10-K/A: Annual report pursuant to Section 13 and 15(d)
Published on August 21, 1998
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K/A
Amendment No. 1 to
-X- Annual Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
For the fiscal year ended December 31, 1997
Commission File Number 0-21886
BARRETT BUSINESS SERVICES, INC.
(Exact name of registrant as specified in its charter)
Maryland 52-0812977
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4724 SW Macadam Avenue
Portland, Oregon 97201
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (503) 220-0988
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $.01 Per Share
(Title of class)
Indicate by check mark whether the Registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ---
State the aggregate market value of the voting stock held by
non-affiliates of the Registrant: $53,155,434 at February 27, 1998
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of the latest practicable date:
Class Outstanding at February 27, 1998
----- --------------------------------
Common Stock, Par Value $.01 Per Share 6,743,563 Shares
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement for the 1998 Annual Meeting
of Stockholders are hereby incorporated by reference into Part III of Form 10-K.
- --------------------------------------------------------------------------------
AMENDMENT NO. 1 TO
1997 ANNUAL REPORT ON FORM 10-K
BARRETT BUSINESS SERVICES, INC.
TABLE OF CONTENTS
Note: Items 6, 7 and 8 of Part II and Item 14, Financial Statements and Exhibits
11, 27.1, 27.3 and 27.4 to this report have been amended to reflect the
restatement of the registrant's financial statements for the years ended
December 31, 1993 through 1997, giving effect to the registrant's merger with a
staffing services company on June 29, 1998.
1
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
the Company's financial statements and the accompanying notes listed in Item 14
of this report.
(1) Effective July 1, 1987, the Company elected to be treated as a corporation
subject to taxation under Subchapter S of the Internal Revenue Code,
pursuant to which the earnings of the Company were attributable to the
Company's stockholders rather than to the Company. The Company terminated
its election on April 30, 1993, and recognized a cumulative net deferred tax
asset of $505,000. The amounts shown reflect a pro forma tax provision as if
the Company had been a Subchapter C corporation subject to income taxes for
all periods presented.
(2) All share and per share amounts have been restated to reflect the 2-for-1
stock split effective May 23, 1994.
2
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The Company's revenues consist of staffing services and professional
employer organization ("PEO") services. Staffing services revenues consist of
short-term staffing, contract staffing and on-site management. PEO services
refer exclusively to co-employer contractual agreements with PEO clients. The
Company's revenues represent all amounts billed to customers for direct payroll,
related employment taxes, workers' compensation coverage and a service fee
(equivalent to a mark-up percentage). The Company's Oregon branches accounted
for approximately 49% of its total revenues in 1997, and an additional 39% was
derived from its branches in California and Washington. Consequently, weakness
in economic conditions on the West Coast could have a material adverse effect on
the Company's financial results.
The Company's cost of revenues is comprised of direct payroll costs,
payroll taxes and employee benefits, workers' compensation and safety
incentives. Direct payroll costs represent the gross payroll earned by employees
based on salary or hourly wages. Payroll taxes and employee benefits consist of
the employer's portion of Social Security and Medicare taxes, federal
unemployment taxes, state unemployment taxes and employee reimbursements for
materials, supplies and other expenses, which are paid by the customer. Workers'
compensation expense consists primarily of the costs associated with the
Company's self-insured workers' compensation program, such as claims reserves,
claims administration fees, legal fees, state and federal administrative agency
fees and reinsurance costs for catastrophic injuries. The Company also maintains
a large-deductible workers' compensation insurance policy for employees working
in states where the Company is not currently self-insured. Safety incentives
represent cash incentives paid to certain PEO client companies as a reward for
maintaining safe-work practices in order to minimize workplace injuries. The
incentive is based on a percentage of annual payroll and is paid annually to
customers who meet predetermined loss parameters.
The largest portion of workers' compensation expense is the cost of
workplace injury claims. When an injury occurs and is reported to the Company,
the Company's respective independent third-party claims administrator ("TPA")
analyzes the details of the injury and develops a case reserve, which is the
TPA's estimate of the cost of the claim based on similar injuries and its
professional judgment. The Company then records, or accrues, an expense and a
corresponding liability based upon the TPA's estimates for claims reserves. As
cash payments are made by the Company's TPA against specific case reserves, the
accrued liability is reduced by the corresponding payment amount. The TPA also
reviews existing injury claims on an on-going basis and adjusts the case
reserves as new or additional information for each claim becomes available. The
Company has established an additional IBNR reserve to provide for future
unanticipated increases in expenses ("adverse loss development") of the claims
reserves for open injury claims and for claims incurred but not reported related
to prior and current periods. Management believes that the Company's internal
claims reporting system minimizes the occurrence of unreported incurred claims.
Selling, general and administrative expenses represent both branch and
corporate operating expenses. Branch operating expenses consist primarily of
branch office staff payroll and payroll related costs, advertising, rent, office
supplies, depreciation and branch incentive compensation. Branch incentive
compensation represents a combined 15% of branch pre-tax profits, of which 10%
is paid to the branch manager and 5% is shared among the office staff. Corporate
operating expenses consist primarily of executive and office staff payroll and
payroll related costs, professional and legal fees, travel, depreciation,
occupancy costs, information systems costs and executive and corporate staff
incentive bonuses.
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
3
the useful life of goodwill, as compared to the 40-year maximum permitted by
generally accepted accounting principles, and amortizes such cost using the
straight-line method. Other intangible assets, such as customer lists and
covenants not to compete, are amortized using the straight-line method over
their estimated useful lives, which range from two to 15 years.
FORWARD-LOOKING INFORMATION
Statements in this Item or in Item 1 of this report which are not
historical in nature, including discussion of economic conditions in the
Company's market areas, the potential for and effect of future acquisitions, the
effect of changes in the Company's mix of services on gross margin, the adequacy
of the Company's workers' compensation reserves and allowance for doubtful
accounts, the tax-qualified status of the Company's 401(k) savings plan, and the
availability of financing and working capital to meet the Company's funding
requirements, are forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Such forward-looking statements
involve known and unknown risks, uncertainties and other factors that may cause
the actual results, performance or achievements of the Company or industry
results to be materially different from any future results, performance or
achievements expressed or implied by such forward-looking statements. Such
factors with respect to the Company include difficulties associated with
integrating acquired businesses and clients into the Company's operations,
economic trends in the Company's service areas, uncertainties regarding
government regulation of PEOs, including the possible adoption by the IRS of an
unfavorable position as to the tax-qualified status of employee benefit plans
maintained by PEOs, future workers' compensation claims experience, and the
availability of and costs associated with potential sources of financing. The
Company disclaims any obligation to update any such factors or to publicly
announce the result of any revisions to any of the forward-looking statements
contained herein to reflect future events or developments.
RESULTS OF OPERATIONS
The following table sets forth the percentages of total revenues
represented by selected items in the Company's Statements of Operations for the
years ended December 31, 1997, 1996 and 1995, listed in Item 14 of this report.
Certain 1996 and 1995 revenue and cost of revenue amounts have been reclassified
to conform with the 1997 presentation. Such reclassifications had no impact on
gross margin, net income or stockholders' equity. References to the Notes to
Financial Statements appearing below are to the notes to the Company's financial
statements listed in Item 14 of this report.
YEARS ENDED DECEMBER 31, 1997 AND 1996
Net income for 1997 amounted to $3,845,000, a decrease of $1,123,000 or
22.6% from 1996 net income of $4,968,000. The decrease in 1997 net income from
1996 was primarily due to a lower
4
gross margin percentage, which resulted primarily from increased payroll costs
as a percentage of revenues, offset in part by lower income taxes as a
percentage of revenues. Diluted net income per share for 1997 was $0.49 compared
to $0.64 for 1996.
Total 1997 revenues were $305,531,000, which represented an increase of
$73,579,000 or 31.7% over 1996 revenues of $231,952,000. The increase in
revenues over 1996 was primarily due to a 1997 internal growth rate of 23.2%,
combined with the effect from a full year of operations for five 1996
acquisitions, as well as from two acquisitions in the first half of 1997.
Staffing services revenues increased 35.6% over 1996 primarily as a result of
the growth in large contract staffing and on-site management services and the
effect of a full year of operations for the 1996 acquisitions. Professional
employer (staff leasing) services revenues increased 26.7% over 1996 due to the
effect from a full year of operations for the 1996 acquisitions. Revenues from
staffing services, as a percent of total revenues, increased in 1997 to 58.0% as
compared to 56.4% of total revenues in 1996.
During 1997, the Company closed its branch offices in Seattle,
Washington and Phoenix, Arizona. Management relocated the Seattle operations to
Tacoma, Washington in connection with a new customer base in the south Puget
Sound area. The Phoenix office, which opened during the third quarter of 1996
and represented the Company's first office in Arizona, transferred its business
to the expanding operations of the Company's Tucson, Arizona office.
Gross margin for 1997 totaled $31,414,000, representing an increase of
$4,735,000 or 17.7% over 1996. The gross margin rate of 10.3% of revenues
represents a 120 basis point decline from 1996 due primarily to increases in
direct payroll costs as a percentage of revenues. Direct payroll costs as a
percentage of revenues increased primarily as a result of increased business
activity in contract staffing and on-site management arrangements. The Company
expects gross margin, as a percentage of revenues, to continue to be influenced
by increases or decreases in contract staffing and on-site management
arrangements, as well as by the adequacy of its estimates for workers'
compensation liabilities, which may be negatively affected by unanticipated
adverse loss development of claims reserves.
The increase in direct payroll costs as a percentage of revenues from
76.1% for 1996 to 77.3% for 1997 was primarily attributable to increased
business activity in contract staffing and on-site management arrangements,
which are typically higher volume, lower margin accounts.
Workers' compensation expense increased from 2.9% of revenues for 1996
to 3.0% of revenues for 1997. The increase in the total number of injury claims
for 1997 over 1996 was due in large part to a new policy implemented in 1997
which records "first aid" type claims. Such claims totaled 276 for 1997 and were
not recorded in 1996. The increase in workers' compensation expense for 1997 was
generally attributable to a moderately higher incidence of injuries during 1997,
as compared to 1996, and management's decision to (i) continue to increase the
Company's accrual for future adverse loss development of open claims and (ii)
build an accrual for potential future catastrophic workers' compensation claims.
The following table summarizes certain indicators of experience
regarding the Company's self-insured workers' compensation program by quarter
for 1997 and 1996.
5
Self-Insured Workers' Compensation Profile
Total Self-Insured
Total Self-Insured Workers' Comp
No. of Self-Insured Workers' Comp Expense Expense as a % of
Injury Claims (in thousands) Total Payroll
------------------- --------------------- -------------------
1997 1996 1997 1996 1997 1996
----- ----- ------ ------ ----- -----
Q1 321 193 $1,855 $ 770 3.9% 2.4%
Q2 419 312 1,973 1,213 3.7 3.1
Q3 578 401 2,237 2,161 3.6 4.7
Q4 476 422 2,081 1,794 3.8 3.9
----- ----- ------ ------
For the Year 1,794 1,328 $8,146 $5,938 3.7 3.6
===== ===== ====== ======
Selling, general and administrative expenses consist of compensation and
other expenses incident to the operation of the Company's headquarters and
branch offices and marketing of its services. Selling, general and
administrative ("SG&A") expenses (excluding the amortization of intangibles) for
1997 amounted to $24,011,000, an increase of $5,477,000 or 29.6% over 1996.
Selling, general and administrative expenses expressed as a percentage of
revenues decreased from 8.0% for 1996 to 7.9% for 1997. The increase in total
SG&A dollars for 1997 over 1996 was primarily attributable to incremental branch
office expenses as a result of the four acquisitions since October 1, 1996, the
opening of four new offices in 1996 and early 1997, the addition of experienced
personnel at several offices to expand the Company's managerial resources and an
approximately $700,000 increase in bad debt expense. Two customers accounted for
over one-half of the increase in bad debt expense. Management believes that the
Company's allowance for doubtful accounts of $575,000 is adequate at December
31, 1997. There can be no assurance, however, that future experience with
respect to the Company's ability to collect accounts receivable will not be
adverse.
Amortization of intangibles totaled $1,332,000 for 1997 or 0.4% of
revenues, which compares to $860,000 or 0.4% of revenues for 1996. The increased
amortization expense for 1997 was primarily attributable to amortization arising
from the four acquisitions made since October 1, 1996.
The Company offers various qualified employee benefit plans to its
employees, including its worksite employees. These qualified employee benefit
plans include a savings plan (the "401(k) plan") under Section 401(k) of the
Internal Revenue Code (the "Code"), a cafeteria plan under Code Section 125, a
group health plan, a group life insurance plan, a group disability insurance
plan and an employee assistance plan. Generally, qualified employee benefit
plans are subject to provisions of both the Code and ERISA. In order to qualify
for favorable tax treatment under the Code, qualified plans must be established
and maintained by an employer for the exclusive benefit of its employees.
A definitive judicial interpretation of "employer" in the context of a
PEO arrangement has not been established. The tax-exempt status of the Company's
401(k) plan and cafeteria plan is subject to continuing scrutiny and approval by
the Internal Revenue Service (the "IRS") and depends upon the Company's ability
to establish the Company's employer-employee relationship with PEO employees.
The issue of whether the Company's tax-qualified benefit plans can legitimately
include worksite employees under their coverage has not yet been resolved. If
the worksite employees cannot be covered by the plans, then the exclusive
benefit requirement imposed by the Code would not be met by the plans as
currently administered and the plans could be disqualified.
The IRS has established a Market Segment Study Group regarding Employee
Leasing for the stated purpose of examining whether PEOs, such as the Company,
are the employers of worksite employees under the Code provisions applicable to
employee benefit plans and are, therefore, able to offer to worksite employees
benefit plans that qualify for favorable tax treatment. The IRS Study Group is
reportedly also examining whether the owners of client companies are employees
of PEO companies under Code provisions applicable to employee benefit plans. To
the best of the Company's knowledge, the Market Segment Study Group has not
issued a report.
6
A PEO company headquartered in Texas has stated publicly that the IRS
National Office is being requested by the IRS Houston District to issue a
Technical Advice Memorandum ("TAM") on the PEO worksite employee issue in
connection with an ongoing audit of a plan of the Texas PEO company. The stated
purpose of TAMs is to help IRS personnel in closing cases and to establish and
maintain consistent holdings. The IRS's position is that TAMs are not
precedential; that is, they are limited to the particular taxpayer involved and
that taxpayer's set of facts. The draft request for a TAM by the IRS Houston
District reportedly states its determination that the Texas PEO company's Code
Section 401(k) plan should be disqualified for the reason, among others, that it
covers worksite employees who are not employees of the PEO company.
The timing and nature of the issuance and contents of any TAM regarding
the worksite employee issue or any report of the Market Segment Study Group
regarding Employee Leasing is unknown at this time. There has also been public
discussion of the possibility that the Treasury Department may propose some form
of administrative relief or that Congress may provide legislative resolution or
clarification regarding this issue.
In the event the tax exempt status of the Company's benefit plans were
to be discontinued and the benefit plans were to be disqualified, such actions
could have a material adverse effect on the Company's business, financial
condition, and results of operations. The Company is not presently able to
predict the likelihood of disqualification nor the resulting range of loss, in
light of the lack of public direction from the IRS or Congress.
YEARS ENDED DECEMBER 31, 1996 AND 1995
Net income for 1996 amounted to $4,968,000, an increase of $780,000 or
18.6% over 1995 net income of $4,188,000. The increase in 1996 net income from
1995 was primarily due to continued growth in revenues and gross margin, which
was offset in part by increased selling, general and administrative expenses.
Diluted net income per share for 1996 was $0.64 compared to $0.55 for 1995.
Total 1996 revenues were $231,952,000, which represented an increase of
$39,035,000 or 20.2% over 1995 revenues of $192,917,000. The increase in
revenues over 1995 was primarily due to a 1996 internal growth rate of 11.7%,
coupled with the acquisition of five staffing and PEO businesses during 1996.
Professional employer (staff leasing) services revenues increased 27.3% over
1995 due to the growth in the number of new PEO clients, primarily in Oregon and
California. The growth in 1996 PEO services revenues was a result of internal
sales efforts, together with the acquisitions made during 1996. Revenues from
staffing services, as a percent of total revenues, declined in 1996 to 56.4% as
compared to 58.8% of total revenues in 1995, despite a 15.3% growth rate over
1995.
Gross margin for 1996 totaled $26,679,000, representing an increase of
$4,101,000 or 18.2% over 1995. The gross margin rate of 11.5% of revenues for
1996 represented a 20 basis point decrease from 1995 due to slight increases in
direct payroll costs and payroll taxes and benefits, offset in part by a
decrease in workers' compensation expense as a percentage of total revenues.
Workers' compensation expense, both in terms of total dollars and as a
percent of total payroll dollars, improved in 1996 to $6,641,000 or 2.9% of
revenues, compared to $6,729,000 or 3.5 % of revenues in 1995. The decrease in
the 1996 expense was primarily the result of lower severity for 1996 claims,
coupled with a slightly lower incidence of injuries compared to 1995.
Selling, general and administrative expenses (excluding the amortization
of intangibles) amounted to $18,534,000 or 8.0% of revenues for 1996, as
compared to $15,496,000 or 8.0% of revenues for 1995. The increase in total
dollars for 1996, as compared to 1995, was primarily due to additional branch
office staff resulting from the five acquisitions consummated during 1996.
7
Amortization of intangibles totaled $860,000 for 1996, or 0.4% of
revenues, which compared to $606,000 or 0.3% of revenues for 1995. The increased
amortization expense for 1996 over 1995 was primarily attributable to the five
acquisitions during 1996.
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
The Company has historically experienced significant fluctuations in its
quarterly operating results and expects such fluctuations to continue in the
future. The Company's operating results may fluctuate due to a number of factors
such as seasonality, wage limits on payroll taxes, claims experience for
workers' compensation, demand and competition for the Company's services and the
effect of acquisitions. The Company's revenue levels fluctuate from quarter to
quarter primarily due to the impact of seasonality on its staffing services
business and on certain of its PEO clients in the agriculture and forest
products-related industries. As a result, the Company may have greater revenues
and net income in the third and fourth quarters of its fiscal year. Payroll
taxes and benefits fluctuate with the level of direct payroll costs but may tend
to represent a smaller percentage of revenues later in the Company's fiscal year
as federal and state statutory wage limits for unemployment and social security
taxes are exceeded by some employees. Workers' compensation expense varies with
both the frequency and severity of workplace injury claims reported during a
quarter, as well as adverse loss development of prior period claims during a
subsequent quarter.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash position of $3,439,000 at December 31, 1997 increased
$1,816,000 from December 31, 1996. The increase was primarily due to $7,281,000
provided by operations and $757,000 provided by the exercise of stock options
and warrants, offset by $2,227,000 used for acquisitions, $1,497,000 used for
the purchase of property and equipment and $2,825,000 used for the repurchase of
common stock (see discussion below).
Net cash provided by operating activities for 1997 amounted to
$7,281,000 as compared to $2,238,000 for 1996. For 1997, cash flow was primarily
generated by net income together with increases of $2,180,000 in accrued payroll
and benefits and $900,000 in accrued workers' compensation claim liabilities.
The $1,030,000 increase in other long-term liabilities includes the $1,000,000
deferred noncompete agreement arising from the acquisition of HR Only and is
reflected in the supplemental schedule of noncash activities within the
"liabilities assumed" caption.
Net cash used in investing activities totaled $4,112,000 for 1997, as
compared to $3,935,000 for 1996. During 1997, the Company paid $2,227,000 in
cash in connection with the HR Only and TLC Staffing acquisitions and had
capital expenditures of $1,497,000. Approximately $1.0 million of the total
capital expenditures was related to new computer hardware and software for the
Company's new management information system, which will address all concerns
related to the "Year 2000 issue," as discussed in Item 1 under "Management
Information System." During 1996, the Company paid $1,519,000 in cash in
connection with five acquisitions, incurred $1,390,000 in capital expenditures
and had net purchases of $1,026,000 of restricted marketable securities to
satisfy various state and federal self-insured workers' compensation surety
deposit requirements. At March 30, 1998, the Company had no material long-term
capital commitments.
Net cash used in financing activities for 1997 totaled $1,353,000, which
compares to $204,000 net cash provided by financing activities for 1996. For
1997, the principal use of cash used in financing activities arose from the
Company's obligation to redeem 159,154 shares of its common stock at a value of
$2,824,984 pursuant to a Plan and Agreement of Reorganization between
StaffAmerica, Inc. and the Company. The cash used for this stock redemption was
offset in part by net proceeds from the exercise of stock options and warrants
totaling $757,000 and net proceeds from credit-line borrowings of $701,000. As
of March 30, 1998, an underwriter continued to hold warrants to purchase 30,000
shares of common stock at $4.20 per share issued in connection with the
Company's 1993 initial public offering of its common stock.
8
The Company has an unsecured $4.0 million revolving credit facility with
its principal bank and $2.1 million for standby letters of credit in connection
with certain workers' compensation surety arrangements. There was no outstanding
balance on the revolving credit facility at December 31, 1997. See Note 7 of the
Notes to Financial Statements. Management believes that the credit facility and
other potential sources of financing, together with anticipated funds generated
from operations, will be sufficient in the aggregate to fund the Company's
working capital needs for the foreseeable future.
INFLATION
Inflation generally has not been a significant factor in the Company's
operations during the periods discussed above. The Company has taken into
account the impact of escalating medical and other costs in establishing
reserves for future expenses for self-insured workers' compensation claims.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and notes thereto required by this item begin
on page F-1 of this report, as listed in Item 14.
9
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
FINANCIAL STATEMENTS AND SCHEDULES
The Financial Statements, together with the report thereon of
PricewaterhouseCoopers LLP, are included on the pages indicated below:
Page
----
Report of Independent Public Accountants F-1
Balance Sheets - December 31, 1997 and 1996 F-2
Statements of Operations for the years ended December 31,
1997, 1996 and 1995 F-3
Statements of Redeemable Common Stock and Nonredeemable
Stockholders' Equity - December 31, 1997, 1996 and 1995 F-4
Statements of Cash Flows for the years ended December 31,
1997, 1996 and 1995 F-5
Notes to Consolidated Financial Statements F-6
There are no schedules required to be filed herewith.
REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the quarter ended December 31, 1997.
EXHIBITS
Exhibits are listed in the Exhibit Index that follows the Financial Statements
included in this report. Each management contract or compensatory plan or
arrangement required to be filed as an exhibit to this report is listed under
Item 10, "Executive Compensation Plans and Arrangements and Other Management
Contracts" in the Exhibit Index.
10
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this amendment to this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
BARRETT BUSINESS SERVICES, INC.
Registrant
Date: August 20, 1998 By: /s/ Michael D. Mulholland
Michael D. Mulholland
Vice President-Finance and Secretary
(Principal Financial Officer)
11
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of
Barrett Business Services, Inc.
In our opinion, the accompanying balance sheets and the related statements of
operations, of redeemable common stock and nonredeemable stockholders' equity
and of cash flows present fairly, in all material respects, the financial
position of Barrett Business Services, Inc. at December 31, 1997 and 1996, and
the results of its operations and its cash flows for each of the three years in
the period ended December 31, 1997, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
Portland, Oregon
August 20, 1998
F-1
BARRETT BUSINESS SERVICES, INC.
BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
The accompanying notes are an integral part of these financial statements.
F-2
BARRETT BUSINESS SERVICES, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
The accompanying notes are an integral part of these financial statements.
F-3
BARRETT BUSINESS SERVICES, INC.
STATEMENTS OF REDEEMABLE COMMON STOCK AND
NONREDEEMABLE STOCKHOLDERS' EQUITY
DECEMBER 31, 1997, 1996 AND 1995
The accompanying notes are an integral part of these financial statements.
F-4
BARRETT BUSINESS SERVICES, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
The accompanying notes are an integral part of these financial statements.
F-5
BARRETT BUSINESS SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
- --------------------------------------------------------------------------------
1. SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Barrett Business Services, Inc. ("Barrett" or the "Company"), a Maryland
corporation, is engaged in providing staffing and professional employer
services to a diversified group of customers through a network of branch
offices throughout Oregon, Washington, Idaho, California, Arizona,
Maryland, Delaware and Michigan. Approximately 49%, 61% and 63%,
respectively, of the Company's revenues during 1997, 1996 and 1995 were
attributable to its Oregon operations. On June 29, 1998, the Company
acquired Western Industrial Management, Inc. and Catch 55, Inc.
(collectively "WIMI"). The acquisition was accounted for as a
pooling-of-interests pursuant to Accounting Principles Board ("APB")
Opinion No. 16, and accordingly, the Company's financial statements have
been restated for all prior periods to give effect to the merger, as more
fully described in Note 2.
REVENUE RECOGNITION
The Company recognizes revenue as the services are rendered by its work
force. Staffing services are engaged by customers to meet short-term and
long-term personnel needs. Professional employer services are normally used
by organizations to satisfy ongoing human resource management needs and
typically involve contracts with a minimum term of one year, renewable
annually, which cover all employees at a particular work site.
CASH AND CASH EQUIVALENTS
The Company considers nonrestricted short-term investments which are highly
liquid, readily convertible into cash, and have original maturities of less
than three months to be cash equivalents for purposes of the statements of
cash flows.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company had an allowance for doubtful accounts of $575,000 and $25,000
at December 31, 1997 and 1996, respectively.
MARKETABLE SECURITIES
At December 31, 1997 and 1996, marketable securities consisted primarily of
governmental debt instruments with maturities generally from 90 days to 30
years (see Note 6). Marketable equity and debt securities have been
categorized as held-to-maturity and, as a result, are stated at amortized
cost. Realized gains and losses on sales of marketable securities are
included in other (expense) income on the Company's statements of
operations.
INTANGIBLES
Intangible assets consist primarily of identifiable intangible assets
acquired and the cost of acquisition in excess of the fair value of net
assets acquired ("goodwill"). Intangible assets acquired are recorded at
their estimated fair value at the acquisition date.
The Company uses a 15-year estimate as the useful life of goodwill. This
life is based on an analysis of industry practice and the factors
influencing the acquisition decision. Other intangible assets are amortized
on the straight-line method over their estimated useful lives, ranging from
2 to 15 years. (See Note 4.)
F-6
BARRETT BUSINESS SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
- --------------------------------------------------------------------------------
1. SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INTANGIBLES (CONTINUED)
The Company reviews for asset impairment at the end of each quarter or more
frequently when events or changes in circumstances indicate that the
carrying amount of intangible assets may not be recoverable. To perform
that review, the Company estimates the sum of expected future undiscounted
net cash flows from the intangible assets. If the estimated net cash flows
are less than the carrying amount of the intangible asset, the Company
recognizes an impairment loss in an amount necessary to write down the
intangible asset to a fair value as determined from expected future
discounted cash flows. No write-down for impairment loss was recorded for
the years ended December 31, 1997, 1996 and 1995.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Expenditures for maintenance and
repairs are charged to operating expense as incurred, and expenditures for
additions and betterments are capitalized. The cost of assets sold or
otherwise disposed of and the related accumulated depreciation are
eliminated from the accounts, and any resulting gain or loss is reflected
in the statements of operations.
Depreciation of property and equipment is calculated using either
straight-line or accelerated methods over estimated useful lives which
range from 3 years to 31.5 years.
CUSTOMER SAFETY INCENTIVES PAYABLE
Safety incentives are paid annually to professional employer services
clients if the cost of workers' compensation claims is less than agreed
upon amounts; amounts paid are based on a percentage of payroll. The
Company accrues the amounts payable under this program on a monthly basis.
CUSTOMER DEPOSITS
The Company requires deposits from certain professional employer services
customers to cover a portion of its accounts receivable due from such
customers in event of default of payment.
STATEMENTS OF CASH FLOWS
The Company has recorded the following non-cash transactions:
During 1995, the President and Chief Executive Officer of the Company
contributed 7,400 shares of common stock of the Company with a then-fair
market value of $111,000 to the Company in settlement of a personal
guarantee of a receivable from an insolvent customer (see Note 11).
Interest paid during 1997, 1996, and 1995 did not materially differ from
interest expense.
Income taxes paid by the Company in 1997, 1996 and 1995 totaled $3,223,920,
$2,953,317 and $2,543,700, respectively.
F-7
BARRETT BUSINESS SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
- --------------------------------------------------------------------------------
1. SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NET INCOME PER SHARE
The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 128, "Earnings per Share," for the year ended December 31, 1997. SFAS
No. 128 requires disclosure of basic and diluted earnings per share. All
prior years have been restated to reflect the adoption of SFAS No. 128.
Basic earnings per share are computed based on the weighted average number
of common shares outstanding for each year. Diluted earnings per share
reflect the potential effects of the exercise of outstanding stock options
and warrants.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with the 1997
presentation. Such reclassifications have no impact on net income or
stockholders' equity.
ACCOUNTING ESTIMATES
The preparation of the Company's financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reported periods. Actual results may differ from those
estimates.
2. ACQUISITIONS
MID-DEL EMPLOYMENT SERVICE, INC.; SUSSEX EMPLOYMENT SERVICES, INC.; PPI
(PRESTIGE PERSONNEL) - SALISBURY, INC.; AND DEL-MAR-VA NURSES-ON-CALL INC.
On July 17, 1995, the Company purchased certain assets of Mid-Del
Employment Service, Inc.; Sussex Employment Services, Inc.; PPI (Prestige
Personnel) - Salisbury, Inc.; and Del-Mar-Va Nurses-On-Call Inc.
(collectively, "the Maryland and Delaware companies"). These companies were
engaged in the temporary staffing business in eastern Maryland and
Delaware. The all-cash purchase price of $969,000 (inclusive of
acquisition-related costs of $19,000) was accounted for under the purchase
method of accounting, which resulted in $944,000 of intangible assets and
$25,000 of fixed assets.
STREGE & ASSOCIATES, INC.
Effective December 11, 1995, the Company purchased certain assets of Strege
& Associates, Inc., a company specializing in providing highly skilled
tradesmen to various industries for maintenance and supplemental labor
purposes in Portland, Oregon. Of the $1,141,000 purchase price (inclusive
of acquisition-related costs of $4,000), the Company paid $230,000 in cash
and issued 67,443 shares of its common stock with a then-fair market value
of $911,000. The acquisition was accounted for under the purchase method of
accounting, which resulted in $1,136,000 of intangible assets and $5,000 of
fixed assets.
F-8
BARRETT BUSINESS SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
- --------------------------------------------------------------------------------
2. ACQUISITIONS (CONTINUED)
STAFFAMERICA, INC.
On April 1, 1996, the Company acquired certain assets and the business of
StaffAmerica, Inc., pursuant to a Plan and Agreement of Reorganization.
StaffAmerica provides both temporary staffing and staff leasing services
through its two offices located in Goleta and Oxnard, California. In 1995,
StaffAmerica had revenues of approximately $6.7 million. In exchange for
the StaffAmerica assets and business operations, the Company issued 157,464
shares of its common stock valued at $2,795,000, assumed a StaffAmerica
liability of $50,000 for customer deposits, issued to each of the two
owners of StaffAmerica 845 shares of Company common stock for their
covenants not to compete, and incurred $102,000 in acquisition-related
costs. The acquisition was accounted for under the purchase method of
accounting, which resulted in $2,597,000 of intangible assets, a promissory
note receivable of $324,000 from the seller, and $56,000 in fixed assets.
The $324,000 promissory note was repaid to the Company during 1997.
On April 11, 1997, pursuant to the Plan and Agreement of Reorganization
between StaffAmerica, Inc. and the Company, the Company repurchased from
StaffAmerica and its two shareholders all 159,154 shares of common stock
previously issued by the Company as consideration for the acquisition, for
a total of $2,824,984 or $17.75 per share. Upon completion of the share
repurchase, the Company canceled the shares of common stock.
JOBWORKS AGENCY, INC.
On April 8, 1996, the Company acquired certain assets and the business of
JobWorks Agency, Inc. (JobWorks) by way of a Plan and Agreement of
Reorganization. JobWorks provided both temporary staffing and staff leasing
services through its two offices located in Hood River and The Dalles,
Oregon. JobWorks had revenues of approximately $1.2 million (unaudited) in
1995. The Company issued 20,446 shares of its common stock with a then-fair
value of $380,000 for the assets and business of JobWorks, assumed a
customer deposit liability of $2,000, and incurred $14,000 in
acquisition-related costs. The Company paid $20,000 in cash for the selling
shareholder's agreement of noncompetition. The acquisition was accounted
for under the purchase method of accounting, which resulted in $324,000 of
intangible assets, $72,000 in accounts receivable, and $20,000 in fixed
assets.
CASCADE TECHNICAL STAFFING
Effective August 26, 1996, the Company acquired certain assets of Cascade
Technical Staffing (Cascade). Cascade provided technical and light
industrial staffing services primarily in the electronics industry through
its Beaverton, Oregon office. Cascade had revenues of approximately $3.5
million (unaudited) in 1995. The Company paid $550,000 in cash for the
assets and incurred $6,000 in acquisition-related costs. The acquisition
was accounted for under the purchase method of accounting, which resulted
in $536,000 of intangible assets and $20,000 of fixed assets.
CALIFORNIA EMPLOYER SERVICES, INC.
Effective November 4, 1996, the Company purchased the staff leasing
division of California Employer Services, Inc. (CES), an Orange County,
California staffing services company. The CES division had revenues of
approximately $10.5 million (unaudited) for the fiscal year ended September
30, 1996. The Company paid $624,000 in cash for the division, assumed a
customer deposit liability of $36,000, and incurred $25,000 in
acquisition-related costs. The transaction was accounted for under the
purchase method of accounting, which resulted in $685,000 of intangible
assets.
F-9
BARRETT BUSINESS SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
- --------------------------------------------------------------------------------
2. ACQUISITIONS (CONTINUED)
PROFESSIONAL PERSONNEL, INC.
Effective November 25, 1996, the Company purchased certain assets of
Professional Personnel, Inc. (PPI), a provider of staff leasing services
located in Downey, California. PPI had revenues of approximately $2.4
million (unaudited) for the year ended September 30, 1996. The Company paid
$176,000 in cash for certain assets, assumed a customer deposit liability
of $19,000, and incurred $2,000 in acquisition-related costs. The
transaction was accounted for under the purchase method of accounting,
which resulted in $195,000 of intangible assets and $2,000 of fixed assets.
HR ONLY
Effective February 1, 1997, the Company acquired D&L Personnel Department
Specialists, Inc., dba HR Only, a staffing services company which
specializes in human resource professionals, with offices in Los Angeles
and Garden Grove, California. The Company paid $1,800,000 in cash for all
of the outstanding common stock of HR Only and $1,200,000 in cash for
noncompete agreements with certain individuals, of which $1,000,000 was
deferred with simple interest at 5% per annum for five years and then be
paid ratably over the succeeding five-year period. The deferred portion of
the noncompete agreement is presented on the balance sheet in other
long-term liabilities. HR Only's revenues for the fiscal year ended January
31, 1997 were approximately $4.3 million. The transaction was accounted for
under the purchase method of accounting, which resulted in $3,027,000 of
intangible assets, including $92,000 for acquisition-related costs, and
$65,000 of net tangible assets.
TLC STAFFING
Effective April 13, 1997, the Company purchased certain assets of JRL
Services, Inc., dba TLC Staffing, a provider of clerical staffing services
located in Tucson, Arizona. TLC Staffing had revenues of approximately
$800,000 (unaudited) for the year ended December 31, 1996. The Company paid
$150,000 in cash for the assets, assumed an $18,000 office lease liability
and incurred $4,000 in acquisition related costs. The transaction was
accounted for under the purchase method of accounting, which resulted in
$152,000 of intangible assets and $2,000 of fixed assets.
PRO FORMA RESULTS OF OPERATIONS (UNAUDITED)
The operating results of each of the above acquisitions are included in the
Company's results of operations from the respective date of acquisition.
The following unaudited summary presents the combined results of operations
as if the StaffAmerica, Cascade Technical Staffing, California Employer
Services, and HR Only acquisitions had occurred at the beginning of 1996,
after giving effect to certain adjustments for the amortization of
intangible assets, taxation and cost of capital. The other acquisitions
made since January 1, 1996 are not included in the pro forma information as
their effect is not material.
YEAR ENDED DECEMBER 31,
1997 1996
--------- ---------
(in thousands, except per share amounts)
Revenue $ 305,889 $ 250,306
========= =========
Net income $ 3,848 $ 5,216
========= =========
Basic earnings per share $ .50 $ .68
========= =========
Diluted earnings per share $ .49 $ .66
========= =========
F-10
BARRETT BUSINESS SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
- --------------------------------------------------------------------------------
2. ACQUISITIONS (CONTINUED)
The unaudited pro forma results above have been prepared for comparative
purposes only and do not purport to be indicative of what would have
occurred had the acquisitions been made as of that date, or of results
which may occur in the future.
On June 29, 1998, the Company completed a merger with WIMI, whereby WIMI
was merged directly into Barrett. The transaction qualified as a tax-free
merger and has been accounted for as a pooling-of-interests. As a result of
the merger, the former shareholders of WIMI received a total of 894,642
shares of the Company's common stock, which included 10,497 shares issued
in exchange for real property consisting of an office condominium in which
WIMI's main office is located. A dissenting WIMI shareholder received cash
in the amount of $519,095, based on the value of $11.375 per share of
Barrett's common stock. WIMI was a privately-held staffing services company
headquartered in San Bernardino, California.
Separate results of operations of the periods prior to the merger with the
Company are as follows:
YEAR ENDED DECEMBER 31,
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.
F-11
BARRETT BUSINESS SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
- --------------------------------------------------------------------------------
3. FAIR VALUE OF FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK
(CONTINUED)
Financial instruments that potentially subject the Company to concentration
of credit risk consist primarily of temporary cash investments, marketable
securities, and trade accounts receivable. The Company restricts investment
of temporary cash investments and marketable securities to financial
institutions with high credit ratings and to investments in governmental
debt instruments. Credit risk on trade receivables is minimized as a result
of the large and diverse nature of the Company's customer base. At December
31, 1997, the Company had significant concentrations of credit risk as
follows:
- Marketable securities - $2,155,000 of marketable securities at December
31, 1997 consisted of Oregon State Housing & Community Service Bonds.
- Trade receivables - $2,500,000 of trade receivables were with two
customers at December 31, 1997 (13% of trade receivables outstanding at
December 31, 1997).
4. INTANGIBLES
Intangibles consist of the following (in thousands):
F-12
BARRETT BUSINESS SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
- --------------------------------------------------------------------------------
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 $3,772,000 and $2,853,000 at December 31, 1997 and
1996, respectively, as an estimated liability for unsettled workers'
compensation claims. This estimated liability represents management's best
estimate which includes, in part, an evaluation of information provided by
the Company's third-party administrators and its independent actuary.
Included in the claims liabilities are case reserve estimates for reported
losses, plus additional amounts based on projections for incurred but not
reported claims, anticipated increases in case reserve estimates and
additional claims administration expenses. These estimates are continually
reviewed and adjustments to liabilities are reflected in current operations
as they become known. The Company believes that the difference between
amounts recorded for its estimated liability and the possible range of
costs of settling related claims is not material to results of operations;
nevertheless, it is reasonably possible that adjustments required in future
periods may be material to results of operations.
The United States Department of Labor and the States of Oregon, Maryland,
Washington and California require the Company to maintain specified
investment balances or other financial instruments, totaling $7,698,000 at
December 31, 1997 and $7,151,000 at December 31, 1996, to cover potential
claims losses. In partial satisfaction of these requirements, at December
31, 1997, the Company has provided letters of credit in the amount of
$2,096,000 and surety bonds totaling $457,000. The investments are included
in restricted marketable securities and workers' compensation deposits in
the accompanying balance sheets.
Liabilities incurred for work-related employee fatalities are recorded
either at an agreed lump-sum settlement amount or the net present value of
future fixed and determinable payments over the actuarially determined
remaining life of the beneficiary, discounted at a rate that approximates a
long-term, high-quality corporate bond rate. The Company has obtained
excess workers' compensation insurance to limit its self-insurance exposure
to $350,000 per occurrence in all states, except for $300,000 in Maryland
and $500,000 per occurrence for USL&H exposure. The excess insurance
provides unlimited coverage above the aforementioned exposures. At December
31, 1997, the Company has recorded $632,000 for work-related catastrophic
injuries and fatalities in long-term workers' compensation liabilities in
the accompanying balance sheets.
The aggregate undiscounted pay-out amount for the catastrophic injuries and
fatalities is $1,570,000. The actuarially determined pay-out periods to the
beneficiaries range from nine years to 44 years. As a result, the five-year
cash requirements related to these claims are immaterial.
The workers' compensation expense in the accompanying statements of
operations consists of $8,099,000, $5,799,000 and $5,802,000 for
self-insurance expense for 1997, 1996 and 1995, respectively. Premiums in
the insured states were $976,000, $842,000 and $927,000 for 1997, 1996 and
1995, respectively.
F-13
BARRETT BUSINESS SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
- --------------------------------------------------------------------------------
7. CREDIT FACILITY
Effective May 30, 1997, the Company renegotiated its loan agreement (the
"Agreement") with a major bank, which provides for (a) an unsecured
revolving credit facility for working capital purposes, (b) a term real
estate loan (Note 8) and (c) standby letters of credit totaling $2,096,000,
in connection with certain workers' compensation surety arrangements. The
Agreement expires on May 31, 1998 and currently permits total borrowings of
up to $4,000,000 under the revolving credit facility. The interest rates
available 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 loan agreement, the Company is required to
maintain a zero outstanding balance against the revolving credit facility
for a minimum of 30 consecutive days during each year. The pledging of any
of the Company's assets, other than existing mortgages on its real
property, is limited to a pro rata basis with any other lender.
During the year ended December 31, 1997, the maximum balance outstanding
under the revolving credit facility was $3,556,000, the average balance
outstanding was $1,412,000, and the weighted average interest rate during
the period was 7.3%. The weighted average interest rate during 1997 was
calculated using daily weighted averages. There were no borrowings on the
revolving credit facility during 1996.
The Company has an additional revolving credit facility. Total borrowings
outstanding at December 31, 1997 and 1996 were $887,000 and $186,000,
respectively. This credit facility was paid off in 1998.
8. LONG-TERM DEBT
Long-term debt consists of the following:
F-14
BARRETT BUSINESS SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
- --------------------------------------------------------------------------------
8. LONG-TERM DEBT (CONTINUED)
Maturities on long-term debt are summarized as follows at December 31, 1997
(in thousands):
YEAR ENDING
DECEMBER 31,
------------
1998 $ 731
1999 57
2000 60
2001 51
2002 49
Thereafter 356
--------
$ 1,304
========
9. SAVINGS PLAN
On April 1, 1990, the Company established a Section 401(k) employee savings
plan for the benefit of its eligible employees. All employees 21 years of
age or older become eligible to participate in the savings plan upon
completion of 1,000 hours of service in any consecutive 12-month period
following the initial date of employment. Employees covered under a
co-employer (PEO) contract receive credit for prior employment with the PEO
client for purposes of meeting savings plan service eligibility. The
determination of Company contributions to the plan, if any, is subject to
the sole discretion of the Company. Participants' interests in Company
contributions to the plan vest over a seven-year period. Company
contributions to the plan were $111,000, $134,000 and $142,000 for the
years ended December 31, 1997, 1996 and 1995, respectively.
Recent attention has been placed by the Internal Revenue Service (the
"IRS") and the staff leasing industry on IRC Section 401(k) plans sponsored
by staff leasing companies. As such, the tax-exempt status of the Company's
plan is subject to continuing scrutiny and approval by the IRS and to the
Company's ability to support to the IRS the Company's employer-employee
relationship with leased employees. In the event the tax-exempt status were
to be discontinued and the plan were to be disqualified, the operations of
the Company could be adversely affected. The Company has not recorded any
provision for this potential contingency, as the Company and its legal
counsel cannot presently estimate either the likelihood of disqualification
or the resulting range of loss, if any.
F-15
BARRETT BUSINESS SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
- --------------------------------------------------------------------------------
10. COMMITMENTS
LEASE COMMITMENTS
The Company leases its branch offices under operating lease agreements
which require minimum annual payments as follows (in thousands):
YEAR ENDING
DECEMBER 31,
------------------
1998 $ 920
1999 701
2000 455
2001 229
2002 81
--------
$ 2,386
========
Rent expense for the years ended December 31, 1997, 1996 and 1995 was
approximately $1,188,000, $848,000 and $680,000, respectively.
11. RELATED PARTY TRANSACTIONS
During 1997, 1996 and 1995, the Company recorded revenues of $4,047,000,
$4,086,000 and $3,753,000, respectively, and cost of revenues of
$3,719,000, $3,768,000 and $3,408,000, respectively, for providing services
to a company of which a then director of the Company was president and
majority stockholder. At December 31, 1997 and 1996, Barrett had trade
receivables from this company of $188,000 and $126,000, respectively.
At December 31, 1993, the President and Chief Executive Officer of the
Company, pursuant to the approval of a majority of the disinterested
outside directors, agreed to personally guarantee, at no cost to the
Company, the repayment of a $111,000 receivable from an unrelated,
insolvent customer. During 1995, pursuant to this agreement, the Company
exercised its right to the personal guarantee provided by the Company's
Chief Executive Officer. Accordingly, the Chief Executive Officer
surrendered to the Company 7,400 shares of common stock of Barrett Business
Services, Inc., with a then-fair market value of $111,000 or $15.00 per
share, in satisfaction of the guarantee. The Company subsequently retired
the shares and the par value of the shares was reclassified to additional
paid-in capital. The uncollectible account was included in the Company's
provisions for doubtful accounts during 1993 and 1994.
On December 31, 1997, the Company took a loan from a shareholder in the
amount of $122,100. The note bears interest at 10% per annum and is due in
1998.
F-16
BARRETT BUSINESS SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
- --------------------------------------------------------------------------------
12. INCOME TAXES
The provisions for income taxes are as follows (in thousands):
Deferred tax assets (liabilities) are comprised of the following components
(in thousands):
The effective tax rate differed from the U.S. statutory federal tax rate
due to the following:
During 1997, the Company recognized a State of Oregon tax credit of
approximately $121,000 related to the 1996 tax year. During 1996, the
Company recognized a State of Oregon surplus tax refund of approximately
$145,000 related to tax years 1993 through 1995.
F-17
BARRETT BUSINESS SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
- --------------------------------------------------------------------------------
13. REDEEMABLE COMMON STOCK AND NONREDEEMABLE STOCKHOLDERS' EQUITY
REDEEMABLE COMMON STOCK
As part of the 1996 acquisition of StaffAmerica discussed in Note 2, the
Company granted "put rights" to certain shareholders that required the
Company to redeem 159,154 shares of its common stock at a redemption price
of $17.75 per share for a total of $2,824,984 on April 11, 1997.
At December 31, 1996, the shares of common stock subject to the "put
rights" are presented in the accompanying balance sheets as redeemable
common stock. Such shares were recorded at their fair market value as of
the date of acquisition. Such fair market value equaled the maximum
redemption amount.
14. STOCK INCENTIVE PLAN
As of March 1, 1993, the Company adopted the 1993 Stock Incentive Plan (the
"Plan") which provides for stock-based awards to the Company's employees,
non-employee directors, and outside consultants or advisors. Effective May
14, 1997, the Company's stockholders approved an increase in the number of
shares of common stock reserved for issuance under the Plan from 800,000 to
1,300,000.
The options generally become exercisable in four equal annual installments
beginning one year after the date of grant, and expire ten years after the
date of grant. Under the terms of the Plan, the exercise price of the
options must be not less than the fair market value of the Company's stock
on the date of grant. The number of options and the price per share have
been restated to reflect the 2-for-1 stock split effective May 23, 1994.
In connection with its initial public offering in 1993, the Company issued
200,000 warrants to its underwriters and related parties for the purchase
of shares of the Company's common stock exercisable in whole at any time or
in part from time to time commencing June 11, 1994 at $4.20 per share,
after giving effect to the 2-for-1 stock split. A total of 170,000 warrants
have been exercised through December 31, 1997 for proceeds of $714,000. The
remaining unexercised warrants expire on June 10, 1998.
F-18
BARRETT BUSINESS SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
- --------------------------------------------------------------------------------
14. STOCK INCENTIVE PLAN (CONTINUED)
A summary of the status of the Company's stock option plan at December 31,
1997, 1996 and 1995, together with changes during the periods then ended,
is presented below.
The Company applies APB Opinion 25 and related interpretations in
accounting for the Plan. Accordingly, no compensation expense has been
recognized for its stock option grants. Had compensation expense for the
Company's stock-based compensation plan been determined based on the fair
market value at the grant date for awards under the Plan, consistent with
the method of Statement of Financial Accounting Standards No. 123, the
Company's net income and earnings per share would have been reduced to the
pro forma amounts indicated below:
F-19
BARRETT BUSINESS SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
- --------------------------------------------------------------------------------
14. STOCK INCENTIVE PLAN (CONTINUED)
The effects of applying SFAS No. 123 for providing pro forma disclosures
for 1997, 1996 and 1995 are not likely to be representative of the effects
on reported net income for future years, because options vest over several
years and additional awards generally are made each year.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model, with the following weighted-average
assumptions used for grants in 1997, 1996 and 1995:
Total fair value of options granted at market price was computed to be
$1,809,662, $1,227,834 and $1,165,925 for the years ended December 31,
1997, 1996 and 1995, respectively. Total fair value of options granted at
110% above market price was computed to be $531,300 for the year ended
December 31, 1995. Such options were granted to the chief executive officer
in 1995. The weighted average value of options granted in 1997, 1996 and
1995 was $8.23, $8.93 and $5.26, respectively.
The following table summarizes information about stock options outstanding
at December 31, 1997:
At December 31, 1997, 1996 and 1995, 211,958, 126,500 and 82,875 were
exercisable at weighted average exercise prices of $12.02, $10.80 and
$7.04, respectively.
15. LITIGATION
The Company is subject to legal proceedings and claims which arise in the
ordinary course of its business. In the opinion of management, the amount
of ultimate liability with respect to currently pending or threatened
actions is not expected to materially affect the financial position or
results of operations of the Company.
F-20
BARRETT BUSINESS SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
- --------------------------------------------------------------------------------
16. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
F-21
EXHIBIT INDEX
2 Acquisition and Merger Agreement dated June 29, 1998, among the
registrant, Western Industrial Management, Inc., Catch 55, Inc., and the
other parties listed therein. Incorporated by reference to Exhibit 2 to
the registrant's Current Report on Form 8-K dated June 29, 1998.
3.1 Charter of the registrant, as amended. Incorporated by reference to
Exhibit 3 to the registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1994.
3.2 Bylaws of the registrant, as amended. Incorporated by reference to
Exhibit 3.2 to the registrant's Annual Report on Form 10-K for the year
ended December 31, 1996.
4.1 Loan Agreement between the registrant and Wells Fargo Bank, N.A., dated
May 30, 1997. Incorporated by reference to Exhibit 4.1 to the
registrant's Quarterly Report on Form 10-Q for the quarter ended June
30, 1997.
The registrant has incurred other long-term indebtedness as to
which the amount involved is less than 10 percent of the
registrant's total assets. The registrant agrees to furnish
copies of the instruments relating to such indebtedness to the
Commission upon request.
10 Executive Compensation Plans and Arrangements and Other Management
Contracts.
10.1 1993 Stock Incentive Plan of the registrant as amended. Incorporated by
reference to Exhibit 10.1 to the registrant's Annual Report on Form 10-K
for the year ended December 31, 1996.
10.2 Form of Indemnification Agreement with each director of the registrant.
Incorporated by reference to Exhibit 10.8 to the registrant's
Registration Statement on Form S-1 (No. 33-61804).
10.3* Deferred Compensation Plan for Management Employees of the registrant.
11 Statement of calculation of Basic and Diluted shares outstanding.
23 Consent of PricewaterhouseCoopers LLP, independent accountants.
24* Power of attorney of certain officers and directors.
27.1 Restated Financial Data Schedule, fiscal year end 1997.
27.2* Financial Data Schedules, fiscal year ends 1995 and 1996 and Qtrs. 1, 2
and 3 of 1996.
27.3 Restated Financial Data Schedules, Qtrs. 1, 2 and 3 of 1997.
27.4 Restated Financial Data Schedules, fiscal year ends 1995 and 1996.
* Previously filed