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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Form 10-K
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X Annual Report Pursuant to Section 13 or 15(d) of
--- The Securities Exchange Act of 1934
For the fiscal year ended December 31, 1998
Commission File Number 0-21886
BARRETT BUSINESS SERVICES, INC.
(Exact name of registrant as specified in its charter)
Maryland 52-0812977
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4724 SW Macadam Avenue
Portland, Oregon 97201
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (503) 220-0988
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $.01 Per Share
(Title of class)
Indicate by check mark whether the Registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. X
---
State the aggregate market value of the voting stock held by
non-affiliates of the Registrant: $33,077,380 at February 26, 1999.
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 26, 1999
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Common Stock, Par Value $.01 Per Share 7,679,456 Shares
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement for the 1999 Annual Meeting
of Stockholders are hereby incorporated by reference into Part III of Form 10-K.
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BARRETT BUSINESS SERVICES, INC.
1998 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
Page
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PART I
Item 1. Business 2
Item 2. Properties 12
Item 3. Legal Proceedings 12
Item 4. Submission of Matters to a Vote of Security Holders 12
f
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 23
Item 8. Financial Statements and Supplementary Data 23
Item 9. Changes in and Disagreements With Accountants
on Accounting and Financial Disclosure 23
PART III
Item 10. Directors and Executive Officers of the Registrant 24
Item 11. Executive Compensation 24
Item 12. Security Ownership of Certain Beneficial
Owners and Management 24
Item 13. Certain Relationships and Related Transactions 24
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K 25
Signatures 26
Financial Statements F-1
Exhibit Index
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
employment-related regulatory compliance. For 1998, Barrett's staffing services
revenues represented 54.6% of total revenues, compared to 45.4% 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 1998, 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 1998 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 1,600 employees through various
staffing services arrangements. In addition, Barrett had approximately 612 PEO
clients at December 31, 1998, compared to 654 at December 31, 1997. The decline
in the number of PEO clients in 1998 as compared to 1997 reflects the Company's
continued adherence to its safe-work policies and credit policies.
The Company operates through a network of 30 branch offices in Oregon,
California, Washington, Maryland, Idaho and Arizona. Barrett also has 22 smaller
recruiting offices in its general market areas under the direction of a branch
office.
2
OPERATING STRATEGIES
The Company's principal operating strategies are to: (i) provide a
unique and efficient blend of staffing and PEO services, (ii) promote a
decentralized and autonomous management philosophy and structure, (iii) leverage
zone and branch level economies of scale, (iv) motivate employees through wealth
sharing, and (v) control workers' compensation costs through effective risk
management.
GROWTH STRATEGIES
The Company's principal growth strategies are to: (i) expand through
acquisitions of human resource-related businesses in new and existing geographic
markets, (ii) utilize a zone management structure to strengthen and expand
operations and (iii) enhance management information systems to support continued
growth and to improve customer services.
RECENT ACQUISITIONS
On April 13, 1998, the Company acquired certain assets of BOLT Staffing
Service, Inc., a provider of staffing services located in Pocatello, Idaho. BOLT
Staffing had revenues of approximately $2.4 million (unaudited) for the year
ended December 31, 1997. The Company paid $675,000 in cash for the assets,
assumed a $6,000 office lease liability and incurred approximately $18,000 in
acquisition related costs.
On June 29, 1998, the Company consummated its transaction with Western
Industrial Management, Inc. ("WIMI") pursuant to a stock-for-stock merger. The
transaction qualified as a tax-free merger and has been accounted for as a
pooling-of-interests. As a result of the merger, the former shareholders of WIMI
received a total of 894,642 shares of the Company's common stock, which included
10,497 shares issued in exchange for real property consisting of an office
condominium in which WIMI's main office is located. A dissenting WIMI
shareholder received cash in the amount of $519,095, based on a value of $11.375
per share of Barrett's common stock. The Company also paid certain professional
fees owed by WIMI in connection with the transaction totaling approximately
$425,000. WIMI was a privately-held staffing services company headquartered in
San Bernardino, California, with 1997 revenues of approximately $24.5 million
(unaudited).
Subsequent to year end, effective January 1, 1999, the Company acquired
all of the outstanding common stock of Temporary Staffing Systems, Inc. ("TSS"),
a staffing services company with eight branch offices in North Carolina and one
in South Carolina. The Company paid $2,000,000 in cash and issued a note payable
for $950,000 due January 31, 2000, payment of which is contingent upon a minimum
equity requirement for 1998 and certain financial performance criteria for 1999.
The Company also paid $50,000 in cash for a noncompete agreement with the
selling shareholder. TSS's revenues for the fiscal year ended March 29, 1998
were approximately $12.9 million (audited).
Subsequent to year end, effective February 15, 1999, the Company
acquired certain assets of TPM Staffing Services, Inc. ("TPM"), a staffing
services company with three offices in Southern California - Lake Forest, Santa
Ana and Anaheim. The Company paid $1,200,000 in cash for the assets of TPM and
the selling shareholder's noncompete agreement, of which $240,000 will be
deferred for six months. TPM's revenues for the year ended December 31, 1998
were approximately $5.7 million (unaudited).
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
3
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
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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:
o 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.
o 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.
o 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.
o 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.
o 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
4
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
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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 for their personnel needs, thereby converting a portion of their fixed
personnel costs to a variable expense.
Contract staffing refers to the Company's responsibilities for the
placement of employees for a period of more than three months or an indefinite
period. This type of arrangement often involves outsourcing an entire department
in a large corporation or providing the work force for a large project.
In an on-site management arrangement, Barrett places an experienced
manager on site at a customer's place of business. The manager is responsible
for conducting all recruiting, screening, interviewing, testing, hiring and
employee placement functions at the customer's facility for a long-term or
indefinite period.
The Company's staffing services customers operate in a broad range of
businesses, including forest products and agriculture-based companies,
electronic manufacturers, transportation and shipping companies, food
processors, professional firms and construction contractors. Such customers
range in size from small local firms to companies with international operations,
which use Barrett's services on a domestic basis. None of the Company's staffing
services customers individually accounted for more than 10% of its total 1998
revenues.
In 1998, light industrial workers generated approximately 67% of the
Company's staffing services revenues, while technical personnel accounted for
19% of such revenues and clerical office staff represented the balance of 14%.
Light industrial workers in the Company's employ perform such tasks as operation
of machinery, manufacturing, loading and shipping, site preparation for special
events, construction-site cleanup and janitorial services. Technical personnel
include electronic parts assembly workers and designers and drafters of
electronic parts.
Barrett emphasizes prompt, personalized service in assigning quality,
trained, drug-free personnel at competitive rates to its staffing services
customers. The Company uses internally developed computer databases of employee
skills and availability at each of its branches to match customer needs with
available qualified employees. The Company emphasizes the development of an
understanding of the unique requirements of its clientele by its account
managers. Customers are offered a "money-back" guarantee if dissatisfied with
staffing employees placed by Barrett.
The Company utilizes a variety of methods to recruit its work force for
staffing services, including among others, referrals by existing employees,
newspaper advertising and marketing brochures distributed at colleges and
vocational schools. The employee application process includes an interview,
skills assessment test, reference verification and drug screening. The
recruiting of qualified employees requires more effort when unemployment rates
are low.
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
5
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.
The Company began offering PEO services to Oregon customers in 1990 and
subsequently expanded these services to other states. The Company has entered
into co-employer arrangements with a wide variety of clients, including
companies involved in moving and shipping, professional firms, construction,
retail, manufacturing and distribution businesses. PEO clients are typically
small to mid-sized businesses with up to 100 employees. None of the Company's
PEO clients individually accounted for more than 10% of its total annual
revenues during 1998.
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.
6
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 certain of 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.
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 $500,000 for USL&H coverage)
with statutory limits (i.e., in unlimited amounts) pursuant to annual policies
with major insurance companies. The excess-insurance policies contain standard
exclusions from coverage, including punitive damages, fines or penalties in
connection with violation of any statute or regulation and losses covered by
other insurance or indemnity provisions.
In addition, the Company maintains an insured large-deductible program
which allows it to become insured for workers' compensation coverage in nearly
all states where the extent of the Company's operations does not yet warrant the
investment to become a self-insured employer.
7
Claims Management. Pursuant to its self-insured status, the Company's
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workers' compensation expense is tied directly to the incidence and severity of
workplace injuries to its employees. Barrett seeks to contain its workers'
compensation costs through an aggressive approach to claims management. The
Company uses managed-care systems to reduce medical costs and keeps time-loss
costs to a minimum by assigning injured workers, whenever possible, to
short-term assignments which accommodate the workers' physical limitations. The
Company believes that these assignments minimize both time actually lost from
work and covered time-loss costs. Barrett has also engaged third-party
administrators ("TPAs") to provide additional claims management expertise.
Typical management procedures include performing thorough and prompt on-site
investigations of claims filed by employees, working with physicians to
encourage efficient medical management of cases, denying questionable claims and
negotiating early settlements to eliminate future case development and costs.
Barrett also maintains a mandatory corporate-wide pre-employment drug screening
program and a mandatory post-injury drug test. The program is believed to have
resulted in a reduction in the frequency of fraudulent claims and in accidents
in which the use of illegal drugs appears to have been a contributing factor.
Elements of Self-Insurance Costs. The costs associated with the
-----------------------------------
Company's self-insured workers' compensation program include case reserves for
reported claims, an additional expense provision (referred to as the "IBNR
reserve") for unanticipated increases in the cost of open injury claims (known
as "adverse loss development") and for claims incurred in prior periods but not
reported, fees payable to the Company's TPAs, additional claims administration
expenses, administrative fees payable to state and federal workers' compensation
regulatory agencies, premiums for excess workers' compensation insurance, legal
fees and safety incentive payments. Although not directly related to the size of
the Company's payroll, the number of claims and correlative loss payments may be
expected to increase with growth in the total number of employees. 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'
8
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-fifth 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 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 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 $2.7 million. The new system is
currently expected to be operational in mid-1999 and has been certified by the
vendor to be year 2000 compliant.
EMPLOYEES AND EMPLOYEE BENEFITS
At December 31, 1998, the Company had approximately 19,410 employees,
including approximately 14,000 staffing services employees, approximately 5,100
PEO employees and approximately 310 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 1998,
approximately 1% of the Company's employees were covered by a collective
bargaining agreement. Each of Barrett's managerial, sales and administrative
employees has entered into a standard form of employment agreement which, among
other things, contains covenants not to engage in certain activities in
competition with the Company for 18 months following termination of employment
and to maintain the confidentiality of certain proprietary information. Barrett
believes its employee relations are good.
The Company's decentralized management structure relies heavily on its
zone managers, each responsible for overseeing the operations of several branch
offices. Accordingly, the efficiency of Barrett's operations is dependent upon
its ability to attract and retain highly qualified, motivated individuals to
serve as zone managers. This ability is also central to the Company's plans to
expand through acquiring human resources related businesses in existing and new
geographic areas. There is no assurance that the Company will continue to be
able to recruit and retain individuals with the skills and experience required
of zone managers.
9
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 development of nontraditional employment relationships,
such as professional employer, temporary employment, and outsourcing
arrangements, many of these laws do not specifically address the obligations and
responsibilities of nontraditional employers. In addition, the definition of
"employer" under these laws is not uniform.
As an employer, the Company is subject to all federal statutes and
regulations governing its employer-employee relationships. Subject to the issues
discussed below, the Company believes that its operations are in compliance in
all material respects with all applicable federal statutes and regulations.
The Company offers various qualified employee benefit plans to its
employees, including its worksite employees. These employee benefit plans
include a savings plan (the "401(k) plan") under Section 401(k) of the Internal
Revenue Code (the "Code"), a cafeteria plan under Code Section 125, a group
health plan, a group life insurance plan, a group disability insurance plan and
an employee assistance plan. In addition, the Company offers a nonqualified
deferred compensation plan, which is available to highly compensated employees
who are not eligible to participate in the Company's 401(k) plan. Generally,
qualified employee benefit plans are subject to provisions of both the Code and
the Employee Retirement Income Security Act of 1974 ("ERISA"). In order to
qualify for favorable tax treatment under the Code, qualified plans must be
established and maintained by an employer for the exclusive benefit of its
employees. See Item 7 of this report for a discussion of issues regarding
10
qualification of the Company's employee benefit plans arising out of
participation by the Company's PEO employees.
COMPETITION
The staffing services and PEO businesses are characterized by rapid
growth and intense competition. The staffing services market includes
competitors of all sizes, including several, such as Manpower, Inc., Kelly
Services, Inc., 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 60 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.
11
ITEM 2. PROPERTIES
- ------------------------
The Company provides staffing and PEO services through all 30 of its
branch offices. The following table shows the number of branch offices located
in each state in which the Company operates. The Company's Oregon offices
accounted for 46% of its total revenues in 1998. The Company also leases office
space in 22 other locations in its market areas which it uses to recruit and
place employees.
Number of
Branch
State Offices
------------------ --------------
Arizona 1
California 13
Idaho 2
Maryland 3
Oregon 10
Washington 1
The Company's corporate headquarters are located in an office building
in Portland, Oregon, with approximately 9,200 square feet of office space. The
building is subject to a mortgage loan with a principal balance of approximately
$530,000 at December 31, 1998.
The Company also owns another office building in Portland, Oregon,
which houses its Portland/Bridgeport branch office. The building has
approximately 7,000 square feet of office space.
Barrett leases office space for its other branch offices. At December
31, 1998, such leases had expiration dates ranging from less than one year to
five years, with total minimum payments through 2003 of approximately
$2,882,000.
ITEM 3. LEGAL PROCEEDINGS
- -------------------------------
There were no material legal proceedings pending against the Company at
September 30, 1998, or during the period beginning with that date through March
30, 1999.
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 1998.
12
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table identifies, as of February 26, 1999, 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 53 President; Chief Executive Officer; Director 1980
Michael D. Mulholland 47 Vice President-Finance and Secretary; Chief 1994
Financial Officer
K. Risa Olsen (1) 48 Vice President 1997
Gregory R. Vaughn 43 Vice President 1998
James D. Miller 35 Controller and Assistant Secretary; 1994
Principal Accounting Officer
- -------------------------------------
(1) Ms. Olsen tendered her resignation on March 19, 1999, effective April 2, 1999.
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. from 1995 to 1996 and Continental
Information Systems, Inc. from 1990 to 1994.
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 26, 1999, there were 70
stockholders of record and approximately 1,100 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:
1997 High Low
---- ---- ---
First Quarter $ 19.00 $ 12.75
Second Quarter 15.00 11.50
Third Quarter 17.50 13.63
Fourth Quarter 17.25 11.00
1998 High Low
---- ---- ---
First Quarter $ 12.00 $ 10.25
Second Quarter 13.38 9.13
Third Quarter 10.88 7.88
Fourth Quarter 9.38 6.00
The Company issued 30,000 shares of Common Stock in April 1998, upon
the exercise of stock warrants with an exercise price of $4.20 per share issued
in connection with the Company's initial public offering in June 1993 without
registration under the Securities Act of 1933 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.
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
------------------------------------------------------------------
1998 1997 1996 1995 1994
---------- --------- ---------- ---------- ----------
(In thousands, except per share data)
Statement of Operations Data:
Revenues:
Staffing services............................... $ 165,443 $ 177,263 $ 130,746 $ 113,437 $ 83,344
Professional employer services.................. 137,586 128,268 101,206 79,480 68,571
---------- --------- --------- --------- --------
Total....................................... 303,029 305,531 231,952 192,917 151,915
---------- --------- --------- --------- --------
Cost of revenues:
Direct payroll costs............................ 235,265 236,307 176,686 146,490 114,493
Payroll taxes and benefits...................... 25,550 27,226 20,414 16,139 12,888
Workers' compensation........................... 8,670 9,075 6,641 6,729 5,758
Safety incentives............................... 1,520 1,509 1,532 981 1,103
---------- --------- --------- --------- --------
Total....................................... 271,005 274,117 205,273 170,339 134,242
---------- --------- --------- --------- --------
Gross margin....................................... 32,024 31,414 26,679 22,578 17,673
Selling, general, and administrative expenses...... 23,481 24,011 18,534 15,496 11,695
Merger expenses.................................... 750 -- -- -- --
Amortization of intangibles........................ 1,316 1,332 860 606 472
---------- --------- --------- --------- --------
Income from operations............................. 6,477 6,071 7,285 6,476 5,506
---------- --------- --------- --------- --------
Other (expense) income:
Interest expense................................ (173) (247) (122) (154) (231)
Interest income................................. 441 362 554 400 224
Other, net...................................... (1) 1 -- 32 78
---------- --------- --------- --------- --------
Total....................................... 267 116 432 278 71
---------- --------- --------- --------- --------
Income before provision for income taxes........... 6,744 6,187 7,717 6,754 5,577
Provision for income taxes......................... 2,923 2,342 2,749 2,566 2,117
---------- --------- --------- --------- --------
Net income.................................. $ 3,821 $ 3,845 $ 4,968 $ 4,188 $ 3,460
========== ========= ========= ========= ========
Basic net income per share......................... $ .50 $ .50 $ .65 $ .57 $ .48
========== ========= ========= ========= ========
Weighted average basic shares...................... $ 7,664 7,646 7,602 7,358 7,217
========== ========== ========= ========= ========
Diluted net income per share....................... $ .50 $ .49 $ .64 $ .55 $ .46
========== ========= ========= ========= ========
Weighted average diluted shares.................... $ 7,711 7,780 7,823 7,564 7,475
========== ========= ========= ========= ========
As of December 31
------------------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
(In thousands)
Selected Balance Sheet Data:
Working capital.................................... $ 13,272 $ 10,201 $ 11,489 $ 8,387 $ 4,738
Total assets....................................... 52,770 50,815 44,063 32,450 25,552
Long-term debt, net of current portion............. 503 573 1,107 875 908
Stockholders' equity............................... 33,702 30,231 25,629 20,139 14,490
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 offices accounted for
approximately 46% of its total revenues in 1998. An additional 36% of revenues
was derived from its offices in California. Consequently, weakness in economic
conditions in these regions could have a material adverse effect on the
Company's financial results.
The Company's cost of revenues is comprised of direct payroll costs,
payroll taxes and employee benefits, workers' compensation and safety
incentives. Direct payroll costs represent the gross payroll earned by employees
based on salary or hourly wages. Payroll taxes and employee benefits consist of
the employer's portion of Social Security and Medicare taxes, federal
unemployment taxes, state unemployment taxes and employee reimbursements for
materials, supplies and other expenses, which are paid by the customer. Workers'
compensation expense consists primarily of the costs associated with the
Company's self-insured workers' compensation program, such as claims reserves,
claims administration fees, legal fees, state and federal administrative agency
fees and reinsurance costs for catastrophic injuries. The Company also maintains
a large-deductible workers' compensation insurance policy for employees working
in states where the Company is not currently self-insured. Safety incentives
represent cash incentives paid to certain PEO client companies 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 additional reserves to provide for future unanticipated
increases in expenses ("adverse loss development") of the claims reserves for
open injury claims and for claims incurred but not reported related to prior and
current periods. Management believes that the Company's internal claims
reporting system minimizes the occurrence of unreported incurred claims.
Selling, general and administrative expenses represent both branch
office and corporate operating expenses. Branch operating expenses consist
primarily of branch office staff payroll and payroll related costs, advertising,
rent, office supplies, depreciation and branch incentive compensation. Branch
incentive compensation represents a combined 15% of branch pretax profits, of
which 10% is paid to the branch manager and 5% is shared among the office staff.
Corporate 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 recent and future
acquisitions, the effect of changes in the Company's mix of services on gross
margin, the adequacy of the Company's workers' compensation reserves and
allowance for doubtful accounts, the tax-qualified status of the Company's
401(k) savings plan, the timely resolution of the Year 2000 issue by the Company
and its customers and vendors, 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, 1998, 1997 and 1996, listed in Item 14 of this report.
The Company's acquisition by merger of Western Industrial Management, Inc. and a
related company (together, "WIMI"), in June 1998 was accounted for as a
pooling-of-interests and, accordingly, the Company's financial statements have
been restated for prior periods to give effect to the merger. Certain 1997 and
1996 revenue and cost of revenue amounts have been reclassified to conform with
the 1998 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,
1998 1997 1996
------- ------- -------
Revenues:
Staffing services.............................. 54.6% 58.0% 56.4%
Professional employer services................. 45.4 42.0 43.6
------ ------ ------
Total revenues............................. 100.0 100.0 100.0
------ ------ ------
Cost of revenues:
Direct payroll costs........................... 77.6 77.3 76.1
Payroll taxes and benefits..................... 8.4 8.9 8.8
Workers' compensation.......................... 2.9 3.0 2.9
Safety incentives.............................. 0.5 0.5 0.7
------ ------ ------
Total cost of revenues..................... 89.4 89.7 88.5
------ ------ ------
Gross margin........................................ 10.6 10.3 11.5
Selling, general and administrative expenses........ 7.8 7.9 8.0
Merger expenses..................................... 0.2 - -
Amortization of intangibles......................... 0.4 0.4 0.4
------ ------ ------
Income from operations.............................. 2.2 2.0 3.1
Other income (expense).............................. 0.1 - 0.2
------ ------ ------
Pretax income....................................... 2.3 2.0 3.3
Provision for income taxes.......................... 1.0 0.7 1.2
------ ------ ------
Net income.......................................... 1.3% 1.3% 2.1%
====== ====== ======
YEARS ENDED DECEMBER 31, 1998 AND 1997
Net income for 1998 amounted to $3,821,000, a decrease of $24,000 or
0.6% from 1997 net income of $3,845,000. The small decrease in 1998 net income
from 1997 was primarily due to $750,000 of merger expenses in connection with
the WIMI transaction and a higher income tax rate, offset in part by the effect
of a higher gross margin percent and lower selling, general and administrative
expenses. Diluted net income per share for 1998 was $0.50 compared to $0.49 for
1997.
Revenues for 1998 totaled $303,029,000 which represented a decrease of
$2,502,000 or 0.8% from 1997 revenues of $305,531,000. To date, the revenue
trend has not been a company-wide issue and has been primarily confined to a few
larger branch offices. The decline in revenues is related to a limited number of
large staffing customers that have been affected by various economic conditions.
Staffing services revenue decreased $11,820,000 or 6.7%, while
professional employer services revenue increased $9,318,000 or 7.3%, which
resulted in a decrease in the share of staffing services to 54.6% of total
revenues for 1998, as compared to 58.0% for 1997. The decline in staffing
services revenue for 1998 was primarily attributable to two factors: (1)
management's decision not to renew a business relationship with a large seasonal
customer which was anticipated to provide an unacceptable profit margin and (2)
a moderation in the demand for the Company's services by a limited number of
large staffing customers that were affected by various economic conditions. The
share of professional employer services revenues had a corresponding increase
from 42.0% of total revenues for 1997 to 45.4% for 1998.
Gross margin for 1998 totaled $32,024,000, representing an increase of
$610,000 or 1.9% over 1997. The gross margin rate of 10.6% of revenues
represents a 30 basis point increase from 1997 due primarily to lower payroll
taxes and benefits and workers' compensation expenses as a percentage of
revenues, offset in part by higher direct payroll costs as a percentage of
revenues. The decline in payroll taxes and benefits, in total dollars and as a
percent of revenues, for 1998 was primarily due to lower state unemployment tax
rates. The increase in direct payroll costs, as a percentage of revenues, was
primarily attributable to the increased share of professional employer services
business, where payroll costs typically represent a higher percentage of
revenues as compared to staffing services. The Company expects gross margin, as
a percentage of revenues, to continue to be influenced by fluctuations in the
mix between staffing and PEO services, as well as by the adequacy of its
estimates
18
for workers' compensation liabilities, which may be negatively affected by
unanticipated adverse loss development of claims reserves.
Workers' compensation expense decreased from 3.0% of revenues for 1997
to 2.9% of revenues for 1998. The decrease in workers' compensation expense for
1998 was generally attributable to a lower incidence of injuries during 1998, as
compared to 1997.
Selling, general and administrative ("SG&A") expenses consist of
compensation and other expenses incident to the operation of the Company's
headquarters and the branch offices and the marketing of its services. SG&A
expenses (excluding the amortization of intangibles) for 1998 amounted to
$23,481,000, a decrease of $530,000 or 2.2% from 1997. SG&A expenses expressed
as a percentage of revenues also decreased from 7.9% for 1997 to 7.8% for 1998.
The decrease in total SG&A expenses for 1998 from 1997 was primarily
attributable to lower management payroll and bad debt expense. During the first
quarter of 1998, management implemented specific performance criteria for all
branch offices to align operating expenses more closely with growth in gross
margin dollars rather than growth in revenues. For 1998, improvement in SG&A
expense was achieved by reducing SG&A expenses as a percent of gross margin
dollars from 76.4% in 1997 to 73.3% in 1998. Management believes that its
zone-management practices and tighter operating controls implemented in 1998
have enhanced the Company's ability to more effectively manage its operating
costs.
Amortization of intangibles totaled $1,316,000 for 1998 or 0.4% of
revenues, which compares to $1,332,000 or 0.4% of revenues for 1997.
The Company's effective income tax rate for 1998 was 43.3%, as compared
to 37.9% for 1997. The increase in the effective rate was primarily attributable
to the nondeductibility of certain merger expenses and an increase in
nondeductible amortization expense.
The Company offers various qualified employee benefit plans to its
employees, including its worksite employees. These qualified employee benefit
plans include a savings plan (the "401(k) plan") under Section 401(k) of the
Internal Revenue Code (the "Code"), a cafeteria plan under Code Section 125, a
group health plan, a group life insurance plan, a group disability insurance
plan and an employee assistance plan. Generally, qualified employee benefit
plans are subject to provisions of both the Code and the Employee Retirement
Income Security Act of 1974 ("ERISA"). In order to qualify for favorable tax
treatment under the Code, qualified plans must be established and maintained by
an employer for the exclusive benefit of its employees.
A definitive judicial interpretation of "employer" in the context of a
PEO arrangement has not been established. The tax-exempt status of the Company's
401(k) plan and cafeteria plan is subject to continuing scrutiny and approval by
the Internal Revenue Service (the "IRS") and depends upon the Company's ability
to establish the Company's employer-employee relationship with PEO employees.
The issue of whether the Company's tax-qualified benefit plans can legally
include worksite employees under their coverage has not yet been resolved. If
the worksite employees cannot be covered by the plans, then the exclusive
benefit requirement imposed by the Code would not be met by the plans as
currently administered and the plans could be disqualified.
The IRS has established a Market Segment Study Group regarding Employee
Leasing for the stated purpose of examining whether PEOs, such as the Company,
are the employers of worksite employees under the Code provisions applicable to
employee benefit plans and are, therefore, able to offer to worksite employees
benefit plans that qualify for favorable tax treatment. The IRS Study Group is
reportedly also examining whether the owners of client companies are employees
of PEO companies under Code provisions applicable to employee benefit plans. To
the best of the Company's knowledge, the Market Segment Study Group has not
issued a report.
19
A PEO company headquartered in Texas stated publicly over three years
ago that the IRS National Office was being requested by the IRS Houston District
to issue a Technical Advice Memorandum ("TAM") on the PEO worksite employee
issue in connection with an ongoing audit of a plan of the Texas PEO company.
The stated purpose of TAMs is to help IRS personnel in closing cases and to
establish and maintain consistent holdings. The IRS's position is that TAMs are
not precedential; that is, they are limited to the particular taxpayer involved
and that taxpayer's set of facts.
The draft request for a TAM by the IRS Houston District reportedly
stated its determination that the Texas PEO company's Code Section 401(k) plan
should be disqualified for the reason, among others, that it covers worksite
employees who are not employees of the PEO company.
The timing and nature of the issuance and contents of any TAM regarding
the worksite employee issue or any report of the Market Segment Study Group
regarding Employee Leasing is unknown at this time. There has also been public
discussion for the past several years of the 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, 1997 AND 1996
Net income for 1997 amounted to $3,845,000, a decrease of $1,123,000 or
22.6% from 1996 net income of $4,968,000. 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 $0.49 compared to $0.64 for 1996.
Total 1997 revenues were $305,531,000, which represented an increase of
$73,579,000 or 31.7% over 1996 revenues of $231,952,000. The increase in
revenues over 1996 was primarily due to a 1997 internal growth rate of 23.2%,
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 35.6% 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. PEO services
revenues increased 26.7% 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 58.0% as compared to 56.4% of
total revenues in 1996.
Gross margin for 1997 totaled $31,414,000, representing an increase of
$4,735,000 or 17.7% over 1996. The gross margin rate of 10.3% of revenues
represents a 120 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 increase in direct payroll costs as a percentage of revenues from
76.1% for 1996 to 77.3% 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 2.9% of revenues for 1996
to 3.0% 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
20
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.
Selling, general and administrative ("SG&A") expenses (excluding the
amortization of intangibles) for 1997 amounted to $24,011,000, an increase of
$5,477,000 or 29.6% over 1996. SG&A expenses expressed as a percentage of
revenues decreased from 8.0% for 1996 to 7.9% 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 four acquisitions after 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 an
approximate $700,000 increase in bad debt expense. Two customers accounted for
over one-half of the increase in bad debt expense for 1997.
Amortization of intangibles totaled $1,332,000 for 1997, or 0.4% of
revenues, which compares to $860,000 or 0.4% of revenues for 1996. The increased
amortization expense for 1997 was primarily attributable to amortization arising
from the four acquisitions made after October 1, 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 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 $4,029,000 at December 31, 1998
increased $590,000 from December 31, 1997. The increase was primarily due to
$4,246,000 of cash provided by operating activities, offset by $1,627,000 for
the combined payments on credit-line borrowings and long-term debt, $1,077,000
used for the purchase of property and equipment and $693,000 used for
acquisitions.
Net cash provided by operating activities for 1998 amounted to
$4,246,000, as compared to $7,281,000 for 1997. For 1998, cash flow was
primarily generated by net income and depreciation and amortization expenses,
offset in part by an increase of $856,000 in accounts receivable and a decrease
of $788,000 in accrued payroll and benefits. For 1997, cash flow was primarily
generated by net income and depreciation and amortization expenses, together
with an increase of $2,180,000 in accrued payroll and benefits.
Net cash used in investing activities totaled $1,679,000 for 1998, as
compared to $4,112,000 for 1997. During 1998, the Company had capital
expenditures of $1,077,000 and paid $693,000 in cash for the purchase of BOLT
Staffing. Approximately $500,000 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 discussed in Item 1 under "Management Information System" and below
under "Year 2000 Readiness." During 1997, the
21
Company paid $2,227,000 in cash in connection with the HR Only and TLC Staffing
acquisitions and had capital expenditures of $1,497,000. At March 30, 1999, the
Company had no material long-term capital commitments.
Net cash used in financing activities for 1998 totaled $1,977,000,
which compares to $1,353,000 net cash used in financing activities for 1997. For
1998, the principal use of cash for financing activities was for repayments of
credit-line borrowings of $887,000 and long-term debt of $740,000 and for
payment of $519,000 to a dissenting WIMI shareholder in connection with the WIMI
merger. 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 and net proceeds from credit-line borrowings of $701,000.
The Company negotiated an amendment to its loan agreement with its
principal bank, effective February 8, 1999, to increase the revolving credit
facility by $2.0 million, from $5.65 million to $7.65 million. This facility
includes a subfeature for letters of credit, as to which approximately $1.9
million was outstanding as of December 31, 1998. As such, the Company currently
has approximately $5.7 million of unused availability on its line of credit.
There was no outstanding balance on the revolving credit facility at December
31, 1998. 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.
On February 26, 1999, the Company's board of directors authorized a
stock repurchase program to purchase up to 250,000 common shares from time to
time in open market purchases. Management anticipates that the capital necessary
to execute this program will be provided by existing cash balances.
INFLATION
Inflation generally has not been a significant factor in the Company's
operations during the periods discussed above. The Company has taken into
account the impact of escalating medical and other costs in establishing
reserves for future expenses for self-insured workers' compensation claims.
YEAR 2000 READINESS
The Company has developed a Year 2000 plan to ensure its internal
operational readiness, as well as compliance by the Company's key vendors.
Management's plan is focused on evaluating the readiness of the Company's
mission-critical applications software, operating systems software, hardware,
communications, third-party interfaces, facilities (typically non-information
technology systems) and key vendors. This evaluation process involves four
phases: (1) identification of risks, (2) assessment of risks, (3) development of
remediation and contingency plans, and (4) testing and implementation.
As the Company has previously reported, management initiated a project
in mid-1997 to convert its information systems to new technologies which are
expected to enable the Company to more effectively accommodate its anticipated
growth. This upgrade is anticipated to be completed in mid-1999 and is expected
to alleviate the Year 2000 issue for such mission-critical applications as
payroll processing and financial reporting systems. The Company has incurred
capital expenditures of $2.2 million through December 31, 1998, for this project
and expects to incur another $0.5 million prior to completion. The remaining
mission-critical application is a branch-level legacy system which is expected
to require only minor reprogramming by the Company's internal staff during the
first half of 1999 at no incremental cost to the Company.
22
Mission-critical applications are currently in a remediation or testing
phase. Management is currently uncertain as to the need for contingency plans
for the Company's mission-critical applications, as it expects these systems to
be fully operational by the third quarter of 1999.
The Company's assessment of the risks associated with
non-mission-critical systems is incomplete but ongoing, and as such, management
cannot predict whether significant problems will be identified, and if so, the
costs to remediate such problems. In addition, management has not yet identified
any reasonably likely worst case scenarios or determined the extent of
contingency planning that may be required. Costs identified to date, however,
have not been material. As part of its assessment, the Company is relying on
assurances from key vendors that their products and services will be Year 2000
compliant.
The risks associated with the Year 2000 problem are pervasive and
complex, can be difficult to identify and to address, and can result in material
adverse consequences to the Company. Even if the Company, in a timely manner,
completes all of its assessments, identifies and tests remediation plans
believed to be adequate, and develops contingency plans believed to be adequate,
some problems may not be identified or corrected in time to prevent material
adverse consequences to the Company. Also, the Company's business may be
adversely affected by events outside its control, such as disruptions to
services provided by utilities, banks or transportation or telecommunications
networks.
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.
23
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 1999 Annual Meeting of Stockholders ("Proxy
Statement"), under the headings "Election of Directors" and "Stock Ownership by
Principal Stockholders and Management--Section 16(a) Beneficial Ownership
Reporting Compliance" or appears under the heading "Executive Officers of the
Registrant" on page 13 of this report. The information required by Item 11,
Executive Compensation, is incorporated herein by reference to the Proxy
Statement, under the headings "Executive Compensation" and "Election of
Directors--Compensation Committee Interlocks and Insider Participation." The
information required by Item 12, Security Ownership of Certain Beneficial Owners
and Management, is incorporated herein by reference to the Proxy Statement,
under the heading "Stock Ownership by Principal Stockholders and
Management--Beneficial Ownership Table." The information required by Item 13,
Certain Relationships and Related Transactions, is incorporated herein by
reference to the Proxy Statement, under the heading "Election of
Directors--Compensation Committee Interlocks and Insider Participation."
24
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
- ---------------------------------------------------------------------
FORM 8-K
--------
FINANCIAL STATEMENTS AND SCHEDULES
The Financial Statements, together with the report thereon of
PricewaterhouseCoopers LLP, are included on the pages indicated below:
Page
----
Report of Independent Accountants F-1
Balance Sheets - December 31, 1998 and 1997 F-2
Statements of Operations
for the Years Ended December 31,
1998, 1997 and 1996 F-3
Statements of Redeemable Common Stock and Nonredeemable
Stockholders' Equity - December 31, 1998, 1997 and 1996 F-4
Statements of Cash Flows for the Years Ended December 31,
1998, 1997 and 1996 F-5
Notes to Consolidated Financial Statements F-6
No schedules are required to be filed herewith.
REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the quarter ended December 31, 1998.
EXHIBITS
Exhibits are listed in the Exhibit Index that follows the Financial Statements
included in this report. Each management contract or compensatory plan or
arrangement required to be filed as an exhibit to this report is listed under
Item 10, "Executive Compensation Plans and Arrangements and Other Management
Contracts" in the Exhibit Index.
25
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, 1999 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, 1999.
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 and Assistant Secretary
James D. Miller
Other Directors:
* ROBERT R. AMES Director
* HERBERT L. HOCHBERG Director
* ANTHONY MEEKER Director
* STANLEY G. RENECKER Director
* NANCY B. SHERERTZ Director
* By /s/ Michael D. Mulholland
Michael D. Mulholland
Attorney-in-Fact
26
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, 1998 and 1997, and
the results of its operations and its cash flows for each of the three years in
the period ended December 31, 1998, 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.
PricewaterhouseCoopers LLP
Portland, Oregon
February 8, 1999, except as to Note 16, which is
as of February 15, 1999
F-1
BARRETT BUSINESS SERVICES, INC.
BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
- --------------------------------------------------------------------------------
(in thousands, except par value)
1998 1997
--------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 4,029 $ 3,439
Trade accounts receivable, net 21,907 21,051
Prepaid expenses and other 1,103 1,231
Deferred tax assets (Note 12) 1,857 1,895
--------- ---------
Total current assets 28,896 27,616
Intangibles, net (Note 4) 11,508 12,133
Property and equipment, net (Notes 5 and 8) 5,184 4,574
Restricted marketable securities and workers'
compensation deposits (Note 6) 6,004 6,095
Deferred tax assets (Note 12) 552 191
Other assets 626 206
--------- ---------
$ 52,770 $ 50,815
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt (Note 8) $ 61 $ 731
Line of credit payable (Note 7) - 887
Income taxes payable (Note 12) 438 -
Accounts payable 948 1,136
Accrued payroll, payroll taxes and related benefits 9,246 10,034
Accrued workers' compensation claim liabilities (Note 6) 3,244 3,140
Customer safety incentives payable 1,173 1,073
Other accrued liabilities 514 414
--------- ---------
Total current liabilities 15,624 17,415
Long-term debt, net of current portion (Note 8) 503 573
Customer deposits 829 934
Long-term workers' compensation claim liabilities (Note 6) 714 632
Other long-term liabilities (Note 2) 1,398 1,030
--------- ---------
19,068 20,584
--------- ---------
Commitments and contingencies (Notes 9, 10 and 14)
Stockholders' equity:
Common stock, $.01 par value; 20,500 shares authorized,
7,676 and 7,638 shares issued and outstanding (Note 13 77 76
Additional paid-in capital 11,409 11,760
Retained earnings 22,216 18,395
--------- ---------
33,702 30,231
--------- ---------
$ 52,770 $ 50,815
========= =========
The accompanying notes are an integral part of these financial statements.
F-2
BARRETT BUSINESS SERVICES, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
(in thousands, except per share amounts)
1998 1997 1996
---------- ---------- ----------
Revenues:
Staffing services $ 165,443 $ 177,263 $ 130,746
Professional employer services 137,586 128,268 101,206
---------- --------- ----------
303,029 305,531 231,952
---------- ---------- ----------
Cost of revenues:
Direct payroll costs 235,265 236,307 176,686
Payroll taxes and benefits 25,550 27,226 20,414
Workers' compensation (Note 6) 8,670 9,075 6,641
Safety incentives 1,520 1,509 1,532
---------- ---------- ----------
271,005 274,117 205,273
---------- ---------- ----------
Gross margin 32,024 31,414 26,679
Selling, general and administrative expenses 23,481 24,011 18,534
Merger expenses 750 - -
Amortization of intangibles (Note 4) 1,316 1,332 860
---------- ---------- ----------
Income from operations 6,477 6,071 7,285
---------- ---------- ----------
Other (expense) income:
Interest expense (173) (247) (122)
Interest income 441 362 554
Other, net (1) 1 -
---------- ---------- ----------
267 116 432
---------- ---------- ----------
Income before provision for income taxes 6,744 6,187 7,717
Provision for income taxes (Note 12) 2,923 2,342 2,749
---------- ---------- ----------
Net income $ 3,821 $ 3,845 $ 4,968
========== ========== ==========
Basic earnings per share $ .50 $ .50 $ .65
========== ========== ==========
Weighted average number of basic shares outstanding 7,664 7,646 7,602
========== ========== ==========
Diluted earnings per share $ .50 $ .49 $ .64
========== ========== ==========
Weighted average number of diluted shares outstanding 7,711 7,780 7,823
========== ========== ==========
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, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
NONREDEEMABLE STOCKHOLDERS' EQUITY
--------------------------------------------------------
REDEEMABLE
COMMON STOCK COMMON STOCK ADDITIONAL
----------------- ---------------- PAID-IN RETAINED
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS TOTAL
------- ------- ------- ------- ---------- -------- --------
Balance, December 31, 1995 - $ - 7,436 $ 75 $ 10,482 $ 9,582 $ 20,139
Common stock issued for acquisitions 159 2,825 20 - 380 - 380
Common stock issued on exercise
of options, net - - 54 - 112 - 112
Net income - - - - - 4,968 4,968
Contributions of capital - - 10 - 30 - 30
------- ------- ------- ------ ---------- -------- --------
Balance, December 31, 1996 159 2,825 7,520 75 11,004 14,550 25,629
Common stock issued on exercise
of options and warrants, net - - 118 1 756 - 757
Redemption of redeemable common
stock (159) (2,825) - - - - -
Net income - - - - - 3,845 3,845
------- ------- ------- ------- ---------- -------- --------
Balance, December 31, 1997 - - 7,638 76 11,760 18,395 30,231
Common stock issued on exercise
of options and warrants, net - - 38 1 168 - 169
Distribution to dissenting shareholder
in connection with merger (Note 2) - - - - (519) - (519)
Net income - - - - - 3,821 3,821
------- ------- ------- ------ ----------- -------- --------
Balance, December 31, 1998 - $ - 7,676 $ 77 $ 11,409 $ 22,216 $ 33,702
======= ======= ======= ====== ========== ======== ========
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, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
(in thousands)
1998 1997 1996
---------- ---------- ---------
Cash flows from operating activities:
Net income $ 3,821 $ 3,845 $ 4,968
Reconciliations of net income to net cash provided
by operating activities:
Depreciation and amortization 1,785 1,765 1,189
Deferred taxes (323) (727) (422)
Changes in certain assets and liabilities, net of amounts
purchased in acquisitions:
Trade accounts receivable, net (856) (332) (5,824)
Prepaid expenses and other 128 (179) (513)
Income taxes payable 438 - -
Accounts payable (188) 73 125
Accrued payroll, payroll taxes and related benefits (788) 2,180 1,903
Other accrued liabilities 100 (316) 606
Accrued workers' compensation claim liabilities 104 900 148
Customer safety incentives payable 100 58 239
Customer deposits, other liabilities and other assets, net (443) (16) (181)
Other long-term liabilities 368 30 -
--------- --------- --------
Net cash provided by operating activities 4,246 7,281 2,238
--------- --------- --------
Cash flows from investing activities:
Cash paid for acquisitions, including other direct costs (693) (2,227) (1,519)
Purchase of property and equipment, net of amounts purchased
in acquisitions (1,077) (1,497) (1,390)
Proceeds from maturities of marketable securities 5,532 5,343 7,025
Purchase of marketable securities (5,441) (5,731) (8,051)
--------- --------- --------
Net cash used in investing activities (1,679) (4,112) (3,935)
--------- --------- --------
Cash flows from financing activities:
Payment of credit line assumed in acquisition - (401) -
Net (payments on) proceeds from credit-line borrowings (887) 701 (188)
Note receivable - 324 -
Proceeds from issuance of long-term debt - 180 284
Payments on long-term debt (740) (89) (34)
Distribution to dissenting shareholder (519) - -
Redemption of common stock - (2,825) -
Contribution of capital - - 30
Proceeds from the exercise of stock options and warrants 169 757 112
--------- --------- --------
Net cash (used in) provided by financing activities (1,977) (1,353) 204
--------- --------- --------
Net increase (decrease) in cash and cash equivalents 590 1,816 (1,493)
Cash and cash equivalents, beginning of year 3,439 1,623 3,116
--------- --------- --------
Cash and cash equivalents, end of year $ 4,029 $ 3,439 $ 1,623
========= ======== ========
Supplemental schedule of noncash activities:
Acquisition of other businesses:
Cost of acquisitions in excess of fair market value of
net assets acquired $ 683 $ 3,160 $ 4,337
Tangible assets acquired 10 674 494
Liabilities assumed - 1,607 107
Common stock issued in connection with acquisitions - - 3,205
The accompanying notes are an integral part of these financial statements.
F-5
BARRETT BUSINESS SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
- --------------------------------------------------------------------------------
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 and
Maryland. Approximately 46%, 49% and 61%, respectively, of the Company's
revenues during 1998, 1997, and 1996 were attributable to its Oregon
operations. On June 29, 1998, the Company merged with Western Industrial
Management, Inc. and Catch 55, Inc. (collectively "WIMI"). The transaction
was accounted for as a pooling-of-interests pursuant to Accounting
Principles Board ("APB") Opinion No. 16 and, accordingly, the Company's
financial statements have been restated for all prior periods to give
effect to the merger, as more fully described in Note 2.
REVENUE RECOGNITION
The Company recognizes revenue as services are rendered by its 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 $262,000 and $575,000
at December 31, 1998 and 1997, respectively.
MARKETABLE SECURITIES
At December 31, 1998 and 1997, 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, 1998 AND 1997
- --------------------------------------------------------------------------------
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, 1998, 1997 and 1996.
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 the event of default of payment.
STATEMENTS OF CASH FLOWS
The Company has recorded the following non-cash transactions:
Interest paid during 1998, 1997 and 1996 did not materially differ from
interest expense.
Income taxes paid by the Company in 1998, 1997 and 1996 totaled $2,623,000,
$3,224,000 and $2,953,000, respectively.
NET INCOME PER SHARE
The Company adopted Statement of Financial Accounting Standards ("SFAS")
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.
F-7
BARRETT BUSINESS SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
- --------------------------------------------------------------------------------
1. SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with the 1998
presentation. Such reclassifications had 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 requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reporting periods. Actual results may differ from those
estimates.
2. BUSINESS COMBINATIONS
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 provided 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 noncompete agreement. 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.
F-8
BARRETT BUSINESS SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
- --------------------------------------------------------------------------------
2. BUSINESS COMBINATIONS (CONTINUED)
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.
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 to be
paid ratably over the succeeding five-year period. The deferred portion of
the noncompete agreement is presented on the balance sheet in other
long-term liabilities. HR Only's revenues for the fiscal year ended January
31, 1997 were approximately $4.3 million (audited). The transaction was
accounted for under the purchase method of accounting, which resulted in
$3,027,000 of intangible assets, including $92,000 for acquisition-related
costs, and $65,000 of net tangible assets.
TLC STAFFING
Effective April 13, 1997, the Company purchased certain assets of JRL
Services, Inc., dba TLC Staffing, a provider of clerical staffing services
located in Tucson, Arizona. TLC Staffing had revenues of approximately
$800,000 (unaudited) for the year ended December 31, 1996. The Company paid
$150,000 in cash for the assets, assumed an $18,000 office lease liability
and incurred $4,000 in acquisition related costs. The transaction was
accounted for under the purchase method of accounting, which resulted in
$152,000 of intangible assets and $2,000 of fixed assets.
F-9
BARRETT BUSINESS SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
- --------------------------------------------------------------------------------
2. BUSINESS COMBINATIONS (CONTINUED)
BOLT STAFFING
On April 13, 1998, the Company acquired certain assets of BOLT Staffing
Services, Inc., a provider of staffing services located in Pocatello,
Idaho. BOLT Staffing had revenues of approximately $2.4 million (unaudited)
for the year ended December 31, 1997. The Company paid $675,000 in cash for
the assets, assumed a $6,000 office lease liability and incurred
approximately $18,000 in acquisition related costs. The transaction was
accounted for under the purchase method of accounting, which resulted in
$683,000 of intangible assets and $10,000 of fixed assets.
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 HR Only and BOLT Staffing acquisitions had occurred at the
beginning of 1997, after giving effect to certain adjustments for the
amortization of intangible assets, taxation and cost of capital. The other
acquisitions made since January 1, 1997 are not included in the pro forma
information as their effect is not material.
(in thousands, except per share amounts)
Year ended December 31,
1998 1997
---------- ----------
Revenue $ 303,829 $ 308,289
---------- ----------
Net income $ 3,852 $ 3,975
---------- ----------
Basic earnings per share $ .50 $ .52
---------- ----------
Diluted earnings per share $ .50 $ .51
---------- ----------
The unaudited pro forma results above have been prepared for comparative
purposes only and do not purport to be indicative of what would have
occurred had the acquisitions been made as of January 1, 1997, or of
results which may occur in the future.
WESTERN INDUSTRIAL MANAGEMENT, INC.
On June 29, 1998, the Company completed a merger with WIMI, whereby WIMI
was merged directly with and into Barrett. The transaction qualified as a
tax-free merger and has been accounted for as a pooling-of-interests. As a
result of the merger, the former shareholders of WIMI received a total of
894,642 shares of the Company's common stock, which included 10,497 shares
issued in exchange for real property consisting of an office condominium in
which WIMI's main office is located. A dissenting WIMI shareholder received
cash in the amount of $519,095, based on the value of $11.375 per share of
Barrett's common stock. WIMI was a privately-held staffing services company
headquartered in San Bernardino, California.
F-10
BARRETT BUSINESS SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
- --------------------------------------------------------------------------------
2. BUSINESS COMBINATIONS (CONTINUED)
PRO FORMA RESULTS OF OPERATIONS (UNAUDITED)
Separate results of operations for the periods prior to the merger with the
Company are as follows:
(in thousands)
YEAR ENDED DECEMBER 31,
1997 1996
----------- -----------
Revenues:
Barrett $ 281,006 $ 213,926
WIMI 24,525 18,026
---------- -----------
Combined $ 305,531 $ 231,952
========== ============
Net income (loss):
Barrett $ 3,825 $ 5,036
WIMI 20 (68)
---------- -----------
Combined $ 3,845 $ 4,968
========== ===========
Other changes in redeemable
common stock and nonredeemable
stockholders' equity:
Barrett $ (2,068) $ 3,317
WIMI - 30
---------- -----------
Combined $ (2,068) $ 3,347
========== ===========
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, 1998, the Company had significant concentrations of credit risk as
follows:
- Marketable securities - $2,585,000 of marketable securities at December
31, 1998 consisted of Oregon State Housing & Community Service Bonds.
F-11
BARRETT BUSINESS SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
- --------------------------------------------------------------------------------
3. FAIR VALUE OF FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK
(CONTINUED)
- Trade receivables - $1,483,000 of trade receivables were with two
customers at December 31, 1998 (7% of trade receivables outstanding at
December 31, 1998).
4. INTANGIBLES
Intangibles consist of the following (in thousands):
1998 1997
------------ ------------
Covenants not to compete $ 3,484 $ 3,469
Goodwill 13,595 12,925
Customer lists 358 358
------------ ------------
17,437 16,752
Less accumulated amortization 5,929 4,619
------------ ------------
$ 11,508 $ 12,133
============ ============
5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
1998 1997
------------ -----------
Office furniture and fixtures $ 3,032 $ 2,899
Computer hardware and software 2,225 1,820
Buildings 1,463 1,441
Vehicles 34 55
------------ -----------
6,754 6,215
Less accumulated depreciation 1,878 1,949
------------ -----------
4,876 4,266
Land 308 308
------------ -----------
$ 5,184 $ 4,574
============ ===========
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, 1998 AND 1997
- --------------------------------------------------------------------------------
6. ACCRUED WORKERS' COMPENSATION CLAIM LIABILITIES (CONTINUED)
The Company has provided $3,958,000 and $3,772,000 at December 31, 1998 and
1997, 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.
Liabilities incurred for work-related employee fatalities are recorded
either at an agreed lump-sum settlement amount or the net present value of
future fixed and determinable payments over the actuarially determined
remaining life of the beneficiary, discounted at a rate that approximates a
long-term, high-quality corporate bond rate. The Company has obtained
excess workers' compensation insurance to limit its self-insurance exposure
to $350,000 per occurrence in all states, except $500,000 per occurrence
for USL&H exposure. The excess insurance provides unlimited coverage above
the aforementioned exposures.
At December 31, 1998, the Company's long-term workers' compensation claim
liabilities in the accompanying balance sheet includes $714,000 for
work-related catastrophic injuries and fatalities. The aggregate
undiscounted pay-out amount of the catastrophic injuries and fatalities is
$1,655,000. The actuarially determined pay-out periods to the beneficiaries
ranges from eight years to 43 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 $7,460,000, $8,099,000 and $5,799,000 for
self-insurance expense for 1998, 1997 and 1996, respectively. Premiums for
insured operations were $1,210,000, $976,000 and $842,000 for 1998, 1997
and 1996, respectively.
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 $7,651,000 at
December 31, 1998 and $7,698,000 at December 31, 1997, to cover potential
claims losses. In partial satisfaction of these requirements, at December
31, 1998, the Company has provided letters of credit in the amount of
$1,572,000 and surety bonds totaling $457,000. The investments are included
in restricted marketable securities and workers' compensation deposits in
the accompanying balance sheets.
F-13
BARRETT BUSINESS SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
- --------------------------------------------------------------------------------
7. CREDIT FACILITY
Effective May 31, 1998, 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 $1,908,000,
in connection with certain workers' compensation surety arrangements. The
Agreement expires on May 31, 1999 and permits total borrowings of up to
$4,000,000 under the revolving credit facility. The interest rates
available on outstanding balances under the revolving credit facility
include Prime Rate, Federal Funds Rate plus 1.75%, or Adjusted Eurodollar
Rate plus 1.25%. Under the 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, 1998, the maximum balance outstanding
under the revolving credit facility was $1,971,000, the average balance
outstanding was $773,000, and the weighted average interest rate during the
period was 7.3%. The weighted average interest rate during 1998 was
calculated using daily weighted averages.
The Company had an additional revolving credit facility. Total borrowings
outstanding at December 31, 1997 were $887,0000. This credit facility was
paid off in 1998.
F-14
BARRETT BUSINESS SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
- --------------------------------------------------------------------------------
8. LONG-TERM DEBT
Long-term debt consists of the following:
1998 1997
-------- --------
(in thousands)
Loan from shareholder, interest at 10% per annum paid in
1998 (See Note 11) $ - $ 122
Mortgage note payable in monthly installments of $2,784, including
interest at 11% per annum through 1998, with a principal payment
of $269,485 paid in 1998, secured by land and building - 273
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) 530 566
Mortgage note payable, including interest at 10% per annum paid in
1998, secured by land and building - 210
Capitalized lease equipment with variable monthly installments, including
interest at 11.5% per annum through 2000, secured by
equipment 34 75
Other - 58
-------- --------
564 1,304
Less portion due within one year 61 731
-------- --------
$ 503 $ 573
======== ========
Maturities on long-term debt are summarized as follows at December 31,
1998 (in thousands):
Year ending
December 31,
-----------
1999 $ 61
2000 53
2001 45
2002 49
2003 356
--------
$ 564
========
F-15
BARRETT BUSINESS SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
- --------------------------------------------------------------------------------
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 $104,000, $111,000 and $134,000 for the
years ended December 31, 1998, 1997 and 1996, 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.
10. COMMITMENTS
LEASE COMMITMENTS
The Company leases its offices under operating lease agreements which
require minimum annual payments as follows (in thousands):
YEAR ENDING
December 31,
-----------
1999 $ 1,315
2000 725
2001 470
2002 228
2003 144
----------
$ 2,882
==========
Rent expense for the years ended December 31, 1998, 1997 and 1996 was
approximately $1,369,000, $1,188,000 and $848,000, respectively.
F-16
BARRETT BUSINESS SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
- --------------------------------------------------------------------------------
11. RELATED PARTY TRANSACTIONS
During 1997 and 1996, the Company recorded revenues of $4,047,000 and
$4,086,000, respectively, and cost of revenues of $3,719,000 and
$3,768,000, respectively, for providing services to a company of which a
former director of the Company is president and majority stockholder. At
December 31, 1997, Barrett had trade receivables from this company of
$188,000.
On December 31, 1997, the Company borrowed $122,100 from a shareholder. The
note bore interest at 10% per annum and was repaid in full on June 29,
1998.
12. INCOME TAXES
The provisions for income taxes are as follows (in thousands):
YEAR ENDED DECEMBER 31,
1998 1997 1996
--------- ---------- ----------
Current:
Federal $ 2,571 $ 2,566 $ 2,692
State 675 503 479
--------- ---------- ----------
3,246 3,069 3,171
--------- ---------- ----------
Deferred:
Federal (255) (600) (348)
State (68) (127) (74)
--------- ---------- ----------
(323) (727) (422)
--------- ---------- ----------
Total provision $ 2,923 $ 2,342 $ 2,749
========= ========== ==========
Deferred tax assets (liabilities) are comprised of the following components
(in thousands):
December 31,
1998 1997
---------- ---------
Current:
Accrued workers' compensation
claim liabilities $ 1,232 $ 1,223
Allowance for doubtful accounts 102 236
Safety incentives 310 276
Other accruals 213 160
---------- ----------
$ 1,857 $ 1,895
========== ==========
Noncurrent:
Tax depreciation in excess
of book depreciation $ (101) $ (165)
Accrued workers' compensation
claim liabilities 278 246
Amortization of intangibles 289 110
Deferred compensation 62 -
Other 24 -
---------- ----------
$ 552 $ 191
========== ==========
F-17
BARRETT BUSINESS SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
- --------------------------------------------------------------------------------
12. INCOME TAXES (CONTINUED)
The effective tax rate differed from the U.S. statutory federal tax rate
due to the following:
YEAR ENDED DECEMBER 31,
1998 1997 1996
------- ------ -------
Statutory federal tax rate 34.0 % 34.0 % 34.0 %
State taxes, net of federal benefit 6.1 3.5 3.5
Nondeductible expenses 3.4 - -
Nondeductible amortization of intangibles 2.5 1.3 .1
Federal tax-exempt interest income (1.0) (1.0) (1.4)
Other, net (1.7) .1 (.6)
-------- ------- -------
43.3 % 37.9 % 35.6 %
======== ======= =======
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.
13. 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 Company employees,
non-employee directors, and outside consultants or advisors. Effective May
14, 1997, the Company's stockholders approved an increase in the number of
shares of common stock reserved for issuance under the Plan from 800,000 to
1,300,000. The number of options and the price per share have been restated
to reflect the 2-for-1 stock split effective May 23, 1994.
The options generally become exercisable in four equal annual installments
beginning one year after the date of grant, and expire ten years after the
date of grant. Under the terms of the Plan, the exercise price of incentive
stock options must not be less than the fair market value of the Company's
stock on the date of grant. Certain of the Company's zone and branch
management employees have elected to receive a portion of their quarterly
cash bonus in the form of nonqualified deferred compensation stock options.
Such options are awarded at a sixty percent discount from the then fair
market value of the Company's stock and are fully vested and immediately
exercisable upon grant. The amount of the grantee's deferred compensation
(discount from fair market value) is subject to market risk. During 1998,
the Company awarded deferred compensation stock options for 51,417 shares
at an average exercise price of $4.26 per share.
F-18
BARRETT BUSINESS SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
- --------------------------------------------------------------------------------
13. STOCK INCENTIVE PLAN (CONTINUED)
A summary of the status of the Company's stock option plan at December 31,
1998, 1997 and 1996, together with changes during the periods then ended,
are presented below.
WEIGHTED
AVERAGE
EXERCISE
OPTIONS PRICE
------------- -------------
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
Options granted at market price 217,601 10.91
Options granted below market price 51,417 4.26
Options exercised (7,250) 5.91
Options canceled or expired (71,592) 14.50
-------------
Outstanding at December 31, 1998 785,295 12.15
=============
Available for grant at December 31, 1998 306,330
=============
The Company applies APB Opinion No. 25 and related interpretations in
accounting for the Plan. Accordingly, no compensation expense has been
recognized for its stock option grants. If compensation expense for the
Company's stock-based compensation plan had been determined based on the
fair market value at the grant date for awards under the Plan, consistent
with the method of Statement of Financial Accounting Standards No. 123, the
Company's net income and earnings per share would have been reduced to the
pro forma amounts indicated below:
1998 1997 1996
-------- -------- --------
(in thousands, except per share amounts)
Net income, as reported $ 3,821 $ 3,845 $ 4,968
Net income, pro forma 3,117 3,364 4,596
Basic earnings per share, as reported .50 .50 .65
Basic earnings per share, pro forma .41 .43 .59
Diluted earnings per share, as reported .50 .49 .64
Diluted earnings per share, pro forma .41 .42 .58
F-19
BARRETT BUSINESS SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
- --------------------------------------------------------------------------------
13. STOCK INCENTIVE PLAN (CONTINUED)
The effects of applying SFAS No. 123 for providing pro forma disclosures
for 1998, 1997 and 1996 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 1998, 1997 and 1996:
1998 1997 1996
----------- ----------- ----------
Expected volatility 43% 42% 41%
Risk free rate of return 5.50% 6.25% 6.10%
Expected dividend yield 0% 0% 0%
Expected life (years) 8.0 7.5 7.0
Total fair value of options granted at market price was computed to be
$1,364,155, $1,809,662 and $1,227,834 for the years ended December 31,
1998, 1997 and 1996, respectively. Total fair value of options granted at
60% below market price was computed to be $422,743 for the year ended
December 31, 1998. In accordance with APB No. 25, the Company recognized
compensation expense of $212,941 in connection with the issuance of these
discounted options. The weighted average value of options granted in 1998,
1997 and 1996 was $6.64, $8.23 and $8.93, respectively.
The following table summarizes information about stock options outstanding
at December 31, 1998:
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 1998 price
------------------------- -------------- -------------- --------------- -------------- -------------
$ 3.39 - 5.23 79,917 $ 3.99 7.6 55,831 $ 3.81
8.75 - 9.50 64,000 9.42 5.2 64,000 9.42
10.13 - 12.50 284,954 11.10 8.9 52,360 11.52
13.37 - 14.88 161,500 14.40 7.6 76,625 14.41
15.00 - 18.00 194,924 16.08 7.2 114,479 15.97
At December 31, 1998, 1997 and 1996, 363,295, 211,958 and 126,500 were
exercisable at weighted average exercise prices of $11.97, $12.02 and
$10.80, respectively.
14. 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, 1998 AND 1997
- --------------------------------------------------------------------------------
15. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
(in thousands, except per share amounts)
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------------- ------------- -------------- -------------
Year ended December 31, 1996
Revenues $ 46,502 $ 55,902 $ 64,694 $ 64,854
Cost of revenues 40,987 49,146 57,438 57,702
Net income 816 1,287 1,639 1,226
Basic earnings per share .11 .17 .21 .16
Diluted earnings per share .11 .16 .21 .16
Common stock market prices:
High 20.75 20.00 22.25 17.50
Low 14.50 16.25 14.00 13.50
Year ended December 31, 1997
Revenues $ 67,011 $ 75,660 $ 85,995 $ 76,865
Cost of revenues 60,296 67,686 77,258 68,877
Net income 823 1,254 976 792
Basic earnings per share .11 .16 .13 .10
Diluted earnings per share .10 .16 .13 .10
Common stock market prices:
High 19.00 15.00 17.50 17.25
Low 12.75 11.50 13.63 11.00
Year ended December 31, 1998
Revenues $ 69,241 $ 76,651 $ 81,969 $ 75,168
Cost of revenues 62,467 68,524 73,002 67,012
Net income 387 600 1,599 1,235
Basic earnings per share .05 .08 .21 .16
Diluted earnings per share .05 .08 .21 .16
Common stock market prices:
High 12.00 13.38 10.88 9.38
Low 10.25 9.13 7.88 6.00
16. SUBSEQUENT EVENTS
Subsequent to year end, effective January 1, 1999, the Company acquired all
of the outstanding common stock of Temporary Staffing Systems, Inc.
("TSS"), a staffing services company with eight branch offices in North
Carolina and one in South Carolina. The Company paid $2,000,000 in cash and
issued a note payable for $950,000 due January 31, 2000, payment of which
is contingent upon a minimum equity requirement for 1998 and certain
financial performance criteria for 1999. The Company also paid $50,000 in
cash for a noncompete agreement with the selling shareholder. TSS's
revenues for the fiscal year ended March 29, 1998 were approximately $12.9
million (audited).
F-21
BARRETT BUSINESS SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
- --------------------------------------------------------------------------------
16. SUBSEQUENT EVENTS (CONTINUED)
Subsequent to year end, effective February 8, 1999, the Company negotiated
an amendment to the loan agreement with its principal bank to increase the
availability under the unsecured revolving credit facility by $2.0 million.
All other terms and conditions of the loan agreement were unchanged.
Subsequent to year end, effective February 15, 1999, the Company acquired
certain assets of TPM Staffing Services, Inc. ("TPM"), a staffing services
company with three offices in southern California - Lake Forest, Santa Ana,
and Anaheim. The Company paid $1,200,000 in cash for the assets of TPM and
the selling shareholder's noncompete agreement, of which $240,000 will be
deferred for six months. TPM's revenues for the year ended December 31,
1998 were approximately $5.7 million (unaudited).
F-22
EXHIBIT INDEX
2 Acquisition and Merger Agreement dated June 29, 1998, among the
registrant, Western Industrial Management, Inc., Catch 55, Inc., and
the other parties listed therein. Incorporated by reference to Exhibit
2 to the registrant's Current Report on Form 8-K filed July 13, 1998.
3.1 Charter of the registrant, as amended. Incorporated by reference to
Exhibit 3 to the registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1994.
3.2 Bylaws of the registrant, as amended. Incorporated by reference to
Exhibit 3.2 to the registrant's Annual Report on Form 10-K for the year
ended December 31, 1996.
4.1 Loan Agreement between the registrant and Wells Fargo Bank, N.A., dated
May 31, 1998. Incorporated by reference to Exhibit 4.1 to the
registrant's Quarterly Report on Form 10-Q for the quarter ended June
30, 1998.
4.2 Amendment, dated February 8, 1999, to Loan Agreement between the
registrant and Wells Fargo Bank, N.A., dated May 31, 1998.
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.
Incorporated by reference to Exhibit 10.3 to the registrant's Annual
Report on Form 10-K for the year ended December 31, 1997.
10.4 Employment Agreement between the registrant and Michael D. Mulholland,
dated January 26, 1999.
11 Statement of calculation of Basic and Diluted shares outstanding.
23 Consent of PricewaterhouseCoopers LLP, independent accountants.
24 Power of attorney of certain officers and directors.
27 Financial Data Schedule, fiscal year end 1998.