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, 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 October 29, 1999
was 7,476,898 shares.
BARRETT BUSINESS SERVICES, INC.
INDEX
Page
----
Part I - Financial Information
Item 1. Financial Statements
Balance Sheets - September 30, 1999 and
December 31, 1998..........................................3
Statements of Operations - Three Months
Ended September 30, 1999 and 1998..........................4
Statements of Operations - Nine Months
Ended September 30, 1999 and 1998..........................5
Statements of Cash Flows - Nine Months
Ended September 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 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)
September 30, December 31,
1999 1998
------------- ------------
Assets
Current assets:
Cash and cash equivalents $ - $ 4,029
Trade accounts receivable, net 33,223 21,907
Prepaid expenses and other 2,002 1,103
Deferred tax assets (Note 3) 1,629 1,857
------ ------
Total current assets 36,854 28,896
Intangibles, net 22,625 11,508
Property and equipment, net 6,481 5,184
Restricted marketable securities
and workers' compensation deposits 6,431 6,004
Deferred tax assets (Note 3) 733 552
Other assets 1,150 626
------ ----
$74,274 $52,770
====== ======
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable $ 865 $ -
Current portion of long-term debt 2,783 61
Line of credit payable 2,972 -
Income taxes payable (Note 3) 200 438
Accounts payable 1,362 948
Accrued payroll, payroll taxes
and related benefits 16,755 9,246
Accrued workers' compensation claims liabilities 2,700 3,244
Customer safety incentives payable 1,135 1,173
Other accrued liabilities 512 514
---- ----
Total current liabilities 29,284 15,624
Long-term debt, net of current portion 4,941 503
Customer deposits 787 829
Long-term workers' compensation liabilities 703 714
Other long-term liabilities 1,791 1,398
------ ------
37,506 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 10,686 11,409
Retained earnings 26,006 22,216
------ ------
36,768 33,702
------ ------
$74,274 $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
September 30,
---------------------
1999 1998
------ ------
Revenues:
Staffing services $56,434 $44,199
Professional employer services 39,441 37,770
------ ------
95,875 81,969
Cost of revenues:
Direct payroll costs 74,285 63,768
Payroll taxes and benefits 7,620 6,587
Workers' compensation 2,578 2,201
Safety incentives 444 446
------ ------
84,927 73,002
Gross margin 10,948 8,967
Selling, general and administrative expenses 7,116 5,826
Amortization of intangibles 532 322
------ ------
Income from operations 3,300 2,819
Other income (expense):
Interest expense (247) (30)
Interest income 82 97
Other, net 27 1
------ ------
(138) 68
------ ------
Income before provision for income taxes 3,162 2,887
Provision for income taxes (Note 3) 1,327 1,288
------ ------
Net income $ 1,835 $ 1,599
====== ======
Basic earnings per share $ .24 $ .21
====== ======
Weighted average number of basic
shares outstanding 7,581 7,675
====== ======
Diluted earnings per share $ .24 $ .21
====== ======
Weighted average number of diluted
shares outstanding 7,634 7,714
====== ======
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)
Nine Months Ended
September 30,
--------------------
1999 1998
------- -------
Revenues:
Staffing services $139,848 $127,289
Professional employer services 111,749 100,572
------- -------
251,597 227,861
------- -------
Cost of revenues:
Direct payroll costs 195,025 176,783
Payroll taxes and benefits 21,013 19,656
Workers' compensation 6,992 6,408
Safety incentives 1,165 1,146
------- -------
224,195 203,993
------- -------
Gross margin 27,402 23,868
Selling, general and administrative expenses 19,376 17,677
Merger expenses - 750
Amortization of intangibles 1,339 1,004
------- -------
Income from operations 6,687 4,437
Other income (expense):
Interest expense (376) (147)
Interest income 266 322
Other, net 30 3
------- -------
(80) 178
------- -------
Income before provision for income taxes 6,607 4,615
Provision for income taxes (Note 3) 2,817 2,029
------- -------
Net income $ 3,790 $ 2,586
======= =======
Basic earnings per share $ .50 $ .34
======= =======
Weighted average number of basic
shares outstanding 7,609 7,660
======= =======
Diluted earnings per share $ .50 $ .34
======= =======
Weighted average number of diluted
shares outstanding 7,655 7,710
======= =======
The accompanying notes are an integral part of these financial statements.
5
BARRETT BUSINESS SERVICES, INC.
Statements of Cash Flows
(Unaudited)
(In thousands)
Nine Months Ended
September 30,
-------------------
1999 1998
------- ------
Cash flows from operating activities:
Net income $ 3,790 $ 2,586
Reconciliation of net income to cash from operations:
Depreciation and amortization 1,784 1,349
Changes in certain assets and liabilities, net
of assets acquired and liabilities assumed:
Trade accounts receivable, net (8,575) (3,039)
Prepaid expenses and other (840) (962)
Deferred tax assets 155 (214)
Accounts payable 267 (652)
Accrued payroll, payroll taxes and related benefits 7,348 3,739
Accrued workers' compensation claims liabilities (544) 276
Customer safety incentives payable (38) 125
Income taxes payable (238) 516
Other accrued liabilities (206) 83
Customer deposits and long-term workers'
compensation liabilities and other assets (555) (72)
Other long-term liabilities 393 168
------- ------
Net cash provided by operating activities 2,741 3,903
------- ------
Cash flows from investing activities:
Cash paid for acquisitions, including other
direct costs (Note 2) (14,022) (687)
Purchases of fixed assets, net of amounts
purchased in acquisitions (1,329) (846)
Proceeds from maturities of marketable securities 2,325 5,458
Purchases of marketable securities (2,731) (5,190)
------- ------
Net cash used in investing activities (15,757) (1,265)
------- ------
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 2,972 (887)
Proceeds from issuance of notes payable 1,105 -
Payments on notes payable (240) -
Proceeds from issuance of long-term debt 8,000 -
Payments on long-term debt (958) (461)
Payment to dissenting shareholder - (519)
Payment to shareholder (58) -
Repurchase of common stock (700) -
Proceeds from exercise of stock options and warrants 34 168
------- ------
Net cash provided by (used in) financing activities 8,987 (1,699)
------- ------
Net (decrease) increase in cash and cash equivalents (4,029) 939
Cash and cash equivalents, beginning of period 4,029 3,439
------- ------
Cash and cash equivalents, end of period $ - $ 4,378
======= ======
Supplemental schedule of noncash activities:
Acquisition of other businesses:
Cost of acquisitions in excess of fair market
value of net assets acquired $12,456 $ 677
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 liabilities and, to date, the recognition of an
additional $2,251,000 of intangible assets, which includes $51,000 for
acquisition-related costs.
7
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. The Company also paid $75,000 for
noncompete agreements. TPM'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 $8,622,000 of intangible
assets, including $184,000 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):
September 30, 1999 December 31, 1998
------------------ -----------------
Current:
Accrued workers' compensation claims
liabilities $ 897 $1,232
Allowance for doubtful accounts 101 102
Safety incentives 442 310
Other accruals 189 213
----- -----
$1,629 $1,857
===== =====
Noncurrent:
Tax depreciation in excess of book
depreciation $ (78) $ (101)
Accrued workers' compensation claims
liabilities 273 278
Book amortization of intangibles in excess
of tax amortization 368 289
Deferred compensation 44 62
NOL carryforward 92 -
Other 34 24
----- -----
$ 733 $ 552
===== =====
The provision for income taxes for the nine months ended September 30,
1999 and 1998, is as follows (in thousands):
Nine Months Nine Months
Ended Ended
September 30, 1999 September 30, 1998
Current:
Federal $2,090 $1,847
State 562 396
----- -----
2,652 2,243
----- -----
Deferred:
Federal 139 (188)
State 26 (26)
----- -----
165 (214)
----- -----
Provision for income taxes $2,817 $2,029
===== =====
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.
The following table summarizes options granted under the Plan in 1999:
9
Outstanding at December 31, 1998 785,295 $ 3.39 to $18.00
Options granted 181,737 $ 2.80 to $8.94
Options exercised (9,059) $ 3.50 to $5.23
Options canceled or expired (74,002)
Outstanding at September 30, 1999 883,971 $ 2.80 to $17.94
=======
Exercisable at September 30, 1999 486,337
Available for grant at
September 30, 1999 198,595
=======
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 first nine months of 1999, the Company
awarded deferred compensation stock options for 28,866 shares at exercise prices
ranging from $2.80 to $3.58 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 nine-month periods ended September 30, 1999 and 1998.
Percentage of Total Revenues
-----------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
----------------- -----------------
1999 1998 1999 1998
---- ---- ---- ----
Revenues:
Staffing services 58.9% 53.9% 55.6% 55.9%
Professional employer services 41.1 46.1 44.4 44.1
----- ----- ----- -----
Total revenues 100.0 100.0 100.0 100.0
----- ----- ----- -----
Cost of revenues:
Direct payroll costs 77.5 77.8 77.5 77.6
Payroll taxes and benefits 7.9 8.1 8.3 8.6
Workers' compensation 2.7 2.7 2.8 2.8
Safety incentives 0.5 0.5 0.5 0.5
----- ----- ----- -----
Total cost of revenues 88.6 89.1 89.1 89.5
----- ----- ----- -----
Gross margin 11.4 10.9 10.9 10.5
Selling, general and administrative
expenses 7.4 7.1 7.7 7.8
Merger expenses - - - 0.3
Amortization of intangibles 0.6 0.4 0.5 0.5
----- ----- ----- -----
Income from operations 3.4 3.4 2.7 1.9
Other income (expense) (0.1) 0.1 (0.1) 0.1
----- ----- ----- -----
Pretax income 3.3 3.5 2.6 2.0
Provision for income taxes 1.4 1.5 1.1 0.9
----- ----- ----- -----
Net income 1.9% 2.0% 1.5% 1.1%
===== ===== ===== =====
Three months ended September 30, 1999 and 1998
Net income for the third quarter of 1999 was $1,835,000, an increase of
$236,000 or 14.8% over the third quarter of 1998. The increase in net income for
1999 was attributable to a higher gross margin percent owing primarily to lower
direct payroll costs and lower payroll taxes and benefits, expressed as a
percentage of revenues, offset in part by higher selling, general and
administrative expenses. Basic and diluted earnings per share for the third
quarter of 1999 were $.24 as compared to $.21 for both basic and diluted
earnings per share for the third quarter of 1998.
Revenues for the third quarter of 1999 totaled approximately $95.9
million, an increase of approximately $13.9 million or 17.0% over the third
quarter of 1998. The quarter-over-quarter internal
11
growth rate of revenues was 1.7%. 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.
Staffing services revenue increased $12.2 million or 27.7% and
professional employer ("PEO") services revenue increased approximately $1.7
million or 4.4%, which resulted in an increase in the share of staffing services
from 53.9% of total revenues for the third quarter of 1998 to 58.9% for the
third quarter of 1999. The share of PEO services had a corresponding decrease
from 46.1% of total revenues for the third quarter of 1998 to 41.1% for the
third quarter of 1999.
Gross margin for the third quarter of 1999 totaled approximately $10.9
million, which represented an increase of $2.0 million or 22.1% over the third
quarter of 1998. The gross margin percent increased from 10.9% of revenues for
the third quarter of 1998 to 11.4% for the third quarter of 1999. The increase
in the gross margin percentage was due to lower direct payroll costs and payroll
taxes and benefits as a percentage of revenues. The decrease in direct payroll
costs was primarily attributable to the increased share of revenues for staffing
services which typically provide higher markups resulting in reduced payroll
costs as a percentage of revenues. The decrease in payroll taxes and benefits
for the third quarter of 1999 was primarily attributable to lower state
unemployment tax rates in some of the states in which the Company does business.
Workers' compensation expense for the third quarter of 1999 totaled $2.6 million
or 2.7% of revenues, which is comparable to the $2.2 million or 2.7% of revenues
for the third quarter of 1998.
Selling, general and administrative ("SG&A") expenses for the third
quarter of 1999 amounted to approximately $7.1 million, an increase of $1.3
million or 22.1% over the third quarter of 1998. SG&A expenses, expressed as a
percentage of revenues, increased from 7.1% for the third quarter of 1998 to
7.4% for the third quarter of 1999. The increase in SG&A expenses was primarily
due to increased management payroll, advertising expense and rent expense in
connection with the 21 additional branch offices acquired in the TSS, TPM and
TSU acquisitions.
Amortization of intangibles totaled $532,000 or 0.6% of revenues for the
third quarter of 1999, which compares to $322,000 or 0.4% of revenues for the
third 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 five months of 1999.
12
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.
Nine Months Ended September 30, 1999 and 1998
Net income for the nine months ended September 30, 1999 was $3,790,000, an
increase of $1,204,000 or 46.6% 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 and slightly lower direct payroll costs,
expressed as a percentage of revenues. Additionally, the 1998 nine-month period
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 nine-month period of 1999 were $.50 as
compared to $.34 for both basic and diluted earnings per share for the similar
period of 1998.
Revenues for the nine months ended September 30, 1999 totaled
approximately $251.6 million, an increase of approximately $23.7 million or
10.4% 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 nine months ended September 30, 1999 totaled
approximately $27.4 million, which represented an increase of $3.5 million or
14.8% over the similar period of 1998. The gross margin percent increased from
10.5% of revenues for the nine-month period of 1998 to 10.9% for the same period
of 1999. The increase in the gross margin percentage was due to lower payroll
taxes and benefits and slightly lower direct payroll costs. The decrease in
payroll taxes and benefits for the nine-month period of 1999 was primarily
attributable to lower state unemployment tax rates in certain states in which
the Company does business.
13
Selling, general and administrative ("SG&A") expenses for the nine months
ended September 30, 1999 amounted to approximately $19.4 million, an increase of
$1.7 million or 9.6% over the similar period of 1998. SG&A expenses, expressed
as a percentage of revenues, decreased from 7.8% for the nine-month period of
1998 to 7.7% for the same period of 1999. The increase in total SG&A dollars was
primarily due to management payroll, advertising expense, rent expense and
increased profit sharing and related taxes in connection with the 21 additional
branch offices acquired in the TSS, TPM and TSU acquisitions.
Amortization of intangibles totaled $1.3 million or 0.5% of revenues for
the nine months ended September 30, 1999, which compares to $1.0 million or 0.5%
of revenues for the same period of 1998. The increased amortization expense in
dollars 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 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 at September 30, 1999 decreased by $4,029,000
from December 31, 1998. The decrease in cash at September 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
unsecured credit line.
14
Net cash provided by operating activities for the nine months ended
September 30, 1999 amounted to $2,741,000 as compared to $3,903,000 for the
comparable 1998 period. For the 1999 period, cash flow was primarily generated
by net income coupled with an increase of $7,348,000 in accrued payroll and
benefits, offset in part by an increase in accounts receivable of $8,575,000.
Net cash used in investing activities totaled $15,757,000 for the
nine-month period ended September 30, 1999, as compared to $1,265,000 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 nine months ended
September 30, 1999 amounted to $8,987,000, which compares to $1,699,000 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 $2,972,000
of net borrowings on the Company's credit line. The term loan was obtained to
provide financing for the TSU acquisition, and, at September 30, 1999, had an
outstanding principal balance of $7.1 million.
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 has completed three acquisitions in
1999. 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 a credit arrangement with its principal bank which
provides an unsecured revolving credit facility of $12.0 million. This facility,
which expires May 31, 2000, includes a subfeature for standby letters of credit
in connection with certain workers' compensation surety arrangements, as to
which approximately $2.0 million was outstanding as of September 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 November 11, 1999, the Company announced that its board of directors
had authorized the repurchase of up to an additional 200,000 common shares under
the Company's stock repurchase program from time to time in open-market
purchases. This action increases the total number of common shares authorized
for repurchase from 250,000 to 450,000. From the inception of the Company's
stock repurchase program on February 26, 1999 through October 22, 1999, the
Company repurchased 203,200 shares at an aggregate price of approximately $1.4
million. Management anticipates that the capital necessary to execute this
program will be provided by cash generated from operating activities.
15
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 assess 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.
Management believes that the mission-critical corporate and branch-level
legacy payroll processing systems are currently Y2K compliant. Such compliance
was achieved through minor reprogramming by internal staff at no incremental
cost to the Company. Management believes that the Company's financial reporting
systems are also currently Y2K compliant.
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 management believes that this new system is Y2K compliant for the
mission-critical application of payroll processing. The Company has incurred
capital expenditures of $3.0 million through September 30, 1999, for this
project and expects to incur another $0.8 million prior to completion. In
summary, the Company believes that its mission-critical business systems are Y2K
compliant in all material respects.
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.
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. 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.
17
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 debt obligations. As
of September 30, 1999, the Company had interest-bearing debt obligations of
approximately $12.6 million, of which approximately $10.1 million bears interest
at a variable rate and approximately $2.5 million at a fixed rate of interest.
The variable rate debt is comprised of approximately $3.0 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 September
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 September 30, 1999, the Company had not entered into any
interest rate instruments to reduce its exposure to interest rate risk.
18
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) No Current Reports on Form 8-K were filed by the Registrant during
the quarter ended September 30, 1999.
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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: November 12, 1999 By: /s/ Michael D. Mulholland
Michael D. Mulholland
Vice President-Finance
(Principal Financial Officer)
20
EXHIBIT INDEX
EXHIBIT
- -------
11 Statement of Calculation of Average
Common Shares Outstanding
27 Financial Data Schedule
21