10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on August 14, 1998
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, 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 July 31, 1998
was 7,675,456 shares.
BARRETT BUSINESS SERVICES, INC.
INDEX
2
PART I - Financial Information
Item 1. Financial Statements
BARRETT BUSINESS SERVICES, INC.
Balance Sheets
(Unaudited)
(In thousands)
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)
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)
The accompanying notes are an integral part of these financial statements.
5
BARRETT BUSINESS SERVICES, INC.
Statements of Cash Flows
(Unaudited)
(In thousands)
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:
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 at
pages F1-F21. As of the date of filing of the Company's 1998 second quarter
report on Form 10-Q, the Company's restated 1997 annual financial statements to
reflect the merger with WIMI had not been filed with the Securities and Exchange
Commission. 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
7
31, 1997. The Company paid $675,000 in cash for the assets, assumed a $6,000
office lease liability and incurred approximately $5,000 in acquisition related
costs. The transaction was accounted for under the purchase method of
accounting, which resulted in $670,000 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).
Operating results of Barrett and WIMI, individually, prior to giving
effect to the pooling and of the combined companies for the second quarter and
six-month periods ended June 30, 1998 were as follows:
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
8
merger-related expenses of $750,000 ($450,000 after taxes, or $.06 per share on
a diluted basis).
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):
Second Quarter Ended
June 30,1998
Professional fees
WIMI $ 425
Barrett 285
Other fees and expenses 40
---
$ 750
===
NOTE 4 - PROVISION FOR INCOME TAXES:
Deferred tax assets (liabilities) are comprised of the following
components (in thousands):
9
The provision for income taxes for the six months ended June 30, 1998 and
1997, is as follows (in thousands):
NOTE 5 - STOCK INCENTIVE PLAN:
In 1993, the Company adopted a stock incentive plan (the "Plan") which
provides for stock-based awards to the Company's employees, directors and
outside consultants or advisers. The number of shares of common stock reserved
for issuance under the Plan is 1,300,000.
The following table summarizes options granted under the Plan in 1998:
Outstanding at December 31, 1997 595,119 $ 3.50 to $18.00
Options granted 253,493 $ 4.40 to $12.00
Options exercised (7,250) $ 3.50 to $11.50
Options canceled or expired (71,592) $11.44 to $17.94
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Outstanding at June 30, 1998 769,770 $ 3.50 to $18.00
=======
Exercisable at June 30, 1998 291,770
=======
Available for grant at
June 30, 1998 321,855
=======
The options listed in the table generally become exercisable in four
equal annual installments beginning one year after the date of grant.
10
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.
11
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 six-month periods ended June 30, 1998
and 1997.
Three months ended June 30, 1998 and 1997
Net income for the 1998 second quarter, before a one-time charge for
merger-related expenses and the effect of the June 29, 1998 merger, was
$935,000, a decrease of $319,000 or 25.4% from the pre-merger operating results
for the comparable 1997 period. The decline in net income was attributable to a
10 basis point decline in gross margin percent and higher selling, general and
administrative expenses. Diluted earnings per share for the second quarter of
1998, before a one-time charge for merger-related
12
expenses and the effect of the merger, were $.14, as compared to $.18 per
diluted share for 1997.
Net income for the 1998 second quarter, after a one-time charge for
merger-related expenses of $750,000 ($450,000 after tax or $.06 per diluted
share) and the effect of the merger, was $600,000 or $.08 per diluted share, as
compared to net income of $1,254,000 or $.16 per diluted share for the
comparable 1997 period. The decrease in 1998 net income from 1997 was due to the
one-time charge for merger-related expenses of $750,000, together with higher
selling, general and administrative expenses, offset in part by a slightly
higher gross margin, both in terms of a percentage of revenues and total
dollars.
Revenues for the second quarter of 1998 totaled approximately $76.7
million, an increase of approximately $1.0 million or 1.3% over the second
quarter of 1997. Without the effect of the merger, revenues for the 1998 second
quarter were $68.6 million, as compared to 69.6 million for the 1997 second
quarter, a decrease of $1.0 million or 1.4%.
Staffing services revenue decreased approximately $0.6 million or 1.4%,
while professional employer services revenue increased approximately $1.6
million or 4.9%, which resulted in a decrease in the mix of staffing services to
55.8% of total revenues for the second quarter of 1998, as compared to 57.3% for
the second quarter of 1997. The mix of professional employer services revenues
had a corresponding increase from 42.7% for the second quarter of 1997 to 44.2%
for the second quarter of 1998.
Gross margin for the second quarter of 1998 totaled approximately $8.1
million, which represented an increase of approximately $0.2 million or 1.9%
over the second quarter of 1997. The gross margin percent increased 10 basis
points to 10.6% of revenues for the second quarter of 1998, as compared to 10.5%
for the same period of 1997. The increase in the gross margin percentage was due
to slightly lower payroll taxes and benefits, offset in part by slightly higher
direct payroll costs, both in terms of total dollars and as a percentage of
revenues.
Workers' compensation expense for both the second quarter of 1998 and
1997 was comparable at $2.2 million and 2.9% of revenues. 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 second
quarter amounted to approximately $6.0 million, an
13
increase of $0.4 million or 7.0% over the comparable period in 1997. The
increase in total dollars was due primarily to higher management payroll, profit
sharing, bad debt expense and maintenance expenses. SG&A expenses also increased
from 7.4% of revenues for the second quarter of 1997 to 7.9% of revenues for the
second 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 second quarter of 1998, excluding the effect of the merger, improvement
in SG&A expense management was achieved by (1) reducing SG&A expenses to 7.5% of
revenues, as compared to 8.0% of revenues for the first quarter of 1998, (2)
reducing SG&A expenses as a percent of gross margin dollars from 86.6% in the
1998 first quarter to 74.2% in the 1998 second quarter and (3) reducing the
quarter-over-comparable quarter growth rate of SG&A expenses from 11.2% (1Q98
vs. 1Q97) to 6.4% (2Q98 vs. 2Q97).
Amortization of intangibles totaled $329,000, or 0.4% of revenues for the
second quarter of 1998, which compares to $285,000 or 0.4% of revenues for the
same period in 1997. The increased amortization expense was primarily
attributable to the Company's April 13, 1998 acquisition of BOLT Staffing
Service.
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 1997 Annual Report on Form
10-K for a more detailed discussion of this issue.
Six Months Ended June 30, 1998 and 1997
Net income for the six months ended June 30, 1998 was $987,000, a
decrease of $1,090,000 or 52.5% from the same period in
14
1997. The decrease in net income was primarily due to a one-time charge for
merger-related expenses of $750,000 ($450,000 after tax or $.06 per diluted
share) and a $1.1 million increase in SG&A expenses, which also increased as a
percent of revenues from 7.6% for the 1997 six-month period to 8.1% for the
comparable 1998 period. Basic and diluted earnings per share for the 1998
six-month period were $.13, as compared to $.27 for both basic and diluted
earnings per share for the same 1997 period.
Revenues for the six months ended June 30, 1998 totaled approximately
$145.9 million, an increase of approximately $3.2 million or 2.3% over the
comparable period of 1997.
Gross margin for the six months ended June 30, 1998 totaled approximately
$14.9 million, which represented an increase of $0.2 million or 1.4% over the
same period of 1997. The gross margin percent decreased to 10.2% of revenues for
the first six months of 1998, as compared to 10.3% for the same period of 1997.
The decline in the gross margin percentage was due to higher direct payroll
costs both in terms of total dollars and as a percentage of revenues, offset in
part by slightly lower payroll taxes and benefits and workers' compensation
expenses, both in terms of total dollars and as a percentage of revenues.
SG&A expenses for the six months ended June 30, 1998 amounted to
approximately $11.9 million, an increase of $1.1 million or 10.2% over the
comparable period in 1997. These expenses also increased from 7.6% of revenues
for the 1997 period to 8.1% of revenues for the comparable 1998 period. The
increase in total dollars was primarily attributable to increased expenses for
management payroll, profit sharing, bad debt expense and maintenance expenses.
Amortization of intangibles totaled $682,000 or .5% of revenues for the
six-month period ended June 30, 1998, which compares to $612,000 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
15
services, and the effect of acquisitions. The Company's revenue levels fluctuate
from quarter to quarter primarily due to the impact of seasonality in its
staffing services business and on certain of its PEO clients in the agriculture
and forest products related industries. As a result, the Company may have
greater revenues and net income in the third and fourth quarters of its fiscal
year. Payroll taxes and benefits fluctuate with the level of direct payroll
costs but may tend to represent a smaller percentage of revenues later in the
Company's fiscal year as federal and state statutory wage limits for
unemployment and social security taxes are exceeded by 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 $1,076,000 at June 30, 1998 decreased by
$2,363,000 from December 31, 1997. The decrease was primarily due to cash used
in financing activities for repayment of bank credit-line borrowings and payment
to a dissenting shareholder of WIMI in the merger, as well as cash used in
investing activities related to the BOLT Staffing acquisition and fixed asset
additions.
Net cash used in operating activities for the six months ended June 30,
1998 amounted to $53,000, as compared to cash provided by operating activities
of $2,624,000 for the comparable 1997 period. For the 1998 period, cash flow
generated by net income, depreciation and amortization expenses, together with
an increase of $1,579,000 in accrued payroll and benefits, was offset by a
$2,895,000 increase in trade accounts receivable, a $577,000 increase in prepaid
expenses and a $448,000 decrease in accounts payable.
Net cash used in investing activities totaled $1,058,000 for the six
months ended June 30, 1998, as compared to $3,257,000 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 six-month period ended June
30, 1998 was $1,252,000, which compares to net cash used in financing activities
of $605,000 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 for
16
payment to a dissenting WIMI shareholder in connection with the WIMI merger.
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.
Management recently renewed the Company's credit arrangement with its
principal bank on terms and conditions which were generally more favorable than
the prior agreement. The amount of the credit facility, which remained
unchanged, primarily includes an unsecured $4.0 million revolving credit
facility and $1.6 million for previously existing 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.
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, 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
17
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
Part II - Other Information
Item 2. Changes in Securities and Use of Proceeds
On June 29, 1998, the Company issued 894,642 shares of common stock in
connection with the acquisition of Western Industrial Management, Inc., and a
related entity, Catch 55, Inc., in a stock-for-stock merger. The shares issued
included 10,497 shares issued in exchange for real property consisting of an
office condominium. The shares were issued to two of the shareholders of the
acquired entities; a third shareholder dissented from the transaction and
received cash. The transaction was valued by the parties at approximately $10.7
million, including the $519,095 cash payment to the dissenting shareholder. The
Company relied on the exemption from registration provided by Section 4(2) of
the Securities Act of 1933 with respect to the issuance and sale of such shares.
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its 1998 annual meeting of stockholders on May 13, 1998.
The following directors were elected at the annual meeting:
The other matter presented for action at the annual meeting was approved
by the following vote:
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
Subsequent to quarter end, 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. The
transaction qualified as a tax-free merger and was 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, a
privately-held staffing services company headquartered in San
Bernardino, California, had 1997 revenues of approximately $24.5
million (unaudited).
20
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, 1998 By:/s/ Michael D. Mulholland
Michael D. Mulholland
Vice President-Finance
(Principal Financial Officer)
21
EXHIBIT INDEX
EXHIBIT
4.1 Loan agreement between the Registrant and Wells Fargo Bank, N.A.
dated May 31, 1998.
11 Statement of Calculation of Average
Common Shares Outstanding
27 Financial Data Schedule