10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on May 14, 1997
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 1997
Commission File No. 0-21886
BARRETT BUSINESS SERVICES, INC.
(Exact name of registrant as specified in its charter)
Maryland 52-0812977
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
4724 SW Macadam Avenue
Portland, Oregon 97201
(Address of principal executive offices) (Zip Code)
(503) 220-0988
(Registrant's telephone number, including area code)
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 report), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [ X ] No [ ]
Number of shares of Common Stock, $.01 par value, outstanding at April 30, 1997
was 6,667,423 shares.
BARRETT BUSINESS SERVICES, INC.
INDEX
2
PART I - Financial Information
Item 1. Financial Statements
BARRETT BUSINESS SERVICES, INC.
Balance Sheets
(Unaudited)
(In thousands)
The accompanying notes are an integral part of these financial
statements.
3
BARRETT BUSINESS SERVICES, INC.
Statements of Operations
(Unaudited)
(In thousands, except per share amounts)
The accompanying notes are an integral part of these financial
statements.
4
BARRETT BUSINESS SERVICES, INC.
Statements of Cash Flows
(Unaudited)
(In thousands)
The accompanying notes are an integral part of these financial
statements.
5
BARRETT BUSINESS SERVICES, INC.
Notes to Financial Statements
NOTE 1 - BASIS OF PRESENTATION OF INTERIM PERIOD STATEMENTS:
The accompanying financial statements are unaudited and have been
prepared by Barrett Business Services, Inc. (the "Company") pursuant to the
rules and regulations of the Securities and Exchange Commission. Certain
information and note disclosures typically included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. In the opinion of
management, the financial statements include all adjustments, consisting only of
normal recurring adjustments, necessary for a fair statement of the results for
the interim periods presented. The financial statements should be read in
conjunction with the audited financial statements and notes thereto included in
the Company's 1996 Annual Report on Form 10-K at pages 28-51. The results of
operations for an interim period are not necessarily indicative of the results
of operations for a full year.
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 128 "Earnings Per
Share". SFAS 128 replaces APB Opinion 15, "Earnings per Share", and simplifies
the computation of EPS by replacing the presentation of primary EPS with a
presentation of basic EPS. In accordance with this pronouncement, the Company
will adopt the new standard for periods ending after December 15, 1997. The
impact of the SFAS 128 EPS calculation for the first quarter of 1997 is not
material.
Certain prior year amounts have been reclassified to conform with
the 1997 presentation. Such reclassifications had no impact on net income or
stockholders' equity.
NOTE 2 - ACQUISITION
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. The
deferred portion of the noncompete agreement is presented on the balance sheet
in other long-term liabilities. HR Only's revenues for the fiscal year ended
January 31, 1997 were approximately $4.3 million. The transaction was accounted
for under the purchase method of accounting, which resulted in $3,030,000 of
intangible assets, including $95,000 for acquisition-related costs, and $65,000
of net tangible assets.
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NOTE 3 - PROVISION FOR INCOME TAXES:
Deferred tax assets (liabilities) are comprised of the following
components (in thousands):
NOTE 4 - STOCK INCENTIVE PLAN:
In 1993, the Company adopted a stock incentive plan (the "Plan")
which provides for stock-based awards to the Company's employees, directors and
outside consultants or advisers. The number of shares of common stock reserved
for issuance under the Plan is 800,000.
7
The following table summarizes options granted under the Plan in
1997:
Outstanding at December 31, 1996 491,998 $ 3.50 to $16.36
Options granted 81,011 $13.38 to $17.94
Options exercised (42,375) $ 3.50 to $15.06
Options canceled or expired (39,375) $ 3.50 to $15.06
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Outstanding at March 31, 1997 491,259 $ 3.50 to $17.94
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Exercisable at March 31, 1997 164,583
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Available for grant at
March 31, 1997 142,616
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The options listed in the table generally become exercisable in
four equal annual installments beginning one year after the date of grant.
NOTE 5 - NET INCOME PER SHARE:
Net income per share for 1997 is computed based on the weighted
average number of actual shares of common stock outstanding during the period,
without giving effect to securities that would otherwise be considered to be
common stock equivalents because such securities aggregate less than 3% of
shares outstanding and, thus, are not considered dilutive. Net income per share
for 1996 is computed based on the weighted average number of common stock and
common stock equivalent shares outstanding during the period; common stock
equivalents aggregated more than 3% of shares outstanding for such period.
NOTE 6 - LITIGATION:
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
8
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 material adverse
effect on the Company's financial position or results of operations.
On March 11, 1997, a Notice of Intent to Revoke Farm/Forest Labor
Contractor License and to Assess Civil Penalties (the "Notice") was served on
the Company by the Bureau of Labor and Industries of the State of Oregon (the
"Bureau"). The Notice also names Daniel A. Hatfield, 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. It
is presently anticipated that an administrative hearing on the matter will be
held in July 1997. 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.
NOTE 7 - SUBSEQUENT EVENTS:
Effective April 13, 1997, the Company acquired certain assets of
JRL Services, Inc., dba TLC Staffing, a provider of clerical staffing services
located in Tucson, Arizona. TLC Staffing had revenues of approximately $800,000
(unaudited) for the year ended December 31, 1996. The Company paid $150,000 in
cash for the assets, assumed an $18,000 office lease liability and incurred
approximately $2,000 in acquisition related costs. The transaction was accounted
for under the purchase method of accounting, which resulted in $150,000 of
intangible assets and $2,000 of fixed assets.
On April 11, 1997, pursuant to a Plan and Agreement of
Reorganization between StaffAmerica, Inc. and the Company dated April 1, 1996,
the Company repurchased from StaffAmerica and its two shareholders all 159,154
shares of common stock previously issued by the Company as consideration for the
acquisition, for a total of $2,824,984 or $17.75 per share. Upon completion of
the share repurchase, the Company canceled the shares of common stock.
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations
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The following table sets forth the percentages of total revenues
represented by selected items in the Company's Statements of Operations for the
three months ended March 31, 1997 and 1996.
Three months ended March 31, 1997 and 1996
Net income for the first quarter of 1997 was $830,000, an
increase of $3,000 over the same period in 1996. The increase in net income was
attributable to higher revenues, offset in part by a lower gross margin due to
higher direct payroll costs and workers' compensation expense, expressed as a
percentage of revenues. Earnings per share for the first quarter of 1997 were
$.12, the same amount as the first quarter of 1996.
Revenues for the first quarter of 1997 totaled approximately
$62.8 million, an increase of approximately $19.6 million or 45.4% over the
first quarter of 1996. The quarter-over-quarter internal growth rate of revenues
was 25.1%. The percentage increase in total revenues exceeded the internal
growth rate of revenues primarily due to the acquisition of six staffing and PEO
businesses since April 1, 1996.
The higher internal growth rate of revenues of 25.1% for the 1997
first quarter compared to the 1996 first quarter internal growth rate of 5.3% is
primarily attributable to the opening of three new branch offices during 1996 in
Boise, Idaho, Tucson, Arizona and Ontario, California, coupled with the
continued growth in business at existing branch offices, particularly in
contract staffing and on-site management arrangements. Professional employer
services revenue increased approximately $9.5 million or 46.2%, while staffing
services revenue increased approximately $10.1 million or 44.6%, which resulted
in a slight increase in the mix of professional employer services to 47.9% of
total revenues for the first quarter of 1997, as compared to 47.6% for the first
quarter of 1996. The mix of staffing services revenues had a corresponding
decline from 52.4% for the first quarter of 1996 to 52.1% for the first quarter
of 1997.
Gross margin for the first quarter of 1997 totaled approximately
$6.1 million, which represented an increase of $1.1 million or 21.7% over the
first quarter of 1996. The gross margin percent decreased to 9.7% of revenues
for the first quarter of 1997, as compared to 11.6% for the same period of 1996.
The decline in the gross margin percentage was due to higher direct payroll
costs and workers' compensation expense both in terms of total dollars and as a
percentage of revenues. The increase in the percentage of direct payroll costs
from 75.8% for the first quarter of 1996 to 76.5% for the first quarter of 1997
is primarily attributable to increased business activity in contract staffing
and on-site management arrangements. The increase in workers' compensation
expense to 3.0% of revenues for the 1997 first quarter, up from the 1996 first
quarter level of 1.8% of revenues, is due to a higher incidence of injuries
during the 1997 period as compared to 1996 and management's decision to continue
to build the Company's accrual for future adverse loss development of open
claims.
The following table summarizes certain indicators of performance
regarding the Company's self-insured workers' compensation program for the first
quarters of 1997 and 1996.
Self-Insured Workers' Compensation Profile
Selling, general and administrative expenses for the 1997 first
quarter amounted to approximately $4.5 million, an increase of $889,000 or 24.5%
over the comparable period in 1996. Selling, general and administrative
expenses, expressed as a percentage of revenues, decreased from 8.3% for the
first quarter of 1996 to 7.2% of revenues for the first quarter of 1997. The
increase in total dollars was primarily attributable to additional branch office
expenses as a result of the six acquisitions made since April 1, 1996, and the
opening of three new offices.
11
Amortization of intangibles totaled $317,000 or .5% of revenues
for the first quarter of 1997, which compares to $160,000 or .4% of revenues for
the same period in 1996. The increased amortization expense was primarily due to
amortization from the six acquisitions made since April 1, 1996.
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. 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. Reference is made to
pages 12-14 of the Company's 1996 Annual Report on Form 10-K for a more detailed
discussion of this issue.
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 expense for
workers' compensation, demand and competition for the Company's services, and
the effect of acquisitions. The Company's revenue levels fluctuate from quarter
to quarter primarily due to the impact of seasonality 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
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The Company's cash position of $1,615,000 at March 31, 1997
decreased by $286,000 from December 31, 1996. The decrease was primarily due to
cash used in investing activities for acquisitions, offset in part by the cash
provided by operating activities.
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Net cash provided by operating activities for the three months
ended March 31, 1997 amounted to $1,818,000, as compared to $2,325,000 for the
comparable 1996 period. For the 1997 period, cash flow generated by net income,
together with an increase of $1,946,000 in accrued payroll and benefits, was
offset in part by a $1,734,000 increase in trade accounts receivable. The
$1,005,000 increase in other long-term liabilities represents the $1,000,000
deferred noncompete agreement arising from the acquisition of HR Only and is
reflected in the supplemental schedule of noncash activities within the
liabilities assumed caption.
Net cash used in investing activities totaled $2,193,000 for the
three months ended March 31, 1997, as compared to $1,213,000 for the similar
1996 period. For the 1997 period, the principal use of cash for investing
activities was the acquisition of HR Only. The Company presently has no material
long-term capital commitments.
Net cash provided by financing activities for the three-month
period ended March 31, 1997 was $89,000, which compares to $62,000 for the
comparable 1996 period. For the 1997 period, the principal source of cash
provided by financing activities arose from the exercise of employee stock
options at exercise prices ranging from $3.50 to $15.06 per share, offset in
part by payments totaling $401,000 made to liquidate a credit line assumed by
the Company in connection with the acquisition of HR Only. 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 issued in connection with the Company's 1993
initial public offering of its common stock.
The Company's business strategy continues to focus on growth
through the acquisition of additional personnel-related businesses, both in its
existing markets and other strategic geographic areas, together with the
expansion of operations at existing offices. As disclosed in Note 2 to the
financial statements included herein, the Company purchased, during February
1997, a staffing services company located in the Los Angeles, California area
for $2,095,000 in cash, plus an additional $1,000,000 for a noncompete agreement
which will be paid ratably over five years beginning after the end of the fifth
year following the acquisition. As disclosed in Note 7 herein, the Company
purchased in April 1997, certain assets of a staffing services company located
in Tucson, Arizona for $152,000 in cash. The Company actively explores proposals
for various acquisition opportunities on an ongoing basis, but there can be no
assurance that any additional transactions will be consummated.
On April 11, 1997, the Company repurchased 159,154 shares of its
common stock at $17.75 per share issued by the Company pursuant to a Plan and
Agreement of Reorganization between StaffAmerica, Inc. and the Company dated
April 1, 1996 (the "Agreement"). The redemption proceeds totaling $2,824,984
were remitted to the seller and its shareholders as provided by the Agreement.
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The Company presently has an unsecured $4.0 million revolving
credit facility which expires May 30, 1997. There was no outstanding balance at
March 31, 1997. As a consequence of the recent stock redemption, the Company has
maintained an average daily outstanding balance against its credit facility of
approximately $806,000 from April 11 through May 9. Management expects that the
renewal of such credit facility will be in an amount and on such terms and
conditions as will be not less favorable than the current credit arrangement.
Management also believes the funds anticipated to be generated from operations,
together with the renewed credit facility and other potential sources of
financing, will be sufficient in the aggregate to fund the Company's working
capital needs for the foreseeable future.
Inflation
Inflation generally has not been a significant factor in the
Company's operations during the periods discussed above. The Company has taken
into account the impact of escalating medical and other costs in establishing
reserves for future expenses for self-insured workers' compensation claims.
Forward-Looking Information
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Statements in 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, the outcome of various legal proceedings, 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.
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Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) The exhibits filed herewith are listed in the Exhibit Index
following the signature page of this report.
(b) Reports on Form 8-K
Subsequent to quarter end, on April 2, 1997, the Company filed a
Current Report on Form 8-K dated March 31, 1997, to report that
the Company had received a request for redemption for all 159,154
shares of common stock issued by the Company pursuant to a Plan
and Agreement of Reorganization between StaffAmerica, Inc. and
the Company dated April 1, 1996.
Subsequent to quarter end, on April 9, 1997, the Company filed a
Current Report on Form 8-K dated April 8, 1997, to report that
the Company's Farm and Forest Labor Contractor License had been
revoked by the State of Oregon through a default judgment
received on April 4, 1997.
Subsequent to quarter end, on April 25, 1997, the Company filed a
Current Report on Form 8-K dated April 23, 1997, to report that
the Company's Farm and Forest Labor Contractor License was
reinstated by the State of Oregon. An administrative law judge
withdrew the final order on default of April 4, 1997 entered by
the Oregon Bureau of Labor and Industries, thereby allowing the
Company to present its case at a hearing to evaluate the merits
of the State's administrative complaint.
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SIGNATURES
Pursuant to the requirements 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: May 13, 1997 By: /s/ Michael D. Mulholland
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Michael D. Mulholland
Vice President-Finance
(Principal Financial Officer)
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EXHIBIT INDEX
Exhibit
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11 Statement of Calculation of Average
Common Shares Outstanding
27 Financial Data Schedule
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