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TMCNet:  BARRETT BUSINESS SERVICES INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

[August 08, 2014]

BARRETT BUSINESS SERVICES INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

(Edgar Glimpses Via Acquire Media NewsEdge) Overview 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 tools from the human resource outsourcing industry and a knowledge-based approach from the management consulting industry. This platform, through the effective leveraging of human capital, assists our business owner clients in more effectively running their business. We believe this platform, delivered through local teams of professionals, differentiates BBSI from our competitors. BBSI was incorporated in Maryland in 1965.


Business Strategy Our strategy is to align with the mission of small-and mid-sized business owners, driving value to their business. To do so, BBSI: • aligns with the business owner to frame a three-tiered management platform that brings predictability to their organization; • partners with business owners to leverage their investment in human capital through a high-touch, results-oriented approach; 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 locally based teams, typically located within 50 miles of our client companies. We recruit senior level managers to oversee, develop and expand our business at the branch-office level.

Additionally, we recruit professionals with expertise in human resources, risk management and workplace safety and various types of administration, including payroll, to field our client delivery teams. This structure fosters autonomous decision-making, allowing local teams of professionals to deliver plans that most closely align with the needs of each business owner client. It also assists us by incubating talent to support increased growth and capacity. We have clients with employees located in 22 states and the District of Columbia, through a network of 52 branch locations in California, Oregon, Washington, Idaho, Arizona, Nevada, Utah, Colorado, Maryland, Delaware and North Carolina.

We also have several smaller recruiting locations in our general market areas, which are under the direction of a branch office.

BBSI believes that making significant investments in the best talent available allows us to leverage the value of this investment many times over. 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 performance, reinforcing a culture focused on achievement of client goals.

- 17 --------------------------------------------------------------------------------- Table of Contents Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Our Services 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 3,000 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 alignment in which the business owners' attitudes, objectives and culture are aligned with BBSI's processes, controls and culture. This stage includes an implementation process, which addresses the administrative components of managing employees.

Tier 2: Dynamic Relationship The second stage of the relationship focuses on the development of the client's organization. There is a focus on process improvement, development of best practices, supervisor development and leadership training.

Tier 3: Strategic Counsel With a focus on advocating for the business owner, activities in the third stage of the relationship are more strategic and forward-looking with a goal of cultivating an environment in which all efforts are directed by the mission and objectives of the business owner.

In addition to serving as 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 internal claims managers and our third-party administrators, we provide claims management services for our co-employed clients. We work aggressively to manage and reduce job injury claims, identify fraudulent claims and structure optimal work programs, including modified duty employees.

Results of Operations The following table sets forth percentages of total revenues represented by selected items in the Company's Consolidated Statements of Operations for the three and six months ended June 30, 2014 and 2013.

- 18 --------------------------------------------------------------------------------- Table of Contents Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Results of Operations (Continued) Percentage of Total Revenue Percentage of Total Revenue Three Months Ended Six Months Ended June 30, June 30, 2014 2013 2014 2013Revenues: Professional employer service fees 74.5 % 72.6 % 74.8 % 72.9 % Staffing services 25.5 27.4 25.2 27.1 Total revenues 100.0 100.0 100.0 100.0 Cost of revenues: Direct payroll costs 19.4 20.7 19.1 20.3 Payroll taxes and benefits 40.4 41.5 46.8 46.9 Workers' compensation 20.4 19.4 20.4 19.5 Total cost of revenues 80.2 81.6 86.3 86.7 Gross margin 19.8 18.4 13.7 13.3 Selling, general and administrative expenses 12.0 11.2 11.4 10.9 Depreciation and amortization 0.4 0.4 0.4 0.4 Income from operations 7.4 6.8 1.9 2.0 Other income 0.1 0.1 0.1 0.1 Income before income taxes 7.5 6.9 2.0 2.1 Provision for income taxes 2.7 2.3 0.7 0.7 Net income 4.8 % 4.6 % 1.3 % 1.4 % We report professional employer services revenues on a net basis because we are not the primary obligor for the services provided by our co-employed clients to their customers pursuant to our client service agreements. The presentation of revenues on a net basis and the relative contributions of staffing and professional employer services revenues can create volatility in our gross margin percentage. The general impact of fluctuations in our revenue mix is described below.

- 19 - -------------------------------------------------------------------------------- Table of Contents Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Results of Operations (Continued) • A relative increase in professional employer services revenue will generally increase our gross margin percentage. Improvement in gross margin percentage occurs because incremental client services revenue dollars are reported as revenue net of all related direct costs.

• A relative increase in staffing revenues will typically decrease our gross margin percentage. Staffing revenues are presented at gross with the related direct costs reported in cost of sales. While staffing relationships typically have higher margins than co-employment relationships, an increase in staffing revenues and related costs presented at gross dilutes the impact of the net professional employer services revenue on gross margin percentage.

We present for comparison purposes the gross revenues and cost of revenues information set forth in the table below. Although not in accordance with GAAP, management believes this information is more informative as to the level of our business activity and more illustrative of how we manage our operations, including the preparation of our internal operating forecasts, because it presents our professional employer services on a basis comparable to our staffing services.

Unaudited Unaudited Three Months Ended Six Months Ended (in thousands) June 30, June 30, 2014 2013 2014 2013 Revenues: Professional employer services $ 759,838 $ 639,663 $ 1,453,764 $ 1,201,146 Staffing services 38,566 35,304 72,017 65,037 Total revenues 798,404 674,967 1,525,781 1,266,183 Cost of revenues: Direct payroll costs 672,078 568,799 1,285,398 1,067,538 Payroll taxes and benefits 61,130 53,483 133,947 112,606 Workers' compensation 35,344 28,959 67,278 54,002 Total cost of revenues 768,552 651,241 1,486,623 1,234,146 Gross margin $ 29,852 $ 23,726 $ 39,158 $ 32,037 - 20 - -------------------------------------------------------------------------------- Table of Contents Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Results of Operations (Continued) A reconciliation of non-GAAP gross professional employer services revenues to net professional employer services revenues is as follows: Unaudited Three Months Ended June 30, Gross Revenue Net Revenue (in thousands) Reporting Method Reclassification Reporting Method 2014 2013 2014 2013 2014 2013 Revenues:Professional employer services $ 759,838 $ 639,663 $ (647,335 ) $ (546,169 ) $ 112,503 $ 93,494 Staffing services 38,566 35,304 0 0 38,566 35,304 Total revenues $ 798,404 $ 674,967 $ (647,335 ) $ (546,169 ) $ 151,069 $ 128,798 Cost of revenues $ 768,552 $ 651,241 $ (647,335 ) $ (546,169 ) $ 121,217 $ 105,072 Unaudited Six Months Ended June 30, Gross Revenue Net Revenue (in thousands) Reporting Method Reclassification Reporting Method 2014 2013 2014 2013 2014 2013 Revenues: Professional employer services $ 1,453,764 $ 1,201,146 $ (1,239,572 ) $ (1,025,834 ) $ 214,192 $ 175,312 Staffing services 72,017 65,037 0 0 72,017 65,037 Total revenues $ 1,525,781 $ 1,266,183 $ (1,239,572 ) $ (1,025,834 ) $ 286,209 $ 240,349 Cost of revenues $ 1,486,623 $ 1,234,146 $ (1,239,572 ) $ (1,025,834 ) $ 247,051 $ 208,312 The amount of the reclassification is comprised of direct payroll costs and safety incentives attributable to our co-employed client companies.

Three months ended June 30, 2014 and 2013 Net income for the second quarter of 2014 amounted to $7.3 million, as compared to a net income of $5.9 million for the second quarter of 2013. Diluted income per share for the second quarter of 2014 was $0.98 compared to diluted income per share of $0.80 for the comparable 2013 period.

Revenues for the second quarter of 2014 totaled $151.1 million, an increase of approximately $22.3 million or 17.3% over the second quarter of 2013, which reflects an increase in the Company's professional employer service fee revenue of $19.0 million or 20.3%, coupled with an increase in staffing services revenue of $3.3 million or 9.2%.

- 21 - -------------------------------------------------------------------------------- Table of Contents Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Results of Operations (Continued) Three months ended June 30, 2014 and 2013 (Continued) Approximately 76% and 73%, respectively, of our revenue during the three months ended June 30, 2014 and 2013 was attributable to our California operations.

Our growth in professional employer service revenues continues to be primarily attributable to new customers, resulting from continued strength in our referral channels as business from new customers during the second quarter of 2014 nearly doubled our lost business from former customers. Professional employer service revenues from continuing customers reflected a 9.2% increase compared to the second quarter of 2013, primarily resulting from increases in employee headcount and hours worked. The increase in staffing revenues was due primarily to an increase in revenue from the addition of new business, partially offset by lost business from former customers.

Gross margin for the second quarter of 2014 totaled approximately $29.9 million or an increase of 25.8% over the second quarter of 2013, primarily due to the 17.3% increase in revenues and a decline in direct payroll cost and payroll taxes and benefits, as a percentage of revenues, partially offset by higher workers' compensation expense, as a percentage of revenues.

The decrease in direct payroll costs, as a percentage of revenues, from 20.7% for the second quarter of 2013 to 19.4% for the second quarter of 2014 was primarily due to the increase in our mix of professional employer services in the Company's customer base compared to the second quarter of 2013 and the effect of each customer's unique mark-up percent.

Payroll taxes and benefits, as a percentage of revenues, for the second quarter of 2014 was 40.4% compared to 41.5% for the second quarter of 2013. The percentage rate decrease was primarily due to optimizing the use of prior wages applied against the state statutory unemployment taxable wage basis as new PEO customers are brought on board and to a slight rise in the overall average wage rates which allowed the tax ceilings to be reached sooner in the year 2014 as compared to 2013.

Workers' compensation expense, in terms of dollars and as a percentage of revenues, increased from $25.0 million or 19.4% in the second quarter of 2013 to $30.8 million or 20.4% in the second quarter of 2014. The percentage rate increase was primarily due to an increase in the provision for claim costs related to current year claims. Our total provision for current year claims of $17.5 million was based on the loss rate as a percentage of payroll calculated by our independent actuary at December 31, 2013. We also accrued $1.3 million in additional expense during the quarter related to prior year claims.

In September 2012, California Senate Bill 863 ("SB 863") was signed into law.

Under SB 863, the California Director of Self-Insurance was ordered not to issue certificates of consent to self-insure after January 1, 2013 to any employer engaged in the activities of a professional employer organization, a leasing employer, a temporary services employer or any employer the Director determines to be in the business of providing employees to other employers.

- 22 --------------------------------------------------------------------------------- Table of Contents Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Results of Operations (Continued) Three months ended June 30, 2014 and 2013 (Continued) Additionally, the Director is required to revoke any previously issued certificate of consent to self-insure in favor of any employer engaged in these types of activities not later than January 1, 2015. To address this issue, BBSI entered into an arrangement typically known as a "fronted" program with ACE Group ("ACE") in February 2014. Under this arrangement, the risk of loss up to the first $5.0 million per claim will be retained by BBSI through an indemnity agreement, although ACE will be responsible for any claims BBSI is unable to satisfy. In addition, ACE continues to be BBSI's carrier for costs in excess of $5.0 million per claim. During the first quarter of 2014, we began the transition to the ACE program so that by December 31, 2014, all of our employees working in California will be covered by this new arrangement. We expect to incur increased costs during this transition that will likely continue following implementation of the fronted insurance program.

As described in more detail in our Annual Report on Form 10-K for the year ended December 31, 2013, we maintain reserves (recorded as accrued liabilities on our balance sheet) to cover our estimated liabilities for our self-insured workers' compensation claims. The adequacy of reserves can be affected by both internal and external events, including adverse development on existing claims, changes in medical, administrative and legal costs, and legislative or systemic changes.

We have undertaken a number of steps during the past two years to improve our workers' compensation claims administration and reserving practices. These steps include hiring additional claim administrators in response to our business growth, and working to close litigated claims more quickly. In order to further refine our reserving practices, the Company has engaged an additional actuarial firm to assist management in gaining an enhanced understanding of actuarial valuation in light of the Company's specific workers' compensation claims experience.

Selling, general and administrative ("SG&A") expenses for the second quarter of 2014 totaled approximately $18.0 million, an increase of $3.5 million or 23.9% over the second quarter of 2013. The increase was primarily attributable to increases in management payroll, increased information technology ("IT") expenses and other variable expense components within SG&A to support our business growth. The increased IT expenses relate to projects designed to enhance access and delivery of information to the field as well as improve efficiencies over time.

The income tax rate for the 2014 second quarter was 36.0% compared to the 2013 second quarter rate of 33.4%. We expect the effective income tax rate for the balance of 2014 to remain at a similar rate to the 2014 second quarter income tax rate.

Six months ended June 30, 2014 and 2013 Net income for the six months ended June 30, 2014 amounted to $3.7 million, as compared to a net income of $3.3 million for the first six months of 2013.

Diluted income per share for the first six months of 2014 was $0.50 compared to diluted income per share of $0.45 for the comparable 2013 period.

- 23 --------------------------------------------------------------------------------- Table of Contents Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Results of Operations (Continued) Six months ended June 30, 2014 and 2013 (Continued) Revenues for the six months ended June 30, 2014 totaled $286.2 million, an increase of approximately $45.9 million or 19.1% over the comparable period in 2013, which reflects an increase in the Company's professional employer service fee revenue of $38.9 million or 22.2%, coupled with an increase in staffing services revenue of $7.0 million or 10.7%. Approximately 77% and 74% respectively, of our revenue during the six months ended June 30, 2014 and 2013 was attributable to our California operations.

Our growth in professional employer service revenues continues to be primarily attributable to new customers, resulting from continued strength in our referral channels as business from new customers during the first six months of 2014 nearly doubled our lost business from former customers. Professional employer service revenues from continuing customers reflected a 9.1% increase compared to the first six months of 2013, primarily resulting from increases in employee headcount and hours worked. The increase in staffing revenues was due primarily to an increase in revenue from the addition of new business, partially offset by lost business from former customers.

Gross margin for the six months ended June 30, 2014 totaled approximately $39.2 million or an increase of 22.2% over the comparable period of 2013, primarily due to the 19.1% increase in revenues and a decline in direct payroll costs, as a percentage of revenues, partially offset by higher workers' compensation expense, as a percentage of revenues.

The decrease in direct payroll costs, as a percentage of revenues, from 20.3% for the first six months of 2013 to 19.1% for the first six months of 2014 was primarily due to the increase in our mix of professional employer services in the Company's customer base compared to the same period of 2013 and the effect of each customer's unique mark-up percent.

Payroll taxes and benefits, as a percentage of revenues, for the first six months of 2014 was 46.8% compared to 46.9% for the comparable period of 2013.

Workers' compensation expense, in terms of dollars and as a percentage of revenues, increased from $46.8 million or 19.5% in the first six months of 2013 to $58.4 million or 20.4% in the first six months of 2014. The percentage rate increase was primarily due to an increase in the provision for claim costs related to current year claims. Our total provision for current year claims of $33.9 million was based on the loss rate as a percentage of payroll calculated by our independent actuary at December 31, 2013. We also accrued $5.1 million in additional expense during the first six months of 2014 related to prior year claims.

- 24 - -------------------------------------------------------------------------------- Table of Contents Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Results of Operations (Continued) Six months ended June 30, 2014 and 2013 (Continued) Selling, general and administrative ("SG&A") expenses for the first six months of 2014 totaled approximately $32.3 million, an increase of $6.0 million or 22.9% over the first six months of 2013. The increase was primarily attributable to increases in management payroll, IT expenses and other variable expense components within SG&A to support our business growth.

The income tax rate for the first six months of 2014 was 36.5% compared to the income tax rate for the first six months of 2013 of 32.8%.

Factors Affecting Quarterly Results The Company has historically experienced significant fluctuations in its quarterly operating results and expects such fluctuations to continue in the future. The Company's operating results may fluctuate due to a number of factors such as seasonality, wage limits on statutory payroll taxes, claims experience for workers' compensation, demand for the Company's services, competition, and the effect of acquisitions. The Company's revenue levels may fluctuate from quarter to quarter primarily due to the impact of seasonality on its staffing services business and on certain of its co-employed clients in the agriculture, food processing and construction-related industries. As a result, the Company may have greater revenues and net income in the third quarter of its fiscal year. Revenue levels in the fourth quarter may be affected by many customers' practice of operating on holiday-shortened schedules. Payroll taxes and benefits fluctuate with the level of direct payroll costs, but tend to represent a smaller percentage of revenues and direct payroll later in the Company's fiscal year as federal and state statutory wage limits for unemployment and Social Security taxes are exceeded on a per employee basis. 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. Adverse loss development of prior period claims during a subsequent quarter may also contribute to volatility in the Company's estimated workers' compensation expense.

Liquidity and Capital Resources The Company's cash position for the six months ended June 30, 2014 decreased $45.7 million from December 31, 2013, which compares to a decrease of $36.9 million for the comparable period in 2013. The decrease in cash at June 30, 2014 as compared to December 31, 2013, was primarily due to the purchase of restricted marketable securities and restricted certificates of deposit of $35.7 million, the purchase of marketable securities of $24.0 million, and an increase in trade accounts receivable of $18.4 million, partially offset by net income of $3.7 million, a $13.2 million increase in accrued payroll and payroll taxes, and a $10.1 million increase in workers' compensation claims liabilities.

Net cash provided by operating activities for the six months ended June 30, 2014 amounted to $8.7 million compared to $17.4 million for the comparable 2013 period. For the six months ended June 30, 2014, cash flow was principally provided by a net income of $3.7 million, increases in accrued payroll, payroll taxes and benefits of $13.2 million and a $10.1 million increase in workers' compensation claims liabilities, partially offset by an increase in trade accounts receivable of $18.4 million.

- 25 --------------------------------------------------------------------------------- Table of Contents Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Liquidity and Capital Resources (Continued) Net cash used in investing activities for the six months ended June 30, 2014 was $51.0 million as compared to $50.2 million of net cash used by investing activities for the comparable 2013 period. For the 2014 period, cash from investing activities was used primarily to purchase restricted marketable securities and restricted certificates of deposit of $35.7 million and to purchase marketable securities of $24.0 million, partially offset by the sale and maturities of marketable securities of $7.0 million and from the maturities of restricted marketable securities of $4.0 million.

Net cash used in financing activities for the six months ended June 30, 2014 was $3.3 million as compared to $4.1 million used in financing activities for the comparable 2013 period. For the 2014 period, the primary use of cash for financing activities was the payment of regular quarterly cash dividends totaling $2.6 million to holders of the Company's common stock and the repurchase of common stock totaling $1.0 million.

The Company's business strategy continues to focus on growth through the expansion of operations at existing offices, together with the selective acquisition of additional personnel-related businesses, both in its existing markets and other strategic geographic markets. The Company periodically evaluates proposals for various acquisition opportunities, but there can be no assurance that any additional transactions will be consummated.

As disclosed in Note 3 to the Consolidated Financial Statements in this report, the Company maintains a credit agreement (the "Agreement") with its principal bank, Wells Fargo Bank, National Association (the "Bank"). The Agreement, which expires October 1, 2017, provides for a revolving credit facility with a current borrowing capacity of up to $16.5 million. The Company had no outstanding borrowings on the revolving credit facility as of June 30, 2014 or at December 31, 2013. The Agreement also provides for the continuance of existing standby letters of credit in connection with various surety deposit requirements for workers' compensation purposes, as to which the amount outstanding totaled approximately $27.6 million as of June 30, 2014.

The states of California, Oregon, Maryland, Washington, Delaware and Colorado require us to maintain specified investment balances or other financial instruments, totaling $115.1 million at June 30, 2014, to cover potential workers' compensation claims losses relating to the Company's status as a self-insured employer. In partial satisfaction of these requirements, at June 30, 2014, we have provided surety bonds and standby letters of credit totaling $111.5 million. The State of California requires the Company to maintain a surety deposit of $104.7 million (which is included in the total of $111.5 million of surety bonds and standby letters of credit), which the Company satisfied through the posting of third party issued surety bonds, backed by a $20.9 million letter of credit. In conjunction with this letter of credit, the Company posted $20.9 million of certificates of deposit with Wells Fargo as collateral. The $20.9 million letter of credit is included in the total $27.6 million of standby letters of credit with Wells Fargo.

- 26 --------------------------------------------------------------------------------- Table of Contents Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Liquidity and Capital Resources (Continued) Advances under the revolving credit facility bear interest, at the Company's option, at either (a) a fixed rate for a term selected by the Company from time-to-time or (b) a fluctuating rate. In each case, the rate is calculated based on LIBOR plus 1.75%. The Agreement also provides for an unused commitment fee of 0.25% per annum on the average daily unused amount of the revolving credit facility.

The credit facility is collateralized by the Company's accounts receivable and other rights to receive payment, general intangibles, inventory and equipment.

Under the Agreement, the maximum principal amount available is reduced by $2.5 million every six months commencing April 1, 2013. The maximum principal amount available at June 30, 2014 was $16.5 million.

The Agreement, as amended, requires the satisfaction of certain financial covenants as follows: • Minimum Fixed Charge Coverage ratio of no less than 1.25:1.0, measured quarterly on a rolling four-quarter basis; • Funded Debt: EBITDA of no more than 1.75:1 through September 30, 2014; 1.5:1 through September 30, 2015; and 1.25:1 thereafter, measured quarterly on a rolling four-quarter basis; • Ratio of restricted and unrestricted cash and marketable securities to workers' compensation and safety incentive liabilities of at least 1.0:1.0, measured quarterly; and • Prohibition on incurring additional indebtedness without the prior approval of the Bank, other than up to $200,000 per year in purchase money financing.

The Agreement also contains customary events of default. 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.

The Company was in compliance with all applicable financial covenants at June 30, 2014.

Management expects that the funds anticipated to be generated from operations and availability under its revolving credit facility will be sufficient in the aggregate to fund the Company's working capital needs for the next twelve months.

Inflation Inflation generally has not been a significant factor in the Company's operations during the periods discussed above. The Company has taken into account the impact of escalating medical and other costs in establishing reserves for future expenses for self-insured workers' compensation claims.

- 27 --------------------------------------------------------------------------------- Table of Contents Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Forward-Looking Information Statements in this report which are not historical in nature, including discussion of economic conditions in the Company's market areas and effect on revenue levels, the potential for and effect of acquisitions, the effect of changes in the Company's mix of services on gross margin, the adequacy of the Company's workers' compensation reserves and the effect of changes in estimate of its claims liabilities, the adequacy of the Company's allowance for doubtful accounts, the effect of the Company's formation and operation of two wholly owned, fully licensed captive insurance subsidiaries and becoming self-insured for certain business risks, the operation and cost of the Company's fronted insurance program with ACE in California, the financial viability of the Company's excess insurance carriers, the effectiveness of the Company's management information systems, payment of future dividends, and the availability of working capital to meet the Company's funding requirements, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company or industry to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors with respect to the Company include the ability to retain current clients and attract new clients, difficulties associated with integrating acquired businesses and clients into the Company's operations, economic trends in the Company's service areas, material deviations from expected future workers' compensation claims experience, the effect of changes in the workers' compensation regulatory environment in one or more of the Company's primary markets, collectability of accounts receivable, the carrying values of deferred income tax assets and goodwill, which may be affected by the Company's future operating results, the effect of conditions in the global capital markets on the Company's investment portfolio, and the availability of capital or letters of credit necessary to meet state-mandated surety deposit requirements for maintaining the Company's status as a qualified self-insured employer for workers' compensation coverage or its fronted insurance program, among others. The Company disclaims any obligation to update any such factors or to publicly announce the result of any revisions to any of the forward-looking statements contained herein to reflect future events or developments.

- 28 --------------------------------------------------------------------------------- Table of Contents

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