| BARRETT BUSINESS SERVICES INC Item 1A RISK FACTORS In addition to other information contained in this report, the following risk factors should be considered carefully in evaluating our business |
| Our workers’ compensation loss reserves may be inadequate to cover our ultimate liability for workers’ compensation costs |
| We maintain reserves to cover our estimated liabilities for our self-insured workers’ compensation program |
| The determination of these reserves is based upon a number of factors, including current and historical claims activity, claims payment patterns and medical cost trends and developments in existing claims |
| Accordingly, reserves do not represent an exact calculation of liability |
| Reserves can be affected by both internal and external events, such as adverse developments on existing claims or changes in medical costs, claims handling procedures, administrative costs, inflation, and legal trends and legislative changes |
| Reserves are adjusted from time to time to reflect new claims, claim developments, or systemic changes, and such adjustments are reflected in the results of the periods in which the reserves are changed |
| Because of the uncertainties that surround estimating workers’ compensation loss reserves, we cannot be certain that our reserves are adequate |
| If our reserves are insufficient to cover our actual losses, we would have to increase our reserves and incur charges to our earnings that could be material |
| Changes in the market for workers’ compensation insurance in the state of California could adversely affect our business |
| Our PEO service revenues in California have grown rapidly over the last two years due in large part to difficult market conditions for workers’ compensation insurance in California and our status as a state-approved self-insured employer with respect to workers’ compensation coverage in that state |
| Since 2002, California has enacted several legislative reforms in an attempt to address the crisis in its workers’ compensation system, and it may attempt additional legislative or regulatory reforms in the future |
| Any successful legislative reforms or non-governmental changes in market conditions in California could lessen a key advantage we have in that state, leading to a reduction in our new business opportunities and a potential slowing in the growth of our PEO business in California |
| Any such slowing would adversely affect our results of operations and likely lead to declines in our stock price |
| - 12 - _________________________________________________________________ Because we assume the obligation to make wage, tax and regulatory payments in respect of some employees, we are exposed to client credit risks |
| We generally assume responsibility for and manage the risks associated with our clients’ employee payroll obligations, including liability for payment of salaries and wages (including payroll taxes), as well as group health and retirement benefits |
| These obligations are fixed, whether or not the client makes payments required by our services agreement, which exposes us to credit risks |
| We attempt to mitigate this risk by invoicing our staffing customers weekly and our PEO clients at the end of their specific payroll processing cycle |
| We also carefully monitor the timeliness of our clients’ payments and impose strict credit standards on our customers |
| If we fail to successfully manage our credit risk, our results of operations and financial condition could be materially and adversely affected |
| Our staffing business is vulnerable to economic fluctuations |
| Companies tend to use fewer temporary employees as economic activity slows, while recruiting employees to fill our customers’ needs becomes increasingly difficult during economic booms |
| Demand for our staffing services is sensitive to changes in the level of economic activity in the regions in which we do business |
| As economic activity begins to improve, temporary employees are often added before full time employees are hired as companies cautiously re-enter the labor market |
| As a result, our revenues derived from staffing services may be highest at the beginning of an economic recovery |
| During strong economic periods, however, we often experience shortages of qualified employees to meet customer needs |
| Also, as economic activity begins to slow down, companies often reduce their use of temporary employees before undertaking layoffs of permanent staff, resulting in decreased demand for staffing services |
| A significant economic downturn, particularly in the Western United States, could have a material adverse effect on our results of operations and financial condition |
| If we are determined not to be an “employer” under certain laws and regulations, our clients may stop using our services, and we may be subject to additional liabilities |
| We believe that we are an employer of employees provided to our PEO clients on a co-employment basis under the various laws and regulations of the Internal Revenue Service and the US Department of Labor |
| If we are determined not to be an employer under such laws and regulations and are therefore unable to assume obligations of our clients for employment and other taxes, our clients may be held jointly and severally liable for payment of such taxes |
| Some clients or prospective clients may view such potential liability as an unacceptable risk, discouraging current clients from continuing a relationship with us or prospective clients from entering into a new relationship with us |
| Any determination that we are not an employer for purposes of the Employee Retirement Income Security Act (“ERISA”) could adversely affect our cafeteria benefits plan operated under Section 125 of the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”), and result in liabilities to us under the plan |
| - 13 - _________________________________________________________________ We may be exposed to employment-related claims and costs and periodic litigation that could adversely affect our business and results of operations |
| We either co-employ employees in connection with our PEO arrangements or place our employees in our customers’ workplace in connection with our staffing business |
| As such, we are subject to a number of risks inherent to our status as an employer, including without limitation: • claims of misconduct or negligence on the part of our employees, discrimination or harassment claims against our employees, or claims by our employees of discrimination or harassment by our clients; • immigration-related claims; • claims relating to violations of wage, hour and other workplace regulations; • claims relating to employee benefits, entitlements to employee benefits, or errors in the calculation or administration of such benefits; and • possible claims relating to misuse of customer confidential information, misappropriation of assets or other similar claims |
| If we experience significant incidents involving any of the above-described risk areas we could face substantial out-of-pocket losses, fines or negative publicity |
| In addition, such claims may give rise to litigation, which may be time consuming, distracting and costly, and could have a material adverse effect on our business |
| With respect to claims involving our co-employer relationship with our PEO clients, although our PEO services agreement provides that the client will indemnify us for any liability attributable to the conduct of the client or its employees, we may not be able to enforce such contractual indemnification, or the client may not have sufficient assets to satisfy its obligations to us |
| Adverse developments in the market for excess workers’ compensation insurance could lead to increases in our costs |
| We are a state-approved self-insured employer for workers’ compensation coverage in California, Oregon, Delaware and Maryland, as well as in Washington for our non-PEO services |
| To manage our financial exposure in the event of catastrophic injuries or fatalities, we maintain excess workers’ compensation insurance with a current per occurrence retention of dlra1dtta0 million |
| Changes in the market for excess workers’ compensation insurance may lead to limited availability of such coverage, additional increases in our insurance costs or further increases in our self-insured retention, any of which may have a material adverse effect on our financial condition |
| We operate in a complex regulatory environment, and failure to comply with applicable laws and regulations could adversely affect our business |
| Corporate human resource operations are subject to a broad range of complex and evolving laws and regulations, including those applicable to payroll practices, benefits administration, employment practices and privacy |
| Because our clients have employees in many states throughout the United States, we must perform our services in compliance with the legal and regulatory requirements of multiple jurisdictions |
| Some of these laws and regulations may be difficult to ascertain or interpret and may change from time to time |
| Violation of such laws and regulations could subject us to fines and penalties, damage our reputation, constitute a breach of our client agreements, impair our ability to obtain and renew required licenses, and decrease our profitability or competitiveness |
| If any of these effects were to occur, our operating results and financial condition could be adversely affected |
| - 14 - _________________________________________________________________ Changes in government regulations may result in restrictions or prohibitions applicable to the provision of employment services or the imposition of additional licensing, regulatory or tax requirements |
| Our PEO and staffing businesses are heavily regulated in most jurisdictions in which we operate |
| We cannot assure you that the states in which we conduct or seek to conduct business will not: • impose additional regulations that prohibit or restrict employment-related businesses like ours; • require additional licensing or add restrictions on existing licenses to provide employment-related services; or • increase taxes or make changes in the way in which taxes are calculated for providers of employment-related services |
| Any changes in applicable laws and regulations may make it more difficult or expensive for us to do business, inhibit expansion of our business, or result in additional expenses that limit our profitability or decrease our ability to attract and retain clients |
| We may find it difficult to expand our business into additional states due to varying state regulatory requirements |
| Future growth in our operations depends, in part, on our ability to offer our services to prospective clients in new states, which may subject us to different regulatory requirements and standards |
| In order to operate effectively in a new state, we must obtain all necessary regulatory approvals, adapt our procedures to that state’s regulatory requirements and modify our service offerings to adapt to local market conditions |
| In the event that we expand into additional states, we may not be able to duplicate in other markets the financial performance experienced in our current markets |
| Acquisitions subject us to various risks, including risks relating to selection and pricing of acquisition targets, integration of acquired companies into our business and assumption of unanticipated liabilities |
| We have completed 23 acquisitions since 1993 and may pursue additional acquisitions and investment opportunities |
| We cannot assure you that we will be able to identify or consummate any additional acquisitions on favorable terms or at all |
| If we do pursue acquisitions, we may not realize the anticipated benefits of such acquisitions |
| Acquisitions involve many risks, including risks relating to the assumption of unforeseen liabilities of an acquired business, adverse accounting charges resulting from the acquisition, and difficulties in integrating acquired companies into our business, both from a cultural perspective, as well as with respect to personnel and client retention and technological integration |
| Acquired liabilities may be significant and may adversely affect our financial condition and results of operations |
| Our inability to successfully integrate acquired businesses may lead to increased costs, failure to generate expected returns, accounting charges, or even a total loss of amounts invested, any of which could have a material adverse effect on our financial condition and results of operations |
| Our business is subject to risks associated with geographic market concentration |
| Our California and Oregon operations accounted for approximately 53prca and 21prca, respectively, of our total revenues in 2005 |
| As a result of the current importance of our California and Oregon operations and anticipated continued growth from these operations, our profitability over the next several years is expected to be largely dependent on economic and regulatory conditions in these markets, particularly in California |
| If these states experience an economic downturn or growth rates slow, or if the regulatory environment changes in a way that adversely affects our ability to do business in these states or limits our competitive advantages in these markets, our profitability and growth prospects may be materially and adversely affected |
| - 15 - _________________________________________________________________ We face competition from a number of other companies |
| We face competition from various companies that may provide all or some of the services we offer |
| Our competitors include companies that are engaged in staffing services such as Kelly Services, Inc |
| and Manpower Inc, companies that are focused on co-employment, such as Administaff, Inc |
| and Gevity HR, Inc, and companies that primarily provide payroll processing services, such as Automatic Data Processing, Inc |
| and Paychex, Inc |
| We also face competition from information technology outsourcing firms and broad-based outsourcing and consulting firms that perform individual projects |
| Several of our existing or potential competitors have substantially greater financial, technical and marketing resources than we do, which may enable them to: • develop and expand their infrastructure and service offerings more quickly and achieve greater cost efficiencies; • invest in new technologies; • expand operations into new markets more rapidly; • devote greater resources to marketing; • compete for acquisitions more effectively and complete acquisitions more easily; and • aggressively price products and services and increase benefits in ways that we may not be able to match economically |
| In order to compete effectively in our markets, we must target our potential clients carefully, continue to improve our efficiencies and the scope and quality of our services, and rely on our service quality, innovation, education and program clarity |
| If our competitive advantages are not compelling or sustainable, then we are unlikely to increase or sustain profits and our stock price could decline |
| We are dependent upon certain key personnel and recruitment and retention of key employees may be difficult and expensive |
| We believe that the successful operation of our business is dependent upon our retention of the services of key personnel, including our chief executive officer, other executive officers and branch managers |
| We may not be able to retain all of our executives, senior managers and key personnel in light of competition for their services |
| If we lose the services of one of our executive officers or a significant number of our senior managers, our operations and profitability likely would be adversely affected |
| - 16 - _________________________________________________________________ We do not have an expansive in-house sales staff and therefore rely extensively on brokers to make referrals |
| We maintain only a minimal internal professional sales force |
| Instead, we rely heavily on insurance brokers to provide referrals to new business, especially in California, although each branch office manager is expected to be an effective leader in business development, including marketing efforts and sales closures |
| In connection with these arrangements, we pay a fee to brokers for new clients |
| As a result of our reliance on brokers, we are dependent on firms and individuals that do not have an exclusive relationship with us |
| If we are unable to maintain our relationships with brokers, if brokers increase their fees or if brokers lose confidence in our services, we could face declines in our business and additional costs and uncertainties as we attempt to hire and train an internal sales force |
| We depend on attracting and retaining qualified employees; during periods of economic growth our costs to do so increase and it becomes more difficult to attract and retain people |
| The success of our staffing services depends on our ability to attract and retain qualified employees for placement with our customers |
| Our ability to attract and retain qualified personnel could be impaired by rapid improvement in economic conditions resulting in lower unemployment and increases in compensation |
| During periods of economic growth, we face growing competition for retaining and recruiting qualified personnel, which in turn leads to greater advertising and recruiting costs and increased salary expenses |
| If we cannot attract and retain qualified employees, the quality of our services may deteriorate and our reputation and results of operations could be adversely affected |
| Our service agreements may be terminated on short notice, leaving us vulnerable to loss of a significant amount of customers in a short period of time if business or regulatory conditions change or events occur that negatively affect our reputation |
| Our PEO services agreements are generally terminable on 30 days notice by either us or the client |
| As a result, our clients may terminate their agreement with us at any time, making us particularly vulnerable to changing business or regulatory conditions or changes affecting our reputation or the reputation of our industry |
| Our industry has at times received negative publicity and had some stigma associated with it that, if it were to predominate, could cause our business to decline |
| Both PEOs and staffing services companies periodically have been tarnished by bad publicity or scandals from bad business judgment or even outright fraud |
| If we or our industry face negative publicity, customers’ confidence in the use of temporary personnel or co-employed workers may deteriorate, and they may be unwilling to enter into or continue our staffing or co-employment relationships |
| If a negative perception were to prevail, it would be more difficult for us to attract and retain customers |
| Changes in state unemployment tax laws and regulations could adversely affect our business |
| Recently, there has been significant negative publicity relating to the use of staffing or PEO companies to shield employers from poor unemployment history and high unemployment taxes |
| New legislation enacted at the state or federal level to try to counter this perceived problem could have a material adverse effect on our business by limiting our ability to market our services or making our services less attractive to our customers and potential customers |
| - 17 - _________________________________________________________________ We are dependent upon technology services and if we experience damage, service interruptions or failures in our computer and telecommunications systems, or if our security measures are breached, our client relationships and our ability to attract new clients may be adversely affected |
| Our business could be interrupted by damage to or disruption of our computer and telecommunications equipment and software systems, and we may lose data |
| Our clients’ businesses may be adversely affected by any system or equipment failure we experience |
| As a result of any of the foregoing, our relationships with our clients may be impaired, we may lose clients, our ability to attract new clients may be adversely affected and we could be exposed to contractual liability |
| Precautions in place to protect ourselves from, or minimize the effect of, such events, may not be adequate |
| In addition, our business involves the storage and transmission of clients’ proprietary information and security breaches could expose us to a risk of loss of this information, litigation and possible liability |
| If our security measures are breached as a result of third-party action, employee error, malfeasance or otherwise, and, as a result, someone obtains unauthorized access to client data, our reputation will be damaged, our business may suffer and we could incur significant liability |
| Techniques used to obtain unauthorized access or to sabotage systems change frequently and are growing increasingly sophisticated |
| As a result, we may be unable to anticipate these techniques or to implement adequate preventative measures |
| If an actual or perceived breach of our security occurs, we could be liable and the market perception of our services could be harmed |
| The compliance costs associated with Section 404 of the Sarbanes-Oxley Act regarding internal control over financial reporting could be substantial, while failure to achieve and maintain compliance could have an adverse effect on our stock price |
| Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 and current SEC regulations, beginning with our Annual Report on Form 10-K for the fiscal year ending December 31, 2006, we expect to be required to furnish a report by our management on our internal control over financial reporting |
| Such report will contain, among other matters, an assessment of the effectiveness of our internal control over financial reporting as of the end of 2006 |
| We are engaged in the process of documenting and testing our internal control procedures in order to satisfy these requirements, which is likely to result in increased general and administrative expenses and may shift management time and attention from revenue-generating activities to compliance activities |
| Also, during the course of our internal control testing, we may identify deficiencies which we may not be able to remediate in time to meet the reporting deadline under Section 404 |
| Failure to achieve and maintain an effective internal control environment or complete our Section 404 certifications could have a material adverse effect on our stock price |