UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
FORM 10-Q
--------------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 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 October 31, 1997
was 6,727,423 shares.
<PAGE>
BARRETT BUSINESS SERVICES, INC.
INDEX
Page
Part I - Financial Information
Item 1. Financial Statements
Balance Sheets - September 30, 1997 and
December 31, 1996.............................................3
Statements of Operations - Three Months
Ended September 30, 1997 and 1996.............................4
Statements of Operations - Nine Months
Ended September 30, 1997 and 1996.............................5
Statements of Cash Flows - Nine Months
Ended September 30, 1997 and 1996.............................6
Notes to Financial Statements.................................7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations...................................................10
Part II - Other Information
Item 1. Legal Proceedings............................................17
Item 6. Exhibits and Reports on Form 8-K.............................18
Signatures .............................................................19
Exhibit Index .............................................................20
2
<PAGE>
PART I - Financial Information
Item 1. Financial Statements
BARRETT BUSINESS SERVICES, INC.
Balance Sheets
(Unaudited)
(In thousands)
September 30, December 31,
1997 1996
------------- ------------
Assets
Current assets:
Cash and cash equivalents $ 1,754 $ 1,901
Trade accounts receivable, net 24,376 19,057
Note receivable - 324
Prepaid expenses and other 1,205 914
Deferred tax asset (Note 4) 1,708 1,279
------ ------
Total current assets 29,043 23,475
Intangibles, net 12,434 10,226
Property and equipment, net 4,035 3,111
Restricted marketable securities
and workers' compensation deposits 6,077 5,707
Other assets 139 127
------ ------
$51,728 $42,646
====== ======
Liabilities and Stockholders' Equity
Current liabilities:
Advances on credit line $ 1,614 $ -
Current portion of long-term debt 62 36
Accounts payable 1,229 667
Accrued payroll, payroll taxes
and related benefits 11,808 7,354
Accrued workers' compensation claims
liabilities 2,750 2,240
Customer safety incentives payable 1,143 1,015
Other accrued liabilities 383 606
------ ------
Total current liabilities 18,989 11,918
Long-term debt, net of current portion 810 838
Customer deposits 951 890
Long-term workers' compensation
liabilities 606 613
Other long-term liabilities 1,022 -
------ ------
22,378 14,259
------ ------
Commitments and contingencies
Redeemable common stock, 159 shares issued
and outstanding (Note 2) - 2,825
Nonredeemable stockholders' equity:
Common stock, $.01 par value; 20,500
shares authorized, 6,727 and 6,625
shares issued and outstanding, respectively 67 66
Additional paid-in capital 11,685 10,929
Retained earnings 17,598 14,567
------ ------
29,350 25,562
------ ------
$51,728 $42,646
====== ======
The accompanying notes are an integral part of these financial statements.
3
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BARRETT BUSINESS SERVICES, INC.
Statements of Operations
(Unaudited)
(In thousands, except per share amounts)
Three Months Ended
September 30,
----------------------
1997 1996
------ ------
Revenues:
Staffing services $47,271 $32,612
Professional employer services 33,934 27,640
------ ------
81,205 60,252
Cost of revenues:
Direct payroll costs 62,997 45,817
Payroll taxes and benefits 7,654 5,248
Workers' compensation 2,237 2,161
Safety incentives 464 433
------ ------
73,352 53,659
------ ------
Gross margin 7,853 6,593
Selling, general and administrative
expenses 6,072 4,104
Amortization of intangibles 351 207
------ ------
Income from operations 1,430 2,282
Other income (expense):
Interest expense (60) (20)
Interest income 84 129
Other, net (2) -
------ ------
22 109
------ ------
Income before provision for income taxes 1,452 2,391
Provision for income taxes 505 730
------ ------
Net income $ 947 $ 1,661
====== ======
Primary earnings per share (Note 6) $ .14 $ .24
====== ======
Primary weighted average number of common
stock equivalent shares outstanding 6,727 7,019
====== ======
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
BARRETT BUSINESS SERVICES, INC.
Statements of Operations
(Unaudited)
(In thousands, except per share amounts)
Nine Months Ended
September 30,
--------------------------
1997 1996
------- -------
Revenues:
Staffing services $118,405 $ 82,332
Professional employer services 96,035 72,976
------- -------
214,440 155,308
Cost of revenues:
Direct payroll costs 165,200 117,695
Payroll taxes and benefits 20,907 14,570
Workers' compensation 6,065 4,144
Safety incentives 1,168 1,142
------- -------
193,340 137,551
------- -------
Gross margin 21,100 17,757
Selling, general and administrative
expenses 15,444 11,671
Amortization of intangibles 943 576
------- -------
Income from operations 4,713 5,510
Other income (expense):
Interest expense (127) (62)
Interest income 273 380
Other, net (2) -
------- -------
144 318
------- -------
Income before provision for income taxes 4,857 5,828
Provision for income taxes 1,826 2,036
------- -------
Net income $ 3,031 $ 3,792
======= =======
Primary earnings per share (Note 6) $ .45 $ .55
======= =======
Primary weighted average number of common
stock equivalent shares outstanding 6,754 6,928
======= =======
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
BARRETT BUSINESS SERVICES, INC.
Statements of Cash Flows
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
--------------------------
1997 1996
------- ------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 3,031 $ 3,792
Reconciliation of net income to cash
from operations:
Depreciation and amortization 1,230 799
Changes in certain assets and liabilities, net
of assets acquired and liabilities assumed:
Trade accounts receivable, net (4,773) (4,186)
Note receivable 324 -
Prepaid expenses and other (232) (304)
Deferred tax asset (429) (266)
Accounts payable 553 336
Accrued payroll, payroll taxes and related
benefits 4,447 2,426
Accrued workers' compensation claims
liabilities 510 (259)
Customer safety incentives payable 128 261
Income taxes payable - 648
Other accrued liabilities (347) -
Customer deposits and long-term workers'
compensation liabilities 54 427
Other long-term liabilities 22 -
------ ------
Net cash provided by operating activities 4,518 3,674
------ ------
Cash flows from investing activities:
Cash paid for acquisitions, including other
direct costs (Note 3) (2,246) (685)
Purchases of fixed assets, net of amounts
purchased in acquisitions (1,137) (301)
Proceeds from maturities of marketable
securities 5,338 5,493
Purchases of marketable securities (5,708) (6,528)
------ ------
Net cash used in investing activities (3,753) (2,021)
------ ------
Cash flows from financing activities:
Payment of credit line assumed in acquisition (401) -
Proceeds from credit line borrowings 1,614 -
Payments on long-term debt (57) (24)
Repurchase of common stock (2,825) -
Proceeds from exercise of stock
options and warrants 757 109
------ ------
Net cash (used in) provided by financing activities (912) 85
------ ------
Net (decrease) increase in cash and cash equivalents (147) 1,738
Cash and cash equivalents, beginning of period 1,901 3,218
------ ------
Cash and cash equivalents, end of period $ 1,754 $ 4,956
====== ======
Supplemental schedule of noncash activities:
Acquisition of other businesses:
Cost of acquisitions in excess of fair market
value of net assets acquired $ 3,179 $ 3,450
Tangible assets acquired 674 492
Liabilities assumed 1,607 52
Common stock issued in connection with acquisitions - 3,205
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
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 three and nine-month periods
ended September 30, 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 - REDEEMABLE COMMON STOCK:
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.
NOTE 3 - ACQUISITIONS:
Effective February 1, 1997, the Company acquired D&L Personnel
Department Specialists, Inc., dba HR Only, a staffing services company which
specializes in human resource professionals with offices in Los Angeles and
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 with
7
<PAGE>
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.
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 $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.
NOTE 4 - PROVISION FOR INCOME TAXES:
Deferred tax assets (liabilities) are comprised of the
following components (in thousands):
<TABLE>
September 30, 1997 December 31, 1996
------------------ -----------------
<S> <C> <C>
Accrued workers' compensation claims
liabilities $1,320 $1,113
Allowance for doubtful accounts 133 10
Tax depreciation in excess of book
depreciation (164) (154)
Safety incentives 331 281
Book amortization of intangibles in excess
of tax amortization 88 29
----- -----
$1,708 $1,279
===== =====
</TABLE>
The provision for income taxes for the nine months ended September 30, 1997 and
1996, is as follows (in thousands):
<TABLE>
Nine Months Nine Months
Ended Ended
Sept. 30, 1997 Sept. 30, 1996
-------------- --------------
Current:
<S> <C> <C>
Federal $1,892 $2,045
State 363 257
----- -----
2,255 2,302
Deferred:
Federal (355) (221)
State (74) (45)
----- -----
(429) (266)
----- -----
Provision for income taxes $1,826 $2,036
===== =====
</TABLE>
8
<PAGE>
During the third quarter of 1997, the Company recognized, net
of federal tax, a State of Oregon tax credit of approximately $61,000 related to
surplus tax revenues collected by the State for prior tax years. The State is
statutorily required to provide credits or refunds to taxpayers for excess tax
revenues collected.
NOTE 5 - 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 1,300,000.
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 166,011 $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
-------
Outstanding at September 30, 1997 576,259 $ 3.50 to $17.94
=======
Exercisable at September 30, 1997 228,208
=======
Available for grant at
September 30, 1997 557,616
=======
The options listed in the table generally become exercisable in four equal
annual installments beginning one year after the date of grant.
NOTE 6 - 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.
9
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
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 three and nine-month periods ended September 30, 1997 and 1996.
<TABLE>
Percentage of Total Revenues
---------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
1997 1996 1997 1996
---- ---- ---- ----
Revenues:
<S> <C> <C> <C> <C>
Staffing services 58.2% 54.1% 55.2% 53.0%
Professional employer services 41.8 45.9 44.8 47.0
----- ----- ----- -----
Total revenues 100.0 100.0 100.0 100.0
----- ----- ----- -----
Cost of revenues:
Direct payroll costs 77.6 76.0 77.0 75.8
Payroll taxes and benefits 9.4 8.8 9.8 9.4
Workers' compensation 2.8 3.6 2.8 2.7
Safety incentives .5 .7 .6 .7
----- ----- ----- -----
Total cost of revenues 90.3 89.1 90.2 88.6
----- ----- ----- -----
Gross margin 9.7 10.9 9.8 11.4
Selling, general and administrative
expenses 7.5 6.8 7.2 7.5
Amortization of intangibles .4 .3 .4 .4
----- ----- ----- -----
Income from operations 1.8 3.8 2.2 3.5
Other income (expense) - .2 .1 .2
----- ----- ----- -----
Pretax income 1.8 4.0 2.3 3.7
Provision for income taxes .6 1.2 .9 1.3
----- ----- ----- -----
Net income 1.2 2.8 1.4 2.4
===== ===== ===== =====
</TABLE>
Three months ended September 30, 1997 and 1996
Net income for the third quarter of 1997 was $947,000, a
decrease of $714,000 or 43.0% from the same period in 1996. The decrease in net
income was attributable to a lower gross margin percentage and increased
selling, general and administrative expenses. Earnings per share for the third
quarter of 1997 were $.14, as compared to $.24 for the third quarter of 1996.
Revenues for the third quarter of 1997 totaled approximately
$81.2 million, an increase of approximately $21.0 million or 34.8% over the
third quarter of 1996. The quarter-over-quarter internal growth rate of revenues
was 27.0%. The percentage increase in total revenues exceeded the internal
growth rate of revenues primarily due to the acquisition of four staffing and
PEO businesses since October 1, 1996.
10
<PAGE>
The higher internal growth rate of revenues of 27.0% for the
1997 third quarter compared to 14.6% for the 1996 third quarter was primarily
attributable to the opening of four new branch offices during 1996 and early
1997 in Boise, Idaho, Tucson, Arizona, Ontario, California, and Flint, Michigan,
coupled with the continued growth in business at existing branch offices.
Staffing services revenues increased approximately $14.7 million or 44.9%, while
professional employer services revenues increased approximately $6.3 million or
22.8%, which resulted in an increase in the mix of staffing services to 58.2% of
total revenues for the third quarter of 1997, as compared to 54.1% for the third
quarter of 1996. The mix of professional employer services revenues had a
corresponding decline from 45.9% for the third quarter of 1996 to 41.8% for the
third quarter of 1997.
Gross margin for the third quarter of 1997 totaled
approximately $7.9 million, which represented an increase of $1.3 million or
19.1% over the third quarter of 1996. Gross margin as a percentage of revenues,
however, decreased to 9.7% of revenues for the third quarter of 1997, as
compared to 10.9% for the same period of 1996. The decline in the gross margin
percentage was due to higher direct payroll costs and payroll taxes and
benefits, both in terms of total dollars and as a percentage of revenues. The
effect of these higher costs was offset in part by lower workers' compensation
expense as a percentage of revenues.
The increase in the percentage of direct payroll costs from
76.0% for the third quarter of 1996 to 77.6% for the third quarter of 1997 was
primarily attributable to increased business activity in contract staffing and
on-site management arrangements, which are typically higher volume, lower margin
accounts. In many of these staffing arrangements, the Company acts as the master
vendor, while other staffing services companies ("subcontractors") participate
in the contract. Under such arrangements, the other staffing companies invoice
Barrett for employees provided to Barrett. Barrett in turn invoices the customer
at the subcontractors' invoice cost, which results in a pass-through of costs
with no gross margin realized by the Company in accordance with industry
practice. These pass-through costs, however, increase the percentage of revenues
represented by direct payroll costs yielding a lower gross margin percentage.
During the third quarter of 1997, subcontractor labor costs
totaled approximately $1.1 million, compared to approximately $300,000 for the
1996 third quarter. The impact of the subcontractor costs for the third quarter
of 1997 was an increase of approximately 30 basis points in the direct payroll
costs expressed as a percentage of revenues. In view of the dynamics of
competitive market forces, including the increasing volume of large contract
staffing and on-site management staffing contracts, there can be no assurance
that the percentage of revenues represented by direct payroll costs will return
to historical levels.
The increase in the percentage of payroll taxes and benefits
from 8.8% of revenues for the third quarter of 1996 to 9.4% for the third
quarter of 1997 was primarily due to the increase in seasonal employment and
incremental new business in
11
<PAGE>
California, which has a relatively high state unemployment tax rate.
Workers' compensation expense decreased from 3.6% of revenues
for the third quarter of 1996 to 2.8% of revenues for the 1997 third quarter due
to an overall reduction in severity of injuries. The 2.8% of revenues for the
1997 third quarter represents current loss experience for the third quarter 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
for each of the first three quarters of 1997 and 1996.
Self-Insured Workers' Compensation Profile
<TABLE>
Total Workers'
Total Workers' Comp Expense
No. of Injury Comp Expense as a % of
Claims (in thousands) Total Payroll
------------------ -------------------- --------------------
1997 1996 1997 1996 1997 1996
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Q1 321 193 $1,855 $ 770 3.9% 2.4%
Q2 419 312 1,973 1,213 3.6 3.1
Q3 578 401 2,237 2,161 3.6 4.7
----- --- ----- -----
YTD 1,318 906 $6,065 $4,144 3.7% 3.5%
===== === ===== =====
</TABLE>
Selling, general and administrative ("SG&A") expenses for the
1997 third quarter amounted to approximately $6.1 million, an increase of
approximately $2.0 million or 48.0% over the comparable period in 1996. Selling,
general and administrative expenses expressed as a percentage of revenues
increased from 6.8% for the 1996 third quarter to 7.5% for the 1997 third
quarter primarily due to an increase in bad debt expense attributable to a
single customer of $250,000, coupled with the addition of high-quality personnel
at several branches in order to better manage and grow the Company's business.
Management believes that the Company's allowance for doubtful accounts is
adequate at September 30, 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. The increase in total SG&A dollars was also attributable to
incremental branch office expenses as a result of the four acquisitions since
October 1, 1996, as well as the opening of four new offices in 1996 and early
1997.
Amortization of intangibles totaled $351,000, or .4% of
revenues, for the third quarter of 1997, which compares to $207,000 or .3% of
revenues for the same period in 1996. The increased amortization expense was
primarily due to the Company's four acquisitions since October 1, 1996.
The Company offers various employee benefit plans to its
employees, including its worksite employees. These employee
12
<PAGE>
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.
Nine Months Ended September 30, 1997 and 1996
Net income for the nine months ended September 30, 1997 was
$3,031,000, a decrease of $761,000 or 20.0% from the same period in 1996. The
decrease in net income was primarily due to a lower gross margin percentage
owing primarily to increased direct payroll costs. Net income per share for the
nine months ended September 30, 1997 was $.45, as compared to $.55 for the nine
months ended September 30, 1996.
Revenues for the nine months ended September 30, 1997 totaled
approximately $214.4 million, an increase of approximately $59.1 million or
38.1% over the comparable period of 1996. The internal growth rate of revenues
was 25.8%. The growth rate of total revenues exceeded the internal growth rate
of revenues primarily due to the acquisition of four staffing and PEO businesses
between November 1996 and April 1997.
The higher internal growth rate of revenues of 25.8% for 1997
compared to the 1996 period internal growth rate of 8.6% was primarily
attributable to the opening of four new branch offices during 1996 and in early
1997, coupled with the continued growth in business at existing branch offices.
Gross margin for the nine months ended September 30, 1997
totaled approximately $21.1 million, which represented an increase of $3.3
million or 18.8% over the same period of 1996. The gross margin percent
decreased to 9.8% of revenues for the first nine months of 1997, as compared to
11.4% for the same period of 1996. The decline in the gross margin percentage
was primarily due to higher direct payroll costs 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 nine months of 1996 to 77.0% for the
first nine months of 1997 was primarily attributable to increased business
activity in contract staffing and on-site management arrangements.
Selling, general and administrative expenses for the nine
months ended September 30, 1997 amounted to approximately $15.4 million, an
increase of $3.8 million or 32.3% over the comparable
13
<PAGE>
period in 1996. These expenses, however, decreased from 7.5% of revenues for the
1996 period to 7.2% of revenues for 1997. The increase in total dollars was
primarily attributable to additional branch office expenses as a result of the
four acquisitions made since October 1, 1996, and the opening of four new
offices.
Amortization of intangibles totaled $943,000 or .4% of
revenues for the nine-month period ended September 30, 1997, which compares to
$576,000 for the same period in 1996. The increased amortization expense was
attributable to the four acquisitions made since October 1, 1996.
Fluctuations in Quarterly Operating Results
The Company has historically experienced significant
fluctuations in its quarterly operating results and expects such fluctuations to
continue in the future. The Company's operating results may fluctuate due to a
number of factors such as seasonality, wage limits on payroll taxes, claims
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
- -------------------------------
The Company's cash position of $1,754,000 at September 30,
1997 decreased by $147,000 from December 31, 1996. The decrease was primarily
due to cash used in investing activities for acquisitions and in financing
activities to satisfy the Company's obligation to repurchase shares of its
common stock, offset in part by the cash provided by operating activities.
Net cash provided by operating activities for the nine months
ended September 30, 1997 amounted to $4,518,000 as compared to $3,674,000 for
the comparable 1996 period. For the 1997 period, cash flow generated by net
income, together with an increase of $4,447,000 in accrued payroll and benefits,
was offset in part by a $4,773,000 increase in trade accounts receivable. The
$1,022,000 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 $3,753,000 for
the nine months ended September 30, 1997, as compared to
14
<PAGE>
$2,021,000 for the similar 1996 period. For the 1997 period, the principal uses
of cash for investing activities were the acquisition of HR Only and the
purchase of new computer hardware, as well as capitalized software
implementation costs, in connection with the Company's new management
information system which will, among other things, address the "Year 2000"
issue. The Company presently has no material long-term capital commitments.
Net cash used in financing activities for the nine-month
period ended September 30, 1997 was $912,000, which compares to net cash
provided by financing activities of $85,000 for the comparable 1996 period. For
the 1997 period, the principal use of cash for 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 borrowings on the Company's revolving bank
credit line in the amount of $1,614,000 and proceeds from the exercise of stock
options and warrants totaling $757,000. As of the date of this report, an
underwriter continues to hold warrants to purchase 30,000 shares of common stock
at $4.20 per share issued in connection with the Company's 1993 initial public
offering of its common stock.
The 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 3 to the
financial statements included herein, the Company purchased, during February
1997, a staffing services company located in the Los Angeles, California area
for $2,092,000 in cash, plus an additional $1,000,000 for a noncompete agreement
which will be paid ratably, with accrued interest, over five years beginning
after the end of the fifth year following the acquisition. As also disclosed in
Note 3, the Company purchased in April 1997, certain assets of a staffing
services company located in Tucson, Arizona for $154,000 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.
The Company maintains an unsecured $4.0 million revolving
credit facility with its principal bank and $1.6 million for standby letters of
credit in connection with certain workers' compensation surety arrangements.
Management expects the funds anticipated to be generated from operations,
together with the 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.
15
<PAGE>
Forward-Looking Information
- ---------------------------
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 and allowance for doubtful accounts, 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, future experience in the collection of accounts receivable, 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.
16
<PAGE>
Part II - Other Information
Item 1. Legal Proceedings
A lawsuit was filed in the Circuit Court of the State of
Oregon for the County of Multnomah on February 5, 1997, by Javier and Ester
Munoz, husband and wife, against Asger M. Nielson, doing business as Nielson and
Son ("Nielson"), Rain-Master Roofing, Inc. ("Rain-Master"), and the Company. Mr.
Munoz was employed by the Company under a PEO arrangement with Rain-Master,
which is in the roofing business. On February 1, 1995, Rain-Master was providing
roofing services at a construction site for which Nielson was serving as a
general contractor. Mr. Munoz fell from the roof at the site in the course of
his employment and is now a paraplegic as a result of the injuries he suffered.
Until the filing of the lawsuit referred to above, Mr. Munoz's claim was being
defended as a workers' compensation claim. In the lawsuit, the plaintiffs 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. On July 14, 1997, the court granted
the Company's motion to dismiss the Company as a party to the lawsuit. The
dismissal was without prejudice. The plaintiffs and the Company have agreed that
the dismissal of the plaintiffs' suit be with prejudice and, therefore, the
plaintiffs will be barred from refiling their suit against the Company. Nielson
had previously filed a cross-claim against the Company for indemnity and
contribution based on the same grounds as the plaintiffs' suit. Nielson has
agreed to voluntarily dismiss the cross-claim against the Company.
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 contracts by Oregon law, including
licensing violations, failure to comply with wage payment laws, and failure to
maintain and to provide workers and the Bureau with required documentation. A
default judgment entered against the Company was withdrawn by an administrative
law judge on April 23, 1997. An administrative hearing commenced in late
September 1997 and is presently subject to a continuance to provide more time
for discovery. Management is vigorously contesting the claims asserted in the
Notice.
17
<PAGE>
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) No Current Reports on Form 8-K were filed by the Registrant
during the quarter ended September 30, 1997.
18
<PAGE>
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: November 12, 1997 By: /s/ Michael D. Mulholland
Michael D. Mulholland
Vice President-Finance
(Principal Financial Officer)
19
<PAGE>
EXHIBIT INDEX
EXHIBIT
- -------
11 Statement of Calculation of Average
Common Shares Outstanding
27 Financial Data Schedule
EXHIBIT 11
BARRETT BUSINESS SERVICES, INC.
STATEMENT OF CALCULATION OF AVERAGE
COMMON SHARES OUTSTANDING
<TABLE>
Three Months
Ended
September 30, 1997
------------------
Primary Earnings Per Share:
<S> <C>
Weighted average number of shares 6,727,423
Stock option plan shares to be issued at prices
ranging from $3.50 to $17.9375 per share 559,431
Warrant issues at a price of $4.20 per share 30,000
Less: Assumed purchase at average market price
during the period using proceeds received upon exercise of options
and purchase of stock, and using tax benefits of compensation due
to premature
dispositions (458,953)
---------
Total Primary Shares 6,857,901
=========
Fully Diluted Earnings Per Share:
Weighted average number of shares 6,727,423
Stock option plan shares to be issued at prices
ranging from $3.50 to $17.9375 per share 559,431
Warrant issues at a price of $4.20 per share 30,000
Less: Assumed purchase at the higher of ending or
average market price during the period using proceeds
received upon exercise of options and purchase of
stock, and using tax benefits of compensation due to
premature dispositions (439,929)
---------
Total Diluted Shares 6,876,925
=========
</TABLE>
Note: The effect of common stock equivalents upon the primary and fully diluted
earnings per share calculation is less than 3%; therefore, earnings per share
are based on the weighted average number of shares outstanding during the
period.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Company's balance sheets and related statements of operations for the period
ended September 30, 1997 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 1,754
<SECURITIES> 0
<RECEIVABLES> 24,376
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 29,043
<PP&E> 4,035
<DEPRECIATION> 0
<TOTAL-ASSETS> 51,728
<CURRENT-LIABILITIES> 18,989
<BONDS> 810
0
0
<COMMON> 67
<OTHER-SE> 29,283
<TOTAL-LIABILITY-AND-EQUITY> 51,728
<SALES> 0
<TOTAL-REVENUES> 214,440
<CGS> 0
<TOTAL-COSTS> 193,340
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 127
<INCOME-PRETAX> 4,857
<INCOME-TAX> 1,826
<INCOME-CONTINUING> 3,031
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,031
<EPS-PRIMARY> .45
<EPS-DILUTED> 0
</TABLE>
