UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
|X| Annual Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
For the fiscal year ended December 31, 1996
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 S.W. 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.
State the aggregate market value of the voting stock held by
non-affiliates of the Registrant.
$90,027,225 at February 28, 1997
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 28, 1997
Common Stock, Par Value $.01 Per Share 6,825,827 Shares
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement for the 1997 Annual Meeting
of Stockholders are hereby incorporated by reference into Part III of Form 10-K.
INDEX
Page
PART I ........................................................................................................ 3
ITEM 1. BUSINESS............................................................................... 3
ITEM 2. PROPERTIES............................................................................. 15
ITEM 3. LEGAL PROCEEDINGS...................................................................... 15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.................................... 16
EXECUTIVE OFFICERS OF THE REGISTRANT................................................... 16
PART II........................................................................................................... 18
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS............................................................ 18
ITEM 6. SELECTED FINANCIAL DATA................................................................ 19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.......................................... 20
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA............................................ 28
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE................................................. 52
PART III.......................................................................................................... 52
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT..................................... 52
ITEM 11. EXECUTIVE COMPENSATION................................................................. 52
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT......................................................................... 52
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS......................................... 52
PART IV........................................................................................................... 53
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K.................................................................... 53
SIGNATURES ....................................................................................... 54
EXHIBIT INDEX ....................................................................................... 55
PART I
Item 1. BUSINESS
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 small and mid-sized businesses. 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
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 personnel-related matters.
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 time and energy expended in labor-related regulatory compliance. For
1996, Barrett's staffing services revenues represented 52.6% of total revenues,
compared to 47.4% 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, general contractors in numerous construction-related fields and
various professional services firms. During 1996, the Company provided staffing
services to approximately 5,000 customers. Although a majority of the Company's
staffing customers are small to mid-sized businesses, during 1996 approximately
55 of the Company's customers have each utilized Barrett employees in a number
ranging from at least 200 employees to as many as 1,400 employees through
various staffing services arrangements. In addition, Barrett had approximately
780 PEO clients at December 31, 1996, compared to 530 at December 31, 1995.
The Company operates through a network of 24 branch offices in Oregon,
California, Washington, Maryland, Delaware, Idaho, Arizona and Michigan. Barrett
also has 21 smaller recruiting and staffing offices in its general market areas
under the direction of a branch office.
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Operating Strategies
The Company's principal operating strategies are to: (i) promote a
decentralized and autonomous management philosophy, (ii) motivate employees
through wealth sharing, (iii) operate successfully in smaller geographic
markets, (iv) leverage branch level economies of scale, (v) provide a unique and
efficient blend of staffing and PEO services and (vi) control 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) expand into new geographic markets, (iii) increase revenues in
existing branches through enhanced marketing and sales initiatives, (iv)
accelerate the growth of PEO services and (v) enhance management information
systems to support continued growth and to improve customer services.
Recent Acquisitions
On April 1, 1996, the Company acquired certain assets and the business
of StaffAmerica, Inc., pursuant to a Plan and Agreement of Reorganization.
StaffAmerica provides both temporary staffing and PEO 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 and issued to each of the two owners of StaffAmerica 845 shares of
Company common stock for their covenants not to compete.
On April 8, 1996, the Company acquired certain assets and the business
of JobWorks Agency, Inc. by way of a Plan and Agreement of Reorganization.
JobWorks provides both temporary staffing and PEO services through its two
offices located in Hood River and The Dalles, Oregon. JobWorks had revenues of
approximately $1.2 million 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 paid $20,000 in
cash for the selling shareholder's agreement of noncompetition.
Effective August 26, 1996, the Company acquired certain assets of
Cascade Technical Staffing for $550,000 in cash. Cascade, which had 1995
revenues of approximately $3.5 million, provides technical and light industrial
staffing services primarily in the electronics industry through its Tigard,
Oregon office.
Effective November 4, 1996, the Company acquired the PEO division of
California Employer Services, Inc., an Orange County, California staffing
services company. The Company paid $624,000 in cash for the division and assumed
a customer deposit liability of $36,000. The division generated revenues of
approximately $10.5 million for the fiscal year ended September 30, 1996.
Effective November 25, 1996, the Company acquired certain assets of
Professional Personnel, Inc. ("PPI"), a provider of PEO services located in
Downey, California. The Company paid $176,000 in cash for the division and
assumed a customer deposit liability of $19,000. For the fiscal year ended
September 30, 1996, PPI had revenues of approximately $2.4 million.
4
Subsequent to year end, 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 Orange County, California. The Company paid $1,800,000 in
cash for all of the outstanding common stock of HR Only and $1,200,000 in cash
for noncompete agreements with certain individuals, of which $1,000,000 will be
deferred for five years and then be paid ratably over the succeeding five-year
period. HR Only's revenues for the fiscal year ended January 31,1997 were
approximately $4.3 million.
The Company reviews acquisition opportunities on an ongoing basis.
While growth through acquisition is a major element of the Company's overall
strategic growth plan, there can be no assurance that any additional
acquisitions will be completed in the foreseeable future, or that any future
acquisitions will have a positive effect on the Company's performance.
Acquisitions involve a number of potential risks, including the diversion of
management's attention to the assimilation of the operations and personnel of
the acquired companies, exposure to workers' compensation and other costs in
differing regulatory environments, adverse short-term effects on the Company's
operating results, integration of management information systems and the
amortization of acquired intangible assets.
The Company's Services
Overview of Services. The Company offers a continuum of human resource
management services to its clients. While some services are more frequently
associated with Barrett's co-employer arrangements, the Company's expertise in
such areas as safety services and personnel-related regulatory compliance may
also be utilized by its staffing services customers through the Company's human
resource management services. The Company's range of services and expertise in
human resource management encompasses five major categories:
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, and claims administration.
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.
5
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 enhanced 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, checking job
applications and references, drug screening, criminal and motor
vehicle records checks, hiring, and compliance with such
employment regulatory areas as immigration, the Americans with
Disabilities Act, and federal and state labor regulations.
Staffing Services. Barrett's staffing services include on-demand or
short-term staffing assignments, contract staffing, long-term or indefinite-term
on-site management, and human resource administration. Short-term staffing
involves employee demands caused by such factors as seasonality, fluctuations in
customer demand, vacations, illnesses, parental leave, and special projects
without incurring the ongoing expense and administrative responsibilities
associated with recruiting, hiring, and retaining additional permanent
employees. As more and more U.S. companies focus on cost-cutting and reducing
overhead, the use of employees on a short-term basis allows firms to utilize the
"just-in-time" approach to their personnel needs, converting a portion of their
fixed personnel costs to variable expense.
Contract staffing refers to the Company's responsibilities for the
placement of employees for a period of more than three months or an indefinite
period. This type of arrangement often involves outsourcing an entire department
in a large corporation or providing the manpower for a large project.
In an on-site management arrangement, Barrett places an experienced
manager on site at a customer's place of business. The manager is responsible
for conducting all recruiting, screening, interviewing, testing, hiring, and
employee placement functions at the customer's facility for a long-term or
indefinite period.
The Company's staffing services customers operate in a broad range of
businesses, including forest products and agriculture-based companies,
electronic manufacturers, transportation and shipping companies, food
processors, professional firms, and construction contractors. Such customers
range in size from small local firms to large national companies which use
Barrett's services on a local basis. None of the Company's staffing services
customers individually accounted for more than 10% of its total 1996 revenues.
In 1996, light industrial workers generated approximately 73% of the
Company's staffing services revenues, while technical personnel accounted for
17% of such revenues and clerical staff represented the balance of 10%. 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
6
assembly workers and designers and drafters of electronic parts. Clerical
workers include primarily secretaries, receptionists and office clerks.
Barrett emphasizes prompt, personalized service in assigning quality,
trained, drug-free personnel at competitive rates to users of its staffing
services. The Company uses internally developed computer databases of employee
skills and availability at each of its branches to match customer needs with
available qualified employees. The Company emphasizes the development of an
understanding of the unique requirements of its clientele by its account
managers. Customers are offered a "money-back" guarantee if dissatisfied with
staffing employees placed by Barrett.
The Company utilizes a variety of methods to recruit its workforce for
staffing services, including among others, referrals by existing employees,
newspaper advertising and marketing brochures distributed at colleges and
vocational schools. The employee application process includes an interview,
skills assessment test, reference verification and drug screening. The
recruiting of qualified employees requires more effort when unemployment rates
are low.
Barrett's staffing services employees are not under its direct control
while placed at a customer's worksite. Barrett has not experienced any
significant liability due to claims arising out of negligent acts or misconduct
by its staffing services employees. The possibility exists, however, of claims
being asserted against the Company which may exceed the Company's liability
insurance coverage, which could have a material adverse effect on the Company's
business, financial condition, and results of operations.
PEO Services. Many businesses, particularly those with a limited number
of employees, find personnel administration requirements to be unduly complex
and time consuming. These businesses often cannot justify the expense of a
full-time human resources staff. In addition, the escalating costs of health and
workers' compensation insurance in recent years, coupled with the increased
complexity of laws and regulations affecting the workplace, have created a
compelling motivation for small to mid-sized businesses to outsource these
managerial burdens. The outsourcing of non-core business functions, such as
human resource administration, enables small enterprises to devote their limited
resources to their core competencies.
In a PEO services arrangement, Barrett enters into a contract to become
a co-employer of the client company's existing workforce. Pursuant to this
contract, Barrett assumes responsibility for some or all personnel-related
matters, 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
expanded these services to Maryland and Washington in the first and third
quarters, respectively, of 1994, to Delaware and California in the second
quarter of 1995, to Idaho and Arizona in 1996. The Company has entered into
co-employer arrangements with a wide variety of clients, including companies
involved in reforestation, moving and shipping, professional firms,
construction, retail, manufacturing and distribution businesses. PEO clients are
typically small to mid-sized businesses with up to 100 employees. None of the
Company's PEO clients individually accounted for more than 5% of its total
annual revenues during 1996.
7
Prior to entering into a co-employer arrangement, the Company performs
an analysis of the potential client's actual personnel and workers' compensation
costs based on information provided by the customer. Barrett introduces its
workplace safety program and recommends improvements in procedures and equipment
following a safety inspection of the customer's facilities which the potential
client must agree to implement as part of the co-employer arrangement. Barrett
also offers significant financial incentives to PEO clients to maintain a safe
work environment.
The Company's standard PEO services agreement provides for services for
an indefinite term, until notice of termination is given by either party. The
agreement permits cancellation by either party upon 30 days' written notice. In
addition, the Company may terminate the agreement at any time for specified
reasons, including nonpayment or failure to follow Barrett's workplace safety
program.
The form of agreement also provides for indemnification of the Company
by the client against losses arising out of any default by the client under the
agreement, including failure to comply with any employment-related, health and
safety or immigration laws or regulations. The Company also requires the client
to maintain comprehensive liability coverage in the amount of $1,000,000 for
acts of its worksite employees. In addition, the Company has excess liability
insurance coverage in the amount of $2,000,000 per occurrence and policy limits
of $5,000,000 in the aggregate. Although no claims exceeding such policy limits
have been paid by the Company to date, the possibility exists that claims for
amounts in excess of sums available to the Company through indemnification or
insurance may be asserted in the future, which could have a material adverse
effect on the Company's business, financial condition, and results of
operations.
Sales and Marketing
The Company markets its services primarily through direct sales
presentations by its branch office account managers. The Company also obtains
referrals from existing clients and other third parties, and places radio
commercials and advertisements in various publications, including local
newspapers and the Yellow Pages. Barrett believes that it is able to offer its
services at competitive rates due to the lower costs associated with its
self-insured workers' compensation program when compared to the cost of workers'
compensation insurance. See "Self-Insured Workers' Compensation Program" below.
Billing
Through centralized operations at the Company's headquarters in
Portland, Oregon, the Company prepares invoices weekly for its staffing services
customers and following the end of each payroll period for PEO clients. The
costs of health insurance coverage and Barrett's cafeteria plan are passed
through to its PEO clients based on the number of participating employees. The
Company often requires a deposit from its PEO clients to cover a portion of the
anticipated billing for one payroll period. The Company has generally had
favorable results with collecting accounts receivable, which it attributes to
customer satisfaction, its analysis of potential clients' credit histories, and
weekly monitoring of account aging by each branch manager.
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
8
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 $300,000 in Maryland and
$500,000 for USL&H coverage) with statutory limits (i.e., in unlimited amounts)
pursuant to annual policies with major insurance companies. The excess-insurance
policies contain standard exclusions from coverage, including punitive damages,
fines or penalties in connection with violation of any statute or regulation and
losses covered by other insurance or indemnity provisions.
In addition, the Company has implemented an insured large-deductible
program which allows it to become insured for workers' compensation coverage in
nearly all states where the extent of the Company's operations does not yet
warrant the investment to become a self-insured employer.
Claims Management. Pursuant to its self-insured status, the Company's
workers' compensation expense is tied directly to the incidence and severity of
workplace injuries to its employees. Barrett seeks to contain its workers'
compensation costs through an aggressive approach to claims management. The
Company uses managed-care systems to reduce medical costs and keeps time-loss
costs to a minimum by assigning injured workers, whenever possible, to
short-term assignments which accommodate the workers' physical limitations. The
Company believes that these assignments minimize both time actually lost from
work and covered time-loss costs. Barrett has also engaged third-party
administrators ("TPAs") to provide additional claims management expertise.
Typical management procedures include performing thorough and prompt on-site
investigations of claims filed by employees, working with physicians to
encourage efficient medical management of cases, denying questionable claims and
negotiating early settlements to eliminate future case development and costs.
Barrett also maintains a mandatory corporate-wide pre-employment drug testing
program. 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.
9
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'
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-third 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, construction, and
reforestation. A failure to successfully manage the severity and frequency of
workers' compensation injuries will have a negative impact on the Company. In
early 1995, the Company experienced a noticeable increase in workers'
compensation costs arising out of the failure of some PEO clients to adhere to
the Company's workplace safety policies. In response
10
to this increase, the Company hired additional workers' compensation loss
control branch personnel. Also, management instituted 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 operated and in monitoring the compliance by client with
workplace safety requirements. The adoption of this policy of "zero tolerance"
for avoidable workplace injuries resulted in the termination of more than 100
PEO client accounts.
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 an opportunity to
significantly expand the capacity and capabilities necessary to accommodate its
anticipated growth through the utilization of new software technologies.
Accordingly, management has recently initiated a project 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 cost of implementing this project at approximately $2.0 million.
The new system is currently expected to be operational in late 1997.
Employees and Employee Benefits
At December 31, 1996, the Company had approximately 17,775 employees,
including approximately 11,400 staffing services employees, approximately 6,100
PEO employees and approximately 275 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. Approximately 1% of the
Company's employees are covered by a collective bargaining agreement. Each of
Barrett's managerial, sales and administrative employees has entered into a
standard form of employment agreement which, among other things, contains
covenants not to engage in certain activities in competition with the Company
for 18 months following termination of employment and to maintain the
confidentiality of certain proprietary information. Barrett believes its
employee relations are good.
Benefits offered to Barrett's staffing services employees include group
health insurance, a Section 125 cafeteria plan which permits employees to use
pretax earnings to fund various services, including medical, dental and
childcare, and a Section 401(k) savings plan pursuant to which employees may
begin making contributions upon reaching 21 years of age and completing 1,000
hours of service in any consecutive 12-month period. The Company may also make
contributions to the savings plan, which vest over seven years and are subject
to certain legal limits, at the sole discretion of the Company's Board of
Directors. 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".
11
Regulatory and Legislative Issues
Business Operations. The Company is subject to the laws and regulations
of the jurisdiction 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 has caused Barrett to make certain changes in its PEO
operations and contracts in Oregon, resulting in additional financial risk,
particularly with respect to those clients who breach their payment obligation
to the Company, such compliance has not had a material 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 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. Generally, employee benefit plans are subject to provisions of
both the Code and the Employee Retirement Income Security Act ("ERISA"). In
order to qualify for favorable tax treatment under the Code, qualified plans
must be established and maintained by an employer for the exclusive benefit of
its employees.
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 IRS and depends upon the Company's ability to establish the Company's
employer-employee relationship with PEO employees. The issue of whether the
Company's tax-qualified benefit plans can legitimately include worksite
employees under their coverage has not yet been resolved. If the worksite
employees cannot be covered by the plans, then the exclusive benefit requirement
imposed by the Code would not be met by the plans as currently administered and
the plans could be disqualified.
12
The IRS has established a Market Segment Study Group regarding Employee
Leasing for the stated purpose of examining whether PEOs, such as the Company,
are the employers of worksite employees under the Code provisions applicable to
employee benefit plans and are, therefore, able to offer to worksite employees
benefit plans that qualify for favorable tax treatment. The IRS Study Group is
reportedly also examining whether the owners of client companies are employees
of PEO companies under Code provisions applicable to employee benefit plans. To
the best of the Company's knowledge, the Market Segment Study Group has not
issued a report.
A PEO company headquartered in Texas has stated publicly that the IRS
National Office is being requested by the IRS Houston District to issue a
Technical Advice Memorandum ("TAM") on the PEO worksite employee issue in
connection with an ongoing audit of a plan of the Texas PEO company. The stated
purpose of TAMs is to help IRS personnel in closing cases and to establish and
maintain consistent holdings. The IRS's position is that TAMs are not
precedential; that is, they are limited to the particular taxpayer involved and
that taxpayer's set of facts. The draft request for a TAM by the IRS Houston
District reportedly states its determination that the Texas PEO company's Code
Section 401(k) plan should be disqualified for the reason, among others, that it
covers worksite employees who are not employees of the PEO company.
The timing and nature of the issuance and contents of any TAM regarding
the worksite employee issue or any report of the Market Segment Study Group
regarding Employee Leasing is unknown at this time. There has also been public
discussion of the possibility that the Treasury Department may propose some form
of administrative relief or that Congress may provide legislative resolution or
clarification regarding this issue.
In the event the tax exempt status of the Company's benefit plans were
to be discontinued and the benefit plans were to be disqualified, such actions
could have a material adverse effect on the Company's business, financial
condition, and results of operations. The Company is not presently able to
predict the likelihood of disqualification nor the resulting range of loss, in
light of the lack of public direction from the IRS or Congress.
Competition
The PEO and staffing services businesses are characterized by rapid
growth and intense competition. The staffing services market includes
competitors of all sizes, including several, such as Manpower, Inc., Kelly
Services, Inc., The Olsten Corporation, Interim Services, Inc., and Adia
Services, Inc., which are national in scope and have substantially greater
financial, marketing, and other resources than the Company. In addition to
national companies, Barrett competes with numerous regional and local firms for
both customers and employees. The Company estimates that at least 100 firms
provide staffing services in Oregon. There are relatively few barriers to entry
into the staffing services business. The principal competitive factors in the
staffing services industry are price, the ability to provide qualified workers
in a timely manner and the monitoring of job performance. The Company attributes
its internal growth in staffing services revenues to the cost-efficiency of its
operations which permits the Company to price its services competitively, and to
its ability through its branch office network to understand and satisfy the
needs of its customers with competent personnel.
Although there are believed to be approximately 2,200 companies
currently offering PEO service 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 at least 30 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,
13
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 YourStaff, a subsidiary of Kelly Services, Inc., The Vincam Group Inc.,
Administaff, 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.
14
Item 2. PROPERTIES
The Company provides staffing and PEO services through all 24 of its
branch offices. The following table shows the locations of the Company's branch
offices and the year in which each branch was opened or acquired. The Company's
Oregon branches accounted for 66% of its total revenues in 1996. The Company
also leases office space in 21 other locations in its market areas which it uses
to recruit and place employees.
Year Opened Year Opened
Oregon Locations or Acquired Other Locations or Acquired
--------------------- ----------- ----------------------- -----------
Portland (Industrial) 1984 Tucson, Arizona 1996
Portland (Bridgeport) 1988 Sacramento, California 1988
Bend 1990 Santa Clara, California 1994
Medford 1990 Brea, California 1996
Salem 1990 Goleta, California 1996
Albany 1991 Ontario, California 1996
Eugene 1991 Oxnard, California 1996
Portland (Leasing) 1993 Los Angeles, California 1997
Pendleton 1994 Boise, Idaho 1996
Hood River 1996 Lutherville, Maryland 1951
Tigard 1996 Easton, Maryland 1994
Flint, Michigan 1997
Spokane, Washington 1994
The Company's corporate headquarters are located in an office building
in Portland, Oregon, with approximately 9,200 square feet of office space. The
building is subject to a mortgage loan with a principal balance of approximately
$598,000 at December 31, 1996.
The Company also owns another office building in Portland, Oregon,
which houses its Portland/Bridgeport branch office. The building is subject to a
mortgage loan with a principal balance at December 31, 1996, of approximately
$276,000 and has approximately 7,000 square feet of office space.
Barrett leases office space for its other branch offices. At December
31, 1996, such leases had expiration dates ranging from less than one year to
seven years, with total minimum payments through 2001 of approximately
$2,205,000.
Item 3. LEGAL PROCEEDINGS
A lawsuit was filed in the Circuit Court of the State of Oregon for the
County of Multnomah on February 5, 1997, by Javier and Ester Munoz, husband and
wife, against Asger M. Nielson, doing business as Nielson and Son ("Nielson"),
Rain-Master Roofing, Inc. ("Rain-Master"), and the Company. Mr. Munoz was
employed by the Company under a PEO arrangement with Rain-Master, which is in
the roofing business. On February 1, 1995, Rain-Master was providing roofing
services at a construction site for which Nielson was serving as general
contractor. Mr. Munoz fell from the roof at the site in the course of his
employment and is now a paraplegic as a result of the injuries he suffered.
Until the filing of the lawsuit referred to above, Mr. Munoz's claim was being
defended as a workers' compensation claim.
In the lawsuit, the plaintiffs are seeking damages in the amount of
$10,000,000 pursuant to claims for relief based on employer liability,
intentional injury, product liability, negligence, breach of implied warranty
and loss of consortium. Defense of the lawsuit has been tendered to the
15
Company's excess workers' compensation, commercial general liability and
umbrella liability insurance carriers; acceptance of the defense to the claim
has not yet been received. Management intends to vigorously defend this action
on the basis, among others, that workers' compensation is the exclusive remedy
for employees injured in the course of employment. Under appropriate
circumstances, the Company also may seek to enforce its contractual right to
indemnification from Rain-Master pursuant to its PEO leasing arrangement. Based
upon its investigation and analysis to date, management believes that the
outcome of this proceeding will not have a materially adverse effect on the
Company's financial position or results of operations.
On March 12, 1997, a Notice of Intent to Revoke Farm/Forest Labor
Contractor License and to Assess Civil Penalties (the "Notice") was served on
the Company by the Bureau of Labor and Industries of the State of Oregon (the
"Bureau"). The Notice also names Daniel A. Hatfield, an employee of the Company.
The Notice proposes to assess civil penalties in the amount of $488,000, based
on the numbers of workers allegedly affected, for alleged noncompliance with
various duties imposed on farm labor contractors by Oregon law, including
licensing violations, failure to comply with wage payment laws, and failure to
maintain and to provide workers and the Bureau with required documentation.
Management intends to vigorously contest the claims asserted in the Notice and
is in the process of collecting and analyzing data necessary to defend its
position and to evaluate the probable outcome of the proceedings.
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 1996.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table identifies, as of February 28, 1997, 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 51 President; Chief Executive Officer; Director 1980
Michael D. Mulholland 45 Vice President-Finance and Secretary; Chief 1994
Financial Officer
Michael K. Barrett 33 Vice President-Business Development 1995
K. Risa Olsen 46 Vice President 1997
James D. Miller 33 Controller, Principal Accounting Officer 1994
- -------------------------------
William W. Sherertz has acted as Chief Executive Officer of the Company
since 1980. He has also been a director of the Company since 1980, and was
appointed President of the Company in March 1993. Mr. Sherertz also serves as
Chairman of the Board of Directors.
Michael D. Mulholland joined the Company in August 1994 as Vice
President-Finance and Secretary. From 1988 to 1994, Mr. Mulholland was employed
by Sprouse-Reitz Stores Inc., a former Nasdaq-listed retail company, serving as
its Executive Vice President, Chief Financial Officer and Secretary. In November
1991, Sprouse-Reitz filed a voluntary petition under Chapter 11 of the U.S.
Bankruptcy Code. Its plan of
16
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.
Michael K. Barrett joined the Company as Vice President-Business
Development in December 1995. Prior to joining the Company, Mr. Barrett was Vice
President of Marketing for YourStaff, Inc., a PEO subsidiary of Kelly Services,
Inc., from May 1994 to December 1995. From November 1989 to May 1994, Mr.
Barrett owned and operated an advertising firm.
K. Risa Olsen rejoined the Company in April 1996 as National Accounts
Manager. Ms. Olsen was elected 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.
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.
There are no family relationships among any of the above listed
officers.
17
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
National Market tier of The Nasdaq Stock Market under the symbol "BBSI." At
February 28, 1997, there were 70 stockholders of record and approximately 2,200
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:
1995 High Low
---- -------- -----
First Quarter $19.50 $13.50
Second Quarter 15.00 10.50
Third Quarter 15.75 13.50
Fourth Quarter 15.50 12.25
1996
----
First Quarter $20.75 $14.50
Second Quarter 20.00 16.25
Third Quarter 22.25 14.00
Fourth Quarter 17.50 13.50
During 1996, the Company issued equity securities without registration
under the Securities Act of 1933, in each case in reliance upon the exemption
from registration set forth in Section 4(2) of the Securities Act of 1933
regarding transactions by an issuer not involving a public offering, as follows:
On April 1, 1996, the Company issued 157,464 shares of Common Stock to
the seller in connection with its purchase of certain assets and the business of
StaffAmerica, Inc., valued at $2,795,000, as well as 1,690 shares of Common
Stock valued at $17.75 per share to the two owners of StaffAmerica, Inc., in
exchange for their covenants not to compete.
On April 8, 1996, the Company issued 20,446 shares of Common Stock to
the seller in connection with the Company's purchase of certain assets and the
business of JobWorks Agency, Inc., valued at $380,000.
18
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 presented in
Item 8 of this report.
Years Ended December 31,
-----------------------------------------------------------------------
1996 1995 1994 1993 1992
------- ------- ------- ------- -------
(In thousands, except per share data)
Statement of Operations Data:
Revenues:
Staffing services.......................... $ 113,539 $ 99,233 $ 71,148 $ 41,755 $ 34,681
Professional employer services............. 102,277 80,572 69,404 58,512 45,444
------- ------- ------- ------- ------
Total.................................. 215,816 179,805 140,552 100,267 80,125
------- ------- ------- ------- ------
Cost of revenues:
Direct payroll costs....................... 164,180 136,174 105,515 75,171 59,820
Payroll taxes and benefits................. 19,913 16,088 12,758 9,911 7,826
Workers' compensation...................... 5,938 6,073 5,069 4,591 3,233
Safety incentives.......................... 1,532 981 1,103 598 651
------- ------- ------- ------- ------
Total.................................. 191,563 159,316 124,445 90,271 71,530
------- ------- ------- ------- ------
Gross margin.................................... 24,253 20,489 16,107 9,996 8,595
Selling, general, and administrative expenses... 16,034 13,657 10,302 6,450 6,003
Amortization of intangibles..................... 820 564 430 370 336
------- ------- ------- ------- ------
Income from operations.......................... 7,399 6,268 5,375 3,176 2,256
------- ------- ------- ------- ------
Other (expense) income:
Interest expense........................... (82) (75) (106) (86) (77)
Interest income............................ 534 400 224 161 70
Other, net................................. -- 32 78 133 26
------- ------- ------- ------- ------
Total.................................. 452 357 196 208 19
------- ------- ------- ------- ------
Income before provision for income taxes........ 7,851 6,625 5,571 3,384 2,275
Provision for income taxes(1)................... 2,815 2,507 2,105 437 --
------- ------- ------- ------- ------
Net income................................. $ 5,036 $ 4,118 $ 3,466 $ 2,947 $ 2,275
------- ======= ======= ======= ======
Net income per share....................... $ .73 $ .62 $ .53
======= ======= =======
Unaudited pro forma data(1):
Net income................................. $ 2,060 $ 1,385
======= ======
Net income per share(2).................... $ .39 $ .35
======= ======
Weighted average common shares outstanding(2)... 6,935 6,680 6,591 5,260 4,000
======= ======= ======= ======= ======
As of December 31,
-----------------------------------------------------------------------
1996 1995 1994 1993 1992
------- ------- ------- ------- -------
(In thousands)
Selected Balance Sheet Data:
Working capital (deficit)....................... $ 11,557 $ 8,417 $ 4,889 $ 7,017 $ (678)
Total assets.................................... 42,646 31,273 24,665 18,425 7,219
Long-term debt, net of current portion.......... 838 875 908 946 292
Stockholders' equity............................ 25,562 20,034 14,455 10,480 1,574
- -----------------------------
(1) Effective July 1, 1987, the Company elected to be treated as a corporation
subject to taxation under Subchapter S of the Internal Revenue Code,
pursuant to which the net earnings of the Company were taxed directly to
the Company's stockholders rather than to the Company. The Company
terminated its election on April 30, 1993, and recognized a cumulative net
deferred tax asset of $505,000. The amounts shown reflect a pro forma tax
provision as if the Company had been a Subchapter C corporation subject to
income taxes for all periods presented.
(2) All share and per share amounts have been restated to reflect the 2-for-1
stock split effective May 23, 1994.
19
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, payrolling 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, all
other pass-through costs such as health care insurance, and a service fee
(equivalent to a mark-up percentage). The Company's Oregon branches accounted
for 66% of its total revenues in 1996, and an additional 22% was derived from
its branches in California and Washington. Consequently, weakness in economic
conditions on the West Coast could have a material adverse effect on the
Company's financial results.
The Company's cost of revenues is comprised of direct payroll costs,
payroll taxes and 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 benefits consist of the employer's portion of
Social Security and Medicare taxes, federal unemployment taxes, state
unemployment taxes, health care insurance and employee reimbursements for
materials, supplies and other expenses which are passed through to 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 prearranged loss parameters.
The largest portion of workers' compensation expense is the cost of
workplace injury claims. When an injury occurs and is reported to the Company,
the Company's respective independent third-party claims administrator ("TPA")
analyzes the details of the injury and develops a case reserve, which is the
TPA's estimate of the cost of the claim based on similar injuries and its
professional judgment. The Company then records, or accrues, an expense and a
corresponding liability based upon the TPA's estimates for claims reserves. As
cash payments are made by the Company's TPA against specific case reserves, the
accrued liability is reduced by the corresponding payment amount. The TPA also
reviews existing injury claims on an on-going basis and adjusts the case
reserves as new or additional information for each claim becomes available. The
Company has established an additional IBNR reserve to provide for future
unanticipated increases in expenses ("adverse loss development") of the claims
reserves for open injury claims and for claims incurred but not reported related
to prior and current periods. Management believes that the Company's internal
claims reporting system minimizes the occurrence of unreported incurred claims.
Selling, general and administrative expenses represent both branch and
corporate operating expenses. Branch operating expenses consist primarily of
branch office staff payroll and payroll related costs, advertising, rent, office
supplies, depreciation and branch incentive compensation. Branch incentive
compensation represents a combined 15% of branch pre-tax profits, of which 10%
is paid to the branch manager and 5% is shared among the office staff. Corporate
operating
20
expenses consist primarily of executive and office staff payroll and payroll
related costs, professional and legal fees, travel, depreciation, advertising
and executive and corporate staff incentive bonuses.
Amortization of intangibles consists primarily of the amortization of
the costs of acquisitions in excess of the fair value of net assets acquired
(goodwill). The Company uses a 15-year estimate as the useful life of goodwill,
as compared to the 40-year maximum permitted by generally accepted accounting
principles, and amortizes such cost using the straight-line method. Other
intangible assets, such as customer lists and covenants not to compete, are
amortized using the straight-line method over their estimated useful lives,
which range from two to 15 years.
Forward-Looking Information
Statements in this Item or in Item 1 of this report which are not
historical in nature, including discussion of economic conditions in the
Company's market areas, the potential for and effect of future acquisitions, the
effect of changes in the Company's mix of services on gross margin, the adequacy
of the Company's workers' compensation reserves, the tax-qualified status of the
Company's 401(k) savings plan, and the availability of financing and working
capital to meet the Company's funding requirements, are forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. Such forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause the actual results, performance
or achievements of the Company or industry results to be materially different
from any future results, performance or achievements expressed or implied by
such forward-looking statements. Such factors with respect to the Company
include difficulties associated with integrating acquired businesses and clients
into the Company's operations, economic trends in the Company's service areas,
uncertainties regarding government regulation of PEOs, including the possible
adoption by the IRS of an unfavorable position as to the tax-qualified status of
employee benefit plans maintained by PEOs, future workers' compensation claims
experience, and the availability of and costs associated with potential sources
of financing. The Company disclaims any obligation to update any such factors or
to publicly announce the result of any revisions to any of the forward-looking
statements contained herein to reflect future events or developments.
Results of Operations
The following table sets forth the percentages of total revenues
represented by selected items in the Company's Statements of Operations for the
years ended December 31, 1996, 1995 and 1994, included in Item 8 of this report.
References to the Notes to Financial Statements appearing below are to the notes
to the Company's financial statements included in Item 8 of this report.
21
Percentage of Total Revenues
Years Ended December 31,
1996 1995 1994
------ ------ ------
Revenues:
Staffing services................................................. 52.6% 55.2% 50.6%
Professional employer services.................................... 47.4 44.8 49.4
------ ------ ------
Total revenues................................................ 100.0 100.0 100.0
------ ------ ------
Cost of revenues:
Direct payroll costs.............................................. 76.1 75.7 75.1
Payroll taxes and benefits........................................ 9.2 8.9 9.1
Workers' compensation............................................. 2.8 3.4 3.6
Safety incentives................................................. .7 .6 .8
------ ------ ------
Total cost of revenues........................................ 88.8 88.6 88.6
----- ----- -----
Gross margin........................................................... 11.2 11.4 11.4
Selling, general and administrative expenses........................... 7.4 7.6 7.3
Amortization of intangibles............................................ .4 .3 .3
------ ------ ------
Income from operations................................................. 3.4 3.5 3.8
Other income (expense)................................................. .2 .2 .2
------ ------ ------
Pretax income.......................................................... 3.6 3.7 4.0
Provision for income taxes............................................. 1.3 1.4 1.5
------ ------ ------
Net income............................................................. 2.3 2.3 2.5
====== ====== ======
Years Ended December 31, 1996 and 1995
Net income for 1996 amounted to $5,036,000, an increase of $918,000 or
22.3% over 1995 net income of $4,118,000. The increase in 1996 net income over
1995 was primarily due to continued growth in revenues and gross margin, which
was offset in part by increased selling, general and administrative expenses.
Net income per share for 1996 was $.73 as compared to $.62 for 1995.
Total 1996 revenues were $215,816,000, which represented an increase of
$36,011,000 or 20.0% over 1995 revenues of $179,805,000. The increase in
revenues over 1995 was primarily due to a 1996 internal growth rate of 10.6%,
coupled with the acquisition of five staffing and PEO businesses during 1996.
Professional employer (staff leasing) services revenue increased 26.9% over 1995
due to the growth in the number of new PEO clients, primarily in Oregon and
California. The growth in PEO services revenue was a result of internal sales
efforts coupled with the acquisitions made during the year. These factors
contributed to the increased mix of PEO services for 1996 to 47.4% of total
revenues, up from 44.8% of total revenues for 1995. Revenues from staffing
services, as a percent of total revenues, declined in 1996 to 52.6% as compared
to 55.2% of total revenues in 1995, despite a 14.4% growth rate over 1995.
Subsequent to December 31, 1996, the Company closed its branch offices
in Seattle, Washington and Phoenix, Arizona. Management expects to relocate the
Seattle operations to Tacoma, Washington in connection with a new customer base
in the south Puget Sound area. The Phoenix office, which opened during the third
quarter of 1996 and represented the Company's first office in Arizona, has
recently been transferred to the expanding operations of the Company's Tucson,
Arizona office opened shortly thereafter. During the first quarter of 1997, the
Company opened an office in Flint, Michigan to support a new large contract
staffing arrangement involving two processing facilities of an existing
customer.
22
Gross margin for 1996 totaled $24,253,000, representing an increase of
$3,764,000 or 18.4% over 1995. The gross margin rate of 11.2% of revenues
represents a 20 basis point decrease from 1995 due to slight increases in direct
payroll costs and payroll taxes and benefits offset in part by a decrease in
workers' compensation expense as a percentage of revenues. The Company expects
gross margin to continue to decline as a percentage of revenues due to the
continued growth in PEO services, contract staffing and on-site management in
the Company's service mix and the Company's decision to maintain its workers'
compensation IBNR reserve at a higher level relative to claims, as discussed
below.
The following table summarizes certain indicators of performance
regarding the Company's self-insured workers' compensation program by quarter
for 1996 and 1995.
Self-Insured Workers' Compensation Profile
Total Workers' Comp "IBNR Reserve" (1)
Total Workers' Comp Expense as a as a % of
No. of Injury Claims Expense (in thousands) % of Total Payroll "At Risk Claims"(2)
-------------------- ---------------------- ------------------ -------------------
1996 1995 1996 1995 1996 1995 1996 1995
---- ---- ---- ---- ---- ---- ---- ----
Q1 193 266 $ 770 $2,307 2.4% 7.8% 41.0% 33.0%
Q2 312 309 1,213 1,707 3.1 5.1 41.0 40.6
Q3 401 287 2,161 1,160 4.7 3.1 41.0 40.9
Q4 422 270 1,794 899 3.9 2.5 55.9 41.0
----- ----- ----- -----
For the Year 1,328 1,132 $5,938 $6,073 3.6 4.5
===== ===== ===== =====
- ------------------
(1) "IBNR Reserve" in this context is defined as an additional expense
provision for both the unexpected future adverse loss development of open
claims and for claims incurred but not reported.
(2) "At Risk Claims" are defined as the dollar amount of all injury claims
submitted under self-insured payroll less amounts covered by excess
reinsurance.
Although workers' compensation expense for the third and fourth
quarters of 1996 was higher than in the comparable quarters of 1995, the
preceding table illustrates the 1996 improvement over 1995 in the Company's
total workers' compensation expense both in terms of total dollars and as a
percent of total payroll dollars. Concurrent with the improved expense level and
percentage of workers' compensation expense, expressed as a percent of total
payroll, the Company has increased its IBNR reserve to 55.9% of "at risk claims"
as of December 31, 1996. It is management's objective to continue to increase
the dollar value of the Company's IBNR reserve, which is a component of the
total accrued workers' compensation claims liabilities recorded on the balance
sheet. The IBNR reserve expressed as a percentage reflects the relationship
between the dollar value of the IBNR reserve and the dollar value of all
reserves for open or at risk claims less reserve amounts covered by excess
reinsurance policies. Costs attributable to adverse loss development of open
claims, claims incurred in a prior period but reported currently, and
catastrophic events may be shifted from the IBNR reserve to a specific case
reserve, thereby reducing the IBNR reserve level. Accordingly, there can be no
assurance that the IBNR reserve will remain at its present level or at any
future level.
Selling, general and administrative expenses consist of compensation
and other expenses incident to the operation of the Company's headquarters and
branch offices and marketing of its services. These expenses (excluding the
amortization of intangibles) amounted to $16,034,000 or 7.4% of revenues for
1996, as compared to $13,657,000 or 7.6% of revenues for 1995. The increase in
total dollars for 1996 was primarily due to additional branch office staff
resulting from the five acquisitions made during the year.
23
Amortization of intangibles totaled $820,000 for 1996 or .4% of
revenues which compares to $564,000 or .3% of revenues for 1995. The increased
amortization expense for 1996 was primarily attributable to amortization arising
from the five acquisitions made during the year.
The Company offers various 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. Generally, employee benefit plans are subject to provisions of
both the Code and the Employee Retirement Income Security Act ("ERISA"). In
order to qualify for favorable tax treatment under the Code, qualified plans
must be established and maintained by an employer for the exclusive benefit of
its employees.
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 IRS and depends upon the Company's ability to establish the Company's
employer-employee relationship with PEO employees. The issue of whether the
Company's tax-qualified benefit plans can legitimately include worksite
employees under their coverage has not yet been resolved. If the worksite
employees cannot be covered by the plans, then the exclusive benefit requirement
imposed by the Code would not be met by the plans as currently administered and
the plans could be disqualified.
The IRS has established a Market Segment Study Group regarding Employee
Leasing for the stated purpose of examining whether PEOs, such as the Company,
are the employers of worksite employees under the Code provisions applicable to
employee benefit plans and are, therefore, able to offer to worksite employees
benefit plans that qualify for favorable tax treatment. The IRS Study Group is
reportedly also examining whether the owners of client companies are employees
of PEO companies under Code provisions applicable to employee benefit plans. To
the best of the Company's knowledge, the Market Segment Study Group has not
issued a report.
A PEO company headquartered in Texas has stated publicly that the IRS
National Office is being requested by the IRS Houston District to issue a
Technical Advice Memorandum ("TAM") on the PEO worksite employee issue in
connection with an ongoing audit of a plan of the Texas PEO company. The stated
purpose of TAMs is to help IRS personnel in closing cases and to establish and
maintain consistent holdings. The IRS's position is that TAMs are not
precedential; that is, they are limited to the particular taxpayer involved and
that taxpayer's set of facts. The draft request for a TAM by the IRS Houston
District reportedly states its determination that the Texas PEO company's
Code Section 401(k) plan should be disqualified for the reason, among others,
that it covers worksite employees who are not employees of the PEO company.
The timing and nature of the issuance and contents of any TAM regarding
the worksite employee issue or any report of the Market Segment Study Group
regarding Employee Leasing is unknown at this time. There has also been public
discussion of the possibility that the Treasury Department may propose some form
of administrative relief or that Congress may provide legislative resolution or
clarification regarding this issue.
In the event the tax exempt status of the Company's benefit plans were
to be discontinued and the benefit plans were to be disqualified, such actions
could have a material adverse effect on the Company's business, financial
condition, and results of operations. The Company is not presently able to
predict the likelihood of disqualification nor the resulting range of loss, in
light of the lack of public direction from the IRS or Congress.
24
Years Ended December 31, 1995 and 1994
Net income for 1995 amounted to $4,118,000, an increase of $652,000 or
18.8% over 1994 net income of $3,466,000. The increase in 1995 net income over
1994 was primarily due to continued growth in revenues and gross margin, which
was offset in part by increased selling, general and administrative expenses.
Net income per share for 1995 was $.62 as compared to $.53 for 1994.
Total 1995 revenues were $179,805,000, which represented an increase of
$39,253,000 or 27.9% over 1994 revenues of $140,552,000. The increase in
revenues in 1995 over 1994 was primarily due to a 1995 internal growth rate of
20.3%, coupled with the acquisition of four staffing services businesses during
the 1995 third quarter. Such acquisitions and continued growth of staffing
services in northern California were the principal factors which contributed to
the increased mix of staffing services for 1995 to 55.2% of total revenues, up
from 50.6% of total revenues for 1994. Revenues from PEO services, as a percent
of total revenues, declined in 1995 to 44.8% as compared to 49.4% of total
revenues in 1994, despite a 16.1% growth rate over 1994.
Gross margin for 1995 totaled $20,489,000, representing an increase of
$4,382,000 or 27.2% over 1994. The gross margin rate of 11.4% of revenues,
however, remained unchanged from 1994 due to a slight increase in direct payroll
costs, offset by decreases in payroll taxes and benefits, workers' compensation
and safety incentive expenses, as a percent of revenues.
Workers' compensation expense was lower in terms of total dollars and,
more importantly, as a percent of total payroll dollars in the second half of
1995 compared to the prior year, as a result of actions taken by management in
early 1995 to enhance the Company's monitoring of safe-work practices and to
terminate its co-employer relationship with client companies that did not
conform to Barrett's business philosophies and operating standards. Concurrent
with the improved expense level and percentage of workers' compensation expense,
expressed as a percent of total payroll, the Company increased its IBNR reserve
for future adverse claim development and claims incurred but not reported from
37.0% of "at risk claims" at December 31, 1994, to 41.0% at December 31, 1995.
Selling, general and administrative expenses (excluding the
amortization of intangibles) amounted to $13,657,000 or 7.6% of revenues for
1995, as compared to $10,302,000 or 7.3% of revenues for 1994. The increase for
1995 was primarily due to additional branch office staff added to support the
increased business activity and additional workers' compensation loss control
branch personnel to enhance the administration of the Company's self-insured
workers' compensation program.
Amortization of intangibles totaled $564,000 or .3% of revenues for
1995 which compares to $430,000 or .3% of revenues for 1994. The increase in
amortization in 1995 was attributable to the two acquisitions made during the
year.
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
25
due to the impact of seasonality in its staffing services business and on
certain of its PEO clients in the agriculture and forest products-related
industries. As a result, the Company may have greater revenues and net income in
the third and fourth quarters of its fiscal year. Payroll taxes and benefits
fluctuate with the level of direct payroll costs but may tend to represent a
smaller percentage of revenues later in the Company's fiscal year as federal and
state statutory wage limits for unemployment and social security taxes are
exceeded by 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 the current
quarter.
Liquidity and Capital Resources
The Company's net cash position of $1,901,000 at December 31, 1996
decreased $1,317,000 from year-end 1995. The decrease was primarily due to cash
used to acquire five staffing and PEO businesses and funds used for net
purchases of restricted marketable securities, offset in part by cash provided
by operating activities.
Net cash provided by operating activities for 1996 amounted to
$2,208,000 as compared to $2,496,000 for 1995. For 1996, the cash flow generated
by net income and increases in accrued payroll and related benefits was offset
in part by a $5,834,000 increase in accounts receivable. The increase in 1996
year-end accounts receivable over 1995 was the result of higher sales levels,
the acquisition of five staffing and PEO businesses and an increase in the
number of days' sales in receivables from 28 days in 1995 to 29 days at December
31, 1996.
Net cash used by investing activities totaled $3,603,000 for 1996,
which compares to $2,011,000 for 1995. During 1996, the Company paid $1,519,000
in cash in connection with five acquisitions and had net purchases of $1,026,000
of restricted marketable securities to satisfy various state and federal
self-insured workers' compensation surety deposit requirements. During 1995, the
Company paid $1,199,000 in cash in connection with two acquisitions and
purchased $443,000 in marketable securities. Capital expenditures for 1996,
consisting principally of office equipment and software, totaled $1,058,000. The
Company presently has no material long-term capital commitments.
Net cash provided by financing activities for 1996 totaled $78,000
which compares to $519,000 for 1995. The principal source of cash provided by
financing activities in 1996 arose from the exercise of employee incentive stock
options. During 1995, warrants were exercised by underwriters to purchase
110,000 shares of the Company's Common Stock at $4.20 per share. Such warrants
were received by the Company's underwriters in connection with its June, 1993
initial public offering of Common Stock. As of the date of this filing, an
underwriter continues to hold warrants to purchase 90,000 shares of Common Stock
at $4.20 per share. The unexercised warrants expire on June 10, 1998.
The Company has an unsecured $4.0 million revolving credit facility of
which there was no outstanding balance at December 31, 1996. 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.
26
Inflation
Inflation generally has not been a significant factor in the Company's
operations during the periods discussed above. The Company has taken into
account the impact of escalating medical and other costs in establishing
reserves for future expenses for self-insured workers' compensation claims.
27
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
(a) The following audited financial statements of Barrett Business
Services, Inc., and related documents are set forth herein on the pages
indicated:
Page
Report of Independent Accountants.................................................................................. 29
Balance Sheets at December 31, 1996 and 1995....................................................................... 30
Statements of Operations for the years ended
December 31, 1996, 1995, and 1994................................................................................ 31
Statements of Redeemable Common Stock and Nonredeemable
Stockholders' Equity for the years ended December 31, 1996, 1995, and 1994....................................... 32
Statements of Cash Flows for the years ended
December 31, 1996, 1995, and 1994 ............................................................................... 33
Notes to Financial Statements ..................................................................................... 34
Other financial statement schedules are omitted because they are not
applicable or not required.
28
REPORT OF INDEPENDENT ACCOUNTANTS
February 4, 1997
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, 1996 and 1995, and
the results of its operations and its cash flows for each of the three years in
the period ended December 31, 1996 in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
/s/ Price Waterhouse LLP
Portland, Oregon
29
BARRETT BUSINESS SERVICES, INC.
BALANCE SHEETS
(IN THOUSANDS)
DECEMBER 31,
1996 1995
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 1,901 $ 3,218
Trade accounts receivable, net 19,057 13,151
Note receivable (Note 2) 324 -
Prepaid expenses and other 914 478
Deferred tax assets (Note 12) 1,279 937
----------- -----------
Total current assets 23,475 17,784
Intangibles, net (Note 4) 10,226 6,452
Property and equipment, net (Notes 5 and 8) 3,111 2,261
Restricted marketable securities and workers'
compensation deposits (Note 6) 5,707 4,681
Other assets 127 95
----------- -----------
$ 42,646 $ 31,273
=========== ===========
LIABILITIES, REDEEMABLE COMMON STOCK AND
NONREDEEMABLE STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt (Notes 8 and 11) $ 36 $ 33
Accounts payable 667 378
Accrued payroll, payroll taxes and related benefits 7,960 5,797
Accrued workers' compensation claim liabilities (Note 6) 2,240 2,383
Customer safety incentives payable 1,015 776
----------- -----------
Total current liabilities 11,918 9,367
Long-term debt, net of current portion (Notes 8 and 11) 838 875
Customer deposits 890 675
Long-term workers' compensation liabilities (Note 6) 613 322
----------- -----------
14,259 11,239
Commitments and contingencies (Notes 9, 10 and 15)
Redeemable common stock, $.01 par value; 159 shares issued and
outstanding at December 31, 1996 (Note 13) 2,825 -
----------- -----------
Nonredeemable stockholders' equity:
Common stock, $.01 par value; 20,500 shares authorized,
6,625 and 6,551 shares issued and outstanding (Notes 13 and 14) 66 66
Additional paid-in capital 10,929 10,437
Retained earnings 14,567 9,531
----------- -----------
25,562 20,034
$ 42,646 $ 31,273
=========== ===========
The accompanying notes are an integral part of these financial statements.
30
BARRETT BUSINESS SERVICES, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31,
1996 1995 1994
----------- ----------- --------
Revenues:
Staffing services $ 113,539 $ 99,233 $ 71,148
Professional employer services 102,277 80,572 69,404
----------- ----------- -----------
215,816 179,805 140,552
----------- ----------- -----------
Cost of revenues:
Direct payroll costs 164,180 136,174 105,515
Payroll taxes and benefits 19,913 16,088 12,758
Workers' compensation (Note 6) 5,938 6,073 5,069
Safety incentives 1,532 981 1,103
----------- ----------- -----------
191,563 159,316 124,445
----------- ----------- -----------
Gross margin 24,253 20,489 16,107
Selling, general and administrative expenses 16,034 13,657 10,302
Amortization of intangibles (Note 4) 820 564 430
----------- ----------- -----------
Income from operations 7,399 6,268 5,375
----------- ----------- -----------
Other (expense) income:
Interest expense (82) (75) (106)
Interest income 534 400 224
Other, net - 32 78
----------- ----------- -----------
452 357 196
----------- ----------- -----------
Income before provision for income taxes 7,851 6,625 5,571
Provision for income taxes (Note 12) 2,815 2,507 2,105
----------- ----------- -----------
Net income $ 5,036 $ 4,118 $ 3,466
=========== ========== ==========
Net income per share $ .73 $ .62 $ .53
=========== =========== ===========
Weighted average number of shares outstanding 6,935 6,680 6,591
=========== =========== ===========
The accompanying notes are an integral part of these financial statements.
31
BARRETT BUSINESS SERVICES, INC.
STATEMENTS OF REDEEMABLE COMMON STOCK AND
NONREDEEMABLE STOCKHOLDERS' EQUITY
(IN THOUSANDS)
NONREDEEMABLE STOCKHOLDERS' EQUITY
--------------------------------------------------------------
REDEEMABLE ADDITIONAL
COMMON STOCK COMMON STOCK PAID-IN RETAINED
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS TOTAL
------ ------ ------ ------ ------- -------- ---------
Balance, December 31, 1993 - $ - 3,152 $ 32 $ 8,469 $ 1,979 $ 10,480
Common stock issued for acquisitions 29 468 468
Common stock issued on exercise
of options 22 41 41
Net income 3,466 3,466
Reclassification of retained earnings
for stock split - 3,164 32 (32)
------ -------- ------ ------- --------- ------- --------
- -
Balance, December 31, 1994 - - 6,367 64 8,978 5,413 14,455
Common stock issued for acquisitions 67 1 910 911
Common stock issued on exercise
of options and warrants 124 1 549 550
Net income 4,118 4,118
Contribution of common stock
(Note 11) (7) -
------ -------- ------ ------- --------- ------- --------
Balance, December 31, 1995 - - 6,551 66 10,437 9,531 20,034
Common stock issued for acquisitions 159 2,825 20 380 380
Common stock issued on exercise
of options, net 54 112 112
Net income 5,036 5,036
------ -------- ------ ------- --------- ------- --------
Balance, December 31, 1996 159 $ 2,825 6,625 $ 66 $ 10,929 $ 14,567 $ 25,562
====== ======== ===== ======= ========= ======== =========
The accompanying notes are an integral part of these financial statements.
32
BARRETT BUSINESS SERVICES, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
1996 1995 1994
----------- ----------- -----------
Cash flows from operating activities:
Net income $ 5,036 $ 4,118 $ 3,466
Reconciliation of net income to net cash provided by
operating activities:
Depreciation and amortization 1,126 812 637
Gain on sales of marketable securities - (42) -
Deferred taxes (342) (23) (20)
Changes in certain assets and liabilities,
net of amounts purchased in acquisitions:
Trade accounts receivable, net (5,834) (3,520) (4,677)
Prepaid expenses and other (436) 121 (454)
Income taxes payable - - (79)
Accounts payable 289 160 127
Accrued payroll, payroll taxes and related benefits 2,163 740 1,834
Accrued workers' compensation claim liabilities 148 183 88
Customer safety incentives payable 239 (29) 278
Customer deposits, other liabilities and other assets, net (181) (24) 115
----------- ----------- -----------
Net cash provided by operating activities 2,208 2,496 1,315
----------- ----------- -----------
Cash flows from investing activities:
Cash paid for acquisitions, including other direct costs (1,519) (1,199) (4,870)
Purchases of fixed assets, net of amounts purchased
in acquisitions (1,058) (369) (175)
Proceeds from sales of marketable securities 7,025 1,862 8,619
Purchases of marketable securities (8,051) (2,305) (3,713)
----------- ----------- -----------
Net cash used by investing activities (3,603) (2,011) (139)
----------- ----------- -----------
Cash flows from financing activities:
Payments on long-term debt (34) (31) (130)
Proceeds from the exercise of stock options and warrants 112 550 41
----------- ----------- -----------
Net cash provided (used) by financing activities 78 519 (89)
----------- ----------- -----------
Net (decrease) increase in cash and cash equivalents (1,317) 1,004 1,087
Cash and cash equivalents, beginning of year 3,218 2,214 1,127
----------- ----------- -----------
Cash and cash equivalents, end of year $ 1,901 $ 3,218 $ 2,214
=========== =========== ===========
Supplemental schedule of noncash activities:
Acquisition of other businesses:
Cost of acquisitions in excess of fair market value of
net assets acquired $ 4,337 $ 2,080 $ 5,205
Tangible assets acquired 494 30 133
Liabilities assumed 107 - -
Common stock issued in connection with acquisitions 3,205 911 468
The accompanying notes are an integral part of these financial statements.
33
BARRETT BUSINESS SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
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
organization ("PEO") services to a diversified group of customers through a
network of branch offices throughout Oregon, Washington, Idaho, California,
Arizona, Maryland, and Delaware. Approximately 66%, 68%, and 78%,
respectively, of the Company's revenues during 1996, 1995, and 1994 were
attributable to its Oregon operations.
REVENUE RECOGNITION
The Company recognizes revenue as the services are rendered by its work
force. Staffing services are engaged by customers to meet short-term
fluctuations in personnel needs. Professional employer services are
normally used by organizations to satisfy ongoing personnel needs and
typically involve contracts with an indefinite term, until notice of
termination is given by either party, 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 $25,000 at December
31, 1996 and 1995.
MARKETABLE SECURITIES
The Company adopted Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities,"
effective December 31, 1994. At December 31, 1996 and 1995, 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.)
34
BARRETT BUSINESS SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
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, 1996, 1995, and 1994.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Expenditures for maintenance and
repairs are charged to operating expense as incurred, and expenditures for
additions and betterments are capitalized. The cost of assets sold or
otherwise disposed of and the related accumulated depreciation are
eliminated from the accounts, and any resulting gain or loss is reflected
in the statements of operations.
Depreciation of property and equipment is calculated using either
straight-line or accelerated methods over estimated useful lives which
range from 3 years to 31.5 years.
CUSTOMER SAFETY INCENTIVES PAYABLE
Safety incentives are paid annually to professional employer services
clients if the cost of workers' compensation claims is less than agreed
upon amounts; amounts paid are based on a percentage of payroll. The
Company accrues the amounts payable under this program on a monthly basis.
CUSTOMER DEPOSITS
The Company requires deposits from certain professional employer services
customers to cover a portion of its accounts receivable due from such
customers in event of default of payment.
COMMON STOCK SPLIT AND CHANGE IN AUTHORIZED SHARES
On April 20, 1994, the Company's board of directors approved a 2-for-1
stock split in the form of a stock dividend, paid May 23, 1994, to holders
of record of its common stock at the close of business on May 2, 1994 (the
"Record Date"), at the rate of one new share for each share outstanding on
the Record Date.
All earnings per share amounts have been adjusted to reflect these
transactions for all periods presented.
A special meeting of stockholders was held on August 10, 1994, pursuant to
which the stockholders approved an amendment to the Company's charter to
increase the number of authorized shares of common stock from 7,500,000
shares to 20,500,000 shares.
35
BARRETT BUSINESS SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STATEMENTS OF CASH FLOWS
The Company has recorded the following non-cash transactions:
During 1995, the President and Chief Executive Officer of the Company
contributed 7,400 shares of common stock of the Company with a then-fair
market value of $111,000 to the Company in settlement of a personal
guarantee of a receivable from an insolvent customer (see Note 11).
Interest paid during 1996, 1995, and 1994 did not materially differ from
interest expense.
Income taxes paid by the Company in 1996 and 1995 totaled $2,939,900 and
$2,510,700, respectively.
NET INCOME PER SHARE
Net income per share for the years ended December 31, 1996, 1995, and 1994
is computed based on the weighted average number of common stock and common
stock equivalents outstanding during the periods. Outstanding stock options
and warrants, net of assumed buy-back, are considered common stock
equivalents.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with the 1996
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 (GAAP) requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reported periods. Actual results may differ from those
estimates.
2. ACQUISITIONS
PERSONNEL MANAGEMENT & CONSULTING, INC.
On February 27, 1994, the Company purchased substantially all of the assets
of Personnel Management & Consulting, Inc., a company engaged in the
temporary staffing business in Maryland and Delaware. Of the $270,000
purchase price, the Company paid $42,000 in cash and issued 12,000 shares
of its common stock with a then-fair market value of $228,000. The
acquisition was accounted for under the purchase method of accounting,
which resulted in approximately $241,000 of intangible assets and $29,000
of fixed assets.
36
BARRETT BUSINESS SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
2. ACQUISITIONS (CONTINUED)
GOLDEN WEST TEMPORARY SERVICES
On March 7, 1994, the Company purchased certain assets of Golden West
Temporary Services ("Golden West"), a company in the temporary staffing
business with four offices in northern California. The cash purchase price
of $4,514,000 was paid by liquidating a portion of the Company's short-term
marketable securities. The Company accounted for the acquisition under the
purchase method of accounting, which resulted in approximately $4,425,000
of intangible assets and $89,000 of fixed assets.
CONSTRUCTION WORKFORCE
On December 26, 1994, the Company purchased certain assets of Max Johnson
Enterprises, Inc., operating as Construction Workforce, a company located
in Spokane, Washington, which specializes in providing highly skilled
temporary craftsmen to the commercial construction industry. Of the
$300,000 purchase price, the Company paid $60,000 in cash and issued 17,142
shares of its common stock with a then-fair market value of $240,000. The
acquisition was accounted for under the purchase method of accounting,
which resulted in $285,000 of intangible assets and $15,000 of fixed
assets.
ADVANCED TEMPORARY SYSTEMS, INC.
On December 29, 1994, the Company purchased, for $51,000 in cash, certain
assets of Advanced Temporary Systems, Inc., a company engaged in the
temporary staffing business in Kent, Washington. The Company accounted for
the acquisition under the purchase method of accounting, which resulted in
$51,000 of intangible assets.
MID-DEL EMPLOYMENT SERVICE, INC.; SUSSEX EMPLOYMENT SERVICES, INC.; PPI
(PRESTIGE PERSONNEL) -SALISBURY, INC.; AND DEL-MAR-VA NURSES-ON-CALL INC.
On July 17, 1995, the Company purchased certain assets of Mid-Del
Employment Service, Inc.; Sussex Employment Services, Inc.; PPI (Prestige
Personnel) - Salisbury, Inc.; and Del-Mar-Va Nurses-On-Call Inc.
(collectively, "the Maryland and Delaware companies"). These companies are
engaged in the temporary staffing business in eastern Maryland and
Delaware. The all-cash purchase price of $969,000 (inclusive of
acquisition-related costs of $19,000) was accounted for under the purchase
method of accounting, which resulted in $944,000 of intangible assets and
$25,000 of fixed assets.
STREGE & ASSOCIATES, INC.
Effective December 11, 1995, the Company purchased certain assets of Strege
& Associates, Inc., a company specializing in providing highly skilled
tradesmen to various industries for maintenance and supplemental labor
purposes in Portland, Oregon. Of the $1,141,000 purchase price (inclusive
of acquisition-related costs of $4,000), the Company paid $230,000 in cash
and issued 67,443 shares of its common stock with a then-fair market value
of $911,000. The acquisition was accounted for under the purchase method of
accounting, which resulted in $1,136,000 of intangible assets and $5,000 of
fixed assets.
37
BARRETT BUSINESS SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
2. ACQUISITIONS (CONTINUED)
STAFFAMERICA, INC.
On April 1, 1996, the Company acquired certain assets and the business of
StaffAmerica, Inc., pursuant to a Plan and Agreement of Reorganization.
StaffAmerica provides both temporary staffing and PEO services through its
two offices located in Santa Barbara 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 is due and payable no later than March 31,
1997.
The Plan and Agreement of Reorganization between StaffAmerica and the
Company allows StaffAmerica and the former owners to require the Company to
repurchase the shares issued to them in the acquisition. There are certain
conditions and restrictions imposed on StaffAmerica and the former owners
with regard to the Company's obligation to repurchase its stock. The
Company's obligation to repurchase such shares commenced on May 1, 1996 and
expires on March 31, 1997. Upon redemption, and to the extent the note
receivable from the seller remains outstanding, the price per share shall
be the lower of $17.75 per share or the then-fair market value of the
common stock. If the note receivable has been fully retired, then the price
per share of the common stock for redemption purposes shall be $17.75. The
total 159,154 shares of common stock is shown as redeemable common stock in
the accompanying balance sheet at its recorded value of $2,825,000.
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 provides both temporary staffing and PEO services
through its two offices located in Hood River and The Dalles, Oregon.
JobWorks had revenues of approximately $1.2 million (unaudited) in 1995.
The Company issued 20,446 shares of its common stock with a then-fair value
of $380,000 for the assets and business of JobWorks, assumed a customer
deposit liability of $2,000, and incurred $14,000 in acquisition-related
costs. The Company paid $20,000 in cash for the selling shareholder's
agreement of noncompetition. The acquisition was accounted for under the
purchase method of accounting, which resulted in $324,000 of intangible
assets, $72,000 in accounts receivable, and $20,000 in fixed assets.
CASCADE TECHNICAL STAFFING
Effective August 26, 1996, the Company acquired certain assets of Cascade
Technical Staffing (Cascade). Cascade provides 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.
38
BARRETT BUSINESS SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
2. ACQUISITIONS (CONTINUED)
CALIFORNIA EMPLOYER SERVICES, INC.
Effective November 4, 1996, the Company acquired the PEO 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 acquired certain assets of
Professional Personnel, Inc. (PPI), a provider of PEO 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 the division, 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.
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 pro forma summary presents the combined results of
operations as if the Maryland and Delaware companies, Strege & Associates,
StaffAmerica, Cascade Technical Staffing, and CES acquisitions had occurred
at the beginning of 1995, after giving effect to certain adjustments for
the amortization of intangible assets, taxation and cost of capital. The
other acquisitions made since January 1, 1995 are not included in the pro
forma information as their effect is not material.
Year ended December 31,
1996 1995
----------- -----------
(in thousands, except
per share amounts)
Revenue $ 229,877 $ 204,426
=========== ============
Net income $ 5,248 $ 4,631
=========== ===========
Net income per share $ .75 $ .67
=========== ===========
The unaudited pro forma results above have been prepared for comparative
purposes only and do not purport to be indicative of what would have
occurred had the acquisitions been made as of that date or of results which
may occur in the future.
39
BARRETT BUSINESS SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
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 receivables. 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, 1996, the Company had significant
concentrations of credit risk as follows:
- Marketable securities - $2,170,000 of marketable securities at December
31, 1996 consisted of Oregon State Housing & Community Service Bonds.
- Trade receivables - $2,426,000 of trade receivables were with two
customers at December 31, 1996 (13% of trade receivables outstanding at
December 31, 1996).
4. INTANGIBLES
Intangibles consist of the following (in thousands):
December 31,
1996 1995
----------- -----------
Covenants not to compete $ 2,049 $ 1,614
Goodwill 10,985 6,826
Customer lists 358 358
----------- -----------
13,392 8,798
Less accumulated amortization 3,166 2,346
----------- -----------
$ 10,226 $ 6,452
=========== ===========
40
BARRETT BUSINESS SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
December 31,
1996 1995
----------- -----------
Office furniture and fixtures $ 3,037 $ 1,908
Buildings 1,183 1,175
Vehicles 60 41
----------- -----------
4,280 3,124
Less accumulated depreciation 1,477 1,171
----------- -----------
2,803 1,953
Land 308 308
----------- -----------
$ 3,111 $ 2,261
=========== ===========
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.
The Company has provided $2,853,000 and $2,705,000 at December 31, 1996 and
1995, 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 at December 31, 1996 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.
41
BARRETT BUSINESS SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
6. ACCRUED WORKERS' COMPENSATION CLAIM LIABILITIES (CONTINUED)
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 $7,151,000 at
December 31, 1996 and $5,974,000 at December 31, 1995, to cover potential
claims losses. In partial satisfaction of these requirements, at December
31, 1996 and 1995, the Company has provided a letter of credit in the
amount of $1,572,000 and a $300,000 surety bond guaranteed by an
irrevocable standby letter of credit. The investments are included in
restricted marketable securities and workers' compensation deposits in the
accompanying balance sheets.
Liabilities incurred for work-related employee fatalities are recorded
either at an agreed lump-sum settlement amount or the net present value of
future fixed and determinable payments over the actuarially determined
remaining life of the beneficiary, discounted at a rate that approximates a
long-term, high-quality corporate bond rate. The Company has obtained
excess workers' compensation insurance to limit its self-insurance exposure
to $350,000 per occurrence in all states, except for $300,000 in Maryland
and $500,000 per occurrence for USL&H exposure. The excess insurance
provides unlimited coverage above the aforementioned exposures. At December
31, 1996, the Company has recorded $613,000 for work-related catastrophic
injuries and fatalities in long-term workers' compensation liabilities in
the accompanying balance sheets.
The workers' compensation expense in the accompanying statements of
operations consists of $5,799,000, $5,802,000, and $4,254,000 for
self-insurance expense for 1996, 1995, and 1994, respectively. Premiums in
the insured states were $139,000, $271,000, and $815,000 for 1996, 1995,
and 1994, respectively.
7. CREDIT FACILITY
On August 12, 1993, the Company entered into a loan agreement ("the
Agreement") with a major bank, which provides for (a) an unsecured
revolving credit facility for working capital purposes and (b) a term real
estate loan (see Note 8). The Agreement, as amended, expires on May 30,
1997 and currently 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
amended loan agreement, the Company is required to maintain a zero
outstanding balance against the revolving credit facility for a minimum of
60 consecutive days during each year. The Company is also prohibited from
pledging any of its assets other than existing mortgages on its real
property.
There were no borrowings on the revolving credit facility during 1996 and
1995. During the year ended December 31, 1994, the maximum balance
outstanding under the revolving credit facility was $1,500,069, the average
balance outstanding was $165,000, and the weighted average interest rate
during the period was 6.9%. The weighted average interest rate during 1994
was calculated using daily weighted averages.
42
BARRETT BUSINESS SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
8. LONG-TERM DEBT
Long-term debt consists of the following:
December 31,
1996 1995
----------- -----------
(in thousands)
Mortgage note payable in monthly installments of $2,784, including
interest at 11% per annum through 1998, with a principal payment of
$269,485 due in 1998, secured by land and building $ 276 $ 279
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) 598 629
----------- -----------
874 908
Less portion due within one year 36 33
----------- -----------
$ 838 $ 875
=========== ===========
Maturities on long-term debt are summarized as follows at December 31, 1996
(in thousands):
Year ending
December 31,
1997 $ 36
1998 309
1999 39
2000 42
2001 45
Thereafter 403
-------
$ 874
=======
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, except those covered under a co-employer (PEO) contract,
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
are eligible to participate in the savings plan beginning with their
respective dates of employment. 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 $134,000,
$142,000, and $103,000 for the years ended December 31, 1996, 1995, and
1994, respectively.
43
BARRETT BUSINESS SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
9. SAVINGS PLAN (CONTINUED)
Recent attention has been placed by the Internal Revenue Service ("the
IRS") and the PEO industry on IRC Section 401(k) plans sponsored by PEO
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
nor the resulting range of loss, if any.
10. COMMITMENTS
LEASE COMMITMENTS
The Company leases its branch offices under operating lease agreements
which require minimum annual payments as follows (in thousands):
Year ending
December 31,
1997 $ 806
1998 591
1999 428
2000 201
2001 179
---------
Total minimum payments $ 2,205
=========
Rent expense for the years ended December 31, 1996, 1995, and 1994 was
approximately $799,000, $607,000, and $423,000, respectively.
44
BARRETT BUSINESS SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
11. RELATED PARTY TRANSACTIONS
During 1996, 1995, and 1994, the Company recorded revenues of
$4,086,000, $3,753,000, and $3,261,000, respectively, and cost of
revenues of $3,768,000, $3,408,000, and $2,958,000, respectively, for
providing services to a company of which a director of the Company is
president and majority stockholder. At December 31, 1996 and 1995,
Barrett had trade receivables from this company of $126,000 and
$160,000, respectively.
During 1994, the Company recorded revenues of $119,000 and cost of
revenues of $110,000 for providing professional employer services to a
company owned by Barrett's President and Chief Executive Officer.
At December 31, 1993, the President and Chief Executive Officer of the
Company, pursuant to the approval of a majority of the disinterested
outside directors, agreed to personally guarantee, at no cost to the
Company, the repayment of a $111,000 receivable from an unrelated,
insolvent customer. During 1995, pursuant to this agreement, the
Company exercised its right to the personal guarantee provided by the
Company's Chief Executive Officer. Accordingly, the Chief Executive
Officer surrendered to the Company 7,400 shares of common stock of the
Company with a then-fair market value of $111,000 or $15.00 per share,
in satisfaction of the guarantee. The Company subsequently retired the
shares, and the par value of the shares was reclassified to additional
paid-in capital. The uncollectible account was included in the
Company's provisions for doubtful accounts during 1993 and 1994.
Through June 1995, a director of the Company was Vice Chairman of the
board of directors of the bank that provides the Company's unsecured
revolving credit facility and certain mortgage financing. See Notes 7
and 8.
12. INCOME TAXES
The provisions for income taxes are as follows (in thousands):
Year ended December 31,
1996 1995 1994
----------- ----------- -----------
Current:
Federal $ 2,681 $ 2,067 $ 1,750
State 476 463 375
----------- ----------- -----------
3,157 2,530 2,125
----------- ----------- -----------
Deferred:
Federal (283) (19) (17)
State (59) (4) (3)
----------- ----------- -----------
(342) (23) (20)
------------ ----------- -----------
Total provision $ 2,815 $ 2,507 $ 2,105
=========== =========== ===========
45
BARRETT BUSINESS SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
12. INCOME TAXES (CONTINUED)
Deferred tax assets (liabilities) are comprised of the following
components (in thousands):
December 31,
1996 1995
----------- -----------
Accrued workers' compensation claim liabilities $ 1,113 $ 1,053
Allowance for doubtful accounts 10 10
Tax depreciation in excess of book depreciation (154) (126)
Safety incentives 281
Amortization of intangibles 29
----------- -----------
$ 1,279 $ 937
=========== ===========
The effective tax rate differed from the U.S. statutory federal tax
rate due to the following:
Year eded December 31,
1996 1995 1994
----------- ----------- -----------
Statutory federal tax rate 34.0% 34.0% 34.0%
State taxes, net of federal benefit 3.5 4.6 4.4
Nondeductible amortization of intangibles .1 .1 .2
Federal tax-exempt interest income (1.4) (1.3) (1.1)
Other, net (.3) .6 .3
-------- --------- ---------
35.9% 38.0% 37.8%
======== ========= =========
During 1996, the Company recognized a State of Oregon surplus tax
refund of approximately $145,000 related to tax years 1993 through
1995.
13. REDEEMABLE COMMON STOCK AND NONREDEEMABLE STOCKHOLDERS' EQUITY
REDEEMABLE COMMON STOCK
As part of the 1996 acquisition of StaffAmerica discussed in Note 2,
the Company granted "put rights" to certain shareholders that may
require the Company to redeem 159,154 shares of its common stock at a
maximum redemption price of $17.75 per share subject to certain
contingencies as described in Note 2. If all shareholders with such
"put rights" exercise their options, the Company would be required to
repurchase the above shares of common stock at a maximum amount of
$2,825,000. The redemption period began April 1, 1996 and continues
through March 31, 1997. If such shareholders do not place a redemption
request during the redemption period, the "put right" will expire on
the stated expiration date.
46
BARRETT BUSINESS SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
13. REDEEMABLE COMMON STOCK AND NONREDEEMABLE STOCKHOLDERS' EQUITY (CONTINUED)
The shares of common stock subject to the "put rights" are presented in
the accompanying balance sheets as redeemable common stock. Such shares
have been recorded at their fair market value as of the dates of
acquisition. Such fair market value equals the maximum redemption
amount.
PUBLIC STOCK OFFERING
In June 1993, the Company completed an initial public offering of
1,000,000 shares of common stock at $7.00 per share. In July 1993, the
underwriters exercised an option to purchase 150,000 additional shares
at $7.00 per share to cover over-allotments. Total net proceeds to the
Company were $6,828,000 after deducting the underwriting discount and
offering expenses.
14. STOCK INCENTIVE PLAN
As of March 1, 1993, the Company adopted the 1993 Stock Incentive Plan
("the Plan") which provides for stock-based awards to the Company's
employees, non-employee directors, and outside consultants or advisers.
As of April 20, 1994, the Company increased the number of shares of
common stock reserved for issuance under the Plan from 500,000 to
800,000.
Options granted under the Plan generally become exercisable in four
equal annual installments beginning one year after the date of grant,
and expire ten years after the date of grant. Under the terms of the
Plan, the exercise price of the options must not be less than the fair
market value of the Company's stock on the date of grant. The number of
options and the price per share have been restated to reflect the 2-
for-1 stock split effective May 23, 1994.
In connection with the initial public offering, the Company issued
200,000 warrants to its underwriters and related parties for the
purchase of shares of the Company's common stock exercisable in whole
at any time or in part from time to time commencing June 11, 1994 at
$4.20 per share, after giving effect to the 2-for-1 stock split. A
total of 110,000 warrants were exercised in January 1995 for proceeds
of $462,000. The remaining unexercised warrants expire on June 10,
1998.
A summary of the status of the options granted under the Plan at
December 31, 1996, 1995, and 1994, together with changes during the
period then ended, are presented below. The numbers of options
exercisable at December 31, 1996, 1995, and 1994 were 126,500, 94,375,
and 10,450, respectively.
47
BARRETT BUSINESS SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
14. STOCK INCENTIVE PLAN (CONTINUED)
Weighted
average
exercise
Options price
----------- ----------
Outstanding at December 31, 1993 160,500 $ 3.50
Options granted at market price 233,500 9.67
Options exercised (22,175) 3.50
Options canceled or expired (65,250) 7.45
-----------
Outstanding at December 31, 1994 306,575 7.36
Options granted at market price 151,500 14.31
Options granted above market price 70,000 16.36
Options exercised (13,950) 6.19
Options canceled or expired (17,500) 7.52
-----------
Outstanding at December 31, 1995 496,625 10.78
Options granted at market price 137,498 16.63
Options exercised (83,625) 6.77
Options canceled or expired (58,500) 17.70
-----------
Outstanding at December 31, 1996 491,998 12.27
===========
Available for grant at December 31, 1996 184,252
===========
The Company applies APB Opinion 25 and related interpretations in
accounting for the Plan. Accordingly, no compensation cost has been
recognized for options granted under the Plan. Had compensation cost
associated with the Plan been determined based on the fair market value
at the grant date for options granted under the Plan, consistent with
the methodology of Statement of Financial Accounting Standards (SFAS)
No. 123, the Company's net income and earnings per share would have
been reduced to the pro forma amounts indicated below:
1996 1995
----------- -----------
(in thousands)
Net income, as reported $ 5,036 $ 4,118
Net income, pro forma 4,664 3,857
Earnings per share, as reported .73 .62
Earnings per share, pro forma .67 .58
The effects of applying SFAS No. 123 to pro forma disclosures for 1996
and 1995 are not likely to be representative of the effects on reported
net income for future years, because options vest over several years
and additional awards generally are made each year.
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants in 1996 and 1995: expected
volatility of 41%, expected dividend yield 0%, risk-free rate of return
of 6.1%, and expected lives of seven years.
48
BARRETT BUSINESS SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
14. STOCK INCENTIVE PLAN (CONTINUED)
Total fair value of options granted at market price was computed to be
$1,227,834 and $1,165,925 for the years ended December 31, 1996 and 1995,
respectively. Total fair value of options granted at 110% above market
price was computed to be $531,300 for the year ended December 31, 1995.
Such options were granted to the chief executive officer in 1995.
The following table summarizes information about options outstanding at
December 31, 1996:
Weighted average
Exercise Number Weighted remaining
price range of shares average price contractual life
----------------- -------------- ----------------- ----------------
$ 3.50 - $10.00 159,000 $ 7.41 7.0
$10.50 - $13.00 30,000 $ 11.08 7.9
$13.50 - $19.00 302,833 $ 15.19 8.9
15. LITIGATION
The Company is subject to legal proceedings and claims which arise in the
ordinary course of its business. In the opinion of management, the amount
of ultimate liability with respect to currently pending or threatened
actions are not expected to materially affect the financial position or
results of operations of the Company except as discussed below in Note 16.
16. SUBSEQUENT EVENTS
A lawsuit was filed in the Circuit Court of the State of Oregon for the
County of Multnomah on February 5, 1997, by Javier and Ester Munoz, husband
and wife, against Asger M. Nielson, doing business as Nielson and Son
("Nielson"), Rain-Master Roofing, Inc. ("Rain-Master"), and the Company.
Mr. Munoz was employed by the Company under a PEO arrangement with
Rain-Master, which is in the roofing business. On February 1, 1995,
Rain-Master was providing roofing services at a construction site for which
Nielson was serving as general contractor. Mr. Munoz fell from the roof at
the site in the course of his employment and is now a paraplegic as a
result of the injuries he suffered. Until the filing of the lawsuit
referred to above, Mr. Munoz's claim was being defended as a workers'
compensation claim.
In the lawsuit, the plaintiffs are seeking damages in the amount of
$10,000,000 pursuant to claims for relief based on employer liability,
intentional injury, product liability, negligence, breach of implied
warranty and loss of consortium. Defense of the lawsuit has been tendered
to the Company's excess workers' compensation, commercial general liability
and umbrella liability insurance carriers; acceptance of the defense to the
claim has not yet been received. Management intends to vigorously defend
this action on the basis, among others, that workers' compensation is the
exclusive remedy for employees injured in the course of employment. Under
appropriate circumstances, the Company also may seek to enforce its
contractual right to indemnification from Rain-Master pursuant to its PEO
leasing arrangement. Based upon its investigation and analysis to date,
management believes that the outcome of
49
BARRETT BUSINESS SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
this proceeding will not have a materially adverse effect on the Company's
financial position or results of operations.
On March 12, 1997, a Notice of Intent to Revoke Farm/Forest Labor
Contractor License and to Assess Civil Penalties (the "Notice") was served
on the Company by the Bureau of Labor and Industries of the State of Oregon
(the "Bureau"). The Notice also names Daniel A. Hatfield, an employee of
the Company. The Notice proposes to assess civil penalties in the amount of
$488,000, based on the numbers of workers allegedly affected, for alleged
noncompliance with various duties imposed on farm labor contractors by
Oregon law, including licensing violations, failure to comply with wage
payment laws, and failure to maintain and to provide workers and the Bureau
with required documentation. Management intends to vigorously contest the
claims asserted in the Notice and is in the process of collecting and
analyzing data necessary to defend its position and to evaluate the
probable outcome of the proceedings.
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
Orange County, California. The Company paid $1,800,000 in cash for all of
the outstanding common stock of HR Only and $1,200,000 in cash for
noncompete agreements with certain individuals, of which $1,000,000 will be
deferred for five years and then be paid ratably over the succeeding
five-year period. HR Only's revenues for the fiscal year ended January 31,
1997 were approximately $4.3 million. The transaction was accounted for
under the purchase method of accounting, which resulted in $3,021,000 of
intangible assets, including an estimated $85,000 for acquisition-related
costs, and $64,000 of net tangible assets.
50
BARRETT BUSINESS SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
17. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
First Second Third Fourth
quarter quarter quarter quarter
------- ------- ------- -------
(in thousands, except per share amounts)
Year ended December 31, 1994:
Revenues $ 27,067 $ 35,136 $ 41,149 $ 37,200
Cost of revenues 24,096 31,217 36,107 33,025
Net income 608 765 1,235 858
Net income per share .09 .12 .19 .13
Year ended December 31, 1995:
Revenues 39,298 44,564 49,636 46,306
Cost of revenues 35,819 39,645 43,378 40,474
Net income 344 1,039 1,513 1,223
Net income per share .05 .16 .23 .18
Year ended December 31, 1996:
Revenues 43,185 51,871 60,252 60,508
Cost of revenues 38,169 45,724 53,659 54,011
Net income 827 1,305 1,661 1,243
Net income per share .12 .19 .24 .18
51
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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 1997 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 pages 16-17 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."
52
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. and 2.
The financial statements listed in the index set forth in Item
8 of this report are filed as part of this report.
(b) 3.
Exhibits are listed in the Exhibit Index beginning on page 55
of 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.
(c) Reports on Form 8-K.
No Current Reports on Form 8-K were filed by the Registrant
during the quarter ended December 31, 1996.
53
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 27, 1997 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 27th day of March, 1997.
Principal Executive Officer and Director:
/s/ William W. Sherertz President and Chief Executive Officer
William W. Sherertz and Director
Principal Financial Officer:
/s/ Michael D. Mulholland Vice President-Finance and Secretary
Michael D. Mulholland
Principal Accounting Officer:
/s/ James D. Miller Controller
James D. Miller
Other Directors:
* ROBERT R. AMES Director
* JEFFREY L. BEAUDOIN Director
* STEPHEN A. GREGG Director
* ANTHONY MEEKER Director
* STANLEY G. RENECKER Director
* By /s/ Michael D. Mulholland
Michael D. Mulholland
Attorney-in-Fact
54
EXHIBIT INDEX
Exhibits
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.
4.1 Loan Agreement between the registrant and First Interstate Bank of
Oregon, N.A., dated August 12, 1993 ("Loan Agreement"). Incorporated by
reference to Exhibit 10 to the registrant's Quarterly Report on Form
10-Q for the quarter ended September 30, 1993.
4.2 First Amendment to Loan Agreement dated March 29, 1994. Incorporated by
reference to Exhibit 4 to the registrant's Quarterly Report on Form
10-Q for the quarter ended March 31, 1994.
4.3 Second Amendment to Loan Agreement dated May 31, 1994, together with
Optional Advance Note dated May 31, 1994. Incorporated by reference to
Exhibit 4 to the registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1994.
4.4 Third Amendment to Loan Agreement dated January 3, 1995, together with
Optional Advance Note dated January 3, 1995. Incorporated by reference
to Exhibit 4.4 to the registrant's Annual Report of Form 10-K for the
year ended December 31, 1994.
4.5 Fourth Amendment to Loan Agreement dated June 1, 1995, together with
Optional Advance Note dated June 1, 1995 and Interest Rate Option
Agreement dated June 1, 1995. Incorporated by reference to Exhibit 4.4
to the registrant's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1995.
4.6 Fifth Amendment to Loan Agreement dated May 31, 1996. Incorporated by
reference to Exhibit 4.4 to the registrant's Quarterly Report on Form
10-Q for the quarter ended June 30, 1996.
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.
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).
11 Statement of Calculation of Average Common Shares Outstanding.
23 Consent of Price Waterhouse LLP, independent accountants.
24 Power of attorney of certain officers and directors.
55
27 Financial Data Schedule.
Other exhibits listed in Item 601 of Regulation S-K are not applicable.
56