations of each location is an efficient and effective
means of increasing market share in the geographic areas in which we do business, and that our business teams serve a dual purpose: 1)
Delivering high-quality service to our clients, thereby supporting client business growth and retention, and driving client referrals, and 2)
Incubating talent at the branch level to support expansion into new markets.
Penetrate new markets. We intend to open additional branch offices in new geographic markets as opportunities arise. We have developed a
strategic approach to geographic expansion, which will serve as a guide for determining if and when to enter new markets. As part of this effort,
we have become licensed to provide PEO services nationwide. We believe our decentralized organizational model built on teams of senior-
level professionals allows us to incubate talent to support our expansion efforts.
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Workers’ Compensation
Through our client services agreement, BBSI has the ability to provide workers’ compensation coverage to its clients. We provide this coverage through a
variety of methods, all of which are subject to rigorous underwriting to assess financial stability, risk factors and cultural alignment related to safety and the
client’s desire to improve their operations. In providing this coverage, we are responsible for complying with applicable statutory requirements for workers'
compensation coverage.
Risk mitigation is also an important contributor to our principal goal of helping business owners operate their business more efficiently. It is in the mutual
interests of the client and BBSI to commit to workplace safety and risk mitigation. We maintain clear guidelines for our area managers and risk management
consultants, directly tying their continued employment 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 clients’ compliance with workplace safety requirements.
Elements of Workers' Compensation System
State law (and for certain types of employees, federal law) generally mandates that an employer reimburse its employees for the costs of medical care and other
specified benefits for injuries or illnesses, including catastrophic injuries and fatalities, incurred in the course and scope of employment. Most states require
employers to maintain workers' compensation insurance or otherwise demonstrate financial responsibility to meet workers' compensation obligations to
employees. 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. In many states, employers who meet certain financial and other requirements are permitted to
self-insure.
Insured Program
The Company provides workers’ compensation coverage for client employees primarily through arrangements with fully licensed, third-party insurers (the
“insured program”). Under this program, carriers issue policies or afford coverage to the Company’s clients under a program maintained by the Company.
Approximately 82% of the Company’s workers’ compensation exposure is covered through the insured program.
The Company entered into a new arrangement for its insured program effective July 1, 2021, whereby third-party insurers assume all risk of loss for claims
incurred after June 30, 2021. The agreement continues to June 30, 2022 and includes a renewal commitment through June 30, 2023. The arrangement allows
for premium adjustments depending on overall portfolio performance. If claims develop favorably, BBSI can participate in the savings up to $20.0 million for a
twelve-month policy period. If claims develop adversely, additional premium may be charged up to $7.5 million for a twelve-month policy period.
For claims incurred under the insured program prior to July 1, 2021, the Company retains risk of loss up to the first $3.0 million per occurrence on policies
issued after June 30, 2020 and $5.0 million per occurrence on policies issued before that date.
On June 29, 2020, the Company entered into a loss portfolio transfer agreement (“LPT 1”) to remove all outstanding workers’ compensation claims obligations
for claims incurred under its insured program between February 1, 2014 and December 31, 2017. This transaction reduced the Company’s outstanding
workers’ compensation liabilities and trust account balances by $115.7 million.
On June 30, 2021, the Company entered into a loss portfolio transfer agreement (“LPT 2”) to remove all remaining outstanding workers’ compensation claims
obligations for client policies issued under its insured program up to June 30, 2018. This transaction reduced the Company’s outstanding workers’
compensation liabilities by $53.1 million.
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Self-Insured Programs
The Company is a self-insured employer with respect to workers' compensation coverage for all employees, including employees of PEO clients that elect to
participate in our workers’ compensation program, working in Colorado, Maryland and Oregon. In the state of Washington, state law allows only the Company's
staffing services and internal management employees to be covered under the Company's self-insured workers' compensation program. The Company also
operates a wholly owned, fully licensed insurance company, Ecole, which provides workers’ compensation coverage to client employees working in Arizona and
Utah. Approximately 18% of the Company’s workers’ compensation exposure is covered through self-insurance or Ecole (the “self-insured programs”).
For all claims incurred under the Company’s self- insured programs, the Company retains risk of loss up to the first $3.0 million per occurrence, except in
Maryland and Colorado, where the Company’s retention per occurrence is $1.0 million and $2.0 million, respectively. For claims incurred under the Company’s
self-insured programs prior to July 1, 2020, the Company retains risk of loss up to the first $5.0 million per occurrence, except in Maryland and Colorado, where
the retention per occurrence is $1.0 million and $2.0 million, respectively.
Claims Management
As a result of our status as a self-insured employer in four states and our retention arrangements, our workers' compensation expense is tied directly to the
incidence and severity of covered workplace injuries. We seek to contain our workers' compensation costs through a comprehensive approach to claims
management. We use managed-care systems to reduce medical costs and keep time-loss costs to a minimum by assigning injured workers, whenever possible,
to short-term assignments which accommodate the workers' physical limitations. We believe that these assignments minimize both time actually lost from work
and covered time-loss costs. We engage a third-party claims administrator ("TPA") to provide the primary claims management expertise. Typical claims
management procedures include performing thorough and prompt on-site investigations of claims filed by employees, working with physicians to encourage
efficient medical management of cases, denying questionable claims and attempting to negotiate early settlements to eliminate future adverse development of
claims costs. We also maintain a corporate-wide pre-employment drug screening program and a post-injury drug test program. We believe our claims
management program has resulted in a reduction in the frequency of fraudulent claims and in accidents in which the use of illicit drugs appears to have been a
contributing factor.
Human Capital
At December 31, 2021, we had 121,660 total employees, including 116,154 WSEs under our PEO client service agreements, 4,760 staffing services
employees, 742 managerial, sales and administrative employees (together, “management employees”), and 4 executive officers. The number of employees at
any given time may vary significantly due to business conditions at customer or client companies. We believe our employee relations with management
employees are good.
BBSI believes that making significant investments in the best management employee talent available allows us to leverage the value of this investment many
times over. Additionally, we believe our Company’s success depends on our ability to attract, develop and retain our workforce. As such, we strive to be an
employer of choice and promote the health, welfare and safety of our employees. This involves promoting diversity and treating all employees with dignity and
respect, while providing our management employees with fair, market-based, competitive and equitable compensation.
We motivate our management employees through a compensation package that includes a competitive base salary and the opportunity for profit sharing. At the
branch level, profit sharing is in direct correlation to client WSE growth and workers’ compensation claims performance, reinforcing a culture focused on
achievement of client goals. We also provide a comprehensive benefits package as well as an employee stock purchase plan. We seek feedback from
employees regarding our benefits package through employee surveys. This information is used by management to make improvements as we continuously
strive to be an employer of choice. During 2021, we implemented a program that provides paid volunteer time to encourage our management employees to
participate in community service projects, which has been favorably received both internally and externally.
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We offer various qualified employee benefit plans to our employees, including those employees for whom we are the administrative employer in a co-
employment arrangement with a PEO client that so elects. Employees covered under a PEO arrangement may participate in our 401(k) plan at the sole
discretion of the PEO client. Our qualified staffing and management employee benefit plans include our 401(k) plan , in which employees may enroll upon
reaching 21 years of age and completing 1,000 hours of service in a 12 consecutive month period. We make matching contributions to the 401(k) plan under a
safe harbor provision, which are immediately 100% vested. We match 100% of contributions by management and staffing employees up to 3% of each
participating employee's annual compensation and 50% of the employee's contributions up to an additional 2% of annual compensation. We may also make
discretionary contributions to the 401(k) plan, which vest over six years and are subject to certain legal limits, at the sole discretion of our Board of Directors.
We also offer a cafeteria plan under Section 125 of the Internal Revenue Code and group health, life insurance and disability insurance plans to qualified
staffing and management employees. Generally, qualified employee benefit plans are subject to provisions of both the Internal Revenue Code and the
Employee Retirement Income Security Act of 1974 ("ERISA").
Certain highly compensated employees of the Company are allowed to participate in a nonqualified deferred compensation plan. Under the plan, participants
are permitted to defer receipt for income tax purposes of up to 90% of salary and up to 100% of any incentive bonus. Participants earn a return on their deferred
compensation based on investment earnings of participant-selected investments. As an incentive to participate in the plan, the Company awards restricted stock
units with a value equal to 35% of the amount deferred under the plan, up to a maximum of $75,000 per year. The restricted stock units vest in full on the fifth
anniversary of the grant date, contingent on the continued employment of the participant.
The Company established a Rabbi trust under which compensation deferred by participants is deposited and held separately from the Company's other assets,
subject to the claims of the Company's creditors in the event of its bankruptcy or insolvency.
The Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 (collectively, the “Acts”) subject us to potential
penalties unless we offer to our employees minimum essential healthcare coverage that is affordable. Because each PEO client is considered to be the sole
employer in the application of any rule or law included within the scope of the Acts, we are not required to offer health care coverage to the WSEs of our PEO
clients. However, in order to comply with the employer mandate provision of the Acts, we offer health care coverage to all eligible staffing employees and
management employees eligible for coverage under the Acts.
In response to the COVID-19 pandemic in March 2020, we transitioned much of our workforce to a remote working environment with a commitment to the safety
of our employees and the communities we serve. Beginning in the third quarter of 2020 and continuing through 2021, we re-opened our offices while continuing
to adhere to health and safety protocols and provided remote work options to accommodate employees seeking the flexibility to work remotely as well as in the
office.
Regulatory and Legislative Environment
We are subject to the laws and regulations of the jurisdictions within which we operate, including those governing self-insured employers under the workers'
compensation systems in Oregon, Maryland, and Colorado, as well as in Washington for staffing and management employees. We are also subject to laws and
regulations governing our two wholly owned insurance companies in Arizona. While the specific PEO laws and regulations vary among these jurisdictions, they
typically require some form of licensing or registration and often have statutory requirements for workplace safety and notice of change in obligation of workers’
compensation coverage in the event of contract termination. Although compliance with these requirements imposes some additional financial risk, particularly
with respect to those clients who breach their payment obligation to us, such compliance has not had a material adverse effect on our business to date.
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Our operations are affected by numerous federal and state laws relating to labor, tax and employment matters . Through our client services agreement, we
assume certain obligations and responsibilities as the administrative employer under federal and state laws. Since 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, we are subject to all federal statutes and regulations governing our employer-employee relationships for staffing and management employees.
Subject to the discussion of risk factors below, we believe that our operations are in compliance in all material respects with applicable federal statutes and
regulations.
Due to the nature of our operations, we collect, store, process, use and retain significant amounts of confidential and sensitive personal employee and client
information. As such, we are subject to a variety of federal and state laws and regulations associated with data security.
Additional Information
Our filings with the SEC, including our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements, and
registration statements, as well as any amendments to these filings, are accessible free of charge at our website at http://www.bbsi.com as soon as reasonably
practicable after they are electronically filed with the SEC. By making this reference to our website, we do not intend to incorporate into this report any
information posted on our website. The website should not be considered part of this report.
The SEC also maintains a website at http://www.sec.gov that provides access to reports, proxy and information statements, and other information regarding
issuers that file electronically with the SEC, including the Company.
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Item 1A.
RISK FACTORS
In addition to other information contained in this report, the following risk factors should be considered carefully in evaluating our business.
Risks Relating to the COVID-19 Pandemic
The Company’s business may be negatively affected by outbreaks of disease, such as epidemics or pandemics, including the ongoing COVID-19
pandemic.
In March 2020, the World Health Organization and the United States government declared COVID-19 a pandemic and recommended containment and
mitigation measures worldwide. In response to the COVID-19 pandemic, various preventative actions and government mandates have affected many areas of
the country, including states where BBSI and our clients operate, particularly on the West Coast. These restrictions on business operations have had a
particularly disruptive effect on small-and mid-sized businesses, which comprise our primary client base. As our PEO fees are based on client payroll, workforce
reductions, labor shortages and supply disruptions related to the pandemic or otherwise could have a material adverse effect on our business. Clients that are
impacted by government restrictions and economic disruptions may experience liquidity and other financial issues, reducing their capacity to pay for our
services.
In response to the pandemic, federal and state government agencies have enacted numerous laws and regulatory guidelines designed to help the economy,
individuals and employers. Many of these legislative and regulatory changes, including the American Rescue Plan Act enacted on March 11, 2021, directly
impact the Company and our clients. Several of these programs use payroll tax credits and other payroll tax-related reductions or deferrals as the mechanism to
provide benefits to small businesses and employees. The guidance surrounding these programs is limited and continuously evolving. Failure to appropriately
interpret and comply with legal and regulatory changes arising from the COVID-19 pandemic could have a material adverse effect on our business and
reputation. Additionally, failure to incorporate changes to laws and regulations resulting from COVID-19 into our PEO business model may decrease our ability
to attract and retain clients.
Additionally, many states revised their workers’ compensation standards of coverage to include COVID-19 related illnesses for certain groups of workers. While
effects on the Company’s workers’ compensation exposure in the states in which we operate have been limited to date, these changes in laws and regulations
or in the pattern of COVID-19 illnesses could increase our exposure to workers’ compensation claims.
As our employees may work from home more frequently and access the Company’s systems remotely, the Company may be exposed to heightened security
risks, including the risk of cyber-attacks. Additionally, if the Company’s key management employees are unable to perform their duties for an extended period,
including as the result of illness, the Company’s business may be adversely affected.
The COVID-19 pandemic has also caused significant volatility and uncertainty in the U.S. economy that may result in another economic downturn, which could
in turn lead to a decrease in gross billings, increases in workers’ compensation and unemployment claims, increased unemployment taxes, increased
uncollectable receivables and reductions in the value of the Company’s investment portfolio.
Continuation or exacerbation of the consequences of the pandemic described above and elsewhere in this report would likely have a material adverse effect on
our business, cash flows, results of operations and financial condition, which may also result in our inability to comply with financial covenants under our credit
facilities, our inability to obtain necessary additional financing and a decline in stockholder value.
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Risks Relating to Workers’ Compensation
Our ability to continue our business operations under our present service model is dependent on maintaining workers' compensation insurance
coverage.
Our arrangement with fully licensed, third-party insurers under the insured program provides workers’ compensation coverage to BBSI’s PEO clients through
June 30, 2022, with committed coverage through June 30, 2023, and the possibility of additional annual renewals. If our fully licensed third-party insurers are
unwilling or unable to renew our arrangement in the future, we would need to seek coverage from a small number of alternative insurers. If replacement
coverage were unavailable or available only on significantly less favorable terms, our business and results of operations would be materially adversely affected.
Our consolidated retention for workers' compensation claims prior to July 1, 2021 is $3.0 million per occurrence under our insurance arrangement in
the majority of states in which we operate.
For claims incurred under the insured program prior to July 1, 2021, the Company retains risk of loss up to the first $3.0 million per occurrence on policies
issued after June 30, 2020, and $5.0 million per occurrence on policies issued before that date.
For all claims incurred under the Company’s self-insured programs, the Company retains risk of loss up to the first $3.0 million per occurrence, except in
Maryland and Colorado, where the Company’s retention per occurrence is $1.0 million and $2.0 million, respectively. For claims incurred under the Company’s
self-insured programs prior to July 1, 2020, the Company retains risk of loss up to the first $5.0 million per occurrence, except in Maryland and Colorado, where
the retention per occurrence is $1.0 million and $2.0 million, respectively.
On June 29, 2020, the Company entered into a loss portfolio transfer agreement (“LPT 1”) to remove all outstanding workers’ compensation claims obligations
for claims incurred under its insured program between February 1, 2014 and December 31, 2017. On June 30, 2021, the Company entered into a loss portfolio
transfer agreement (“LPT 2”) to remove all remaining outstanding workers’ compensation claims obligations for client policies issued under its insured program
up to June 30, 2018.
Thus, for claims incurred before July 1, 2020, the Company has financial risk for most workers’ compensation claims under $5.0 million on a per occurrence
basis, except for claims transferred under the insured program as part of LPT 1 and LPT 2. For claims incurred between July 1, 2020 and June 30, 2021, the
Company has financial risk for most workers' compensation claims under $3.0 million on a per occurrence basis. This level of per occurrence retention may
result in higher workers’ compensation costs to us with a corresponding negative effect on our operating results and financial condition.
Collateral requirements could increase beyond our ability to satisfy those requirements.
The Company is required to provide collateral for its insured program and by certain states related to its current and former status as a self-insured employer.
Various factors, including adverse loss experience or a decline in the fair value of investments in our collateral accounts, could cause the counterparties to
require that additional collateral be posted. To partially satisfy these collateral requirements, the Company has provided surety bonds and standby letters of
credit. If there are significant changes to the market for these credit products, or if we are unable to renew these agreements, we may incur increased costs or
be required to deposit additional capital as collateral.
11
Failure to manage the severity and frequency of workplace injuries will increase our workers’ compensation expenses.
Significant increases in the relative frequency or severity of workplace injuries due to failures to accurately assess potential risks or assure implementation of
effective safety measures by our clients may result in increased workers’ compensation claims expenses, with a corresponding negative effect on our results of
operations and financial condition.
Risks Related to Technology
To succeed, we must constantly improve our technology to meet the expectations of our clients. If we fail to meet those expectations, we may lose
clients and harm our business.
In order to attract and retain clients and satisfy their expectations, the software, hardware and networking technologies we use must be frequently and rapidly
upgraded, enhanced and improved in response to technological advances, competitive pressures, client expectations, and new and changing laws. Failure to
successfully implement technological improvements could result in harm to our reputation, loss of market share, reduced revenue, or client claims against us,
any of which could materially harm our business.
As we continue to invest in upgrades or replacements to our existing systems, including enhancements and additional security measures, we may incur
substantial costs and risks relating to development, installation and implementation, including disruptions in our service offerings or increases in expected costs,
which may have a material adverse effect on our operating results and financial condition.
We are dependent upon technology services, and if we experience damage, service interruptions or failures in our computer and
telecommunications systems, our client relationships and our ability to attract new clients may be adversely affected.
We rely extensively on computer systems, including systems of third-party vendors, to provide service offerings to our clients, manage our branch network,
perform employment-related services and accounting and reporting functions, and summarize and analyze our financial results. These systems are subject to
damage or interruption from telecommunications failures, power-related outages, third-party disruptions, computer viruses and malicious attacks, security
breaches and catastrophic events. If these systems are damaged or fail to function properly, we may incur substantial costs to repair or replace them,
experience loss of critical data and interruptions or delays in our ability to manage our operations, and encounter a loss of client confidence. In addition, our
clients’ businesses may be adversely affected by any system or equipment failure or breach we experience. As a result, we may suffer damage to our
reputation, we may lose clients, our ability to attract new clients may be adversely affected, and we could be exposed to contractual liability.
We depend on third-party software to provide our services and support our operations.
Significant portions of our services and operations rely on software that is licensed from third-party vendors. The fees associated with these license agreements
could increase in future periods, resulting in increased operating expenses. If there are significant changes to the terms and conditions of our license
agreements, or if we are unable to renew these license agreements, we may be required to make changes to our vendors or information technology systems.
These changes may impact the services we provide to our clients or the processes we have in place to support our operations, which could have an adverse
effect on our business.
12
We could be subject to reduced revenues, increased costs, liability claims, or harm to our reputation as a result of data theft, cyberattacks or other
security vulnerabilities.
The nature of our business involves the receipt, storage, and transmission of personal and proprietary information about thousands of employees and clients.
Attacks on information technology systems continue to grow in frequency and sophistication, and we and our third-party vendors are targeted by unauthorized
parties using malicious tactics, code and viruses. Hardware or applications we develop or procure from third-party vendors may contain defects in design or
other problems that could unexpectedly compromise the confidentiality, integrity or availability of data or our systems. Because the techniques used to obtain
unauthorized access and disable or sabotage systems change frequently and may be difficult to detect for long periods of time, we and our third-party vendors
may be unable to anticipate these techniques or implement adequate preventive measures. As these threats continue to evolve, we may be required to invest
significant additional resources to modify and enhance our information security and controls or to investigate and remediate any security vulnerabilities. While
our technology infrastructure is designed to safeguard and protect personal and business information, we have limited ability to monitor the implementation of
similar safeguards by our vendors.
Any cyberattack, unauthorized intrusion, malicious software infiltration, network disruption, corruption of data, misuse or theft of private or other sensitive
information, or inadvertent acts by our own employees, could result in the disclosure or misuse of confidential or proprietary information, which could have a
material adverse effect on our business operations or that of our clients. If we experience a significant data security breach, fail to detect and appropriately
respond to a significant data security breach, or fail to comply with the various state cybersecurity regulations, we could be exposed to government enforcement
actions and private litigation. These losses may exceed our insurance coverage for such incidents. In addition, our employees and clients could lose confidence
in our ability to protect their personal and proprietary information, which could cause them to terminate their relationships with us. Any loss of confidence arising
from a significant data security breach could hurt our reputation, further damaging our business.
Other Risks Related to our Business and Industry
In order to continue to grow revenues, we are dependent on retaining current clients and attracting new clients.
The Company’s revenue growth can be volatile and is dependent on same customer sales and the addition of new clients. Revenues increased 8.4% in 2021
and decreased 6.5% in 2020. There can be no assurance that we will continue to maintain current levels of revenues. Efforts to achieve business growth
intensifies pressure on retaining current clients and attracting increasing numbers of new clients.
Our business is subject to risks associated with geographic market concentration.
Our California operations accounted for approximately 73% of our total revenues in 2021. As a result of the current importance of our California operations and
anticipated continued growth from these operations, our profitability over the next several years is expected to be largely dependent on economic and regulatory
conditions in California. If California experiences an economic downturn, or if the regulatory environment changes in a way that adversely affects our ability to
do business or limits our competitive advantages, our profitability and growth prospects may be materially adversely affected. Similarly, due to our geographic
concentration in California, a natural disaster or major event that disrupts these markets or the related workforce could have an immediate and material adverse
impact on our operations and profitability.
13
Economic conditions may impact our ability to attract new clients and cause our existing clients to reduce staffing levels or cease operations.
Weak economic conditions typically have a negative impact on small-and mid-sized businesses, which make up the majority of our clients. In turn, these
businesses could cut costs, including trimming employees from their payrolls, or closing locations or ceasing operations altogether. If current economic
conditions were to weaken further, these forces may result in decreased revenues due both to the downsizing of our current clients and increased difficulties in
attracting new clients in a poor economic environment. In addition, weak economic conditions may also result in additional bad debt expense to the extent that
existing clients cease operations or are otherwise unable to meet their financial obligations.
Our staffing business is vulnerable to economic fluctuations.
Demand for our staffing services is sensitive to changes in the level of economic activity in the regions in which we do business. As economic activity slows
down, companies often reduce their use of temporary employees before undertaking layoffs of permanent staff, resulting in decreased demand for staffing
services. On the other hand, during strong economic periods or tight labor markets due to other factors, we often experience shortages of qualified employees to
meet customer needs, as occurred during 2021.
Because we assume the obligation to make wage, tax and regulatory payments in respect of some employees, we are exposed to client credit risks.
We generally assume credit risk associated with our clients’ employee payroll obligations, including liability for payment of salaries and wages (including payroll
taxes), as well as retirement benefits. These obligations are fixed whether or not the client makes payments to us as required by our services agreement. We
attempt to mitigate this risk by invoicing our clients at the end of their specific payroll processing cycle. We also carefully monitor the timeliness of our clients'
payments and impose strict credit standards on our customers. If we fail to successfully manage our credit risk, our results of operations and financial condition
could be materially and adversely affected.
Increases in unemployment claims could raise our state and federal unemployment tax rates that we may not be able to pass on to our customers.
During weak economic conditions in our markets, the level of unemployment claims tends to rise as a result of employee layoffs at our clients and lack of work in
our temporary staffing pool. The rise in unemployment claims often results in higher state and federal unemployment tax rates, which in most instances cannot
be concurrently passed on to our customers either due to existing client services agreements or competitive pricing pressures. Increases in our state and federal
unemployment tax rates could have a material adverse effect on our results of operations, particularly in the early part of the calendar year when payroll tax
rates are at or near their maximum.
If we are unable to maintain our brand image and corporate reputation, our business may suffer.
Our success depends in part on our ability to maintain our reputation for providing excellent service to our customers. Service quality issues, whether actual or
perceived, and even when due to dissemination of false information or unfounded perceptions, could tarnish the image of our brand and may cause customers
to use other companies. Also, adverse publicity surrounding labor relations, data breaches, SEC investigations, and the like, could negatively affect our overall
reputation. Damage to our reputation could reduce demand for our services and thus have an adverse effect on our business, financial condition and results of
operations.
14
Our service agreements may be terminated on short notice, leaving us vulnerable to a significant loss of customers in a short period of time, if
business or regulatory conditions change or events occur that negatively affect our reputation.
Our client services agreements are generally terminable on 30 days’ notice by either us or our client. As a result, our clients may terminate their agreement with
us at any time, making us particularly vulnerable to changing business or regulatory conditions or changes affecting our reputation or the reputation of our
industry.
We may be exposed to employment‑related claims and costs and periodic litigation that could adversely affect our business and results of
operations.
We either co-employ employees in connection with our PEO client services agreements or place our employees in our customers' workplace in connection with
our staffing business. As such, we are subject to a number of risks inherent to our status as the administrative employer, including without limitation:
•
•
•
•
•
claims of misconduct or negligence on the part of our employees, discrimination or harassment claims against our employees, or claims by our
employees of discrimination or harassment by our clients;
immigration-related claims;
claims relating to violations of wage, hour and other workplace regulations;
claims relating to employee benefits, entitlements to employee benefits, or errors in the calculation or administration of such benefits; and
possible claims relating to misuse of customer confidential information, misappropriation of assets or other similar claims.
If we experience significant incidents involving any of the above-described risk areas, we could face substantial out-of-pocket losses, fines or negative publicity.
In addition, such claims may give rise to litigation, which may be time consuming, distracting and costly, and could have a material adverse effect on our
business. With respect to claims involving our co-employer relationships, although our client services agreement provides that the client will indemnify us for any
liability attributable to the conduct of the client or its employees, we may not be able to enforce such contractual indemnification, or the client may not have
sufficient assets to satisfy its obligations to us. An increase in employment-related claims against us may have a material adverse effect on our results of
operations.
We are dependent on certain key personnel and recruitment and retention of key employees may be difficult and expensive.
We believe that the successful operation of our business is dependent upon our retention of the services of key personnel, including our Chief Executive Officer,
other executive officers and area managers. We may not be able to retain all of our executives, senior managers and key personnel in light of competition for
their services. If we lose the services of one of our executive officers or a significant number of our senior managers, our results of operations likely would be
adversely affected.
We depend on attracting and retaining qualified employees; during periods of economic growth, our costs to do so increase and attracting and
retaining people becomes more difficult.
Our teams of client-facing professionals are the foundation of our value proposition. Our ability to attract and retain qualified personnel could be adversely
affected by lower unemployment rates and higher compensation levels. During periods of economic growth, we face increased competition for retaining and
recruiting qualified personnel, resulting in higher advertising and recruiting costs and increased salary expenses. If we cannot attract and retain qualified
employees, the quality of our services may deteriorate and our reputation and results of operations could be adversely affected.
15
We do not have an expansive in-house sales staff and therefore rely extensively on referral partners.
We currently maintain a minimal internal professional sales force, instead relying heavily on referral partners to provide referrals to new business. In connection
with these arrangements, we pay a fee to referral partners for new clients. These referral firms and individuals do not have an exclusive relationship with us. If
we are unable to maintain these relationships or if our referral partners increase their fees or lose confidence in our services, we could face declines in our
business and additional costs and uncertainties as we attempt to hire and train an internal sales force.
Our business is subject to risks associated with healthcare reforms.
The Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 (collectively, the “Acts”) subject us to potential
penalties unless we offer our employees minimum essential healthcare coverage that is affordable. In order to comply with the employer mandate provision of
the Acts, we offer health care coverage to all temporary and permanent employees eligible for coverage under the Acts other than employees of our PEO
clients, which are responsible for providing required health care coverage to their employees. Designating employees as eligible is complex and is subject to
challenge by employees and the Internal Revenue Service (“IRS”). While we believe we have properly identified eligible employees, a later determination that
we failed to offer the required health coverage to eligible employees could result in penalties that may materially harm our business. We cannot be certain that
compliant insurance coverage will remain available to us on reasonable terms, and we could face additional risks arising from future changes to or repeal of the
Acts or changed interpretations of our obligations under the Acts. There can be no assurance that we will be able to recover all related costs through increased
pricing to our customers or that such costs will be recovered in the period in which costs are incurred, and the net financial impact on our results of operations
could be significant.
We face competition from a number of other companies.
We face competition from various companies that may provide all or some of the services we offer. Our competitors include companies that are engaged in
staffing services such as Robert Half International Inc., Kelly Services, Inc., and ManpowerGroup Inc.; companies that are focused on co-employment, such as
Insperity, Inc., and TriNet Group, Inc.; and companies that primarily provide payroll processing services, such as Automatic Data Processing, Inc. and
Paychex, Inc. We also compete with insurance carriers and other providers of workers’ compensation insurance, and our offerings must be priced competitively
with prices provided by these competitors in order for us to attract and retain our clients. Maintaining competitive pricing in the workers’ compensation market
could lead to reduced margins and profitability. Additionally, we face competition from information technology outsourcing firms and broad-based outsourcing
and consulting firms that perform individual projects.
16
Several of our existing or potential competitors have substantially greater financial, technical and marketing resources than we do, which may enable them to:
•
•
•
•
•
•
develop and expand their infrastructure and service offerings more quickly and achieve greater cost efficiencies;
invest in new technologies;
expand operations into new markets more rapidly;
devote greater resources to marketing;
compete for acquisitions more effectively and complete acquisitions more easily; and
aggressively price products and services and increase benefits in ways that we may not be able to match financially.
In order to compete effectively in our markets, we must target our potential clients carefully, continue to improve our efficiencies and the scope and quality of our
services, and rely on our service quality, innovation, education and program clarity. If our competitive advantages are not compelling or sustainable, then we are
unlikely to increase or sustain profits and our stock price could decline.
Our investment portfolio is subject to market and credit risks, which could adversely impact our financial condition or results of operations.
We seek to hold a diversified portfolio of high-quality investments that is managed by a professional investment advisory firm in accordance with our investment
policy and routinely reviewed by management and approved by the risk management committee of our Board of Directors. However, our investments, including
those held as collateral for our various insurance programs, are subject to general economic conditions and market risks, as well as risks inherent to particular
securities, including credit, interest rate and liquidity risks. Our portfolio consists primarily of debt securities and is subject to the risk that certain investments
may default, become impaired due to deterioration in the financial condition of one or more issuers of the securities, or will need to be sold for realized losses.
Although our investment strategy is designed to preserve our capital, we cannot be certain that our investment objectives will be achieved, and we could incur
substantial realized and unrealized investment losses in future periods.
We may be unable to draw on our revolving credit facility in the future.
If our business does not perform as expected, including if we generate less revenue than anticipated from our operations or encounter significant unexpected
costs, we may fail to comply with the financial covenants under our credit facilities. If we do not comply with our financial covenants and we do not obtain a
waiver or amendment from our lender, the lender may elect to cause all amounts owed to become immediately due and payable or may decline to renew our
credit facility. In that event, we would seek to establish a replacement credit facility with one or more other lenders, including lenders with which we have an
existing relationship, potentially on less desirable terms. There can be no guarantee that replacement financing would be available at commercially reasonable
terms, if at all.
Changes in our income tax positions or adverse outcomes resulting from on-going or future tax audits could harm our business, operating results,
financial condition and prospects.
Significant judgments and estimates are required in determining our provision for income taxes and other tax liabilities. In determining the adequacy of our tax
provision, we assess the likelihood of adverse outcomes that could result if our tax positions were challenged by the IRS and other tax authorities. The tax
authorities in the U.S. regularly examine our income and other tax returns. The ultimate outcome of tax examinations and disputes cannot be predicted with
certainty. Should the IRS or other tax authorities assess additional taxes as a result of these or other examinations, we may be required to record charges to
operations that could have a material impact on our results of operations, financial position or cash flows.
17
Our long-term growth strategy may include acquisitions which could be unsuccessful or cause disruptions to our business, which could adversely
impact our financial condition or results of operations.
Potential future acquisitions may introduce a number of risks related to the integration of businesses, personnel, product lines, and technologies. If we are
unable to successfully identify appropriate acquisition candidates, negotiate favorable terms, and successfully integrate an acquisition, our business, financial
condition, and results of operation could be materially and adversely affected.
Risks Related to Our Regulatory Environment
We operate in a complex regulatory environment, and failure to comply with applicable laws and regulations could adversely affect our business.
Corporate human resource operations are subject to a broad range of complex and evolving laws and regulations, including those applicable to payroll
practices, benefits administration, employment practices, workers’ compensation coverage, and privacy. Because our clients have employees in many states
throughout the United States, we must perform our services in compliance with the legal and regulatory requirements of multiple jurisdictions. Some of these
laws and regulations may be difficult to ascertain or interpret and may change from time to time. Violation of such laws and regulations could subject us to fines,
penalties, and damages, damage our reputation, constitute a breach of our client agreements, impair our ability to obtain and renew required licenses, and
decrease our profitability or competitiveness. If any of these effects were to occur, our operating results and financial condition could be adversely affected.
If we are determined not to be an “employer” under certain laws and regulations, our clients may stop using our services, and we may be subject to
additional liabilities.
We are the administrative employer in our co-employment relationships under the various laws and regulations of the IRS and the U.S. Department of Labor. If
we are determined not to be the administrative employer under such laws and regulations and are therefore unable to assume our clients’ obligations for
employment and other taxes, our clients may be held jointly and severally liable for payment of such taxes. Some clients or prospective clients may view such
potential liability as an unacceptable risk, discouraging current clients from continuing a relationship with us or prospective clients from entering into a new
relationship with us. Any determination that we are not the administrative employer for purposes of ERISA could also adversely affect our cafeteria benefits plan
operated under Section 125 of the Internal Revenue Code and result in liabilities to us under the plan.
Changes in government regulations may result in restrictions or prohibitions applicable to the provision of employment services or the imposition
of additional licensing, regulatory or tax requirements.
Our business is heavily regulated in most jurisdictions in which we operate. We cannot provide assurance that the states in which we conduct or seek to
conduct business will not:
•
•
•
impose additional regulations that prohibit or restrict employment-related businesses like ours;
require additional licensing or add restrictions on existing licenses to provide employment-related services; or
increase taxes or make changes in the way in which taxes are calculated for providers of employment-related services.
Any changes in applicable laws and regulations may make it more difficult or expensive for us to do business, inhibit expansion of our business, or result in
additional expenses that limit our profitability or decrease our ability to attract and retain clients.
18
We may find it difficult to expand our business into additional states due to varying state regulatory requirements.
Future growth in our operations depends, in part, on our ability to offer our services to prospective clients in new states, which may subject us to different
regulatory requirements and standards. In order to operate effectively in a new state, we must obtain and maintain all necessary licenses and regulatory
approvals, adapt our procedures to that state's regulatory requirements and modify our service offerings to adapt to local market conditions. As we expand into
additional states, we may not be able to duplicate in other markets the financial performance experienced in our current markets.
Our wholly owned insurance companies are subject to substantial government regulation.
Our wholly owned insurance companies are primarily regulated by state insurance commissioners in the states in which they conduct business. Such regulation
includes monitoring the financial status of these companies, approving policies and premium rates, maintaining requirements for capital surplus and types of
investments, and approving any significant changes to the legal or operating structure of these entities. State regulators can also impose taxes and other fees
on insurance companies under their jurisdiction. These regulations may restrict our ability to operate these companies in the manner we believe is best, which
could increase the cost of our operations, restrict our access to insurance coverage or adversely affect our liquidity.
Risks Related to Ownership of our Common Stock
Our stock price may be volatile or may decline, resulting in substantial losses for our stockholders.
The market price of our Common Stock has been, and may continue to be, volatile for the foreseeable future. Important factors that may cause our trading price
to decline include the factors listed below and other factors that may have a material adverse effect on our business or financial results, including those
described above in this “Risk Factors” section:
•
•
•
•
•
•
actual or anticipated fluctuations in our results of operations, including a significant slowdown in our revenue growth or material increase in our
workers’ compensation expense;
our failure to maintain effective internal control over financial reporting or otherwise discover material errors in our financial reporting;
imposition of significant fines or penalties or other adverse action by regulatory authorities against the Company;
adverse developments in legal proceedings involving claims against the Company;
our failure to meet financial projections or achieve financial results anticipated by analysts; or
changes in our Board of Directors or management.
19
Maryland law and our Charter and bylaws contain provisions that could make the takeover of the Company more difficult.
Certain provisions of Maryland law and our Charter and bylaws could have the effect of delaying or preventing a third-party from acquiring the Company, even if
a change in control would be beneficial to our stockholders. These provisions of our Charter and bylaws permit the Board of Directors to issue up to 500,000
shares of preferred stock with such rights and preferences, including voting rights, as the Board may establish, without further approval by the Company's
stockholders, which could also adversely affect the voting power of holders of our Common Stock.
In addition, the Company is subject to the Maryland control share act (the “Control Share Act”). Under the Control Share Act, a person (an “Acquiring Person”)
who acquires voting stock in a transaction (a “Control Share Acquisition”) which results in its holding voting power within specified ranges cannot vote the
shares it acquires in the Control Share Acquisition unless voting rights are accorded to such control shares by the holders of two-thirds of the outstanding voting
shares, excluding the Acquiring Person and the Company's officers and directors who are also employees of the Company.
The Company is also subject to the provisions of Maryland law limiting the ability of certain Maryland corporations to engage in specified business combinations
(the “Business Combination Act”). Subject to certain exceptions, the Business Combination Act prohibits a Maryland corporation from engaging in a business
combination with a stockholder who, with its affiliates, owns 10% or more of the corporation's voting stock. These provisions will not apply to business
combinations that are approved by the Board of Directors before the stockholder became an interested stockholder.
Item 1B
None.
UNRESOLVED STAFF COMMENTS
20
Item 2.
PROPERTIES
We operate through 50 branch offices. The following table shows the number of locations in each state in which we have offices. We also lease office space in
other locations in our market areas which we use to recruit and place employees.
Offices
California
Colorado
Oregon
Pennsylvania
Washington
Arizona
Idaho
Maryland
Nevada
Utah
Delaware
New Mexico
North Carolina
Tennessee
Virginia
Number of
Branch
Locations
23
3
3
3
3
2
2
2
2
2
1
1
1
1
1
We lease office space for our branch offices. At December 31, 2021, our leases had expiration dates ranging from less than one year to seven years. Our
corporate headquarters occupies approximately 81 percent of the 65,300 square foot building we own in Vancouver, Washington.
21
Item 3.
LEGAL PROCEEDINGS
BBSI is not subject to material legal proceedings and claims other than those which arise in the ordinary course of our business, except for those matters
discussed in “Note 12 - Litigation” to the consolidated financial statements incorporated into Item 8 of Part II of this report.
Item 4.
MINE SAFETY DISCLOSURES
Not Applicable.
PART II
Item 5.
MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES
Our common stock (the "Common Stock") trades on the Global Select Market segment of The Nasdaq Stock Market under the symbol "BBSI." At February 10,
2022, there were 23 stockholders of record and approximately 5,906 beneficial owners of the Common Stock.
The following table summarizes information related to stock repurchases during the quarter ended December 31, 2021.
Month
October
November
December
Total
Total
Number of
Shares
Repurchased
$
-
31,006
60,098
91,104
Average Price
Paid
Per Share
-
75.83
69.23
Total Number of
Shares Repurchased
as Part of Publicly
Announced Plan (1)
Approximate Dollar Value of
Shares that May Yet
Be Repurchased
Under the Plan (1)
$
-
31,006
60,098
91,104
31,172,822
28,821,716
24,660,945
(1) In August 2019, the Board authorized the repurchase of up to $50.0 million of shares of the Company’s stock from time to time in open market purchases
over a three-year period beginning August 15, 2019. As of December 31, 2021, the Company had repurchased 382,057 shares at an aggregate purchase price
of $25.3 million. On February 28, 2022, the Board of Directors authorized the repurchase of up to $75.0 million of the Company’s common stock over a two-year
period beginning February 28, 2022. The new repurchase program replaces the program approved in August 2019.
22
The following graph shows the cumulative total return at the dates indicated for the period from December 31, 2016 until December 31, 2021, for our
Common Stock, The Nasdaq Composite Index, and the S&P 1500 Human Resource & Emplo yment Services Index, a published industry index that is
considered reflective of the Company’s peers .
The stock performance graph has been prepared assuming that $100 was invested on December 31, 2016 in our Common Stock and the indexes shown, and
that dividends are reinvested. The stock price performance reflected in the graph may not be indicative of future price performance.
Barrett Business Services, Inc.
NASDAQ Composite
S&P 1500 Human Resource & Employment Services Index
100.00
100.00
100.00
102.36
129.64
133.65
92.03
125.96
117.99
147.34
172.17
139.40
113.60
249.51
140.36
116.89
304.85
211.75
12/16
12/17
12/18
12/19
12/20
12/21
23
Item 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
The Company is a leading provider of business management solutions for small and mid-sized companies. The Company has developed a management
platform that integrates a knowledge-based approach from the management consulting industry with tools from the human resource outsourcing industry. This
platform, through the effective leveraging of human capital, helps our business owner clients run their businesses more effectively. We believe this platform,
delivered through a decentralized organizational structure, differentiates BBSI from our competitors.
We report revenues in our financial results in two categories of services: professional employer services (“PEO”) and staffing.
With our PEO clients, we enter into a co-employment arrangement in which we become the administrative employer while the client maintains physical care,
custody and control of their workforce. Our PEO services are billed as a percentage of client payroll; the gross amount invoiced includes direct payroll costs plus
an additional percentage amount to cover employer payroll-related taxes, workers’ compensation coverage (if provided), other service related costs and a
margin. However, actual costs can be higher or lower than anticipated. PEO customers are invoiced following the end of each payroll processing cycle, with
payment generally due on the invoice date. Revenues for PEO services exclude direct payroll billings because we are not the primary obligor for those
payments.
We generate staffing services revenues primarily from short-term staffing, contract staffing, on-site management and direct placement services. For staffing
services other than direct placement, invoiced amounts include direct payroll, an amount intended to cover employer payroll-related taxes, workers’
compensation coverage, other service related costs and a margin. Staffing customers are invoiced weekly and typically have payment terms of 30 days. Direct
placement services are billed at agreed fees at the time of a successful placement.
Our business is concentrated in California, and we expect to continue to derive a majority of our revenues from this market in the future. Revenues generated in
our California operations accounted for 73% of our total revenues in 2021, 75% in 2020 and 77% in 2019. Consequently, any weakness in economic conditions
or changes in the regulatory or insurance environment in California could have a material adverse effect on our financial results.
Our cost of revenues for PEO services includes employer payroll-related taxes and workers' compensation costs. Our cost of revenues for staffing services
includes direct payroll costs, employer payroll-related taxes, employee benefits, and workers’ compensation costs. Direct payroll costs represent the gross
payroll earned by staffing services employees based on salary or hourly wages. Payroll taxes and employee benefits consist of the employer's portion of Social
Security and Medicare taxes, federal and state unemployment taxes and staffing services employee reimbursements for materials, supplies and other
expenses, which are paid by our customer. Workers' compensation costs consist primarily of the costs associated with our workers' compensation program,
including premiums for the insured program, claims reserves for the self-insured program, claims administration fees, legal fees, medical cost containment
(“MCC”) expense, state administrative agency fees, third-party broker commissions, risk manager payroll, premiums for excess insurance, and costs associated
with operating our two wholly owned insurance companies, AICE and Ecole.
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 personnel related costs, advertising, rent, office supplies, professional and legal fees and branch incentive compensation.
Corporate-level operating expenses consist primarily of executive and office staff payroll and personnel related costs, professional and legal fees, travel,
occupancy costs, information systems costs, and executive and corporate staff incentive compensation.
24
Depreciation and amortization represent depreciation of property and equipment, leasehold improvements , software and internally developed software costs.
Property, equipment, software and internally developed software costs are depreciated using the straight-line method over their estimated useful lives, which
range from 3 to 39 years. Leasehold improvements are amortized using the straight-line method over the shorter of the lease term or estimated useful life.
Critical Accounting Policies and Estimates
We have identified the following accounting estimate as critical to our business and the understanding of our results of operations. For a detailed discussion of
the application of this and other accounting policies, see “Note 1 - Summary of Operations and Significant Accounting Policies” to the consolidated financial
statements in Item 8 of Part II of this report. The preparation of this Annual Report on Form 10-K requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the
reporting period. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates.
Workers' Compensation Reserves
We recognize our liability for the ultimate payment of incurred claims and claims adjustment expenses by establishing a reserve that represents our estimates of
future amounts necessary to pay claims and related expenses with respect to workplace injuries that have occurred. When a claim involving a probable loss is
reported, our independent third-party administrator for workers’ compensation claims (“TPA”) establishes a case reserve for the estimated amount of ultimate
loss. The estimate reflects a judgment based on established case reserving practices and the experience and knowledge of the TPA regarding the nature and
expected amount of the claim, as well as the estimated expenses of settling the claim, including legal and other fees and expenses of claims administration. The
adequacy of such case reserves depends in part on the professional judgment of the TPA to properly and comprehensively evaluate the economic
consequences of each claim.
Our reserves include an additional component for potential future increases in the cost to finally resolve open injury claims and claims incurred in prior periods
but not reported (together, "IBNR") based on actuarial estimates provided by the Company’s independent actuary. IBNR reserves, unlike specific case reserves,
do not apply to a specific claim but rather apply to the entire population of claims arising from a specific time period. IBNR primarily covers costs relating to:
•
•
•
Future claim payments in excess of case reserves on recorded open claims;
Additional claim payments on closed claims; and
Claims that have occurred but have not yet been reported to us.
The process of estimating unpaid claims and claims adjustment expense involves a high degree of judgment and is affected by both internal and external
events, including changes in claims handling practices, modifications in reserve estimation procedures, changes in individuals involved in the reserve estimation
process, inflation, trends in the litigation and settlement of pending claims, and legislative changes.
Our estimates are based on actuarial analyses and informed judgment, derived from individual experiences and expertise applied to multiple sets of data and
analyses. We consider significant facts and circumstances known both at the time that loss reserves are initially established and as new facts and
circumstances become known. Due to the inherent uncertainty underlying loss reserve estimates, the expenses incurred through final resolution of our liability
for our workers’ compensation claims will likely vary from the related loss reserves at the reporting date. Therefore, as specific claims are paid out in the future,
actual paid losses may be materially different from our current loss reserves.
25
A basic premise in most actuarial analyses is that historical data and past patterns demonstrated in the incurred and paid historical data form a reasonable
basis upon which to project future outcomes, absent a material change. Significant structural changes to the available data can materially impact the reserve
estimation process. To the extent a material change affecting the ultimate claim liability becomes known, such change is quantified to the extent possible
through an analysis of internal company data and, if available and when appropriate, external data. Actuaries exercise a considerable degree of judgment in the
evaluation of these factors and the need for such actuarial judgment is more pronounced when faced with material uncertainties.
We believe that the amounts recorded for our estimated liabilities for workers’ compensation claims, which are based on informed judgment, analysis of data,
actuarial estimates, and analysis of other trends associated with the Company’s historical universe of claims data, are reasonable. Nevertheless, adjustments to
such estimates will be required in future periods if the development of claim costs varies materially from our estimates, and such future adjustments may be
material to our results of operations.
Recent Accounting Pronouncements
For a discussion of recent accounting pronouncements and their potential effect on the Company's results of operations and financial condition, see “Note 1 -
Summary of Operations and Significant Accounting Policies” to the consolidated financial statements in Item 8 of Part II of this report.
Forward-Looking Information
Statements in this Item or in Items 1, 1A, 3 and 9A of this report include forward-looking statements, which are not historical in nature and are forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, among others, discussion of
economic conditions in our market areas and their effect on revenue levels, the effects of the COVID-19 pandemic on our business operations, the
competitiveness of our service offerings, our ability to attract and retain clients and to achieve revenue growth, the effect of changes in our mix of services on
gross margin, the effect of tight labor market conditions, the adequacy of our workers' compensation reserves, the effect of changes in estimates of our future
claims liabilities on our workers’ compensation reserves, including the effect of changes in our reserving practices and claims management process on our
actuarial estimates, expected levels of required surety deposits and letters of credit, our ability to generate sufficient taxable income in the future to utilize our
deferred tax assets, the effect of our formation and operation of two wholly owned licensed insurance subsidiaries, the risks of operation and cost of our insured
program, the financial viability of our excess insurance carriers, the effectiveness of our management information systems, our relationship with our primary
bank lender and the availability of financing and working capital to meet our funding requirements, litigation costs, the effect of changes in the interest rate
environment on the value of our investment securities and long-term debt, the adequacy of our allowance for doubtful accounts, and the potential for and effect
of acquisitions.
26
All of our forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or
achievements of the Company or industry to be materially different from any future results, performance or achievements expressed or implied by such forward-
looking statements. Such factors with respect to the Company include our ability to retain current clients and attract new clients,
orders, laws or regulations imposing requirements related to the COVID-19 pandemic, difficulties associated with integrating clients into our operations,
economic trends in our service areas, the potential for material deviations from expected future workers’ compensation claims experience, changes in the
workers’ compensation regulatory environment in our primary markets, security breaches or failures in the Company’s information technology systems,
collectability of accounts receivable, changes in effective payroll tax rates and federal and state income tax rates, the carrying values of deferred income tax
assets and goodwill (which may be affected by our future operating results ), the effects of inflation on our operating expenses and those of our clients, the
impact of and potential changes to the Patient Protection and Affordable Care Act , escalating medical costs, and other health care legislative initiatives on our
business, the effect of conditions in the global capital markets on our investment portfolio, and the availability of capital, borrowing capacity on our revolving
credit facility, or letters of credit necessary to meet state-mandated surety deposit requirements for maintaining our status as a qualified self-insured employer
for workers' compensation coverage or our insured program. Additional risk factors affecting our business are discussed in Item 1A of Part I of this report. We
disclaim any obligation to publicly announce any revisions to any of the forward-looking statements contained herein to reflect future events or developments.
the effects of governmental
Results of Operations
The spread of COVID-19 and resulting restrictions and labor shortages across the United States are having, and will continue to have, a negative impact on the
operating results of the Company. As our clients respond to the effects of efforts to address the consequences of the pandemic, including the measures taken at
various levels of government to contain the virus’s spread, we expect that our ability to add new customers, as well as to grow revenues from existing
customers, will be adversely affected due to economic slowdown, business closures, labor shortages and reductions in hours worked.
The following table sets forth the percentages of total revenues represented by selected items in the Company's consolidated statements of operations for the
years ended December 31, 2021, 2020 and 2019, included in Item 8 of Part II of this report.
($ in thousands)
Revenues:
Professional employer service fees
Staffing services
Total revenues
Cost of revenues:
Direct payroll costs
Payroll taxes and benefits
Workers’ compensation
Total cost of revenues
Gross margin
Selling, general and administrative
expenses
Depreciation and amortization
Income from operations
Other income, net
Income before income taxes
Provision for income taxes
Net income
2021
Percentage of Total Net Revenues
Years Ended December 31,
2020
2019
$
843,815
111,351
955,166
88.3 %
11.7
100.0
$
777,430
103,394
880,824
88.3 %
11.7
100.0
$
$
819,873
122,438
942,311
87.0 %
13.0
100.0
83,821
469,888
196,949
750,658
204,508
155,259
5,326
43,923
6,738
50,661
12,582
38,079
$
8.8
49.2
20.6
78.6
21.4
16.3
0.6
4.6
0.7
5.3
1.3
3.9 %
78,380
418,793
200,744
697,917
182,907
141,916
4,844
36,147
6,449
42,596
8,831
33,765
$
8.9
47.5
22.8
79.2
20.8
16.1
0.6
4.1
0.7
4.8
1.0
3.8 %
92,455
429,713
211,890
734,058
208,253
153,879
3,886
50,488
10,650
61,138
12,846
48,292
$
9.8
45.6
22.5
77.9
22.1
16.3
0.4
5.4
1.1
6.5
1.4
5.2 %
27
We report PEO revenues net of direct payroll costs because we are not the primary obligor for wage payments to our clients’ employees. However,
management believes that gross billings and wages are useful in understanding the volume of our business activity and serve as an important performance
metric in managing our operations, including the preparation of internal operating forecasts and establishing executive compensation performance goals. We
therefore present for purposes of analysis gross billings and wage information for the years ended December 31, 2021, 2020 and 2019.
(in thousands)
Gross billings
PEO and staffing wages
2021
Year Ended
December 31,
2020
$
6,569,986
5,693,903
$
5,924,539
5,098,604
$
2019
5,971,008
5,090,943
Because safety incentives represent consideration payable to PEO customers, safety incentive costs are netted against PEO revenue in our consolidated
statements of operations. We therefore present below for purposes of analysis non-GAAP gross workers’ compensation expense, which represents workers’
compensation costs including safety incentive costs. We believe this non-GAAP measure is useful in evaluating the total costs of our workers’ compensation
program. In July 2020, the Company began limiting its safety incentive offering in certain markets, resulting in a substantial reduction in safety incentive costs.
(in thousands)
Workers' compensation
Safety incentive costs
Non-GAAP gross workers' compensation
$
$
2021
196,949
2,985
199,934
$
$
Year Ended
December 31,
2020
200,744
23,544
224,288
$
$
2019
211,890
31,663
243,553
In monitoring and evaluating the performance of our operations, management also reviews the following ratios, which represent selected amounts as a
percentage of gross billings. Management believes these ratios are useful in understanding the efficiency and profitability of our service offerings.
PEO and staffing wages
Payroll taxes and benefits
Non-GAAP gross workers' compensation
Gross margin
Percentage of Gross Billings
Year Ended
December 31,
2020
86.1 %
7.1 %
3.8 %
3.1 %
2021
86.7 %
7.2 %
3.0 %
3.1 %
2019
85.3 %
7.2 %
4.1 %
3.5 %
The presentation of revenue on a net basis and the relative contributions of staffing and PEO services revenue can create volatility in our gross margin as a
percentage of revenue. A relative increase in PEO services revenue will result in a higher gross margin as a percentage of revenue. Improvement in gross
margin percentage occurs because incremental client services revenue dollars are reported as revenue net of all related direct payroll and safety incentive
costs.
28
We refer to employees of our PEO clients as worksite employees (“WSEs”). Management reviews average and ending WSE growth to monitor and evaluate the
performance of our operations. Average WSEs are calculated by dividing the number of unique individuals paid in each month by the number of months in the
period. Ending WSEs represents the number of unique individuals paid in the last month of the period.
Average WSEs
Ending WSEs
Years Ended December 31, 2021 and 2020
2021
% Change
Year Ended
December 31,
2020
% Change
2019
112,928
116,154
4.3 %
6.3 %
108,249
109,292
-5.3 %
-4.6 %
114,341
114,584
Net income for 2021 was $38.1 million compared to net income of $33.8 million for 2020. Diluted income per share for 2021 was $5.00 compared to diluted
income per share of $4.39 for 2020.
Revenue for 2021 totaled $955.2 million, an increase of $74.3 million or 8.4% over 2020, which reflects an increase in the Company’s PEO service fee revenue
of $66.4 million or 8.5% and an increase in staffing services revenue of $8.0 million or 7.7%.
The increase in PEO services revenues was primarily attributable to an increase in average billing per WSE as well as an increase in the average number of
WSEs. The increase in staffing services revenue was due primarily to the reopening of business after the impacts of COVID-19 during the prior year period.
Gross margin for 2021 totaled $204.5 million or 21.4% of revenue compared to $182.9 million or 20.8% of revenue for 2020. The increase in gross margin as a
percentage of revenues is primarily a result of the factors discussed within the separate components of gross margin below.
Direct payroll costs for 2021 totaled $83.8 million or 8.8% of revenue compared to $78.4 million or 8.9% of revenue for 2020. The decrease in direct payroll
costs percentage was primarily due to the increase in PEO services and decrease in staffing services within the mix of our customer base in 2021 as compared
to 2020.
Payroll taxes and benefits for 2021 totaled $469.9 million or 49.2% of revenue compared to $418.8 million or 47.5% of revenue for 2020. The increase in payroll
taxes and benefits as a percentage of revenues is due primarily to an increase in newly hired WSEs, which increased the amount of payroll subject to payroll
taxes in 2021 as compared to 2020.
Workers’ compensation expense for 2021 totaled $196.9 million or 20.6% of revenue compared to $200.7 million or 22.8% of revenue for 2020. The decrease in
workers’ compensation expense as a percentage of revenue was primarily due to favorable claims development as well as a favorable adjustment of $9.2 million
related to prior period claims in 2021, compared to a favorable adjustment of $6.4 million in 2020.
Selling, general and administrative (“SG&A”) expenses for 2021 totaled $155.3 million or 16.3% of revenue compared to $141.9 million or 16.1% of revenue for
2020. The increase of $13.4 million in SG&A expense in 2021 was primarily attributable to an increase in IT expense related to the launch of our myBBSI portal
in 2020 and increased employee related expenses due to prior year reductions during the COVID-19 pandemic that have since been reversed, as well as
increased variable employee compensation and incentive pay in 2021 related to stronger than expected financial results.
Other income, net for 2021 totaled $6.7 million compared to other income of $6.4 million for 2020. The increase was primarily attributable to a decrease in
interest expense, partially offset by decreased investment income due to lower interest rates.
29
Our effective income tax rate for 2021 was 24.8% compared to 20.7% for 2020. Our income tax rate typically differs from the federal statutory tax rate of 21%
primarily due to state taxes as well as federal and state tax credit s. See “Note 9 - Income Taxes” to the consolidated financial statements inc luded in Item 8 of
Part II of this report for additional information regarding income taxes.
A discussion of our financial condition and results of operations for 2020 compared to 2019 can be found in Part II, Item 7. Management's Discussion and
Analysis in our Annual Report on Form 10-K for the year ended December 31, 2020, filed with the SEC on March 8, 2021.
Fluctuations in Quarterly Operating Results
We have historically experienced significant fluctuations in our quarterly operating results, including losses in the first quarter of each year, and expect such
fluctuations to continue in the future. Our operating results may fluctuate due to a number of factors such as seasonality, wage limits on statutory payroll taxes,
claims experience for workers’ compensation, demand for our services, and competition. Payroll taxes, as a component of cost of revenues, generally decline
throughout a calendar year as the applicable statutory wage bases for federal and state unemployment taxes and Social Security taxes are exceeded on a per
employee basis. Our revenue levels may be higher in the third quarter due to the effect of increased business activity of our customers’ businesses in the
agriculture, food processing and forest products-related industries. In addition, revenues in the fourth quarter may be reduced by many customers’ practice of
operating on holiday-shortened schedules. Workers’ compensation expense varies with both the frequency and severity of workplace injury claims reported
during a quarter and the estimated future costs of such claims. In addition, positive or adverse loss development of prior period claims during a subsequent
quarter may also contribute to the volatility in the Company’s estimated workers’ compensation expense.
Liquidity and Capital Resources
The Company's cash balance of $78.6 million, which includes cash, cash equivalents, and restricted cash, decreased $155.2 million for the twelve months
ended December 31, 2021, compared to a decrease of $39.5 million for the comparable period of 2020. The decrease in cash at December 31, 2021 as
compared to December 31, 2020 was primarily due to purchases of investments and restricted investments, decreased workers’ compensation claims liabilities,
increased trade accounts receivable and repurchase of common stock, partially offset by proceeds from the sales and maturities of investments and restricted
investments, increased accrued payroll, payroll taxes and related benefits and net income.
Net cash used in operating activities in 2021 amounted to $15.5 million, compared to net cash used in $27.9 million for the comparable period of 2020. In 2021,
cash used in operating activities was primarily due to decreased workers’ compensation claims liabilities of $77.6 million, increased trade accounts receivable of
$37.2 million and decreased safety incentive of $14.5 million, partially offset by increased accrued payroll, payroll taxes and related benefits of $49.7 million and
net income of $38.1 million.
Net cash used in investing activities totaled $112.9 million in 2021, compared to net cash provided of $4.1 million for the comparable period of 2020. In 2021, net
cash used in investing activities consisted primarily of proceeds from sales and maturities of investments and restricted investments of $202.6 million, partially
offset by purchases of investments and restricted investments of $308.6 million and purchases of property, equipment and software of $6.8 million.
Net cash used in financing activities in 2021 was $26.9 million compared to net cash used of $15.7 million for the comparable period of 2020. In 2021, cash
used in financing activities primarily consisted of repurchases of common stock of $17.3 million, dividend payments of $9.1 million and common stock
repurchased on vesting of stock awards to settle income tax obligations of $1.5 million, partially offset by proceeds from exercises of stock options of $1.2
million.
30
The Company is required to maintain minimum collateral levels for certain policies issued under the insured program, which is held in trust accounts (the “trust
accounts”). The balance in the trust accounts was $273.6 million and $290.7 million at December 31, 2021 and December 31, 2020, respectively. The trust
account balances are included as a component of the current and long-term restricted cash and investments in the Company’s consolidated balance sheets.
On June 30, 2021, the Company entered into a loss portfolio transfer agreement to remove all remaining outstanding workers’ compensation claims obligations
for client policies issued under its insured program up to June 30, 2018. This transaction reduced the Company’s outstanding workers’ compensation liabilities
by $53.1 million. The payment terms of the LPT required $5.0 million to be paid prior to June 30, 2021, with the remaining amount paid in July 2021.
In March 2022, the Company entered into an amended credit agreement (the “Amended Agreement”) with Wells Fargo Bank, N.A. (the “Bank”), which
supersedes the previous agreement. The Amended Agreement increased the revolving credit line from $33.0 million to $50.0 million and maintained the sublimit
for standby letters of credit at $8.0 million. Advances under the credit line bear interest, as selected by the Company, of (a) the daily Simple Secured Overnight
Financing Rate (“SOFR”) plus 1.75% or (b) the one-month Term SOFR plus 1.75%. The Amended Agreement also provides for an unused commitment fee of
0.30% per year on the average daily unused amount of the revolving credit line.
The Amended Agreement replaced the financial covenants in the Agreement (as defined below) with the following financial covenants:
•
•
adjusted free cash flow [net profit after taxes plus interest expense (net of capitalized interest), depreciation, expense and amortization
expense, less dividends/distributions] not less than $10 million as of each fiscal quarter end, determined on a rolling 4-quarter basis.
tangible net worth [aggregate of total stockholders' equity plus subordinated debt less any intangible assets and less any loans or advances to,
or investments in, any related entities or individuals] not less than $100 million at each fiscal quarter end.
Other than as described above, the Agreement (as defined below) previously in place during 2021 is substantially unchanged.
At December, 31, 2021, the Company maintained an agreement (the “Agreement”) with the Bank for a revolving credit line of $33.0 million and a sublimit for
standby letters of credit of $8.0 million. At December 31, 2021, $6.2 million of the sublimit for standby letters of credit was used. Advances under the revolving
credit line bear interest, as selected by the Company, of (a) the daily floating rate of one-month London Inter-Bank Offered Rate (“LIBOR”) plus 1.75% or (b) the
fixed rate of LIBOR plus 1.75%. The Agreement also provided for an unused commitment fee of 0.375% per year on the average daily unused amount of the
revolving credit line, as well as a fee of 1.75% of the face amount of each letter of credit reserved under the line of credit. The Company had no outstanding
borrowings on its revolving credit line at December 31, 2021 and 2020. The credit facility was collateralized by the Company’s accounts receivable and other
rights to receive payment.
The Agreement also provided a $63.7 million standby letter of credit (the “Letter of Credit”). In April 2021, the Company and the insurance carrier reached an
agreement to replace the Letter of Credit with other collateral assets and cancel the Letter of Credit in its entirety. As part of the transaction, the Bank released
the $38.7 million of collateral held in support of the Letter of Credit, and the Company transferred the $38.7 million along with an additional $25.0 million to the
trust accounts to satisfy the collateral requirements of the insured program.
The Agreement required the satisfaction of certain financial covenants as follows:
•
•
EBITDA [net income before taxes plus interest expense (net of capitalized interest expense), depreciation expense, and amortization expense]
on a rolling four-quarter basis must be not less than $30 million at the end of each fiscal quarter; and
the ratio of restricted and unrestricted cash and investments to workers’ compensation and safety incentive liabilities must be at least 1.0:1.0,
measured quarterly.
31
The Agreement imposed certain additional restrictions unless the Bank provides its prior written consent as follows:
•
•
•
incurring additional indebtedness is prohibited, other than purchase financing for the acquisition of assets, provided that the aggregate of all
purchase financing does not exceed $1 million at any time;
the Company may not terminate or cancel any of the AICE policies; and
if an event of default would occur, and is continuing, including on a pro forma basis, no dividends or distributions would be permitted to be paid
and redemptions and repurchases of the Company’s stock would be permitted only up to $15 million in any rolling 12-month period.
The Agreement also contained customary events of default and specified cross-defaults under the Company's workers' compensation insurance arrangements.
If an event of default under the Agreement occurs and is continuing, the Bank may declare any outstanding obligations under the Agreement to be immediately
due and payable. At December 31, 2021, the Company was in compliance with all covenants.
The Company maintained a mortgage loan with the Bank with a balance of approximately $3.5 million and $3.7 million at December 31, 2021 and 2020,
respectively, secured by the Company’s corporate office building in Vancouver, Washington. This loan required payment of monthly installments of $18,375,
bearing interest at the one-month LIBOR plus 2.0%, with the unpaid principal balance due July 1, 2022. On January 31, 2022, the Company paid the
outstanding balance of the mortgage loan.
Management expects that the funds anticipated to be generated from operations, current liquid assets, and availability under the Company’s revolving credit
facility will be sufficient in the aggregate to fund the Company’s working capital needs for the next twelve months.
Contractual Obligations
The Company's contractual obligations as of December 31, 2021 are summarized below:
(in thousands)
Operating leases (1)
Long-term debt
Total contractual obligations
$
$
Total
25,409 $
3,510
28,919 $
As of December 31, 2021
Payments Due by Period
1 - 3
Years
Less than
1 Year
4 - 5
Years
After
5 Years
8,129 $
3,510
11,639 $
11,377 $
—
11,377 $
4,201 $
—
4,201 $
1,702
—
1,702
(1) As of December 31, 2021, the Company has additional operating leases that have not yet commenced of $2.1 million and remaining balances on short-term
operating leases of $22,394. In January 2022, the Company paid off all of its long-term debt.
Item 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's exposure to market risk for changes in interest rates primarily relates to its investment portfolio and its outstanding borrowings on its line of
credit and long-term debt. As of December 31, 2021, the Company’s investments consisted principally of approximately $159.5 million in corporate bonds, $82.6
million in mortgage backed securities, $67.3 million in U.S. treasuries, $42.0 million in U.S. government agency securities, $29.6 million in asset backed
securities, $13.9 million in money market funds, and $6.3 million in mutual funds. The Company’s outstanding debt totaled approximately $3.5 million at
December 31, 2021. Based in the Company's overall interest exposure at December 31, 2021, a 50 basis point increase in market interest rates would have an
$8.2 million effect on the fair value of the Company's investment portfolio. A 50 basis point increase would have an immaterial effect on the Company’s
outstanding borrowings because of the relative size of the outstanding borrowings.
32
Item 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of
Barrett Business Services, Inc.
Vancouver, Washington
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Barrett Business Services, Inc. and subsidiaries (the "Company") as of December 31, 2021
and 2020, the related consolidated statements of operations, comprehensive income, stockholder's equity, and cash flows for each of the three years in the
period ended December 31, 2021, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present
fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for
each of the three years in the period ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal
control over financial reporting as of December 31, 2021, based on criteria established in Internal Control — Integrated Framework (2013) issued by the
Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 7, 2022, expressed an unqualified opinion on the company's
internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial
statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in
accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to
assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such
procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included
evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial
statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to
be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our
especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial
statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the
accounts or disclosures to which it relates.
33
Workers' Compensation Claims Liabilities
Workers’ compensation claims liabilities represent management’s estimate of future amounts necessary to pay claims and related expenses with respect to
workplace injuries that have occurred as of a given reporting date. The estimated liability for open workers’ compensation claims is based on an evaluation of
information provided by the Company’s third-party administrators for workers’ compensation claims, coupled with an actuarial estimate of future adverse loss
development with respect to reported claims and incurred but not reported claims (together, IBNR). Workers’ compensation claims liabilities included case
reserve estimates for reported losses, plus additional amounts for estimated IBNR claims, medical cost containment, legal costs, and unallocated loss
adjustment expenses. The process of arriving at an estimate of unpaid claims and claims adjustment expense involves a high degree of judgment and is
affected by both internal and external events, including changes in claims handling practices, changes in reserve estimation procedures, inflation, trends in the
litigation and settlement of pending claims, and legislative changes. The Company’s estimates are based on informed judgment, derived from individual
experience and expertise applied to multiple sets of data and analyses. The company considers significant facts and circumstances known both at the time that
loss reserves are initially established, and as new facts and circumstances become known. Workers’ compensation claims liabilities as of December 31, 2021
were $279 million.
Given the high degree of judgment required to estimate the value of the workers’ compensation claims liabilities, performing audit procedures to evaluate the
workers’ compensation claims liabilities recorded for the year ended December 31, 2021, required a high degree of auditor judgment and an increased extent of
effort, including the need to involve our actuarial specialists.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the workers’ compensation claims liabilities included the following, among others:
•
•
•
We tested the effectiveness of controls related to workers’ compensation claims liabilities, including those involved in estimating the ultimate losses
to be incurred for reported and unreported claims.
We tested the underlying data that is used as inputs into the actuarial analysis, including historical claims, to evaluate whether those inputs were
reasonable. In addition, we assessed whether any changes in the business or environment, including legislative changes, interest rates, and claims
handling practices, were appropriately considered in developing the estimate of ultimate losses to be incurred for reported and unreported claims.
With the assistance of our actuarial specialists, we evaluated the methods and assumptions used by management to estimate the workers’
compensation claims liabilities by performing the following:
o
o
o
Compared management’s prior-year assumptions of expected claims development and ultimate loss to actuals incurred during the
current year to identify and evaluate potential bias in the determination of the workers’ compensation claims liabilities.
Developed a range of independent estimates of the workers’ compensation claims liabilities, utilizing claim payment patterns, loss
development factors, and future cost trends for workers’ compensation claims liabilities. We compared our estimated ranges to
management’s estimates.
Read the Company’s reinsurance policies and compared the coverage and terms to the assumptions used by management.
/s/ Deloitte & Touche LLP
Portland, Oregon
March 7, 2022
We have served as the Company's auditor since 2016.
34
Barrett Business Services, Inc.
Consolidated Balance Sheets
December 31, 2021 and 2020
(In Thousands, Except Par Value)
ASSETS
December 31,
2021
December 31,
2020
Current assets:
Cash and cash equivalents
Investments
Trade accounts receivable, net
Income taxes receivable
Prepaid expenses and other
Restricted cash and investments
Total current assets
Property, equipment and software, net
Operating lease right-of-use assets
Restricted cash and investments
Goodwill
Other assets
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt
Accounts payable
Accrued payroll, payroll taxes and related benefits
Income taxes payable
Current operating lease liabilities
Other accrued liabilities
Workers' compensation claims liabilities
Safety incentives liability
Total current liabilities
Long-term workers' compensation claims liabilities
Long-term debt
Deferred income taxes
Long-term operating lease liabilities
Customer deposits and other long-term liabilities
Total liabilities
Commitments and contingencies (Notes 6, 8 and 12)
Stockholders' equity:
Common stock, $.01 par value; 20,500 shares authorized, 7,415
and 7,566 shares issued and outstanding in 2021 and 2020, respectively
Additional paid-in capital
Accumulated other comprehensive income
Retained earnings
Total stockholders' equity
$
$
$
$
69,405
96,763
155,707
—
17,606
67,238
406,719
36,277
20,697
232,965
47,820
2,474
746,952
3,510
4,485
199,067
1,673
7,191
15,120
80,028
4,322
315,396
199,379
—
1,687
14,598
7,362
538,422
74
29,054
1,079
178,323
208,530
746,952
$
$
$
$
68,688
101,244
118,506
6,485
15,961
96,991
407,875
34,916
23,025
258,153
47,820
3,161
774,950
221
4,746
149,989
—
7,539
7,275
102,040
18,827
290,637
255,706
3,510
4,518
16,419
5,925
576,715
76
24,885
7,564
165,710
198,235
774,950
The accompanying notes are an integral part of these consolidated financial statements.
35
Barrett Business Services, Inc.
Consolidated Statements of Operations
Years Ended December 31, 2021, 2020 and 2019
(In Thousands, Except Per Share Amounts)
Revenues:
Professional employer service fees
Staffing services
Total revenues
Cost of revenues:
Direct payroll costs
Payroll taxes and benefits
Workers' compensation
Total cost of revenues
Gross margin
Selling, general and administrative expenses
Depreciation and amortization
Income from operations
Other income (expense):
Investment income, net
Interest expense
Other, net
Other income, net
Income before income taxes
Provision for income taxes
Net income
Basic income per common share
Weighted average number of basic common shares outstanding
Diluted income per common share
Weighted average number of diluted common shares outstanding
Year Ended
December 31,
2020
2021
2019
$
$
$
$
843,815 $
111,351
955,166
83,821
469,888
196,949
750,658
204,508
155,259
5,326
43,923
7,215
(372 )
(105 )
6,738
50,661
12,582
38,079 $
5.05 $
7,540
5.00 $
7,621
777,430 $
103,394
880,824
78,380
418,793
200,744
697,917
182,907
141,916
4,844
36,147
7,977
(1,244 )
(284 )
6,449
42,596
8,831
33,765 $
4.46 $
7,577
4.39 $
7,688
819,873
122,438
942,311
92,455
429,713
211,890
734,058
208,253
153,879
3,886
50,488
12,520
(1,789 )
(81 )
10,650
61,138
12,846
48,292
6.48
7,451
6.27
7,699
The accompanying notes are an integral part of these consolidated financial statements.
36
Barrett Business Services, Inc.
Consolidated Statements of Comprehensive Income
Years Ended December 31, 2021, 2020 and 2019
(In Thousands)
Net income
Unrealized (losses) gains on investments, net of tax of ($2,478), $1,814,
and $3,014 in 2021, 2020, and 2019, respectively
Comprehensive income
Year Ended
December 31,
2020
2021
2019
$
38,079
$
33,765
$
48,292
$
(6,485 )
31,594
$
4,745
38,510
$
7,887
56,179
The accompanying notes are an integral part of these consolidated financial statements.
37
Barrett Business Services, Inc.
Consolidated Statements of Stockholders' Equity
Years Ended December 31, 2021, 2020 and 2019
(In Thousands)
Common Stock
Shares
Amount
Additional
Paid-in
Capital
Accumulated
Other
Comprehensive
(Loss)
Income
Retained
Earnings
Total
7,395 $
74 $
15,437
$
(5,068 )
$
108,594 $ 119,037
157
1
753
—
—
754
(38 )
—
—
—
—
7,514 $
223
(27 )
—
(144 )
—
—
—
7,566 $
106
(20 )
—
(237 )
—
—
—
7,415 $
—
—
—
—
—
75 $
2
—
—
(1 )
(3,136 )
7,173
—
—
—
20,227 $
3,082
(1,417 )
3,436
(443 )
—
—
—
76 $
—
—
—
24,885 $
1
—
—
(3 )
1,155
(1,465 )
5,366
(887 )
—
—
—
7,887
—
2,819 $
—
—
—
—
—
4,745
—
7,564 $
—
—
—
—
—
—
—
74 $
—
—
—
29,054 $
—
(6,485 )
—
1,079 $
—
—
(3,136 )
7,173
(8,208 )
—
(8,208 )
7,887
48,292 48,292
148,678 $ 171,799
—
3,084
—
—
(7,612 )
(1,417 )
3,436
(8,056 )
(9,121 )
—
(9,121 )
4,745
33,765 33,765
165,710 $ 198,235
—
1,156
—
—
(16,397 )
(1,465 )
5,366
(17,287 )
(9,069 )
—
38,079
(9,069 )
(6,485 )
38,079
178,323 $ 208,530
Balance, December 31, 2018
Common stock issued on exercise of
options and vesting of restricted stock units
Common stock repurchased on vesting of
restricted stock units
Share-based compensation expense
Cash dividends on common stock ($1.10
per share)
Unrealized gain on investments, net of tax
Net income
Balance, December 31, 2019
Common stock issued on exercise of
options and vesting of restricted stock units
Common stock repurchased on vesting of
restricted stock units
Share-based compensation expense
Company repurchase of common stock
Cash dividends on common stock ($1.10
per share)
Unrealized gain on investments, net of tax
Net income
Balance, December 31, 2020
Common stock issued on exercise of
options and vesting of restricted stock units
Common stock repurchased on vesting of
stock awards
Share-based compensation expense
Company repurchase of common stock
Cash dividends on common stock ($1.10
per share)
Unrealized loss on investments, net of tax
Net income
Balance, December 31, 2021
The accompanying notes are an integral part of these consolidated financial statements.
38
Barrett Business Services, Inc.
Consolidated Statements of Cash Flows
Years Ended December 31, 2021, 2020 and 2019
(In Thousands)
Cash flows from operating activities:
Net income
Reconciliations of net income to net cash (used in) provided by
operating activities:
Depreciation and amortization
Non-cash operating lease expense
Investment amortization and losses recognized
Loss recognized on disposal of property and equipment
Deferred income taxes
Share-based compensation
Changes in certain operating assets and liabilities:
Trade accounts receivable
Income taxes
Prepaid expenses and other
Accounts payable
Accrued payroll, payroll taxes and related benefits
Other accrued liabilities
Workers' compensation claims liabilities
Safety incentives liability
Operating lease liabilities
Other assets and liabilities, net
Net cash (used in) provided by operating activities
Cash flows from investing activities:
Purchase of property, equipment and software
Purchase of investments
Proceeds from sales and maturities of investments
Purchase of restricted investments
Proceeds from sales and maturities of restricted investments
Net cash (used in) provided by investing activities
Cash flows from financing activities:
Proceeds from credit-line borrowings
Payments on credit-line borrowings
Payments on long-term debt
Repurchase of common stock
Common stock repurchased on vesting of stock awards
Dividends paid
Proceeds from exercise of stock options
Net cash used in financing activities
Net (decrease) increase in cash, cash equivalents and restricted cash
Cash, cash equivalents and restricted cash, beginning of period
Cash, cash equivalents and restricted cash, end of period
$
Year Ended
December 31,
2020
2021
2019
$
38,079
$
33,765
$
48,292
5,326
8,045
1,433
114
(347 )
5,366
(37,201 )
8,158
(1,645 )
(261 )
49,739
7,753
(77,640 )
(14,505 )
(7,886 )
13
(15,459 )
(6,801 )
(54,835 )
75,256
(253,781 )
127,298
(112,863 )
2,718
(2,718 )
(221 )
(17,287 )
(1,465 )
(9,069 )
1,156
(26,886 )
(155,208 )
233,837
78,629
$
4,844
7,246
587
574
5,492
3,436
45,055
(5,150 )
(1,042 )
(1,247 )
(22,608 )
(1,671 )
(80,783 )
(9,123 )
(7,062 )
(228 )
(27,915 )
(8,610 )
(65,738 )
47,922
(34,968 )
65,535
4,141
—
—
(220 )
(8,056 )
(1,417 )
(9,121 )
3,084
(15,730 )
(39,504 )
273,341
233,837
3,886
6,991
1,117
—
2,656
7,173
(11,964 )
(5,738 )
(1,039 )
1,657
17,858
(11,720 )
25,477
(1,260 )
(6,242 )
(7 )
77,137
(10,798 )
(54,343 )
88,771
(9,812 )
52,495
66,313
18,843
(18,843 )
(221 )
—
(3,136 )
(8,208 )
754
(10,811 )
132,639
140,702
273,341
$
The accompanying notes are an integral part of these consolidated financial statements.
39
Barrett Business Services, Inc.
Notes to Consolidated Financial Statements
Note 1 - Summary of Operations and Significant Accounting Policies
Nature of operations
Barrett Business Services, Inc. (“BBSI” or the “Company”), is a leading provider of business management solutions for small and mid-sized companies. The
Company has developed a management platform that integrates a knowledge-based approach from the management consulting industry with tools from the
human resource outsourcing industry. This platform, through the effective leveraging of human capital, helps our business owner clients run their businesses
more effectively.
We believe this platform, delivered through our decentralized organizational structure, differentiates BBSI from our competitors. The Company operates through
a network of 50 branch offices throughout Arizona, California, Colorado, Delaware, Idaho, Maryland, Nevada, New Mexico, North Carolina, Oregon,
Pennsylvania, Tennessee, Utah, Virginia and Washington. Approximately 73%, 75% and 77%, respectively, of our revenue during 2021, 2020, and 2019 was
attributable to our California operations. BBSI was incorporated in Maryland in 1965.
The Company operates a wholly owned, fully licensed captive insurance company, Associated Insurance Company for Excess ("AICE") and a wholly owned,
fully licensed insurance company, Ecole. AICE and Ecole provide access to more competitive and cost-effective insurance markets and provide cost-effective
risk management. See “Note 5 – Workers’ Compensation Claims” for additional information in the Company’s insurance programs.
Principles of consolidation
The accompanying financial statements are prepared on a consolidated basis. All intercompany account balances and transactions between BBSI, AICE, and
Ecole have been eliminated in consolidation.
Reportable segment
The Company has one operating and reporting segment. The chief operating decision maker (our Chief Executive Officer) regularly reviews the financial
information of our business at a consolidated level in deciding how to allocate resources and in assessing performance.
Revenue recognition
Professional employer (“PEO”) services are normally used by organizations to satisfy ongoing needs related to the management of human capital and are
governed by the terms of a client services agreement which covers all employees at a particular work site. Staffing revenues relate primarily to short-term
staffing, contract staffing and on-site management services. The Company’s performance obligations for PEO and staffing services are satisfied, and the related
revenue is recognized, as services are rendered by our workforce.
Our PEO client service agreements have a minimum term of one year, are renewable on an annual basis and typically require 30 days’ written notice to cancel
or terminate the contract by either party. In addition, our client service agreements provide for immediate termination upon any payment default of the client
regardless of when notice is given. PEO customers are invoiced following the end of each payroll processing cycle, with payment generally due on the invoice
date. Staffing customers are generally invoiced weekly based on agreed rates per employee and actual hours worked, typically with payment terms of 30 days.
The amount of earned but unbilled revenue is classified as a receivable on the consolidated balance sheets.
40
We report PEO revenues net of direct payroll costs because we are not the primary obligor for these payments to our clients’ employees. Direct payroll costs
include salaries, wages, health insurance, and employee out-of-pocket expenses incurred incidental to employment. We also present revenue net of safety
incentives, because these incentives represent consideration payable to customers.
Cost of revenues
Our cost of revenues for PEO services includes employer payroll-related taxes and workers' compensation costs. Our cost of revenues for staffing services
includes direct payroll costs, employer payroll-related taxes, employee benefits, and workers’ compensation costs. Direct payroll costs represent the gross
payroll earned by staffing services employees based on salary or hourly wages. Payroll taxes and employee benefits consist of the employer's portion of Social
Security and Medicare taxes, federal and state unemployment taxes, and staffing services employee reimbursements for materials, supplies and other
expenses, which are paid by our customer. Workers' compensation costs consist primarily of premiums paid to third-party insurers, claims reserves, claims
administration fees, legal fees, medical cost containment (“MCC”) expense, state administrative agency fees, third-party broker commissions, risk manager
payroll, as well as costs associated with operating our two wholly owned insurance companies, AICE and Ecole.
Cash and cash equivalents
We consider non-restricted short-term investments that are highly liquid, readily convertible into cash, and have maturities at acquisition of less than three
months to be cash equivalents for purposes of the consolidated statements of cash flows and consolidated balance sheets. The Company maintains cash
balances in bank accounts that normally exceed FDIC insured limits. The Company has not experienced any losses related to its cash concentration.
Investments
The Company classifies investments as available-for-sale. The Company’s investments are reported at fair value with unrealized gains and losses, net of taxes,
shown as a component of accumulated other comprehensive income (loss) in stockholders' equity. Investments are recorded as current on the consolidated
balance sheets as the invested funds are available for current operations. Management considers available evidence in evaluating potential impairment of
investments, including the extent to which fair value is less than cost and adverse conditions related to the security. In the event of a credit loss, an allowance
would be recognized to the extent that the fair value of the security is less than the present value of the expected future cash flows. Realized gains and losses
on sales of investments are included in investment income in our consolidated statements of operations.
41
Restricted cash and investments
The Company holds restricted cash and investments primarily for the future payment of workers’ compensation claims. These investments are categorized as
available-for-sale. They are reported at fair value with unrealized gains and losses, net of taxes, shown as a component of accumulated other comprehensive
income (loss) in stockholders’ equity. Restricted cash and investments are classified as current and noncurrent on the consolidated balance sheets based on
the nature of the restriction. Management considers available evidence in evaluating potential impairment of restricted investments, including the extent to
which fair value is less than cost and adverse conditions related to the security. In the event of a credit loss, an allowance would be recognized to the extent that
the fair value of the security is less than the present value of the expected future cash flows. Realized gains and losses on sales of restricted investments are
included in investment income in our consolidated statements of operations.
Restricted cash and investments also includes investments held as part of the Company’s deferred compensation plan. These investments are classified as
trading securities and are recorded at fair value with unrealized gains and losses reported as a component of income (loss) from operations.
Allowance for doubtful accounts
The Company had an allowance for doubtful accounts of $ 460,000 and $757,000 at December 31, 2021 and 2020, respectively. We make estimates of the
collectability of our accounts receivable for services provided to our customers based on future expected credit losses. Management analyzes historical bad
debts, customer concentrations, customer credit-worthiness, current economic trends and changes in customers' payment trends when evaluating the
adequacy of the allowance for doubtful accounts. If the financial condition of our customers deteriorates resulting in an impairment of their ability to make
payments, additional allowances may be required.
Our allowance for doubtful accounts activity is summarized as follows (in thousands):
Balance at January 1,
Allowance for doubtful accounts
Charges to expense
Write-offs of uncollectible accounts, net
of recoveries
Balance at December 31,
Allowance for doubtful accounts
2021
2020
2019
$
757 $
193
888 $
125
(490 )
(256 )
$
460 $
757 $
533
459
(104 )
888
42
Income taxes
Our income taxes are accounted for using an asset and liability approach. This requires the recognition of deferred tax assets and liabilities for the expected
future tax consequences of temporary differences between the financial statement and tax basis of assets and liabilities at the applicable tax rates. A valuation
allowance is recorded against deferred tax assets if, based on the weight of the available evidence, it is more likely than not that some or all of the deferred tax
assets will not be realized. The factors used to assess the likelihood of realization include the Company’s forecast of the reversal of temporary differences,
future taxable income and available tax planning strategies that could be implemented to realize the net deferred tax assets. Failure to achieve forecasted
taxable income in applicable tax jurisdictions could affect the ultimate realization of deferred tax assets and could result in an increase in the Company’s
effective tax rate on future earnings.
The determination of our provision for income taxes requires significant judgment, the use of estimates, and the interpretation and application of complex tax
laws. Significant judgment is required in assessing the timing and amounts of deductible and taxable items and the probability of sustaining uncertain tax
positions. The Company recognizes the tax benefit from uncertain tax positions if it is more likely than not that the tax positions will be sustained on examination
by the tax authorities. The tax benefit is measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate
settlement. As facts and circumstances change, we reassess these probabilities and record any changes in the consolidated financial statements as
appropriate. The Company recognizes interest and penalties related to unrecognized tax benefits in income tax expense.
Goodwill and intangible assets
Goodwill is recorded as the difference, if any, between the aggregate consideration paid for a business combination and the fair value of the net assets
acquired. Goodwill is not amortized but is evaluated for impairment annually, or more frequently if circumstances indicate that it is more likely than not that the
fair value of the reporting unit is below its carrying value. The Company has one reporting unit and evaluates the carrying value of goodwill annually at
December 31. No impairment has been recognized in the periods presented.
Property, equipment and software
Property, equipment and software are stated at cost. Expenditures for maintenance and repairs are charged to selling, general and administrative expenses as
incurred and expenditures for additions and improvements to property and equipment 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 consolidated statements of operations.
We capitalize software development costs incurred during the application development stage, which is the stage when preliminary project planning ends and
software development begins. Capitalized costs generally include both internal and external costs associated with coding and testing. Capitalized costs are
amortized on a straight-line basis over the estimated useful life, commencing when the software is placed into service. Costs incurred during the preliminary
project stage and the postimplementation stage, as well as general and administrative and overhead costs, are expensed as they are incurred.
Depreciation of property and equipment and amortization of software is calculated using the straight-line method over estimated useful lives of the related
assets or lease terms, as follows:
Buildings
Office furniture and fixtures
Computer hardware, software and software development costs
Leasehold improvements
43
Years
39
7
3 - 10
1 - 7
Impairment of long-lived assets
Long-lived assets, such as property, equipment and software and acquired intangibles subject to amortization, are reviewed for impairment annually, or
whenever events or changes in circumstances indicate that the remaining estimated useful life may warrant revision or that the carrying amount of an asset may
not be recoverable. Some of the events or changes in circumstances that would trigger an impairment review include, but are not limited to, significant under-
performance relative to expected and/or historical results, significant negative industry or economic trends, or knowledge of transactions involving the sale of
similar property at amounts below the carrying value.
Assets are grouped for measurement of impairment at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets.
If the carrying amount of an asset group exceeds the estimated undiscounted future cash flows expected to be generated by the asset group, then an
impairment charge is recognized to the extent the carrying amount exceeds the asset group’s fair value. In determining fair value, management considers
current results, trends, future prospects, and other economic factors.
Leases
The Company leases office facilities and equipment under operating leases. In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU
No. 2016-02, “Leases” (Topic 842) which requires lessees to recognize a right-of-use (“ROU”) asset and a lease liability for all leases with terms greater than
12 months and also requires disclosures by lessees and lessors about the amount, timing and uncertainty of cash flows arising from leases.
We determine whether an arrangement is or contains a lease at inception. We record our operating lease liabilities and right-of-use (ROU) assets at the lease
commencement date. Operating lease liabilities are based on the present value of future minimum lease payments over the lease term, and include options to
renew a lease in the future minimum lease payments if it is reasonably certain that the Company will exercise that option. ROU assets are based on the lease
liability, adjusted for any lease prepayments and lease incentives. If a lease does not provide an implicit interest rate, we use our incremental borrowing rate on
a collateralized basis from the information available at commencement date in determining the present value of lease payments. We recognize expense for
lease payments on a straight-line basis over the lease term for operating leases. Leases with initial terms of 12 months or less are considered short-term lease
costs and are not recorded as ROU assets on the consolidated balance sheets. ROU assets are reviewed for impairment in the same manner as long-lived
assets. No impairment has been recorded in the periods presented.
The Company has elected the practical expedient not to separate non-lease components from lease components for all classes of assets. Our lease
agreements contain $3.7 million of residual value guarantees and generally do not contain material variable lease payments or restrictive covenants.
Workers’ compensation claims liabilities
Our workers’ compensation claims liabilities do not represent an exact calculation of liability but rather management’s best estimate, utilizing actuarial expertise
and projection techniques, at a given reporting date. The estimated liability for open workers’ compensation claims is based on an evaluation of information
provided by our third-party administrator for workers’ compensation claims, coupled with an actuarial estimate of future loss development with respect to
reported claims and incurred but not reported claims (together, “IBNR”). Workers’ compensation claims liabilities include case reserve estimates for reported
losses, plus additional amounts for estimated IBNR claims, MCC and legal costs, unallocated loss adjustment expenses and estimated future recoveries. The
estimate of incurred costs expected to be paid within one year is included in current liabilities, while the estimate of incurred costs expected to be paid beyond
one year is included in long-term liabilities on our consolidated balance sheets. These estimates are reviewed at least quarterly and adjustments to estimated
liabilities are reflected in current operating results as they become known.
44
The process of arriving at an estimate of unpaid claims and claims adjustment expense involves a high degree of judgment and is affected by both internal and
external events, including changes in claims handling practices, changes in reserve estimation procedures, inflation, trends in the litigation and settlement of
pending claims, and legislative changes.
Our estimates are based on actuarial analysis and informed judgment, derived from individual experience and expertise applied to multiple sets of data and
analyses. We consider significant facts and circumstances known both at the time that loss reserves are initially established and as new facts and
circumstances become known. Due to the inherent uncertainty underlying loss reserve estimates, the expenses incurred through final resolution of our liability
for our workers’ compensation claims will likely vary from the related loss reserves at the reporting date. Therefore, as specific claims are paid out in the future,
actual paid losses may be materially different from our current loss reserves.
A basic premise in most actuarial analyses is that historical data and past patterns demonstrated in the incurred and paid historical data form a reasonable
basis upon which to project future outcomes, absent a material change. Significant structural changes to the available data can materially impact the reserve
estimation process. To the extent a material change affecting the ultimate claim liability becomes known, such change is quantified to the extent possible
through an analysis of internal Company data and, if available and when appropriate, external data. Nonetheless, actuaries exercise a considerable degree of
judgment in the evaluation of these factors and the need for such actuarial judgment is more pronounced when faced with material uncertainties.
Safety incentives
We accrue for and present expected safety incentives as a reduction of revenue. Safety incentives represent cash incentives paid to certain PEO client
companies for maintaining safe work practices and minimizing workplace injuries. The incentive is based on a percentage of annual payroll and is paid annually
to customers who meet predetermined workers’ compensation claims cost objectives. Safety incentive payments are made only after closure of all workers'
compensation claims incurred during the customer’s contract period. The safety incentive liability is estimated and accrued each month based upon contract
year-to-date payroll and the then current amount of the customer’s estimated workers’ compensation claims reserves as established by us and our third-party
administrator. In July 2020, the Company began limiting its safety incentive offering in certain markets. The Company provided $4.3 million and $ 18.8 million at
December 31, 2021 and 2020, respectively, as an estimate of the liability for unpaid safety incentives.
Customer deposits
We require deposits from certain PEO customers to cover a portion of our accounts receivable due from such customers in the event of default of payment.
Comprehensive income (loss)
Comprehensive income (loss) includes all changes in equity during a period except those that resulted from investments by or distributions to the Company's
stockholders.
Other comprehensive income (loss) refers to revenues, expenses, gains and losses that under U.S. generally accepted accounting principles (“GAAP”) are
included in comprehensive income (loss), but excluded from net income (loss) as these amounts are recorded directly as an adjustment to stockholders' equity.
Our other comprehensive income (loss) comprises unrealized holding gains and losses on our available-for-sale investments.
45
Statements of cash flows
Interest paid in 2021, 2020, and 2019 did not materially differ from interest expense. Income taxes paid by the Company totaled $ 4.7 million, $8.5 million, and
$15.4 million in 2021, 2020, and 2019, respectively.
Bank deposits and other cash equivalents that are restricted for use are classified as restricted cash. The table below reconciles the cash, cash equivalents and
restricted cash balances from our consolidated balance sheets to the amounts reported on the consolidated statements of cash flows (in thousands):
Cash and cash equivalents
Restricted cash, included in restricted cash and investments
Total cash, cash equivalents and restricted cash shown in the
statement of cash flows
Basic and diluted earnings per share
December 31,
2021
December 31,
2020
December 31,
2019
69,405 $
9,224
68,688
165,149
$
44,570
228,771
78,629 $
233,837
$
273,341
$
$
Basic earnings per share are computed based on the weighted average number of common shares outstanding for each year using the treasury method.
Diluted earnings per share reflect the potential effects of the issuance of shares in connection with the exercise of outstanding stock options, vesting of
outstanding restricted stock units and performance share units, and the Company’s employee stock purchase plan. Basic and diluted shares outstanding are
summarized as follows (in thousands):
Weighted average number of basic shares outstanding
Effect of dilutive securities
Weighted average number of diluted shares outstanding
Accounting estimates
2021
7,540
81
7,621
Year Ended
December 31,
2020
7,577
111
7,688
2019
7,451
248
7,699
The preparation of our consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions. These affect the
reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported
amounts of revenues and expenses during the reporting periods. Management bases its estimates on historical experience and on various other assumptions
that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Estimates are used for fair value measurement of investments, allowance for doubtful accounts,
deferred income taxes, carrying values for goodwill and property, equipment and software, accrued workers' compensation liabilities and safety incentive
liabilities. Actual results may or may not differ from such estimates.
Recent accounting pronouncements
There were no new or pending accounting pronouncements in 2021 that had, or will have, a material impact on our results of operations or financial condition.
46
Note 2 - Concentration of Credit Risk
Financial instruments that potentially subject us to concentration of credit risk consist primarily of cash equivalents, investments, restricted cash and
investments, and trade accounts receivable. We limit investment of cash equivalents and investments to financial institutions with high credit ratings. Credit risk
on trade accounts is minimized as a result of the large and diverse nature of our customer base.
At December 31, 2021, we had concentrations of credit risk as follows:
•
•
•
•
•
•
•
$159.5 million, at fair value, in corporate bonds .
$82.6 million, at fair value, in mortgage backed securities
$67.3 million, at fair value, in U.S. treasuries .
$42.0 million, at fair value, in U.S. government agency securities .
$29.6 million, at fair value, in asset backed securities .
$13.9 million, at fair value, in money market funds
$6.3 million, at fair value, in mutual funds
Note 3 - Fair Value Measurement
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the
measurement date.
All of our financial instruments are recognized in our consolidated balance sheets. Carrying values approximate fair value of most financial assets and liabilities.
Investments and restricted cash and investments are recorded at market value. The interest rates on our investments approximate current market rates for these
types of investments.
In determining the fair value of our financial assets, the Company predominately uses the market approach. In determining the fair value of all its corporate
bonds, mortgage backed securities, U.S. treasuries, U.S. government agency securities, supranational, mutual funds, money market funds, asset backed
securities, and municipal bonds, the Company utilizes non-binding quotes provided by our investment brokers.
Factors used in determining the fair value of our financial assets and liabilities are summarized into three levels as established in the fair value hierarchy
framework. The three levels of the fair value hierarchy are described below.
Level 1 – Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets.
Level 2 – Inputs to the valuation methodology include:
•
•
•
•
Quoted prices for similar assets or liabilities in active markets;
Quoted prices for identical or similar assets or liabilities in inactive markets;
Inputs other than quoted prices that are observable for the asset or liability;
Inputs that are derived principally from or corroborated by observable market data by correlation or other means.
Level 3 - Inputs to the valuation methodology are unobservable and significant to the fair value measurement.
47
In determining the fair value measurement of our financial assets, the fair value measurement level within the hierarchy is based on the lowest level input and is
applied to each financial asset. Valuation techniques are used to maximize the use of observable inputs and minimize the use of unobservable inputs.
The following table summarizes the Company’s investments at December 31, 2021 and 2020 measured at fair value on a recurring basis (in thousands):
Current:
Cash equivalents:
Money market funds
Total cash equivalents
Investments:
Corporate bonds
Asset backed securities
U.S. government agency securities
Mortgage backed securities
U.S. treasuries
Total current investments
Restricted cash and investments (1):
Corporate bonds
Mortgage backed securities
Money market funds
U.S. government agency securities
Mutual funds
Supranational bonds
U.S. treasuries
Asset backed securities
Total restricted cash and investments
Total investments
December 31, 2021
Gross
Unrealized
Gains
(Losses)
Recorded
Basis
Cost
December 31, 2020
Gross
Unrealized
Gains
(Losses)
Recorded
Basis
Cost
$ 13,384
13,384
$
—
—
$ 13,384
13,384
$ 42,007
42,007
$
—
—
$ 42,007
42,007
41,954
29,533
7,383
18,089
—
96,959
117,700
64,217
528
32,898
6,273
—
67,614
107
(136 )
(38 )
418
(440 )
—
(196 )
(17 )
764
—
1,281
—
—
(342 )
1
289,337
$ 399,680
$
1,687
1,491
41,818
29,495
7,801
17,649
—
96,763
117,683
64,981
528
34,179
6,273
—
67,272
108
291,024
$ 401,171
50,918
36,948
7,396
4,367
100
99,729
88,902
48,795
40,063
29,737
5,036
4,775
4,371
256
884
(146 )
752
24
1
1,515
4,091
2,356
(4 )
2,466
—
3
19
4
221,935
$ 363,671
8,935
$ 10,450
51,802
36,802
8,148
4,391
101
101,244
92,993
51,151
40,059
32,203
5,036
4,778
4,390
260
230,870
$ 374,121
(1) Included in restricted cash and investments within the consolidated balance sheets as of December 31, 2021 and 2020 is restricted cash of $ 9.2 million and
$124.3 million, respectively, which is excluded from the table above. Restricted cash and investments are classified as current and noncurrent on the balance
sheet based on the nature of the restriction.
48
The following table summarizes the Company's investments at December 31, 2021 and 2020 measured at fair value on a recurring basis by fair value hierarchy
level (in thousands):
Cash equivalents:
Money market
funds
Investments:
Corporate bonds
Asset backed securities
U.S. government
agency securities
Mortgage backed
securities
U.S. treasuries
Restricted cash and investments:
Corporate bonds
Mortgage backed
securities
Money market
funds
U.S. government
agency securities
Mutual funds
Supranational bonds
U.S. treasuries
Asset backed securities
Total investments
December 31, 2021
December 31, 2020
Total
Recorded
Basis
Level 1
Level 2
Level 3
Total
Recorded
Basis
Other (1)
Level 1
Level 2
Level 3
Other (1)
13,384 $
— $
— $
— $ 13,384 $
42,007 $
— $
— $
— $
42,007
41,818
29,495
—
—
41,818
29,495
—
—
—
—
51,802
36,802
—
—
51,802
36,802
—
—
7,801
—
7,801
—
—
8,148
—
8,148
—
17,649
—
—
—
17,649
—
—
—
—
—
4,391
101
—
—
4,391
101
—
—
117,683
—
117,683
—
—
92,993
—
92,993
—
64,981
—
64,981
—
—
51,151
—
51,151
—
—
—
—
—
—
—
—
528
—
—
—
528
40,059
—
—
—
40,059
34,179
6,273
—
67,272
108
—
6,273
—
—
—
401,171 $ 6,273 $
34,179
—
—
67,272
108
380,986 $
$
—
—
—
—
—
—
—
—
—
—
— $ 13,912 $
32,203
5,036
4,778
4,390
260
374,121 $
—
5,036
—
—
—
5,036 $
32,203
—
4,778
4,390
260
287,019 $
—
—
—
—
—
— $
—
—
—
—
—
82,066
(1) Investments in money market funds measured at fair value using the net asset value per share practical expedient are not subject to hierarchy level
classification disclosure. The Company invests in money market funds that seek to maintain a stable net asset value. These investments include commingled
funds that comprise high-quality short-term securities representing liquid debt and monetary instruments where the redemption value is likely to be the fair
value. Redemption is permitted daily without written notice.
49
The following table summarizes the contractual maturities of the Company’s available for sale securities at December 31, 2021 and 2020. Actual maturities may
differ from contractual maturities because borrowers may have the right to prepay obligations with or without prepayment penalties.
(In thousands)
Corporate bonds
Money market funds
U.S. government agency securities
Asset backed securities
Supranational bonds
U.S. treasuries
Total
(In thousands)
Corporate bonds
Money market funds
U.S. government agency securities
Asset backed securities
Supranational bonds
U.S. treasuries
Total
Less than 1 Year
Between 1 to 5
Years
December 31, 2021
Between 5 to 10
Years
After 10 Years
Total
24,601 $
13,657
—
—
—
953
39,211 $
35,570 $
—
25,171
108
—
4,295
65,144 $
99,180 $
—
16,809
2,200
—
62,024
180,213 $
150 $
—
—
27,295
—
—
27,445 $
Less than 1 Year
Between 1 to 5
Years
December 31, 2020
Between 5 to 10
Years
After 10 Years
Total
49,308 $
82,066
1,013
2
4,778
1,367
138,534 $
61,315 $
—
18,668
267
—
1,504
81,754 $
34,172 $
—
20,670
—
—
1,620
56,462 $
— $
—
—
36,793
—
—
36,793 $
$
$
$
$
159,501
13,657
41,980
29,603
—
67,272
312,013
144,795
82,066
40,351
37,062
4,778
4,491
313,543
The average contractual maturity of mortgage backed securities, which are excluded from the table above, was 23 years as of December 31, 2021 and 2020.
Note 4 - Property, Equipment and Software
Property, equipment and software consists of the following (in thousands):
Buildings
Office furniture and fixtures
Computer hardware and software
Software development costs
Other
Less accumulated depreciation and amortization
Land
December 31,
2021
2020
16,857
14,159
11,458
23,332
512
66,318
(31,531 )
34,787
1,490
36,277
$
$
16,498
13,691
11,591
18,353
437
60,570
(27,144 )
33,426
1,490
34,916
$
$
We recognized $3.1 million, $3.4 million and $ 3.3 million in depreciation expense associated with our property and equipment in 2021, 2020 and 2019,
respectively. We recognized $2.2 million, $1.4 million, and $531,000 in amortization of capitalized software development costs in 2021, 2020 and 2019,
respectively. We capitalized $5.0 million, $6.0 million and $ 8.3 million of software development costs in 2021, 2020 and 2019, respectively.
50
Note 5 - Workers' Compensation Claims
The following table summarizes the aggregate workers' compensation reserve activity (in thousands):
Beginning balance
Workers' compensation claims liabilities
Add: claims expense accrual
Current period
Prior periods
Less: claim payments related to
Current period
Prior periods
Change in claims incurred in excess of retention limits
Ending balance
Workers' compensation claims liabilities
Incurred but not reported (IBNR)
Ratio of IBNR to workers' compensation claims
liabilities
Insured program
2021
2020
2019
Years Ended December 31,
$
357,746
$
438,986
$
75,786
(9,225 )
66,561
15,063
129,138
144,201
(699 )
147,097
(6,383 )
140,714
22,877
198,620
221,497
(457 )
$
$
279,407
153,838
$
$
357,746
210,798
$
$
413,397
161,691
(13,355 )
148,336
24,414
98,445
122,859
112
438,986
285,191
55 %
59 %
65 %
The Company provides workers’ compensation coverage for client employees primarily through arrangements with fully licensed, third-party insurers (the
“insured program”). Under this program, carriers issue policies or afford coverage to the Company’s clients under a program maintained by the Company.
Approximately 82% of the Company’s workers’ compensation exposure is covered through the insured program.
The Company entered into a new arrangement for its insured program effective July 1, 2021 whereby third-party insurers assume all risk of loss for claims
incurred after June 30, 2021. The agreement continues to June 30, 2022 and includes a renewal commitment through June 30, 2023. The arrangement allows
for premium adjustments depending on overall portfolio performance. If claims develop favorably, BBSI can participate in the savings up to $20.0 million for a
twelve-month policy period. If claims develop adversely, additional premium may be charged up to $7.5 million for a twelve-month policy period.
For claims incurred under the insured program prior to July 1, 2021, the Company retains risk of loss up to the first $ 3.0 million per occurrence on policies
issued after June 30, 2020 and $5.0 million per occurrence on policies issued before that date.
On June 29, 2020, the Company entered into a loss portfolio transfer agreement (“LPT 1”) to remove all outstanding workers’ compensation claims obligations
for claims incurred under its insured program between February 1, 2014 and December 31, 2017. This transaction reduced the Company’s outstanding
workers’ compensation liabilities and trust account balances by $115.7 million.
On June 30, 2021, the Company entered into a loss portfolio transfer agreement (“LPT 2”) to remove all remaining outstanding workers’ compensation claims
obligations for client policies issued under its insured program up to June 30, 2018. This transaction reduced the Company’s outstanding workers’
compensation liabilities by $53.1 million. The payment terms of LPT 2 required $ 5.0 million to be paid prior to June 30, 2021, with the remaining amount paid in
July 2021.
51
The following is a summary of the risk retained by the Company under its insured program after considering the effects of the loss portfolio transfers and current
insurance arrangements:
Year
2014
2015
2016
2017
2018 (1)
2019 (1)
2020
2021 - Through June 30
2021 - July 1 and after
Claims risk retained
No
No
No
No
No
Yes
Yes
Yes
No
(1) LPT 2 excluded approximately 10% of claims from 2018 and included an approximately offsetting amount of claims from 2019.
The Company is required to maintain minimum collateral levels for certain policies issued under the insured program, which is held in trust accounts (the “trust
accounts”). The balance in the trust accounts was $273.6 million and $ 290.7 million at December 31, 2021 and December 31, 2020, respectively. The trust
account balances are included as a component of the current and long-term restricted cash and investments in the Company’s condensed consolidated balance
sheets.
Self-insured programs
The Company is a self-insured employer with respect to workers' compensation coverage for all employees, including employees of PEO clients that elect to
participate in our workers’ compensation program, working in Colorado, Maryland and Oregon. In the state of Washington, state law allows only the Company's
staffing services and internal management employees to be covered under the Company's self-insured workers' compensation program. The Company also
operates a wholly owned, fully licensed insurance company, Ecole, which provides workers’ compensation coverage to client employees working in Arizona and
Utah. Approximately 18% of the Company’s workers’ compensation exposure is covered through self-insurance or Ecole (the “self-insured programs”).
For all claims incurred under the Company’s self-insured programs, the Company retains risk of loss up to the first $ 3.0 million per occurrence, except in
Maryland and Colorado, where the Company’s retention per occurrence is $1.0 million and $ 2.0 million, respectively. For claims incurred under the Company’s
self-insured programs prior to July 1, 2020, the Company retains risk of loss up to the first $5.0 million per occurrence, except in Maryland and Colorado, where
the retention per occurrence is $1.0 million and $ 2.0 million, respectively.
The states of California, Maryland, Oregon, Washington, Colorado and Delaware required the Company to maintain collateral totaling $ 58.4 million and $ 60.1
million at December 31, 2021 and 2020, respectively, to cover potential workers’ compensation claims losses related to the Company’s current and former status
as a self-insured employer. At December 31, 2021, the Company provided surety bonds and standby letters of credit totaling $58.4 million, including a California
requirement of $32.6 million.
Claims liabilities
The Company provided a total of $ 279.4 million and $ 357.7 million at December 31, 2021 and 2020, respectively, as an estimated future liability for unsettled
workers' compensation claims liabilities. Of this amount, $2.2 million and $ 2.9 million at December 31, 2021 and 2020, respectively, represent case reserves
incurred in excess of the Company’s retention. The accrual for costs incurred in excess of retention limits is offset by a receivable from insurance carriers of
$2.2 million and $ 2.9 million at December 31, 2021 and 2020, respectively, included in other assets in the consolidated balance sheets.
52
Note 6 - Revolving Credit Facility and Long-Term Debt
In March 2022, the Company entered into an amended credit agreement (the “Amended Agreement”) with Wells Fargo Bank, N.A. (the “Bank”), which
supersedes the previous agreement. The Amended Agreement increased the revolving credit line from $33.0 million to $ 50.0 million and maintained the sublimit
for standby letters of credit at $8.0 million. Advances under the credit line bear interest, as selected by the Company, of (a ) the daily Simple Secured Overnight
Financing Rate (“SOFR”) plus 1.75% or (b) the one-month Term SOFR plus 1.75%. The Amended Agreement also provides for an unused commitment fee of
0.30% per year on the average daily unused amount of the revolving credit line .
The Amended Agreement replaced the financial covenants in the Agreement (as defined below) with the following financial covenants:
•
•
adjusted free cash flow [net profit after taxes plus interest expense (net of capitalized interest), depreciation, expense and amortization
expense, less dividends/distributions] not less than $10 million as of each fiscal quarter end, determined on a rolling 4-quarter basis .
tangible net worth [aggregate of total stockholders' equity plus subordinated debt less any intangible assets and less any loans or advances
to, or investments in, any related entities or individuals] not less than $100 million at each fiscal quarter end .
Other than as described above, the Agreement (as defined below) previously in place during 2021 is substantially unchanged.
At December 31, 2021, the Company maintained an agreement (the “Agreement”) with the Bank for a revolving credit line of $ 33.0 million and a sublimit for
standby letters of credit of $8.0 million. At December 31, 2021, $6.2 million of the sublimit for standby letters of credit was used. Advances under the revolving
credit line bear interest, as selected by the Company, of (a) the daily floating rate of one-month London Inter-Bank Offered Rate (“LIBOR”) plus 1.75% or (b) the
fixed rate of LIBOR plus 1.75%. The Agreement also provided for an unused commitment fee of 0.375% per year on the average daily unused amount of the
revolving credit line, as well as a fee of 1.75% of the face amount of each letter of credit reserved under the line of credit. The Company had no outstanding
borrowings on its revolving credit line at December 31, 2021 and 2020. The credit facility was collateralized by the Company’s accounts receivable and other
rights to receive payment.
The Agreement also provided a $ 63.7 million standby letter of credit (the “Letter of Credit”). In April 2021, the Company and the insurance carrier reached an
agreement to replace the Letter of Credit with other collateral assets and cancel the Letter of Credit in its entirety. As part of the transaction, the Bank released
the $38.7 million of collateral held in support of the Letter of Credit and the Company transferred the $ 38.7 million along with an additional $ 25.0 million to the
trust accounts to satisfy the collateral requirements of the insured program.
The Agreement required the satisfaction of certain financial covenants as follows:
•
•
EBITDA [net income before taxes plus interest expense (net of capitalized interest expense), depreciation expense, and amortization
expense] on a rolling four-quarter basis must be not less than $30 million at the end of each fiscal quarter; and
the ratio of restricted and unrestricted cash and investments to workers’ compensation and safety incentive liabilities must be at least 1.0:1.0,
measured quarterly.
The Agreement imposed certain additional restrictions unless the Bank provides its prior written consent as follows:
•
•
•
incurring additional indebtedness is prohibited, other than purchase financing for the acquisition of assets, provided that the aggregate of all
purchase financing does not exceed $1 million at any time;
the Company may not terminate or cancel any of the AICE policies; and
if an event of default would occur, and is continuing, including on a pro forma basis, no dividends or distributions would be permitted to be
paid and redemptions and repurchases of the Company’s stock would be permitted only up to $15 million in any rolling 12-month period .
53
The Agreement also contained customary events of default and specified cross-defaults under the Company's workers' compensation insurance arrangements.
If an event of default under the Agreement occurs and is continuing, the Bank may declare any outstanding obligations under the Agreement to be immediately
due and payable. At December 31, 2021, the Company was in compliance with all covenants.
The Company maintained a mortgage loan with the Bank with a balance of approximately $ 3.5 million and $ 3.7 million at December 31, 2021 and 2020,
respectively, secured by the Company’s corporate office building in Vancouver, Washington. This loan required payment of monthly installments of $18,375,
bearing interest at the one-month LIBOR plus 2.0%, with the unpaid principal balance due July 1, 2022. On January 31, 2022, the Company paid the
outstanding balance of the mortgage loan.
Note 7 – Benefit Plans
We have a 401(k) Retirement Savings Plan for the benefit of our eligible employees. Employees covered under a PEO arrangement may participate in the plan
at the sole discretion of the PEO client. We make matching contributions to the 401(k) plan under a safe harbor provision. The determination of any discretionary
Company contributions to the plan is at the sole discretion of our Board of Directors. No discretionary Company contributions were made to the plan for the
years ended December 31, 2021, 2020 and 2019. We made matching contributions of $1.9 million, $1.8 million and $ 1.9 million in 2021, 2020, and 2019,
respectively.
The Company allows certain highly compensated employees of the Company to defer compensation under a nonqualified deferred compensation plan. The
long-term portion of the deferred compensation plan liability was $6.3 million and $ 4.9 million at December 31, 2021 and 2020, respectively, and is recorded in
customer deposits and other long-term liabilities on the consolidated balance sheets. The current portion of the deferred compensation plan liability was $0.2
million and $0.1 million at December 31, 2021 and 2020, respectively, and is recorded in other accrued liabilities on the consolidated balance sheets. The fair
value of the long-term portion of this plan was $6.3 million and $ 4.9 million at December 31, 2021 and 2020, respectively, and is recorded in noncurrent
restricted cash and investments on the consolidated balance sheets. The fair value of the current portion of this plan was $0.2 million and $ 0.1 million at
December 31, 2021 and 2020, respectively, and is recorded in current restricted cash and investments on the consolidated balance sheets.
Note 8 – Leases
The Company primarily leases office buildings under operating leases which are included in Operating lease right-of-use (“ROU”) assets, Current operating
lease liabilities, and Long-term operating lease liabilities on the consolidated balance sheets. The Company’s leases have remaining terms of 1 to 7 years.
Information related to the Company's total lease costs was as follows (in thousands):
Year Ended
Operating lease cost
Variable lease cost
Short-term lease cost
Total lease cost
54
December 31, 2021 December 31, 2020
8,352
928
709
9,989
8,957 $
689
94
9,740
$
$
$
Information related to the Company's ROU assets and related lease liabilities was as follows (in thousands):
Cash paid for operating lease liabilities
Right-of-use assets obtained in exchange for new operating lease obligations
Weighted-average remaining lease term
Weighted-average discount rate
Year Ended
December 31,
2021
December 31,
2020
$
8,854 $
5,717
8,136
6,444
December 31,
2021
December 31,
2020
3.6 years
3.6 %
3.7 years
3.9 %
The table below reconciles the undiscounted future minimum lease payments (displayed by year and in the aggregate) under noncancellable operating leases
with terms of more than one year to the total operating lease liabilities recognized on the consolidated balance sheets as of December 31, 2021 (in thousands):
2022
2023
2024
2025
2026
Thereafter
Total undiscounted future minimum lease payments
Less: Difference between undiscounted lease payments and discounted operating lease liabilities
Total operating lease liabilities
Current operating lease liabilities
Long-term operating lease liabilities
Total operating lease liabilities
$
$
$
$
7,807
6,405
4,359
2,231
1,322
1,038
23,162
1,373
21,789
7,191
14,598
21,789
The Company has additional operating leases of $ 2.1 million that have not commenced as of December 31, 2021, and as such, have not been recognized in the
Company’s Consolidated Balance Sheets. These operating leases are expected to commence in 2022 with lease terms of 7 years.
55
Note 9 - Income Taxes
The provision for income taxes is as follows (in thousands):
Current:
Federal
State
Deferred:
Federal
State
Total provision
2021
Year Ended December 31,
2020
2019
$
$
9,527
3,408
12,935
143
(496 )
(353 )
12,582
$
$
2,943
396
3,339
4,156
1,336
5,492
8,831
$
$
Deferred income tax assets and liabilities consist of the following components (in thousands):
Deferred income tax assets:
Workers' compensation claims liabilities
Deferred compensation
Operating lease liability
Other
Payroll tax deferral
Equity based compensation
State credit carryforward
MCC accrual
Customer incentives
Less: valuation allowance
Deferred income tax liabilities:
Tax amortization of goodwill
Tax depreciation in excess of book depreciation
Operating lease right-of-use
Other
Tax effect of unrealized gains, net
Net deferred income taxes
December 31,
2021
2020
$
$
7,870
6,109
5,870
1,388
749
678
329
167
12
23,172
163
23,009
(10,120 )
(7,433 )
(5,527 )
(1,223 )
(393 )
(24,696 )
(1,687 )
$
$
The effective tax rate differed from the U.S. statutory federal tax rate due to the following:
Statutory federal tax rate
State taxes, net of federal benefit
Adjustment for final positions on filed returns
Nondeductible expenses and other, net
Federal and state tax credits
Other, net
2021
Year Ended December 31,
2020
2019
21.0 %
4.5
0.9
0.5
(2.1 )
—
24.8 %
21.0 %
3.2
0.6
0.7
(4.9 )
0.1
20.7 %
56
8,806
1,381
10,187
(774 )
3,433
2,659
12,846
9,946
2,235
6,107
1,154
1,668
555
518
1,062
54
23,299
163
23,136
(10,375 )
(7,187 )
(5,766 )
(1,455 )
(2,871 )
(27,654 )
(4,518 )
21.0 %
6.2
(0.2 )
1.3
(7.5 )
0.2
21.0 %
Under ASC 740, “Income Taxes,” management evaluates the realizability of the deferred tax assets on a quarterly basis under a “more-likely-than-not”
standard. As part of this evaluation, management reviews all evidence both positive and negative to determine if a valuation allowance is needed. One
component of this analysis is to determine whether the Company was in a cumulative loss position for the most recent 12 quarters. The Company was in a
cumulative income position for the 12 quarters ended at both December 31, 2021 and December 31, 2020.
The Company’s realization of a portion of net deferred tax assets is based in part on our estimates of the timing of reversals of certain temporary differences and
on the generation of taxable income before such reversals.
The Company is subject to income taxes in U.S. federal and multiple state and local tax jurisdictions. The Internal Revenue Service is examining the Company’s
federal tax returns for the years ended December 31, 2011 through 2014 and 2017 through 2019 . In July 2020, BBSI received notice that the IRS intends to
disallow certain wage-based tax credits claimed for years 2011 to 2014, which would result in an estimated total additional tax due of approximately $ 2.3 million
for the tax years 2012 through 2015, including the impact on carryover tax attributes. In November 2021, BBSI received notice that the IRS intends to disallow
certain wage-based tax credits claimed for the year 2017, which could result in an estimated total additional taxes and penalties due of $ 1.7 million for 2017.
Years 2018 and 2019 remain under audit, however, disallowance of similar wage-based credits for these years would result in additional estimated tax due of
$1.7 million and $ 1.6 million for 2018 and 2019, respectively. The Company disagrees with the IRS determination to disallow certain wage-based credits taken
by the Company and believes that the Company has the technical merits to defend its position. Based on management’s more-likely-than-not assessment that
the position is sustainable, no reserve for the aforementioned IRS notice of disallowance of wage-based tax credits or underpayment penalties has been
recorded in the financial statements.
In the major jurisdictions where it operates, the Company is generally no longer subject to income tax examinations by tax authorities for the 2015 and 2016 tax
years and tax years before 2011. As of December 31, 2021, 2020 and 2019, the Company had no material unrecognized tax benefits.
A portion of the consolidated income the Company generates is not subject to state income tax. Depending on the percentage of this income as compared to
total consolidated income, the Company's state effective tax rate could fluctuate from expectations.
At December 31, 2021, the Company had no state operating loss carryforwards. At December 31, 2021, the Company did not have a federal general business
tax credit carryforward or an alternative minimum tax credit carryforward.
Note 10 - Stock Incentive Plans
The Company's 2020 Stock Incentive Plan (the "2020 Plan"), which provides for share-based awards to Company employees, non-employee directors and
outside consultants or advisors, was approved by stockholders on May 27, 2020. The number of shares of common stock reserved for issuance under the 2020
Plan is 375,000, of which the maximum number of shares for which incentive stock options may be granted is 375,000. The 2020 Plan replaced the Company’s
2015 Stock Incentive Plan (the “2015 Plan”), and no new share-based awards may be granted under the 2015 Plan. The number of shares available for grant at
December 31, 2021 was 185,665.
Share-based compensation expense included in selling, general and administrative expenses during the years ended December 31, 2021, 2020 and 2019, was
$5.4 million, $3.4 million and $ 7.2 million, respectively. Related income tax benefits for the years ended December 31, 2021, 2020 and 2019, were $ 1.3 million,
$0.8 million and $ 1.3 million, respectively.
57
Stock Options
Outstanding stock options generally vest over either four or eight years and expire ten years after the date of grant.
A summary of the status of the Company’s stock options at December 31, 2021, together with changes during the periods then ended, is presented below:
Outstanding at December 31, 2020
Options exercised
Outstanding at December 31, 2021
Exercisable at December 31, 2021
Number
of Options
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Term (Years)
139,648 $
(34,773 )
104,875
24,875 $
56.13
17.60
68.91
26.12
Aggregate
Intrinsic
Value
(In Thousands)
—
—
5.32
2.40 $
—
—
1,068
1,068
No stock options were granted during the years ended December 31, 2021, 2020, and 2019.
The intrinsic value of stock options exercised for the years ended December 31, 2021, 2020 and 2019 was $ 1.7 million, $4.1 million, and $3.8 million,
respectively. No stock options vested during the year ended December 31, 2021. The fair value of stock options vested for the years ended December 31, 2020
and 2019 was $43,000 and $312,000, respectively. As of December 31, 2021, unrecognized compensation expense related to stock options was $ 2.2 million
with a weighted average remaining amortization period of 4.2 years.
Restricted Stock Units
Restricted stock units generally vest in four equal annual installments beginning one year following the date of grant.
The following table presents restricted stock unit activity:
Nonvested at December 31, 2020
Granted
Vested
Cancelled/Forfeited
Nonvested at December 31, 2021
Units
181,823
91,409
(60,038 )
(17,130 )
196,064
$
$
Weighted Average
Grant Date
Fair Value
59.16
72.23
60.48
53.08
65.38
The total fair value of restricted stock units vested during the years ended December 31, 2021, 2020 and 2019 was $ 3.6 million, $3.8 million and $ 5.8 million,
respectively. As of December 31, 2021, unrecognized compensation expense related to restricted stock units was $10.0 million with a weighted average
remaining amortization period of 2.7 years.
58
Performance Share Units
Performance share units (“PSUs”) are granted to key employees of the Company and are conditioned on attaining specified financial performance metrics.
Awards are subject to upward or downward adjustments depending on whether the actual financial metrics are above or below the target level, with a maximum
payout up to 200% of a target number of shares.
PSUs fully vest on the date that the Compensation Committee determines the level of attainment of specified performance goals, generally over a
period.
three-year
The following table presents PSU activity:
Nonvested at December 31, 2020
Granted
Vested
Cancelled/Forfeited
Nonvested at December 31, 2021
Units
8,464
29,821
(3,360 )
(592 )
34,333
$
$
Weighted Average
Grant Date
Fair Value
76.78
69.17
82.21
82.21
69.54
The total fair value of PSUs vested during the years ended December 31, 2021, 2020 and 2019 was $ 276,000, $743,000, and $ 296,000.
Employee Stock Purchase Plan
The Company offers employees the right to purchase shares at a discount from the market price under the Company’s 2019 Employee Stock Purchase Plan.
Subject to the annual statutory limit, employees are eligible to participate through payroll deductions of up to 15% of their compensation. At the end of each six-
month offering period, shares are purchased by the participants at 85% of the fair market value at the end of the offering period. As of December 31, 2021,
approximately 284,000 shares were reserved for future issuance under the 2019 Employee Stock Purchase Plan.
Note 11 - Stock Repurchase Program
The Company maintains a stock repurchase program approved by the Board of Directors, which authorizes the repurchase of shares from time to time in open
market purchases. On August 6, 2019, the Board of Directors authorized the repurchase of up to $50.0 million of the Company's common stock over a three-
year period beginning August 15, 2019. The Company repurchased 237,587 and 144,470 shares at an aggregate purchase price of $ 17.3 million and $ 8.1
million during 2021 and 2020, respectively. No share repurchases were made during 2019. In addition, shares of restricted stock units withheld to satisfy tax-
withholding obligations from the vesting of restricted stock units were 20,308, 25,922 and 38,356 in 2021, 2020, and 2019, respectively, which are not subject
to the current repurchase program. See “Note 6. Revolving Credit Facility and Long-Term Debt” for related restrictions.
On February 28, 2022, the Board of Directors authorized the repurchase of up to $ 75.0 million of the Company’s common stock over a two-year period
beginning February 28, 2022. The new repurchase program replaces the program approved in August 2019.
59
Note 12 - Litigation
On November 21, 2012, David Kaanaana (“Kaanaana”), a former staffing employee, filed a class action wage and hour lawsuit against BBSI in the California
Superior Court on behalf of himself and certain other employees who worked at County Sanitation District No. 2 of Los Angeles County (“the District”). The trial
court ruled in plaintiffs’ favor regarding certain alleged meal break violations but ruled in favor of BBSI with respect to the application of the California prevailing
wage law to the District and other claims. These latter rulings were appealed by the plaintiffs to the California Court of Appeal. On November 30, 2018, the
California Court of Appeal for the Second Appellate District returned its decision in Kaanaana v. Barrett Business Services, Inc., overruling the trial court's
decision to dismiss the prevailing wage claim, ruling that the work in question at the District constitutes “public works” under the applicable law, and also ruling
that plaintiffs’ are entitled to additional remedies with regard to the meal break violations under California law. On January 9, 2019, BBSI filed a petition of review
to the California Supreme Court.
On February 27, 2019, the California Supreme Court granted the petition to review the Court of Appeal’s decision with respect to the prevailing wage issue. An
amicus brief in support of BBSI’s appeal was filed by the District and certain associations of special districts, cities and counties in California. Oral argument took
place on January 5, 2021. A decision from the California Supreme Court was issued March 29, 2021 affirming the Court of Appeal decision and concluding that
the recycling sorting work performed by the staffing employees in question was a “public work” and therefore would be subject to prevailing wage requirements.
No damages were awarded in the appeals process. The case has been remanded to Superior Court for any such determination with respect to both the
prevailing wage issue and any additional remedies for the meal break violations. On December 7, 2021 the parties engaged in a mediation effort which resulted
in a settlement agreement on December 22, 2021. The settlement is subject to customary court approval.
In addition to the matter above, BBSI is subject to other legal proceedings and claims that arise in the ordinary course of our business. There are significant
uncertainties surrounding litigation. For the settlement discussed above, as well as other cases, management has recorded estimated liabilities of $2.6 million in
other accrued liabilities in the condensed consolidated balance sheets.
Note 13 - Subsequent Events
We have evaluated events and transactions occurring after the balance sheet date through our filing date and noted no events that are subject to recognition or
disclosure.
Item 9.
None.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Item 9A.
CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We maintain “disclosure controls and procedures” that are designed with the objective of providing reasonable assurance that information required to be
disclosed in the reports we file or submit under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized,
and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management,
including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), as appropriate, to allow timely decisions regarding required disclosure. In
designing and evaluating our disclosure controls and procedures, our management recognizes that any controls and procedures, no matter how well designed
and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management is required to apply their judgment in
evaluating the cost-benefit relationship of possible controls and procedures.
Based on their evaluation, the Company’s CEO and CFO have concluded that the Company’s disclosure controls and procedures (as defined in Rules 13a-
15(e) and 15d-15(e) under the Exchange Act) were effective as of December 31, 2021.
60
Annual Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting (“ICFR”) as defined in Rules 13a-15(f) and 15d-
15(f) under the Exchange Act. Our ICFR is a process designed by, or under the supervision of, our CEO and our CFO to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of our consolidated financial statements for external purposes in accordance with GAAP in the
United States of America. Management, with the participation of our CEO and CFO, conducted an evaluation of the effectiveness of our ICFR based on the
framework established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Based upon that evaluation, management has concluded that the Company’s internal control over financial reporting was effective as of December 31, 2021.
The effectiveness of the Company’s internal control over financial reporting has also been audited by Deloitte & Touche LLP, the Company’s independent
registered public accounting firm, as stated in their report included below.
Changes in Internal Control over Financial Reporting
There have been no changes in the Company’s internal control over financial reporting that occurred during the quarter ended December 31, 2021 that have
materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Inherent Limitations
Control systems, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control systems' objectives are
being met. Further, the design of any control systems must reflect the fact that there are resource constraints, and the benefits of all controls must be
considered relative to their costs. Due to the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control
issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision making
can be faulty and that breakdowns can occur because of simple errors or mistakes. Control systems can also be circumvented by the individual acts of some
persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain
assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential
future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or
procedures.
Chief Executive Officer and Chief Financial Officer Certifications
The certifications of our CEO and CFO required under Section 302 of the Sarbanes-Oxley Act have been filed as Exhibits 31.1 and 31.2 to this report.
61
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of
Barrett Business Services, Inc.
Vancouver, Washington
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Barrett Business Services, Inc. and subsidiaries (the “Company”) as of December 31, 2021,
based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31,
2021, based on criteria established in Internal Control—Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated
financial statements as of and for the year ended December 31, 2021, of the Company and our report dated March 7, 2022, expressed an unqualified opinion on
those financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting, included in the accompanying Management’s Report over Internal Control over Financial Reporting. Our responsibility is
to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB
and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of
the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an
understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We
believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect
the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being
made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
/s/ Deloitte & Touche LLP
Portland, Oregon
March 7, 2022
62
Item 9B.
OTHER INFORMATION
In March 2022, the Company entered into an amended credit agreement with the Bank, which supersedes the previous agreement. The amended agreement
increased the revolving credit line from $33.0 million to $50.0 million, maintained the sublimit for standby letters of credit at $8.0 million, and replaced certain
financial covenants. The term of the agreement was also extended from July 1, 2022 to July 1, 2024. For additional information regarding the Company’s
borrowing relationship with the Bank, see Note 6 to our consolidated financial statements in Part II, Item 8 of this report. The amended loan documents are filed
with this report as Exhibits 4.1, 4.2 and 4.4.
Item 9C.
DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
Not applicable.
PART III
Item 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information required by this item is incorporated by reference to the information set forth under the captions "Item 1-Election of Directors," “Background and
Experience of Executive Officers” and "Code of Ethics" in our definitive Proxy Statement to be filed with the Securities and Exchange Commission pursuant to
Regulation 14A within 120 days after the end of the fiscal year covered by this report (the “Proxy Statement”).
Item 11.
EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to the information set forth under the captions “Director Compensation for 2021” and
“Executive Compensation” in the Proxy Statement.
Item 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by this item is incorporated by reference to the information set forth under the caption "Stock Ownership of Principal Stockholders and
Management – Beneficial Ownership Table" and “Additional Equity Compensation Plan Information” in the Proxy Statement.
Item 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this item is incorporated by reference to the information set forth under the caption "Item 1-Election of Directors" and "Related
Person Transactions" in the Proxy Statement.
Item 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item is incorporated by reference to the information set forth under the caption "Matters Relating to Our Independent Registered
Public Accounting Firm” in the Proxy Statement.
63
Item 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
Financial Statements and Schedules
PART IV
The Financial Statements, together with the report thereon of Deloitte & Touche LLP, are included on the pages indicated below:
Report of Independent Registered Public Accounting Firm-Deloitte & Touche LLP (PCAOB ID: 34)
Consolidated Balance Sheets as of December 31, 2021 and 2020
Consolidated Statements of Operations for the Years Ended December 31, 2021, 2020 and 2019
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2021, 2020 and 2019
Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2021, 2020 and 2019
Consolidated Statements of Cash Flows for the Years Ended December 31, 2021, 2020 and 2019
Notes to Consolidated Financial Statements
No schedules are required to be filed herewith.
Exhibits
Page
33
35
36
37
38
39
40
The following exhibits are filed or furnished herewith or incorporated by reference and this list is intended to constitute the exhibit index.
Exhibit
Number
Description
3.1
3.2
4.1
4.2
4.3
4.4
4.5
Charter of the Registrant, as amended, through May 31, 2018. Incorporated by reference to Exhibit 3.1 to the Registrant's Quarterly Report on
Form 10‑Q for the quarter ended June 30, 2018 (the "2018 Second Quarter 10-Q").
Bylaws of the Registrant, as amended through May 27, 2020. Incorporated by reference to Exhibit 3.1 to the Registrant's Quarterly Report on
Form 10‑Q for the quarter ended June 30, 2020 (the "2020 Second Quarter 10-Q").
Third Amended and Restated Credit Agreement between the Registrant and Wells Fargo Bank, National Association (“Wells Fargo”), dated as
of March 1, 2022.
Amended and Restated Security Agreement: Business Assets, dated as of March 1, 2022, between the Registrant and Wells Fargo.
Amended and Restated Standby Letter of Credit Agreement dated as of June 20, 2018, between the Registrant and Wells Fargo. Incorporated
by reference to Exhibit 4.4 to the 2018 Second Quarter 10‑Q.
Fourth Amended and Restated Revolving Line of Credit Note dated March 1, 2022 of the Registrant.
Description of the Registrant's Capital Stock. Incorporated by reference to Exhibit 4.1 to the Registrant's Current Report on Form 8-K filed on
June 26, 2020.
64
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
10.14
10.15
10.16
10.17
Second Amended and Restated 1993 Stock Incentive Plan of the Registrant. Incorporated by reference to Exhibit 10.1 to the Registrant’s
Annual Report on Form 10-K for the year ended December 31, 2001.*
2003 Stock Incentive Plan of the Registrant (the "2003 Plan"). Incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on
Form 10-Q for the quarter ended March 31, 2003.*
2009 Stock Incentive Plan of the Registrant (the “2009 Plan”). Incorporated by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on
Form 10-Q for the quarter ended June 30, 2009.*
2015 Stock Incentive Plan of the Registrant (the "2015 Plan"). Incorporated by reference to Exhibit 10.1 to the Registrant's Current Report on
Form 8‑K filed on June 2, 2015.*
2020 Stock Incentive Plan of the Registrant (the "2020 Plan"). Incorporated by reference to Exhibit 10.1 to the Registrant's Current Report on
Form 8-K filed on June 2, 2020.*
Form of Performance Share Award Agreement for Executive Officers for awards granted beginning in 2018 under the 2015 Plan. Incorporated
by reference to Exhibit 10.1 to the 2018 Second Quarter 10‑Q.*
Form of Performance Share Award Agreement under 2020 Stock Incentive Plan. Incorporated by reference to Exhibit 10.1 to the Registrant's
Quarterly Report on Form 10‑Q for the quarter ended June 30, 2021 (the "2021 Second Quarter 10-Q").*
Form of Employee Nonqualified Stock Option Award Agreement under the 2009 Plan. Incorporated by reference to Exhibit 10.2 to the
Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2010 (the “2010 First Quarter 10-Q”).*
Form of Non-Employee Director Nonqualified Stock Option Award Agreement under the 2009 Plan. Incorporated by reference to Exhibit 10.3 to
the 2010 First Quarter 10-Q.*
Form of Employee Nonqualified Stock Option Award Agreement under the 2009 Plan. Incorporated by reference to Exhibit 10.2 to the
Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2011 (the “2011 First Quarter 10-Q”).*
Form of Non-Employee Director Nonqualified Stock Option Award Agreement under the 2009 Plan. Incorporated by reference to Exhibit 10.3 to
the 2011 First Quarter 10-Q.*
Nonqualified Stock Option Award Agreement between the Registrant and Thomas J. Carley dated July 1, 2016. Incorporated by reference to
Exhibit 10.5 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2016.*
Form of Employee Nonqualified Stock Option Award Agreement for grants to Gerald R. Blotz and Gary E. Kramer effective March 28, 2018,
under the 2015 Plan. Incorporated by reference to Exhibit 10.2 to the 2018 Second Quarter 10‑Q.*
Form of Incentive Stock Option Award Agreement relating to February 2, 2015, grants under the 2009 Plan. Incorporated by reference to Exhibit
10.11 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2015.*
Form of Restricted Stock Units Award Agreement for Executive Officers for awards granted beginning in 2018 under the 2015 Plan.
Incorporated by reference to Exhibit 10.3 to the 2018 Second Quarter 10‑Q.*
Form of Restricted Stock Units Award Agreement for Executive Officers under the 2020 Plan. Incorporated by reference to Exhibit 10.1 to the
Registrant's Quarterly Report on Form 10‑Q for the quarter ended September 30, 2020 (the "2020 Third Quarter 10-Q").*
Form of Restricted Stock Units Award Agreement for Non-Employee Directors under the 2020 Plan. Incorporated by reference to Exhibit 10.2 to
the 2020 Third Quarter 10-Q.*
65
10.18
10.19
10.20
10.21
10.22
10.23
10.24
10.25
10.26
10.27
10.28
10.29
10.30
10.31
10.32
21.
23.1
31.1
31.2
32.
Summary of Compensatory Arrangements for Non-Employee Directors of the Registrant effective January 1, 2022.*
Barrett Business Services, Inc., Nonqualified Deferred Compensation Plan. Incorporated by reference to Exhibit 10.8 to the 2017 Second
Quarter 10-Q.*
First and Second Amendments to the Barrett Business Services, Inc., Nonqualified Deferred Compensation Plan. Incorporated by reference to
Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2019.*
Form of Restricted Stock Units Award Agreement under Nonqualified Deferred Compensation Plan. Incorporated by reference to Exhibit 10.1 to
the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2018.*
Form of Restricted Stock Units Award Agreement under Nonqualified Deferred Compensation Plan for grants beginning July 1, 2020.
Incorporated by reference to Exhibit 10.3 to the 2020 Third Quarter 10-Q.*
Employment Agreement between the Registrant and Gary Kramer Jr., dated April 22, 2020. Incorporated by reference to Exhibit 10.2 to the
Registrant's Current Report on Form 8-K filed on April 24, 2020 (the “April 24, 2020 8-K”).*
Employment Agreement between the Registrant and Gerald Blotz, dated April 22, 2020. Incorporated by reference to Exhibit 10.3 to the April
24, 2020 8-K.*
Employment Agreement between the Registrant and Anthony Harris, dated April 22, 2020. Incorporated by reference to Exhibit 10.4 to the April
24, 2020 8-K.*
Employment Agreement between the Registrant and James Potts, dated August 14, 2020. Incorporated by reference to Exhibit 10.30 to the
Registrant’s Annual Report on Form 10-K for the year ended December 31, 2020 (the “2020 10-K”)*
Amended Death Benefit Agreement entered into by the Registrant and Gerald L. Blotz effective October 30, 2020. Incorporated by reference to
Exhibit 10.31 to the 2020 10-K *
Death Benefit Agreement entered into by the Registrant and Anthony Harris effective June 30, 2020. Incorporated by reference to Exhibit 10.7
to the 2020 Second Quarter 10‑Q.*
Amended Death Benefit Agreement entered into by the Registrant and Gary Kramer effective June 30, 2020. Incorporated by reference to
Exhibit 10.8 to the 2020 Second Quarter 10‑Q.*
Death Benefit Agreement entered into by the Registrant and James Potts effective October 30, 2020. Incorporated by reference to Exhibit 10.34
to the 2020 10-K.*
Barrett Business Services, Inc. Amended and Restated Annual Cash Incentive Award Plan. Incorporated by reference to Exhibit 10.45 to the
Registrant's Annual Report on Form 10‑K for the year ended December 31, 2018.*
Form of Indemnification Agreement with each outside director of Barrett Business Services, Inc. Incorporated by reference to Exhibit 10.2 to the
2021 Second Quarter 10‑Q.*
Subsidiaries of the Registrant.
Consent of Deloitte & Touche LLP, Independent Registered Public Accounting Firm.
Certification of Chief Executive Officer pursuant to Rule 13a-14(a).
Certification of Chief Financial Officer pursuant to Rule 13a-14(a).
Certification pursuant to 18 U.S.C. Section 1350.
101.INS
Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded
within the Inline XBRL document).
66
101.SCH
Inline XBRL Taxonomy Extension Schema Document.
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document.
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document.
104
*
Item 16.
None.
Coverage Page Interactive Data File (embedded within the Inline XBRL document).
Denotes a management contract or a compensatory plan or arrangement.
FORM 10-K SUMMARY
67
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.
SIGNATURES
Date: March 7, 2022
BARRETT BUSINESS SERVICES, INC.
Registrant
By:
/s/ Anthony J. Harris
Anthony J. Harris
Executive Vice President and Chief Financial Officer and
Treasurer
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 7th day of March, 2022.
Principal Executive Officer and Director:
/s/ Gary E. Kramer
Gary E. Kramer
Principal Financial and Accounting Officer:
/s/ Anthony J. Harris
Anthony J. Harris
Majority of Directors:
/s/ Thomas J. Carley
Thomas J. Carley
/s/ Thomas B. Cusick
Thomas B. Cusick
/s/ Diane L. Dewbrey
Diane L. Dewbrey
/s/ James B. Hicks
James B. Hicks, Ph.D.
/s/ Jon L. Justesen
Jon L. Justesen
/s/ Anthony Meeker
Anthony Meeker
/s/ Carla A. Moradi
Carla A. Moradi
/s/ Vincent P. Price
Vincent P. Price
President and Chief Executive
Officer and Director
Executive Vice President and Chief Financial Officer and Treasurer
Director
Director
Director
Director
Director
Chairman of the Board and Director
Director
Director
68
EXHIBIT 4.1
THIRD AMENDED AND RESTATED CREDIT AGREEMENT
THIS THIRD AMENDED AND RESTATED CREDIT AGREEMENT (this "Agreement") dated March 1, 2022, is by and between
BARRETT BUSINESS SERVICES, INC., a Maryland corporation ("Borrower"), and WELLS FARGO BANK, NATIONAL ASSOCIATION
("Bank"). This Agreement amends, restates and supersedes in its entirety, and is given as a replacement for, and not in satisfaction of or
as a novation with respect to, that certain Credit Agreement dated August 5, 2019 by and between Borrower and Bank, as such may have
been amended from time to time prior to the date hereof.
Borrower has requested that Bank extend or continue credit to Borrower as described below, and Bank has agreed to provide
such credit to Borrower on the terms and conditions contained herein.
NOW, THEREFORE, for valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Bank and
Borrower hereby agree as follows:
RECITALS
SECTION 1.1.
LINE OF CREDIT.
ARTICLE I
CREDIT TERMS
(a)
Line of Credit. Subject to the terms and conditions of this Agreement, Bank hereby agrees to make advances to
Borrower from time to time up to and including July 1, 2024, not to exceed at any time the aggregate principal amount of Fifty Million
Dollars ($50,000,000.00) ("Line of Credit"), the proceeds of which shall be used for the purposes set forth in Section 7.11. Borrower's
obligation to repay advances under the Line of Credit shall be evidenced by a promissory note dated March 1, 2022, as modified from time
to time ("Line of Credit Note").
(b)
Borrowing and Repayment. Borrower may from time to time during the term of the Line of Credit borrow, partially or
wholly repay its outstanding borrowings, and reborrow, subject to all of the limitations, terms and conditions contained herein or in the Line
of Credit Note; provided however, that the total outstanding borrowings under the Line of Credit shall not at any time exceed the maximum
principal amount available thereunder, as set forth herein.
(c)
Standby Letter of Credit Subfeature. As a subfeature under the Line of Credit, Bank agrees from time to time during the
term thereof to issue or cause an affiliate to issue standby letters of credit for the account of Borrower (each, a “Subfeature Standby Letter
of Credit” and collectively, “Subfeature Standby Letters of Credit”); provided however, that the aggregate undrawn amount of all
outstanding Subfeature Standby Letters of Credit shall not at any time exceed Eight Million Dollars ($8,000,000.00). The form and
substance of each Subfeature Standby Letter of Credit shall be subject to approval by Bank, in its sole discretion. No Subfeature Standby
Letter of Credit shall have an expiration date subsequent to the maturity date of the Line of Credit. The undrawn amount of all Subfeature
Standby Letters of Credit shall be reserved under the Line of Credit and shall not be available for borrowings thereunder. Each Subfeature
Standby Letter of Credit shall be issued for a term not to exceed three hundred sixty five (365) days, as designated by Borrower; provided
however, that no Subfeature Standby Letter of Credit shall be issued with, nor shall Bank be required to renew or (if applicable) allow
automatic renewal of any Subfeature Standby Letter of Credit so that it will have, an expiration
-1-
date that is subsequent to the maturity date of the Line of Credit (with any such Subfeature Standby Letter of Credit with an expiration date
subsequent to the maturity of the Line of Credit to be referred to as an “Extended Date Letter of Credit”) unless Borrower immediately upon
demand by Bank at any time, provides Bank with cash collateral (which may be in addition to or, if agreed by Bank, may be a replacement
for, such other collateral that may have been granted by Borrower to Bank, pursuant to this Agreement or otherwise), consisting of a
deposit account maintained by Borrower with Bank in an amount that is not less than one hundred five percent (105%) of the undrawn
amount of such Extended Date Letter of Credit, as evidenced by and subject to the security agreements and other documents as Bank
shall reasonably require, all in form and substance satisfactory to Bank; and provided further, that in no event shall any Extended Date
Letter of Credit have a then current expiration date more than three hundred sixty five (365) days beyond the maturity date of the Line of
Credit.
SECTION 1.2.
INTEREST/FEES.
(a)
Interest. The outstanding principal balance of each credit subject hereto shall bear interest at the rate of interest set
forth in each promissory note or other instrument or document executed in connection therewith.
(b)
Computation and Payment. Interest shall be computed on the basis set forth in each promissory note or other
instrument or document required hereby. Interest shall be payable at the times and place set forth in each promissory note or other
instrument or document required hereby.
(c)
Unused Commitment Fee. Borrower shall pay to Bank a fee equal to thirty hundredths percent (0.30%) per annum
(computed on the basis of a 360-day year, actual days elapsed) on the daily unused amount of the Line of Credit, which fee shall be
calculated on a quarterly basis by Bank and shall be due and payable by Borrower in arrears on the first day of each January, April, July
and December (notwithstanding the foregoing, Borrower shall continue to be obligated to pay any unused commitment fee due and owing
under the Credit Agreement dated August 5, 2019, for any period prior to the date of this Agreement).
(d)
Subfeature Standby Letter of Credit Fees and Commissions. Borrower shall pay to Bank;
(i) non-refundable issuance fees or commissions for the issuance, extension or increase (including any auto-extension) of each
Subfeature Standby Letter of Credit, determined in advance on the first day of each Calculation Period (as defined below), in an amount
equal to 1.75% per annum (computed on the basis of a 360 day year, actual days projected to elapse) of the face or increased amount, as
applicable, of such Subfeature Standby Letter of Credit, with such face or increased amount set at the time of issuance, extension or
increase, calculated over the projected term thereof for the Calculation Period, with such fees and commissions payable on the first day of
each Calculation Period or, if applicable, by such later date as may be specified in a billing for such amount sent by Bank to Borrower, and
with “Calculation Period” defined as the initial period from the date of issuance, extension or increase, as applicable, up to, but not
including, the first day of the next annual period, and each annual period thereafter; and
(ii) fees or commissions for each drawing under any such Subfeature Standby Letter of Credit and for the occurrence of any
transfer, assignment, amendment, cancellation or other activity with respect to such Subfeature Standby Letter of Credit (including without
limitation
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fees for document examination, discrepancies, reinstatement, document delivery, special handling and other trade services), determined in
accordance with Bank’s standard fees and charges then in effect for such activity, and correspondent bank fees and fees of any adviser,
confirming institution or entity or other nominated person, with such fees and commissions payable at the time of such activity or, if
applicable, by such later date as may be specified in a billing for such amount sent by Bank to Borrower.
SECTION 1.3. COLLECTION OF PAYMENTS. Except to the extent expressly specified otherwise in any Loan Document
other than this Agreement, Borrower authorizes Bank to collect all amounts due to Bank from Borrower under this Agreement or any other
Loan Document (whether for principal, interest or fees, or as reimbursement of drafts paid or other payments made by Bank under any
credit subject to this Agreement) by debiting any deposit account maintained by Borrower with Bank for the full amount thereof. Should
there be insufficient funds in Borrower's deposit accounts with Bank to pay all such sums when due, the full amount of such deficiency
shall be immediately due and payable by Borrower.
SECTION 1.4.
COLLATERAL.
As security for all indebtedness and other obligations of Borrower to Bank, other than indebtedness that is excluded from such
secured obligations by the terms of the security agreement(s) required hereunder, Borrower shall grant to Bank security interests of first
priority in all of Borrower's property described in the Security Agreement between Bank and Borrower of even date herewith.
All of the foregoing shall be evidenced by and subject to the terms of such security agreements, financing statements, deeds or
mortgages, and other documents as Bank shall reasonably require, all in form and substance satisfactory to Bank. Borrower shall pay to
Bank immediately upon demand the full amount of all reasonable and customary charges, costs and expenses (to include fees paid to third
parties and all allocated costs of Bank personnel), expended or incurred by Bank in connection with any of the foregoing security, including
without limitation, filing and recording fees and costs of appraisals, audits and title insurance.
ARTICLE II
REPRESENTATIONS AND WARRANTIES
Borrower makes the following representations and warranties to Bank, on the date hereof, on the date of Borrower’s execution
hereof, and on the date of each subsequent request for any extension of credit hereunder (including, without limitation, the issuance of any
product under any subfeature contained herein, to the extent applicable), which representations and warranties shall survive the execution
of this Agreement and shall continue in full force and effect until the full and final payment, and satisfaction and discharge, of all obligations
of Borrower to Bank subject to this Agreement.
SECTION 2.1.
LEGAL STATUS. (a) Borrower is a corporation, duly organized and existing and in good standing under the
laws of Maryland, and is qualified or licensed to do business (and is in good standing as a foreign corporation, if applicable) in all
jurisdictions in which such qualification or licensing is required other than those in which the failure to so qualify or to be so licensed could
have a material adverse effect on Borrower; and (b) no member of the Borrowing Group (as defined below) is a Sanctioned Target (as
defined below) of economic or financial sanctions, sectoral sanctions, secondary sanctions, trade embargoes or restrictions and anti-
terrorism laws imposed, administered or enforced from time to time by the United
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States of America, the United Nations Security Council, the European Union, the United Kingdom, any other governmental authority with
jurisdiction over Borrower or any member of the Borrowing Group (collectively, “Sanctions”). As used herein, “Borrowing Group” means: (i)
Borrower, (ii) any direct or indirect parent of Borrower, (iii) any affiliate or subsidiary of Borrower, (iv) any Third Party Obligor (as defined
below), and (v) any officer, director or agent acting on behalf of any of the parties referred to in items (i) through and including (iv) with
respect to the obligations hereunder, this Agreement or any of the other Loan Documents. “Sanctioned Target” means any target of
Sanctions, including (i) persons on any list of targets identified or designated pursuant to any Sanctions, (ii) persons, countries, or
territories that are the target of any territorial or country-based Sanctions program, (iii) persons that are a target of Sanctions due to their
ownership or control by any Sanctioned Target(s), or (iv) persons otherwise a target of Sanctions, including vessels and aircraft, that are
designated under any Sanctions program.
SECTION 2.2.
AUTHORIZATION AND VALIDITY. This Agreement and each promissory note, contract, instrument and
other document required hereby or at any time hereafter delivered to Bank in connection herewith (collectively, the "Loan Documents")
have been duly authorized, and upon their execution and delivery in accordance with the provisions hereof will constitute legal, valid and
binding agreements and obligations of Borrower or the party which executes the same, enforceable in accordance with their respective
terms.
SECTION 2.3.
NO VIOLATION. The execution, delivery and performance by Borrower of each of the Loan Documents do
not violate any provision of any law or regulation, or contravene any provision of the organizational and governing documents of Borrower,
or result in any breach of or default under any contract, obligation, indenture or other instrument to which Borrower is a party or by which
Borrower may be bound.
SECTION 2.4.
LITIGATION. There are no pending, or to the best of Borrower's knowledge threatened, actions, claims,
investigations, suits or proceedings by or before any governmental authority, arbitrator, court or administrative agency which could have a
material adverse effect on the financial condition or operation of Borrower other than those disclosed by Borrower to Bank in writing prior to
the date hereof.
SECTION 2.5.
CORRECTNESS OF FINANCIAL STATEMENT AND OTHER INFORMATION. The annual financial
statement of Borrower dated December 31, 2020, and all interim financial statements delivered to Bank since said date, true copies of
which have been delivered by Borrower to Bank prior to the date hereof, (a) are complete and correct in all material respects and present
fairly in all material respects the financial condition of Borrower, (b) disclose all liabilities of Borrower that are required to be reflected or
reserved against under generally accepted accounting principles, whether liquidated or unliquidated, fixed or contingent, and (c) have been
prepared in accordance with generally accepted accounting principles consistently applied. Since the dates of such financial statements
there has been no material adverse change in the financial condition of Borrower, nor has Borrower mortgaged, pledged, granted a
security interest in or otherwise encumbered any of its assets or properties for which it has granted a security interest to Bank except in
favor of Bank, or Permitted Liens or as otherwise permitted by Bank in writing. All information provided from time to time by Borrower or
any Third Party Obligor to Bank for the purpose of enabling Bank to fulfill its regulatory and compliance requirements, standards and
processes was complete and correct at the time such information was provided and, except as specifically identified to Bank in a
subsequent writing, remains complete and correct today. For purposes of this Agreement and any other Loan Documents, “Lien” means,
with respect to any asset, any mortgage, leasehold mortgage, lien,
-4-
pledge, charge, security interest, hypothecation or encumbrance of any kind in respect of such asset, and “Permitted Lien” means:
(a)
Liens for taxes, fees, assessments or other governmental charges or levies either not delinquent or being contested in
good faith by appropriate proceedings;
(b)
Purchase money Liens, whether now existing or hereafter arising (i) on equipment and software acquired or held by the
Borrower incurred for financing the acquisition of the equipment and software, or (ii) existing on equipment when acquired, if the Lien is
confined to the property and improvements and the proceeds of the equipment and software;
(c)
(d)
Section 6.1;
Leases or subleases and licenses or sublicenses granted in the ordinary course of business;
Liens arising from judgments, decrees or attachments in circumstances not constituting an Event of Default under
(e)
Liens in favor of financial institutions arising in connection with the Borrower’s deposit accounts held at such institutions
to secure standard fees for deposit services charged by, but not financing made available by, such institutions;
(f)
Liens of landlords and Liens of carriers, warehousemen, mechanics, materialmen and other similar Liens incurred in the
ordinary course of business for sums not overdue more than sixty (60) days;
(g)
Liens (other than any Lien created by Section 4068 of ERISA and securing an obligation of any employer or employers
which is delinquent) incurred or deposits or pledges made in the ordinary course of business in connection with worker’s compensation,
unemployment insurance and other types of social security, or to secure the performance of bids, leases, customs, tenders, statutory
obligations, surety and appeal bonds, payment and performance bonds, return-of-money bonds and other similar obligations (not incurred
in connection with the borrowing of money or the obtaining of advances or credits to finance the purchase price of property);
(h)
Easements, rights-of-way, restrictions, covenants, conditions and other Liens incurred, licenses and sublicenses and
other similar rights granted to others in the ordinary course of business and not, individually or in the aggregate, materially interfering with
the ordinary conduct of the business of the applicable person;
(i)
Liens which are incidental to the conduct of the Borrower’s business or the ownership of its property and assets
(including, without limitation, leases entered into in the ordinary course of business) and which were not incurred in connection with the
borrowing of money or the obtaining of advances or credit, and which do not in the aggregate materially impair the ordinary conduct of the
business of the applicable person;
(j)
Liens securing Indebtedness incurred and used to finance insurance premiums, provided that the property encumbered
thereby shall be limited to the proceeds of any such insurance policies;
(k)
Any (i) interest or title of a lessor or sublessor under any lease not prohibited by this Agreement, (ii) Lien or restriction
that the interest or title of such lessor or sublessor may be
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subject to, or (iii) subordination of the interest of the lessee or sublessee under such lease to any Lien or restriction referred to in the
preceding clause (ii), so long as the holder of such Lien or restriction agrees to recognize the rights of such lessee or sublessee under
such lease;
(l)
Any zoning or similar law or right reserved to or vested in any Governmental Authority to control or regulate the use of
any real property;
(m)
(n)
Liens arising from UCC financing statement filings regarding operating leases and consignments;
Liens consisting of rights of set-off or bankers’ liens or amounts on deposit, including, without limitation, in respect of
Cash Management Agreements and similar arrangements in the ordinary course of business, and guarantees thereof; and
(o)
Liens on any Borrower property or other assets that are not pledged to or otherwise subject to a Lien in favor of Bank
under this Agreement or any other Loan Documents.
SECTION 2.6.
INCOME TAX RETURNS. Borrower has no knowledge of any pending assessments or adjustments of its
income tax payable with respect to any year except as disclosed in writing to Bank.
SECTION 2.7.
NO SUBORDINATION. There is no agreement, indenture, contract or instrument to which Borrower is a
party or by which Borrower may be bound that requires the subordination in right of payment of any of Borrower's obligations subject to this
Agreement to any other obligation of Borrower.
SECTION 2.8.
PERMITS, FRANCHISES. Borrower possesses, and will hereafter possess, all permits, consents,
approvals, franchises and licenses required and rights to all trademarks, trade names, patents, and fictitious names, if any, necessary to
enable it to conduct the business in which it is now engaged in compliance with applicable law, except those the absence of which would
not have a material adverse effect on Borrower.
SECTION 2.9.
ERISA. Borrower is in compliance in all material respects with all applicable provisions of the Employee
Retirement Income Security Act of 1974, as amended or recodified from time to time ("ERISA"); Borrower has not violated any provision of
any defined employee pension benefit plan (as defined in ERISA) maintained or contributed to by Borrower (each, a "Plan"); no Reportable
Event as defined in ERISA has occurred and is continuing with respect to any Plan initiated by Borrower; Borrower has met its minimum
funding requirements under ERISA with respect to each Plan; and each Plan will be able to fulfill its benefit obligations as they come due in
accordance with the Plan documents and under generally accepted accounting principles.
SECTION 2.10.
OTHER OBLIGATIONS. Borrower is not in default on any obligation for borrowed money, any purchase
money obligation or any other material lease, commitment, contract, instrument or obligation.
SECTION 2.11.
ENVIRONMENTAL MATTERS. Except as disclosed by Borrower to Bank in writing prior to the date
hereof, Borrower is in compliance in all material respects with all applicable federal or state environmental, hazardous waste, health and
safety statutes, and any rules or regulations adopted pursuant thereto, which govern or affect any of Borrower's operations and/or
properties, including without limitation, the Comprehensive Environmental
-6-
Response, Compensation and Liability Act of 1980, the Superfund Amendments and Reauthorization Act of 1986, the Federal Resource
Conservation and Recovery Act of 1976, and the Federal Toxic Substances Control Act, as any of the same may be amended, modified or
supplemented from time to time. None of the operations of Borrower is the subject of any federal or state investigation evaluating whether
any remedial action involving a material expenditure is needed to respond to a release of any toxic or hazardous waste or substance into
the environment. Borrower has no material contingent liability in connection with any release of any toxic or hazardous waste or substance
into the environment.
SECTION 2.12
SANCTIONS, ANTI-MONEY LAUNDERING AND ANTI-CORRUPTION LAWS. (a) each member of the
Borrowing Group has instituted, maintains and complies with policies, procedures and controls reasonably designed to assure compliance
with Anti-Money Laundering Laws and Anti-Corruption Laws (each as defined below), and Sanctions; and (b) to the best of Borrower’s
knowledge, after due care and inquiry, no member of the Borrowing Group is under investigation for an alleged violation of any Sanctions,
Anti-Money Laundering Laws or Anti-Corruption Laws by a governmental authority that enforces such laws. As used herein: “Anti-
Corruption Laws” means: (i) the U.S. Foreign Corrupt Practices Act of 1977, as amended; (ii) the U.K. Bribery Act 2010, as amended; and
(iii) any other anti-bribery or anti-corruption laws, regulations or ordinances in any jurisdiction in which the Borrower or any member of the
Borrowing Group is located or doing business. “Anti-Money Laundering Laws” means applicable laws or regulations in any jurisdiction in
which the Borrower or any member of the Borrowing Group is located or doing business that relates to money laundering, any predicate
crime to money laundering, or any financial record keeping and reporting requirements related thereto.
ARTICLE III
CONDITIONS
SECTION 3.1.
CONDITIONS TO THE EFFECTIVENESS OF THIS AGREEMENT. The effective date of this Agreement
shall be (a) the date that each of the following conditions set forth in this Section 3.1 have been satisfied or waived, as determined by
Bank, or (b) such alternative date to which Bank and Borrower may mutually agree, in each case as evidenced by Bank’s system of
record. Notwithstanding the occurrence of the effective date of this Agreement, Bank shall not be obligated to extend credit under this
Agreement or any other Loan Document until all conditions to each extension of credit set forth in Section 3.2 have been fulfilled to Bank's
satisfaction.
(a)
Approval of Bank Counsel . All legal matters incidental to the effectiveness of this Agreement shall be satisfactory to
Bank's counsel.
(b)
executed by all parties:
Documentation . Bank shall have received, in form and substance satisfactory to Bank, each of the following, duly
(i)
(ii)
(iii)
(iv)
(v)
This Agreement and each promissory note or other instrument or document required hereby.
Corporate Resolution and Certificate of Incumbency: Borrower.
Security Agreement: Business Assets.
Certificate of Insurance.
Such other documents as Bank may require under any other Section of this Agreement.
-7-
(c)
Satisfaction of Regulatory and Compliance Requirements. In addition to any requirements set forth above, and
notwithstanding Borrower’s execution or delivery of this Agreement or any other Loan Document, all regulatory and compliance
requirements, standards and processes shall be completed to the satisfaction of Bank.
SECTION 3.2.
CONDITIONS OF EACH EXTENSION OF CREDIT. The obligation of Bank to make each extension of
credit requested by Borrower hereunder shall be subject to the fulfillment to Bank's satisfaction of each of the following conditions:
(a)
Compliance. The representations and warranties contained herein and in each of the other Loan Documents shall be
true on and as of the date of the signing of this Agreement and on the date of each extension of credit by Bank pursuant hereto, with the
same effect as though such representations and warranties had been made on and as of each such date, and on each such date, no
Event of Default as defined herein, and no condition, event or act which with the giving of notice or the passage of time or both would
constitute such an Event of Default, shall have occurred and be continuing or shall exist.
(b)
Documentation. Bank shall have received all additional documents which may be required in connection with such
extension of credit including without limitation, the following:
(i)
For the issuance of a standby letter of credit under any credit subject to this Agreement, Bank's standard
Application for Standby Letter of Credit.
(c)
Letter of Credit Documentation. Prior to the issuance of any letter of credit, Bank shall have received a Letter of Credit
Agreement and any other letter of credit documentation required by Bank, in each case completed and duly executed by Borrower.
(d)
Payment of Fees. Bank shall have received payment in full of any fee required by any of the Loan Documents to be
paid at the time such credit extension is made.
(e)
Financial Condition. There shall have been no material adverse change, as determined by Bank, in the financial
condition or business of Borrower or any Third Party Obligor hereunder, if any, nor any material decline, as determined by Bank, in the
market value of any collateral required hereunder or a substantial or material portion of the assets of Borrower or any such Third Party
Obligor, if any.
ARTICLE IV
AFFIRMATIVE COVENANTS
Borrower covenants that so long as Bank remains committed to extend credit to Borrower pursuant hereto, or any liabilities
(whether direct or contingent, liquidated or unliquidated) of Borrower to Bank under any of the Loan Documents remain outstanding, and
until payment in full of all obligations of Borrower subject hereto, Borrower shall, unless Bank otherwise consents in writing:
SECTION 4.1.
PUNCTUAL PAYMENTS. Punctually pay all principal, interest, fees or other liabilities due under any of the
Loan Documents at the times and place and in the manner specified therein, and immediately upon demand by Bank, the amount by which
the outstanding principal balance of any credit subject hereto at any time exceeds any limitation on borrowings applicable thereto.
-8-
SECTION 4.2.
ACCOUNTING RECORDS. Maintain adequate books and records in accordance with generally accepted
accounting principles consistently applied, and permit any representative of Bank, at any reasonable time, to inspect, audit and examine
such books and records, to make copies of the same, and to inspect the properties of Borrower. If at any time any change in generally
accepted accounting principles would affect the computation of any covenant (including the computation of any financial covenant) and/or
pricing grid set forth in this Agreement or any other Loan Document, Borrower and Bank shall negotiate in good faith to amend such
covenant and/or pricing grid to preserve the original intent in light of such change; provided, that, until so amended, (i) such covenant
and/or pricing grid shall continue to be computed in accordance with the application of generally accepted accounting principles prior to
such change and (ii) Borrower shall provide to Bank a written reconciliation in form and substance reasonably satisfactory to Bank,
between calculations of such covenant and/or pricing grid made before and after giving effect to such change in generally accepted
accounting principles.
SECTION 4.3.
FINANCIAL STATEMENTS AND OTHER INFORMATION. Provide to Bank all of the following, in form and
detail satisfactory to Bank:
(a) not later than 120 days after and as of the end of each fiscal year, an audited consolidated financial statement of Borrower, prepared by
a certified public accountant acceptable to Bank, to include balance sheet, income statement, and statement of cash flows and sources, which shall be
accompanied by the unqualified opinion of such accountant addressed to Bank, together with a copy of any management letters issued in connection
therewith; and
(b) promptly upon their becoming available, copies of (i) all financial statements, reports, notices and proxy statements made publicly
available by Borrower to its security holders; (ii) all regular and periodic reports and all registration statements and prospectuses, if any, filed by
Borrower with any securities exchange or with the U.S. Securities and Exchange Commission (“SEC”) or any governmental or private regulatory
authority, including, but not limited to (A) not later than 95 calendar days after the end of each fiscal year, Borrower’s 10-K filing with the SEC
(including all exhibits and certifications) for the fiscal year just ended, and (B) not later than 50 calendar days after the end of each fiscal quarter,
Borrower’s 10-Q filing with the SEC (including all exhibits and certifications) for the fiscal quarter just ended; and (iii) all press releases and other
statements made available by Borrower to the public concerning material changes or developments in the business of Borrower; and
(c)
contemporaneously with each annual and quarterly financial statement of Borrower required hereby, a certificate of the
president or chief financial officer of Borrower certifying that such financial statements are accurate and complete in all material respects, that
Borrower is in compliance with all financial covenants in this Agreement (as evidenced by detailed calculations attached to such certificate), and
except as otherwise previously reported in writing to Bank, that there exists no Event of Default nor any condition, act or event which with the giving
of notice or the passage of time or both would constitute an Event of Default; and
(d)
from time to time such other financial and business information as Bank may reasonably request, including without
limitation, copies of rent rolls and other information with respect to any real property collateral required hereby; and
(e)
from time to time such other information as Bank may request for the purpose of enabling Bank to fulfill its regulatory
and compliance requirements, standards and processes.
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SECTION 4.4.
COMPLIANCE.
(a)
Preserve and maintain all licenses, permits, governmental approvals, rights, privileges and franchises necessary for the
conduct of its business except as would not have a material adverse effect on Borrower; comply with the provisions of all documents
pursuant to which Borrower is organized and/or which govern Borrower's continued existence; comply with the requirements of all laws,
rules, regulations and orders of any jurisdiction in which the Borrower is located or doing business, or otherwise is applicable to Borrower
except as would not have a material adverse effect on Borrower; and
(b)
comply with, and cause each member of the Borrowing Group to comply with, all Sanctions, Anti-Money Laundering
Laws, and Anti-Corruption Laws.
SECTION 4.5.
INSURANCE. (a) Maintain and keep in force, for each business in which Borrower is engaged,
insurance of the types and in amounts customarily carried in similar lines of business, including but not limited to fire, extended coverage,
commercial general liability, flood, and, if required by governmental regulation or Bank , hurricane, windstorm, seismic property damage,
workers' compensation, marine cargo insurance, and specific hazards affecting any real property, including terrorism , with all such
insurance carried in amounts satisfactory to Bank and where required by Bank, with replacement cost, mortgagee loss payable and
lender loss payable endorsements in favor of Bank, and (b) deliver to Bank prior to the date hereof, and from time to time at Bank's
request, schedules setting forth all insurance then in effect, together with a lender’s loss payee endorsement for all such insurance naming
Bank as a lender loss payee. Such insurance may be obtained from an insurer or through an insurance agent of Borrower’s choice,
provided that any insurer chosen by Borrower is acceptable to Bank on such reasonable grounds as may be permitted under applicable
law.
SECTION 4.6.
FACILITIES. Keep all properties useful or necessary to Borrower's business in good repair and condition,
and from time to time make necessary repairs, renewals and replacements thereto so that such properties shall be fully and efficiently
preserved and maintained.
SECTION 4.7.
TAXES AND OTHER LIABILITIES. Pay and discharge when due any and all indebtedness, obligations,
assessments and taxes, both real or personal, including without limitation federal and state income taxes and state and local property
taxes and assessments, except (a) such as Borrower may in good faith contest or as to which a bona fide dispute may arise, and (b) for
which Borrower has made provision, to Bank's satisfaction, for eventual payment thereof in the event Borrower is obligated to make such
payment.
SECTION 4.8.
LITIGATION. Promptly give notice in writing to Bank of any litigation pending or threatened against
Borrower or any Affiliate with a claim in excess of $1,000,000.00.
SECTION 4.9.
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)
ADJUSTED FREE CASH FLOW not less than $10,000,000 as of each fiscal quarter end, determined on a rolling 4-quarter basis, with
“ADJUSTED FREE CASH FLOW” defined as net profit after taxes plus interest expense (net of capitalized interest expense), depreciation expense and
amortization expense, less dividends/distributions.
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(b)
Tangible Net Worth not less than $100,000,000 at each fiscal quarter end, with “Tangible Net Worth” defined as the
aggregate of total stockholders' equity plus subordinated debt less any intangible assets and less any loans or advances to, or investments
in, any related entities or individuals.
SECTION 4.10.
NOTICE TO BANK. Promptly (but in no event more than five (5) days after the occurrence of each such
event or matter and in no event more than one (1) business day after the occurrence of each such event or matter described below with
respect to Sanctions, Anti-Money Laundering Laws, and Anti-Corruption Laws) give written notice to Bank in reasonable detail of: (a) the
occurrence of any Event of Default, or any condition, event or act which with the giving of notice or the passage of time or both would
constitute an Event of Default; (b) any change in the name or the organizational structure of Borrower, including, by illustration, merger,
conversion or division; (c) the occurrence and nature of any Reportable Event or Prohibited Transaction, each as defined in ERISA, or any
funding deficiency with respect to any Plan; (d) any termination or cancellation of any insurance policy which Borrower is required to
maintain, or any uninsured or partially uninsured loss exceeding One Million Dollars ($1,000,000) through liability or property damage, or
through fire, theft or any other cause affecting Borrower’s property; or (e) any breach of any covenant contained herein related to
Sanctions, Anti-Money Laundering Laws, and Anti-Corruption Laws or the Borrower’s inability to make the representations and warranties
contained herein related to Sanctions, Anti-Money Laundering Laws, and Anti-Corruption Laws on any date, or the failure of any
representations and warranties contained herein related to Sanctions, Anti-Money Laundering Laws, and Anti-Corruption Laws to be true
and correct in all respects on or as of any date.
SECTION 4.11.
DEPOSIT ACCOUNTS. Maintain Borrower’s principal deposit accounts and other traditional banking
relationships with Bank.
SECTION 4.12.
COLLATERAL AUDITS. Permit Bank to audit all Borrower's collateral required hereunder, with such
audits to be performed from time to time at Bank’s option by collateral examiners acceptable to Bank and in scope and content satisfactory
to Bank, and with all Bank's costs and expenses of each audit to be reimbursed in full by Borrower. Bank shall not be required to share
the results of the audit(s) with Borrower or any third party.
ARTICLE V
NEGATIVE COVENANTS
Borrower further covenants that so long as Bank remains committed to extend credit to Borrower pursuant hereto, or any
liabilities (whether direct or contingent, liquidated or unliquidated) of Borrower to Bank under any of the Loan Documents remain
outstanding, and until payment in full of all obligations of Borrower subject hereto, Borrower will not without Bank's prior written consent:
SECTION 5.1.
USE OF FUNDS. SOURCES OF REPAYMENT AND COLLATERAL.
(a)
Use, or permit any member of the Borrowing Group to use, any of the proceeds of any credit extended hereunder
except for the purposes stated in Article I hereof, or directly or indirectly use any such proceeds to fund, finance or facilitate any activities,
business or transactions: (i) that are prohibited by Sanctions; (ii) that would be prohibited by Sanctions if conducted by Bank or any of
Bank’s affiliates; or (iii) that would be prohibited by any Anti-Money Laundering Laws or Anti-Corruption Laws.
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(b)
Fund any repayment of the obligations hereunder or under any other Loan Document with proceeds, or provide any
property as collateral for any such obligations, or permit any third party to provide any property as collateral for any such obligations, that is
directly or indirectly derived from any transaction or activity that is prohibited by any Sanctions, Anti-Money Laundering Laws or Anti-
Corruption Laws, or that could otherwise cause Bank or any of Bank’s affiliates to be in violation of any Sanctions, Anti-Money Laundering
Laws or Anti-Corruption Laws.
SECTION 5.2.
OTHER INDEBTEDNESS. Create, incur, assume or permit to exist any indebtedness or liabilities resulting
from borrowings, loans or advances, whether secured or unsecured, matured or unmatured, liquidated or unliquidated, joint or several,
except (a) the liabilities of Borrower to Bank, (b) purchase money indebtedness (including capitalized leases) for the acquisition of assets,
provided that the aggregate of all purchase money indebtedness does not exceed One Million Dollars ($1,000,000) at any time, and (c)
any other liabilities of Borrower or any of the affiliates existing as of, and disclosed to the Bank prior to, the date hereof; provided, however,
that if Borrower or any of the affiliates incurs indebtedness or becomes liable to any third party to the extent permitted hereunder, neither
Borrower nor any of the affiliates shall enter into any agreement with such other party that prohibits Borrower or any of the affiliates, as the
case may be, from incurring indebtedness with Bank or any affiliate of Bank or that prohibits Borrower or any of the affiliates from granting
a lien to Bank or any affiliate of Bank on any real or personal property owned by Borrower or any of the affiliates, as the case may be.
SECTION 5.3.
MERGER, CONSOLIDATION, TRANSFER OF ASSETS, (a) Merge into or consolidate with any other entity;
(b) make any substantial change in the nature of Borrower's or any Affiliate’s business as conducted as of the date hereof; (c) acquire all or
substantially all of the assets of any other entity, except for a Permitted Acquisition (as defined below); (d) sell, lease, transfer or otherwise
dispose of all or a substantial or material portion of Borrower’s or any Affiliate’s assets except in the ordinary course of its business, nor (e)
accomplish any of the above by virtue of a division or similar transaction. “Permitted Acquisition” means any acquisition by Borrower of all
or substantially all of the operating assets of any person or entity so long as all of the following conditions are satisfied: (i) the acquisition is
consummated in compliance with applicable law, (ii) there exists no Event of Default, nor any act, condition or event which with the giving
of notice or the passage of time or both would constitute an Event of Default, and no such Event of Default or potential Event of Default
results after giving effect to the acquisition, (iii) the aggregate consideration (valuing any non-cash consideration at its fair market value,
and including without limitation the amount of all liabilities assumed or acquired) does not exceed $10,000,000 for each such acquisition
and does not exceed $10,000,000 in the aggregate in any fiscal year, and (iv) Borrower provides Bank with notice of the acquisition at
least thirty (30) days prior thereto.
SECTION 5.4.
GUARANTIES. Guarantee or become liable in any way as surety, endorser (other than as endorser of
negotiable instruments for deposit or collection in the ordinary course of business), accommodation endorser or otherwise for, nor pledge
or hypothecate any assets of Borrower as security for, any liabilities or obligations of any other person or entity, except any of the foregoing
in favor of Bank.
SECTION 5.5.
LOANS, ADVANCES, INVESTMENTS. Make any loans or advances to or investments in any person or
entity, including any of the foregoing accomplished by a division
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or similar transaction, except any of the foregoing existing as of, and disclosed to Bank prior to, the date hereof, and Permitted
Investments. “Permitted Investments” means:
(a)
(b)
investments in cash and cash equivalents;
investments in marketable securities (including marketable securities held in trust for settlement of the Borrower’s
obligations under certain of its deferred compensation plans or to secure obligations under Borrower’s insurance program) made in the
ordinary course of business and otherwise in a manner substantially consistent with prior practices;
(c)
investments in existing and future subsidiaries or in connection with an acquisition in an amount not to exceed Ten
Million Dollars ($10,000,000) for each such investment or acquisition and in an amount not to exceed Ten Million Dollars ($10,000,000) in
the aggregate in any fiscal year; and
(d)
to the extent not otherwise permitted by the foregoing, intercompany loans or advances arising in the ordinary course of
business between the Borrower and any subsidiary or between a subsidiary of the Borrower and another subsidiary in an amount not to
exceed Ten Million Dollars ($10,000,000) for each such investment or acquisition and in an amount not to exceed Ten Million Dollars
($10,000,000) in the aggregate in any fiscal year.
SECTION 5.6.
PLEDGE OF ASSETS. Mortgage, pledge, grant or permit to exist a security interest in, or lien upon, all or
any portion of Borrower's assets now owned or hereafter acquired, except any of the foregoing in favor of Bank or which is existing as of,
and disclosed to Bank in writing prior to, the date hereof and except purchase money liens to the extent they secure purchase money debt
permitted under this Agreement and except Permitted Liens.
SECTION 5.7.
DIVIDENDS, DISTRIBUTIONS. (a) If an Event of Default has occurred and is continuing or would occur on
a pro forma basis, declare or pay any dividend or distribution either in cash or any other property on Borrower’s stock, membership interest,
partnership interest or other ownership interest now or hereafter outstanding, (b) If an Event of Default has occurred and is continuing or
would occur on a pro forma basis, redeem, retire, repurchase or otherwise acquire any class or type of ownership interest now or hereafter
outstanding except any of the foregoing in this subsection (b) in amounts not to exceed an aggregate of $15,000,000 in any rolling 12-
month period.
ARTICLE VI
EVENTS OF DEFAULT
SECTION 6.1.
The occurrence of any of the following shall constitute an "Event of Default" under this Agreement:
(a)
Borrower shall fail to pay when due any principal, interest, fees or other amounts payable under any of the Loan
Documents.
(b)
Any financial statement or certificate furnished to Bank in connection with, or any representation or warranty made by
Borrower or any other party under this Agreement or any other Loan Document shall prove to be incorrect, false or misleading in any
material respect when furnished or made.
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(c)
Any default in the performance of or compliance with: (1) any collateral value requirement set forth herein or in any other
Loan Document; (2) any negative covenant set forth in Article V hereof; (3) any affirmative covenant set forth in Article IV hereof requiring
the delivery of financial statements and other information to Bank; or (4) any obligation, agreement or other provision contained herein or in
any other Loan Document related to Sanctions, Anti-Money Laundering Laws, or Anti-Corruption Laws.
(d)
Any default in the performance of or compliance with any obligation, agreement or other provision contained herein or
in any other Loan Document (other than those defaults specifically described as constituting an “Event of Default” under any other
subsection of this Section 6.1.), and with respect to such default(s) that by their nature can be cured (excluding any defaults specifically
described as constituting an “Event of Default” under any other subsection of this Section 6.1., none of which shall be subject to a cure
period), such default shall continue for a period of twenty (20) days after written notice from Bank.
(e)
Any default in the payment or performance of any obligation, or any defined event of default, under the terms of any
contract, instrument or document (other than any of the Loan Documents) pursuant to which Borrower, any guarantor hereunder, the owner
of any collateral securing the obligations hereunder or under any other Loan Document, or any general partner or joint venturer in Borrower
if a partnership or joint venture (with each such guarantor, owner of pledged collateral, general partner and/or joint venturer referred to
herein as a "Third Party Obligor") has incurred any debt to any person or entity, including Bank.
(f)
Borrower or any Third Party Obligor shall become insolvent, or shall suffer or consent to or apply for the appointment of
a receiver, trustee, custodian or liquidator of itself or any of its property, or shall generally fail to pay its debts as they become due, or shall
make a general assignment for the benefit of creditors; Borrower or any Third Party Obligor shall file a voluntary petition in bankruptcy, or
seeking reorganization, in order to effect a plan or other arrangement with creditors or any other relief under the Bankruptcy Reform Act,
Title 11 of the United States Code, as amended or recodified from time to time ("Bankruptcy Code"), or under any state or federal law
granting relief to debtors, whether now or hereafter in effect; or Borrower or any Third Party Obligor shall file an answer admitting the
jurisdiction of the court and the material allegations of any involuntary petition; or Borrower or any Third Party Obligor shall be adjudicated
a bankrupt, or an order for relief shall be entered against Borrower or any Third Party Obligor by any court of competent jurisdiction under
the Bankruptcy Code or any other applicable state or federal law relating to bankruptcy, reorganization or other relief for debtors.
(g)
The filing of a notice of judgment lien against Borrower or any Third Party Obligor; or the recording of any abstract of
judgment against Borrower or any Third Party Obligor in any county in which Borrower or such Third Party Obligor has an interest in real
property; or the service of a notice of levy and/or of a writ of attachment or execution, or other like process, against the assets of Borrower
or any Third Party Obligor; or the entry of a judgment against Borrower or any Third Party Obligor; provided the foregoing are of a material
nature, with materiality being defined as having an aggregate value in excess of One Million Dollars ($1,000,000); or any involuntary
petition or proceeding pursuant to the Bankruptcy Code or any other applicable state or federal law relating to bankruptcy, reorganization
or other relief for debtors is filed or commenced against Borrower or any Third Party Obligor and such petition or proceeding has not been
dismissed or otherwise discharged within 30 days thereafter, provided, however, nothing contained herein shall prevent Bank from
declaring an Event of Default and
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filing a notice of claim or taking similar action during such 30 day period if failure to do so would foreclose Bank's rights in such matter.
(h)
There shall exist or occur any event or condition that Bank in good faith believes impairs, or is substantially likely to
impair, the prospect of payment or performance by Borrower, any Third Party Obligor, or the general partner of either if such entity is a
partnership, of its obligations under any of the Loan Documents.
(i)
The death or incapacity of Borrower or any Third Party Obligor if an individual. The withdrawal, resignation or expulsion
of any one or more of the general partners in Borrower or any Third Party Obligor if a partnership. The dissolution, division, or liquidation of
Borrower or any Third Party Obligor if a corporation, partnership, joint venture or other type of entity; or Borrower or any such Third Party
Obligor, or any of its directors, stockholders or members, shall take action seeking to effect the dissolution, division, or liquidation of
Borrower or such Third Party Obligor.
(j)
The withdrawal, resignation or expulsion of any one or more of the general partners in Borrower or any change in control
of Borrower or any entity or combination of entities that directly or indirectly control Borrower, with “control” defined as ownership of an
aggregate of twenty-five percent (25%) or more of the common stock, members' equity or other ownership interest (other than a limited
partnership interest).
(k)
The sale, transfer, hypothecation, assignment or encumbrance, whether voluntary, involuntary or by operation of law,
without Bank's prior written consent, of all or any part of or interest in any real property collateral required hereby, except for any Permitted
Lien.
SECTION 6.2.
REMEDIES. Upon the occurrence of any Event of Default: (a) all principal, unpaid interest outstanding and
other indebtedness of Borrower under each of the Loan Documents, any term thereof to the contrary notwithstanding, shall at Bank's
option and without notice (except as expressly provided in any mortgage or deed of trust pursuant to which Borrower has provided Bank a
lien on any real property collateral) become immediately due and payable without presentment, demand, protest or any notices of any kind,
including without limitation, notice of nonperformance, notice of protest, notice of dishonor, notice of intention to accelerate or notice of
acceleration, all of which are hereby expressly waived by Borrower; (b) the obligation, if any, of Bank to extend any further credit under any
of the Loan Documents shall immediately cease and terminate; and (c) Bank shall have all rights, powers and remedies available under
each of the Loan Documents, or accorded by law, including without limitation the right to resort to any or all security for any credit subject
hereto and to exercise any or all of the rights of a beneficiary or secured party pursuant to applicable law. All rights, powers and remedies
of Bank may be exercised at any time by Bank and from time to time after the occurrence of an Event of Default, are cumulative and not
exclusive, and shall be in addition to any other rights, powers or remedies provided by law or equity.
ARTICLE VII
MISCELLANEOUS
SECTION 7.1.
NO WAIVER. No delay, failure or discontinuance of Bank in exercising any right, power or remedy under
any of the Loan Documents shall affect or operate as a waiver of such right, power or remedy; nor shall any single or partial exercise of any
such right, power or remedy preclude, waive or otherwise affect any other or further exercise thereof or the exercise of any other right,
power or remedy. Any waiver, permit, consent or approval of any
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kind by Bank of any breach of or default under any of the Loan Documents must be in writing and shall be effective only to the extent set
forth in such writing.
SECTION 7.2.
NOTICES. All notices, requests and demands which any party is required or may desire to give to any
other party under any provision of this Agreement must be in writing delivered to each party at the following address:
BORROWER:
BANK:
BARRETT BUSINESS SERVICES, INC.
8100 NE Parkway Drive, Suite 200
Vancouver, Washington 98662
Attn: Chief Financial Officer
WELLS FARGO BANK, NATIONAL ASSOCIATION
MAC P6101-250
1300 SW 5th Avenue, 25th Floor
Portland, Oregon 97201
or to such other address as any party may designate by written notice to all other parties. Each such notice, request and demand shall be
deemed given or made as follows: (a) if sent by hand delivery, upon delivery; (b) if sent by mail, upon the earlier of the date of receipt or
three (3) days after deposit in the U.S. mail, first class and postage prepaid; and (c) if sent by overnight delivery service, on the next
business day.
SECTION 7.3.
COSTS, EXPENSES AND ATTORNEYS' FEES. Borrower shall pay to Bank immediately upon demand the
full amount of all payments, advances, charges, costs and expenses, including, to the extent permitted by applicable law, reasonable
attorneys' fees (to include outside counsel fees and all allocated costs of Bank's in-house counsel to the extent permissible), expended or
incurred by Bank in connection with (a) the negotiation and preparation of this Agreement and the other Loan Documents, Bank's
continued administration hereof and thereof, and the preparation of any amendments and waivers hereto and thereto, (b) the enforcement
of Bank's rights and/or the collection of any amounts which become due to Bank under any of the Loan Documents, whether or not suit is
brought, and (c) the prosecution or defense of any action in any way related to any of the Loan Documents, including without limitation, any
action for declaratory relief, whether incurred at the trial or appellate level, in an arbitration proceeding or otherwise, and including any of
the foregoing incurred in connection with any bankruptcy proceeding (including without limitation, any adversary proceeding, contested
matter or motion brought by Bank or any other person) relating to Borrower or any other person or entity. Notwithstanding anything in this
Agreement to the contrary, reasonable attorneys' fees shall not exceed the amount permitted by law.
SECTION 7.4.
SUCCESSORS, ASSIGNMENT. This Agreement shall be binding upon and inure to the benefit of the heirs,
executors, administrators, legal representatives, successors and assigns of the parties; provided however, that Borrower may not assign or
transfer its interests or rights hereunder without Bank's prior written consent. Bank reserves the right to sell, assign, transfer, negotiate or
grant participations in all or any part of, or any interest in, Bank's rights and benefits under each of the Loan Documents. In connection
therewith, Bank may disclose all documents and information which Bank now has or may hereafter acquire relating to any credit subject
hereto, Borrower or its business, any guarantor hereunder or the business of such guarantor, if any, or any collateral required hereunder.
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SECTION 7.5.
ENTIRE AGREEMENT; AMENDMENT. To the full extent permitted by law, this Agreement and the other
Loan Documents constitute the entire agreement between Borrower and Bank with respect to each credit subject hereto and supersede all
prior negotiations, communications, discussions and correspondence concerning the subject matter hereof. This Agreement may be
amended or modified only in writing signed by each party hereto.
SECTION 7.6.
NO THIRD PARTY BENEFICIARIES. This Agreement is made and entered into for the sole protection and
benefit of the parties hereto and their respective permitted successors and assigns, and no other person or entity shall be a third party
beneficiary of, or have any direct or indirect cause of action or claim in connection with, this Agreement or any other of the Loan
Documents to which it is not a party.
SECTION 7.7.
TIME. Time is of the essence of each and every provision of this Agreement and each other of the Loan
Documents.
SECTION 7.8.
SEVERABILITY OF PROVISIONS. If any provision of this Agreement shall be prohibited by or invalid under
applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity without invalidating the remainder of
such provision or any remaining provisions of this Agreement.
SECTION 7.9.
COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which when
executed and delivered shall be deemed to be an original, and all of which when taken together shall constitute one and the same
Agreement.
SECTION 7.10.
GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of
Oregon (such State, Commonwealth or District is referred to herein as the “State”), but giving effect to federal laws applicable to national
banks, without reference to the conflicts of law or choice of law principles thereof.
SECTION 7.11.
BUSINESS PURPOSE. Borrower represents and warrants that each credit subject hereto is made for (a)
a business, commercial, investment, agricultural or other similar purpose, (b) the purpose of acquiring or carrying on a business,
professional or commercial activity, or (c) the purpose of acquiring any real or personal property as an investment and not primarily for a
personal, family or household use.
SECTION 7.12.
RIGHT OF SETOFF; DEPOSIT ACCOUNTS. Upon and after the occurrence of an Event of Default, (a)
Borrower hereby authorizes Bank, at any time and from time to time, without notice, which is hereby expressly waived by Borrower, and
whether or not Bank shall have declared any credit subject hereto to be due and payable in accordance with the terms hereof, to set off
against, and to appropriate and apply to the payment of, Borrower's obligations and liabilities under the Loan Documents (whether matured
or unmatured, fixed or contingent, liquidated or unliquidated), any and all amounts owing by Bank to Borrower (whether payable in U.S.
dollars or any other currency, whether matured or unmatured, and in the case of deposits, whether general or special (except trust and
escrow accounts), time or demand and however evidenced), and (b) pending any such action, to the extent necessary, to hold such
amounts as collateral to secure such obligations and liabilities and to return as unpaid for insufficient funds any and all checks and other
items drawn against any deposits so held as Bank, in its sole discretion, may elect. Bank may exercise this remedy regardless of the
adequacy of any collateral for the obligations of Borrower to Bank and whether or not the Bank is otherwise fully secured. Borrower
hereby grants to Bank a security interest in all deposits and
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accounts maintained with Bank to secure the payment of all obligations and liabilities of Borrower to Bank under the Loan Documents.
SECTION 7.13.
ARBITRATION.
(a)
Arbitration. The parties hereto agree, upon demand by any party, to submit to binding arbitration all claims, disputes
and controversies between or among them (and their respective employees, officers, directors, attorneys, and other agents), whether in
tort, contract or otherwise in any way arising out of or relating to (i) any credit subject hereto, or any of the Loan Documents, and their
negotiation, execution, collateralization, administration, repayment, modification, extension, substitution, formation, inducement,
enforcement, default or termination; or (ii) requests for additional credit. In the event of a court ordered arbitration, the party requesting
arbitration shall be responsible for timely filing the demand for arbitration and paying the appropriate filing fee within 30 days of the
abatement order or the time specified by the court. Failure to timely file the demand for arbitration as ordered by the court will result in that
party’s right to demand arbitration being automatically terminated.
(b)
Governing Rules. Any arbitration proceeding will (i) proceed in a location in the State selected by the American
Arbitration Association (“AAA”); (ii) be governed by the Federal Arbitration Act (Title 9 of the United States Code), notwithstanding any
conflicting choice of law provision in any of the documents between the parties; and (iii) be conducted by the AAA, or such other
administrator as the parties shall mutually agree upon, in accordance with the AAA’s commercial dispute resolution procedures, unless the
claim or counterclaim is at least $1,000,000.00 exclusive of claimed interest, arbitration fees and costs in which case the arbitration shall
be conducted in accordance with the AAA’s optional procedures for large, complex commercial disputes (the commercial dispute
resolution procedures or the optional procedures for large, complex commercial disputes to be referred to herein, as applicable, as the
“Rules”). If there is any inconsistency between the terms hereof and the Rules, the terms and procedures set forth herein shall
control. Any party who fails or refuses to submit to arbitration following a demand by any other party shall bear all costs and expenses
incurred by such other party in compelling arbitration of any dispute. Nothing contained herein shall be deemed to be a waiver by any
party that is a bank of the protections afforded to it under 12 U.S.C. §91 or any similar applicable state law.
(c)
No Waiver of Provisional Remedies, Self-Help and Foreclosure. The arbitration requirement does not limit the right of
any party to (i) foreclose against real or personal property collateral; (ii) exercise self-help remedies relating to collateral or proceeds of
collateral such as setoff or repossession; or (iii) obtain provisional or ancillary remedies such as replevin, injunctive relief, attachment or
the appointment of a receiver, before during or after the pendency of any arbitration proceeding. This exclusion does not constitute a
waiver of the right or obligation of any party to submit any dispute to arbitration or reference hereunder, including those arising from the
exercise of the actions detailed in sections (i), (ii) and (iii) of this paragraph.
(d)
Arbitrator Qualifications and Powers. Any arbitration proceeding in which the amount in controversy is $5,000,000.00 or
less will be decided by a single arbitrator selected according to the Rules, and who shall not render an award of greater than
$5,000,000.00. Any dispute in which the amount in controversy exceeds $5,000,000.00 shall be decided by majority vote of a panel of
three arbitrators; provided however, that all three arbitrators must actively participate in all hearings and deliberations. The arbitrator will
be a neutral attorney licensed in the State or a neutral retired judge of the state or federal judiciary of the State, in either case
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with a minimum of ten years experience in the substantive law applicable to the subject matter of the dispute to be arbitrated. The
arbitrator will determine whether or not an issue is arbitratable and will give effect to the statutes of limitation in determining any claim. In
any arbitration proceeding the arbitrator will decide (by documents only or with a hearing at the arbitrator's discretion) any pre-hearing
motions which are similar to motions to dismiss for failure to state a claim or motions for summary adjudication. The arbitrator shall resolve
all disputes in accordance with the substantive law of the State and may grant any remedy or relief that a court of such state could order or
grant within the scope hereof and such ancillary relief as is necessary to make effective any award. The arbitrator shall also have the
power to award recovery of all costs and fees, to impose sanctions and to take such other action as the arbitrator deems necessary to the
same extent a judge could pursuant to the Federal Rules of Civil Procedure, the corresponding rules of civil practice and procedure
applicable in the State or other applicable law. Judgment upon the award rendered by the arbitrator may be entered in any court having
jurisdiction. The institution and maintenance of an action for judicial relief or pursuit of a provisional or ancillary remedy shall not constitute
a waiver of the right of any party, including the plaintiff, to submit the controversy or claim to arbitration if any other party contests such
action for judicial relief.
(e)
Discovery. In any arbitration proceeding, discovery will be permitted in accordance with the Rules. All discovery shall
be expressly limited to matters directly relevant to the dispute being arbitrated and must be completed no later than 20 days before the
hearing date. Any requests for an extension of the discovery periods, or any discovery disputes, will be subject to final determination by
the arbitrator upon a showing that the request for discovery is essential for the party's presentation and that no alternative means for
obtaining information is available.
(f)
Class Proceedings and Consolidations. No party hereto shall be entitled to join or consolidate disputes by or against
others in any arbitration, except parties who have executed any Loan Document, or to include in any arbitration any dispute as a
representative or member of a class, or to act in any arbitration in the interest of the general public or in a private attorney general capacity.
(g)
(h)
Payment Of Arbitration Costs And Fees. The arbitrator shall award all costs and expenses of the arbitration proceeding.
Miscellaneous. To the maximum extent practicable, the AAA, the arbitrators and the parties shall take all action
required to conclude any arbitration proceeding within 180 days of the filing of the dispute with the AAA. No arbitrator or other party to an
arbitration proceeding may disclose the existence, content or results thereof, except for disclosures of information by a party required in the
ordinary course of its business or by applicable law or regulation. If more than one agreement for arbitration by or between the parties
potentially applies to a dispute, the arbitration provision most directly related to the Loan Documents or the subject matter of the dispute
shall control. This arbitration provision shall survive termination, amendment or expiration of any of the Loan Documents or any
relationship between the parties.
(i)
Small Claims Court. Notwithstanding anything herein to the contrary, each party retains the right to pursue in Small
Claims Court any dispute within that court’s jurisdiction. Further, this arbitration provision shall apply only to disputes in which either party
seeks to recover an amount of money (excluding attorneys’ fees and costs) that exceeds the jurisdictional limit of the Small Claims Court.
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UNDER OREGON LAW, MOST AGREEMENTS, PROMISES AND COMMITMENTS MADE BY BANK 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.
IN WITNESS WHEREOF, the parties hereto, intending to be legally bound hereby, have caused this Agreement to be effective
as of the effective date set forth above.
BARRETT BUSINESS SERVICES, INC.
By:/s/ Anthony Harris
ANTHONY HARRIS,
CHIEF FINANCIAL OFFICER
WELLS FARGO BANK,
NATIONAL ASSOCIATION
By:/s/ Julie R. Wilson
JULIE R. WILSON,
SENIOR VICE PRESIDENT
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SECURITY AGREEMENT: BUSINESS ASSETS
EXHIBIT 4.2
This Agreement amends and restates in its entirety, and is given as a replacement for, and not in satisfaction of or as a novation
with respect to, that certain Amended and Restated Security Agreement: Business Assets dated June 20, 2018 executed by Debtor in
favor of Bank (the “Original Security Agreement”). It is the intent of the parties hereto that the security interests and liens granted in any
collateral under and pursuant to the Original Security Agreement shall continue in full force and effect.
1.
GRANT OF SECURITY INTEREST. For valuable consideration, the undersigned BARRETT BUSINESS SERVICES,
INC. ("Debtor"), hereby grants and transfers to WELLS FARGO BANK, NATIONAL ASSOCIATION ("Bank") a security interest in all of the
property of Debtor described as follows:
All rights to payment, accounts, deposit accounts, chattel paper (whether electronic or tangible), instruments, promissory notes,
documents, licenses, general intangibles, payment intangibles, software, letter of credit rights and health-care insurance receivables now
existing or at any time hereafter arising and whether they arise from the sale, lease or other disposition of inventory or from performance of
contracts for service, manufacture, construction, repair or otherwise or from any other source whatsoever, including without limitation all
security, guaranties, warranties, indemnity agreements, insurance policies, supporting obligations and other agreements pertaining to the
same or the property described therein; and
All inventory, goods held for sale or lease or to be furnished under contracts for service, goods so leased or furnished, and all software
embedded therein and component parts thereof, and all raw materials, work in process and materials used or consumed in Debtor's
business now or at any time hereafter acquired by Debtor wherever located, whether in the possession of Debtor or any warehouseman,
bailee or any other person or in process of delivery and whether located at Debtor's places of business or elsewhere, and all warehouse
receipts, bills of lading and other documents evidencing any of the foregoing and all goods covered thereby, including without limitation all
security, guaranties, warranties, indemnity agreements, insurance policies, supporting obligations and other agreements pertaining to the
same or the property described therein, and all renewals thereof; and
All tools, machinery, furnishings, furniture and other equipment, and all replacements, accessions and additions thereto and embedded
software included therein, whether now owned or hereafter acquired by Debtor, wherever located, whether in the possession of Debtor or
any other person, including without limitation all security, guaranties, warranties, indemnity agreements, insurance policies, supporting
obligations and other agreements pertaining to the same or the property described therein
(collectively called “Collateral”), together with all proceeds thereof, including whatever is acquired when any of the Collateral or proceeds
thereof are sold, leased, licensed, exchanged or otherwise disposed of, whether such disposition is voluntary or involuntary and whatever
is collected on or distributed on account thereof, including without limitation, (i) all rights to payment however evidenced, (ii) all goods
returned by or repossessed from Debtor’s customers, (iii) rights arising out of Collateral, (iv) claims arising out of the loss, nonconformity,
or interference with the use of, defects or infringement of rights in, or damage to, the Collateral, (v) insurance payable by reason of the loss
or nonconformity of, defects or infringement of rights
-1-
in, or damage to, the Collateral, (vi) returned insurance premiums, and (vii) all rights to payment with respect to any claim or cause of
action affecting or relating to any of the foregoing (hereinafter called "Proceeds").
2.
OBLIGATIONS SECURED. The obligations secured hereby are the payment and performance of: (a) all present and
future Indebtedness of Debtor to Bank specifically including, without limitation, any Reimbursement Obligations (as defined below);
provided however that the obligations secured hereby shall not include any Indebtedness of Debtor to Bank to the extent that the terms of
the agreement(s) giving rise to such Indebtedness expressly state that such Indebtedness is unsecured or not secured by this Agreement,
or otherwise expressly disclaim the security interest created hereby as security for such Indebtedness (excluding, for the avoidance of
doubt, Reimbursement Obligations); and (b) all obligations of Debtor and rights of Bank under this Agreement. For the avoidance of doubt,
and notwithstanding anything herein or in any other agreement between Debtor and Bank to the contrary, the statement herein that
Reimbursement Obligations are specifically included in the Indebtedness secured hereby, shall be sufficient to satisfy a requirement in any
Reimbursement Agreement executed by Debtor and delivered to Bank stating that for such letter of credit or acceptance or similar product
obligations to be secured, they must be specifically described.
As used in this Agreement:
(A) The word "Indebtedness" is used herein in its most comprehensive sense and includes any and all advances, debts,
obligations and liabilities of Debtor to Bank, heretofore, now or hereafter made, incurred or created, whether voluntary or involuntary and
however arising, whether due or not due, absolute or contingent, liquidated or unliquidated, determined or undetermined, including under
any swap, derivative, foreign exchange, hedge, deposit, treasury management or other similar transaction or arrangement, and whether
Debtor may be liable individually or jointly with others, or whether recovery upon such Indebtedness may be or hereafter becomes
unenforceable.
(B) “Reimbursement Obligations” means, any Indebtedness arising directly or indirectly from any of the following: letters of
credit, bankers’ acceptances, open account acceptances, trade acceptances, or similar products, including, for the avoidance of doubt, any
such obligations arising under any related Reimbursement Agreement.
(C) “Reimbursement Agreement” means a credit agreement, letter of credit agreement, acceptance agreement, open account
processing agreement or similar document or agreement governing the reimbursement terms and obligations related to letters of credit,
bankers’ acceptances, open account acceptances, trade acceptances or similar products.
3.
TERMINATION. This Agreement will terminate upon the performance of all obligations of Debtor to Bank secured
hereby, including without limitation, the payment of all Indebtedness of Debtor to Bank secured hereby, and the termination of all
commitments of Bank to extend credit to Debtor that would constitute Indebtedness to Bank secured hereby, existing at the time Bank
receives written notice from Debtor of the termination of this Agreement.
4.
OBLIGATIONS OF BANK. Bank has no obligation to make any loans hereunder. Any money received by Bank in
respect of the Collateral may be deposited, at Bank's option, into a non-interest bearing account over which Debtor shall have no control,
and the same shall, for all purposes, be deemed Collateral hereunder. Bank shall not be required to apply such
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money to the Indebtedness or other obligations secured hereby or to remit such money to Debtor or to any other party until the full
payment of all Indebtedness of Debtor to Bank secured hereby, and the termination of all commitments to Bank to extend credit to Debtor.
5.
REPRESENTATIONS AND WARRANTIES. Debtor represents and warrants to Bank that: (a) Debtor's legal name is
exactly as set forth on the first page of this Agreement, and all of Debtor's organizational documents or agreements delivered to Bank are
complete and accurate in every respect; (b) Debtor is the owner and has possession or control of the Collateral and Proceeds; (c) Debtor
has the exclusive right to grant a security interest in the Collateral and Proceeds; (d) all Collateral and Proceeds are genuine, free from
liens, adverse claims, setoffs, default, prepayment, defenses and conditions precedent of any kind or character, except the lien created
hereby or as otherwise agreed to by Bank, Permitted Liens (as defined in the Credit Agreement), or as heretofore disclosed by Debtor to
Bank, in writing; (e) all statements contained herein and, where applicable, in the Collateral are true and complete in all material respects;
(f) no financing statement covering any of the Collateral or Proceeds, and naming any secured party other than Bank, is on file in any public
office except as heretofore disclosed by Debtor to Bank in writing; (g) where Collateral consists of rights to payment, all persons appearing
to be obligated on the Collateral and Proceeds have authority and capacity to contract and are bound as they appear to be, all property
subject to chattel paper has been properly registered and filed in compliance with law and to perfect the interest of Debtor in such property,
and all such Collateral and Proceeds comply with all applicable laws concerning form, content and manner of preparation and execution,
including where applicable Federal Reserve Regulation Z and any State consumer credit laws; and (h) where the Collateral consists of
equipment, fixtures, or specific goods, Debtor is not in the business of selling goods of the kind included within such Collateral, and Debtor
acknowledges that no sale or other disposition of any such Collateral, including without limitation, any such Collateral which Debtor may
deem to be surplus, has been consented to or acquiesced in by Bank, except as specifically set forth in writing by Bank.
6.
(a)
COVENANTS OF DEBTOR.
Debtor agrees in general: (i) to pay Indebtedness secured hereby when due; (ii) to indemnify Bank against all losses,
claims, demands, liabilities and expenses of every kind caused by property subject hereto; (iii) to permit Bank to exercise its powers; (iv) to
execute and deliver such documents as Bank deems necessary to create, perfect and continue the security interests contemplated hereby;
(v) not to change its name, and as applicable, its chief executive office, its principal residence or the jurisdiction in which it is organized
and/or registered without giving Bank prior written notice thereof; (vi) not to change the places where Debtor keeps all or substantially all of
the Collateral or Debtor's records concerning the Collateral and Proceeds without giving Bank prior written notice of the address to which
Debtor is moving same; (vii) not to sell, lease, transfer or otherwise dispose of all or a substantial or material portion of Debtor's assets
except in the ordinary course of its business, nor accomplish any of the above by virtue of a division or similar transaction; and (viii) to
cooperate with Bank in perfecting all security interests granted herein and in obtaining such agreements from third parties as Bank deems
necessary, proper or convenient in connection with the preservation, perfection or enforcement of any of its rights hereunder.
(b)
Debtor agrees with regard to the Collateral and Proceeds, unless Bank agrees otherwise in writing: (i) that Bank is
authorized to file financing statements in the name of Debtor to perfect Bank's security interest in Collateral and Proceeds; (ii) where
applicable, to operate the Collateral in accordance with all applicable statutes, rules and regulations relating to
-3-
the use and control thereof, and not to use any Collateral for any unlawful purpose or in any way that would void any insurance required to
be carried in connection therewith; (iii) not to remove the Collateral from Debtor's premises except in the ordinary course of Debtor's
business; (iv) to pay in all material respects when due all license fees, registration fees and other charges in connection with any Collateral;
(v) with the exception of Permitted Liens as defined in the Credit Agreement, not to permit any lien on the Collateral or Proceeds, including
without limitation, liens arising from repairs to or storage of the Collateral, except in favor of Bank; (vi) not to sell, hypothecate or dispose of
(including, by illustration, merger, conversion or division), nor permit the transfer by operation of law of, any of the Collateral or Proceeds or
any interest therein, except sales of inventory to buyers in the ordinary course of Debtor’s business; (vii) to permit Bank to inspect the
Collateral at any time; (viii) to keep, in accordance with generally accepted accounting principles, complete and accurate records in all
material respects regarding all Collateral and Proceeds, and to permit Bank to inspect the same and make copies thereof at any
reasonable time; (ix) if requested by Bank, to receive and use reasonable diligence to collect Collateral consisting of accounts and other
rights to payment and Proceeds, in trust and as the property of Bank, and to immediately endorse as appropriate and deliver such
Collateral and Proceeds to Bank daily in the exact form in which they are received together with a collection report in form satisfactory to
Bank; (x) not to commingle Collateral or Proceeds, or collections thereunder, with other property; (xi) to give only normal allowances and
credits and to advise Bank thereof immediately in writing if they affect any rights to payment or Proceeds in any material respect; (xii) from
time to time, when requested by Bank, to prepare and deliver a schedule of all Collateral and Proceeds subject to this Agreement and to
assign in writing and deliver to Bank all accounts, contracts, leases and other chattel paper, instruments, documents and other evidences
thereof; (xiii) in the event Bank elects to receive payments of rights to payment or Proceeds hereunder, to pay all expenses incurred by
Bank in connection therewith, including expenses of accounting, correspondence, collection efforts, reporting to account or contract
debtors, filing, recording, record keeping and expenses incidental thereto; and (xiv) to provide any service and do any other acts which
may be necessary to maintain, preserve and protect all Collateral and, as appropriate and applicable, to keep all Collateral in good and
saleable condition, to deal with the Collateral in accordance with the standards and practices adhered to generally by users and
manufacturers of like property, and to keep all Collateral and Proceeds free and clear of all defenses, rights of offset and counterclaims.
7.
POWERS OF BANK. Debtor appoints Bank its true attorney in fact to perform any of the following powers, which are
coupled with an interest, are irrevocable until termination of this Agreement and may be exercised from time to time by Bank's officers and
employees, or any of them, whether or not Debtor is in default: (a) to perform any obligation of Debtor hereunder in Debtor's name or
otherwise; (b) to give notice to account debtors or others of Bank's rights in the Collateral and Proceeds, to enforce or forebear from
enforcing the same and make extension and modification agreements with respect thereto; (c) to release persons liable on Collateral or
Proceeds and to give receipts and acquittances and compromise disputes in connection therewith; (d) to release or substitute security
securing obligations owing to Debtor; (e) to resort in any order to security securing obligations owing to Debtor; (f) to prepare, execute, file,
record or deliver notes, assignments, schedules, designation statements, financing statements, continuation statements, termination
statements, statements of assignment, applications for registration or like papers to perfect, preserve or release Bank's interest in the
Collateral and Proceeds; (g) to receive, open and read mail addressed to Debtor; (h) to take cash, instruments for the payment of money
and other property to which Bank is entitled; (i) to verify facts concerning the Collateral and Proceeds by inquiry of obligors thereon, or
otherwise, in its own name or a fictitious name; (j) to endorse, collect, deliver and receive payment under instruments for the payment of
money constituting or relating to Proceeds; (k) to prepare, adjust,
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execute, deliver and receive payment under insurance claims, and to collect and receive payment of and endorse any instrument in
payment of loss or returned premiums or any other insurance refund or return, and to apply such amounts received by Bank, at Bank's
sole option, toward repayment of the Indebtedness secured hereby or, where appropriate, replacement of the Collateral; (l) to exercise all
rights, powers and remedies which Debtor would have, but for this Agreement, with respect to all Collateral and Proceeds subject hereto;
(m) to enter onto Debtor's premises in inspecting the Collateral; (n) to make withdrawals from and to close deposit accounts or other
accounts with any financial institution, wherever located, into which Proceeds may have been deposited, and to apply funds so withdrawn
to payment of the Indebtedness secured hereby; (o) to preserve or release the interest evidenced by chattel paper to which Bank is entitled
hereunder and to endorse and deliver any evidence of title incidental thereto; and (p) to do all acts and things and execute all documents in
the name of Debtor or otherwise, deemed by Bank as necessary, proper and convenient in connection with the preservation, perfection or
enforcement of its rights hereunder.
8.
PAYMENT OF PREMIUMS, TAXES, CHARGES, LIENS AND ASSESSMENTS. Debtor agrees to pay, prior to
delinquency, all insurance premiums, taxes, charges, liens and assessments against the Collateral and Proceeds, and upon the failure of
Debtor to do so, Bank at its option may pay any of them and shall be the sole judge of the legality or validity thereof and the amount
necessary to discharge the same. Any such payments made by Bank shall be obligations of Debtor to Bank, due and payable immediately
upon demand, and at Bank’s option and subject to any restrictions under applicable law pertaining to usury, together with interest at a rate
determined in accordance with the provisions of this Agreement, and shall be secured by the Collateral and Proceeds, subject to all terms
and conditions of this Agreement.
9.
EVENTS OF DEFAULT. The occurrence of any of the following shall constitute an "Event of Default" under this
Agreement: (a) any default in the payment or performance of any obligation, or any defined event of default, under (i) any contract or
instrument evidencing any Indebtedness, or (ii) any other agreement between Debtor and Bank, including without limitation any loan
agreement, relating to or executed in connection with any Indebtedness; (b) any representation or warranty made by Debtor herein shall
prove to be incorrect, false or misleading in any material respect when made; (c) Debtor shall fail to observe or perform any obligation or
agreement contained herein; (d) any impairment of the rights of Bank in any Collateral or Proceeds, or any attachment or like levy on any
property of Debtor; and (e) Bank, in good faith, believes any material portion of the Collateral and/or Proceeds to be in danger of misuse,
dissipation, commingling, loss, theft, damage or destruction, or otherwise in jeopardy or unsatisfactory in character or value.
10.
REMEDIES. Upon the occurrence of any Event of Default, Bank shall have the right to declare immediately due and
payable all or any Indebtedness secured hereby and to terminate any commitments to make loans or otherwise extend credit to
Debtor. Bank shall have all other rights, powers, privileges and remedies granted to a secured party upon default under the Uniform
Commercial Code or the Business and Commerce Code of the jurisdiction identified in Section 18 below, or otherwise provided by law,
including without limitation, the right (a) to contact all persons obligated to Debtor on any Collateral or Proceeds and to instruct such
persons to deliver all Collateral and/or Proceeds directly to Bank, and (b) to sell, lease, license or otherwise dispose of any or all
Collateral. In addition to any other remedies set forth in this Agreement, Debtor authorizes Bank to engage in “electronic self-help” as
defined in and in accordance with applicable law. All rights, powers, privileges and remedies of Bank shall be cumulative. No delay,
failure or discontinuance of Bank in exercising any right, power, privilege or remedy hereunder shall affect or operate as a waiver of such
right, power, privilege or
-5-
remedy; nor shall any single or partial exercise of any such right, power, privilege or remedy preclude, waive or otherwise affect any other
or further exercise thereof or the exercise of any other right, power, privilege or remedy. Any waiver, permit, consent or approval of any
kind by Bank of any default hereunder, or any such waiver of any provisions or conditions hereof, must be in writing and shall be effective
only to the extent set forth in writing. It is agreed that public or private sales or other dispositions, for cash or on credit, to a wholesaler or
retailer or investor, or user of property of the types subject to this Agreement, or public auctions, are all commercially reasonable since
differences in the prices generally realized in the different kinds of dispositions are ordinarily offset by the differences in the costs and
credit risks of such dispositions. While an Event of Default exists: (a) Debtor will deliver to Bank from time to time, as requested by Bank,
current lists of all Collateral and Proceeds; (b) Debtor will not dispose of any Collateral or Proceeds except on terms approved by Bank;
(c) at Bank's request, Debtor will assemble and deliver all Collateral and Proceeds, and books and records pertaining thereto, to Bank at a
reasonably convenient place designated by Bank; (d) Bank may, at any time, liquidate any time deposits pledged to Bank hereunder and
apply the Proceeds thereof to payment of the Indebtedness secured hereby, whether or not said time deposits have matured and
notwithstanding the fact that such liquidation may give rise to penalties for early withdrawal of funds; and (e) Bank may, without notice to
Debtor, enter onto Debtor's premises and take possession of the Collateral. With respect to any sale or other disposition by Bank of any
Collateral subject to this Agreement, Debtor hereby expressly grants to Bank the right to sell such Collateral using any or all of Debtor's
trademarks, trade names, trade name rights and/or proprietary labels or marks. Debtor further agrees that Bank shall have no obligation to
process or prepare any Collateral for sale or other disposition.
11.
DISPOSITION OF COLLATERAL AND PROCEEDS; TRANSFER OF INDEBTEDNESS. In disposing of Collateral
hereunder, Bank may disclaim all warranties of title, possession, quiet enjoyment and the like. Any proceeds of any disposition of any
Collateral or Proceeds, or any part thereof, may be applied by Bank to the payment of expenses incurred by Bank in connection with the
foregoing, including reasonable attorneys' fees, and the balance of such proceeds may be applied by Bank toward the payment of the
Indebtedness secured hereby in such order of application as Bank may from time to time elect. Upon the transfer of all or any part of the
Indebtedness secured hereby, Bank may transfer all or any part of the Collateral or Proceeds and shall be fully discharged thereafter from
all liability and responsibility with respect to any of the foregoing so transferred, and the transferee shall be vested with all rights and
powers of Bank hereunder with respect to any of the foregoing so transferred; but with respect to any Collateral or Proceeds not so
transferred, Bank shall retain all rights, powers, privileges and remedies herein given.
12.
STATUTE OF LIMITATIONS. Until all Indebtedness secured hereby shall have been paid in full and all commitments
by Bank to extend credit to Debtor that would constitute Indebtedness secured hereby have been terminated, the power of sale or other
disposition and all other rights, powers, privileges and remedies granted to Bank hereunder shall, to the extent permitted by law, continue
to exist and may be exercised by Bank at any time and from time to time irrespective of the fact that the Indebtedness secured hereby or
any part thereof may have become barred by any statute of limitations, or that the personal liability of Debtor may have ceased, unless
such liability shall have ceased due to the payment in full of all Indebtedness secured hereunder.
13.
MISCELLANEOUS. When there is more than one Debtor named herein: (a) the word "Debtor" shall mean all or any
one or more of them as the context requires; (b) the obligations of each Debtor hereunder are joint and several; and (c) until all
Indebtedness
-6-
secured hereby shall have been paid in full, no Debtor shall have any right of subrogation or contribution, and each Debtor hereby waives
any benefit of or right to participate in any of the Collateral or Proceeds or any other security now or hereafter held by Bank. Debtor hereby
waives any right to require Bank to (i) proceed against Debtor or any other person, (ii) marshal assets or proceed against or exhaust any
security from Debtor or any other person, (iii) perform any obligation of Debtor with respect to any Collateral or Proceeds, and (iv) make
any presentment or demand, or give any notices of any kind, including without limitation, any notice of nonpayment or nonperformance,
protest, notice of protest, notice of dishonor, notice of intention to accelerate or notice of acceleration hereunder or in connection with any
Collateral or Proceeds. Debtor further waives any right to direct the application of payments or security for any Indebtedness of Debtor or
indebtedness of customers of Debtor.
14.
NOTICES. All notices, requests and demands required under this Agreement must be in writing, addressed to Bank
at the address specified in any other loan documents entered into between Debtor and Bank and to Debtor at the address of its chief
executive office (or principal residence, if applicable) specified below or to such other address as any party may designate by written notice
to each other party, and shall be deemed to have been given or made as follows: (a) if personally delivered, upon delivery; (b) if sent by
mail, upon the earlier of the date of receipt or three (3) days after deposit in the U.S. mail, first class and postage prepaid; and (c) if sent by
telecopy, upon receipt.
15.
COSTS, EXPENSES AND ATTORNEYS' FEES. Debtor shall pay to Bank immediately upon demand the full
amount of all payments, advances, charges, costs and expenses, including, to the extent permitted by applicable law, reasonable
attorneys' fees (to include outside counsel fees and all allocated costs of Bank's in-house counsel to the extent permissible ), expended or
incurred by Bank in connection with (a) the perfection and preservation of the Collateral or Bank's interest therein, and (b) the realization,
enforcement and exercise of any right, power, privilege or remedy conferred by this Agreement, whether or not suit is brought or
foreclosure is commenced, and where suit is brought, whether incurred at the trial or appellate level, in an arbitration proceeding or
otherwise, and including any of the foregoing incurred in connection with any bankruptcy proceeding (including without limitation, any
adversary proceeding, contested matter or motion brought by Bank or any other person) relating to Debtor or in any way affecting any of
the Collateral or Bank's ability to exercise any of its rights or remedies with respect thereto. Subject to any restrictions under applicable law
pertaining to usury, all of the foregoing shall be paid by Debtor with interest from the date of demand until paid in full at a rate per annum
equal to the greater of ten percent (10%) or Bank’s Prime Rate in effect from time to time. Notwithstanding anything in this Agreement to
the contrary, reasonable attorneys’ fees shall not exceed the amount permitted by law.
16.
SUCCESSORS; ASSIGNS; AMENDMENT. This Agreement shall be binding upon and inure to the benefit of the
heirs, executors, administrators, legal representatives, successors and assigns of the parties, and may be amended or modified only in
writing signed by Bank and Debtor.
17.
SEVERABILITY OF PROVISIONS. If any provision of this Agreement shall be held to be prohibited by or invalid
under applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity, without invalidating the
remainder of such provision or any remaining provisions of this Agreement.
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18.
GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of Oregon, but
giving effect to federal laws applicable to national banks.
19.
INSURANCE PROVISIONS. Debtor agrees with regard to the Collateral and Proceeds, unless Bank agrees otherwise in writing, to
insure the Collateral on the terms described in the Third Amended and Restated Credit Agreement between Debtor and Bank of even date herewith.
Debtor warrants that Debtor is an organization registered under the laws of Maryland.
Debtor warrants that its chief executive office (or principal residence, if applicable) is located at the following address: 8100 NE
Parkway Drive, Suite 200, Vancouver, WA 98662.
Debtor warrants that the Collateral (except goods in transit) is located or domiciled at the following additional addresses: SEE
ATTACHED EXHIBIT A.
IN WITNESS WHEREOF, this Agreement has been duly executed by Debtor, intending to be legally bound hereby, as of March
1, 2022.
BARRETT BUSINESS SERVICES, INC.
By:
/s/ Anthony Harris
ANTHONY HARRIS,
CHIEF FINANCIAL OFFICER
WELLS FARGO BANK,
NATIONAL ASSOCIATION
By:
/s/ Julie R. Wilson
JULIE R. WILSON,
SENIOR VICE PRESIDENT
-8-
Tucson, Arizona 85711
Barrett Business Services Inc.
4801 E Broadway Blvd,
Suite 101
Colorado Springs, Colorado 80918
Barrett Business Services Inc.
1125 Kelly Johnson Blvd,
Suite 130
Bakersfield, California 93301
Barret Business Services Inc.
1675 Chester Avenue
Suite 100
Camarillo, California 93012
Barrett Business Services Inc.
815 Camarillo Springs Road
Suite C
Inland Empire, California 91761
Barrett Business Services Inc. (Staffing Services)
3401 Centre lake Drive
Suite 100
La Quinta, California 92253
Barrett Business Services Inc.
43576 Washington Street
Suite 200
Long Beach, California 90802
Barrett Business Services Inc.
330 Golden Shore
Suite 170
Ontario, California 91761
Barrett Business Services Inc.
3401 Centre Lake Drive, Suite 150
EXHIBIT A
Pasadena, California 91101
Barrett Business Services Inc.
790 East Colorado Blvd
Suite 440
San Bernardino, California 92408
Barrett Business Services Inc
862 E Hospitality Lane
Suite 150
San Diego, California 92121
Barrett Business Services Inc.
5717 Pacific Center Blvd
Suite 100
San Luis Obispo, California 93401
Barrett Business Services Inc.
3450 Broad Street
Suite 102
Santa Ana, California 92705
Barrett Business Services Inc.
1936 E Deere Avenue
Suite 120
Santa Barbara, California 93117
Barrett Business Services Inc.
110 Castilian Drive
Ste 201 (Goleta)
Temecula, California 92590
Barrett Business Services Inc.
1 Ridgegate Drive
Suite 100
Valencia, California 91355
Barrett Business Services Inc.
25124 Springfield Court, Suite 150
-9-
Concord, California 94520
Barrett Business Services Inc.
1320 Willow Pass Road
Suite 100
Fresno, California 93720
Barrett Business Services Inc.
7108 N Fresno Street
Suite 100
Modesto, California 95354
Barrett Business Services Inc.
1111 I Street
Suite 107
Monterey, California 93940
Barrett Business Services Inc.
2 Lower Ragsdale Drive
Suite 100
Napa, California 94558
Barrett Business Services Inc.
555 Gateway Drive
Suite 100
Redding, California 96002
Barrett Business Services Inc.
2881 Churn Creek Road
Suite A
Roseville, California 95661
Barrett Business Services Inc.
2998 Douglas Blvd
Suite 105
Sacramento, California 95833
Barrett Business Services Inc.
1760 Creekside Oaks Drive
Suite 150
San Jose, California 95131
Barrett Business Services Inc.
2560 N 1st Street
Suite 180
Stockton, California 95207
Barrett Business Services Inc.
1776 W March Lane
Suite 120
San Mateo, California 94404
Barrett Business Services Inc.
1840 Gateway Drive
Suite 125
Union City, California 94587
Barrett Business Services Inc.
32960 Alvarado-Niles Road
Suite 670
Vacaville, California 95688
Barrett Business Services Inc.
810 Vaca Valley Parkway
Suite 105
Albany, Oregon 97321
Barrett Business Services Inc.
421 Water Avenue NE
Suite 2200
Bend, Oregon 97702
Barrett Business Services Inc.
497 SW Century Drive
Suite 101
Coos Bay, Oregon 97420
Barrett Business Services Inc.
1248 N. Bayshore Drive
-10-
Eugene, Oregon 97401
Barrett Business Services Inc.
450 Country Club Road
Suite 150
Grants Pass, Oregon 97527
Barrett Business Services Inc.
1867 Williams Hwy
Suite 101
Hermiston, Oregon 97838
Barrett Business Services Inc.
1055 S Hwy 395
Suite 333
Hillsboro, Oregon 97124
Barrett Business Services Inc.
5920 NE Ray Circle
Suite 190
Lake Oswego, Oregon 97035
Barrett Business Services Inc.
2 Centerpointe Drive
Suite 120
Medford, Oregon 97504
Barrett Business Services Inc.
2045 Cardinal Avenue
Suite 100
Newport, Oregon 97365
Barrett Business Services Inc.
1610 N Coast Highway
Roseburg, Oregon 97470
Barrett Business Services Inc.
522 SE Washington Ave.
Suite 109
Salem, Oregon 97302
Barrett Business Services Inc.
3501 Fairview Industrial Drive SE
Suite 100
The Dalles, Oregon 97058
Barrett Business Services Inc.
3591 Klindt Drive
Suite 100
Tillamook, Oregon 97141
Barrett Business Services Inc.
1910 3rd Street
Fife, Washington 98424
Barrett Business Services Inc.
4507 Pacific Highway E.
Suite B
Kent, Washington 98032
Barrett Business Services Inc.
19717 62nd Avenue
Suite D-112
Moses Lake, Washington 98837
Barrett Business Services Inc.
1550 Pilgrim St.
Suite B
Pasco, Washington 99301
Barrett Business Services Inc.
9825 Sandifur Parkway
Suite E
Prosser, Washington 99350
Barrett Business Services Inc.
30 Merlot Drive
Suite B
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Yakima, Washington 98902
Barrett Business Services Inc.
1202 N 16th Ave
Suite 110
Idaho Falls, Idaho 83402
Barrett Business Services Inc.
957 Pier View Drive
Boise, Idaho 83646
Barrett Business Services Inc.
3573 E Longwing Lane
Suite 220
Twin Falls, Idaho 83301
Barrett Business Services Inc.
1502 Locust St #500
Suite A
Denver, Colorado 80237
Barrett Business Services Inc.
8055 E Tufts Ave
Suite 100
Grand Junction, Colorado 81505
Barrett Business Services Inc.
120 W Park Drive
Suite 108
Layton, Utah 84041
Barrett Business Services Inc.
207 East Gordon Ave.
Suite 4
Orem, Utah 84097
Barrett Business Services Inc.
1061 South 800 East
Suite 100
Salt Lake City, Utah 84111
Barrett Business Services Inc.
257 East 200 South
Suite 100
Sandy, Utah 84070
Barrett Business Services Inc.
75 W Towne Ridge Parkway
Suite 175
West Valley, Utah 84119
Barrett Business Services Inc.
3040 West 3500 South
Suite B
Reno, Nevada 89521
Barrett Business Services Inc.
515 Double Eagle Court
Suite 105
Las Vegas, Nevada 89135
Barrett Business Services Inc.
3755 Breakthrough Way
Suite 105
Baltimore, Maryland 21236
Barrett Business Services Inc.
4940 Campbell Blvd
Suite 250
Salisbury, Maryland 21801
Barrett Business Services Inc.
220 East Main Street
Suite B
Belmont, North Carolina 28012
Barrett Business Services Inc.
100 N. Main Street
Suite 210
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Dover, Delaware 19901
Barrett Business Services Inc.
116 E Water Street
Lehigh Valley, Pennsylvania 18104
Barrett Business Services Inc.
1605 N Cedar Crest Blvd
Suite 108
Philadelphia, Pennsylvania 19312
Barrett Business Services Inc.
1235 Westlakes Drive
Suite 100
Tysons Corner, Virginia 22102
Barrett Business Services Inc.
1765 Greensboro Station Place
Suite 160
Albuquerque, New Mexico 87109
Barrett Business Services Inc.
100 Sun Avenue NE, Suite 650
Pittsburgh, Pennsylvania 15220
Barrett Business Services Inc.
651 Holiday Drive
Suite 116
Franklin, Tennessee 37064
Barrett Business Services Inc.
231 Public Square
Suite 300
Klamath Falls, Oregon 97601
Barrett Business Services Inc.
205 Riverside Ave
Suite G
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FOURTH AMENDED AND RESTATED REVOLVING LINE OF CREDIT NOTE
$50,000,000.00
EXHIBIT 4.4
Portland, Oregon
March 1, 2022
This Note amends, restates and supersedes in its entirety, and is given as a replacement for, and not in satisfaction of or as a
novation with respect to, that certain Third Amended and Restated Revolving Line of Credit Note in the principal amount of Thirty Three
Million Dollars ($33,000,000.00), executed by Borrower in favor of Bank and dated August 5, 2019, as amended or modified from time to
time.
FOR VALUE RECEIVED, the undersigned BARRETT BUSINESS SERVICES, INC. ("Borrower") promises to pay to the order of
WELLS FARGO BANK, NATIONAL ASSOCIATION ("Bank") at its office at MAC P6101-250, 1300 SW 5th Avenue, 25th Floor, Portland,
Oregon 97201, or at such other place as the holder hereof may designate, in lawful money of the United States of America and in
immediately available funds, the principal sum of Fifty Million Dollars ($50,000,000.00), or so much thereof as may be advanced and be
outstanding pursuant to the terms of the Credit Agreement, as defined herein, with interest thereon, to be computed on each advance from
the date of its disbursement as set forth herein.
DEFINITIONS:
As used herein, the following terms shall have the meanings set forth after each, and any other term defined in this Note shall
have the meaning set forth at the place defined:
(a)
“Benchmark Floor” means a rate of interest equal to zero percent (0%).
(b)
“Daily Simple SOFR” means, with respect to any day (a “SOFR Rate Day”), a rate per annum equal to SOFR for the
day (such day, the “SOFR Determination Day”) that is two (2) U.S. Government Securities Business Days prior to (i) if such SOFR Rate
Day is a U.S. Government Securities Business Day, such SOFR Rate Day or (ii) if such SOFR Rate Day is not a U.S. Government
Securities Business Day, the U.S. Government Securities Business Day immediately preceding such SOFR Rate Day, in each case, as
such SOFR is published by the SOFR Administrator on the SOFR Administrator’s Website; provided, however, that if Daily Simple SOFR
determined as provided above would be less than the Benchmark Floor, then Daily Simple SOFR shall be deemed to be the Benchmark
Floor. If by 5:00 p.m. (New York City time) on the second (2nd) U.S. Government Securities Business Day immediately following any SOFR
Determination Day, SOFR in respect of such SOFR Determination Day has not been published on the SOFR Administrator’s Website and
a Benchmark Replacement Date with respect to Daily Simple SOFR has not occurred, then SOFR for such SOFR Determination Day will
be SOFR as published in respect of the first preceding U.S. Government Securities Business Day for which SOFR was published on the
SOFR Administrator’s Website; provided that any SOFR determined pursuant to this sentence shall be utilized for purposes of calculation
of Daily Simple SOFR for no more than three (3) consecutive SOFR Rate Days.
(c)
“Federal Reserve Business Day” means any day that is not a Saturday, Sunday or other day on which the Federal
Reserve Bank of New York is closed.
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(d)
"Interest Period" means a period commencing on a Federal Reserve Business Day and continuing for one (1) month
during which all or a portion of the entire outstanding principal balance of this Note bears interest determined in relation to SOFR Average
with the understanding, that (i) no Interest Period may be selected for a principal amount less than One Hundred Thousand Dollars
($100,000.00), (ii) if the day after the end of any Interest Period is not a Federal Reserve Business Day (so that a new Interest Period could
not be selected by Borrower to start on such day), then such Interest Period shall continue up to, but shall not include, the next Federal
Reserve Business Day after the end of such Interest Period, unless the result of such extension would be to cause any immediately
following Interest Period to begin in the next calendar month in which event the Interest Period shall continue up to, but shall not include,
the Federal Reserve Business Day immediately preceding the last day of such Interest Period, and (iii) no Interest Period shall extend
beyond the scheduled maturity date hereof.
(e)
“Prime Rate” means at any time the rate of interest most recently announced within Bank at its principal office as its
prime rate, with the understanding that the Prime Rate is one of Bank's base rates and serves as the basis upon which effective rates of
interest are calculated for those loans making reference thereto, and is evidenced by the recording thereof after its announcement in such
internal publication or publications as Bank may designate; provided, however, that if Prime Rate determined as provided above would be
less than zero percent (0 %), then Prime Rate shall be deemed to be zero percent (0%).
(f)
Administrator.
“SOFR” means a rate per annum equal to the secured overnight financing rate as administered by the SOFR
(g)
overnight financing rate).
“SOFR Administrator” means the Federal Reserve Bank of New York (or a successor administrator of the secured
(h)
“SOFR Administrator’s Website” means the website of the Federal Reserve Bank of New York, currently at
http://www.newyorkfed.org, or any successor source for the secured overnight financing rate identified as such by the SOFR Administrator
from time to time.
(i)
“SOFR Average” means, for any Interest Period, the rate per annum determined by Bank as the compounded average
of SOFR over a rolling calendar day period of thirty (30) days (“30-Day SOFR Average”), for the day (such day, the “SOFR Average
Determination Day”) that is two (2) U.S. Government Securities Business Days prior to the first day of such Interest Period as such rate is
published by the SOFR Administrator on the SOFR Administrator’s Website; provided, however, that (i) if as of 5:00 p.m. (New York City
time) on any SOFR Average Determination Day, such 30-Day SOFR Average has not been published on the SOFR Administrator’s
Website and a Benchmark Replacement Date with respect to SOFR Average has not occurred, then SOFR Average will be the 30-Day
SOFR Average as published on the SOFR Administrator’s Website for the first preceding U.S. Government Securities Business Day for
which such 30-Day SOFR Average was published on the SOFR Administrator’s Website so long as the first preceding U.S. Government
Securities Business Day is not more than three (3) U.S. Government Securities Business Days prior to such SOFR Average Determination
Day and (ii) if SOFR Average determined as provided above (including pursuant to clause (i) of this proviso) would be less than the
Benchmark Floor, then SOFR Average shall be deemed to be the Benchmark Floor.
-2-
(j)
“U.S. Government Securities Business Day” means any day except for (i) a Saturday, (ii) a Sunday or (iii) a day on
which the Securities Industry and Financial Markets Association, or any successor thereto, recommends that the fixed income departments
of its members be closed for the entire day for purposes of trading in United States government securities.
INTEREST:
(a)
Interest. The outstanding principal balance of this Note shall bear interest (computed on the basis of a 360-day year,
actual days elapsed) either (i) at a fluctuating rate per annum determined by Bank to be one and three quarters percent (1.75%) above
Daily Simple SOFR in effect from time to time, or (ii) at a fixed rate per annum determined by Bank to be one and three quarters percent
(1.75%) above SOFR Average in effect on the first day of the applicable Interest Period. Bank is hereby authorized to note the date,
principal amount and interest rate applicable to this Note and any payments made thereon on Bank's books and records (either manually
or by electronic entry) and/or on any schedule attached to this Note, which notations shall be prima facie evidence of the accuracy of the
information noted. Bank shall be permitted to estimate the amount of accrued interest that is payable at any time hereunder on the
applicable invoice provided by Bank to Borrower in respect thereof, in which case Borrower shall pay such estimated amount and Bank
shall to the extent necessary, include on the next invoice an adjustment to correct any difference between the amount on the applicable
invoice and the amount of interest that actually accrued pursuant to the terms of this Note.
(b)
Selection of Interest Rate Options. Subject to the provisions herein regarding Interest Periods and the prior notice
required for the selection of a SOFR Average interest rate, (i) at any time any portion of this Note bears interest determined in relation to
SOFR Average for an Interest Period, (A) it may be continued by Borrower at the end of the Interest Period applicable thereto so that all or
a portion thereof bears interest determined in relation to SOFR Average for a new Interest Period designated by Borrower, or (B) Borrower
may convert all or a portion thereof so that it bears interest determined in relation to Daily Simple SOFR, (ii) at any time any portion of this
Note bears interest determined in relation to Daily Simple SOFR, Borrower may convert all or a portion thereof so that it bears interest
determined in relation to SOFR Average for an Interest Period designated by Borrower, and (iii) at the time an advance is made
hereunder, Borrower may choose to have all or a portion thereof bear interest determined in relation to Daily Simple SOFR, or to SOFR
Average for an Interest Period designated by Borrower.
To select a SOFR Average option hereunder, Borrower shall give Bank notice thereof that is received by Bank prior to 11:00
a.m. in the time zone of the city referenced on the first page of this Note above the Note date on a Federal Reserve Business Day at least
two (2) Federal Reserve Business Days prior to the first day of the Interest Period, or at a later time during such Federal Reserve Business
Day if Bank, at its sole option but without obligation to do so, accepts Borrower’s notice and quotes a fixed rate to Borrower. Such notice
shall specify: (A) the interest rate option selected by Borrower, (B) the principal amount subject thereto, and (C) for each SOFR Average
selection, to the extent Borrower has the option to designate the length of an Interest Period, the length of the applicable Interest Period. If
Bank has not received such notice in accordance with the foregoing before an advance is made hereunder or before the end of any
Interest Period, Borrower shall be deemed to have made a Daily Simple SOFR interest selection for such advance on the principal amount
to which such Interest Period applied. Any such notice may be given by telephone (or such other electronic method as Bank may permit)
-3-
so long as it is given in accordance with the foregoing and, with respect to each SOFR Average selection, if requested by Bank, Borrower
provides to Bank written confirmation thereof not later than three (3) Federal Reserve Business Days after such notice is given. Borrower
shall reimburse Bank immediately upon demand for any loss or expense (including any loss or expense incurred by reason of the
liquidation or redeployment of funds obtained to fund or maintain a SOFR Average borrowing) incurred by Bank as a result of the failure of
Borrower to accept or complete a SOFR Average borrowing hereunder after making a request therefor. Any reasonable determination of
such amounts by Bank shall be conclusive and binding upon Borrower. Should more than one person or entity sign this Note as a
Borrower, any notice required above may be given by any one Borrower acting alone, which notice shall be binding on all other Borrowers.
(c)
Taxes and Regulatory Costs. Borrower shall pay to Bank immediately upon demand, in addition to any other amounts
due or to become due hereunder, any and all (i) withholdings, interest equalization taxes, stamp taxes or other taxes (except income and
franchise taxes) imposed by any domestic or foreign governmental authority and related in any manner to SOFR, Daily Simple SOFR or
SOFR Average, and (ii) costs, expenses and liabilities arising from or in connection with reserve percentages prescribed by the Board of
Governors of the Federal Reserve System (or any successor) for "Eurocurrency Liabilities" (as defined in Regulation D of the Board of
Governors of the Federal Reserve System, as amended), assessment rates imposed by the Federal Deposit Insurance Corporation, or
similar requirements or costs imposed by any domestic or foreign governmental authority or resulting from compliance by Bank with any
request or directive (whether or not having the force of law) from any central bank or other governmental authority and related in any
manner to SOFR, Daily Simple SOFR or SOFR Average. In determining which of the foregoing are attributable to any SOFR, Daily Simple
SOFR or SOFR Average option available to Borrower hereunder, any reasonable allocation made by Bank among its operations shall be
conclusive and binding upon Borrower.
(d)
Default Interest. Bank shall have the option in its sole and absolute discretion to have the outstanding principal
balance of this Note bear interest at an increased rate per annum (computed on the basis of a 360-day year, actual days elapsed) equal to
four percent (4.0%) above the rate of interest from time to time applicable to this Note (i) from and after the maturity date of this Note; (ii)
from and after the date prior to the maturity date of this Note when all principal owing hereunder becomes due and payable by acceleration
or otherwise; and/or (iii) upon the occurrence and during the continuance of any Event of Default.
(e)
Inability to Determine Interest Rates; Illegality. Subject to the Benchmark Replacement Provisions below, if Bank
determines (any determination of which shall be conclusive and binding on Borrower) that either (i) Daily Simple SOFR or SOFR Average
cannot be determined pursuant to the definition thereof other than as a result of a Benchmark Transition Event (an “Inability
Determination”) or (ii) any law has made it unlawful, or that any governmental authority has asserted that it is unlawful, for Bank to make or
maintain an advance based on SOFR, Daily Simple SOFR or SOFR Average, or to determine or charge interest rates based upon SOFR,
Daily Simple SOFR or SOFR Average (an “Illegality Determination”), then Bank will so notify Borrower. If the foregoing Inability
Determination or Illegality Determination relates to Daily Simple SOFR, then any outstanding principal balance of this Note bearing interest
determined in relation to Daily Simple SOFR shall bear interest (computed on the basis of a 360-day year, actual days elapsed) at a
fluctuating rate per annum determined by Bank to be equal to the Prime Rate in effect from time to time, from the date of such Inability
Determination or such Illegality Determination until Bank revokes such Inability Determination or notifies Borrower that the circumstances
giving rise to such Illegality Determination no longer exist, as applicable. If the foregoing Inability Determination or Illegality Determination
relates to SOFR Average, then any outstanding principal balance of this Note bearing interest determined in relation to SOFR Average
shall bear interest (computed on the basis of a 360-day year, actual days elapsed) at a fluctuating rate per annum determined by Bank to
be equal to the Prime Rate in effect from time to time, from the date of such Inability Determination or such Illegality Determination until
Bank revokes such Inability
-4-
Determination or notifies Borrower that the circumstances giving rise to such Illegality Determination no longer exist, as applicable;
provided, however, that, with respect to any outstanding principal balance of this Note bearing interest determined in relation to SOFR
Average, no such determination of interest shall take effect during any applicable Interest Period as a result of an Inability
Determination. When interest is determined in relation to the Prime Rate, each change in the rate of interest hereunder shall become
effective on the date each Prime Rate change is announced within Bank. Notwithstanding any of the foregoing to the contrary, if a
Benchmark Replacement is subsequently determined in accordance with applicable Benchmark Replacement Provisions, that Benchmark
Replacement, plus any applicable margin, will then supersede the foregoing with respect to the replaced Benchmark.
BENCHMARK REPLACEMENT PROVISIONS:
Notwithstanding anything to the contrary contained in this Note or in any related loan document (for the purposes of these
Benchmark Replacement Provisions, a swap agreement by and between Borrower and Bank or any of its affiliates is not a loan document):
(a)
Benchmark Replacement. If a Benchmark Transition Event with respect to any applicable then-current Benchmark
occurs, the applicable Benchmark Replacement will replace such Benchmark for all purposes under this Note or under any related loan
document. Any Benchmark Replacement will become effective on the applicable Benchmark Replacement Date without any further action
or consent of Borrower.
(b)
Benchmark Replacement Conforming Changes. Bank will have the right to make Benchmark Replacement
Conforming Changes from time to time and any amendments implementing such Benchmark Replacement Conforming Changes will
become effective without any further action or consent of Borrower.
(c)
Notices; Standards for Decisions and Determinations. Bank will promptly notify Borrower of (i) the implementation of
any Benchmark Replacement and (ii) the effectiveness of any Benchmark Replacement Conforming Changes. Any determination,
decision or election that may be made by Bank pursuant to these Benchmark Replacement Provisions, including any determination with
respect to a tenor, rate or adjustment or of the occurrence or non-occurrence of an event, circumstance or date and any decision to take or
refrain from taking any action or any selection, will be conclusive and binding absent manifest error and will be made in its sole discretion
and without Borrower consent.
(d)
Certain Defined Terms. As used in this Note, each of the following capitalized terms has the meaning given to such
term below:
(i)
“Benchmark” means, initially, Daily Simple SOFR or SOFR Average, as applicable; provided, however, that if a
Benchmark Transition Event has occurred with respect to Daily Simple SOFR, SOFR Average or the applicable then-current Benchmark,
then “Benchmark” means the applicable Benchmark Replacement to the extent that such Benchmark Replacement has become effective
pursuant to the provisions of this Note.
-5-
(ii)
“Benchmark Administrator” means, initially, the SOFR Administrator or any successor administrator of the applicable
then-current Benchmark or any insolvency or resolution official with authority over such administrator.
(iii)
“Benchmark Replacement” means the sum of: (A) the alternate rate of interest that has been selected by Bank as the
replacement for the applicable then-current Benchmark; and (B) the spread adjustment, or method for calculating or determining such
spread adjustment, (which may be a positive or negative value or zero) that has been selected by Bank, in each case, giving due
consideration to (x) any selection or recommendation by the Relevant Governmental Body at such time for a replacement rate, the
mechanism for determining such a rate, the methodology or conventions applicable to such rate, or the spread adjustment, or method for
calculating or determining such spread adjustment, for such rate, or (y) any evolving or then-prevailing market convention for determining a
rate of interest as a replacement to the applicable then-current Benchmark, the methodology or conventions applicable to such rate, or the
spread adjustment, or method for calculating or determining such spread adjustment, for such alternate rate for U.S. dollar-denominated
syndicated or bilateral credit facilities at such time; provided, however, that if the applicable Benchmark Replacement as determined as
provided above would be less than the Benchmark Floor, then the applicable Benchmark Replacement shall be deemed to be the
Benchmark Floor, subject to any other applicable floor rate provision.
(iv)
“Benchmark Replacement Conforming Changes” means any technical, administrative or operational changes
(including, without limitation, changes to the definition of “U.S. Government Securities Business Day,” the definition of “Interest Period,” the
timing and frequency of determining rates and making payments of interest, prepayment provisions and other technical, administrative or
operational matters) that Bank decides may be appropriate to reflect the adoption and implementation of a Benchmark Replacement and
to permit the administration thereof by Bank.
(v)
“Benchmark Replacement Date” means the date specified by Bank in a notice to Borrower following a Benchmark
Transition Event.
(vi)
“Benchmark Transition Event” means the occurrence of one or more of the following events with respect to any
then-current Benchmark: a public statement or publication of information by or on behalf of the Benchmark Administrator or a regulatory
supervisor for the Benchmark Administrator announcing that (A) the Benchmark Administrator has ceased or will cease to provide such
Benchmark permanently or indefinitely or (B) such Benchmark is no longer, or as of a specified future date will no longer be,
representative of underlying markets.
(vii)
“Relevant Governmental Body” means the Board of Governors of the Federal Reserve System and/or the
Federal Reserve Bank of New York, or a committee officially endorsed or convened by the Board of Governors of the Federal Reserve
System and/or the Federal Reserve Bank of New York or any successor thereto.
BORROWING AND REPAYMENT:
(a)
Borrowing and Repayment of Principal. Borrower may from time to time during the term of this Note borrow, partially
or wholly repay its outstanding borrowings, and reborrow, subject to all of the limitations, terms and conditions of this Note and of any
document executed
-6-
in connection with or governing this Note; provided however, that the total outstanding borrowings under this Note shall not at any time
exceed the principal amount stated above. The unpaid principal balance of this obligation at any time shall be the total amounts advanced
hereunder by the holder hereof less the amount of principal payments made hereon by or for Borrower, which balance may be endorsed
hereon from time to time by the holder. The outstanding principal balance of this Note shall be due and payable in full on July 1, 2024.
(b)
Payment of Interest. Interest accrued on this Note shall be payable on the first day of each month, commencing
March 1, 2022, and on the maturity date set forth above.
(c)
Advances. Advances hereunder, to the total amount of the principal sum stated above, may be made by the holder at
the oral or written request of (i) ANTHONY HARRIS or GARY KRAMER, any one acting alone (subject to any of Bank’s applicable
authentication policies or procedures, which may require that a particular individual—including another specific individual listed above—
provide verification of the identity of the requestor), who are authorized to request advances and direct the disposition of any advances
until written notice of the revocation of such authority is received by the holder at the office designated above, or (ii) any person, with
respect to advances deposited to the credit of any deposit account of Borrower, which advances, when so deposited, shall be conclusively
presumed to have been made to or for the benefit of Borrower regardless of the fact that persons other than those authorized to request
advances may have authority to draw against such account. The holder shall have no obligation to determine whether any person
requesting an advance is or has been authorized by Borrower.
(d)
Application of Payments. Each payment made on this Note shall be credited first, to any interest then due and
second, to the outstanding principal balance hereof. All payments credited to principal shall be applied first, to the outstanding principal
balance of this Note which bears interest determined in relation to Daily Simple SOFR, if any, and second, to the outstanding principal
balance of this Note which bears interest determined in relation to SOFR Average, with such payments applied to the oldest Interest Period
first.
PAYMENTS:
If any payment of principal or interest to be made pursuant to this Note, other than a prepayment or a payment due on the
maturity date of this Note, shall fall due on a day that is not a Federal Reserve Business Day, payment shall be made on the next
succeeding Federal Reserve Business Day, except that, if such next succeeding Federal Reserve Business Day would fall in the next
calendar month, such payment shall be made on the immediately preceding Federal Reserve Business Day. Any extension or contraction
of time shall be reflected in computing interest or fees, as the case may be.
PREPAYMENT:
(a)
Daily Simple SOFR. Borrower may prepay principal on any portion of this Note which bears interest determined in
relation to Daily Simple SOFR, in any amount and without penalty.
(b)
SOFR Average. Borrower may prepay principal on any portion of this Note which bears interest determined in relation
to SOFR Average in the minimum amount of One Hundred Thousand Dollars ($100,000.00); provided however, that if the outstanding
principal balance of such portion of this Note is less than said amount, the minimum prepayment amount shall be
-7-
the entire outstanding principal balance hereof. In consideration of Bank providing this prepayment option to Borrower, or if any such
portion of this Note shall become due and payable at any time prior to the last day of any Interest Period by acceleration or otherwise,
Borrower shall pay to Bank immediately upon demand a fee which is the amount, if any, by which (i) exceeds (ii) below:
(i)
(ii)
The amount of interest that would have accrued on the amount prepaid at the interest rate applicable to such
amount had it remained outstanding until the last day of the Interest Period applicable thereto.
The amount of interest that would have accrued on the amount prepaid at the SOFR Average (without adding any
spread or margin specified in part (a) under the “INTEREST” section of this Note) that would have been applicable to
such amount had this Note been disbursed on the repayment date and remained outstanding until the last day of the
Interest Period applicable thereto.
Borrower acknowledges that prepayment of such amount may result in Bank incurring additional costs, expenses and/or liabilities, and that
it is difficult to ascertain the full extent of such costs, expenses and/or liabilities. Borrower, therefore, agrees to pay the above-described
prepayment fee and agrees that said amount represents a reasonable estimate of the prepayment costs, expenses and/or liabilities of
Bank. If Borrower fails to pay any prepayment fee when due, the amount of such prepayment fee shall thereafter bear interest until paid at
a rate per annum two percent (2.00%) above the Prime Rate in effect from time to time (computed on the basis of a 360-day year, actual
days elapsed).
(c)
Application of Prepayments. If principal under this Note is payable in more than one installment, then any prepayments
of principal shall be applied to the most remote principal installment or installments then unpaid.
SWAP AGREEMENT:
Borrower understands and acknowledges that (i) any Swap Agreement constitutes an independent agreement between
Borrower and Bank and will be unaffected by any repayment, prepayment, acceleration, reduction, increase or change in the terms of this
Note, except as otherwise expressly provided in the Swap Agreement, (ii) nothing in this Note shall be construed as a modification of a
Swap Agreement or create an obligation to amend a Swap Agreement, (iii) Borrower may incur losses or reductions in benefits related to
differences between the economic terms and characteristics of this Note and those of a related Swap Agreement (including, without
limitation, differences with respect to maturity dates, payment dates and methods for determining interest rates and differences between
borrowings hereunder and the notional amount of a Swap Agreement), and Bank is under no obligation to ensure that there are no
differences or that differences will not arise hereafter, including, without limitation, differences between usage hereunder and the notional
amount of a Swap Agreement, and (iv) Bank has no obligation to modify, renew or extend the maturity date of this Note to match the
maturity date of a Swap Agreement. For the purposes of this Note, “Swap Agreement” means any existing or future swap agreement by
and between Borrower and Bank or any of its affiliates.
EVENTS OF DEFAULT:
This Note is made pursuant to and is subject to the terms and conditions of that certain Third and Amended Restated Credit
Agreement between Borrower and Bank dated March 1,
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2022, as amended from time to time (the "Credit Agreement"). Any default in the payment or performance of any obligation under this
Note, or any defined event of default under the Credit Agreement, shall constitute an "Event of Default" under this Note.
MISCELLANEOUS:
(a)
Remedies. Upon the sale, transfer, hypothecation, assignment or other encumbrance (other than a Permitted Lien as
defined in the Credit Agreement), whether voluntary, involuntary or by operation of law, of all or any interest in any real property securing
this Note, if any, or upon the occurrence of any Event of Default, the holder of this Note, at the holder's option, may declare all sums of
principal and interest outstanding hereunder to be immediately due and payable without presentment, demand, notice of nonperformance,
notice of protest, protest or notice of dishonor, all of which are expressly waived by Borrower, and the obligation, if any, of the holder to
extend any further credit hereunder shall immediately cease and terminate. Borrower shall pay to the holder immediately upon demand
the full amount of all payments, advances, charges, costs and expenses, including reasonable attorneys' fees (to include outside counsel
fees and all allocated costs of the holder's in-house counsel), expended or incurred by the holder in connection with the enforcement of the
holder's rights and/or the collection of any amounts which become due to the holder under this Note whether or not suit is brought, and the
prosecution or defense of any action in any way related to this Note, including without limitation, any action for declaratory relief, whether
incurred at the trial or appellate level, in an arbitration proceeding or otherwise, and including any of the foregoing incurred in connection
with any bankruptcy proceeding (including without limitation, any adversary proceeding, contested matter or motion brought by Bank or any
other person) relating to Borrower or any other person or entity.
(b)
Collateral Exclusion. No lien or security interest created by or arising under any deed of trust, mortgage, security
deed, or similar real estate collateral agreement (“Lien Document”) shall secure the Note Obligations unless such Lien Document
specifically describes the promissory note(s), instrument(s) or agreement(s) evidencing Note Obligations as a part of the indebtedness
secured thereby. This exclusion shall apply notwithstanding (i) the fact that such Lien Document may appear to secure the Note
Obligations by virtue of a cross-collateralization provision or other provisions expanding the scope of the secured obligations, and (ii)
whether such Lien Document was entered into prior to, concurrently with, or after the date hereof. As used herein, “Note Obligations”
means any obligations under this Note, as amended, extended, renewed, refinanced, supplemented or otherwise modified from time to
time, or under any other evidence of indebtedness that has been modified, renewed or extended in whole or in part by this Note, as
amended, extended, renewed, refinanced, supplemented or otherwise modified from time to time.
(c)
Obligations Joint and Several. Should more than one person or entity sign this Note as a Borrower, the obligations of
each such Borrower shall be joint and several.
(d)
Governing Law. This Note shall be governed by and construed in accordance with the laws of Oregon, but giving
effect to federal laws applicable to national banks, without reference to the conflicts of law or choice of law principles thereof.
(e)
Effective Date. The effective date of this Note shall be the date that Bank has accepted this Note and all conditions to
the effectiveness of the Credit Agreement have been fulfilled to Bank’s satisfaction. Notwithstanding the occurrence of the effective date
of this Note,
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Bank shall not be obligated to extend credit under this Note until all conditions to each extension of credit set forth in the Credit Agreement
have been fulfilled to Bank's satisfaction.
UNDER OREGON LAW, MOST AGREEMENTS, PROMISES AND COMMITMENTS MADE BY BANK 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.
IN WITNESS WHEREOF, the undersigned has executed this Note to be effective as of the effective date set forth herein.
BARRETT BUSINESS SERVICES, INC.
By:
/s/ Anthony Harris
ANTHONY HARRIS,
CHIEF FINANCIAL OFFICER
WELLS FARGO BANK,
NATIONAL ASSOCIATION
By:
/s/ Julie R. Wilson
JULIE R. WILSON,
SENIOR VICE PRESIDENT
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BARRETT BUSINESS SERVICES, INC.
SUMMARY OF COMPENSATION ARRANGEMENTS
FOR NON-EMPLOYEE DIRECTORS
EXHIBIT 10.18
As of January 1, 2022, compensation arrangements for non-employee directors of Barrett Business Services, Inc. (the "Company"), include an
annual retainer of $65,000 ($135,000 for the Chairman of the Board) payable in cash in monthly installments. Committee chairs receive an
annual cash retainer, payable in monthly installments, as follows: chair of Audit and Compliance Committee, $15,000; chair of
Compensation Committee, $10,000; chair of Risk Management Committee, $10,000; and chair of Corporate Governance and Nominating
Committee, $10,000. Committee members receive an annual cash retainer, payable in monthly installments, as follows: Audit and
Compliance Committee, $7,500; Compensation Committee, $5,000; Risk Management Committee, $5,000; and Corporate Governance and
Nominating Committee, $5,000.
The compensation arrangements also contemplate that each non-employee director in office on July 1, 2022, will be granted an award of
restricted stock units ("RSUs") under the Company's 2020 Stock Incentive Plan with a grant date fair value of approximately $100,000, based
on the closing sale price of the Company’s common stock on that date. The 2022 RSU awards will vest in full on July 1, 2023, provided that
the grantee continues to serve as a director through that date.
SUBSIDIARIES OF BARRETT BUSINESS SERVICES, INC.
AT DECEMBER 31, 2021
Subsidiary
Jurisdiction of Formation
EXHIBIT 21
Associated Insurance Company for Excess
Ecole Insurance Company
BBS I, LLC
Arizona
Arizona
Oregon
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statement Nos. 333-33487, 333-105833, 333-161592, 333-205434, 333-231926, and 333-239460
on Form S-8, and Registration Statement 333-260745 on Form S-3 of our reports dated March 7, 2022 relating to the financial statements of Barrett Business
Services, Inc., and the effectiveness of Barrett Business Services, Inc.’s internal control over financial reporting, appearing in this Annual Report on Form 10-K
of Barrett Business Services, Inc. for the year ended December 31, 2021.
EXHIBIT 23.1
/s/ DELOITTE & TOUCHE LLP
Portland, Oregon
March 7, 2022
EXHIBIT 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, Gary E. Kramer, certify that:
1.
2.
3.
4.
I have reviewed this Annual Report on Form 10-K of Barrett Business Services, Inc.;
Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the
period covered by this annual report;
Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this annual
report;
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-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) for the Registrant and have:
a.
b.
c.
d.
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the period in which this annual report is being prepared;
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles;
evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this annual report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report,
based on such evaluation; and
disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the registrant’s
most-recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and
5.
The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting,
to the Registrant’s auditors and the audit committee of the Registrant’s board of directors (or persons performing the equivalent functions):
a.
b.
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and
any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s
internal control over financial reporting.
Date: March 7, 2022
/s/ Gary E. Kramer
Gary E. Kramer
Chief Executive Officer
EXHIBIT 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, Anthony J. Harris, certify that:
1.
2.
3.
4.
I have reviewed this Annual Report on Form 10-K of Barrett Business Services, Inc.;
Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the
period covered by this annual report;
Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this annual
report;
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-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) for the Registrant and have:
a.
b.
c.
d.
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the period in which this annual report is being prepared;
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles;
evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this annual report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report,
based on such evaluation; and
disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the registrant’s
most-recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and
5.
The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting,
to the Registrant’s auditors and the audit committee of the Registrant’s board of directors (or persons performing the equivalent functions):
a.
b.
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and
any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s
internal control over financial reporting.
Date: March 7, 2022
/s/ Anthony J. Harris
Anthony J. Harris
Chief Financial Officer
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
EXHIBIT 32
In connection with the Annual Report of Barrett Business Services, Inc. (the "Company") on Form 10-K for the year ended December 31, 2021 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), the undersigned certify, pursuant to 18 U.S.C. § 1350, that:
(1)
The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)
Company.
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the
/s/ Gary E. Kramer
Gary E. Kramer
Chief Executive Officer
March 7, 2022
/s/ Anthony J. Harris
Anthony J. Harris
Chief Financial Officer
March 7, 2022
A signed original of this written statement required by Section 906 has been provided to Barrett Business Services, Inc. and will be retained by Barrett Business
Services, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.