UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------- FORM 10-Q -------------- [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 <TABLE> Page ---- Part I - Financial Information Item 1. Financial Statements <S> <C> Balance Sheets - June 30, 1998 and December 31, 1997..................................................3 Statements of Operations - Three Months Ended June 30, 1998 and 1997.......................................4 Statements of Operations - Six Months Ended June 30, 1998 and 1997.......................................5 Statements of Cash Flows - Six Months Ended June 30, 1998 and 1997.......................................6 Notes to Financial Statements......................................7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........................................................12 Part II - Other Information Item 2. Changes in Securities and Use of Proceeds.........................19 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 </TABLE> 2
PART I - Financial Information Item 1. Financial Statements BARRETT BUSINESS SERVICES, INC. Balance Sheets (Unaudited) (In thousands) <TABLE> June 30, December 31, 1998 1997 ---------- ------------ Assets Current assets: <S> <C> <C> Cash and cash equivalents $ 1,076 $ 3,439 Trade accounts receivable, net 23,946 21,051 Prepaid expenses and other 1,808 1,231 Deferred tax assets (Note 4) 2,281 2,086 ------ ------ Total current assets 29,111 27,807 Intangibles, net 12,130 12,133 Property and equipment, net 4,968 4,574 Restricted marketable securities and workers' compensation deposits 5,857 6,095 Other assets 386 206 ------ ------ $52,452 $50,815 ====== ====== Liabilities and Stockholders' Equity Current liabilities: Current portion of long-term debt $ 488 $ 731 Line of credit payable 252 887 Income taxes payable (Note 4) 48 - Accounts payable 688 1,136 Accrued payroll, payroll taxes and related benefits 11,613 10,034 Accrued workers' compensation claims liabilities 3,260 3,140 Customer safety incentives payable 1,125 1,073 Other accrued liabilities 821 414 ------ ------ Total current liabilities 18,295 17,415 Long-term debt, net of current portion 550 573 Customer deposits 898 934 Long-term workers' compensation liabilities 722 632 Other long-term liabilities 1,120 1,030 ------ ------ 21,585 20,584 ------ ------ Commitments and contingencies Stockholders' equity: Common stock, $.01 par value; 20,500 shares authorized, 7,676 and 7,638 shares issued and outstanding, respectively 77 76 Additional paid-in capital 11,408 11,760 Retained earnings 19,382 18,395 ------ ------ 30,867 30,231 ------ ------ $52,452 $50,815 ====== ====== </TABLE> 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) <TABLE> Three Months Ended June 30, --------------------------- 1998 1997 ------ ------ Revenues: <S> <C> <C> Staffing services $42,786 $43,387 Professional employer services 33,865 32,273 ------ ------ 76,651 75,660 ------ ------ Cost of revenues: Direct payroll costs 59,348 58,349 Payroll taxes and benefits 6,629 6,781 Workers' compensation 2,211 2,175 Safety incentives 336 381 ------ ------ 68,524 67,686 ------ ------ Gross margin 8,127 7,974 Selling, general and administrative expenses 6,035 5,641 Merger expenses (Note 3) 750 - Amortization of intangibles 329 285 ------ ------ Income from operations 1,013 2,048 Other income (expense): Interest expense (60) (62) Interest income 100 87 Other, net 1 - ------ ------ 41 25 ------ ------ Income before provision for income taxes 1,054 2,073 Provision for income taxes (Note 4) 454 819 ------ ------ Net income $ 600 $ 1,254 ====== ====== Basic earnings per share (Note 6) $ .08 $ .16 ====== ====== Weighted average number of basic shares outstanding 7,666 7,630 ====== ====== Diluted earnings per share (Note 6) $ .08 $ .16 ====== ====== Weighted average number of diluted shares outstanding 7,722 7,727 ====== ====== </TABLE> 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) <TABLE> Six Months Ended June 30, ------------------------- 1998 1997 ------- ------- Revenues: <S> <C> <C> Staffing services $ 83,090 $ 80,136 Professional employer services 62,802 62,535 ------- ------- 145,892 142,671 ------- ------- Cost of revenues: Direct payroll costs 113,015 109,787 Payroll taxes and benefits 13,069 13,265 Workers' compensation 4,207 4,226 Safety incentives 700 704 ------- ------- 130,991 127,982 ------- ------- Gross margin 14,901 14,689 Selling, general and administrative expenses 11,851 10,750 Merger expenses (Note 3) 750 - Amortization of intangibles 682 612 ------- ------- Income from operations 1,618 3,327 Other income (expense): Interest expense (117) (107) Interest income 225 190 Other, net 2 - ------- ------- 110 83 ------- ------- Income before provision for income taxes 1,728 3,410 Provision for income taxes (Note 4) 741 1,333 ------- ------- Net income $ 987 $ 2,077 ======= ======= Basic earnings per share (Note 6) $ .13 $ .27 ======= ======= Weighted average number of basic shares outstanding 7,652 7,663 ======= ======= Diluted earnings per share (Note 6) $ .13 $ .27 ======= ======= Weighted average number of diluted shares outstanding 7,707 7,809 ======= ======= </TABLE> The accompanying notes are an integral part of these financial statements. 5
BARRETT BUSINESS SERVICES, INC. Statements of Cash Flows (Unaudited) (In thousands) <TABLE> Six Months Ended June 30, ----------------------- 1998 1997 ------ ------ Cash flows from operating activities: <S> <C> <C> Net income $ 987 $ 2,077 Reconciliation of net income to cash from operations: Depreciation and amortization 905 815 Changes in certain assets and liabilities, net of assets acquired and liabilities assumed: Trade accounts receivable, net (2,895) (3,185) Note receivable - 324 Prepaid expenses and other (577) (588) Deferred tax asset (195) (194) Accounts payable (448) (80) Accrued payroll, payroll taxes and related benefits 1,579 3,108 Accrued workers' compensation claims liabilities 120 248 Customer safety incentives payable 52 (10) Income taxes payable 48 222 Other accrued liabilities 227 (171) Customer deposits and long-term workers' compensation liabilities 54 44 Other long-term liabilities 90 14 ------ ------ Net cash (used in) provided by operating activities (53) 2,624 ------ ------ Cash flows from investing activities: Cash paid for acquisitions, including other direct costs (Note 2) (680) (2,246) Purchases of fixed assets, net of amounts purchased in acquisitions (616) (644) Proceeds from maturities of marketable securities 3,766 3,782 Purchases of marketable securities (3,528) (4,149) ------ ------ Net cash used in investing activities (1,058) (3,257) ------ ------ Cash flows from financing activities: Payment of credit-line assumed in acquisition - (401) Net (payments on) proceeds from credit-line borrowings (635) 1,907 Payments on long-term debt (266) (43) Payment to dissenting shareholder (519) - Repurchase of common stock - (2,825) Proceeds from exercise of stock options and warrants 168 757 ------ ------ Net cash used in financing activities (1,252) (605) ------ ------ Net decrease in cash and cash equivalents (2,363) (1,238) Cash and cash equivalents, beginning of period 3,439 1,623 ------ ------ Cash and cash equivalents, end of period $ 1,076 $ 385 ====== ====== Supplemental schedule of noncash activities: Acquisition of other businesses: Cost of acquisitions in excess of fair market value of net assets acquired $ 670 $ 3,179 Tangible assets acquired 10 674 Liabilities assumed - 1,607 Common stock issued in connection with acquisitions - - </TABLE> 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 $24.5 million (unaudited). Operating results of Barrett and WIMI, individually, prior to giving effect to the pooling and of the combined companies for the second quarter and six-month periods ended June 30, 1998 were as follows: <TABLE> Second Quarter Ended Six Months Ended ($ in thousands) June 30, 1998 June 30, 1998 --------------- -------------- Barrett: <S> <C> <C> Revenues $ 68,570 $ 131,335 Gross margin 6,966 12,767 Gross margin percent 10.2% 9.7% Net income 935 1,258 WIMI: Revenues 8,081 14,557 Gross margin 1,161 2,134 Gross margin percent 14.4% 14.7% Net income 115 179 Combined: Revenues 76,651 145,892 Gross margin 8,127 14,901 Gross margin percent 10.6% 10.2% Merger expenses, net of income tax benefit of $300 450 450 Net income $ 600 $ 987 </TABLE> 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): <TABLE> June 30, 1998 December 31, 1997 ------------- ----------------- <S> <C> <C> Accrued workers' compensation claims liabilities $1,549 $1,469 Allowance for doubtful accounts 265 236 Tax depreciation in excess of book depreciation (159) (165) Safety incentives 315 276 Book amortization of intangibles in excess of tax amortization 151 110 State unemployment tax accrual 160 160 ----- ----- $2,281 $2,086 ===== ===== </TABLE> 9
The provision for income taxes for the six months ended June 30, 1998 and 1997, is as follows (in thousands): <TABLE> Six Months Six Months Ended Ended June 30, 1998 June 30, 1997 ------------- ------------- Current: <S> <C> <C> Federal $ 765 $ 1,236 State 171 291 ---- ----- 936 1,527 Deferred:` Federal (172) (159) State (23) (35) ---- ----- (195) (194) ---- ----- Provision for income taxes $ 741 $ 1,333 ==== ===== </TABLE> NOTE 5 - STOCK INCENTIVE PLAN: In 1993, the Company adopted a stock incentive plan (the "Plan") which provides for stock-based awards to the Company's employees, directors and outside consultants or advisers. The number of shares of common stock reserved for issuance under the Plan is 1,300,000. 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 ------- 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. <TABLE> Percentage of Total Revenues ------------------------------------------------------ Three Months Ended Six Months Ended June 30, June 30, --------------------- ---------------------- 1998 1997 1998 1997 ---- ---- ---- ---- Revenues: <S> <C> <C> <C> <C> Staffing services 55.8% 57.3% 57.0% 56.2% Professional employer services 44.2 42.7 43.0 43.8 ----- ----- ----- ----- Total revenues 100.0 100.0 100.0 100.0 ----- ----- ----- ----- Cost of revenues: Direct payroll costs 77.4 77.1 77.4 77.0 Payroll taxes and benefits 8.7 9.0 9.0 9.3 Workers' compensation 2.9 2.9 2.9 3.0 Safety incentives 0.4 0.5 0.5 0.4 ----- ----- ----- ----- Total cost of revenues 89.4 89.5 89.8 89.7 ----- ----- ----- ----- Gross margin 10.6 10.5 10.2 10.3 Selling, general and administrative expenses 7.9 7.4 8.1 7.6 Merger expenses 1.0 - 0.5 - Amortization of intangibles 0.4 0.4 0.5 0.4 ----- ----- ----- ----- Income from operations 1.3 2.7 1.1 2.3 Other income (expense) 0.1 - 0.1 0.1 ----- ----- ----- ----- Pretax income 1.4 2.7 1.2 2.4 Provision for income taxes 0.6 1.1 0.5 0.9 ----- ----- ----- ----- Net income 0.8 1.6 0.7 1.5 ===== ===== ===== ===== </TABLE> 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: <TABLE> ABSTENTIONS AND FOR WITHHELD BROKER NON-VOTES --- -------- ---------------- <S> <C> <C> Robert R. Ames 6,497,405 29,922 Herbert L. Hochberg 6,477,905 49,422 Anthony Meeker 6,490,605 36,722 Stanley G. Renecker 6,490,705 36,622 Nancy B. Sherertz 6,347,741 179,586 William W. Sherertz 6,490,291 37,036 </TABLE> The other matter presented for action at the annual meeting was approved by the following vote: <TABLE> ABSTENTIONS AND FOR AGAINST BROKER NON-VOTES --- ------- ---------------- <S> <C> <C> <C> Approval of the 6,518,499 789 8,039 appointment of Price Waterhouse LLP as independent accountants </TABLE> 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