10-Q: Quarterly report pursuant to Section 13 or 15(d)

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 March 31, 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 April 30, 1998
was 6,780,813 shares.


BARRETT BUSINESS SERVICES, INC.

INDEX

Page

Part I - Financial Information

Item 1. Financial Statements

Balance Sheets - March 31, 1998 and
December 31, 1997.........................................3

Statements of Operations - Three Months
Ended March 31, 1998 and 1997.............................4

Statements of Cash Flows - Three Months
Ended March 31, 1998 and 1997.............................5

Notes to Financial Statements.............................6

Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................................9

Part II - Other Information

Item 6. Exhibits and Reports on Form 8-K.........................15

Signatures .........................................................16

Exhibit Index .........................................................17

2
PART I - Financial Information

Item 1. Financial Statements

BARRETT BUSINESS SERVICES, INC.
Balance Sheets
(Unaudited)
(In thousands)

March 31, December 31,
1998 1997
Assets --------- ------------

Current assets:
Cash and cash equivalents $ 3,435 $ 3,380
Trade accounts receivable, net 20,551 19,366
Prepaid expenses and other 1,476 1,080
Deferred tax assets (Note 2) 2,002 1,926
------- -------
Total current assets 27,464 25,752
Intangibles, net 11,753 12,094
Property and equipment, net 4,489 4,263
Restricted marketable securities and
workers' compensation deposits 6,013 6,095
Other assets 200 206
------- -------
$49,919 $48,410
======= =======

Liabilities and Stockholders' Equity

Current liabilities:
Current portion of long-term debt $ 312 $ 323
Income taxes payable (Note 2) 54 --
Accounts payable 846 801
Accrued payroll, payroll taxes and
related benefits 10,505 9,403
Accrued workers' compensation claim
liabilities 3,094 3,140
Customer safety incentives payable 1,070 1,073
Other accrued liabilities 378 399
------- -------
Total current liabilities 16,259 15,139
Long-term debt, net of current portion 520 531
Customer deposits 882 934
Long-term workers' compensation liabilities 728 632
Other long-term liabilities 1,038 1,030
------- -------
19,427 18,266
------- -------
Commitments and contingencies

Stockholders' equity:
Common stock, $.01 par value; 20,500 shares
authorized, 6,747 and 6,743 shares issued
and outstanding, respectively 67 67
Additional paid-in capital 11,710 11,685
Retained earnings 18,715 18,392
------- -------
30,492 30,144
------- -------
$49,919 $48,410
======= =======


The accompanying notes are an integral part of these financial
statements. statements.

3


BARRETT BUSINESS SER INC.SERVICES,
Statements of Operations
(Unaudited)
(In thousands, except per share amounts)


Three Months Ended
March 31,
----------------------
1998 1997
-------- -------

Revenues:
Staffing services $34,511 $32,436
Professional employer services 28,254 29,650
------ ------
62,765 62,086
------ ------
Cost of revenues:
Direct payroll costs 48,926 47,807
Payroll taxes and benefits 5,808 5,997
Workers' compensation 1,866 1,855
Safety incentives 364 323
------ ------
56,964 55,982
------ ------

Gross margin 5,801 6,104

Selling, general and administrative
expenses 5,021 4,515
Amortization of intangibles 341 317
------ ------

Income from operations 439 1,272

Other income (expense):
Interest expense (27) (25)
Interest income 125 103
Other, net 1 --
------ ------
99 78
------ ------

Income before provision for income taxes 538 1,350
Provision for income taxes 215 520
------ ------

Net income $ 323 $ 830
====== ======

Basic earnings per share (Note 4) $ .05 $ .12
====== ======

Weighted average number of basic
shares outstanding 6,744 6,800
====== ======

Diluted earnings per share (Note 4) $ .05 $ .12
====== ======

Weighted average number of diluted
shares outstanding 6,798 6,997
====== ======

The accompanying notes are an integral part of these financial
statements.

4

BARRETT BUSINESS SERVICES, INC.
Statements of Cash Flows
(Unaudited)
(In thousands)
Three Months Ended
March 31,
-------------------
1998 1997
------ -------

Cash flows from operating activities:
Net income $ 323 $ 830
Reconciliation of net income to cash
from operations:
Depreciation and amortization 447 404
Changes in certain assets and liabilities,
net of acquisition:
Trade accounts receivable, net (1,185) (1,734)
Note receivable - 324
Prepaid expenses and other (396) (385)
Deferred tax asset (76) (84)
Accounts payable 45 29
Accrued payroll, payroll taxes and related
benefits 1,102 1,946
Accrued workers' compensation claims
liabilities (46) 183
Customer safety incentives payable (3) 14
Income taxes payable 54 504
Other accrued liabilities and other assets (15) (214)
Customer deposits and long-term workers'
compensation liabilities 44 (4)
Other long-term liabilities 8 5
------ ------
Net cash provided by operating activities 302 1,818
------ ------

Cash flows from investing activities:
Cash paid for acquisition, including other
direct costs - (2,095)
Purchases of fixed assets, net of amounts
purchased in acquisition (332) (106)
Proceeds from maturities of marketable securities 2,839 1,556
Purchases of marketable securities (2,757) (1,548)
------ ------
Net cash used in investing activities (250) (2,193)
------ ------

Cash flows from financing activities:
Payment of credit line assumed in acquisition - (401)
Payments on long-term debt (22) (15)
Proceeds from exercise of stock
options and warrants 25 505
------ ------
Net cash provided by financing activities 3 89
------ ------

Net increase (decrease) in cash and cash equivalents 55 (286)

Cash and cash equivalents, beginning of period 3,380 1,901
------ ------

Cash and cash equivalents, end of period $ 3,435 $ 1,615
====== ======

Supplemental schedule of noncash activities:
Acquisition of other business:
Cost of acquisition in excess of fair market
value of net assets acquired - $ 3,030
Tangible assets acquired - 672
Liabilities issued or assumed - 1,607


The accompanying notes are an integral part of these financial
statements.

5

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 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. 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 - PROVISION FOR INCOME TAXES:

Deferred tax assets (liabilities) are comprised of the following
components (in thousands):

March 31, 1998 December 31, 1997
-------------- -----------------
Accrued workers' compensation claims
liabilities $1,489 $1,469

Allowance for doubtful accounts 236 236

Tax depreciation in excess of book
depreciation (161) (165)

Safety incentives 308 276

Book amortization of intangibles in excess
of tax amortization 130 110
----- -----

$2,002 $1,926
===== =====

6

The provision for income taxes for the three months ended March 31, 1998
and 1997, is as follows (in thousands):

Three Months Three Months
Ended Ended
March 31, 1998 March 31, 1997
-------------- --------------

Current:
Federal $ 235 $ 488
State 56 116
---- ----
291 604
Deferred:
Federal (67) (70)
State (9) (14)
---- ----
(76) (84)
---- ----

Provision for income taxes $ 215 $ 520
==== ====


NOTE 3 - 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 50,331 $ 4.60 to $11.44
Options exercised (3,750) $ 3.50 to $ 9.50
Options canceled or expired (54,071) $ 11.44 to $17.94
-------

Outstanding at March 31, 1998 587,629 $ 3.50 to $18.00
=======

Exercisable at March 31, 1998 276,855
=======

Available for grant at
March 31, 1998 507,496
=======

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 highly compensated 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

7

percent discount from the then-fair market value of the Company's stock and are
fully vested and immediately exerciseable upon grant. The amount of the
grantee's deferred compensation (discount from fair market value) is subject to
market risk. During the first quarter of 1998, the Company awarded deferred
compensation stock options for 7,735 shares at an exercise price of $4.60 per
share.

NOTE 4 - NET INCOME PER SHARE:

The Company adopted Statement of Financial Accounting Standards 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. 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.


NOTE 5 - SUBSEQUENT EVENTS:

Effective April 13, 1998, the Company acquired certain assets of BOLT
Staffing Service, Inc., a provider of staffing services located in Pocatello,
Idaho. BOLT Staffing had revenues of approximately $2.4 million (unaudited) for
the year ended December 31, 1997. The Company paid $675,000 in cash for the
assets, assumed a $6,000 office lease liability and incurred approximately
$10,000 in acquisition related costs. The transaction was accounted for under
the purchase method of accounting, which resulted in $675,000 of intangible
assets and $10,000 of fixed assets.

On April 15, 1998, the Company announced that it had reached an
agreement in principle to acquire Western Industrial Management, Inc., pursuant
to a stock-for-stock merger. The transaction will be accounted for as a
pooling-of-interests. The transaction is valued at approximately $11.1 million
and provides that the Company will issue approximately 975,000 shares of its
common stock in exchange for all the stock of Western. The acquisition is
expected to close on June 1, 1998. Western, a privately-held staffing services
company headquartered in San Bernardino, California, operates six branch offices
in Southern California. Western's revenues for the year ended December 31, 1997
were approximately $24.5 million (unaudited).
8

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 months ended March 31, 1998 and 1997.

Percentage of
Total Revenues
Three Months Ended
March 31,
--------------------

1998 1997
------ -----
Revenues:
Staffing services 55.0% 52.2%
Professional employer services 45.0 47.8
----- -----
Total revenues 100.0 100.0
----- -----

Cost of revenues:
Direct payroll costs 78.0 77.0
Payroll taxes and benefits 9.2 9.7
Workers' compensation 3.0 3.0
Safety incentives .6 .5
----- -----
Total cost of revenues 90.8 90.2
----- -----

Gross margin 9.2 9.8
Selling, general and administrative
expenses 8.0 7.3
Amortization of intangibles .5 .5
----- -----
Income from operations .7 2.0
Other income (expense) .2 .1
----- -----
Pretax income .9 2.1
Provision for income taxes .4 .8
----- -----
Net income .5 1.3
====== ======


Three months ended March 31, 1998 and 1997

Net income for the first quarter of 1998 was $323,000, a decrease of
$507,000 from the same period in 1997. The decrease in net income from 1997 was
attributable to a lower gross margin percent owing primarily to higher direct
payroll costs, expressed as a percentage of revenues, coupled with higher
selling, general and administrative expenses both in terms of a percentage of
revenues and total dollars. Basic and diluted earnings per share for the first
quarter of 1998 were $.05, as compared to $.12 for both basic and diluted
earnings per share for the first quarter of 1997.
9

Revenues for the first quarter of 1998 totaled approximately $62.8
million, an increase of approximately $679,000 or 1.1% over the first quarter of
1997. The quarter-over-quarter internal growth rate of revenues was .5%. The
percentage increase in total revenues exceeded the internal growth rate of
revenues primarily due to the HR Only acquisition effective February 1, 1997.

Staffing services revenue increased approximately $2.1 million or 6.4%,
while professional employer services revenue decreased approximately $1.4
million or 4.7%, which resulted in a decrease in the mix of professional
employer services to 45.0% of total revenues for the first quarter of 1998, as
compared to 47.8% for the first quarter of 1997. The mix of staffing services
had a corresponding increase from 52.2% of total revenues for the first quarter
of 1997 to 55.0% for the first quarter of 1998.

The decrease in PEO revenues was primarily concentrated in Oregon and
was largely due to a culling of customers who were (i) not generating an
acceptable profit, (ii) a poor credit risk, or (iii) not complying with the
Company's workplace safety policies.

Gross margin for the first quarter of 1998 totaled approximately $5.8
million, which represented a decrease of $303,000 or 5.0% from the first quarter
of 1997. The gross margin percent decreased to 9.2% of revenues for the first
quarter of 1998, as compared to 9.8% for the same period of 1997. The decline in
the gross margin percentage was due to higher direct payroll costs, offset in
part by a decrease in payroll taxes and benefits, both in terms of total dollars
and as a percentage of revenues. The increase in the percentage of direct
payroll costs from 77.0% for the first quarter of 1997 to 78.0% for the first
quarter of 1998 was primarily attributable to increased business activity in
contract staffing and on-site management arrangements, which are typically
higher volume, lower margin accounts.

Workers' compensation expense for the first quarter of 1998 totaled
$1,866,000 or 3.0% of revenues which compares to $1,855,000 or 3.0% of revenues
for the same period in 1997. Management believes it has continued to increase
the Company's accruals for future adverse loss development of open claims and
potential future catastrophic workers' compensation claims.

The following table summarizes certain indicators of performance
regarding the Company's self-insured workers' compensation program for the first
quarters of 1998 and 1997.
10


Self-Insured Workers' Compensation Profile

Total Workers'
Total Workers' Comp Expense
No. of Injury Comp Expense as a % of
Claims (in thousands) Total Payroll
-------------- -------------- -------------
1998 1997 1998 1997 1998 1997
---- ---- ---- ---- ---- ----

Q1 289 321 $1,866 $1,855 3.8% 3.9%


Selling, general and administrative expenses for the 1998 first quarter
amounted to approximately $5.0 million, an increase of $506,000 or 11.2% over
the comparable period in 1997. Selling, general and administrative expenses,
expressed as a percentage of revenues, increased from 7.3% for the first quarter
of 1997 to 8.0% for the first quarter of 1998. The increase in total dollars
over 1997 was primarily attributable to higher branch management payroll and
profit sharing and related taxes, coupled with a full quarter of operating
expenses from the HR Only acquisition. During the first quarter of 1998,
management implemented specific performance criteria for all branches to align
operating expenses more closely with growth in gross margin dollars rather than
growth in revenues.

Amortization of intangibles totaled $341,000 or .5% of revenues for the
first quarter of 1998, which compares to $317,000 or .5% of revenues for the
same period in 1997. The increased amortization expense was primarily due to a
full quarter of amortization from the HR Only acquisition, which was effective
February 1, 1997.

The Company offers various qualified employee benefit plans to its
employees, including its worksite employees. These qualified employee benefit
plans include a savings plan (the "401(k) plan") under Section 401(k) of the
Internal Revenue Code (the "Code"), a cafeteria plan under Code Section 125, a
group health plan, a group life insurance plan, a group disability insurance
plan and an employee assistance plan. Generally, qualified employee benefit
plans are subject to provisions of both the Code and the Employee Retirement
Income Security Act ("ERISA"). In order to qualify for favorable tax treatment
under the Code, qualified plans must be established and maintained by an
employer for the exclusive benefit of its employees. In the event the tax exempt
status of the Company's benefit plans were to be discontinued and the benefit
plans were to be disqualified, such actions could have a material adverse effect
on the Company's business, financial condition and results of operations.
Reference is made to pages 19-20 of the Company's 1997 Annual Report on Form
10-K for a more detailed discussion of this issue.
11



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 experience 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 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, as well as adverse loss development of prior period claims during the
current or subsequent quarters.

Liquidity and Capital Resources
- -------------------------------

The Company's cash position of $3,435,000 at March 31, 1998 increased
by $55,000 from December 31, 1997, which compares to a decrease of $286,000 for
the comparable period in 1997. The slight increase in cash at March 31, 1998 as
compared to December 31, 1997, was primarily attributable to cash provided by
operating activities, largely offset by additions to fixed assets.

Net cash provided by operating activities for the three months ended
March 31, 1998 amounted to $302,000, as compared to $1,818,000 for the
comparable 1997 period. For the 1998 period, cash flow generated by net income,
together with an increase of $1,102,000 in accrued payroll and benefits, was
offset in part by a $1,185,000 increase in trade accounts receivable.

Net cash used in investing activities totaled $250,000 for the three
months ended March 31, 1998, as compared to $2,193,000 for the similar 1997
period. For the 1998 period, the principal use of cash for investing activities
was for purchases of fixed assets of $332,000. For the 1997 period, the
principal use of cash for investing activities was the acquisition of HR Only.
The Company presently has no material long-term capital commitments.
12

Net cash provided by financing activities for the three-month period
ended March 31, 1998 was $3,000, which compared to $89,000 for the similar 1997
period. For the 1998 period, the principal source of cash provided by financing
activities arose from the exercise of employee stock options at exercise prices
ranging from $3.50 to $9.50 per share, offset in part by payments totaling
$22,000 on long-term debt.

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 5 to the financial
statements included herein, the Company purchased in April 1998, certain assets
of a staffing services company located in Pocatello, Idaho for $685,000 in cash.
Also as disclosed in Note 5 herein, the Company has reached an agreement in
principle to acquire Western Industrial Management, Inc., a staffing services
company headquartered in San Bernardino, California, in exchange for 975,000
shares of the Company's common stock. The transaction is valued at approximately
$11.1 million and is expected to close on June 1, 1998. The Company actively
explores proposals for various acquisition opportunities on an ongoing basis,
but there can be no assurance that any additional transactions will be
consummated.

The Company presently has an unsecured $4.0 million revolving credit
facility which expires May 31, 1998. There was no outstanding balance at March
31, 1998. Management expects that the renewal of such credit facility will be in
an amount and on such terms and conditions as will be not less favorable than
the current credit arrangement. Management also believes the funds anticipated
to be generated from operations, together with the renewed 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.
13



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 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.
14

Part II - Other Information


Item 6. Exhibits and Reports on Form 8-K

(a) The exhibits filed herewith are listed in the Exhibit Index
following the signature page of this report.

(b) Reports on Form 8-K

Subsequent to quarter end, on April 17, 1998, the Company filed a
Current Report on Form 8-K dated April 13, 1998, to report that
the Company had acquired, effective April 13, 1998, certain assets
of BOLT Staffing Service, Inc., located in Pocatello, Idaho for
$675,000 in cash. The Company also reported that it had reached an
agreement in principle to acquire Western Industrial Management,
Inc., headquartered in San Bernardino, California, in exchange for
approximately 975,000 shares of the Company's common stock. The
transaction, which is valued at approximately $11.1 million, will
be effected as a stock-for-stock merger and will be accounted for
as a pooling-of-interests. The transaction is expected to close on
June 1, 1998.
15


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: May 13, 1998 By: /s/Michael D. Mulholland
-------------------------
Michael D. Mulholland
Vice President-Finance
(Principal Financial Officer)

16

EXHIBIT INDEX

Exhibit
- -------

11 Statement of Calculation of Basic and Diluted Shares Outstanding

27 Financial Data Schedule

17