UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1998
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 30, 1998
was 7,675,456 shares.
<PAGE>
BARRETT BUSINESS SERVICES, INC.
INDEX
<TABLE>
Page
----
Part I - Financial Information
Item 1. Financial Statements
<S> <C> <C>
Balance Sheets - September 30, 1998 and
December 31, 1997........................................................3
Statements of Operations - Three Months
Ended September 30, 1998 and 1997........................................4
Statements of Operations - Nine Months
Ended September 30, 1998 and 1997........................................5
Statements of Cash Flows - Nine Months
Ended September 30, 1998 and 1997........................................6
Notes to Financial Statements............................................7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations..............................................................11
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K........................................19
Signatures ........................................................................20
Exhibit Index ........................................................................21
</TABLE>
2
<PAGE>
PART I - Financial Information
Item 1. Financial Statements
BARRETT BUSINESS SERVICES, INC.
Balance Sheets
(Unaudited)
(In thousands, except par value)
<TABLE>
September 30, December 31,
1998 1997
------------- ------------
Assets
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 4,378 $ 3,439
Trade accounts receivable, net 24,090 21,051
Prepaid expenses and other 2,193 1,231
Deferred tax assets (Note 4) 2,300 2,086
------ ------
Total current assets 32,961 27,807
Intangibles, net 11,815 12,133
Property and equipment, net 5,076 4,574
Restricted marketable securities
and workers' compensation deposits 5,827 6,095
Other assets 403 206
------ ------
$56,082 $50,815
====== ======
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt $ 398 $ 731
Line of credit payable - 887
Income taxes payable (Note 4) 516 -
Accounts payable 484 1,136
Accrued payroll, payroll taxes
and related benefits 13,773 10,034
Accrued workers' compensation claims
liabilities 3,416 3,140
Customer safety incentives payable 1,198 1,073
Other accrued liabilities 694 414
------ ------
Total current liabilities 20,479 17,415
Long-term debt, net of current portion 445 573
Customer deposits 869 934
Long-term workers' compensation liabilities 625 632
Other long-term liabilities 1,198 1,030
------ ------
23,616 20,584
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value; 20,500
shares authorized, 7,676 and 7,638
shares issued and outstanding, respectively 77 76
Additional paid-in capital 11,408 11,760
Retained earnings 20,981 18,395
------ ------
32,466 30,231
------ ------
$56,082 $50,815
====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
BARRETT BUSINESS SERVICES, INC.
Statements of Operations
(Unaudited)
(In thousands, except per share amounts)
<TABLE>
Three Months Ended
September 30,
-------------------------------
1998 1997
------ ------
Revenues:
<S> <C> <C>
Staffing services $44,199 $51,957
Professional employer services 37,770 34,038
------ ------
81,969 85,995
------ ------
Cost of revenues:
Direct payroll costs 63,768 66,717
Payroll taxes and benefits 6,587 7,588
Workers' compensation 2,201 2,489
Safety incentives 446 464
------ ------
73,002 77,258
------ ------
Gross margin 8,967 8,737
Selling, general and administrative expenses 5,826 6,888
Amortization of intangibles 322 361
------ ------
Income from operations 2,819 1,488
Other income (expense):
Interest expense (30) (82)
Interest income 97 84
Other, net 1 (2)
------ ------
68 -
------ ------
Income before provision for income taxes 2,887 1,488
Provision for income taxes (Note 4) 1,288 512
------ ------
Net income $ 1,599 $ 976
====== ======
Basic earnings per share (Note 6) $ .21 $ .13
====== ======
Weighted average number of basic
shares outstanding 7,675 7,622
====== ======
Diluted earnings per share (Note 6) $ .21 $ .13
====== ======
Weighted average number of diluted
shares outstanding 7,714 7,794
====== ======
</TABLE>
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)
<TABLE>
Nine Months Ended
September 30,
----------------------------
1998 1997
------- -------
Revenues:
<S> <C> <C>
Staffing services $127,289 $132,093
Professional employer services 100,572 96,573
------- -------
227,861 228,666
------- -------
Cost of revenues:
Direct payroll costs 176,783 176,504
Payroll taxes and benefits 19,656 20,853
Workers' compensation 6,408 6,715
Safety incentives 1,146 1,168
------- -------
203,993 205,240
------- -------
Gross margin 23,868 23,426
Selling, general and administrative expenses 17,677 17,638
Merger expenses (Note 3) 750 -
Amortization of intangibles 1,004 973
------- -------
Income from operations 4,437 4,815
Other income (expense):
Interest expense (147) (189)
Interest income 322 274
Other, net 3 (2)
------- -------
178 83
------- -------
Income before provision for income taxes 4,615 4,898
Provision for income taxes (Note 4) 2,029 1,845
------- -------
Net income $ 2,586 $ 3,053
======= =======
Basic earnings per share (Note 6) $ .34 $ .40
======= =======
Weighted average number of basic
shares outstanding 7,660 7,649
======= =======
Diluted earnings per share (Note 6) $ .34 $ .39
======= =======
Weighted average number of diluted
shares outstanding 7,710 7,804
======= =======
</TABLE>
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>
Nine Months Ended
September 30,
----------------------------
1998 1997
------ ------
Cash flows from operating activities:
<S> <C> <C>
Net income $ 2,586 $ 3,053
Reconciliation of net income to cash from operations:
Depreciation and amortization 1,349 1,289
Changes in certain assets and liabilities, net
of assets acquired and liabilities assumed:
Trade accounts receivable, net (3,039) (5,136)
Note receivable - 324
Prepaid expenses and other (962) (357)
Deferred tax assets (214) (489)
Accounts payable (652) 445
Accrued payroll, payroll taxes and related
benefits 3,739 5,208
Accrued workers' compensation claims
liabilities 276 510
Customer safety incentives payable 125 128
Income taxes payable 516 -
Other assets and other accrued liabilities, net 83 (347)
Customer deposits and long-term workers'
compensation liabilities (72) 54
Other long-term liabilities 168 22
------ ------
Net cash provided by operating activities 3,903 4,704
------ ------
Cash flows from investing activities:
Cash paid for acquisitions, including other
direct costs (Note 2) (687) (2,246)
Purchases of fixed assets, net of amounts
purchased in acquisitions (846) (1,155)
Proceeds from maturities of marketable
securities 5,458 5,338
Purchases of marketable securities (5,190) (5,708)
------ ------
Net cash used in investing activities (1,265) (3,771)
------ ------
Cash flows from financing activities:
Payment of credit-line assumed in acquisition - (401)
Net (payments on) proceeds from credit-line borrowings (887) 1,730
Payments on long-term debt (461) (64)
Payment to dissenting shareholder (519) -
Repurchase of common stock - (2,825)
Proceeds from exercise of stock
options and warrants 168 757
------ ------
Net cash used in financing activities (1,699) (803)
------ ------
Net increase in cash and cash equivalents 939 130
Cash and cash equivalents, beginning of period 3,439 1,623
------ ------
Cash and cash equivalents, end of period $ 4,378 $ 1,753
====== ======
Supplemental schedule of noncash activities:
Acquisition of other businesses:
Cost of acquisitions in excess of fair market
value of net assets acquired $ 677 $ 3,179
Tangible assets acquired 10 674
Liabilities assumed - 1,607
</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:
On June 29, 1998, Barrett Business Services, Inc. (the "Company")
completed its merger with Western Industrial Management, Inc., and with a
related company, Catch 55, Inc., (together, "WIMI"). The transaction was
accounted for as a pooling-of-interests pursuant to Accounting Principles Board
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. The accompanying financial statements are unaudited and
have been prepared by management 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 preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results may differ from such estimates and assumptions. The financial
statements should be read in conjunction with the audited financial statements
and notes thereto included in the Company's 1997 Annual Report on Form 10-K/A,
as amended, at pages F1-F21. The results of operations for an interim period are
not necessarily indicative of the results of operations for a full year.
Certain prior year amounts have been reclassified to conform with the
1998 presentation. Such reclassifications had no impact on gross margin, net
income or stockholders' equity.
NOTE 2 - ACQUISITIONS:
On April 13, 1998, the Company acquired certain assets of BOLT Staffing
Service, Inc., a provider of staffing services located in Pocatello, Idaho. BOLT
Staffing had revenues of approximately $2.4 million (unaudited) for the year
ended December 31, 1997. The Company paid $675,000 in cash for the assets,
assumed a $6,000 office lease liability and incurred approximately $12,000 in
acquisition related costs. The transaction was accounted for under the purchase
method of accounting, which
7
<PAGE>
resulted in $677,000 of intangible assets and $10,000 of fixed assets.
On June 29, 1998, the Company consummated its acquisition of WIMI
pursuant to a stock-for-stock merger. 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 a value of $11.375 per share of Barrett's common stock. The Company
also paid certain professional fees owed by WIMI in connection with the
transaction totaling approximately $425,000. WIMI was a privately-held staffing
services company headquartered in San Bernardino, California, with 1997 revenues
of approximately $24.5 million (unaudited).
NOTE 3 - MERGER EXPENSES:
In connection with the merger with WIMI, the Company recorded in the
second quarter ended June 30, 1998 a one-time charge for merger-related expenses
of $750,000. Merger expenses consisted primarily of professional fees, such as
legal, accounting, business broker fees and other related charges. The primary
components of the charge were as follows (in thousands):
Professional fees
WIMI $ 425
Barrett 285
Other fees and expenses 40
-------
$ 750
=======
8
<PAGE>
NOTE 4 - PROVISION FOR INCOME TAXES:
Deferred tax assets (liabilities) are comprised of the following
components (in thousands):
<TABLE>
September 30, 1998 December 31, 1997
------------------ -----------------
<S> <C> <C>
Accrued workers' compensation claims
liabilities $1,572 $1,469
Allowance for doubtful accounts 294 236
Tax depreciation in excess of book
depreciation (157) (165)
Safety incentives 333 276
Book amortization of intangibles in excess
of tax amortization 171 110
State unemployment tax accrual 87 160
------ ------
$2,300 $2,086
====== ======
</TABLE>
The provision for income taxes for the nine months ended September 30,
1998 and 1997, is as follows (in thousands):
<TABLE>
Nine Months Nine Months
Ended Ended
September 30, 1998 September 30, 1997
------------------ ------------------
Current:
<S> <C> <C>
Federal $ 1,847 $ 1,959
State 396 375
----- -----
2,243 2,334
Deferred:
Federal (188) (406)
State (26) (83)
----- -----
(214) (489)
----- -----
Provision for income taxes $ 2,029 $ 1,845
===== =====
</TABLE>
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.
9
<PAGE>
The following table summarizes options granted under the Plan in 1998:
Outstanding at December 31, 1997 595,119 $ 3.50 to $18.00
Options granted 259,987 $ 3.93 to $12.00
Options exercised (7,250) $ 3.50 to $11.50
Options canceled or expired (71,592) $11.44 to $17.94
-------
Outstanding at September 30, 1998 776,264 $ 3.50 to $18.00
=======
Exercisable at September 30, 1998 340,514
=======
Available for grant at
September 30, 1998 315,361
=======
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:
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. The 1997 period
has been restated to reflect the adoption of SFAS No. 128 and to give effect to
the WIMI merger (Note 2), which was accounted for as a pooling-of-interests
pursuant to Accounting Principles Board Opinion No. 16. Basic earnings per share
are computed based on the weighted average number of common shares outstanding
during the period. Diluted earnings per share reflect the potential effects of
the exercise of outstanding stock options and warrants.
10
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
- ---------------------
As more fully described above in Notes 1 and 2 to the Company's
financial statements, the financial statements have been restated for all prior
periods to give effect to the merger with WIMI. 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, 1998 and 1997.
<TABLE>
Percentage of Total Revenues
-------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- -------------------------
1998 1997 1998 1997
---- ---- ---- ----
Revenues:
<S> <C> <C> <C> <C>
Staffing services 53.9% 60.4% 55.9% 57.8%
Professional employer services 46.1 39.6 44.1 42.2
----- ----- ----- -----
Total revenues 100.0 100.0 100.0 100.0
----- ----- ----- -----
Cost of revenues:
Direct payroll costs 77.8 77.6 77.6 77.2
Payroll taxes and benefits 8.1 8.8 8.6 9.1
Workers' compensation 2.7 2.9 2.8 3.0
Safety incentives 0.5 0.6 0.5 0.5
----- ----- ----- -----
Total cost of revenues 89.1 89.9 89.5 89.8
----- ----- ----- -----
Gross margin 10.9 10.1 10.5 10.2
Selling, general and administrative
expenses 7.1 8.0 7.8 7.7
Merger expenses - - 0.3 -
Amortization of intangibles 0.4 0.4 0.5 0.4
----- ----- ----- -----
Income from operations 3.4 1.7 1.9 2.1
Other income (expense) 0.1 - 0.1 -
----- ----- ----- -----
Pretax income 3.5 1.7 2.0 2.1
Provision for income taxes 1.5 0.6 0.9 0.8
----- ----- ----- -----
Net income 2.0% 1.1% 1.1% 1.3%
===== ===== ===== =====
</TABLE>
Three months ended September 30, 1998 and 1997
Net income for the 1998 third quarter was $1,599,000, an increase of
$623,000 or 63.8% over the operating results for the comparable 1997 period. The
increase in net income was primarily attributable to an 80 basis point increase
in gross margin percent, combined with lower selling, general and administrative
expenses. Diluted earnings per share for the third quarter of 1998 were $.21, as
compared to $.13 per diluted share for 1997.
11
<PAGE>
Revenues for the third quarter of 1998 totaled approximately $82.0
million, a decrease of approximately $4.0 million or 4.7% from third quarter
1997 revenues of $86.0 million. Management believes that the revenue trend is
not a company-wide issue and is confined to a few larger branch offices. The
decline in revenues primarily reflects a very limited number of large customers
which have been affected by various economic conditions.
Staffing services revenue decreased approximately $7.8 million or 14.9%,
while professional employer services revenue increased approximately $3.8
million or 11.0%, which resulted in a decrease in the mix of staffing services
to 53.9% of total revenues for the third quarter of 1998, as compared to 60.4%
for the third quarter of 1997. The decline in staffing services revenue for the
1998 third quarter was primarily attributable to two factors: (1) management's
decision not to renew a business relationship with a large seasonal customer
which was anticipated to provide an unacceptable profit margin and (2) a
moderation in the demand for the Company's services by a limited number of large
customers which were affected by various economic conditions. The mix of
professional employer services revenues had a corresponding increase from 39.6%
for the third quarter of 1997 to 46.1% for the third quarter of 1998.
Gross margin for the third quarter of 1998 totaled approximately $9.0
million, which represented an increase of approximately $0.2 million or 2.6%
over the third quarter of 1997. The gross margin percent increased 80 basis
points to 10.9% of revenues for the third quarter of 1998, as compared to 10.1%
for the same period of 1997. The increase in the gross margin percentage was due
to lower payroll taxes and benefits, and slightly lower workers' compensation
expense, offset in part by slightly higher direct payroll costs as a percentage
of revenues. The decline in payroll taxes and benefits, as a percent of
revenues, for the third quarter of 1998 was primarily due to lower state
unemployment tax rates.
Workers' compensation expense for the third quarter of 1998 was $2.2
million or 2.7% of revenues as compared to $2.5 million or 2.9% of revenues for
the third quarter of 1997. The decrease was primarily due to a lower incidence
of injuries during the third quarter of 1998. Management believes it has
continued to increase the Company's accruals for future adverse loss development
of open claims.
Selling, general and administrative ("SG&A") expenses for the 1998 third
quarter amounted to approximately $5.8 million, a
12
<PAGE>
decrease of $1.1 million or 15.4% from the comparable period in 1997. The
decrease in total dollars was due primarily to lower management payroll, profit
sharing and bad debt expenses. SG&A expenses also decreased from 8.0% of
revenues for the third quarter of 1997 to 7.1% of revenues for the third quarter
of 1998. During the first quarter of 1998, management implemented specific
performance criteria for all branch offices to align operating expenses more
closely with growth in gross margin dollars rather than growth in revenues. For
the third quarter of 1998, improvement in SG&A expense was achieved by (1)
reducing SG&A expenses to 7.1% of revenues, as compared to 8.4% of revenues for
the first quarter of 1998, (2) reducing SG&A expenses as a percent of gross
margin dollars from 85.9% in the 1998 first quarter to 65.0% in the 1998 third
quarter and (3) reducing the quarter-over-comparable quarter growth rate of SG&A
expenses from 13.8% (1Q98 vs. 1Q97) to a decline of 15.4% (3Q98 vs. 3Q97).
Management believes that its recently implemented zone-management practices and
tighter operating controls have enhanced the Company's ability to more
effectively manage its operating costs.
Amortization of intangibles totaled $322,000, or 0.4% of revenues for
the third quarter of 1998, which compares to $361,000 or 0.4% of revenues for
the same period in 1997.
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 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 6-7 of the Company's 1997 Annual Report on Form
10-K/A for a more detailed discussion of this issue.
Nine Months Ended September 30, 1998 and 1997
Net income for the nine months ended September 30, 1998 was $2,586,000,
a decrease of $467,000 or 15.3% from the same period in
13
<PAGE>
1997. The decrease in net income was primarily due to a one-time charge for
merger-related expenses of $750,000. Basic and diluted earnings per share for
the 1998 nine-month period were $.34, as compared to $.40 for basic and $.39 for
diluted earnings per share for the same 1997 period.
Revenues for the nine months ended September 30, 1998 totaled
approximately $227.9 million, a decrease of approximately $0.8 million or 0.4%
from the comparable period of 1997.
Gross margin for the nine months ended September 30, 1998 totaled
approximately $23.9 million, which represented an increase of $0.4 million or
1.9% over the same period of 1997. The gross margin percent increased to 10.5%
of revenues for the first nine months of 1998, as compared to 10.2% for the same
period of 1997. The increase in the gross margin percentage was due to lower
payroll taxes and benefits and workers' compensation expenses, as a percentage
of revenues, offset in part by higher direct payroll costs as a percentage of
revenues.
SG&A expenses for the nine months ended September 30, 1998 amounted to
approximately $17.7 million, an increase of $39,000 or 0.2% over the comparable
period in 1997. These expenses also increased from 7.7% of revenues for the 1997
period to 7.8% of revenues for the comparable 1998 period. The slight increase
in total dollars was primarily attributable to increased expenses for management
payroll, offset in part by lower profit sharing and bad debt expenses.
Amortization of intangibles totaled $1,004,000 or 0.4% of revenues for
the nine-month period ended September 30, 1998, which compares to $973,000 for
the same period in 1997. The increased amortization expense was attributable to
the April, 1998 acquisition of BOLT Staffing Service.
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 Professional Employer Organization clients in the agriculture
and forest products
14
<PAGE>
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 or subsequent quarters.
Liquidity and Capital Resources
- -------------------------------
The Company's cash position of $4,378,000 at September 30, 1998
increased by $939,000 over December 31, 1997. The increase was primarily due to
cash generated from operations, offset in part by cash used in financing
activities for repayment of bank credit-line borrowings and payment to a
dissenting shareholder of WIMI in connection with the merger transaction, as
well as cash used in investing activities related to the BOLT Staffing
acquisition and fixed asset additions.
Net cash provided by operating activities for the nine months ended
September 30, 1998 amounted to $3,903,000, as compared to cash provided by
operating activities of $4,704,000 for the comparable 1997 period. For the 1998
period, cash flow generated by net income and depreciation and amortization
expenses, together with an increase of $3,739,000 in accrued payroll and
benefits, was partially offset by a $3,039,000 increase in trade accounts
receivable and a $962,000 increase in prepaid expenses.
Net cash used in investing activities totaled $1,265,000 for the nine
months ended September 30, 1998, as compared to $3,771,000 for the similar 1997
period. For the 1998 period, the principal use of cash for investing activities
was the acquisition of BOLT Staffing Service, capitalized
software-implementation costs and computer equipment. The Company presently has
no material long-term capital commitments.
Net cash used in financing activities for the nine-month period ended
September 30, 1998 was $1,699,000, which compares to net cash used in financing
activities of $803,000 for the comparable 1997 period. For the 1998 period, the
principal use of cash for financing activities was for repayments of credit-line
borrowings and long-term debt and for payment to a dissenting WIMI shareholder
in connection with the WIMI merger.
15
<PAGE>
The Company's business strategy continues to focus on growth through the
acquisition of additional personnel-related businesses, both in its existing
markets and other strategic geographic areas, together with the expansion of
operations at existing offices. As disclosed in Note 2 to the financial
statements included herein, during April 1998, the Company purchased a staffing
services company located in Pocatello, Idaho, for $675,000 in cash. As also
disclosed in Note 2, the Company completed a stock-for-stock merger with WIMI in
June 1998. 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 certain standby letters of
credit in connection with certain workers' compensation surety arrangements.
Management expects that 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.
Year 2000 Readiness
The Company has developed a Year 2000 plan to ensure its internal
operational readiness, as well as compliance by the Company's key vendors.
Management's plan is focused on evaluating the readiness of the Company's
mission critical applications software, operating systems software, hardware,
communications, third-party interfaces, facilities (typically non-information
technology systems) and key vendors. This evaluation process involves four
phases: (1) identification of risks, (2) assessment of risks, (3) development of
remediation and contingency plans, and (4) testing and implementation.
As the Company has previously reported, management initiated a project
in mid-1997 to convert its information systems to new technologies which are
expected to enable the Company to more effectively accommodate its anticipated
growth. This upgrade is
16
<PAGE>
anticipated to be completed at the beginning of 1999 and is expected to
alleviate the Year 2000 issue for such mission-critical applications as payroll
processing and financial reporting systems. The Company has incurred capital
expenditures of $2.0 million through September 30, 1998, for this project and
expects to incur another $0.6 million prior to completion. The remaining
mission-critical application is a branch-level legacy system which is expected
to require only minor reprogramming by the Company's internal staff during the
first half of 1999 at no incremental cost to the Company.
Mission-critical applications are currently in a remediation or testing
phase. Management is currently uncertain as to the need for contingency plans
for the Company's mission-critical applications, as it expects these systems to
be fully operational in the first half of 1999.
The Company's assessment of the risks associated with non-mission
critical systems is incomplete but ongoing, and as such, management cannot
predict whether significant problems will be identified, and if so, the costs to
remediate such problems. In addition, management has not yet identified any
reasonably likely worst case scenarios or determined the extent of contingency
planning that may be required. Costs identified to date, however, have not been
material. As part of its assessment, the Company is relying on assurances from
key vendors that their products and services will be Year 2000 compliant.
The risks associated with the Year 2000 problem are pervasive and
complex, can be difficult to identify and to address, and can result in material
adverse consequences to the Company. Even if the Company, in a timely manner,
completes all of its assessments, identifies and tests remediation plans
believed to be adequate, and develops contingency plans believed to be adequate,
some problems may not be identified or corrected in time to prevent material
adverse consequences to the Company. Also, the Company's business may be
adversely affected by events outside its control, such as disruptions to
services provided by utilities, banks or transportation or telecommunications
networks.
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, revenue trends, the effect of changes in
the Company's mix of services on gross margin, the adequacy of the Company's
workers' compensation
17
<PAGE>
reserves and allowance for doubtful accounts, the tax-qualified status of the
Company's 401(k) savings plan, the timely resolution of the Year 2000 issue by
the Company and its customers and vendors, 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 Professional Employer
Organizations ("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.
18
<PAGE>
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) The exhibits filed herewith are listed in the Exhibit Index
following the signature page of this report.
(b) Reports on Form 8-K
As previously reported, on July 13, 1998, the Company filed a
Current Report on Form 8-K dated June 29, 1998, to report that
the Company had completed its acquisition of Western Industrial
Management, Inc., and of a related company, Catch 55, Inc.
(together, "WIMI"), pursuant to a stock-for-stock merger. WIMI, a
privately-held staffing services company headquartered in San
Bernardino, California, had 1997 revenues of approximately $24.5
million (unaudited).
19
<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, 1998 By: /s/Michael D. Mulholland
-----------------------------
Michael D. Mulholland
Vice President-Finance
(Principal Financial Officer)
20
<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 BASIC
AND DILUTED COMMON SHARES OUTSTANDING
<TABLE>
Three Months
Ended
September 30, 1998
------------------
<S> <C>
Weighted average number of basic shares outstanding 7,675,455
Stock option plan shares to be issued at prices
ranging from $3.50 to $18.00 per share 774,487
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 (735,610)
---------
Weighted average number of diluted shares outstanding 7,714,332
=========
</TABLE>
<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, 1998 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-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 4,378
<SECURITIES> 0
<RECEIVABLES> 24,090
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 32,961
<PP&E> 5,076
<DEPRECIATION> 0
<TOTAL-ASSETS> 56,082
<CURRENT-LIABILITIES> 20,479
<BONDS> 445
0
0
<COMMON> 77
<OTHER-SE> 32,389
<TOTAL-LIABILITY-AND-EQUITY> 56,082
<SALES> 0
<TOTAL-REVENUES> 227,861
<CGS> 0
<TOTAL-COSTS> 203,993
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 147
<INCOME-PRETAX> 4,615
<INCOME-TAX> 2,029
<INCOME-CONTINUING> 2,586
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,586
<EPS-PRIMARY> .34
<EPS-DILUTED> .34
</TABLE>
