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 June 30, 1999
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 reports), 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 July 30, 1999
was 7,576,898 shares.
BARRETT BUSINESS SERVICES, INC.
INDEX
Page
----
Part I - Financial Information
Item 1. Financial Statements
Balance Sheets - June 30, 1999 and
December 31, 1998.................................3
Statements of Operations - Three Months
Ended June 30, 1999 and 1998......................4
Statements of Operations - Six Months
Ended June 30, 1999 and 1998......................5
Statements of Cash Flows - Six Months
Ended June 30, 1999 and 1998......................6
Notes to Financial Statements.....................7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations.......................................11
Item 3. Quantitative and Qualitative Disclosure
About Market Risk................................18
Part II - Other Information
Item 4. Submission of Matters to a Vote of Security
Holders..........................................19
Item 6. Exhibits and Reports on Form 8-K.................20
Signatures .................................................21
Exhibit Index .................................................22
2
PART I - Financial Information
Item 1. Financial Statements
BARRETT BUSINESS SERVICES, INC.
Balance Sheets
(Unaudited)
(In thousands, except par value)
June 30, December 31,
1999 1998
-------- ------------
Assets
Current assets:
Cash and cash equivalents $ 945 $ 4,029
Trade accounts receivable, net 30,145 21,907
Prepaid expenses and other 1,694 1,103
Deferred tax assets (Note 3) 1,761 1,857
------ ------
Total current assets 34,545 28,896
Intangibles, net 23,116 11,508
Property and equipment, net 6,132 5,184
Restricted marketable securities
and workers' compensation deposits 6,364 6,004
Deferred tax assets (Note 3) 716 552
Other assets 1,076 626
------ ------
$71,949 $52,770
====== ======
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable $ 1,105 $ -
Current portion of long-term debt 2,782 61
Line of credit payable 2,541 -
Income taxes payable (Note 3) - 438
Accounts payable 1,706 948
Accrued payroll, payroll taxes
and related benefits 15,744 9,246
Accrued workers' compensation claims
liabilities 2,769 3,244
Customer safety incentives payable 1,112 1,173
Other accrued liabilities 447 514
------ ------
Total current liabilities 28,206 15,624
Long-term debt, net of current portion 5,632 503
Customer deposits 798 829
Long-term workers' compensation liabilities 706 714
Other long-term liabilities 1,691 1,398
------ ------
37,033 19,068
------ ------
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value; 20,500
shares authorized, 7,581 and 7,676
shares issued and outstanding,
respectively 76 77
Additional paid-in capital 10,668 11,409
Retained earnings 24,172 22,216
------ ------
34,916 33,702
------ ------
$71,949 $52,770
====== ======
The accompanying notes are an integral part of these financial statements.
3
BARRETT BUSINESS SERVICES, INC.
Statements of Operations
(Unaudited)
(In thousands, except per share amounts)
Three Months Ended
June 30,
-------------------
1999 1998
------ ------
Revenues:
Staffing services $46,185 $42,786
Professional employer services 38,522 33,865
------ ------
84,707 76,651
------ ------
Cost of revenues:
Direct payroll costs 65,575 59,348
Payroll taxes and benefits 7,142 6,629
Workers' compensation 2,445 2,211
Safety incentives 403 336
------ ------
75,565 68,524
------ ------
Gross margin 9,142 8,127
Selling, general and administrative expenses 6,551 6,035
Merger expenses - 750
Amortization of intangibles 434 329
------ ------
Income from operations 2,157 1,013
Other income (expense):
Interest expense (105) (60)
Interest income 89 100
Other, net 1 1
------ ------
(15) 41
------ ------
Income before provision for income taxes 2,142 1,054
Provision for income taxes (Note 3) 926 454
------ ------
Net income $ 1,216 $ 600
====== ======
Basic earnings per share $ .16 $ .08
====== ======
Weighted average number of basic
shares outstanding 7,581 7,666
====== ======
Diluted earnings per share $ .16 $ .08
====== ======
Weighted average number of diluted
shares outstanding 7,624 7,722
====== ======
The accompanying notes are an integral part of these financial statements.
4
BARRETT BUSINESS SERVICES, INC.
Statements of Operations
(Unaudited)
(In thousands, except per share amounts)
Six Months Ended
June 30,
------------------
1999 1998
------- -------
Revenues:
Staffing services $ 83,414 $ 83,090
Professional employer services 72,308 62,802
------- -------
155,722 145,892
------- -------
Cost of revenues:
Direct payroll costs 120,738 113,015
Payroll taxes and benefits 13,393 13,069
Workers' compensation 4,414 4,207
Safety incentives 720 700
------- -------
139,265 130,991
------- -------
Gross margin 16,457 14,901
Selling, general and administrative expenses 12,261 11,851
Merger expenses - 750
Amortization of intangibles 808 682
------- -------
Income from operations 3,388 1,618
Other income (expense):
Interest expense (129) (117)
Interest income 184 225
Other, net 2 2
------- -------
57 110
------- -------
Income before provision for income taxes 3,445 1,728
Provision for income taxes (Note 3) 1,489 741
------- -------
Net income $ 1,956 $ 987
======= =======
Basic earnings per share $ .26 $ .13
======= =======
Weighted average number of basic
shares outstanding 7,624 7,652
======= =======
Diluted earnings per share $ .26 $ .13
======= =======
Weighted average number of diluted
shares outstanding 7,666 7,707
======= =======
The accompanying notes are an integral part of these financial statements.
5
BARRETT BUSINESS SERVICES, INC.
Statements of Cash Flows
(Unaudited)
(In thousands)
Six Months Ended
June 30,
----------------
1999 1998
------ ------
Cash flows from operating activities:
Net income $ 1,956 $ 987
Reconciliation of net income to cash
from operations:
Depreciation and amortization 1,093 905
Changes in certain assets and liabilities, net
of assets acquired and liabilities assumed:
Trade accounts receivable, net (5,497) (2,895)
Prepaid expenses and other (532) (577)
Deferred tax assets 40 (195)
Accounts payable 611 (448)
Accrued payroll, payroll taxes and
related benefits 6,337 1,579
Accrued workers' compensation claims
liabilities (475) 120
Customer safety incentives payable (61) 52
Income taxes payable (438) 48
Other accrued liabilities (271) 407
Customer deposits and long-term workers'
compensation liabilities and other assets (467) (126)
Other long-term liabilities 293 90
------ ------
Net cash provided by (used in) operating
activities 2,589 (53)
------ ------
Cash flows from investing activities:
Cash paid for acquisitions, including
other direct costs (Note 2) (13,982) (680)
Purchases of fixed assets, net of amounts
purchased in acquisitions (820) (616)
Proceeds from maturities of marketable
securities 1,679 3,766
Purchases of marketable securities (2,018) (3,528)
------ ------
Net cash used in investing activities (15,141) (1,058)
------ ------
Cash flows from financing activities:
Payment of credit-line assumed in
acquisition (1,113) -
Payment of note payable assumed in
acquisition (55) -
Net proceeds from (payments on)
credit-line borrowings 2,541 (635)
Proceeds from issuance of note payable 1,105 -
Proceeds from issuance of long-term debt 8,000 -
Payments on long-term debt (268) (266)
Payment to dissenting shareholder - (519)
Payment to shareholder (57) -
Repurchase of common stock (700) -
Proceeds from exercise of stock options
and warrants 15 168
------ ------
Net cash provided by (used in) financing
activities 9,468 (1,252)
------ ------
Net decrease in cash and cash equivalents (3,084) (2,363)
Cash and cash equivalents, beginning of period 4,029 3,439
------ ------
Cash and cash equivalents, end of period $ 945 $ 1,076
====== ======
Supplemental schedule of noncash activities:
Acquisition of other businesses:
Cost of acquisitions in excess of fair
market value of net assets acquired $12,416 $ 670
Tangible assets acquired 3,364 10
Liabilities assumed 1,798 -
The accompanying notes are an integral part of these financial statements.
6
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 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 1998
Annual Report on Form 10-K at pages F1-F22. 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 1999
presentation. Such reclassifications had no impact on gross margin, net income
or stockholders' equity.
NOTE 2 - ACQUISITIONS:
Effective January 1, 1999, the Company acquired all of the outstanding
common stock of Temporary Staffing Systems, Inc. ("TSS"), a staffing services
company with eight branch offices in North Carolina and one in South Carolina.
The Company paid $2,000,000 in cash and issued a note payable for $950,000 due
January 31, 2000, payment of which is contingent upon a minimum equity
requirement for 1998 and certain financial performance criteria for 1999. The
Company also paid $50,000 in cash for a noncompete agreement with the selling
shareholder. TSS's revenues for the fiscal year ended March 29, 1998 were
approximately $12.9 million (audited). The transaction, subject to the
resolution of the above contingencies, has been accounted for under the purchase
method of accounting. The effect of this transaction resulted in the recording
of $1,255,000 of tangible assets, $393,000 of existing intangible assets, the
assumption of $1,798,000 of
7
liabilities and, to date, the recognition of an additional $2,251,000 of
intangible assets, which includes $51,000 for acquisition-related costs.
Effective February 15, 1999, the Company acquired certain assets of TPM
Staffing Services, Inc. ("TPM"), a staffing services company with three offices
in southern California - Lake Forest, Santa Ana and Anaheim. The Company paid
$1,125,000 in cash for the assets of TPM, of which $240,000 was deferred for six
months from the date of acquisition. The Company also paid $75,000 for
noncompete agreements. Tam's revenues for the year ended December 31, 1998 were
approximately $5.7 million (unaudited). The transaction was accounted for under
the purchase method of accounting, which resulted in $1,190,000 of intangible
assets, including $15,000 for acquisition-related costs, and $25,000 of fixed
assets.
Effective May 31, 1999, the Company acquired certain assets of Temporary
Skills Unlimited, Inc., dba TSU Staffing ("TSU"), a staffing services company
with nine branch offices in northern California. The Company paid $10,422,000 in
cash for certain assets of TSU, of which $864,500 was deferred for one year from
the date of acquisition. The Company also paid $100,000 for noncompete
agreements. TSU's revenues for the year ended December 27, 1998 were
approximately $25.0 million (audited). The transaction was accounted for under
the purchase method of accounting, which resulted in $8,582,000 of intangible
assets, including $144,000 for acquisition-related costs, $1,797,000 of accounts
receivable and $287,000 of fixed assets.
8
NOTE 3 - PROVISION FOR INCOME TAXES:
Deferred tax assets (liabilities) are comprised of the following components
(in thousands):
June 30, 1999 December 31, 1998
------------- -----------------
Current:
Accrued workers' compensation claims
liabilities $1,047 $1,232
Allowance for doubtful accounts 72 102
Safety incentives 439 310
Other accruals 203 213
----- -----
$1,761 $1,857
===== =====
Noncurrent:
Tax depreciation in excess of book
depreciation $ (75) $ (101)
Accrued workers' compensation claims
liabilities 275 278
Book amortization of intangibles in
excess of tax amortization 341 289
Deferred compensation 44 62
NOL carryforward 100 -
Other 31 24
----- -----
$ 716 $ 552
===== =====
The provision for income taxes for the six months ended June 30, 1999 and
1998, is as follows (in thousands):
Six Months Six Months
Ended Ended
June 30, 1999 June 30, 1998
------------- -------------
Current:
Federal $1,224 $ 765
State 333 171
----- -----
1,557 936
----- -----
Deferred:
Federal (54) (172)
State (14) (23)
----- -----
(68) (195)
----- -----
Provision for income taxes $1,489 $ 741
===== =====
NOTE 4 - STOCK INCENTIVE PLAN:
In 1993, the Company adopted a stock incentive plan (the "Plan") which
provides for stock-based awards to the Company's employees, directors and
outside consultants or advisers. The number of shares of common stock reserved
for issuance under the Plan is 1,300,000.
9
The following table summarizes options granted under the Plan in 1999:
Outstanding at December 31, 1998 785,295 $ 3.39 to $18.00
Options granted 174,370 $ 2.80 to $8.94
Options exercised (4,750) $ 3.50
Options canceled or expired (8,224)
Outstanding at June 30, 1999 946,691 $ 2.80 to $18.00
=======
Exercisable at June 30, 1999 463,927
=======
Available for grant at
June 30, 1999 140,184
=======
The options listed in the table generally become exercisable in four equal
annual installments beginning one year after the date of grant.
Certain of the Company's zone and branch management employees had
previously elected to receive a portion of their quarterly cash bonus in the
form of nonqualified deferred compensation stock options. Such options are
awarded at a sixty percent discount from the then-fair market value of the
Company's stock and are fully vested and immediately exercisable upon grant. The
amount of the grantee's deferred compensation (discount from fair market value)
is subject to market risk. During the second quarter of 1999, the Company
awarded deferred compensation stock options for 10,126 shares at an exercise
price of $2.80 per share.
10
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 six-month periods ended June 30, 1999 and 1998.
Percentage of Total Revenues
------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
---------------- ----------------
1999 1998 1999 1998
----- ----- ----- -----
Revenues:
Staffing services 54.5% 55.8% 53.6% 57.0%
Professional employer
services 45.5 44.2 46.4 43.0
----- ----- ----- -----
Total revenues 100.0 100.0 100.0 100.0
----- ----- ----- -----
Cost of revenues:
Direct payroll costs 77.4 77.4 77.5 77.4
Payroll taxes and benefits 8.4 8.7 8.6 9.0
Workers' compensation 2.9 2.9 2.8 2.9
Safety incentives 0.5 0.4 0.5 0.5
----- ----- ----- -----
Total cost of revenues 89.2 89.4 89.4 89.8
----- ----- ----- -----
Gross margin 10.8 10.6 10.6 10.2
Selling, general and
administrative expenses 7.7 7.9 7.9 8.1
Merger expenses - 1.0 - 0.5
Amortization of intangibles 0.5 0.4 0.5 0.5
----- ----- ----- -----
Income from operations 2.6 1.3 2.2 1.1
Other income (expense) - 0.1 - 0.1
----- ----- ----- -----
Pretax income 2.6 1.4 2.2 1.2
Provision for income taxes 1.1 0.6 0.9 0.5
----- ----- ----- -----
Net income 1.5% 0.8% 1.3% 0.7%
===== ===== ===== =====
Three months ended June 30, 1999 and 1998
Net income for the second quarter of 1999 was $1,216,000, an increase of
$616,000 or 102.7% over the second quarter of 1998. The increase in net income
for 1999 was attributable to a higher gross margin percent owing primarily to
lower payroll taxes and benefits, expressed as a percentage of revenues, coupled
with lower selling, general and administrative expenses, as a percentage of
revenues. Additionally, the 1998 second quarter included $750,000 of merger
expenses related to the Company's June 1998 pooling-of-interests merger with
Western Industrial Management, Inc. Basic and diluted earnings per share for the
second quarter of 1999 were
11
$.16 as compared to $.08 for both basic and diluted earnings per share for the
second quarter of 1998.
Revenues for the second quarter of 1999 totaled approximately $84.7
million, an increase of approximately $8.0 million or 10.5% over the second
quarter of 1998. The quarter-over-quarter internal growth rate of revenues was
1.4%. The percentage increase in total revenues exceeded the internal growth
rate of revenues primarily due to the TSS acquisition effective January 1, 1999,
the TPM acquisition effective February 15, 1999 and the TSU acquisition
effective May 31, 1999.
Professional employer (PEO) services revenue increased approximately $4.7
million or 13.8% and staffing services revenue increased $3.4 million or 7.9%,
which resulted in an increase in the share of PEO services from 44.2% of total
revenues for the second quarter of 1998 to 45.5% for the second quarter of 1999.
The share of staffing services had a corresponding decrease from 55.8% of total
revenues for the second quarter of 1998 to 54.5% for the second quarter of 1999.
Gross margin for the second quarter of 1999 totaled approximately $9.1
million, which represented an increase of $1.0 million or 12.5% over the second
quarter of 1998. The gross margin percent increased from 10.6% of revenues for
the second quarter of 1998 to 10.8% for the second quarter of 1999. The increase
in the gross margin percentage was due to lower payroll taxes and benefits,
offset in part by slightly higher safety incentives. The decrease in payroll
taxes and benefits for the second quarter of 1999 was primarily attributable to
lower state unemployment tax rates in various states in which the Company does
business. Workers' compensation expense for the second quarter of 1999 totaled
$2,445,000 or 2.9% of revenues, which is comparable to the $2,211,000 or 2.9% of
revenues for the second quarter of 1998.
Selling, general and administrative ("SG&A") expenses for the second
quarter of 1999 amounted to approximately $6.6 million, an increase of $516,000
or 8.6% over the second quarter of 1998. SG&A expenses, expressed as a
percentage of revenues, decreased from 7.9% for the second quarter of 1998 to
7.7% for the second quarter of 1999. The increase in total SG&A dollars was
primarily due to increased profit sharing and related taxes, management payroll
and rent expense in connection with the additional branch offices acquired in
the TSS, TPM and TSU acquisitions.
Amortization of intangibles totaled $434,000 or 0.5% of revenues for the
second quarter of 1999, which compares to $329,000
12
or 0.4% of revenues for the second quarter of 1998. The increased amortization
expense was primarily due to the amortization of intangibles recognized in the
TSS, TPM and TSU acquisitions, which were consummated in the first half of 1999.
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 19-20 of the Company's 1998 Annual Report on Form
10-K for a more detailed discussion of this issue.
Six Months Ended June 30, 1999 and 1998
Net income for the six months ended June 30, 1999 was $1,956,000, an
increase of $969,000 or 98.2% over the same period in 1998. The increase in net
income was attributable to a higher gross margin percent owing primarily to
lower payroll taxes and benefits, expressed as a percentage of revenues, coupled
with lower selling, general and administrative expenses, as a percentage of
revenues. Additionally, the 1998 six-month period included $750,000 of merger
expenses related to the Company's June 1998 pooling-of-interests merger with
WIMI. Basic and diluted earnings per share for the six-month period of 1999 were
$.26 as compared to $.13 for both basic and diluted earnings per share for the
similar period of 1998.
Revenues for the six months ended June 30, 1999 totaled approximately
$155.7 million, an increase of approximately $9.8 million or 6.7% over the
similar period of 1998. The increase in total revenues was primarily due to the
TSS, TPM and TSU acquisitions, which were consummated in 1999.
Gross margin for the six months ended June 30, 1999 totaled approximately
$16.5 million, which represented an increase of $1.6
13
million or 10.4% over the similar period of 1998. The gross margin percent
increased from 10.2% of revenues for the six-month period of 1998 to 10.6% for
the same period of 1999. The increase in the gross margin percentage was due to
lower payroll taxes and benefits and slightly lower workers' compensation,
offset in part by slightly higher direct payroll costs. The decrease in payroll
taxes and benefits for the six-month period of 1999 was primarily attributable
to lower state unemployment tax rates in various states in which the Company
does business.
Selling, general and administrative ("SG&A") expenses for the six months
ended June 30, 1999 amounted to approximately $12.3 million, an increase of
$410,000 or 3.5% over the similar period of 1998. SG&A expenses, expressed as a
percentage of revenues, decreased from 8.1% for the six-month period of 1998 to
7.9% for the same period of 1999. The increase in total SG&A dollars was
primarily due to increased profit sharing and related taxes, management payroll
and rent expense in connection with the additional branch offices acquired in
the TSS, TPM and TSU acquisitions.
Amortization of intangibles totaled $808,000 or 0.5% of revenues for the
six months ended June 30, 1999, which compares to $682,000 or 0.5% of revenues
for the same period of 1998. The increased amortization expense was primarily
due to the amortization of intangibles recognized in the 1999 acquisitions of
TSS, TPM and TSU.
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 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
14
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 $945,000 at June 30, 1999 decreased by
$3,084,000 from December 31, 1998. The decrease in cash at June 30, 1999 was
primarily due to cash used in connection with three acquisitions made since
January 1, 1999 and open-market share repurchase activity, offset in part by
proceeds from operating activities, the Company's bank term loan and borrowings
on its credit line.
Net cash provided by operating activities for the six months ended June
30, 1999 amounted to $2,589,000 as compared to net cash used in operating
activities of $53,000 for the comparable 1998 period. For the 1999 period, cash
flow was primarily generated by net income coupled with an increase of
$6,337,000 in accrued payroll and benefits, offset in part by an increase in
accounts receivable of $5,497,000.
Net cash used in investing activities totaled $15,141,000 for the
six-month period ended June 30, 1999, as compared to $1,058,000 for the similar
1998 period. For the 1999 period, cash used in investing activities was
primarily for the acquisitions of TSS, TPM and TSU. The Company presently has no
material long-term capital commitments.
Net cash provided by financing activities for the six months ended June
30, 1999 amounted to $9,468,000, which compares to $1,252,000 of net cash used
in financing activities for the same period in 1998. For the 1999 period, the
primary source of cash provided by financing activities was an $8,000,000 term
loan obtained from the Company's principal bank and $2,541,000 of net borrowings
on the Company's credit line. The term loan was obtained to provide financing
for the TSU acquisition.
The Company's business strategy continues to focus on growth through the
acquisition of additional personnel-related businesses, both in its existing
markets and other strategic geographic areas, together with the expansion of
operations at existing offices. As disclosed in Note 2 to the financial
statements included herein, the Company acquired all of the outstanding common
stock of Temporary Staffing Systems, Inc., a staffing services company
headquartered in North Carolina, effective January 1, 1999, for $2,050,000 in
cash and issued a contingent note payable for $950,000. As disclosed in Note 2
herein, on February 15, 1999, the
15
Company purchased certain assets of TPM Staffing Services, Inc., a staffing
services company located in southern California, for $1,200,000 in cash, of
which $240,000 is being deferred for six months from the date of acquisition.
Also as disclosed in Note 2 herein, on May 31, 1999, the Company purchased
certain assets of Temporary Skills Unlimited, Inc., dba TSU Staffing, a staffing
services company headquartered in northern California, for $10,522,000 in cash,
of which $864,500 is being deferred for one year from the date of acquisition.
Effective May 31, 1999, management renewed the Company's credit
arrangement with its principal bank on terms and conditions which were generally
more favorable than the prior agreement. The amended agreement provided for an
increase in the unsecured revolving credit facility from $7.65 million to $12.0
million. This facility, which expires May 31, 2000, includes a subfeature for
previously existing standby letters of credit in connection with certain
workers' compensation surety arrangements, as to which approximately $1.9
million was outstanding as of June 30, 1999. In addition, the Company obtained a
three-year term loan in the amount of $8.0 million bearing interest at LIBOR
plus 135 basis points to provide financing for the acquisition of TSU. Terms and
conditions of the term loan include certain restrictive quarterly financial
covenants relating to the Company's working capital, earnings before interest,
taxes, depreciation and amortization ("EBITDA"), and ratio of funded debt to
EBITDA; the Company was in compliance with such covenants at June 30, 1999.
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.
On February 26, 1999, the Company's board of directors authorized a stock
repurchase program to purchase up to 250,000 common shares from time to time in
open-market purchases. During the six-month period ended June 30, 1999, the
Company repurchased 103,200 shares at an aggregate price of $700,000. Management
anticipates that the capital necessary to execute this program will be provided
by existing cash balances.
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.
16
Year 2000 Readiness
The Company has developed a Year 2000 ("Y2K") 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 anticipated to be completed during the fourth quarter of
1999 and is expected to alleviate the Y2K issue for the mission-critical
application of payroll processing. The Company has incurred capital expenditures
of $2.6 million through June 30, 1999, for this project and expects to incur
another $0.4 million prior to completion. The Company's financial reporting
systems are currently Y2K compliant. The mission-critical branch-level legacy
system is also Y2K compliant, which was achieved through minor reprogramming by
internal staff at no incremental cost to the Company.
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 by the middle of the fourth quarter of 1999.
The Company's assessment of the risks associated with non-mission critical
systems has been completed and remediation activities have commenced. Management
expects the costs to remediate these systems to be minimal. Management has not
yet identified any reasonably likely worst case scenarios or determined the
extent of contingency planning that may be required. As part of its assessment,
the Company is relying on assurances from key vendors that their products and
services will be Y2K compliant. To date, no significant compliance issues have
been identified with third parties.
17
The risks associated with the Y2K 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, 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 timely resolution of the Y2K
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 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.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
The Company's exposure to market risk for changes in interest rates
primarily relates to the Company's short-term and long-term
18
debt obligations. As of June 30, 1999, the Company had interest-bearing debt
obligations of approximately $13.1 million, of which approximately $10.3 million
bear interest at a variable rate and approximately $2.8 million at a fixed rate
of interest. The variable rate debt is comprised of approximately $2.5 million
outstanding under an unsecured revolving credit facility, which bears interest
at the federal funds rate plus 125 basis points. The Company also has an
unsecured three-year term note with its principal bank, which bears interest at
LIBOR plus 135 basis points. Based on the Company's overall interest exposure at
June 30, 1999, a 10 percent change in market interest rates would not have a
material effect on the fair value of the Company's long-term debt or its results
of operations. As of June 30, 1999, the Company had not entered into any
interest rate instruments to reduce its exposure to interest rate risk.
Part II - Other Information
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its 1999 annual meeting of stockholders on May 12, 1999.
The following directors were elected at the annual meeting:
ABSTENTIONS AND
FOR WITHHELD BROKER NON-VOTES
--- -------- ----------------
Robert R. Ames 7,406,118 6,210
Herbert L. Hochberg 7,357,518 54,810
Anthony Meeker 7,357,618 54,710
Stanley G. Renecker 7,400,618 11,710
Nancy B. Sherertz 7,400,718 11,610
William W. Sherertz 7,401,718 10,610
The other matter presented for action at the annual meeting was approved
by the following vote:
ABSTENTIONS AND
FOR AGAINST BROKER NON-VOTES
--- ------- ----------------
Approval of the 7,408,118 2,600 1,610
appointment of Price-
waterhouseCoopers LLP as
independent accountants
19
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
On June 14, 1999, the Company filed a Current Report on Form 8-K
dated May 31, 1999, to report that the Company had purchased certain
assets of Temporary Skills Unlimited, Inc., dba TSU Staffing. The
all-cash transaction provided for total consideration of $10,522,000
for certain assets, including certain accounts receivable of
$1,797,000. The Company paid TSU $9,657,000 in cash and issued a
one-year note for $864,500. TSU provides staffing services through
nine branch offices in northern California and had 1998 revenues of
approximately $25.0 million.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BARRETT BUSINESS SERVICES, INC.
(Registrant)
Date: August 13, 1999 By: /s/ Michael D. Mulholland
Michael D. Mulholland
Vice President-Finance
(Principal Financial Officer)
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EXHIBIT INDEX
EXHIBIT
- -------
4.1 Loan agreement between the Registrant and Wells Fargo Bank, N.A. dated
May 31, 1999.
11 Statement of Calculation of Average
Common Shares Outstanding
27 Financial Data Schedule
22