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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
Annual Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
For the fiscal year ended December 31, 1997
Commission File Number 0-21886
BARRETT BUSINESS SERVICES, INC.
(Exact name of registrant as specified in its charter)
Maryland 52-0812977
(State or other jurisdiction (I.R.S. Employer
of Identification No.)
incorporation or
organization)
97201
4724 SW Macadam Avenue (Zip Code)
Portland, Oregon
(Address of principal
executive offices)
Registrant's telephone number, including area code: (503) 220-0988
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $.01 Per Share
(Title of class)
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No --
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ---
State the aggregate market value of the voting stock held by
non-affiliates of the Registrant: $53,155,434 at February 27, 1998
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of the latest practicable date:
Class Outstanding at February 27, 1998
Common Stock, Par Value $.01 Per Share 6,743,563 Shares
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement for the 1998 Annual Meeting of
Stockholders are hereby incorporated by reference into Part III of Form 10-K.
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BARRETT BUSINESS SERVICES, INC.
1997 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
Page
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PART I
Item 1. Business 2
Item 2. Properties 11
Item 3. Legal Proceedings 11
Item 4. Submission of Matters to a Vote of Security Holders 12
Executive Officers of the Registrant 13
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters 14
Item 6. Selected Financial Data 15
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations 16
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 22
Item 8. Financial Statements and Supplementary Data 22
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure 22
PART III
Item 10. Directors and Executive Officers of the Registrant 23
Item 11. Executive Compensation 23
Item 12. Security Ownership of Certain Beneficial Owners and Management 23
Item 13. Certain Relationships and Related Transactions 23
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 24
Signatures 25
Financial Statements F-1
Exhibit Index
1
PART I
ITEM 1. BUSINESS
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GENERAL
Barrett Business Services, Inc. ("Barrett" or the "Company"), was
incorporated in the state of Maryland in 1965. Barrett is a leading human
resource management company. The Company provides comprehensive outsourced
solutions addressing the costs and complexities of a broad array of
employment-related issues for businesses of all sizes. Employers are faced with
increasing complexities in employment laws and regulations, employee benefits
and administration, federal, state and local payroll tax compliance and
mandatory workers' compensation coverage, as well as the recruitment and
retention of quality employees. The Company believes that outsourcing the
management of various employer and human resource responsibilities, which are
typically considered non-core functions, enables organizations to focus on their
core competencies, thereby improving operating efficiencies.
Barrett's range of services and expertise in human resource management
encompasses five major categories: payroll processing, employee benefits and
administration, workers' compensation coverage, aggressive risk management and
workplace safety programs, and human resource administration, which includes
functions such as recruiting, interviewing, drug testing, hiring, placement,
training and regulatory compliance. These services are typically provided
through a variety of contractual arrangements, as part of either a traditional
staffing service or a professional employer organization ("PEO") service.
Staffing services include on-demand or short-term staffing assignments,
long-term or indefinite-term contract staffing, and comprehensive on-site
personnel management responsibilities. In a PEO arrangement, the Company enters
into a contract to become a co-employer of the client company's existing
workforce and assumes responsibility for some or all of the human resource
management responsibilities. The Company's target PEO clients typically have
limited resources available to effectively manage these matters. The Company
believes that its ability to offer clients a broad mix of staffing and PEO
services differentiates it from its competitors and benefits its clients through
(i) lower recruiting and personnel administration costs, (ii) decreases in
payroll expenses due to lower workers' compensation and health insurance costs,
(iii) improvements in workplace safety and employee benefits, (iv) lower
employee turnover and (v) reductions in management resources expended in
labor-related regulatory compliance. For 1997 Barrett's staffing services
revenues represented 55.2% of total revenues, compared to 44.8% for PEO services
revenues.
Barrett provides services to a diverse array of customers, including,
among others, electronics manufacturers, various light-manufacturing industries,
forest products and agriculture-based companies, transportation and shipping
enterprises, food processing, telecommunications, public utilities, general
contractors in numerous construction-related fields and various professional
services firms. During 1997, the Company provided staffing services to
approximately 5,400 customers. Although a majority of the Company's staffing
customers are small to mid-sized businesses, during 1997 approximately 40 of the
Company's customers have each utilized Barrett employees in a number ranging
from at least 200 employees to as many as 1,800 employees through various
staffing services arrangements. In addition, Barrett had approximately 654 PEO
clients at December 31, 1997, compared to 780 at December 31, 1996. The decline
in the number of PEO clients in 1997 as compared to 1996 reflects the Company's
disciplined adherence to its safe-work policies and credit policies.
The Company operates through a network of 24 branch offices in Oregon,
California, Washington, Maryland, Delaware, Idaho, Arizona and Michigan. Barrett
also has 22 smaller recruiting offices in its general market areas under the
direction of a branch office.
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OPERATING STRATEGIES
The Company's principal operating strategies are to: (i) promote a
decentralized and autonomous management philosophy and structure, (ii) motivate
employees through wealth sharing, (iii) leverage zone and branch level economies
of scale, (iv) provide a unique and efficient blend of staffing and PEO services
and (v) control workers' compensation costs through effective risk management.
GROWTH STRATEGIES
The Company's principal growth strategies are to: (i) expand through
acquisitions of human resource-related businesses in new and existing geographic
markets, (ii) ensure acquisitions are fully aligned with zone management to
strengthen and expand operations, (iii) continue to support the full
implementation of operational line authority through zone managers and (iv)
enhance management information systems to support continued growth and to
improve customer services.
RECENT ACQUISITIONS
Effective February 1, 1997, the Company acquired D&L Personnel
Department Specialists, Inc., dba HR Only, a staffing services company which
specializes in human resource professionals with offices in Los Angeles and
Garden Grove, California. The Company paid $1,800,000 in cash for all of the
outstanding common stock of HR Only and $1,200,000 in cash for noncompete
agreements with certain individuals, of which $1,000,000 will be deferred for
five years and then be paid ratably over the succeeding five-year period. HR
Only's revenues for the fiscal year ended January 31, 1997 were approximately
$4.3 million.
Effective April 13, 1997, the Company acquired certain assets of JRL
Services, Inc., dba TLC Staffing, a provider of clerical staffing services
located in Tucson, Arizona. TLC Staffing had revenues of approximately $800,000
(unaudited) for the year ended December 31, 1996. The Company paid $150,000 in
cash for the assets and assumed an $18,000 office lease liability.
The Company reviews acquisition opportunities on an ongoing basis. While
growth through acquisition is a major element of the Company's overall strategic
growth plan, there can be no assurance that any additional acquisitions will be
completed in the foreseeable future, or that any future acquisitions will have a
positive effect on the Company's performance. Acquisitions involve a number of
potential risks, including the diversion of management's attention to the
assimilation of the operations and personnel of the acquired companies, exposure
to workers' compensation and other costs in differing regulatory environments,
adverse short-term effects on the Company's operating results, integration of
management information systems and the amortization of acquired intangible
assets.
THE COMPANY'S SERVICES
Overview of Services. The Company offers a continuum of human resource
management services to its clients. While some services are more frequently
associated with Barrett's co-employer arrangements, the Company's expertise in
such areas as safety services and personnel-related regulatory compliance may
also be utilized by its staffing services customers through the Company's human
resource management services. The Company's range of services and expertise in
human resource management encompasses five major categories:
- Payroll Processing. For both the Company's PEO and staffing
services employees, the Company performs all functions associated
with payroll administration, including preparing and delivering
paychecks, computing tax withholding and payroll deductions,
handling garnishments, computing vacation and sick pay, and
preparing W-2 forms and accounting reports through centralized
operations at its headquarters in Portland, Oregon.
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- Employee Benefits and Administration. As a result of its size,
Barrett is able to offer employee benefits which are not
available at an affordable cost to many of its customers,
particularly those with fewer than 100 employees. These benefits
include health care insurance, a 401(k) savings plan, a Section
125 cafeteria plan, life and disability insurance, claims
administration and a nonqualified deferred compensation plan.
- Safety Services. Barrett offers safety services to both its
staffing services and PEO customers in keeping with its corporate
philosophy of "making the workplace safer." The Company has at
least one risk manager available at each branch office to perform
workplace safety assessments for each of its customers and to
recommend actions to achieve safer operations. The Company's
services include safety training and safety manuals for both
workers and supervisors, job-site visits and meetings,
improvements in workplace procedures and equipment to further
reduce the risk of injury, compliance with OSHA requirements,
environmental regulations, and workplace regulation by the U.S.
Department of Labor and state agencies and accident
investigations. As discussed under "Self-Insured Workers'
Compensation Program" below, the Company also pays safety
incentives to its customers who achieve improvements in workplace
safety.
- Workers' Compensation Coverage. Beginning in 1987, the Company
acquired self-insured employer status for workers' compensation
coverage in Oregon and is currently a qualified self-insured
employer in many of the state and federal jurisdictions in which
it operates. Through its third-party administrators, Barrett
provides claims management services to its PEO customers. As
discussed under "Self-Insured Workers' Compensation Program"
below, the Company aggressively manages job injury claims,
including identifying fraudulent claims and utilizing its
staffing services to return workers to active employment earlier.
As a result of its ability to manage workers' compensation costs,
the Company is often able to reduce its clients' overall expenses
arising out of job-related injuries and insurance.
- Human Resource Administration. Barrett offers its clients the
opportunity to leverage the Company's experience in
personnel-related regulatory compliance. For both its PEO clients
and for staffing services employees, the Company handles the
burdens of advertising, recruitment, skills testing, evaluating
job applications and references, drug screening, criminal and
motor vehicle records reviews, hiring, and compliance with such
employment regulatory areas as immigration, the Americans with
Disabilities Act, and federal and state labor regulations.
Staffing Services. Barrett's staffing services include on-demand or
short-term staffing assignments, contract staffing, long-term or indefinite-term
on-site management and human resource administration. Short-term staffing
involves employee demands caused by such factors as seasonality, fluctuations in
customer demand, vacations, illnesses, parental leave, and special projects
without incurring the ongoing expense and administrative responsibilities
associated with recruiting, hiring and retaining additional permanent employees.
As more and more companies focus on cost-cutting and reducing overhead, the use
of employees on a short-term basis allows firms to utilize the "just-in-time"
approach to their personnel needs, thereby converting a portion of their fixed
personnel costs to variable expense.
Contract staffing refers to the Company's responsibilities for the
placement of employees for a period of more than three months or an indefinite
period. This type of arrangement often involves outsourcing an entire department
in a large corporation or providing the manpower for a large project.
In an on-site management arrangement, Barrett places an experienced
manager on site at a customer's place of business. The manager is responsible
for conducting all recruiting, screening,
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interviewing, testing, hiring and employee placement functions at the customer's
facility for a long-term or indefinite period.
The Company's staffing services customers operate in a broad range of
businesses, including forest products and agriculture-based companies,
electronic manufacturers, transportation and shipping companies, food
processors, professional firms and construction contractors. Such customers
range in size from small local firms to large national companies which use
Barrett's services on a local basis. None of the Company's staffing services
customers individually accounted for more than 10% of its total 1997 revenues.
In 1997, light industrial workers generated approximately 70% of the
Company's staffing services revenues, while technical personnel accounted for
18% of such revenues and clerical office staff represented the balance of 12%.
Light industrial workers in the Company's employ perform such tasks as operation
of machinery, manufacturing, loading and shipping, site preparation for special
events, construction-site cleanup and janitorial services. Technical personnel
include electronic parts assembly workers and designers and drafters of
electronic parts.
Barrett emphasizes prompt, personalized service in assigning quality,
trained, drug-free personnel at competitive rates to its staffing services
customers. The Company uses internally developed computer databases of employee
skills and availability at each of its branches to match customer needs with
available qualified employees. The Company emphasizes the development of an
understanding of the unique requirements of its clientele by its account
managers. Customers are offered a "money-back" guarantee if dissatisfied with
staffing employees placed by Barrett.
The Company utilizes a variety of methods to recruit its workforce for
staffing services, including among others, referrals by existing employees,
newspaper advertising and marketing brochures distributed at colleges and
vocational schools. The employee application process includes an interview,
skills assessment test, reference verification and drug screening. The
recruiting of qualified employees requires more effort when unemployment rates
are low.
Barrett's staffing services employees are not under its direct control
while placed at a customer's worksite. Barrett has not experienced any
significant liability due to claims arising out of negligent acts or misconduct
by its staffing services employees. The possibility exists, however, of claims
being asserted against the Company which may exceed the Company's liability
insurance coverage, which could have a material adverse effect on the Company's
business, financial condition and results of operations.
PEO Services. Many businesses, particularly those with a limited number
of employees, find personnel administration requirements to be unduly complex
and time consuming. These businesses often cannot justify the expense of a
full-time human resources staff. In addition, the escalating costs of health and
workers' compensation insurance in recent years, coupled with the increased
complexity of laws and regulations affecting the workplace, have created a
compelling motivation for small to mid-sized businesses to outsource these
managerial burdens. The outsourcing of non-core business functions, such as
human resource administration, enables small enterprises to devote their limited
resources to their core competencies.
In a PEO services arrangement, Barrett enters into a contract to become
a co-employer of the client company's existing workforce. Pursuant to this
contract, Barrett assumes responsibility for some or all of the human resource
management responsibilities, including payroll and payroll taxes, employee
benefits, health insurance, workers' compensation coverage, workplace safety
programs, compliance with federal and state employment laws, labor and workplace
regulatory requirements and related administrative responsibilities. Barrett
also hires and fires its PEO employees, although the client company remains
responsible for day-to-day assignments, supervision and training and, in most
cases, recruiting.
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The Company began offering PEO services to Oregon customers in 1990 and
expanded these services to Maryland and Washington in the first and third
quarters, respectively, of 1994, to Delaware and California in the second
quarter of 1995, and to Idaho and Arizona in 1996. The Company has entered into
co-employer arrangements with a wide variety of clients, including companies
involved in moving and shipping, professional firms, construction, retail,
manufacturing and distribution businesses. PEO clients are typically small to
mid-sized businesses with up to 100 employees. None of the Company's PEO clients
individually accounted for more than 5% of its total annual revenues during
1997.
Prior to entering into a co-employer arrangement, the Company performs
an analysis of the potential client's actual personnel and workers' compensation
costs based on information provided by the customer. Barrett introduces its
workplace safety program and recommends improvements in procedures and equipment
following a safety inspection of the customer's facilities which the potential
client must agree to implement as part of the co-employer arrangement. Barrett
also offers significant financial incentives to PEO clients to maintain a
safe-work environment.
The Company's standard PEO services agreement provides for services for
an indefinite term, until notice of termination is given by either party. The
agreement permits cancellation by either party upon 30 days written notice. In
addition, the Company may terminate the agreement at any time for specified
reasons, including nonpayment or failure to follow Barrett's workplace safety
program.
The form of agreement also provides for indemnification of the Company
by the client against losses arising out of any default by the client under the
agreement, including failure to comply with any employment-related, health and
safety or immigration laws or regulations. The Company also requires the client
to maintain comprehensive liability coverage in the amount of $1,000,000 for
acts of its worksite employees. In addition, the Company has excess liability
insurance coverage in the amount of $2,000,000 per occurrence and policy limits
of $5,000,000 in the aggregate. Although no claims exceeding such policy limits
have been paid by the Company to date, the possibility exists that claims for
amounts in excess of sums available to the Company through indemnification or
insurance may be asserted in the future, which could have a material adverse
effect on the Company's business, financial condition and results of operations.
SALES AND MARKETING
The Company markets its services primarily through direct sales
presentations by its branch office account managers. The Company also obtains
referrals from existing clients and other third parties, and places radio
commercials and advertisements in various publications, including local
newspapers and the Yellow Pages. Barrett believes that it is able to offer its
services at competitive rates due to the lower costs associated with its
self-insured workers' compensation program when compared to the cost of workers'
compensation insurance. See "Self-Insured Workers' Compensation Program" below.
BILLING
Through centralized operations at the Company's headquarters in
Portland, Oregon, the Company prepares invoices weekly for its staffing services
customers and following the end of each payroll period for PEO clients. Health
insurance premiums are passed through to PEO clients. The Company requires a
deposit from its PEO clients to cover one payroll period plus gross margin.
SELF-INSURED WORKERS' COMPENSATION PROGRAM
A principal service provided by Barrett to its customers, particularly
its PEO clients, is workers' compensation coverage. As the employer of record,
Barrett is responsible for complying with applicable statutory requirements for
workers' compensation coverage. The Company's workplace safety services, also
described under "Overview of Services," are closely tied to its approach to the
management of workers' compensation risk.
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Elements of Workers' Compensation System. State law (and, for certain
types of employees, federal law) generally mandates that an employer reimburse
its employees for the costs of medical care and other specified benefits for
injuries or illnesses incurred in the course and scope of employment. The
benefits payable for various categories of claims are determined by state
regulation and vary with the severity and nature of the injury or illness and
other specified factors. In return for this guaranteed protection, workers'
compensation is an exclusive remedy and employees are generally precluded from
seeking other damages from their employer for workplace injuries. Most states
require employers to maintain workers' compensation insurance or otherwise
demonstrate financial responsibility to meet workers' compensation obligations
to employees. In many states, employers who meet certain financial and other
requirements are permitted to self-insure.
Self Insurance for Workers' Compensation. In August 1987, Barrett became
a self-insured employer for workers' compensation coverage in Oregon. The
Company has subsequently obtained self-insured employer status for workers'
compensation in four additional states, Maryland, Washington, Delaware and
California. In addition, in May 1995, the Company was granted self-insured
employer status by the U.S. Department of Labor for longshore and harbor
("USL&H") workers' compensation coverage. Regulations governing self-insured
employers in each jurisdiction typically require the employer to maintain surety
deposits of cash, government securities or other financial instruments to cover
workers' claims in the event the employer is unable to pay for such claims.
Barrett also maintains excess workers' compensation insurance for single
occurrences exceeding $350,000 (except for $300,000 in Maryland and $500,000 for
USL&H coverage) with statutory limits (i.e., in unlimited amounts) pursuant to
annual policies with major insurance companies. The excess-insurance policies
contain standard exclusions from coverage, including punitive damages, fines or
penalties in connection with violation of any statute or regulation and losses
covered by other insurance or indemnity provisions.
In addition, the Company has implemented an insured large-deductible
program which allows it to become insured for workers' compensation coverage in
nearly all states where the extent of the Company's operations does not yet
warrant the investment to become a self-insured employer.
Claims Management. Pursuant to its self-insured status, the Company's
workers' compensation expense is tied directly to the incidence and severity of
workplace injuries to its employees. Barrett seeks to contain its workers'
compensation costs through an aggressive approach to claims management. The
Company uses managed-care systems to reduce medical costs and keeps time-loss
costs to a minimum by assigning injured workers, whenever possible, to
short-term assignments which accommodate the workers' physical limitations. The
Company believes that these assignments minimize both time actually lost from
work and covered time-loss costs. Barrett has also engaged third-party
administrators ("TPAs") to provide additional claims management expertise.
Typical management procedures include performing thorough and prompt on-site
investigations of claims filed by employees, working with physicians to
encourage efficient medical management of cases, denying questionable claims and
negotiating early settlements to eliminate future case development and costs.
Barrett also maintains a mandatory corporate-wide pre-employment drug screening
program and a mandatory post-injury drug test. The program is believed to have
resulted in a reduction in the frequency of fraudulent claims and in accidents
in which the use of illegal drugs appears to have been a contributing factor.
Elements of Self-Insurance Costs. The costs associated with the
Company's self-insured workers' compensation program include case reserves for
reported claims, an additional expense provision (referred to as the "IBNR
reserve") for unanticipated increases in the cost of open injury claims (known
as "adverse loss development") and for claims incurred in prior periods but not
reported, fees payable to the Company's TPAs, additional claims administration
expenses, administrative fees payable to state and federal workers' compensation
regulatory agencies, premiums for excess workers'
7
compensation insurance, legal fees and safety incentive payments. Although not
directly related to the size of the Company's payroll, the number of claims and
correlative loss payments may be expected to increase with growth in the total
number of employees. TPA fees also vary with the number of claims administered.
The state assessments are typically based on payroll amounts and, to a limited
extent, the amount of permanent disability awards during the previous year.
Excess insurance premiums are also based in part on the size of the Company's
payroll. Safety incentives expense may increase as the number of the Company's
PEO employees rises, although increases will only occur for any given PEO client
if such client's claims costs are below agreed-upon amounts.
WORKERS' COMPENSATION CLAIMS EXPERIENCE AND RESERVES
The Company recognizes its liability for the ultimate payment of
incurred claims and claims adjustment expenses by accruing liabilities which
represent estimates of future amounts necessary to pay claims and related
expenses with respect to covered events that have occurred. When a claim
involving a probable loss is reported, the Company's TPA establishes a case
reserve for the estimated amount of ultimate loss. The estimate reflects an
informed judgment based on established case reserving practices and the
experience and knowledge of the TPA regarding the nature and expected value of
the claim, as well as the estimated expense of settling the claim, including
legal and other fees and expenses of administering claims. The adequacy of such
case reserves depends on the professional judgment of each TPA to properly and
comprehensively evaluate the economic consequences of each claim. Additionally,
on an aggregate basis, the Company has established an additional expense reserve
for both future adverse loss development in excess of initial case reserves on
open claims and for claims incurred but not reported, referred to as the IBNR
reserve.
As part of the case reserving process, historical data is reviewed and
consideration is given to the anticipated effect of various factors, including
known and anticipated legal developments, inflation and economic conditions.
Reserve amounts are necessarily based on management's estimates, and as other
data becomes available, these estimates are revised, which may result in
increases or decreases in existing case reserves. Barrett has engaged a
nationally-recognized, independent actuary to periodically review the Company's
total workers' compensation claims liability and reserving practices. Based in
part on such review, the Company believes its total accrued workers'
compensation claims liabilities are adequate. There can, however, be no
assurance that the Company's actual future workers' compensation obligations
will not exceed the amount of its accrued liabilities, with a corresponding
negative effect on future earnings, due to such factors as unanticipated adverse
loss development of known claims, and the effect, if any, of claims incurred but
not reported.
Approximately one-fourth of the Company's payroll exposure associated
with staffing or PEO services is in relatively high-risk industries with respect
to workplace injuries, including trucking, logging and construction. A failure
to successfully manage the severity and frequency of workers' compensation
injuries will have a negative impact on the Company. Management maintains clear
guidelines for its branch managers, account managers, and loss control
specialists directly tying their continued employment with the Company to their
diligence in understanding and addressing the risks of accident or injury
associated with the industries in which client companies operate and in
monitoring the compliance by clients with workplace safety requirements. The
Company has adopted a policy of "zero tolerance" for avoidable workplace
injuries.
MANAGEMENT INFORMATION SYSTEM
The Company performs all functions associated with payroll
administration through its internal management information system. Each branch
performs payroll data entry functions and maintains an independent database of
employees and customers, as well as payroll and invoicing records. All
processing functions are centralized at Barrett's corporate headquarters in
Portland, Oregon. Although the current system employed by the Company
satisfactorily meets its current needs, the Company perceives it to be
advantageous to significantly expand the capacity and capabilities through the
utilization of new software technologies. Accordingly, management initiated a
project in mid-1997 to convert to new technologies which it anticipates will
enable the Company to more effectively
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accommodate its anticipated growth, maintain a cost-effective and efficient
processing structure, improve functionality, meet expected customer requirements
for expanded communication capabilities, and provide additional customer
services and information reporting. The Company's new system will utilize
client-server technology, an existing software product from an independent
software development company and a relational database environment. Management
estimates the total cost of implementing this project at approximately $2.5
million. The new system is currently expected to be operational in mid-1998 and
will address all concerns related to what is commonly known as the "Year 2000
issue."
EMPLOYEES AND EMPLOYEE BENEFITS
At December 31, 1997, the Company had approximately 18,925 employees,
including approximately 12,800 staffing services employees, approximately 5,800
PEO employees and approximately 325 managerial, sales and administrative
employees. The number of employees at any given time may vary significantly due
to business conditions at customer or client companies. During 1997,
approximately 3% of the Company's employees were covered by a collective
bargaining agreement. Each of Barrett's managerial, sales and administrative
employees has entered into a standard form of employment agreement which, among
other things, contains covenants not to engage in certain activities in
competition with the Company for 18 months following termination of employment
and to maintain the confidentiality of certain proprietary information. Barrett
believes its employee relations are good.
Benefits offered to Barrett's staffing services employees include group
health insurance, a Section 125 cafeteria plan which permits employees to use
pretax earnings to fund various services, including medical, dental and
childcare, and a Section 401(k) savings plan pursuant to which employees may
begin making contributions upon reaching 21 years of age and completing 1,000
hours of service in any consecutive 12-month period. The Company may also make
contributions to the savings plan, which vest over seven years and are subject
to certain legal limits, at the sole discretion of the Company's Board of
Directors. In addition, the Company offers a nonqualified deferred compensation
plan for highly compensated employees who are precluded from participation in
the 401(k) plan. Employees subject to a co-employer arrangement may participate
in the Company's benefit plans, provided that the group health insurance
premiums may, at the client's option, be paid by payroll deduction. See
"Regulatory and Legislative Issues--Employee Benefit Plans."
REGULATORY AND LEGISLATIVE ISSUES
Business Operations. The Company is subject to the laws and regulations
of the jurisdictions within which it operates, including those governing
self-insured employers under the workers' compensation systems in Oregon,
Washington, Maryland, Delaware, California and the U.S. Department of Labor for
USL&H workers. An Oregon PEO company, such as Barrett, is required to be
licensed as a worker-leasing company by the Workers' Compensation Division of
the Oregon Department of Consumer and Business Services. Temporary staffing
companies are expressly exempt from the Oregon licensing requirement. Oregon PEO
companies are also required to ensure that each PEO client provides adequate
training and supervision for its employees to comply with statutory requirements
for workplace safety and to give 30 days' written notice in the event of a
termination of its obligation to provide workers' compensation coverage for PEO
employees and other subject employees of a PEO client. Although compliance with
these requirements imposes some additional financial risk on Barrett,
particularly with respect to those clients who breach their payment obligation
to the Company, such compliance has not had a material adverse impact on
Barrett's business, financial condition or results of operations.
Employee Benefit Plans. The Company's operations are affected by
numerous federal and state laws relating to labor, tax and employment matters.
By entering into a co-employer relationship with employees who are assigned to
work at client locations (sometimes referred to as "worksite employees"), the
Company assumes certain obligations and responsibilities of an employer under
these federal and state laws. Because many of these federal and state laws were
enacted prior to the
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development of nontraditional employment relationships, such as professional
employer, temporary employment, and outsourcing arrangements, many of these laws
do not specifically address the obligations and responsibilities of
nontraditional employers. In addition, the definition of "employer" under these
laws is not uniform.
As an employer, the Company is subject to all federal statutes and
regulations governing its employer-employee relationships. Subject to the issues
discussed below, the Company believes that its operations are in compliance in
all material respects with all applicable federal statutes and regulations.
The Company offers various qualified employee benefit plans to its
employees, including its worksite employees. These employee benefit plans
include a savings plan (the "401(k) plan") under Section 401(k) of the Internal
Revenue Code (the "Code"), a cafeteria plan under Code Section 125, a group
health plan, a group life insurance plan, a group disability insurance plan and
an employee assistance plan. In addition, the Company offers a nonqualified
deferred compensation plan, which is available to highly compensated employees
who are not eligible for participation in the Company's 401(k) plan. Generally,
qualified employee benefit plans are subject to provisions of both the Code and
the Employee Retirement Income Security Act of 1974 ("ERISA"). In order to
qualify for favorable tax treatment under the Code, qualified plans must be
established and maintained by an employer for the exclusive benefit of its
employees. See Item 7 of this report for a discussion of issues regarding
qualification of the Company's employee benefit plans arising out of
participation by the Company's PEO employees.
COMPETITION
The PEO and staffing services businesses are characterized by rapid
growth and intense competition. The staffing services market includes
competitors of all sizes, including several, such as Manpower, Inc., Kelly
Services, Inc., The Olsten Corporation, Interim Services, Inc., and Adia
Services, Inc., which are national in scope and have substantially greater
financial, marketing and other resources than the Company. In addition to
national companies, Barrett competes with numerous regional and local firms for
both customers and employees. The Company estimates that at least 100 firms
provide staffing services in Oregon. There are relatively few barriers to entry
into the staffing services business. The principal competitive factors in the
staffing services industry are price, the ability to provide qualified workers
in a timely manner and the monitoring of job performance. The Company attributes
its internal growth in staffing services revenues to the cost-efficiency of its
operations which permits the Company to price its services competitively, and to
its ability through its branch office network to understand and satisfy the
needs of its customers with competent personnel.
Although there are believed to be approximately 2,200 companies
currently offering PEO services in the U.S., many of these potential competitors
are located in states in which the Company presently does not operate. Barrett
believes that there are approximately 50 firms offering PEO services in Oregon,
but the Company has the largest presence in the state. The Company may face
additional competition in the future from new entrants to the field, including
other staffing services companies, payroll processing companies and insurance
companies. Certain PEO companies operating in areas in which Barrett does not
now, but may in the future, offer its services have greater financial and
marketing resources than the Company, such as The Vincam Group Inc.,
Administaff, Inc., Staff Leasing, Inc. and Paychex, Inc., among others.
Competition in the PEO industry is based largely on price, although service and
quality are also important. Barrett believes that its growth in PEO services
revenues is attributable to its ability to provide small and mid-sized companies
with the opportunity to provide enhanced benefits to their employees while
reducing their overall personnel administration and workers' compensation costs.
The Company's competitive advantage may be adversely affected by a substantial
increase in the costs of maintaining its self-insured workers' compensation
program. A general market decrease in the level of workers' compensation
insurance premiums may also decrease demand for PEO services.
10
ITEM 2. PROPERTIES
- ------------------------
The Company provides staffing and PEO services through all 24 of its
branch offices. The following table shows the locations of the Company's branch
offices and the year in which each branch was opened or acquired. The Company's
Oregon branches accounted for 53% of its total revenues in 1997. The Company
also leases office space in 22 other locations in its market areas which it uses
to recruit and place employees.
Year Opened Year Opened
Oregon Locations or Acquired Other Locations or Acquired
- -------------------------- ---------------- ---------------------------- ---------------------
Portland (Industrial) 1984 Tucson, Arizona 1996
Portland (Bridgeport) 1988 Sacramento, California 1988
Bend 1990 Santa Clara, California 1994
Medford 1990 Brea, California 1996
Salem 1990 Goleta, California 1996
Albany 1991 Ontario, California 1996
Eugene 1991 Oxnard, California 1996
Portland (Leasing) 1993 Los Angeles, California 1997
Pendleton 1994 Boise, Idaho 1996
Hood River 1996 Lutherville, Maryland 1951
Salisbury, Maryland 1994
Easton, Maryland 1994
Flint, Michigan 1997
Spokane, Washington 1994
The Company's corporate headquarters are located in an office building
in Portland, Oregon, with approximately 9,200 square feet of office space. The
building is subject to a mortgage loan with a principal balance of approximately
$566,000 at December 31, 1997.
The Company also owns another office building in Portland, Oregon,
which houses its Portland/Bridgeport branch office. The building is subject to a
mortgage loan with a principal balance at December 31, 1997, of approximately
$273,000 and has approximately 7,000 square feet of office space.
Barrett leases office space for its other branch offices. At December
31, 1997, such leases had expiration dates ranging from less than one year to
six years, with total minimum payments through 2002 of approximately $2,170,000.
ITEM 3. LEGAL PROCEEDINGS
- -------------------------------
A lawsuit was filed in the Circuit Court of the State of Oregon for the
County of Multnomah on February 5, 1997, by Javier and Ester Munoz, husband and
wife, against Asger M. Nielson, doing business as Nielson and Son ("Nielson"),
Rain-Master Roofing, Inc. ("Rain-Master"), and the Company. Mr. Munoz was
employed by the Company under a PEO arrangement with Rain-Master, which is in
the roofing business. On February 1, 1995, Rain-Master was providing roofing
services at a construction site for which Nielson was serving as a general
contractor. Mr. Munoz fell from the roof at the site in the course of his
employment and is now a paraplegic as a result of the injuries he suffered.
Until the filing of the lawsuit referred to above, Mr. Munoz's claim was being
defended as a workers' compensation claim. In the lawsuit, the plaintiffs were
seeking damages in the amount of $10,000,000 pursuant to claims for relief based
on employer liability, intentional injury, product liability, negligence, breach
of implied warranty and loss of consortium.
11
On July 14, 1997, the court granted the Company's motion to dismiss the
Company as a party to the lawsuit. The dismissal was without prejudice. The
plaintiffs and the Company agreed that the dismissal of the plaintiffs' suit was
with prejudice and, therefore, the plaintiffs were barred from refiling their
suit against the Company. A stipulated judgment dismissing plaintiffs' case
against the Company was entered on October 16, 1997. Nielson had previously
filed a cross-claim against the Company for indemnity and contribution based on
the same grounds as the plaintiffs' suit. Nielson agreed to voluntarily dismiss
the cross-claim against the Company.
As part of a mediation held November 11, 1997, the Company agreed to
waive a portion of its right to recoup certain sums previously paid to Mr. Munoz
as part of the workers' compensation claim. As a result, a settlement was
reached whereby the Company will receive reimbursement from Nielson of a portion
of the workers' compensation benefits paid to Mr. Munoz and secured by the
Company's workers' compensation lien. The Company paid no additional amounts to
Mr. Munoz or any other party as a result of the settlement of this lawsuit. A
final order of dismissal eliminating the remainder of the case has been executed
by all parties and will be filed upon the completed execution of a mutual
release of all claims.
On March 11, 1997, a Notice of Intent to Revoke Farm/Forest Labor
Contractor License and to Assess Civil Penalties (the "Notice") was served on
the Company by the Bureau of Labor and Industries of the State of Oregon (the
"Bureau"). The Notice also names Daniel A. Hatfield ("Hatfield"), an employee of
the Company. The Notice proposed to assess civil penalties in the amount of
$488,000, based on the numbers of workers allegedly affected, for alleged
noncompliance with various duties imposed on farm labor contracts by Oregon law,
including licensing violations, failure to comply with wage payment laws, and
failure to maintain and to provide workers and the Bureau with required
documentation. The case was resolved by a Stipulation, Agreement and Consent
Final Order dated February 27, 1998 (the "Order") wherein the Bureau, the
Company and Hatfield agreed to the following conditions: (i) the Company will
terminate all farm and forest contracting work at the Company's Salem, Oregon
branch for a period of three years; (ii) the Bureau will renew licenses for all
other Company branches; (iii) Hatfield will not engage in such contracting work
for three years; (iv) $50,000 in civil penalties assessed against Hatfield will
be paid by the Company's Salem branch, and (v) $50,000 in civil penalties
assessed against the Company was suspended and payment thereof will not be
required unless the Bureau finds that the Company has willfully violated the
statutory and regulatory requirements relating to farm labor contracts during
the three years following the date of the initial Order.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- -----------------------------------------------------------------
No matters were submitted to a vote of the Company's stockholders
during the fourth quarter of 1997.
12
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table identifies, as of February 27, 1998, each executive
officer of the Company. Executive officers are elected annually and serve at the
discretion of the Board of Directors.
Officer
Name Age Principal Positions and Business Experience Since
- ------------------------- ------- ---------------------------------------------- ---------
William W. Sherertz 52 President; Chief Executive Officer; Director 1980
Michael D. Mulholland 46 Vice President-Finance and Secretary; Chief 1994
Financial Officer
K. Risa Olsen 47 Vice President 1997
Gregory R. Vaughn 42 Vice President 1998
James D. Miller 34 Controller, Principal Accounting Officer 1994
- -------------------------------
William W. Sherertz has acted as Chief Executive Officer of the Company
since 1980. He has also been a director of the Company since 1980, and was
appointed President of the Company in March 1993. Mr. Sherertz also serves as
Chairman of the Board of Directors.
Michael D. Mulholland joined the Company in August 1994 as Vice
President-Finance and Secretary. From 1988 to 1994, Mr. Mulholland was employed
by Sprouse-Reitz Stores Inc., a former Nasdaq-listed retail company, serving as
its Executive Vice President, Chief Financial Officer and Secretary. In November
1991, Sprouse-Reitz filed a voluntary petition under Chapter 11 of the U.S.
Bankruptcy Code. Its plan of reorganization was confirmed by the Bankruptcy
Court in June 1992. Subsequently, Mr. Mulholland was appointed to the additional
position of Acting Chief Executive Officer prior to Sprouse's filing of a
voluntary petition in connection with a prepackaged liquidating Chapter 11 in
November 1993. He is a certified public accountant on inactive status.
K. Risa Olsen rejoined the Company in April 1996 as National Accounts
Manager. Ms. Olsen was appointed Vice President in January 1997. Prior to
rejoining Barrett, she was a self-employed Area Director for The Worth
Collection, Ltd., a national privately-held direct marketer of women's apparel,
from November 1994 to March 1996. From January 1993 to October 1994, Ms. Olsen
owned and operated a marketing organization for various manufacturers of women's
apparel. Prior to 1993, Ms. Olsen was employed by The John H. Harland Co., a
publicly-held provider of checks, forms, and business documents to financial
institutions, as a District Manager. Ms. Olsen was previously employed by the
Company from 1976 to 1981.
Gregory R. Vaughn joined the Company in July 1997 as Operations
Manager. Mr. Vaughn was appointed Vice President in January 1998. Prior to
joining Barrett, Mr. Vaughn was Chief Executive Officer of Insource America,
Inc., a privately-held human resource management company headquartered in
Portland, Oregon, since 1996. Mr. Vaughn has also held senior management
positions with Sundial Time Systems, Inc. and Continental Information Systems,
Inc.
James D. Miller joined the Company in January 1994 as Controller. From
1991 to 1994, he was the Corporate Accounting Manager for Christensen Motor
Yacht Corporation. Mr. Miller, a certified public accountant on inactive status,
was employed by Price Waterhouse LLP from 1987 to 1991.
13
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
- ---------------------------------------------------------------------------
MATTERS
-------
The Company's common stock (the "Common Stock") trades on The Nasdaq
Stock Market under the symbol "BBSI." At February 27, 1998, there were 57
stockholders of record and approximately 2,500 beneficial owners of the Common
Stock. The Company has not declared or paid any cash dividends since the closing
of its initial public offering of Common Stock on June 18, 1993, and has no
present plan to pay any cash dividends in the foreseeable future. The following
table presents the high and low sales prices of the Common Stock for each
quarterly period during the last two fiscal years, as reported by The Nasdaq
Stock Market:
1996 High Low
---- ---- ---
First Quarter $ 20.75 $ 14.50
Second Quarter 20.00 16.25
Third Quarter 22.25 14.00
Fourth Quarter 17.50 13.50
1997
----
First Quarter $ 19.00 $ 12.75
Second Quarter 15.00 11.50
Third Quarter 17.50 13.63
Fourth Quarter 17.25 11.00
During 1997, the Company issued equity securities without registration
under the Securities Act of 1933, in each case in reliance upon the exemption
from registration set forth in Section 4(2) of the Securities Act of 1933
regarding transactions by an issuer not involving a public offering, as follows:
60,000 shares of Common Stock issued in April 1997, upon the exercise of stock
warrants with an exercise price of $3.50 per share issued in connection with the
Company's initial public offering in June 1993.
14
ITEM 6. SELECTED FINANCIAL DATA
- -------------------------------------
The following selected financial data should be read in conjunction
with the Company's financial statements and the accompanying notes listed in
Item 14 of this report.
Year Ended December 31
-----------------------
1997 1996 1995 1994 1993
--------- ---------- ---------- --------- ---------
(In thousands, except per share data)
Statement of Operations Data:
Revenues:
Staffing services............................... $ 155,192 $ 112,778 $ 99,036 $ 71,148 $ 41,755
Professional employer services.................. 125,814 101,148 79,480 68,571 57,950
--------- ---------- ---------- --------- ---------
Total....................................... 281,006 213,926 178,516 139,719 99,705
--------- ---------- ---------- --------- ---------
Cost of revenues:
Direct payroll costs............................ 218,249 163,448 135,980 105,515 75,171
Payroll taxes and benefits...................... 24,996 18,755 14,993 11,925 9,349
Workers' compensation........................... 8,146 5,938 6,073 5,069 4,591
Safety incentives............................... 1,509 1,532 981 1,103 598
--------- ---------- ---------- --------- ---------
Total....................................... 252,900 189,673 158,027 123,612 89,709
--------- ---------- ---------- --------- ---------
Gross margin....................................... 28,106 24,253 20,489 16,107 9,996
Selling, general, and administrative expenses...... 20,887 16,034 13,657 10,302 6,450
Amortization of intangibles........................ 1,292 820 564 430 370
--------- ---------- ---------- --------- ---------
Income from operations............................. 5,927 7,399 6,268 5,375 3,176
--------- ---------- ---------- --------- ---------
Other (expense) income:
Interest expense................................ (162) (82) (75) (106) (86)
Interest income................................. 362 534 400 224 161
Other, net...................................... 1 -- 32 78 133
--------- ---------- ---------- --------- ---------
Total....................................... 201 452 357 196 208
--------- ---------- ---------- --------- ---------
Income before provision for income taxes........... 6,128 7,851 6,625 5,571 3,384
Provision for income taxes(1)...................... 2,303 2,815 2,507 2,105 437
--------- ---------- ---------- --------- ---------
Net income.................................. $ 3,825 $ 5,036 $ 4,118 $ 3,466 $ 2,947
========= ========== ========== ========= =========
Basic net income per share......................... $ 0.57 $ .75 $ .64 $ .55
========= ========== ========== =========
Weighted average basic shares...................... 6,751 6,714 6,474 6,333
========= ========== ========== ========
Diluted net income per share....................... $ 0.56 $ 0.73 $ 0.62 $ 0.53
========= ========== ========== =========
Weighted average diluted shares.................... 6,885 6,935 6,680 6,591
========= ========== ========== =========
Unaudited pro forma data(1):
Net income.................................. $ 2,060
=========
Basic net income per share(2)...................... $ .39
=========
Weighted average basic shares...................... 5,260
=========
Diluted net income per share....................... $ .39
=========
Weighted average diluted shares.................... 5,329
=========
As of December 31
------------------------------------------------------------------
1997 1996 1995 1994 1993
------------ ------------- ------------- ------------ ----------
(In thousands)
Selected Balance Sheet Data:
Working capital.................................... $ 10,613 $ 11,557 $ 8,417 $ 4,889 $ 7,017
Total assets....................................... 48,410 42,646 31,273 24,665 18,425
Long-term debt, net of current portion............. 531 838 875 908 946
Stockholders' equity............................... 30,144 25,562 20,034 14,455 10,480
- ---------------------------
(1) Effective July 1, 1987, the Company elected to be treated as a corporation
subject to taxation under Subchapter S of the Internal Revenue Code,
pursuant to which the earnings of the Company were attributable to the
Company's stockholders rather than to the Company. The Company terminated
its election on April 30, 1993, and recognized a cumulative net deferred
tax asset of $505,000. The amounts shown reflect a pro forma tax provision
as if the Company had been a Subchapter C corporation subject to income
taxes for all periods presented.
(2) All share and per share amounts have been restated to reflect the 2-for-1
stock split effective May 23, 1994.
15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- -------------------------------------------------------------------------
AND RESULTS OF OPERATIONS
-------------------------
OVERVIEW
The Company's revenues consist of staffing services and professional
employer organization ("PEO") services. Staffing services revenues consist of
short-term staffing, contract staffing and on-site management. PEO services
refer exclusively to co-employer contractual agreements with PEO clients. The
Company's revenues represent all amounts billed to customers for direct payroll,
related employment taxes, workers' compensation coverage and a service fee
(equivalent to a mark-up percentage). The Company's Oregon branches accounted
for approximately 53% of its total revenues in 1997, and an additional 34% was
derived from its branches in California and Washington. Consequently, weakness
in economic conditions on the West Coast could have a material adverse effect on
the Company's financial results.
The Company's cost of revenues is comprised of direct payroll costs,
payroll taxes and employee benefits, workers' compensation and safety
incentives. Direct payroll costs represent the gross payroll earned by employees
based on salary or hourly wages. Payroll taxes and employee benefits consist of
the employer's portion of Social Security and Medicare taxes, federal
unemployment taxes, state unemployment taxes and employee reimbursements for
materials, supplies and other expenses, which are paid by the customer. Workers'
compensation expense consists primarily of the costs associated with the
Company's self-insured workers' compensation program, such as claims reserves,
claims administration fees, legal fees, state and federal administrative agency
fees and reinsurance costs for catastrophic injuries. The Company also maintains
a large-deductible workers' compensation insurance policy for employees working
in states where the Company is not currently self-insured. Safety incentives
represent cash incentives paid to certain PEO client companies as a reward for
maintaining safe-work practices in order to minimize workplace injuries. The
incentive is based on a percentage of annual payroll and is paid annually to
customers who meet predetermined loss parameters.
The largest portion of workers' compensation expense is the cost of
workplace injury claims. When an injury occurs and is reported to the Company,
the Company's respective independent third-party claims administrator ("TPA")
analyzes the details of the injury and develops a case reserve, which is the
TPA's estimate of the cost of the claim based on similar injuries and its
professional judgment. The Company then records, or accrues, an expense and a
corresponding liability based upon the TPA's estimates for claims reserves. As
cash payments are made by the Company's TPA against specific case reserves, the
accrued liability is reduced by the corresponding payment amount. The TPA also
reviews existing injury claims on an on-going basis and adjusts the case
reserves as new or additional information for each claim becomes available. The
Company has established an additional IBNR reserve to provide for future
unanticipated increases in expenses ("adverse loss development") of the claims
reserves for open injury claims and for claims incurred but not reported related
to prior and current periods. Management believes that the Company's internal
claims reporting system minimizes the occurrence of unreported incurred claims.
Selling, general and administrative expenses represent both branch and
corporate operating expenses. Branch operating expenses consist primarily of
branch office staff payroll and payroll related costs, advertising, rent, office
supplies, depreciation and branch incentive compensation. Branch incentive
compensation represents a combined 15% of branch pre-tax profits, of which 10%
is paid to the branch manager and 5% is shared among the office staff. Corporate
operating expenses consist primarily of executive and office staff payroll and
payroll related costs, professional and legal fees, travel, depreciation,
occupancy costs, information systems costs and executive and corporate staff
incentive bonuses.
16
Amortization of intangibles consists primarily of the amortization of
the costs of acquisitions in excess of the fair value of net assets acquired
(goodwill). The Company uses a 15-year estimate as the useful life of goodwill,
as compared to the 40-year maximum permitted by generally accepted accounting
principles, and amortizes such cost using the straight-line method. Other
intangible assets, such as customer lists and covenants not to compete, are
amortized using the straight-line method over their estimated useful lives,
which range from two to 15 years.
FORWARD-LOOKING INFORMATION
Statements in this Item or in Item 1 of this report which are not
historical in nature, including discussion of economic conditions in the
Company's market areas, the potential for and effect of future acquisitions, the
effect of changes in the Company's mix of services on gross margin, the adequacy
of the Company's workers' compensation reserves and allowance for doubtful
accounts, the tax-qualified status of the Company's 401(k) savings plan, and the
availability of financing and working capital to meet the Company's funding
requirements, are forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Such forward-looking statements
involve known and unknown risks, uncertainties and other factors that may cause
the actual results, performance or achievements of the Company or industry
results to be materially different from any future results, performance or
achievements expressed or implied by such forward-looking statements. Such
factors with respect to the Company include difficulties associated with
integrating acquired businesses and clients into the Company's operations,
economic trends in the Company's service areas, uncertainties regarding
government regulation of PEOs, including the possible adoption by the IRS of an
unfavorable position as to the tax-qualified status of employee benefit plans
maintained by PEOs, future workers' compensation claims experience, and the
availability of and costs associated with potential sources of financing. The
Company disclaims any obligation to update any such factors or to publicly
announce the result of any revisions to any of the forward-looking statements
contained herein to reflect future events or developments.
RESULTS OF OPERATIONS
The following table sets forth the percentages of total revenues
represented by selected items in the Company's Statements of Operations for the
years ended December 31, 1997, 1996 and 1995, listed in Item 14 of this report.
Certain 1996 and 1995 revenue and cost of revenue amounts have been reclassified
to conform with the 1997 presentation. Such reclassifications had no impact on
gross margin, net income or stockholders' equity. References to the Notes to
Financial Statements appearing below are to the notes to the Company's financial
statements listed in Item 14 of this report.
17
Percentage of Total Revenues
-----------------------------------------
Years Ended December 31,
1997 1996 1995
------- ------ ------
Revenues:
Staffing services................................................. 55.2% 52.7% 55.5%
Professional employer services.................................... 44.8 47.3 44.5
------ ------ ------
Total revenues................................................ 100.0 100.0 100.0
------ ------ ------
Cost of revenues:
Direct payroll costs.............................................. 77.7 76.4 76.2
Payroll taxes and benefits........................................ 8.9 8.8 8.4
Workers' compensation............................................. 2.9 2.8 3.4
Safety incentives................................................. 0.5 0.7 0.5
------ ------ ------
Total cost of revenues........................................ 90.0 88.7 88.5
------ ------ ------
Gross margin........................................................... 10.0 11.3 11.5
Selling, general and administrative expenses........................... 7.4 7.5 7.7
Amortization of intangibles............................................ 0.5 0.3 0.3
------ ------ ------
Income from operations................................................. 2.1 3.5 3.5
Other income (expense)................................................. 0.1 0.2 0.2
------ ------ ------
Pretax income.......................................................... 2.2 3.7 3.7
Provision for income taxes............................................. 0.8 1.3 1.4
------ ------ ------
Net income............................................................. 1.4% 2.4% 2.3%
====== ====== ======
YEARS ENDED DECEMBER 31, 1997 AND 1996
Net income for 1997 amounted to $3,825,000, a decrease of $1,211,000 or
24.0% from 1996 net income of $5,036,000. The decrease in 1997 net income from
1996 was primarily due to a lower gross margin percentage, which resulted
primarily from increased payroll costs as a percentage of revenues, offset in
part by lower income taxes as a percentage of revenues. Diluted net income per
share for 1997 was $0.56 compared to $0.73 for 1996.
Total 1997 revenues were $281,006,000, which represented an increase of
$67,080,000 or 31.4% over 1996 revenues of $213,926,000. The increase in
revenues over 1996 was primarily due to a 1997 internal growth rate of 22.1%,
combined with the effect from a full year of operations for five 1996
acquisitions, as well as from two acquisitions in the first half of 1997.
Staffing services revenues increased 37.6% over 1996 primarily as a result of
the growth in large contract staffing and on-site management services and the
effect of a full year of operations for the 1996 acquisitions. Professional
employer (staff leasing) services revenues increased 24.4% over 1996 due to the
effect from a full year of operations for the 1996 acquisitions. Revenues from
staffing services, as a percent of total revenues, increased in 1997 to 55.2% as
compared to 52.7% of total revenues in 1996.
During 1997, the Company closed its branch offices in Seattle,
Washington and Phoenix, Arizona. Management relocated the Seattle operations to
Tacoma, Washington in connection with a new customer base in the south Puget
Sound area. The Phoenix office, which opened during the third quarter of 1996
and represented the Company's first office in Arizona, transferred its business
to the expanding operations of the Company's Tucson, Arizona office.
Gross margin for 1997 totaled $28,106,000, representing an increase of
$3,853,000 or 15.9% over 1996. The gross margin rate of 10.0% of revenues
represents a 130 basis point decline from 1996 due primarily to increases in
direct payroll costs as a percentage of revenues. Direct payroll costs as a
percentage of revenues increased primarily as a result of increased business
activity in contract staffing and on-site management arrangements. The Company
expects gross margin, as a percentage of revenues, to continue to be influenced
by increases or decreases in contract staffing and on-site management
arrangements, as well as by the adequacy of its estimates for workers'
compensation liabilities, which may be negatively affected by unanticipated
adverse loss development of claims reserves.
18
The increase in direct payroll costs as a percentage of revenues from
76.4% for 1996 to 77.7% for 1997 was primarily attributable to increased
business activity in contract staffing and on-site management arrangements,
which are typically higher volume, lower margin accounts.
Workers' compensation expense increased from 2.8% of revenues for 1996
to 2.9% of revenues for 1997. The increase in the total number of injury claims
for 1997 over 1996 was due in large part to a new policy implemented in 1997
which records "first aid" type claims. Such claims totaled 276 for 1997 and were
not recorded in 1996. The increase in workers' compensation expense for 1997 was
generally attributable to a moderately higher incidence of injuries during 1997,
as compared to 1996, and management's decision to (i) continue to increase the
Company's accrual for future adverse loss development of open claims and (ii)
build an accrual for potential future catastrophic workers' compensation claims.
The following table summarizes certain indicators of experience
regarding the Company's self-insured workers' compensation program by quarter
for 1997 and 1996.
Self-Insured Workers' Compensation Profile
Total Workers' Comp Total Workers'
Expense Comp Expense as a
No. of Injury Claims (in thousands) % of Total Payroll
----------------------- --------------------------- --------------------
1997 1996 1997 1996 1997 1996
---------- --------- ----------- ------------ -------- -------
Q1 321 193 $ 1,855 $ 770 3.9% 2.4%
Q2 419 312 1,973 1,213 3.7% 3.1
Q3 578 401 2,237 2,161 3.6% 4.7
Q4 476 422 2,081 1,794 3.8% 3.9
----- ----- -------- --------
For the Year 1,794 1,328 $ 8,146 $ 5,938 3.7% 3.6
===== ===== ======== ========
Selling, general and administrative expenses consist of compensation
and other expenses incident to the operation of the Company's headquarters and
branch offices and marketing of its services. Selling, general and
administrative ("SG&A") expenses (excluding the amortization of intangibles) for
1997 amounted to approximately $20.9 million, an increase of approximately $4.9
million or 30.3% over 1996. Selling, general and administrative expenses
expressed as a percentage of revenues decreased from 7.5% for 1996 to 7.4% for
1997. The increase in total SG&A dollars for 1997 over 1996 was primarily
attributable to incremental branch office expenses as a result of the four
acquisitions since October 1, 1996, the opening of four new offices in 1996 and
early 1997, the addition of experienced personnel at several offices to expand
the Company's managerial resources and a $0.7 million increase in bad debt
expense. Two customers accounted for over one-half of the increase in bad debt
expense. Management believes that the Company's allowance for doubtful accounts
of $575,000 is adequate at December 31, 1997. There can be no assurance,
however, that future experience with respect to the Company's ability to collect
accounts receivable will not be adverse.
Amortization of intangibles totaled $1,292,000 for 1997 or 0.5 % of
revenues, which compares to $820,000 or 0.3% of revenues for 1996. The increased
amortization expense for 1997 was primarily attributable to amortization arising
from the four acquisitions made since October 1, 1996.
The Company offers various qualified employee benefit plans to its
employees, including its worksite employees. These qualified employee benefit
plans include a savings plan (the "401(k) plan") under Section 401(k) of the
Internal Revenue Code (the "Code"), a cafeteria plan under Code Section 125, a
group health plan, a group life insurance plan, a group disability insurance
plan and an employee assistance plan. Generally, qualified employee benefit
plans are subject to provisions of both the Code and ERISA. In order to qualify
for favorable tax treatment under the Code, qualified plans must be established
and maintained by an employer for the exclusive benefit of its employees.
19
A definitive judicial interpretation of "employer" in the context of a
PEO arrangement has not been established. The tax-exempt status of the Company's
401(k) plan and cafeteria plan is subject to continuing scrutiny and approval by
the Internal Revenue Service (the "IRS") and depends upon the Company's ability
to establish the Company's employer-employee relationship with PEO employees.
The issue of whether the Company's tax-qualified benefit plans can legitimately
include worksite employees under their coverage has not yet been resolved. If
the worksite employees cannot be covered by the plans, then the exclusive
benefit requirement imposed by the Code would not be met by the plans as
currently administered and the plans could be disqualified.
The IRS has established a Market Segment Study Group regarding Employee
Leasing for the stated purpose of examining whether PEOs, such as the Company,
are the employers of worksite employees under the Code provisions applicable to
employee benefit plans and are, therefore, able to offer to worksite employees
benefit plans that qualify for favorable tax treatment. The IRS Study Group is
reportedly also examining whether the owners of client companies are employees
of PEO companies under Code provisions applicable to employee benefit plans. To
the best of the Company's knowledge, the Market Segment Study Group has not
issued a report.
A PEO company headquartered in Texas has stated publicly that the IRS
National Office is being requested by the IRS Houston District to issue a
Technical Advice Memorandum ("TAM") on the PEO worksite employee issue in
connection with an ongoing audit of a plan of the Texas PEO company. The stated
purpose of TAMs is to help IRS personnel in closing cases and to establish and
maintain consistent holdings. The IRS's position is that TAMs are not
precedential; that is, they are limited to the particular taxpayer involved and
that taxpayer's set of facts. The draft request for a TAM by the IRS Houston
District reportedly states its determination that the Texas PEO company's Code
Section 401(k) plan should be disqualified for the reason, among others, that it
covers worksite employees who are not employees of the PEO company.
The timing and nature of the issuance and contents of any TAM regarding
the worksite employee issue or any report of the Market Segment Study Group
regarding Employee Leasing is unknown at this time. There has also been public
discussion of the possibility that the Treasury Department may propose some form
of administrative relief or that Congress may provide legislative resolution or
clarification regarding this issue.
In the event the tax exempt status of the Company's benefit plans were
to be discontinued and the benefit plans were to be disqualified, such actions
could have a material adverse effect on the Company's business, financial
condition, and results of operations. The Company is not presently able to
predict the likelihood of disqualification nor the resulting range of loss, in
light of the lack of public direction from the IRS or Congress.
YEARS ENDED DECEMBER 31, 1996 AND 1995
Net income for 1996 amounted to $5,036,000, an increase of $918,000 or
22.3% over 1995 net income of $4,118,000. The increase in 1996 net income from
1995 was primarily due to continued growth in revenues and gross margin, which
was offset in part by increased selling, general and administrative expenses.
Diluted net income per share for 1996 was $0.73 compared to $0.62 for 1995.
Total 1996 revenues were $213,926,000, which represented an increase of
$35,410,000 or 19.8% over 1995 revenues of $178,516,000. The increase in
revenues over 1995 was primarily due to a 1996 internal growth rate of 10.6%,
coupled with the acquisition of five staffing and PEO businesses during 1996.
Professional employer (staff leasing) services revenues increased 27.3% over
1995 due to the growth in the number of new PEO clients, primarily in Oregon and
California. The growth in 1996 PEO services revenues was a result of internal
sales efforts, together with the acquisitions made during 1996. Revenues from
staffing services, as a percent of total revenues, declined in 1996 to 52.7% as
compared to 55.5% of total revenues in 1995, despite a 13.9% growth rate over
1995.
20
Gross margin for 1996 totaled $24,253,000, representing an increase of
$3,764,000 or 18.4% over 1995. The gross margin rate of 11.3% of revenues for
1996 represented a 20 basis point decrease from 1995 due to slight increases in
direct payroll costs and payroll taxes and benefits, offset in part by a
decrease in workers' compensation expense as a percentage of total revenues.
Workers' compensation expense, both in terms of total dollars and as a
percent of total payroll dollars, improved in 1996 to $5,938,000 or 2.8% of
revenues, compared to $6,073,000 or 3.4 % of revenues in 1995. The decrease in
the 1996 expense was primarily the result of lower severity for 1996 claims,
coupled with a slightly lower incidence of injuries compared to 1995.
Selling, general and administrative expenses (excluding the
amortization of intangibles) amounted to $16,034,000 or 7.5% of revenues for
1996, as compared to $13,657,000 or 7.7% of revenues for 1995. The increase in
total dollars for 1996, as compared to 1995, was primarily due to additional
branch office staff resulting from the five acquisitions consummated during
1996.
Amortization of intangibles totaled $820,000 for 1996, or 0.3 % of
revenues, which compared to $564,000 or 0.3% of revenues for 1995. The increased
amortization expense for 1996 over 1995 was primarily attributable to the five
acquisitions during 1996.
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
The Company has historically experienced significant fluctuations in
its quarterly operating results and expects such fluctuations to continue in the
future. The Company's operating results may fluctuate due to a number of factors
such as seasonality, wage limits on payroll taxes, claims experience for
workers' compensation, demand and competition for the Company's services and the
effect of acquisitions. The Company's revenue levels fluctuate from quarter to
quarter primarily due to the impact of seasonality on its staffing services
business and on certain of its PEO clients in the agriculture and forest
products-related industries. As a result, the Company may have greater revenues
and net income in the third and fourth quarters of its fiscal year. Payroll
taxes and benefits fluctuate with the level of direct payroll costs but may tend
to represent a smaller percentage of revenues later in the Company's fiscal year
as federal and state statutory wage limits for unemployment and social security
taxes are exceeded by some employees. Workers' compensation expense varies with
both the frequency and severity of workplace injury claims reported during a
quarter, as well as adverse loss development of prior period claims during a
subsequent quarter.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash position of $3,380,000 at December 31, 1997
increased $1,479,000 from December 31, 1996. The increase was primarily due to
$7,783,000 provided by operations and $757,000 provided by the exercise of stock
options and warrants, offset by $2,227,000 used for acquisitions, $1,469,000
used for the purchase of property and equipment and $2,825,000 used for the
repurchase of common stock (see discussion below).
Net cash provided by operating activities for 1997 amounted to
$7,783,000 as compared to $2,208,000 for 1996. For 1997, cash flow was primarily
generated by net income together with increases of $2,042,000 in accrued payroll
and benefits and $900,000 in accrued workers' compensation claim liabilities.
The $1,030,000 increase in other long-term liabilities includes the $1,000,000
deferred noncompete agreement arising from the acquisition of HR Only and is
reflected in the supplemental schedule of noncash activities within the
"liabilities assumed" caption.
Net cash used in investing activities totaled $4,084,000 for 1997, as
compared to $3,603,000 for 1996. During 1997, the Company paid $2,227,000 in
cash in connection with the HR Only and TLC Staffing acquisitions and had
capital expenditures of $1,469,000. Approximately $1.0 million of the total
capital expenditures was related to new computer hardware and software for the
Company's new management information system, which will address all concerns
related to the "Year 2000 issue," as
21
discussed in Item 1 under "Management Information System." During 1996, the
Company paid $1,519,000 in cash in connection with five acquisitions, incurred
$1,058,000 in capital expenditures and had net purchases of $1,026,000 of
restricted marketable securities to satisfy various state and federal
self-insured workers' compensation surety deposit requirements. The Company
presently has no material long-term capital commitments.
Net cash used in financing activities for 1997 totaled $2,220,000,
which compares to $78,000 net cash provided by financing activities for 1996.
For 1997, the principal use of cash used in financing activities arose from the
Company's obligation to redeem 159,154 shares of its common stock at a value of
$2,824,984 pursuant to a Plan and Agreement of Reorganization between
StaffAmerica, Inc. and the Company. The cash used for this stock redemption was
offset in part by net proceeds from the exercise of stock options and warrants
totaling $757,000. As of the date of this report, an underwriter continues to
hold warrants to purchase 30,000 shares of common stock at $4.20 per share
issued in connection with the Company's 1993 initial public offering of its
common stock. The unexercised warrants expire on June 10, 1998.
The Company has an unsecured $4.0 million revolving credit facility
with its principal bank and $2.1 million for standby letters of credit in
connection with certain workers' compensation surety arrangements. There was no
outstanding balance on the revolving credit facility at December 31, 1997. See
Note 7 of the Notes to Financial Statements. Management believes that the credit
facility and other potential sources of financing, together with anticipated
funds generated from operations, will be sufficient in the aggregate to fund the
Company's working capital needs for the foreseeable future.
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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- ------------------------------------------------------------------------
No disclosure is required under this item.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ---------------------------------------------------------
The financial statements and notes thereto required by this item begin
on page F-1 of this report, as listed in Item 14.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- -----------------------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
None.
22
PART III
ITEM 10. INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
- -------------------------------------------------------------
The information required by Item 10, Directors and Executive Officers
of the Registrant, is incorporated herein by reference to the Company's
definitive Proxy Statement for the 1998 Annual Meeting of Stockholders ("Proxy
Statement"), under the headings "Election of Directors" and "Stock Ownership by
Principal Stockholders and Management--Section 16(a) Beneficial Ownership
Reporting Compliance" or appears under the heading "Executive Officers of the
Registrant" on page 13 of this report. The information required by Item 11,
Executive Compensation, is incorporated herein by reference to the Proxy
Statement, under the headings "Executive Compensation" and "Election of
Directors--Compensation Committee Interlocks and Insider Participation." The
information required by Item 12, Security Ownership of Certain Beneficial Owners
and Management, is incorporated herein by reference to the Proxy Statement,
under the heading "Stock Ownership by Principal Stockholders and
Management--Beneficial Ownership Table." The information required by Item 13,
Certain Relationships and Related Transactions, is incorporated herein by
reference to the Proxy Statement, under the heading "Election of
Directors--Compensation Committee Interlocks and Insider Participation."
23
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
- ---------------------------------------------------------------------
FORM 8-K
--------
FINANCIAL STATEMENTS AND SCHEDULES
The Financial Statements, together with the report thereon of Price Waterhouse
LLP, are included on the pages indicated below:
Page
----
Report of Independent Public Accountants F-1
Balance Sheets - December 31, 1997 and 1996 F-2
Statements of Operations for the years ended December 31, 1997, 1996 and 1995
F-3
Statements of Redeemable Common Stock and Nonredeemable Stockholders' Equity -
December 31, 1997, 1996 and 1995 F-4
Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995
F-5
Notes to Consolidated Financial Statements F-6
There are no schedules required to be filed herewith.
REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the quarter ended December 31, 1997.
EXHIBITS
Exhibits are listed in the Exhibit Index which follows the Financial Statements
included in this report. Each management contract or compensatory plan or
arrangement required to be filed as an exhibit to this report is listed under
Item 10, "Executive Compensation Plans and Arrangements and Other Management
Contracts" in the Exhibit Index.
24
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
BARRETT BUSINESS SERVICES, INC.
Registrant
Date: March 30, 1998 By: /s/ William W. Sherertz
William W. Sherertz
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities indicated on the 30th day of March, 1998.
Principal Executive Officer and Director:
/s/ William W. Sherertz President and Chief Executive Officer
William W. Sherertz and Director
Principal Financial Officer:
/s/ Michael D. Mulholland Vice President-Finance and Secretary
Michael D. Mulholland
Principal Accounting Officer:
/s/ James D. Miller Controller
James D. Miller
Other Directors:
* ROBERT R. AMES Director
* HERBERT L. HOCHBERG Director
* ANTHONY MEEKER Director
* STANLEY G. RENECKER Director
* By /s/ Michael D. Mulholland
Michael D. Mulholland
Attorney-in-Fact
25
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of
Barrett Business Services, Inc.
In our opinion, the accompanying balance sheets and the related statements of
operations, of redeemable common stock and nonredeemable stockholders' equity
and of cash flows present fairly, in all material respects, the financial
position of Barrett Business Services, Inc. at December 31, 1997 and 1996, and
the results of its operations and its cash flows for each of the three years in
the period ended December 31, 1997, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
/s/ Price Waterhouse LLP
Portland, Oregon
February 11, 1998
F-1
BARRETT BUSINESS SERVICES, INC.
BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
- -------------------------------------------------------------------------------------------------------------------
(in thousands, except par value) 1997 1996
ASSETS
Current assets:
Cash and cash equivalents $ 3,380 $ 1,901
Trade accounts receivable, net 19,366 19,057
Note receivable (Note 2) - 324
Prepaid expenses and other 1,080 914
Deferred tax assets (Note 12) 1,926 1,279
---------------- ----------------
Total current assets 25,752 23,475
Intangibles, net (Note 4) 12,094 10,226
Property and equipment, net (Notes 5 and 8) 4,263 3,111
Restricted marketable securities and workers' compensation
deposits (Note 6) 6,095 5,707
Other assets 206 127
---------------- ----------------
$ 48,410 $ 42,646
================ ================
LIABILITIES, REDEEMABLE COMMON STOCK AND
NONREDEEMABLE STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt (Note 8) $ 323 $ 36
Accounts payable 801 667
Accrued payroll, payroll taxes and related benefits 9,403 7,354
Accrued workers' compensation claim liabilities (Note 6) 3,140 2,240
Customer safety incentives payable 1,073 1,015
Other accrued liabilities 399 606
---------------- ----------------
Total current liabilities 15,139 11,918
Long-term debt, net of current portion (Note 8) 531 838
Customer deposits 934 890
Long-term workers' compensation liabilities (Note 6) 632 613
Other long-term liabilities 1,030 -
---------------- ----------------
18,266 14,259
---------------- ----------------
Commitments and contingencies (Notes 9, 10 and 15)
Redeemable common stock, $.01 par value; 159 shares issued and
outstanding at December 31, 1996 (Note 13) - 2,825
---------------- ----------------
Nonredeemable stockholders' equity:
Common stock, $.01 par value; 20,500 shares authorized,
6,743 and 6,625 shares issued and outstanding (Notes 13 and 14) 67 66
Additional paid-in capital 11,685 10,929
Retained earnings 18,392 14,567
---------------- ----------------
30,144 25,562
---------------- ----------------
$ 48,410 $ 42,646
================ ================
The accompanying notes are an integral part of these financial statements.
F-2
BARRETT BUSINESS SERVICES, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- -------------------------------------------------------------------------------------------------------------------
(in thousands, except per share amounts) 1997 1996 1995
Revenues:
Staffing services $ 155,192 $ 112,778 $ 99,036
Professional employer services 125,814 101,148 79,480
---------------- ---------------- ----------------
281,006 213,926 178,516
---------------- ---------------- ----------------
Cost of revenues:
Direct payroll costs 218,249 163,448 135,980
Payroll taxes and benefits 24,996 18,755 14,993
Workers' compensation (Note 6) 8,146 5,938 6,073
Safety incentives 1,509 1,532 981
---------------- ---------------- ----------------
252,900 189,673 158,027
---------------- ---------------- ----------------
Gross margin 28,106 24,253 20,489
Selling, general and administrative expenses 20,887 16,034 13,657
Amortization of intangibles (Note 4) 1,292 820 564
---------------- ---------------- ----------------
Income from operations 5,927 7,399 6,268
---------------- ---------------- ----------------
Other (expense) income:
Interest expense (162) (82) (75)
Interest income 362 534 400
Other, net 1 - 32
---------------- ---------------- ----------------
201 452 357
---------------- ---------------- ----------------
Income before provision for income taxes 6,128 7,851 6,625
Provision for income taxes (Note 12) 2,303 2,815 2,507
---------------- ---------------- ----------------
Net income $ 3,825 5,036 4,118
================ ================ ================
Basic earnings per share $ .57 .75 .64
================ ================ ================
Weighted average number of basic shares outstanding 6,751 6,714 6,474
================ ================ ================
Diluted earnings per share $ .56 .73 .62
================ ================ ================
Weighted average number of diluted shares outstanding 6,885 6,935 6,680
================ ================ ================
The accompanying notes are an integral part of these financial statements.
F-3
BARRETT BUSINESS SERVICES, INC.
STATEMENTS OF REDEEMABLE COMMON STOCK AND
NONREDEEMABLE STOCKHOLDERS' EQUITY
DECEMBER 31, 1997, 1996 AND 1995
- -----------------------------------------------------------------------------------------------------------------------------------
NONREDEEMABLE STOCKHOLDERS' EQUITY
------------------------------------------------------------------
REDEEMABLE ADDITIONAL
COMMON STOCK COMMON STOCK PAID-IN RETAINED
(in thousands) SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS TOTAL
------------ ------------ ------------ ------------ ------------ ------------ ----------
Balance, December 31, 1994 - $ - 6,367 $ 64 $ 8,978 $ 5,413 $ 14,455
Common stock issued for acquisitions 67 1 910 911
Common stock issued on exercise
of options and warrants 124 1 549 550
Net income 4,118 4,118
Contribution of common stock
(Note 11) (7) -
------------ ------------ ------------ ------------ ------------ ------------ -----------
Balance, December 31, 1995 - - 6,551 66 10,437 9,531 20,034
Common stock issued for acquisitions 159 2,825 20 380 380
Common stock issued on exercise
of options, net 54 112 112
Net income 5,036 5,036
------------ ------------ ------------ ------------ ------------ ------------ -----------
Balance, December 31, 1996 159 2,825 6,625 66 10,929 14,567 25,562
Common stock issued on exercise
of options and warrants, net 118 1 756 757
Repurchase of redeemable common
stock (159) (2,825) -
Net income 3,825 3,825
------------ ------------ ------------ ------------ ------------ ------------ -----------
Balance, December 31, 1997 - $ - 6,743 $ 67 $ 11,685 $ 18,392 $ 30,144
============ ============ ============ ============ ============ ============ ===========
The accompanying notes are an integral part of these financial statements.
F-4
BARRETT BUSINESS SERVICES, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- ------------------------------------------------------------------------------------------------------------------------
(in thousands) 1997 1996 1995
Cash flows from operating activities:
Net income $ 3,825 $ 5,036 $ 4,118
Reconciliations of net income to net cash provided
by operating activities:
Depreciation and amortization 1,683 1,126 812
Gain on sales of marketable securities - - (42)
Deferred taxes (647) (342) (23)
Changes in certain assets and liabilities, net of
amounts purchased in acquisitions:
Trade accounts receivable, net 237 (5,834) (3,520)
Prepaid expenses and other (123) (436) 121
Accounts payable 125 289 160
Accrued payroll, payroll taxes and related benefits 2,042 1,557 740
Other accrued liabilities (331) 606 -
Accrued workers' compensation claim liabilities 900 148 183
Customer safety incentives payable 58 239 (29)
Customer deposits, other liabilities and other assets, net (16) (181) (24)
Other long-term liabilities 30 - -
-------------- ---------------- -------------
Net cash provided by operating activities 7,783 2,208 2,496
-------------- ---------------- -------------
Cash flows from investing activities:
Cash paid for acquisitions, including other direct costs (2,227) (1,519) (1,199)
Purchases of fixed assets, net of amounts purchased
in acquisitions (1,469) (1,058) (369)
Proceeds from maturities of marketable securities 5,343 7,025 1,862
Purchases of marketable securities (5,731) (8,051) (2,305)
-------------- ---------------- -------------
Net cash used in investing activities (4,084) (3,603) (2,011)
-------------- ---------------- -------------
Cash flows from financing activities:
Payment of credit line assumed in acquisition (401) - -
Note receivable 324 - -
Payments on long-term debt (75) (34) (31)
Repurchase of common stock (2,825) - -
Proceeds from the exercise of stock options and warrants 757 112 550
-------------- ---------------- -------------
Net cash (used in) provided by financing activities (2,220) 78 519
-------------- ---------------- -------------
Net increase (decrease) in cash and cash equivalents 1,479 (1,317) 1,004
Cash and cash equivalents, beginning of year 1,901 3,218 2,214
-------------- ---------------- -------------
Cash and cash equivalents, end of year $ 3,380 $ 1,901 $ 3,218
-------------- ---------------- -------------
Supplemental schedule of noncash activities:
Acquisition of other businesses:
Cost of acquisitions in excess of fair market value of
net assets acquired $ 3,160 $ 4,337 $ 2,080
Tangible assets acquired 674 494 30
Liabilities assumed 1,607 107 -
Common stock issued in connection with acquisitions - 3,205 911
The accompanying notes are an integral part of these financial statements.
F-5
BARRETT BUSINESS SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
- --------------------------------------------------------------------------------
1. SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Barrett Business Services, Inc. ("Barrett" or "the Company"), a Maryland
corporation, is engaged in providing staffing and professional employer
services to a diversified group of customers through a network of branch
offices throughout Oregon, Washington, Idaho, California, Arizona,
Maryland, Delaware and Michigan. Approximately 53%, 66% and 68%,
respectively, of the Company's revenues during 1997, 1996 and 1995 were
attributable to its Oregon operations.
REVENUE RECOGNITION
The Company recognizes revenue as the services are rendered by its work
force. Staffing services are engaged by customers to meet short-term and
long-term personnel needs. Professional employer services are normally used
by organizations to satisfy ongoing human resource management needs and
typically involve contracts with a minimum term of one year, renewable
annually, which cover all employees at a particular work site.
CASH AND CASH EQUIVALENTS
The Company considers nonrestricted short-term investments which are highly
liquid, readily convertible into cash, and have original maturities of less
than three months to be cash equivalents for purposes of the statements of
cash flows.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company had an allowance for doubtful accounts of $575,000 and $25,000
at December 31, 1997 and 1996, respectively.
MARKETABLE SECURITIES
At December 31, 1997 and 1996, marketable securities consisted primarily of
governmental debt instruments with maturities generally from 90 days to 30
years (see Note 6). Marketable equity and debt securities have been
categorized as held-to-maturity and, as a result, are stated at amortized
cost. Realized gains and losses on sales of marketable securities are
included in other (expense) income on the Company's statements of
operations.
INTANGIBLES
Intangible assets consist primarily of identifiable intangible assets
acquired and the cost of acquisition in excess of the fair value of net
assets acquired ("goodwill"). Intangible assets acquired are recorded at
their estimated fair value at the acquisition date.
The Company uses a 15-year estimate as the useful life of goodwill. This
life is based on an analysis of industry practice and the factors
influencing the acquisition decision. Other intangible assets are amortized
on the straight-line method over their estimated useful lives, ranging from
2 to 15 years. (See Note 4.)
F-6
BARRETT BUSINESS SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
- --------------------------------------------------------------------------------
1. SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INTANGIBLES (CONTINUED)
The Company reviews for asset impairment at the end of each quarter or more
frequently when events or changes in circumstances indicate that the
carrying amount of intangible assets may not be recoverable. To perform
that review, the Company estimates the sum of expected future undiscounted
net cash flows from the intangible assets. If the estimated net cash flows
are less than the carrying amount of the intangible asset, the Company
recognizes an impairment loss in an amount necessary to write down the
intangible asset to a fair value as determined from expected future
discounted cash flows. No write-down for impairment loss was recorded for
the years ended December 31, 1997, 1996 and 1995.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Expenditures for maintenance and
repairs are charged to operating expense as incurred, and expenditures for
additions and betterments are capitalized. The cost of assets sold or
otherwise disposed of and the related accumulated depreciation are
eliminated from the accounts, and any resulting gain or loss is reflected
in the statements of operations.
Depreciation of property and equipment is calculated using either
straight-line or accelerated methods over estimated useful lives which
range from 3 years to 31.5 years.
CUSTOMER SAFETY INCENTIVES PAYABLE
Safety incentives are paid annually to professional employer services
clients if the cost of workers' compensation claims is less than agreed
upon amounts; amounts paid are based on a percentage of payroll. The
Company accrues the amounts payable under this program on a monthly basis.
CUSTOMER DEPOSITS
The Company requires deposits from certain professional employer services
customers to cover a portion of its accounts receivable due from such
customers in event of default of payment.
STATEMENTS OF CASH FLOWS
The Company has recorded the following non-cash transactions:
During 1995, the President and Chief Executive Officer of the Company
contributed 7,400 shares of common stock of the Company with a then-fair
market value of $111,000 to the Company in settlement of a personal
guarantee of a receivable from an insolvent customer (see Note 11).
Interest paid during 1997, 1996, and 1995 did not materially differ from
interest expense.
Income taxes paid by the Company in 1997, 1996 and 1995 totaled $3,117,200,
$2,939,900 and $2,510,700, respectively.
F-7
BARRETT BUSINESS SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
- --------------------------------------------------------------------------------
1. SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NET INCOME PER SHARE
The Company adopted Statement of Financial Accounting Standards No. 128,
"Earnings per Share", for the year ended December 31, 1997. SFAS No. 128
requires disclosure of basic and diluted earnings per share. All prior
years have been restated to reflect the adoption of SFAS No. 128. Basic
earnings per share are computed based on the weighted average number of
common shares outstanding for each year. Diluted earnings per share reflect
the potential effects of the exercise of outstanding stock options and
warrants.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with the 1997
presentation. Such reclassifications have no impact on net income or
stockholders' equity.
ACCOUNTING ESTIMATES
The preparation of the Company's financial statements in conformity with
generally accepted accounting principles (GAAP) requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reported periods. Actual results may differ from those
estimates.
2. ACQUISITIONS
MID-DEL EMPLOYMENT SERVICE, INC.; SUSSEX EMPLOYMENT SERVICES, INC.; PPI
(PRESTIGE PERSONNEL) - SALISBURY, INC.; AND DEL-MAR-VA NURSES-ON-CALL INC.
On July 17, 1995, the Company purchased certain assets of Mid-Del
Employment Service, Inc.; Sussex Employment Services, Inc.; PPI (Prestige
Personnel) - Salisbury, Inc.; and Del-Mar-Va Nurses-On-Call Inc.
(collectively, "the Maryland and Delaware companies"). These companies were
engaged in the temporary staffing business in eastern Maryland and
Delaware. The all-cash purchase price of $969,000 (inclusive of
acquisition-related costs of $19,000) was accounted for under the purchase
method of accounting, which resulted in $944,000 of intangible assets and
$25,000 of fixed assets.
STREGE & ASSOCIATES, INC.
Effective December 11, 1995, the Company purchased certain assets of Strege
& Associates, Inc., a company specializing in providing highly skilled
tradesmen to various industries for maintenance and supplemental labor
purposes in Portland, Oregon. Of the $1,141,000 purchase price (inclusive
of acquisition-related costs of $4,000), the Company paid $230,000 in cash
and issued 67,443 shares of its common stock with a then-fair market value
of $911,000. The acquisition was accounted for under the purchase method of
accounting, which resulted in $1,136,000 of intangible assets and $5,000 of
fixed assets.
F-8
BARRETT BUSINESS SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
- --------------------------------------------------------------------------------
2. ACQUISITIONS (CONTINUED)
STAFFAMERICA, INC.
On April 1, 1996, the Company acquired certain assets and the business of
StaffAmerica, Inc., pursuant to a Plan and Agreement of Reorganization.
StaffAmerica provides both temporary staffing and staff leasing services
through its two offices located in Goleta and Oxnard, California. In 1995,
StaffAmerica had revenues of approximately $6.7 million. In exchange for
the StaffAmerica assets and business operations, the Company issued 157,464
shares of its common stock valued at $2,795,000, assumed a StaffAmerica
liability of $50,000 for customer deposits, issued to each of the two
owners of StaffAmerica 845 shares of Company common stock for their
covenants not to compete, and incurred $102,000 in acquisition-related
costs. The acquisition was accounted for under the purchase method of
accounting, which resulted in $2,597,000 of intangible assets, a promissory
note receivable of $324,000 from the seller, and $56,000 in fixed assets.
The $324,000 promissory note was repaid to the Company during 1997.
On April 11, 1997, pursuant to the Plan and Agreement of Reorganization
between StaffAmerica, Inc. and the Company, the Company repurchased from
StaffAmerica and its two shareholders all 159,154 shares of common stock
previously issued by the Company as consideration for the acquisition, for
a total of $2,824,984 or $17.75 per share. Upon completion of the share
repurchase, the Company canceled the shares of common stock.
JOBWORKS AGENCY, INC.
On April 8, 1996, the Company acquired certain assets and the business of
JobWorks Agency, Inc. (JobWorks) by way of a Plan and Agreement of
Reorganization. JobWorks provided both temporary staffing and staff leasing
services through its two offices located in Hood River and The Dalles,
Oregon. JobWorks had revenues of approximately $1.2 million (unaudited) in
1995. The Company issued 20,446 shares of its common stock with a then-fair
value of $380,000 for the assets and business of JobWorks, assumed a
customer deposit liability of $2,000, and incurred $14,000 in
acquisition-related costs. The Company paid $20,000 in cash for the selling
shareholder's agreement of noncompetition. The acquisition was accounted
for under the purchase method of accounting, which resulted in $324,000 of
intangible assets, $72,000 in accounts receivable, and $20,000 in fixed
assets.
CASCADE TECHNICAL STAFFING
Effective August 26, 1996, the Company acquired certain assets of Cascade
Technical Staffing (Cascade). Cascade provided technical and light
industrial staffing services primarily in the electronics industry through
its Beaverton, Oregon office. Cascade had revenues of approximately $3.5
million (unaudited) in 1995. The Company paid $550,000 in cash for the
assets and incurred $6,000 in acquisition-related costs. The acquisition
was accounted for under the purchase method of accounting, which resulted
in $536,000 of intangible assets and $20,000 of fixed assets.
CALIFORNIA EMPLOYER SERVICES, INC.
Effective November 4, 1996, the Company purchased the staff leasing
division of California Employer Services, Inc. (CES), an Orange County,
California staffing services company. The CES division had revenues of
approximately $10.5 million (unaudited) for the fiscal year ended September
30, 1996. The Company paid $624,000 in cash for the division, assumed a
customer deposit liability of $36,000, and incurred $25,000 in
acquisition-related costs. The transaction was accounted for under the
purchase method of accounting, which resulted in $685,000 of intangible
assets.
F-9
BARRETT BUSINESS SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
- --------------------------------------------------------------------------------
2. ACQUISITIONS (CONTINUED)
PROFESSIONAL PERSONNEL, INC.
Effective November 25, 1996, the Company purchased certain assets of
Professional Personnel, Inc. (PPI), a provider of staff leasing services
located in Downey, California. PPI had revenues of approximately $2.4
million (unaudited) for the year ended September 30, 1996. The Company paid
$176,000 in cash for certain assets, assumed a customer deposit liability
of $19,000, and incurred $2,000 in acquisition-related costs. The
transaction was accounted for under the purchase method of accounting,
which resulted in $195,000 of intangible assets and $2,000 of fixed assets.
HR ONLY
Effective February 1, 1997, the Company acquired D&L Personnel Department
Specialists, Inc., dba HR Only, a staffing services company which
specializes in human resource professionals, with offices in Los Angeles
and Garden Grove, California. The Company paid $1,800,000 in cash for all
of the outstanding common stock of HR Only and $1,200,000 in cash for
noncompete agreements with certain individuals, of which $1,000,000 was
deferred with simple interest at 5% per annum for five years and then be
paid ratably over the succeeding five-year period. The deferred portion of
the noncompete agreement is presented on the balance sheet in other
long-term liabilities. HR Only's revenues for the fiscal year ended January
31, 1997 were approximately $4.3 million. The transaction was accounted for
under the purchase method of accounting, which resulted in $3,027,000 of
intangible assets, including $92,000 for acquisition-related costs, and
$65,000 of net tangible assets.
TLC STAFFING
Effective April 13, 1997, the Company purchased certain assets of JRL
Services, Inc., dba TLC Staffing, a provider of clerical staffing services
located in Tucson, Arizona. TLC Staffing had revenues of approximately
$800,000 (unaudited) for the year ended December 31, 1996. The Company paid
$150,000 in cash for the assets, assumed an $18,000 office lease liability
and incurred $4,000 in acquisition related costs. The transaction was
accounted for under the purchase method of accounting, which resulted in
$152,000 of intangible assets and $2,000 of fixed assets.
PRO FORMA RESULTS OF OPERATIONS (UNAUDITED)
The operating results of each of the above acquisitions are included in the
Company's results of operations from the respective date of acquisition.
The following unaudited summary presents the combined results of operations
as if the StaffAmerica, Cascade Technical Staffing, California Employer
Services, and HR Only acquisitions had occurred at the beginning of 1996,
after giving effect to certain adjustments for the amortization of
intangible assets, taxation and cost of capital. The other acquisitions
made since January 1, 1996 are not included in the pro forma information as
their effect is not material.
YEAR ENDED
DECEMBER 31,
1997 1996
------------- -------------
(in thousands, except per share amounts)
Revenue $ 281,361 $ 232,280
============= =============
Net income $ 3,829 $ 5,284
============= =============
Basic earnings per share $ .57 $ .78
============= =============
Diluted earnings per share $ .56 $ .76
============= =============
F-10
BARRETT BUSINESS SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
- --------------------------------------------------------------------------------
2. ACQUISITIONS (CONTINUED)
The unaudited pro forma results above have been prepared for comparative
purposes only and do not purport to be indicative of what would have
occurred had the acquisitions been made as of that date, or of results
which may occur in the future.
3. FAIR VALUE OF FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK
All of the Company's significant financial instruments are recognized in
its balance sheet. Carrying values approximate fair market value of most
financial assets and liabilities. The fair market value of certain
financial instruments was estimated as follows:
- Marketable securities - Marketable securities primarily consist of U.S.
Treasury bills and municipal bonds. The interest rates on the Company's
marketable security investments approximate current market rates for
these types of investments; therefore, the recorded value of the
marketable securities approximates fair market value.
- Long-term debt - The interest rates on the Company's long-term debt
approximate current market rates, based upon similar obligations with
like maturities; therefore, the recorded value of long-term debt
approximates the fair market value.
Financial instruments that potentially subject the Company to concentration
of credit risk consist primarily of temporary cash investments, marketable
securities, and trade accounts receivable. The Company restricts investment
of temporary cash investments and marketable securities to financial
institutions with high credit ratings and to investments in governmental
debt instruments. Credit risk on trade receivables is minimized as a result
of the large and diverse nature of the Company's customer base. At December
31, 1997, the Company had significant concentrations of credit risk as
follows:
- Marketable securities - $2,155,000 of marketable securities at December
31, 1997 consisted of Oregon State Housing & Community Service Bonds.
- Trade receivables - $2,500,000 of trade receivables were with two
customers at December 31, 1997 (13% of trade receivables outstanding at
December 31, 1997).
F-11
BARRETT BUSINESS SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
- --------------------------------------------------------------------------------
4. INTANGIBLES
Intangibles consist of the following (in thousands):
1997 1996
-------------- --------------
Covenants not to compete $ 3,269 $ 2,049
Goodwill 12,925 10,985
Customer lists 358 358
-------------- --------------
16,552 13,392
Less accumulated amortization 4,458 3,166
-------------- --------------
$ 12,094 $ 10,226
-------------- --------------
5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
1997 1996
-------------- --------------
Office furniture and fixtures $ 2,884 $ 2,360
Computer hardware and software 1,683 677
Buildings 1,201 1,183
Vehicles 55 60
-------------- --------------
5,823 4,280
Less accumulated depreciation 1,868 1,477
-------------- --------------
3,955 2,803
Land 308 308
-------------- --------------
$ 4,263 $ 3,111
-------------- --------------
6. ACCRUED WORKERS' COMPENSATION CLAIM LIABILITIES
In August 1987, the Company became a self-insured employer with respect to
workers' compensation coverage for all its employees working or living in
Oregon. The Company also became a self-insured employer for workers'
compensation coverage in the states of Maryland effective November 1993,
Washington effective July 1994, Delaware effective January 1995, and
California effective March 1995. Effective May 1995, the Company also
became self-insured for workers' compensation purposes by the United States
Department of Labor for longshore and harbor ("USL&H") workers' coverage.
F-12
BARRETT BUSINESS SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
- --------------------------------------------------------------------------------
6. ACCRUED WORKERS' COMPENSATION CLAIM LIABILITIES (CONTINUED)
The Company has provided $3,772,000 and $2,853,000 at December 31, 1997 and
1996, respectively, as an estimated liability for unsettled workers'
compensation claims. This estimated liability represents management's best
estimate which includes, in part, an evaluation of information provided by
the Company's third-party administrators and its independent actuary.
Included in the claims liabilities are case reserve estimates for reported
losses, plus additional amounts based on projections for incurred but not
reported claims, anticipated increases in case reserve estimates and
additional claims administration expenses. These estimates are continually
reviewed and adjustments to liabilities are reflected in current operations
as they become known. The Company believes that the difference between
amounts recorded for its estimated liability and the possible range of
costs of settling related claims is not material to results of operations;
nevertheless, it is reasonably possible that adjustments required in future
periods may be material to results of operations.
The United States Department of Labor and the States of Oregon, Maryland,
Washington, and California require the Company to maintain specified
investment balances or other financial instruments, totaling $7,698,000 at
December 31, 1997 and $7,151,000 at December 31, 1996, to cover potential
claims losses. In partial satisfaction of these requirements, at December
31, 1997, the Company has provided letters of credit in the amount of
$2,096,000 and surety bonds totaling $457,000. The investments are included
in restricted marketable securities and workers' compensation deposits in
the accompanying balance sheets.
Liabilities incurred for work-related employee fatalities are recorded
either at an agreed lump-sum settlement amount or the net present value of
future fixed and determinable payments over the actuarially determined
remaining life of the beneficiary, discounted at a rate that approximates a
long-term, high-quality corporate bond rate. The Company has obtained
excess workers' compensation insurance to limit its self-insurance exposure
to $350,000 per occurrence in all states, except for $300,000 in Maryland
and $500,000 per occurrence for USL&H exposure. The excess insurance
provides unlimited coverage above the aforementioned exposures. At December
31, 1997, the Company has recorded $632,000 for work-related catastrophic
injuries and fatalities in long-term workers' compensation liabilities in
the accompanying balance sheets.
The aggregate undiscounted pay-out amount for the catastrophic injuries and
fatalities is $1,570,000. The actuarially determined pay-out periods to the
beneficiaries range from nine years to 44 years. As a result, the five-year
cash requirements related to these claims are immaterial.
The workers' compensation expense in the accompanying statements of
operations consists of $8,099,000, $5,799,000 and $5,802,000 for
self-insurance expense for 1997, 1996 and 1995, respectively. Premiums in
the insured states were $47,000, $139,000 and $271,000 for 1997, 1996 and
1995, respectively.
F-13
BARRETT BUSINESS SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
- --------------------------------------------------------------------------------
7. CREDIT FACILITY
Effective May 30, 1997, the Company renegotiated its loan agreement ("the
Agreement") with a major bank, which provides for (a) an unsecured
revolving credit facility for working capital purposes, (b) a term real
estate loan (Note 8) and (c) standby letters of credit totaling $2,096,000,
in connection with certain workers' compensation surety arrangements. The
Agreement expires on May 31, 1998 and currently permits total borrowings of
up to $4,000,000 under the revolving credit facility. The interest rates
available Federal on outstanding balances under the revolving credit
facility include Prime Rate, Funds Rate plus 1.75%, or Adjusted Eurodollar
Rate plus 1.25%. Under the loan agreement, the Company is required to
maintain a zero outstanding balance against the revolving credit facility
for a minimum of 30 consecutive days during each year. The pledging of any
of the Company's assets, other than existing mortgages on its real
property, is limited to a pro rata basis with any other lender.
During the year ended December 31, 1997, the maximum balance outstanding
under the revolving credit facility was $3,556,000, the average balance
outstanding was $1,412,000, and the weighted average interest rate during
the period was 7.3%. The weighted average interest rate during 1997 was
calculated using daily weighted averages. There were no borrowings on the
revolving credit facility during 1996.
8. LONG-TERM DEBT
Long-term debt consists of the following:
1997 1996
----------- -----------
(IN THOUSANDS)
Mortgage note payable in monthly installments of $2,784,
including interest at 11% per annum through 1998, with a
principal payment of $269,485 due in 1998, secured by land
and building $ 273 $ 276
Mortgage note payable in monthly installments of $6,730,
including interest at 8.15% per annum through 2003, with a
principal payment of $366,900 due in 2003, secured by land
and building (Note 7) 566 598
Capitalized lease equipment with monthly installments of
$2,965, including interest at 11.5% per annum through 1998,
secured by equipment 15 -
---------- ----------
854 874
Less portion due within one year 323 36
---------- ----------
$ 531 $ 838
========== ==========
F-14
BARRETT BUSINESS SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
- --------------------------------------------------------------------------------
8. LONG-TERM DEBT (CONTINUED)
Maturities on long-term debt are summarized as follows at December 31, 1997
(in thousands):
YEAR ENDING
DECEMBER 31,
- -------------------------
1998 $ 323
1999 39
2000 42
2001 45
2002 49
Thereafter 356
----------
$ 854
==========
9. SAVINGS PLAN
On April 1, 1990, the Company established a Section 401(k) employee savings
plan for the benefit of its eligible employees. All employees 21 years of
age or older become eligible to participate in the savings plan upon
completion of 1,000 hours of service in any consecutive 12-month period
following the initial date of employment. Employees covered under a
co-employer (PEO) contract receive credit for prior employment with the PEO
client for purposes of meeting savings plan service eligibility. The
determination of Company contributions to the plan, if any, is subject to
the sole discretion of the Company. Participants' interests in Company
contributions to the plan vest over a seven-year period. Company
contributions to the plan were $111,000, $134,000 and $142,000 for the
years ended December 31, 1997, 1996 and 1995, respectively.
Recent attention has been placed by the Internal Revenue Service ("the
IRS") and the staff leasing industry on IRC Section 401(k) plans sponsored
by staff leasing companies. As such, the tax-exempt status of the Company's
plan is subject to continuing scrutiny and approval by the IRS and to the
Company's ability to support to the IRS the Company's employer-employee
relationship with leased employees. In the event the tax-exempt status were
to be discontinued and the plan were to be disqualified, the operations of
the Company could be adversely affected. The Company has not recorded any
provision for this potential contingency, as the Company and its legal
counsel cannot presently estimate either the likelihood of disqualification
or the resulting range of loss, if any.
F-15
BARRETT BUSINESS SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
- --------------------------------------------------------------------------------
10. COMMITMENTS
LEASE COMMITMENTS
The Company leases its branch offices under operating lease agreements
which require minimum annual payments as follows (in thousands):
YEAR ENDING
DECEMBER 31,
-------------------
1998 $ 834
1999 630
2000 399
2001 226
2002 81
---------
$ 2,170
=========
Rent expense for the years ended December 31, 1997, 1996 and 1995 was
approximately $1,139,000, $799,000 and $607,000, respectively.
11. RELATED PARTY TRANSACTIONS
During 1997, 1996 and 1995, the Company recorded revenues of $4,047,000,
$4,086,000 and $3,753,000, respectively, and cost of revenues of
$3,719,000, $3,768,000 and $3,408,000, respectively, for providing services
to a company of which a then director of the Company was president and
majority stockholder. At December 31, 1997 and 1996, Barrett had trade
receivables from this company of $188,000 and $126,000, respectively.
At December 31, 1993, the President and Chief Executive Officer of the
Company, pursuant to the approval of a majority of the disinterested
outside directors, agreed to personally guarantee, at no cost to the
Company, the repayment of a $111,000 receivable from an unrelated,
insolvent customer. During 1995, pursuant to this agreement, the Company
exercised its right to the personal guarantee provided by the Company's
Chief Executive Officer. Accordingly, the Chief Executive Officer
surrendered to the Company 7,400 shares of common stock of Barrett Business
Services, Inc., with a then-fair market value of $111,000 or $15.00 per
share, in satisfaction of the guarantee. The Company subsequently retired
the shares and the par value of the shares was reclassified to additional
paid-in capital. The uncollectible account was included in the Company's
provisions for doubtful accounts during 1993 and 1994.
F-16
BARRETT BUSINESS SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
- --------------------------------------------------------------------------------
12. INCOME TAXES
The provisions for income taxes are as follows (in thousands):
YEAR ENDED DECEMBER 31,
1997 1996 1995
---------------- ---------------- ----------------
Current:
Federal $ 2,471 $ 2,681 $ 2,067
State 479 476 463
---------------- ---------------- ----------------
2,950 3,157 2,530
---------------- ---------------- ----------------
Deferred:
Federal (535) (283) (19)
State (112) (59) (4)
---------------- ---------------- ----------------
(647) (342) (23)
---------------- ---------------- ----------------
Total provision $ 2,303 $ 2,815 $ 2,507
================ ================ ================
Deferred tax assets (liabilities) are comprised of the following components
(in thousands):
1997 1996
---------------- ----------------
Accrued workers' compensation claim liabilities $ 1,469 $ 1,113
Allowance for doubtful accounts 236 10
Tax depreciation in excess of book depreciation (165) (154)
Safety incentives 276 281
Amortization of intangibles 110 29
---------------- ----------------
$ 1,926 $ 1,279
================ ================
The effective tax rate differed from the U.S. statutory federal tax rate
due to the following:
YEAR ENDED DECEMBER 31,
1997 1996 1995
-------------- -------------- --------------
Statutory federal tax rate 34.0 % 34.0 % 34.0 %
State taxes, net of federal benefit 3.5 3.5 4.6
Nondeductible amortization of intangibles 1.3 .1 .1
Federal tax-exempt interest income (1.0) (1.4) (1.3)
Other, net (.2) (.3) .6
-------------- -------------- --------------
37.6 % 35.9 % 38.0 %
============== ============== ==============
During 1997, the Company recognized a State of Oregon tax credit of
approximately $121,000 related to the 1996 tax year. During 1996, the
Company recognized a State of Oregon surplus tax refund of approximately
$145,000 related to tax years 1993 through 1995.
F-17
BARRETT BUSINESS SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
- --------------------------------------------------------------------------------
13. REDEEMABLE COMMON STOCK AND NONREDEEMABLE STOCKHOLDERS' EQUITY
REDEEMABLE COMMON STOCK
As part of the 1996 acquisition of StaffAmerica discussed in Note 2, the
Company granted "put rights" to certain shareholders that required the
Company to redeem 159,154 shares of its common stock at a redemption price
of $17.75 per share for a total of $2,824,984 on April 11, 1997.
At December 31, 1996, the shares of common stock subject to the "put
rights" are presented in the accompanying balance sheets as redeemable
common stock. Such shares were recorded at their fair market value as of
the date of acquisition. Such fair market value equaled the maximum
redemption amount.
14. STOCK INCENTIVE PLAN
As of March 1, 1993, the Company adopted the 1993 Stock Incentive Plan
("the Plan") which provides for stock-based awards to the Company's
employees, non-employee directors, and outside consultants or advisors.
Effective May 14, 1997, the Company's stockholders approved an increase in
the number of shares of common stock reserved for issuance under the Plan
from 800,000 to 1,300,000.
The options generally become exercisable in four equal annual installments
beginning one year after the date of grant, and expire ten years after the
date of grant. Under the terms of the Plan, the exercise price of the
options must be not less than the fair market value of the Company's stock
on the date of grant. The number of options and the price per share have
been restated to reflect the 2-for-1 stock split effective May 23, 1994.
In connection with its initial public offering in 1993, the Company issued
200,000 warrants to its underwriters and related parties for the purchase
of shares of the Company's common stock exercisable in whole at any time or
in part from time to time commencing June 11, 1994 at $4.20 per share,
after giving effect to the 2-for-1 stock split. A total of 170,000 warrants
have been exercised through December 31, 1997 for proceeds of $714,000. The
remaining unexercised warrants expire on June 10, 1998.
F-18
BARRETT BUSINESS SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
- --------------------------------------------------------------------------------
14. STOCK INCENTIVE PLAN (CONTINUED)
A summary of the status of the Company's stock option plan at December 31,
1997, 1996 and 1995, together with changes during the periods then ended,
is presented below.
WEIGHTED
AVERAGE
EXERCISE
OPTIONS PRICE
----------------- -----------------
Outstanding at December 31, 1994 306,575 $ 7.36
Options granted at market price 151,500 14.31
Options granted above market price 70,000 16.36
Options exercised (13,950) 6.19
Options canceled or expired (17,500) 7.52
-----------------
Outstanding at December 31, 1995 496,625 10.78
Options granted at market price 137,498 16.63
Options exercised (83,625) 6.77
Options canceled or expired (58,500) 17.70
-----------------
Outstanding at December 31, 1996 491,998 12.27
Options granted at market price 219,871 14.54
Options exercised (77,375) 9.46
Options canceled or expired (39,375) 13.87
-----------------
Outstanding at December 31, 1997 595,119 13.50
=================
Available for grant at December 31, 1997 503,756
=================
The Company applies APB Opinion 25 and related interpretations in
accounting for the Plan. Accordingly, no compensation expense has been
recognized for its stock option grants. Had compensation expense for the
Company's stock-based compensation plan been determined based on the fair
market value at the grant date for awards under the Plan, consistent with
the method of Statement of Financial Accounting Standards No. 123, the
Company's net income and earnings per share would have been reduced to the
pro forma amounts indicated below:
1997 1996 1995
------------- ------------- -------------
(in thousands, except per share amounts)
Net income, as reported $ 3,825 $ 5,036 $ 4,118
Net income, pro forma 3,344 4,664 3,857
Basic earnings per share, as reported .57 .75 .64
Basic earnings per share, pro forma .50 .69 .60
Diluted earnings per share, as reported .56 .73 .62
Diluted earnings per share, pro forma .49 .67 .58
F-19
BARRETT BUSINESS SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
- --------------------------------------------------------------------------------
14. STOCK INCENTIVE PLAN (CONTINUED)
The effects of applying SFAS No. 123 for providing pro forma disclosures
for 1997, 1996 and 1995 are not likely to be representative of the effects
on reported net income for future years, because options vest over several
years and additional awards generally are made each year.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model, with the following weighted-average
assumptions used for grants in 1997, 1996 and 1995:
1997 1996 1995
------------- ------------- -------------
Expected volatility 42% 41% 41%
Risk free rate of return 6.25% 6.10% 6.10%
Expected dividend yield 0% 0% 0%
Expected life (years) 7.5 7.0 7.0
Total fair value of options granted at market price was computed to be
$1,809,662, $1,227,834 and $1,165,925 for the years ended December 31,
1997, 1996 and 1995, respectively. Total fair value of options granted at
110% above market price was computed to be $531,300 for the year ended
December 31, 1995. Such options were granted to the chief executive officer
in 1995. The weighted average value of options granted in 1997, 1996 and
1995 was $8.23, $8.93 and $5.26, respectively.
The following table summarizes information about stock options outstanding
at December 31, 1997:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------------------------- ------------------------------
WEIGHTED
AVERAGE EXERCISABLE WEIGHTED
EXERCISE WEIGHTED REMAINING AT AVERAGE
PRICE NUMBER AVERAGE CONTRACTUAL DECEMBER 31, EXERCISE
RANGE OF SHARES PRICE LIFE 1997 PRICE
--------------- ------------ ----------- ------------ -------------- ------------
$ 3.50 33,000 $ 3.50 5.4 33,000 $ 3.50
8.75 - 9.50 66,250 9.42 6.1 35,750 9.35
10.75 - 12.07 83,860 11.69 8.8 20,000 11.00
13.37 - 14.88 202,000 14.39 8.4 49,500 14.40
15.00 - 18.69 210,009 16.22 6.7 73,708 15.80
At December 31, 1997, 1996 and 1995, 211,958, 126,500 and 82,875 were
exercisable at weighted average exercise prices of $12.02, $10.80 and
$7.04, respectively.
15. LITIGATION
The Company is subject to legal proceedings and claims which arise in the
ordinary course of its business. In the opinion of management, the amount
of ultimate liability with respect to currently pending or threatened
actions is not expected to materially affect the financial position or
results of operations of the Company.
F-20
BARRETT BUSINESS SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
- --------------------------------------------------------------------------------
16. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
---------------- ---------------- ---------------- ----------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Year ended December 31, 1995
Revenues $ 39,005 $ 44,270 $ 49,308 $ 45,933
Cost of revenues 35,526 39,351 43,050 40,100
Net income 344 1,039 1,513 1,223
Basic earnings per share .06 .16 .23 .19
Diluted earnings per share .05 .16 .23 .18
Year ended December 31, 1996
Revenues 42,888 51,558 59,666 59,814
Cost of revenues 37,872 45,411 53,073 53,318
Net income 827 1,305 1,661 1,243
Basic earnings per share .13 .19 .25 .18
Diluted earnings per share .12 .19 .24 .18
Year ended December 31, 1997
Revenues 62,086 69,568 79,455 69,897
Cost of revenues 55,982 62,425 71,602 62,891
Net income 830 1,254 947 794
Basic earnings per share .12 .19 .14 .12
Diluted earnings per share .12 .18 .14 .12
F-21
EXHIBIT INDEX
3.1 Charter of the registrant, as amended. Incorporated by reference to
Exhibit 3 to the registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1994.
3.2 Bylaws of the registrant, as amended. Incorporated by reference to
Exhibit 3.2 to the registrant's Annual Report on Form 10-K for the year
ended December 31, 1996.
4.1 Loan Agreement between the registrant and Wells Fargo Bank, N.A., dated
May 30, 1997. Incorporated by reference to Exhibit 4.1 to the
registrant's Quarterly Report on Form 10-Q for the quarter ended June
30, 1997.
The registrant has incurred other long-term indebtedness as to
which the amount involved is less than 10 percent of the
registrant's total assets. The registrant agrees to furnish
copies of the instruments relating to such indebtedness to the
Commission upon request.
10 Executive Compensation Plans and Arrangements and Other Management
Contracts.
10.1 1993 Stock Incentive Plan of the registrant as amended. Incorporated by
reference to Exhibit 10.1 to the registrant's Annual Report on Form
10-K for the year ended December 31, 1996.
10.2 Form of Indemnification Agreement with each director of the registrant.
Incorporated by reference to Exhibit 10.8 to the registrant's
Registration Statement on Form S-1 (No. 33-61804).
10.3 Deferred Compensation Plan for Management Employees of the registrant.
11 Statement of calculation of Basic and Diluted shares outstanding.
23 Consent of Price Waterhouse LLP, independent accountants.
24 Power of attorney of certain officers and directors.
27.1 Financial Data Schedule, fiscal year end 1997.
27.2 Financial Data Schedule, fiscal year ends 1995 and 1996 and Qtrs. 1, 2
and 3 of 1996.
27.3 Financial Data Schedule, Qtrs. 1, 2 and 3 of 1997.