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Barrett Business Services Inc – ‘424B4’ on 7/28/05

On:  Thursday, 7/28/05, at 8:57pm ET   ·   As of:  7/29/05   ·   Accession #:  1047469-5-20255   ·   File #:  333-126496

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  As Of                Filer                Filing    For·On·As Docs:Size              Issuer               Agent

 7/29/05  Barrett Business Services Inc     424B4                  1:821K                                   Merrill Corp/New/FA

Document/Exhibit                   Description                      Pages   Size 

 1: 424B4       Prospectus                                          HTML    803K 

Filed Pursuant to Rule 424(b)(4)
Registration Nos. 333-126496 and
333-126953

PROSPECTUS

2,139,000 Shares

BARRETT BUSINESS SERVICES, INC.

Common Stock

We are offering 1,864,000 shares of our common stock and the selling stockholders are offering 275,000 shares of our common stock. We will not receive any of the proceeds from the shares of common stock sold by the selling stockholders. Our common stock is quoted on The Nasdaq National Market under the symbol "BBSI." On July 27, 2005, the last reported sale price of our common stock on The Nasdaq National Market was $17.14 per share.

The underwriters may also purchase up to an additional 320,850 shares of our common stock from us at the public offering price, less the underwriting discounts and commissions, within 30 days from the date of this prospectus to cover over-allotments, if any.

Investing in our common stock involves significant risks. See "Risk Factors" beginning on page 6.

The underwriters are offering the shares of common stock on a firm commitment basis. The underwriters expect to deliver the shares on or about August 2, 2005.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The date of this prospectus is July 27, 2005.

TABLE OF CONTENTS

You should rely only on the information contained in this prospectus. Neither we nor the underwriters in this offering have authorized anyone to provide you with information different from that contained in this prospectus. We are offering to sell, and seeking offers to buy, shares of common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of our common stock.

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PROSPECTUS SUMMARY

This summary highlights information contained elsewhere in this prospectus and does not contain all of the information that may be important to you. You should read the entire prospectus carefully, including the "Risk Factors," the documents referred to in "Where You Can Find More Information" and our consolidated financial statements and related notes appearing at the end of this prospectus, before deciding to invest in shares of our common stock.

Barrett Business Services, Inc.

Our Company

We offer a comprehensive range of human resource management services to help small and medium-sized businesses manage the increasing costs and complexities of a broad array of employment-related issues. Our principal services, professional employer organization ("PEO") services and staffing services, assist our clients in leveraging their investment in human capital. We believe that the combination of these two principal services enables us to provide our clients with a unique blend of services not offered by our competition. Our platform of outsourced human resource management services is built upon our expertise in payroll processing, employee benefits and administration, workers' compensation coverage, effective risk management and workplace safety programs and human resource administration.

In a PEO arrangement, we enter into a contract to become a co-employer of the client's existing workforce and we assume responsibility for some or all of the client's human resource management responsibilities. Staffing services include on-demand or short-term staffing assignments, long-term or indefinite-term contract staffing and comprehensive on-site management. Our staffing services also include direct placement services, which involve fee-based search efforts for specific employee candidates at the request of our PEO clients, staffing customers or other companies.

Our ability to offer clients a broad mix of services allows us to effectively become the human resource department and a strategic business partner for our clients. We believe our approach to human resource management services is designed to positively affect our clients' business results by:

•

allowing our clients to focus on core business activities instead of human resource matters;



•

increasing our clients' productivity by improving employee satisfaction and generating greater employee retention;



•

reducing overall payroll expenses due to lower workers' compensation and health insurance costs; and



•

assisting our clients in complying with complex and evolving human resource related regulatory and tax issues.

We serve a growing and diverse client base of small and medium-sized businesses in a wide variety of industries. During the three months ended March 31, 2005, we served approximately 1,000 staffing services customers. In addition, we served approximately 665 PEO clients as of March 31, 2005. We serve our clients, who have employees located in 17 states and the District of Columbia, through a network of 31 branch offices in California, Oregon, Washington, Idaho, Arizona, Maryland, Delaware and North Carolina. We also have several smaller recruiting offices in our general market areas, which are under the direction of a branch office.

Market Opportunity

The human resource outsourcing industry is large and growing rapidly. Some of the key factors driving growth include the desire of businesses to outsource non-core business functions, to reduce regulatory

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compliance risk, to rationalize the number of service providers that they use and to reduce costs by integrating human resource systems and processes.

The outsourcing of business processes represents a growing trend within the United States. By utilizing the expertise of outsourcing service providers, businesses are able to reduce processing costs and administrative burdens while at the same time offering competitive benefits for their employees. The technical capabilities, knowledge and operational expertise that we have built, along with our broad portfolio of services for clients, has enabled us to capitalize on the growing business processing outsourcing trend.

We believe that the small and medium-sized business segment of the human resource outsourcing market is particularly attractive because:

•

this segment is large and has a low penetration rate by providers of outsourced comprehensive human resource services;



•

small and medium-sized businesses typically have fewer in-house resources than larger businesses and, as a result, are generally more dependent on their service providers;



•

quality of service, ease-of-use and responsiveness to clients' needs are key considerations of this business segment in selecting a service provider;



•

small and medium-sized businesses generally do not require customized solutions, enabling service providers to achieve significant economies of scale through an integrated technology and service platform; and



•

this segment is generally characterized by a relatively high client retention rate and lower client acquisition costs.

Our Strategic Approach

Our long-term goal is to become the leading provider of human resource outsourcing services for small and medium-sized businesses. We seek to differentiate our strategic position by offering a full spectrum of PEO and staffing services. We believe that the integrated nature of our service platform assists our clients and customers in successfully aligning and strengthening their organizational structure to meet the demands of their businesses. In pursuit of this goal, we have adopted the operating and growth strategies described below to provide the framework for our future growth, while maintaining the quality and integrity of our current service offerings.

Operating Strategy

•

Provide a broad scope of services. We provide our clients with a broad range of human resource management tools and professional services that address their critical human resource needs. By contrast, we believe that most of our competitors offer discrete services that entail a greater cost in the aggregate and are less efficient for the customer to implement as compared to a single source provider like us.



•

Promote a decentralized and autonomous management philosophy and structure. We hire senior-level managers to oversee, develop and expand our business at the branch office level. We believe that by making significant investments in the best management talent available within their respective areas of expertise, we can leverage the value of this investment many times over.



•

Motivate employees through a competitive compensation package. We offer a very competitive base salary structure at the branch office level and provide the opportunity for our employees to earn additional profit sharing on a quarterly basis.

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•

Control workers' compensation costs through effective risk management. We are committed to the proactive mitigation of workers' compensation risk through stringent underwriting and management processes.

Growth Strategy

•

Support, strengthen and expand branch office operations. We believe that increasing the penetration of our existing markets is an effective and cost-efficient means of growth.



•

Increase client utilization of our services. We believe that we will be able to continue to improve client retention as our clients more fully utilize our current service offering.



•

Enhance management information systems. We are continuing to invest in our information technology platform, which we believe gives us a competitive advantage by allowing us to provide a high level of flexibility in meeting a variety of demands of our small and medium-sized business clients on a cost-effective basis.



•

Penetrate other selected markets. We intend to open additional branch offices in new geographic markets as opportunities arise.



•

Pursue strategic acquisitions. In order to increase our client base, expand our presence in existing markets, enter new markets and broaden our service offerings, we may continue to pursue strategic acquisitions, particularly in the staffing area.

Corporate Information

We were incorporated in Maryland in 1965. Our principal executive offices are located at 4724 S.W. Macadam Avenue, Portland, Oregon 97239. Our telephone number is (503) 220-0988. We maintain our corporate website at www.barrettbusiness.com. The information contained in, or that can be accessed through or on, our website is not a part of this prospectus.

Recent Developments

In our press release announcing our first quarter 2005 earnings, we disclosed limited financial guidance for the second quarter ending June 30, 2005, including management's expectation that gross revenues for the second quarter would range from $172 million to $174 million. Management believes that gross revenues to be disclosed in our earnings release for the second quarter ended June 30, 2005 will be greater than $174 million. Our corresponding total revenues on a net basis are anticipated to equal or exceed $56 million, after subtracting an estimated cost of gross PEO revenues of $118 million. We currently expect to publish our financial results for the 2005 second quarter in early August 2005.

Our financial statements present our PEO revenues on a net basis, which is in accordance with generally accepted accounting principles in the United States ("GAAP"). See "Management's Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations" for an explanation of the change in our reporting of PEO revenues from a gross basis to a net basis in 2002 and why we continue to use and present gross PEO revenues on a non-GAAP basis.

We have submitted a non-binding letter of intent to purchase an office building in the greater Portland metropolitan area for a purchase price of $8.85 million. The letter of intent specifies a 45-day due diligence period following execution of a purchase and sale agreement to be negotiated. If the transaction is completed, it will be funded from liquid assets and we plan to relocate our headquarters to one floor of the building. We believe the building contains approximately 63,000 square feet of usable office space, of which approximately one-half is currently leased by tenants.

See "Special Note Regarding Forward-Looking Statements" for a discussion of risks and uncertainties associated with forward-looking statements in this prospectus, including the foregoing discussion.

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The Offering

Unless we indicate otherwise, all information contained in this prospectus has been adjusted for a 3-for-2 stock split effected on May 19, 2005 as a 50% stock dividend and assumes:

•

8,720,142 shares of our common stock outstanding as of July 1, 2005;



•

no exercise of options to purchase 970,393 shares of our common stock outstanding as of July 1, 2005, with a weighted average exercise price of $5.74 per share;



•

no issuance of 114,677 shares of common stock reserved for future grant and issuance as of July 1, 2005, under our stock-based compensation plans;



•

no exercise by the underwriters of their over-allotment option to purchase up to 320,850 shares of our common stock in the offering; and



•

a public offering price of $16.25 per share.

Unless the context otherwise requires, references in this prospectus to "Barrett," "we," "us" and "our" refer to Barrett Business Services, Inc. and our consolidated subsidiary, BBS I, LLC.

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Summary Consolidated Financial Data

The following table presents our summary consolidated historical financial information. The statement of operations data set forth below for each of the years ended December 31, 2002, 2003 and 2004 are derived from our audited consolidated financial statements included elsewhere in this prospectus. The statement of operations data for the three months ended March 31, 2004 and 2005 and the balance sheet data as of March 31, 2005 are derived from our unaudited consolidated financial statements included elsewhere in this prospectus. In the opinion of management, these unaudited consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of these financial statements. Historical results are not necessarily indicative of the results that may be expected in the future. You should read this information together with the consolidated financial statements and related notes and the information under "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this prospectus.

(1)

All share and per share amounts have been adjusted for a 3-for-2 stock split effected on May 19, 2005 as a 50% stock dividend.

(2)

As adjusted to give effect to the sale of 1,864,000 shares of our common stock by us in this offering at the public offering price of $16.25 per share, less underwriting discounts and commissions, the 0.75% non-accountable expense allowance and estimated offering expenses payable by us.

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RISK FACTORS

An investment in our common stock involves significant risks. You should carefully consider risks described below and the other information included in this prospectus, including our financial statements and related notes, before deciding to purchase our common stock. Our business, financial condition and results of operations could be harmed by any of the following risks. The trading price of our common stock could decline due to any of these risks, and you could lose part or all of your investment.

Risks Related to Our Business

Our workers' compensation loss reserves may be inadequate to cover our ultimate liability for workers' compensation costs.

We maintain reserves to cover our estimated liabilities for our self-insured workers' compensation program. Workers' compensation reserves are established primarily based upon an independent actuarial estimate of the costs of administration and settlement of known and future claims. The determination of these reserves is based upon a number of factors, including current and historical claims activity, claims payment patterns and medical cost trends and developments in existing claims. Accordingly, reserves do not represent an exact calculation of liability. Reserves can be affected by both internal and external events, such as adverse developments on existing claims or changes in medical costs, claims handling procedures, administrative costs, inflation, and legal trends and legislative changes. Reserves are adjusted from time to time to reflect new claims, claim developments, or systemic changes, and such adjustments are reflected in the results of the periods in which the reserves are changed. Because of the uncertainties that surround estimating workers' compensation loss reserves, we cannot be certain that our reserves are adequate. If our reserves are insufficient to cover our actual losses, we would have to increase our reserves and incur charges to our earnings that could be material.

Changes in the market for workers' compensation insurance in the state of California could adversely affect our business.

Our PEO service revenues in California have grown rapidly over the last two years due in large part to difficult market conditions for workers' compensation insurance in California and our status as a state-approved self-insured employer with respect to workers' compensation coverage in that state. Our California operations represented 51% of our total revenues in 2004 and 54% of our total revenues for the three months ended March 31, 2005. Since 2002, California has enacted several legislative reforms in an attempt to address the crisis in its workers' compensation system, and it may attempt additional legislative or regulatory reforms in the future. Any successful legislative reforms or non-governmental changes in market conditions in California could lessen a key advantage we have in that state, leading to a reduction in our new business opportunities and a potential slowing in the growth of our PEO business in California. Any such slowing would adversely affect our results of operations and likely lead to declines in our stock price.

Because we assume the obligation to make wage, tax and regulatory payments in respect of some employees, we are exposed to client credit risks.

We generally assume responsibility for and manage the risks associated with our clients' employee payroll obligations, including liability for payment of salaries and wages (including payroll taxes), as well as group health and retirement benefits. These obligations are fixed, whether or not the client makes payments required by our services agreement, which exposes us to credit risks. We attempt to mitigate this risk by invoicing our staffing customers weekly and our PEO clients at the end of their specific payroll processing cycle. We also carefully monitor the timeliness of our clients' payments and impose strict credit standards on our customers. If we fail to successfully manage our credit risk, our results of operations and financial condition could be materially and adversely affected.

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Our staffing business is vulnerable to economic fluctuations. Companies tend to use fewer temporary employees as economic activity slows, while recruiting employees to fill our customers' needs becomes increasingly difficult during economic booms.

Demand for our staffing services is sensitive to changes in the level of economic activity in the regions in which we do business. As economic activity begins to improve, temporary employees are often added before full time employees are hired as companies cautiously re-enter the labor market. As a result, our revenues derived from staffing services may be highest at the beginning of an economic recovery. During strong economic periods, however, we often experience shortages of qualified employees to meet customer needs. Also, as economic activity begins to slow down, companies often reduce their use of temporary employees before undertaking layoffs of permanent staff, resulting in decreased demand for staffing services. A significant economic downturn, particularly in the Western United States, could have a material adverse effect on our results of operations and financial condition.

If we are determined not to be an "employer" under certain laws and regulations, our clients may stop using our services, and we may be subject to additional liabilities.

We believe that we are an employer of employees provided to our PEO clients on a co-employment basis under the various laws and regulations of the Internal Revenue Service and the U.S. Department of Labor. If we are determined not to be an employer under such laws and regulations and are therefore unable to assume obligations of our clients for employment and other taxes, our clients may be held jointly and severally liable for payment of such taxes. Some clients or prospective clients may view such potential liability as an unacceptable risk, discouraging current clients from continuing a relationship with us or prospective clients from entering into a new relationship with us.

Any determination that we are not an employer for purposes of the Employee Retirement Income Security Act ("ERISA") could adversely affect our cafeteria benefits plan operated under Section 125 of the Internal Revenue Code of 1986, as amended (the "Internal Revenue Code"), and result in liabilities to us under the plan.

We may be exposed to employment-related claims and costs and periodic litigation that could adversely affect our business and results of operations.

We either co-employ employees in connection with our PEO arrangements or place our employees in our customers' workplace in connection with our staffing business. As such, we are subject to a number of risks inherent to our status as an employer, including without limitation:

•

claims of misconduct or negligence on the part of our employees, discrimination or harassment claims against our employees, or claims by our employees of discrimination or harassment by our clients;



•

immigration-related claims;



•

claims relating to violations of wage, hour and other workplace regulations;



•

claims relating to employee benefits, entitlements to employee benefits, or errors in the calculation or administration of such benefits; and



•

possible claims relating to misuse of customer confidential information, misappropriation of assets or other similar claims.

If we experience significant incidents involving any of the above-described risk areas we could face substantial out-of-pocket losses, fines or negative publicity. In addition, such claims may give rise to litigation, which may be time consuming, distracting and costly, and could have a material adverse effect on our business. With respect to claims involving our co-employer relationship with our PEO clients, although our PEO services agreement provides that the client will indemnify us for any liability

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attributable to the conduct of the client or its employees, we may not be able to enforce such contractual indemnification, or the client may not have sufficient assets to satisfy its obligations to us.

Adverse developments in the market for excess workers' compensation insurance could lead to increases in our costs.

We are a state-approved self-insured employer for workers' compensation coverage in California, Oregon, Delaware and Maryland, as well as in Washington for our non-PEO services. To manage our financial exposure in the event of catastrophic injuries or fatalities, we maintain excess workers' compensation insurance with a current per occurrence retention of $1.0 million, which is significantly higher than our $400,000 retention level in effect in 2001. The increased retention amount may result in higher workers' compensation costs with a corresponding negative effect on our results of operations. Changes in the market for excess workers' compensation insurance may lead to limited availability of such coverage, additional increases in our insurance costs or further increases in our self-insured retention, any of which may have a material adverse effect on our financial condition.

We operate in a complex regulatory environment, and failure to comply with applicable laws and regulations could adversely affect our business.

Corporate human resource operations are subject to a broad range of complex and evolving laws and regulations, including those applicable to payroll practices, benefits administration, employment practices and privacy. Because our clients have employees in many states throughout the United States, we must perform our services in compliance with the legal and regulatory requirements of multiple jurisdictions. Some of these laws and regulations may be difficult to ascertain or interpret and may change from time to time. Violation of such laws and regulations could subject us to fines and penalties, damage our reputation, constitute a breach of our client agreements, impair our ability to obtain and renew required licenses, and decrease our profitability or competitiveness. If any of these effects were to occur, our operating results and financial condition could be adversely affected.

Changes in government regulations may result in restrictions or prohibitions applicable to the provision of employment services or the imposition of additional licensing, regulatory or tax requirements.

Our PEO and staffing businesses are heavily regulated in most jurisdictions in which we operate. We cannot assure you that the states in which we conduct or seek to conduct business will not:

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impose additional regulations that prohibit or restrict employment-related businesses like ours;



•

require additional licensing or add restrictions on existing licenses to provide employment-related services; or



•

increase taxes or make changes in the way in which taxes are calculated for providers of employment-related services.

Any changes in applicable laws and regulations may make it more difficult or expensive for us to do business, inhibit expansion of our business, or result in additional expenses that limit our profitability or decrease our ability to attract and retain clients.

We may find it difficult to expand our business into additional states due to varying state regulatory requirements.

Future growth in our operations depends, in part, on our ability to offer our services to prospective clients in new states, which may subject us to different regulatory requirements and standards. In order to operate effectively in a new state, we must obtain all necessary regulatory approvals, adapt our procedures to that state's regulatory requirements and modify our service offerings to adapt to local market conditions. In the event that we expand into additional states, we may not be able to duplicate in other markets the financial performance experienced in our current markets.

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Acquisitions subject us to various risks, including risks relating to selection and pricing of acquisition targets, integration of acquired companies into our business and assumption of unanticipated liabilities.

We have completed 22 acquisitions since 1993 and may use a portion of the proceeds of this offering to pursue additional acquisitions and investment opportunities. We cannot assure you that we will be able to identify or consummate any additional acquisitions on favorable terms or at all. If we do pursue acquisitions, we may not realize the anticipated benefits of such acquisitions. Acquisitions involve many risks, including risks relating to the assumption of unforeseen liabilities of an acquired business, adverse accounting charges resulting from the acquisition, and difficulties in integrating acquired companies into our business, both from a cultural perspective, as well as with respect to personnel and client retention and technological integration. Acquired liabilities may be significant and may adversely affect our financial condition or results of operations. Our inability to successfully integrate acquired businesses may lead to increased costs, failure to generate expected returns, accounting charges, or even a total loss of amounts invested, any of which could have a material adverse effect on our financial condition and results of operations.

Our business is subject to risks associated with geographic market concentration.

While we currently have 31 branch offices in eight states, our California and Oregon operations accounted for approximately 51% and 21%, respectively, of our total revenues in 2004. For the first three months of 2005, our California and Oregon operations accounted for 75% of our total revenues, with 54% of our total revenues derived from California operations and 21% from Oregon operations. As a result of the current importance of our California and Oregon operations and anticipated continued growth from these operations, our profitability over the next several years is expected to be largely dependent on economic and regulatory conditions in these markets, particularly in California. If these states experience an economic downturn or growth rates slow, or if the regulatory environment changes in a way that adversely affects our ability to do business in these states or limits our competitive advantages in these markets, our profitability and growth prospects may be materially and adversely affected.

We face competition from a number of other companies.

We face competition from various companies that may provide all or some of the services we offer. Our competitors include companies that are engaged in staffing services such as Kelly Services, Inc. and Manpower Inc., companies that are focused on co-employment, such as Administaff, Inc. and Gevity HR, Inc., and companies that primarily provide payroll processing services, such as Automatic Data Processing, Inc. and Paychex, Inc. We also face competition from information technology outsourcing firms and broad-based outsourcing and consulting firms that perform individual projects.

Several of our existing or potential competitors have substantially greater financial, technical and marketing resources than we do, which may enable them to:

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develop and expand their infrastructure and service offerings more quickly and achieve greater cost efficiencies;



•

invest in new technologies;



•

expand operations into new markets more rapidly;



•

devote greater resources to marketing;



•

compete for acquisitions more effectively and complete acquisitions more easily; and



•

aggressively price products and services and increase benefits in ways that we may not be able to match economically.

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In order to compete effectively in our markets, we must target our potential clients carefully, continue to improve our efficiencies and the scope and quality of our services, and rely on our service quality, innovation, education and program clarity. If our competitive advantages are not compelling or sustainable, then we are unlikely to increase or sustain profits and our stock price could decline.

We are dependent upon certain key personnel and recruitment and retention of key employees may be difficult and expensive.

We believe that the successful operation of our business is dependent upon our retention of the services of key personnel, including our chief executive officer, other executive officers and branch managers. We may not be able to retain all of our executives, senior managers and key personnel in light of competition for their services. If we lose the services of one of our executive officers or a significant number of our senior managers, our operations and profitability likely would be adversely affected.

We do not have an expansive in-house sales staff and therefore rely extensively on brokers to make referrals.

We maintain only a minimal internal professional sales force. Instead, we rely heavily on insurance brokers to provide referrals to new business, especially in California, although each branch office manager is expected to be an effective leader in business development, including marketing efforts and sales closures. In connection with these arrangements, we pay a fee to brokers for new clients. As a result of our reliance on brokers, we are dependent on firms and individuals that do not have an exclusive relationship with us. If we are unable to maintain our relationships with brokers, if brokers increase their fees or if brokers lose confidence in our services, we could face declines in our business and additional costs and uncertainties as we attempt to hire and train an internal sales force.

We depend on attracting and retaining qualified employees; during periods of economic growth our costs to do so increase and it becomes more difficult to attract and retain people.

The success of our staffing services depends on our ability to attract and retain qualified employees for placement with our customers. Our ability to attract and retain qualified personnel could be impaired by rapid improvement in economic conditions resulting in lower unemployment and increases in compensation. During periods of economic growth, we face growing competition for retaining and recruiting qualified personnel, which in turn leads to greater advertising and recruiting costs and increased salary expenses. If we cannot attract and retain qualified employees, the quality of our services may deteriorate and our reputation and results of operations could be adversely affected.

Our service agreements may be terminated on short notice, leaving us vulnerable to loss of a significant amount of customers in a short period of time if business or regulatory conditions change or events occur that negatively affect our reputation.

Our PEO services agreements are generally terminable on 30 days notice by either us or the client. As a result, our clients may terminate their agreement with us at any time, making us particularly vulnerable to changing business or regulatory conditions or changes affecting our reputation or the reputation of our industry.

Our industry has at times received negative publicity and had some stigma associated with it that, if it were to predominate, could cause our business to decline.

Both PEOs and staffing services companies periodically have been tarnished by bad publicity or scandals from bad business judgment or even outright fraud. If we or our industry face negative publicity, customers' attitudes towards the use of temporary personnel or co-employed workers may worsen, and they may be unwilling to enter into or continue our staffing or co-employment relationships. If a negative perception were to prevail, it would be more difficult for us to attract and retain customers.

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Changes in state unemployment tax laws and regulations could adversely affect our business.

Recently, there has been significant negative publicity relating to the use of staffing or PEO companies to shield employers from poor unemployment history and high unemployment taxes. New legislation enacted at the state or federal level to try to counter this perceived problem could have a material adverse effect on our business by limiting our ability to market our services or making our services less attractive to our customers and potential customers.

We are dependent upon technology services and if we experience damage, service interruptions or failures in our computer and telecommunications systems, or if our security measures are breached, our client relationships and our ability to attract new clients may be adversely affected.

Our business could be interrupted by damage to or disruption of our computer and telecommunications equipment and software systems, and we may lose data. Our clients' businesses may be adversely affected by any system or equipment failure we experience. As a result of any of the foregoing, our relationships with our clients may be impaired, we may lose clients, our ability to attract new clients may be adversely affected and we could be exposed to contractual liability. Precautions in place to protect ourselves from, or minimize the effect of, such events, may not be adequate.

In addition, our business involves the storage and transmission of clients' proprietary information and security breaches could expose us to a risk of loss of this information, litigation and possible liability. If our security measures are breached as a result of third-party action, employee error, malfeasance or otherwise, and, as a result, someone obtains unauthorized access to client data, our reputation will be damaged, our business may suffer and we could incur significant liability. Techniques used to obtain unauthorized access or to sabotage systems change frequently and are growing increasingly sophisticated. As a result, we may be unable to anticipate these techniques or to implement adequate preventative measures. If an actual or perceived breach of our security occurs, we could be liable and the market perception of our services could be harmed.

The compliance costs associated with Section 404 of the Sarbanes-Oxley Act regarding internal control over financial reporting could be substantial, while failure to achieve and maintain compliance could have an adverse effect on our stock price.

Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 and current SEC regulations, beginning with our Annual Report on Form 10-K for the fiscal year ending December 31, 2006, we will be required to furnish a report by our management on our internal control over financial reporting. Such report will contain, among other matters, an assessment of the effectiveness of our internal control over financial reporting as of the end of 2006. We are just beginning the process of documenting and testing our internal control procedures in order to satisfy these requirements, which is likely to result in increased general and administrative expenses and may shift management time and attention from revenue-generating activities to compliance activities. Also, during the course of our internal control testing, we may identify deficiencies which we may not be able to remediate in time to meet the reporting deadline under Section 404. Failure to achieve and maintain an effective internal control environment or complete our Section 404 certifications could have a material adverse effect on our stock price.

Risks Related to Our Common Stock

Future sales of a substantial amount of our common stock may cause our stock price to decline.

Upon completing this offering, we will have approximately 10.6 million shares of common stock outstanding. Our directors and executive officers will own approximately 4.2 million of these shares, or approximately 40.1% of outstanding shares, including 2.7 million shares and 1.5 million shares owned by William Sherertz and Nancy Sherertz, respectively, following their sale of a small portion of their shares in this offering. These stockholders will be free to sell those shares, subject to a 180-day lock-up

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in the case of Mr. Sherertz and Ms. Sherertz and a 90-day lock-up for all other officers and directors. We cannot predict when any of these stockholders may sell their shares or in what volumes, although we do know that Nancy Sherertz has been an active seller of shares to diversify her assets. The market price of our common stock could decline significantly if any of these stockholders were to sell a large number of shares into the public market or if the market believes that these sales may occur.

Limited trading volume of our common stock may contribute to our price volatility.

For the first six months of 2005, the average daily trading volume for our common stock as reported by The Nasdaq National Market was approximately 35,000 shares. Even if we achieve a wider dissemination of our common stock as a result of this offering, we do not expect that a significantly more active trading market in our common stock will develop. As a result, relatively small trades may have a significant effect on the price of our common stock and stockholders may have difficulty liquidating their investments in our shares.

Our stock price has been and may continue to be volatile.

The market price of our common stock has been, and is likely to continue to be, very volatile. Since July 1, 2004, the market price for our common stock has been as low as $8.66 per share and as high as $18.72 per share. Additionally, the stock market in general has been highly volatile. The volatility in our stock price may result in substantial losses for investors.

We are controlled by our President and Chief Executive Officer, who could have the ability to exert significant influence over matters that might not be favored by other stockholders.

As of July 1, 2005, our President and Chief Executive Officer, William W. Sherertz, beneficially owned or had the right to vote shares representing approximately 33.5% of the outstanding voting power of our capital stock. Our directors and executive officers, as a group, beneficially own or have the right to vote shares representing approximately 54.8% of the outstanding voting power of our capital stock, including 19.7% owned by Nancy Sherertz. As a result, Mr. Sherertz or, if they should decide to act together, Mr. Sherertz and Ms. Sherertz, or our directors and officers as a group, will be able to exercise significant influence over the outcome of any matters submitted to our stockholders for approval, including the election of directors and the authorization of other corporate actions requiring stockholder approval.

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus and certain documents incorporated by reference into this prospectus contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and include, without limitation, statements regarding future results of operations, discussion of economic conditions in our market areas and effect on revenue growth, the potential for and effect of past and future acquisitions, the effect of changes in our mix of services on gross margin, the adequacy of our workers' compensation reserves and allowance for doubtful accounts, the effectiveness of our management information systems and disclosure controls and internal control, and the availability of financing and working capital to meet our funding requirements. In some cases, you can identify forward-looking statements by terms such as "may," "intend," "anticipate," "might," "will," "should," "could," "would," "expect," "believe," "estimate," "predict," "potential" and similar expressions intended to identify forward-looking statements. These statements reflect our current views with respect to future events and are based on management's beliefs and assumptions only as of the date of this prospectus and are subject to risks and uncertainties. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors with respect to our business include factors listed in "Risk Factors" in this prospectus and risks discussed elsewhere in the text of this prospectus and other documents incorporated by reference into this prospectus, as well as risks relating to:

•

material deviations from expected future workers' compensation claims experience and the cost development trends of such claims;



•

regulatory changes, particularly in California, that could decrease the attractiveness of our services to existing or potential customers;



•

economic trends in our service areas;



•

potential difficulties associated with integrating acquired businesses and clients into our operations and other unanticipated consequences of acquisitions;



•

collectibility of accounts receivable; and



•

the availability of and costs associated with potential sources of financing.

Except as required by law, we assume no obligation to update any forward-looking statements, even if new information becomes available to us in the future.

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USE OF PROCEEDS

We estimate that we will receive net proceeds from the sale of shares of our common stock in this offering of approximately $28.2 million, after deducting underwriting discounts and commissions of approximately $1.5 million, the 0.75% non-accountable expense allowance of $260,690 and estimated offering expenses of $358,000. If the underwriters exercise their over-allotment option in full, we estimate that the net proceeds to us will be approximately $33.1 million. We will not receive any proceeds from the sale of shares of our common stock by the selling stockholders.

We intend to use the net proceeds from this offering for general corporate purposes, including working capital and potential future acquisitions or investments in complementary businesses. We currently have no commitments with respect to any such acquisitions or investments. Proceeds will also strengthen our balance sheet for purposes of our qualification as a self-insured workers' compensation provider in the five states in which we are a state-approved self-insured employer. Pending use of the net proceeds of this offering, we intend to invest net proceeds of this offering in short-term, interest-bearing investments.

MARKET PRICE RANGE FOR OUR COMMON STOCK

Our common stock is listed under the symbol "BBSI" on The Nasdaq National Market. The following table sets forth for the periods indicated the per share range of high and low sales prices for our common stock on The Nasdaq National Market. All share prices below have been adjusted for a 3-for-2 stock split effected on May 19, 2005 as a 50% stock dividend.

On July 27, 2005, the last reported sale price of our common stock on The Nasdaq National Market was $17.14 per share. As of July 1, 2005, we had 55 holders of record of our common stock.

DIVIDEND POLICY

We have not declared or paid any cash dividends since the closing of our initial public offering of common stock in June 1993, and do not anticipate declaring or paying any cash dividends in the foreseeable future. Any future determination relating to dividend policy will be made at the discretion of our board of directors and will depend on a number of factors, including our future earnings, capital requirements, financial condition, future prospects and other factors as our board of directors may deem relevant.

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CAPITALIZATION

The following table sets forth our capitalization as of March 31, 2005:

•

on an actual basis; and



•

on an as-adjusted basis to give effect to the completion of this offering as if it had been completed on March 31, 2005.

You should read the foregoing table together with "Use of Proceeds," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our audited and unaudited consolidated financial statements and the related notes and the other financial information included elsewhere in this prospectus.

Our capitalization information set forth above gives effect to a 3-for-2 stock split effected on May 19, 2005 as a 50% stock dividend and assumes:

•

no exercise of outstanding options to purchase 970,393 shares of our common stock outstanding as of July 1, 2005, with a weighted average exercise price of $5.74 per share;



•

no issuance of 114,677 shares of common stock reserved for future grant and issuance as of July 1, 2005, under our stock-based compensation plans;



•

no exercise by the underwriters of their over-allotment option to purchase up to 320,850 shares of our common stock in this offering; and



•

a public offering price of $16.25 per share.

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SELECTED CONSOLIDATED FINANCIAL INFORMATION

The following tables set forth our selected historical consolidated financial data. The statement of operations data set forth below for each of the years ended December 31, 2002, 2003 and 2004 and the balance sheet data as of December 31, 2003 and 2004, are derived from our audited consolidated financial statements included elsewhere in this prospectus, which financial statements have been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as indicated in their report included elsewhere in this prospectus. The statement of operations data for the years ended December 31, 2000 and 2001, and the balance sheet data as of December 31, 2000, 2001 and 2002 has been derived from audited consolidated financial statements not included in this prospectus. The statement of operations data for the three months ended March 31, 2004 and 2005 and the balance sheet data as of March 31, 2005, has been derived from our unaudited consolidated financial statements included elsewhere in this prospectus. In the opinion of our management, these unaudited consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of these financial statements. It is important that you read this selected consolidated financial data with the consolidated financial statements and related notes to the consolidated financial statements and "Management's Discussion and Analysis of Financial Condition and Results of Operations" appearing elsewhere in this prospectus. Historical results are not necessarily indicative of the results that may be expected in the future.

(1)

All share and per share amounts have been adjusted for a 3-for-2 stock split effected on May 19, 2005 as a 50% stock dividend.

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes, which are included elsewhere in this prospectus. This discussion contains forward-looking statements that involve risks and uncertainties and are based on assumptions known to us at this time. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of certain factors discussed in "Risk Factors" and elsewhere in this prospectus.

Overview

We provide human resource management services, comprised of staffing services and PEO services. We generate staffing services revenues primarily from short-term staffing, contract staffing, on-site management and direct placement services. Our PEO service fees are generated from contractual agreements with our PEO clients under which we become a co-employer of our client's workforce with responsibility for some or all of the client's human resource functions. We recognize revenues from our staffing services for all amounts invoiced, including direct payroll, employer payroll-related taxes, workers' compensation coverage and a service fee (equivalent to a mark-up percentage). PEO service fee revenues are recognized on a net basis in accordance with Emerging Issues Task Force No. 99-19, "Reporting Revenues Gross as a Principal Versus Net as an Agent" ("EITF No. 99-19"). As such, our PEO service fee revenues represent the gross margin generated from our PEO services after deducting the amounts invoiced to PEO customers for direct payroll expenses such as salaries, wages, health insurance and employee out-of-pocket expenses incurred incidental to employment. These amounts are also excluded from cost of revenues. PEO service fees also include amounts invoiced to our clients for employer payroll-related taxes and workers' compensation coverage.

Through centralized operations at our headquarters in Portland, Oregon, we prepare invoices weekly for our staffing services customers and following the end of each payroll processing cycle for PEO clients. We invoice our customers and clients as each payroll is processed. Payment terms for staffing customers are generally 30 days, while PEO clients' invoices are generally due on the invoice date.

Our business is concentrated in California and Oregon and we expect to continue to derive a majority of our revenues from these markets in the future. Revenues generated in our California and Oregon offices accounted for 78% of our total revenues in 2003, 72% in 2004 and 75% in the first three months of 2005. Consequently, any weakness in economic conditions or changes in the regulatory environments in these regions could have a material adverse effect on our financial results.

We offer cash safety incentives to certain PEO clients for maintaining safe-work practices in order to minimize workplace injuries. The cash incentive is based on a percentage of annual payroll and is paid annually to customers who meet predetermined workers' compensation claims cost objectives. Safety incentive payments are made only after closure of all workers' compensation claims incurred during the customer's contract period. The safety incentive expense is also netted against PEO revenues on our statements of operations.

Our cost of revenues is comprised of direct payroll costs for staffing services, employer payroll-related taxes and employee benefits and workers' compensation. Direct payroll costs represent the gross payroll earned by staffing services employees based on salary or hourly wages. Payroll taxes and employee benefits consist of the employer's portion of Social Security and Medicare taxes, federal unemployment taxes, state unemployment taxes and staffing services employee reimbursements for materials, supplies and other expenses, which are paid by the customer. Workers' compensation expense consists primarily of the costs associated with our self-insured workers' compensation program, such as claims reserves, claims administration fees, legal fees, state administrative agency fees and excess insurance costs for

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catastrophic injuries. We also maintain separate workers' compensation insurance policies for employees working in states where we are not self-insured.

The largest portion of workers' compensation expense is the cost of workplace injury claims. When an injury occurs and is reported to us, our respective independent third-party claims administrator ("TPA") analyzes the details of the injury and develops a case reserve, which is the TPA's estimate of the cost of the claim based on similar injuries and its professional judgment. We then record or accrue an expense and a corresponding liability based upon the TPA's estimates for claims reserves. As cash payments are made by our TPA against specific case reserves, the accrued liability is reduced by the corresponding payment amount. The TPA also reviews existing injury claims on an on-going basis and adjusts the case reserves as new or additional information for each claim becomes available. We have established an additional reserve for both future unanticipated increases in costs ("adverse loss development") of the claims reserves for open claims and for claims incurred but not reported related to prior and current periods. We believe our operational policies and internal claims reporting system help to limit the occurrence of unreported incurred claims.

Selling, general and administrative expenses represent both branch office and corporate-level operating expenses. Branch operating expenses consist primarily of branch office staff payroll and personnel related costs, advertising, rent, office supplies, depreciation and branch incentive compensation. Corporate-level operating expenses consist primarily of executive and office staff payroll and personnel related costs, professional and legal fees, travel, depreciation, occupancy costs, information systems costs and executive and corporate staff incentive compensation.

Amortization of intangible assets consists of the amortization of software costs, and covenants not to compete, which are amortized using the straight-line method over their estimated useful lives, which range from two to ten years.

Critical Accounting Policies

We have identified the following policies as critical to our business and the understanding of our results of operations. For a detailed discussion of the application of these and other accounting policies, see Note 1 in the Notes to Consolidated Financial Statements included elsewhere in this prospectus.

Self-Insured Workers' Compensation Reserves

We are self-insured for workers' compensation coverage in a majority of our employee work sites. Accruals for workers' compensation expense are made based upon our claims experience and an annual independent actuarial analysis, utilizing past experience, as well as claim cost development trends and current workers' compensation industry loss information. As such, a majority of our recorded expense for workers' compensation is management's best estimate after reviewing our annual independent actuarial analysis and evaluating subsequent claims development. We believe the amount accrued is adequate to cover all known and unreported claims at March 31, 2005. However, if the actual costs of such claims and related expenses exceed the amount estimated, additional reserves may be required, which could have a material adverse effect on our operating results.

Allowance for Doubtful Accounts

We are required to make estimates of the collectibility of accounts receivables. Management analyzes historical bad debts, customer concentrations, customer creditworthiness, current economic trends and changes in the customers' payment tendencies when evaluating the adequacy of the allowance for doubtful accounts. If the financial condition of our customers deteriorates, resulting in an impairment of their ability to make payments, additional allowances may be required.

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Intangible Assets and Goodwill

We assess the recoverability of intangible assets and goodwill annually and whenever events or changes in circumstances indicate that the carrying value might be impaired. Factors that are considered include significant underperformance relative to expected historical or projected future operating results, significant negative industry trends and significant change in the manner of use of the acquired assets. Management's current assessment of the carrying value of intangible assets and goodwill indicates there was no impairment as of March 31, 2005. If these estimates or their related assumptions change in the future, we may be required to record impairment charges for these assets.

Results of Operations

The following table sets forth the percentages of total revenues represented by selected items in our statements of operations for the years ended December 31, 2002, 2003 and 2004, and for the three months ended March 31, 2004 and 2005.

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We changed our reporting of PEO revenues from a gross basis to a net basis in 2002 because it was determined in accordance with the requirements of EITF No. 99-19 that we were not the primary obligor for the services provided by our PEO clients to their customers pursuant to our PEO contracts. We present for comparison purposes the gross revenues and cost of revenues information for the years ended December 31, 2002, 2003 and 2004 and for the three months ended March 31, 2004 and 2005, set forth in the table below, although not in accordance with generally accepted accounting principles in the United States ("GAAP"). Management believes this information is more informative as to the level of our business activity and more illustrative of how we manage our operations, including the preparation of our internal operating forecasts, because it presents our PEO services on a basis comparable to our staffing services.

A reconciliation of non-GAAP gross PEO revenues to GAAP net PEO revenues is as follows for the years ended December 31, 2002, 2003 and 2004 (in thousands):

A reconciliation of non-GAAP gross PEO revenues to GAAP net PEO revenues is as follows for the three months ended March 31, 2004 and 2005 (in thousands):

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Three Months Ended March 31, 2005 and 2004

Net income for the first quarter of 2005 amounted to $931,000, an improvement of $325,000 or 53.6% over net income of $606,000 for the first quarter of 2004. The improvement for the first quarter of 2005 was primarily due to higher gross margin dollars as a result of significant growth in our PEO services business, partially offset by higher selling, general and administrative expenses. Diluted earnings per share for the first quarter of 2005 was $0.10 compared to $0.07 for the comparable 2004 period. Our improved operating results continue to reflect, in part, growing market acceptance of the business process outsourcing model, market share gains owing to strong branch-level management and to the competitive advantage of offering a broad array of human resource management services through our PEO arrangements. We expect this favorable trend to continue for at least the next 12 months, particularly in California, principally due to business opportunities available to us as a qualified self-insured employer for workers' compensation coverage resulting from ongoing adverse conditions in the workers' compensation insurance market in that state.

Revenues for the first quarter of 2005 were $49.2 million, an increase of approximately $8.6 million or 21.2% over the same period of 2004. These figures again reflect significant growth in our PEO service fee revenue, combined with a smaller increase in staffing services revenue.

PEO service fee revenue increased approximately $5.1 million or 33.1% primarily due to market acceptance of the business process outsourcing model, market share gains owing to strong branch-level management and to increased demand for our broad array of competitively-priced human resource management services that satisfy customers' needs. At March 31, 2005, we had approximately 665 PEO clients as compared to approximately 515 PEO clients at March 31, 2004. Staffing services revenue increased approximately $3.5 million or 13.9% over the comparable 2004 quarter primarily due to improved economic conditions in the majority of areas in which we do business. During the three months ended March 31, 2005, we served approximately 1,000 staffing services customers, which compares to approximately 1,100 customers during the comparable period of 2004. Although the number of customers declined in the 2005 period as compared to the comparable period of 2004, the increase in staffing services revenues reflects increased business activity with certain customers owing to their size of operation, as well as with customers whose demand for our services increased. We expect demand for staffing services will continue to reflect overall economic conditions in our target markets.

Gross margin for the first quarter of 2005 totaled approximately $7.6 million, which represented an increase of $877,000 or 13.0% over the first quarter of 2004, primarily due to the 21.2% increase in revenues. The gross margin percent decreased from 16.6% of revenues for the first quarter of 2004 to 15.4% for the first quarter of 2005. The decrease in the gross margin percentage was primarily due to higher payroll taxes and benefits and slightly higher workers' compensation expense, offset in part by lower direct payroll costs, all expressed as a percentage of total revenues. The increase in payroll taxes and benefits as a percentage of total revenues from 28.4% for the first quarter of 2004 to 31.9% for the first quarter of 2005 was largely due to the effect of significant growth in PEO services and to slightly higher statutory state unemployment tax rates in various states in which we operate. Workers' compensation expense for the first quarter of 2005 totaled $4.9 million, which compares to $4.0 million for the first quarter of 2004. The increase in workers' compensation expense was generally due to an increased provision for the future estimated costs of existing claims, as well as to the effect of increased business activity in California, where injury claims are more costly as compared to other states in which we operate. The decline in direct payroll costs as a percentage of total revenues from 45.1% for the first quarter of 2004 to 42.7% for the first quarter of 2005 reflects the shift from staffing services to PEO services in the relative mix of services to our customer base and the effect of each customer's unique mark-up percent.

Selling, general and administrative expenses for the first quarter of 2005 amounted to approximately $5.9 million, an increase of $414,000 or 7.5% over the first quarter of 2004. The increase over the first quarter of 2004 was primarily attributable to increases in branch management personnel and related

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expenses as a result of growth in our PEO business. Selling, general and administrative expenses as a percentage of total revenues declined from 13.6% in the first quarter of 2004 to 12.0% in the first quarter of 2005.

Years Ended December 31, 2004 and 2003

Net income for the year ended December 31, 2004 was $7.4 million, an improvement of $5.3 million over net income of $2.1 million for 2003. The improvement in net income was primarily attributable to higher gross margin dollars as a result of significant growth in PEO services business, offset in part by an increase in selling, general and administrative expenses to support the increase in business activity. Basic income per share for 2004 was $0.86 and diluted income per share for 2004 was $0.79 as compared to basic and diluted income per share of $0.24 for 2003. Our improved operating results continued to reflect, in part, market acceptance of the business process outsourcing model, market share gains owing to strong branch-level management and to the competitive advantage of offering a broad array of human resource management services through our PEO arrangements that has enabled us to significantly increase our business opportunities in California.

Revenues for 2004 totaled $195.0 million, an increase of approximately $72.2 million or 58.9% over 2003 revenues of $122.7 million. The increase in total revenues was due primarily to the significant growth in our PEO service fee revenue in California due in part to the competitive advantages available to us as a result of adverse conditions in the workers' compensation insurance market in that state, combined with an increase in staffing services revenue.

PEO service fee revenue increased $42.3 million or 144.9%, while staffing services revenue increased $30.0 million or 32.0%, which resulted in an increase in the share of PEO service fee revenue to 36.6% of total revenues for 2004, as compared to 23.8% for 2003. The increase in PEO service fee revenue for 2004 was primarily due to market acceptance of the business process outsourcing model, market share gains owing to strong branch-level management and to increased demand for our services, particularly in California. At December 31, 2004, we had approximately 600 PEO clients as compared to approximately 500 PEO clients at December 31, 2003. The increase in staffing services revenue for 2004 was primarily due to our acquisition of certain assets of Skills Resource Training Center ("SRTC"), a staffing services company with nine offices in Central Washington, Eastern Oregon and Southern Idaho, effective January 1, 2004. Operations of SRTC accounted for approximately $25.6 million or 85.3% of the increase in staffing services revenue. During 2004, we served approximately 2,000 staffing services customers as compared to 2,100 customers during 2003. Although the number of customers declined in 2004 as compared to 2003, the increase in staffing services revenues reflects increased business activity with certain customers owing to their size of operation, as well as with customers whose demand for our services increased. Management expects demand for our staffing services will continue to reflect overall economic conditions in our market areas. Staffing services revenues decreased to 63.4% of total revenues for 2004 as compared to 76.2% for 2003.

Gross margin for 2004 totaled $36.7 million, which represented an increase of $15.7 million or 74.6% over 2003. The gross margin percentage increased from 17.1% of total revenues for 2003 to 18.8% for 2004. The increase in the gross margin percentage was due to lower direct payroll costs, offset in part by higher payroll taxes and benefit costs and higher workers' compensation costs, as a percentage of total revenues. The decrease in direct payroll costs as a percentage of total revenues from 56.3% for 2003 to 46.8% for 2004 primarily reflects the shift in relative mix of services to our customer base from staffing to PEO services and to the effect of each customer's unique mark-up percent. The increase in payroll taxes and benefits as a percentage of total revenues from 18.7% for 2003 to 23.4% for 2004 was primarily attributable to higher statutory state unemployment tax rates in various states in which we operate, as well as to the effect of significant growth in PEO services. Workers' compensation expense for 2004 totaled $21.6 million, which compares to $9.7 million for 2003. The increase in workers' compensation expense was generally due to increased business activity, particularly in California, where injury claims are more costly as compared to other states in which we operate, as well as to an

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increased provision for the future estimated costs of existing claims. We expect gross margin as a percentage of total revenues to continue to be influenced by fluctuations in the mix between staffing and PEO services, including the mix within the staffing segment, as well as the adequacy of our estimates for workers' compensation liabilities.

In connection with our self-insured workers' compensation program, we have maintained an excess workers' compensation policy that limits the financial effect of costly workers' compensation claims. For 2002, such policies included a self-insured retention or deductible of $750,000 per occurrence. Effective January 1, 2004, the self-insured retention or deductible increased to $1.0 million per occurrence and remained as such for the January 1, 2005 renewal, with the premium cost per $100 of payroll also remaining unchanged. Management believes that we obtained the most favorable terms and conditions available given current market conditions.

Selling, general and administrative expenses consist of compensation and other expenses incident to the operation of our headquarters and our branch offices and the marketing of our services. Selling, general and administrative expenses for 2004 amounted to $23.8 million, an increase of $7.0 million or 41.8% over $16.8 million in 2003. Selling, general and administrative expenses expressed as a percentage of total revenues declined from 13.7% for 2003 to 12.2% for 2004. The increase in selling, general and administrative dollars was primarily due to increases in branch management personnel and related expenses as a result of the growth in our PEO business and, to a lesser extent, the incremental selling, general and administrative expenses associated with the SRTC acquisition.

Depreciation and amortization totaled $1.0 million for 2004, which compares to $1.1 million for 2003. The depreciation and amortization expense level remained relatively comparable to 2003 amounts due to our current low level of capital expenditures.

Our effective income tax rate for 2004 was 39.8%, as compared to 29.9% for 2003. The higher 2004 effective rate was primarily attributable to a higher federal tax rate as a result of higher taxable income, a higher weighted-average state tax rate due to increased taxable income in California and a lower relative effect of tax credits due to higher taxable income.

At December 31, 2004, we had net deferred income tax assets of $4.7 million primarily reflecting temporary differences between taxable income for financial accounting and tax purposes, which will reduce taxable income in future years. Pursuant to GAAP, we are required to assess the realization of the deferred income tax assets as significant changes in circumstances may require adjustments during future periods. Although realization is not assured, management has concluded that it is more likely than not that the remaining net deferred income tax assets will be realized, principally based upon projected taxable income for the next two years. The amount of the net deferred income tax assets actually realized could vary, if there are differences in the timing or amount of future reversals of existing deferred income tax assets or changes in the actual amounts of future taxable income as compared to operating forecasts. If our operating forecast is determined to no longer be reliable due to uncertain market conditions, our long-term forecast may require reassessment. As a result, in the future, a valuation allowance may be required to be established for all or a portion of the net deferred income tax assets. Such a valuation allowance could have a significant effect on our future results of operations and financial position.

Years Ended December 31, 2003 and 2002

Net income for the year ended December 31, 2003 was $2.1 million, an improvement of $3.5 million over the net loss of $1.4 million for 2002. The improvement in net income was primarily attributable to higher gross margin dollars, primarily due to a 12.3% increase in revenues, offset in part by an increase in selling, general and administrative expenses to support the increase in business activity. Basic and diluted income per share for 2003 were $0.24, as compared to basic and diluted loss per share of $0.15 for 2002.

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Total revenues for 2003 were $122.7 million, an increase of approximately $13.4 million or 12.3% over total revenues of $109.3 million in 2002. The increase in total revenues was due primarily to the significant growth in our PEO service fee revenue in California, partially offset by a small decline in staffing services revenue.

PEO service fee revenue increased $16.6 million or 132.3% while staffing services revenue decreased $3.2 million or 3.3% which resulted in an increase in the share of PEO service fee revenue to 23.8% of total revenues for 2003, as compared to 11.5% for 2002. The increase in PEO service fee revenue for 2003 was primarily due to strong market acceptance of the business process outsourcing model, market share gains owing to strong branch-level management and to growth in California attributable to business opportunities resulting from the adverse market conditions for workers' compensation insurance in the state. At December 31, 2003, we had approximately 500 PEO clients as compared to approximately 300 PEO clients at December 31, 2002. The decrease in staffing services revenue for 2003 was primarily attributable to lower demand for our services in the majority of areas in which we do business, which we believe resulted from weak economic conditions. During 2003, we served approximately 2,100 staffing services customers as compared to approximately 2,400 customers during 2002. Staffing services revenues had a corresponding decrease from 88.5% of total revenues for 2002 to 76.2% for 2003.

Gross margin for 2003 totaled $21.0 million, which represented an increase of $6.0 million or 40.3% over 2002. The gross margin percentage increased from 13.7% of total revenues for 2002 to 17.1% for 2003. The increase in the gross margin percentage was largely due to lower direct payroll costs and workers' compensation costs, offset in part by higher payroll taxes and benefit costs, as a percentage of total revenues. The decrease in direct payroll costs as a percentage of total revenues from 65.4% for 2002 to 56.3% for 2003 primarily reflects the shift in relative mix of services to our customer base and to the effect of each customer's mark-up percent. The decrease in workers' compensation costs as a percentage of total revenues from 8.0% of revenues for 2002 to 7.9% for 2003, was principally due to a lessening of the increase in the adverse development of estimated future costs of workers' compensation claims primarily concentrated in our California operations. The increase in payroll taxes and benefits as a percentage of total revenues from 12.9% for 2002 to 18.7% for 2003 was primarily attributable to higher state unemployment tax rates in various states in which we operate, and to a lesser extent was due to the effect of significant growth in PEO services.

Selling, general and administrative expenses for 2003 amounted to $16.8 million, an increase of $802,000 or 5.0% over 2002. Selling, general and administrative expenses expressed as a percentage of total revenues declined from 14.6% for 2002 to 13.7% for 2003. The increase in selling, general and administrative dollars was primarily due to increases in branch management personnel and related expenses as a result of the growth in our PEO business.

Depreciation and amortization totaled $1.1 million for 2003, which compares to $1.2 million for 2002. The depreciation and amortization expense level remained comparable to 2002 amounts due to a low level of capital expenditures.

Our effective tax rate for 2003 was 29.9%, as compared to 39.7% for 2002. The decline in the effective rate for 2003 was primarily due to lower nondeductible expenses and other, net as well as to lower federal tax-exempt interest income and lower federal tax credits.

Quarterly Results of Operations

We have historically experienced significant fluctuations in our quarterly operating results and expect such fluctuations to continue in the future. Our operating results may fluctuate due to a number of factors such as wage limits on statutory payroll taxes, claims experience for workers' compensation, demand for our services and competition. Payroll taxes, as a component of cost of revenues, generally decline throughout a calendar year as the applicable statutory wage bases for federal and state unemployment taxes and Social Security taxes are exceeded on a per employee basis. Our revenue levels may be higher in the third quarter due to the effect of increased business activity of our customers' businesses in the agriculture, food processing and forest products-related industries. In addition, revenues in the fourth quarter may be affected by many customers' practice of operating on holiday-shortened schedules.

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The following table sets forth our quarterly consolidated statement of operations data for the nine quarters ended March 31, 2005. The information for each quarter is unaudited and we have prepared it on the same basis as the audited consolidated financial statements appearing elsewhere in this prospectus. This information includes all adjustments that management considers necessary for the fair presentation of such data. The quarterly data should be read together with our consolidated financial statements and related notes appearing elsewhere in this prospectus. The results of operations for any given quarter are not necessarily indicative of results for any future period.