<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended APRIL 13, 1996
Commission file number 0-24990
WESTERN STAFF SERVICES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-1266151
(State or other jurisdiction (I.R.S. employer
of incorporation or organization) identification number)
301 LENNON LANE
WALNUT CREEK, CALIFORNIA 94598-2453
(510) 930-5300
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes No X
----- -----
THIS IS THE FIRST FILING ON FORM 10-Q REQUIRED TO BE FILED BY SECTION 13 OR
15(D) OF THE SECURITIES AND EXCHANGE ACT OF 1934. THE EFFECTIVE DATE OF THE
REGISTRANT'S REGISTRATION STATEMENT ON FORM S-1 UNDER THE SECURITIES ACT OF 1933
WAS APRIL 30, 1996.
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Class Outstanding at June 14, 1996
------------------ ----------------------------
Common Stock, $.01 par value 10,338,116 shares
<PAGE>
WESTERN STAFF SERVICES, INC. AND SUBSIDIARIES
INDEX
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
October 28, 1995 and April 13, 1996 3
Condensed Consolidated Statements of Operations -
12 and 24 weeks ended April 15, 1995 and April 13, 1996 4
Condensed Consolidated Statements of Cash Flows -
24 weeks ended April 15, 1995 and April 13, 1996 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities 15
Item 3. Defaults upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 17
2
<PAGE>
PART I FINANCIAL INFORMATION
WESTERN STAFF SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
- --------------------------------------------------------------------------------
OCTOBER 28, APRIL 13,
1995 1996
----------- -----------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 3,014 $ 4,433
Trade accounts receivable, less allowance for
doubtful accounts of $823 and $796 53,937 49,534
Due from licensees 7,143 5,646
Deferred income taxes 1,015 1,039
Other current assets 3,143 2,934
--------- --------
Total current assets 68,252 63,586
Property, plant and equipment, net 16,438 17,913
Deferred income taxes 694 708
Intangible assets, net of accumulated
amortization of $4,709 and $5,003 9,476 10,173
Other assets 1,309 1,828
--------- --------
$ 96,169 $ 94,208
--------- --------
--------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 12,600 $ 13,100
Current portion of loans payable 1,770 1,492
Current portion of note payable to related party 2,468 973
Accounts payable and accrued expenses 33,135 30,148
Income taxes payable 930 547
--------- --------
Total current liabilities 50,903 46,260
Loans payable 3,678 2,014
Note payable to related party 1,945 1,945
Deferred income taxes 299 304
Other long-term liabilities 7,552 7,515
--------- --------
Total liabilities 64,377 58,038
--------- --------
Commitments and contingencies (Note 3)
Stockholders' equity:
Common stock, no par value; 15,420 shares authorized;
8,838 shares issued and outstanding 50 50
Additional paid-in-capital 3,999 3,999
Retained earnings 27,386 31,771
Cumulative currency translation 357 350
--------- --------
Total stockholders' equity 31,792 36,170
--------- --------
$ 96,169 $ 94,208
--------- --------
--------- --------
See accompanying notes to condensed consolidated financial statements.
3
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WESTERN STAFF SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
12 WEEKS ENDED 24 WEEKS ENDED
-------------------------- ---------------------------
APRIL 15, APRIL 13, APRIL 15, APRIL 13,
1995 1996 1995 1996
--------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Sales of services $ 88,334 $ 96,231 $ 171,596 $ 193,365
License fees 700 709 1,467 1,600
--------- --------- ---------- ----------
Total sales of services and license fees 89,034 96,940 173,063 194,965
--------- --------- ---------- ----------
Costs of services 68,322 75,634 134,032 152,313
Franchise agents' share of gross profit 4,811 4,010 9,177 7,899
Selling and administrative expenses 12,834 14,903 24,542 29,440
--------- --------- ---------- ----------
Total costs and expenses 85,967 94,547 167,751 189,652
--------- --------- ---------- ----------
Operating income 3,067 2,393 5,312 5,313
Interest expense 234 325 434 762
Interest income (65) (33) (125) (98)
--------- --------- ---------- ----------
Income before income taxes 2,898 2,101 5,003 4,649
Provision for income taxes 145 95 250 264
--------- --------- ---------- ----------
Net income $ 2,753 $ 2,006 $ 4,753 $ 4,385
--------- --------- ---------- ----------
--------- --------- ---------- ----------
PRO FORMA DATA:
Income before income taxes $ 2,898 $ 2,101 $ 5,003 $ 4,649
Provision for income taxes 985 819 1,701 1,780
--------- --------- ---------- ----------
Net income $ 1,913 $ 1,282 $ 3,302 $ 2,869
--------- --------- ---------- ----------
--------- --------- ---------- ----------
Net income per common share $ 0.21 $ 0.15 $ 0.37 $ 0.32
--------- --------- ---------- ----------
--------- --------- ---------- ----------
Weighted average common shares outstanding 8,838 8,838 8,838 8,838
--------- --------- ---------- ----------
--------- --------- ---------- ----------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
WESTERN STAFF SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(AMOUNTS IN THOUSANDS)
- --------------------------------------------------------------------------------
24 WEEKS ENDED
------------------------
APRIL 15, APRIL 13,
1995 1996
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 4,753 $ 4,385
Adjustments to reconcile net income to
net cash flows from operating activities:
Depreciation 1,168 1,556
Amortization 76 293
Provision for losses on doubtful accounts 182 164
Deferred income taxes 65 (30)
Changes in assets and liabilities:
Trade accounts receivable (3,184) 4,220
Due from licensees (1,236) 1,497
Other assets (1,224) (454)
Accounts payable and accrued expenses (2,473) (3,202)
Income taxes payable 684 (370)
Other long-term liabilities 120 (47)
--------- ----------
Net cash flows from operating activities (1,069) 8,012
--------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Expenditures for purchases of fixed assets (1,712) (3,163)
Other, net 141 (455)
--------- ----------
Net cash flows from investing activities (1,571) (3,618)
--------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings under line of
credit agreements 6,500 500
Principal payments on loans payable (709) (1,943)
Repayment of note payable to related party (1,495)
Distributions to stockholders (4,477)
--------- ----------
Net cash flows from financing activities 1,314 (2,938)
--------- ----------
Effect of exchange rates on cash 81 (37)
--------- ----------
Net change in cash and cash equivalents (1,245) 1,419
Cash and cash equivalents at beginning of period 2,866 3,014
--------- ----------
Cash and cash equivalents at end of period $ 1,621 $ 4,433
--------- ----------
--------- ----------
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
WESTERN STAFF SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AND SHARE AMOUNTS)
- --------------------------------------------------------------------------------
1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements of Western
Staff Services, Inc. (the Parent) and its domestic and foreign subsidiaries
(together, the Company), as of and for the 12 and 24 week periods ended
April 15, 1995 and April 13, 1996 are unaudited. The principal stockholder
of the Parent owns minority interests in each of the Parent's foreign and
domestic subsidiaries and also owns Kontorservice, Inc. (Norwegian Branch),
a temporary personnel services company doing business in Norway. Based on
common control and management, these minority interests and the Norwegian
Branch have been retroactively combined with the Company's financial
statements for all periods presented in a manner similar to a pooling of
interests. Material intercompany accounts and transactions have been
eliminated.
The condensed consolidated financial statements, in the opinion of
management, reflect all adjustments, which are of a normal recurring
nature, necessary for a fair presentation of the financial position,
results of operations and cash flows for the periods presented.
Certain financial information which is normally included in financial
statements prepared in accordance with generally accepted accounting
principles, but which is not required for interim reporting purposes, has
been condensed or omitted. The accompanying condensed consolidated
financial statements should be read in conjunction with the financial
statements and notes thereto included in the Company's Registration
Statement on Form S-1 (File No. 33-85536).
The Company's fiscal year is a fifty-two or fifty-three week period ending
the Saturday nearest the end of October. For interim reporting purposes,
the first three fiscal quarters comprise twelve weeks each while the fourth
fiscal quarter consists of sixteen or seventeen weeks. The results of
operations for the 12 and 24 week periods ended April 13, 1996 are not
necessarily indicative of the results to be expected for the full year or
for any future period.
2. INITIAL PUBLIC OFFERING OF COMMON STOCK AND PRO FORMA INFORMATION
On May 3, 1996, the Company completed an initial public offering of
2,300,000 shares of common stock at $14.00 per share (the Offering) of
which 1,500,000 shares were sold by the Company and 800,000 shares were
sold by certain of the Company's stockholders. Prior to the Offering,
there was no public market for the Company's common stock. The common
stock is traded on the Nasdaq National Market under the symbol "WSTF".
The net proceeds to the Company from the sale of the 1,500,000 shares of
common stock, after deduction of associated expenses, were approximately
$19,000. A portion of the net proceeds was used to repay $13,800
outstanding under the Company's revolving credit facility, with the
remaining balance reserved for further debt reduction or for working
capital and other general corporate use. The Company did not receive any
of the proceeds from the sale of the shares of common stock offered by the
stockholders.
6
<PAGE>
WESTERN STAFF SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AND SHARE AMOUNTS)
- --------------------------------------------------------------------------------
2. INITIAL PUBLIC OFFERING OF COMMON STOCK AND PRO FORMA INFORMATION
(CONTINUED)
Concurrent with the Offering, the Company effected a 1,542.01 for 1 stock
split, established a par value of $0.01 per share and increased the
authorized shares to 25,000,000. The Company also issued 202,857 shares
valued at $2,800 to the Company's principal stockholder in exchange for the
contribution of his minority interests in each of the Company's foreign and
domestic subsidiaries and the capital stock of the Norwegian Branch (see
Note 1 - Basis of Presentation). In addition, the Company established a
preferred stock series, $0.01 par value per share and authorized 1,000,000
shares. No shares of the preferred stock are outstanding.
The effect of the Offering on the Company's capital structure was to
increase common stock by $53 (10,338,116 shares issued and outstanding) and
to increase additional paid-in-capital by approximately $18,952.
On April 30, 1996, and in conjunction with the Offering, the Company
elected to terminate its S corporation status. In connection with the
termination, the Company is required by the Internal Revenue Service Code
to change its method of accounting for income tax reporting purposes from
the cash basis to the accrual basis. The termination will result in a non-
recurring net charge to earnings in the third quarter of fiscal 1996. This
charge is due primarily to temporary differences resulting from the
Company's historical use of the cash method of accounting for income tax
purposes and will be reflected through an increase in current and deferred
income tax liabilities, partially offset by an increase in the Company's
deferred tax assets. The actual current and deferred income tax assets and
liabilities and the related income tax provision will be recorded in the
third quarter of fiscal 1996, based on temporary differences as of April
30, 1996, the effective date of the termination. The Company has not yet
finalized its detailed calculation of the current and deferred income tax
assets and liabilities and the related income tax provision; however, the
Company currently estimates that the net charge to earnings will be
approximately $7,500 consisting of a $12,500 income tax liability partially
offset by $5,000 of deferred tax assets. These amounts may be subject to
change pending completion of the actual calculation of the current and
deferred income tax assets and liabilities and the related income tax
provision. The income tax liability will be payable in quarterly
installments due over four years. The initial quarterly installment
relating to such estimated tax liability is due on July 15, 1996.
Pro forma net income per common share represents income before income taxes
after a pro forma provision for federal and state income taxes as if the
Company had been subject to federal and state income taxation as a C
corporation during each of the periods presented, divided by the pro forma
weighted average shares of common stock outstanding during the period. The
pro forma weighted average shares outstanding gives effect to the common
stock split and the additional shares issued to the principal stockholder.
Historical net income per share is not presented in view of prior period S
corporation status.
Prior to consummation of the Offering, the Company declared a dividend
payable to its current stockholders consisting of all of the remaining
undistributed earnings of the Company
7
<PAGE>
WESTERN STAFF SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AND SHARE AMOUNTS)
- --------------------------------------------------------------------------------
2. INITIAL PUBLIC OFFERING OF COMMON STOCK AND PRO FORMA INFORMATION
(CONTINUED)
accumulated from November 1, 1987 to April 30, 1996, the effective date of
the Company's S corporation termination, which were subject to taxation at
the stockholder level. The Company has not yet finalized its detailed
calculation of the undistributed earnings of the Company from November 1,
1987 to April 30, 1996. The Company currently estimates that the
undistributed earnings will be approximately $9,000; however, this amount
is subject to change pending completion of the actual calculation. The
Company has entered into an agreement which limits the S corporation
distribution to $5,000. The difference between the actual distribution of
$5,000 and the undistributed earnings will be reclassified for financial
reporting purposes from retained earnings to additional paid-in-capital in
the third fiscal quarter of 1996. The distribution will be paid in
quarterly installments over a one-year period.
3. COMMITMENTS AND CONTINGENCIES
The Company is subject to claims and other actions arising in the ordinary
course of business. Some of these claims and actions have resulted in
lawsuits in which the Company is a defendant. Management believes that the
ultimate obligations, if any, which may result from unfavorable outcomes of
such lawsuits will not have a material adverse effect on the financial
position or results of operations of the Company and that such obligations,
if any, would be adequately covered by insurance.
4. SUBSEQUENT EVENT
On May 3, 1996 the Company granted options to purchase 426,000 shares of
common stock to certain of its directors, executive officers and
management employees pursuant to the 1996 Stock Option/Stock Issuance
Plan at the initial public offering price of $14.00.
8
<PAGE>
WESTERN STAFF SERVICES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
The following discussion is intended to assist in the understanding and
assessment of significant changes and trends related to the results of
operations and financial condition of Western Staff Services, Inc., together
with its consolidated subsidiaries. This discussion and analysis should be read
in conjunction with the Company's Condensed Consolidated Financial Statements
and Notes thereto included herein and with the Consolidated Financial Statements
and Notes thereto included in the Company's Registration Statement on Form S-1
(File No. 33-85536).
In addition to historical information, management's discussion and analysis
includes certain forward-looking statements regarding events and financial
trends which may affect the Company's future operating results and financial
position. Such statements are subject to risks and uncertainties that could
cause the Company's actual results and financial position to differ materially
from those anticipated in the forward-looking statements. Such factors include,
but are not limited to: demand for the Company's services, the competition
within its markets, the loss of a principal customer, the Company's ability to
increase the productivity of its existing offices, to control costs and to
expand operations. Due to the foregoing factors, it is possible that in some
future period the Company's results of operations may be below the expectations
of the public market analysts and investors. In addition, the Company's results
of operations have historically been subject to seasonal fluctuations, with
demand for temporary staffing historically highest in the fourth fiscal quarter,
due largely to the planning cycles of many of the Company's customers, and
typically lower in the first fiscal quarter, due to national holidays as well as
to plant shutdowns during and after the holiday season. These and other risks
and uncertainties related to the business are described in detail in the "Risk
Factors" and "Business" sections of the Company's Registration Statement on Form
S-1 (File No. 33-85536) which is incorporated herein by reference. Readers are
cautioned not to place undue reliance on these forward looking statements, which
speak only as of the date hereof. The Company undertakes no obligation to
publicly release the result of any revisions to these forward-looking statements
to reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
OVERVIEW
The Company provides traditional temporary staffing services to businesses,
government agencies and health care organizations in regional and local markets
in the United States and selected international markets. The Company was
founded in 1948 with an office in San Francisco, gradually expanding to over 350
offices in the United States, the United Kingdom, Australia, New Zealand,
Denmark and Norway. Beginning in the late 1950s, the Company began its
franchise agent program and in fiscal 1993 introduced its licensing program.
Demand for the Company's temporary staffing services is significantly affected
by the general level of economic activity in the United States and certain
international markets. During periods of economic expansion, temporary
employees are often added before full-time employees are hired, resulting in
strong industry growth. The temporary staffing industry also benefits during
periods of economic uncertainty when employers are reluctant to hire new full-
time workers and instead choose to utilize temporary employees. When economic
activity slows, however, companies often choose to reduce their usage of
temporary employees before laying off regular employees, resulting in a
contraction in the temporary staffing industry.
9
<PAGE>
WESTERN STAFF SERVICES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
FISCAL QUARTER ENDED APRIL 13, 1996 COMPARED TO FISCAL QUARTER ENDED APRIL 15,
1995
SALES OF SERVICES AND LICENSE FEES. Sales of services and license fees
increased $7.9 million or 8.9% for the fiscal quarter ended April 13, 1996 as
compared to the fiscal quarter ended April 15, 1995. The increase resulted
from a 7.7% increase in billed hours and a 1.7% increase in average billing
rates per hour. Billed hours increased primarily due to increased demand in
the Company's existing offices and the addition of new offices. Sales of
services for the second quarter of fiscal 1996 increased 10.5% and 9.0%,
respectively, for the Company's domestic business services and international
business services and declined 2.6% for the Company's medical services, as
compared to the second quarter of fiscal 1995. The increase in average
billing rates primarily reflects inflationary factors as well as changes in
the overall business mix.
License fees are charged to licensed offices based upon a percentage of the
gross profit generated by the licensed offices. License fees increased $9,000
or 1.3% for the fiscal quarter ended April 13, 1996 as compared to the fiscal
quarter ended April 15, 1995. Approximately $204,000 of the license fees and
gross profit for the fiscal quarter ended April 15, 1995 was associated with a
major customer of one of the Company's licensees. This licensee's contract with
this customer was completed on December 31, 1995. The Company added one new
licensee and converted one franchise agent to the license program during the
fiscal quarter ended April 13, 1996.
COSTS OF SERVICES. Costs of services include hourly wages of temporary
employees, employer payroll taxes, state unemployment and workers' compensation
insurance and other employee-related costs. Costs of services increased $7.3
million or 10.7% for the second quarter of fiscal 1996 as compared to the second
quarter of fiscal 1995. Gross margin decreased from 23.3% for the second
quarter of fiscal 1995 to 22.0% for the second quarter of fiscal 1996. Workers'
compensation costs were 3.3% of payroll in the second quarter of fiscal 1996 as
compared to 2.2% during the second quarter of fiscal 1995. The second quarter
of fiscal 1995 included a reduction in workers' compensation costs of $980,000
due to the settlement of all workers' compensation claims associated with policy
years 1986 through 1991. The $980,000 reflects the difference between the final
settlement payment to the insurance carrier and the remaining workers'
compensation accruals for those policy years. In addition, gross margins for
the international business declined slightly during the second quarter of fiscal
1996 as compared to the second quarter of fiscal 1995.
FRANCHISE AGENT'S SHARE OF GROSS PROFIT. Franchise agents' share of
gross profit represents the net distribution paid to franchise agents based
upon a percentage of gross profit generated by the franchise agents'
operation. Franchise agents' share of gross profit decreased $801,000 or
16.6% for the second quarter of fiscal 1996 as compared to the second quarter
of fiscal 1995. As a percentage of sales of services and license fees,
franchise agents' share of gross profit declined from 5.4% during the second
quarter of fiscal 1995 to 4.1% for the second quarter of fiscal 1996. This
decrease is the result of the acquisition by the Company of the operations of
two of its ten largest franchise agents and the conversion of these offices
to Company-owned offices during the fourth quarter of fiscal 1995.
10
<PAGE>
WESTERN STAFF SERVICES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
SELLING AND ADMINISTRATIVE EXPENSES. Selling and administrative expenses
increased $2.1 million or 16.1% for the fiscal quarter ended April 13, 1996 as
compared to the fiscal quarter ended April 15, 1995. As a percentage of sales
of services and license fees, selling and administrative expenses increased from
14.4% to 15.4% for the same period. This increase is principally due to the
conversion of franchise agent offices to Company-owned offices during the
fourth quarter of fiscal 1995. When offices are converted from franchise agent
offices to Company-owned offices, the Company becomes responsible for the
operating expenses of the new Company-owned offices, resulting in an increase in
the overall selling and administrative costs and a decrease in the franchise
agents' share of gross profit.
INTEREST EXPENSE. Interest expense increased $91,000 or 38.9% for the
fiscal quarter ended April 13, 1996 as compared to the fiscal quarter ended
April 15, 1995, reflecting higher average borrowings outstanding during the
fiscal 1996 quarter.
PRO FORMA PROVISION FOR INCOME TAXES. Pro forma provision for income taxes
decreased from $985,000 for the fiscal quarter ended April 15, 1995 to $819,000
for the fiscal quarter ended April 13, 1996, due primarily to the decrease in
income before income taxes of $797,000. The effective income tax rate increased
from 34% for the fiscal quarter ended April 15, 1995 to 39% for the fiscal
quarter ended April 13, 1996. The fiscal 1995 rate was lower due to income tax
credits and the recognition of the benefit of foreign net operating loss
carryforwards.
24 WEEK PERIOD ENDED APRIL 13, 1996 COMPARED TO 24 WEEK PERIOD ENDED APRIL 15,
1995
SALES OF SERVICES AND LICENSE FEES. Sales of services and license fees
increased $21.9 million or 12.7% for the 24 week period ended April 13, 1996 as
compared to the 24 week period ended April 15, 1995. The increase resulted from
a 9.5% increase in billed hours and a 3.1% increase in average billing rates per
hour. Billed hours increased primarily due to increased demand in the Company's
existing offices and the addition of new offices. Sales of services for the 24
week period ended April 13, 1996 increased 14.3%, 12.2% and 0.8%, respectively,
for the Company's domestic business services, international business services
and medical services as compared to the 24 week period ended April 15, 1995.
The increase in average billing rates primarily reflects inflationary factors as
well as changes in the overall business mix.
License fees increased $133,000 or 9.1% for the 24 week period ended April 13,
1996 as compared to the 24 week period ended April 15, 1995 as a result of the
overall growth in the gross profits generated by existing licensees and the
addition of one new licensee and the conversion of one franchise agent to the
license program during the second quarter of fiscal 1996. Approximately
$432,000 and $589,000 of the license fees and gross profit for the 24 week
periods ended April 13, 1996 and April 15, 1995, respectively, were associated
with a major customer of one of the Company's licensees. The licensee's
contract with this customer was completed on December 31, 1995.
COSTS OF SERVICES. Costs of services increased $18.3 million or 13.6% for
the 24 week period ended April 13, 1996 as compared to the 24 week period ended
April 15, 1995. Gross margin decreased from 22.6% for the 24 week period ended
April 15, 1995 to 21.9% for the 24 week period ended April 13, 1996. Workers'
compensation costs were 3.4% of payroll for the 24 week period ended April 13,
11
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WESTERN STAFF SERVICES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
1996 as compared to 3.2% during the 24 week period ended April 13, 1995. The
fiscal 1995 period included a reduction in workers' compensation costs of
$980,000 due to the settlement of all workers' compensation claims associated
with policy years 1986 through 1991. The $980,000 reflects the difference
between the final settlement payment to the insurance carrier and the remaining
workers' compensation accruals for those policy years. Also affecting the gross
margin was a slight decrease in the gross margins for the international offices.
FRANCHISE AGENT'S SHARE OF GROSS PROFIT. Franchise agents' share of
gross profit decreased $1.3 million or 13.9% for the 24 week period ended
April 13, 1996 as compared to the 24 week period ended April 15, 1995. As a
percentage of sales of services and license fees, franchise agents' share of
gross profit declined from 5.3% during the 24 week period ended April 15,
1995 to 4.1% for the 24 week period ended April 13, 1996. This decrease is
the result of the acquisition by the Company of the operations of two of its
ten largest franchise agents and the conversion of these offices to
Company-owned offices during the fourth quarter of fiscal 1995.
SELLING AND ADMINISTRATIVE EXPENSES. Selling and administrative expenses
increased $4.9 million or 20.0% for the 24 week period ended April 13, 1996 as
compared to the 24 week period ended April 15, 1995. As a percentage of sales
of services and license fees, selling and administrative expenses increased from
14.2% to 15.1% over the same period. This increase is principally due to the
conversion of franchise agent offices to Company-owned offices during the
fourth quarter of fiscal 1995. When offices are converted from franchise agent
offices to company-owned offices, the Company becomes responsible for the
operating expenses of the new Company-owned offices, resulting in an increase in
the overall selling and administrative costs and a decrease in the franchise
agents' share of gross profit.
INTEREST EXPENSE. Interest expense increased $328,000 or 75.6% for the 24
week period ended April 13, 1996 as compared to the 24 week period ended April
15, 1995 reflecting higher average borrowings outstanding during the fiscal 1996
period.
PRO FORMA PROVISION FOR INCOME TAXES. Pro forma provision for income taxes
increased from $1.7 million for the 24 week period ended April 15, 1995 to $1.8
million for the 24 week period ended April 13, 1996. The effective income tax
rate increased from 34% for the fiscal 24 week period ended April 15, 1995 to
38% for the 24 week period ended April 13, 1996. The fiscal 1995 rate was lower
due to income tax credits and the recognition of the benefit of foreign net
operating loss carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has financed its operations through cash generated by
operating activities and through various forms of external financing, including
term loans, mortgage financing and bank lines of credit. The principal use of
cash is for financing of accounts receivable, particularly during periods of
growth. Temporary personnel are generally paid on a weekly basis while payments
from customers are generally received 30 to 60 days after billing. As a result
of seasonal fluctuations, accounts receivable balances are historically higher
in the fourth fiscal quarter and are generally at their lowest during the first
fiscal quarter. Short-term borrowings used to finance accounts receivable
follow a similar seasonal pattern.
12
<PAGE>
WESTERN STAFF SERVICES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Net cash flows from operating activities was $8.0 million for the 24 week period
ended April 13, 1996 as compared to ($1.1) million for the comparable 1995
period. The increase in cash flows from operating activities was largely due to
decreases in accounts receivable and decreases in amounts due from licensees.
During the 1995 period, revenues were increasing more rapidly than the 1996
period requiring additional funding of accounts receivables. While revenues
have continued to grow during 1996, the rate of increase is not as significant
as in the prior year. Due from licensees decreased due to the completion of the
contract for a major customer of one of the licensees on December 31, 1995.
Cash flows were also positively impacted by increased depreciation and
amortization costs resulting from recent acquisitions and investments in the
Company's payroll and billing system.
Cash used for capital expenditures, which are generally for software, computers
and peripherals, and office furniture and equipment, totaled $3.2 million for
the 24 weeks ended April 13, 1996 and $1.7 million for the 24 weeks ended April
15, 1995. The 1996 period included approximately $1.3 million associated with
the Company's new management information system, including costs for both the
payroll and billing portion of the system as well as costs for new modules under
development.
The Company expects to spend an additional $200,000 in fiscal 1996 to fully
implement the payroll and billing portion of the new system. The Company has no
other significant commitments for capital purchases.
During the 24 weeks ended April 13, 1996, the Company made payments totaling
$564,000 for new acquisitions and for contingent payments under existing
acquisitions.
Net cash used for debt reduction totaled $2.9 million for the 24 weeks ended
April 15, 1996, including a payment of $1.5 million for fiscal 1995
acquisitions. During the 24 week period ended April 15, 1995, the Company
increased borrowings by a net $5.8 million in order to provide working capital
to support the Company's growth and to pay dividends to the Company's
stockholders. Distributions to stockholders totaled $4.5 million for the 24
week period ended April 15, 1995, of which, approximately $3.5 million was used
to fund income tax obligations.
During the second quarter of fiscal 1996, the Company executed a new term loan
and revolving credit agreement. The new facility provides for a secured
revolving line of credit in the amount of $40.0 million, with the maximum amount
of direct advances limited to $20.0 million and the maximum amount of
irrevocable standby letters of credit limited to $20.0 million. The new
facility also provides for a non-revolving line of credit, to be used primarily
for acquisitions, converting on March 31, 1997 to a six-year fully amortized
term loan in an amount up to $21.8 million. Amounts borrowed under the new
facility will bear interest at variable rates based on the prime rate or at
fixed rates based on LIBOR plus applicable margins on the date of borrowing.
The new credit facility contains covenants which, among other things, require
the Company to maintain certain financial ratios and generally restrict, limit
or prohibit the Company with respect to capital expenditures, disposition of
assets, incurrence of debt, mergers, loans to affiliates and purchases of
investments. The facility also prohibits cash dividend payments on its capital
stock. The revolving line of credit will mature on March 31, 1998 and the term
loan will mature no later than March 31, 2003.
13
<PAGE>
WESTERN STAFF SERVICES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
SUBSEQUENT EVENT
On May 3, 1996, the Company completed its initial public offering (the Offering)
of 2.3 million shares of Common Stock, 800,000 of which were sold by certain
stockholders of the Company. The Company received net proceeds of approximately
$19.0 million and used a portion of the net proceeds to repay all $13.8 million
of borrowings outstanding under its revolving credit facility. The remaining
net proceeds will be used for working capital and general corporate purposes or
to further reduce debt.
On April 30, 1996, and in conjunction with the Offering, the Company elected
to terminate its S corporation status. In connection with the termination,
the Company is required by the Internal Revenue Service Code to change its
method of accounting for income tax reporting purposes from the cash basis to
the accrual basis. The termination will result in a non-recurring net charge
to earnings in the third quarter of fiscal 1996. This charge is due
primarily to temporary differences resulting from the Company's historical
use of the cash method of accounting for income tax purposes and will be
reflected through an increase in current and deferred income tax liabilities,
partially offset by an increase in the Company's deferred tax assets. The
actual current and deferred income tax assets and liabilities and the related
income tax provision will be recorded in the third quarter of fiscal 1996,
based on temporary differences as of April 30, 1996, the effective date of
the termination. The Company has not yet finalized its detailed calculation
of the current and deferred income tax assets and liabilities and the related
income tax provision; however, the Company currently estimates that the net
charge to earnings will be approximately $7.5 million consisting of a $12.5
million income tax liability partially offset by $5.0 million of deferred tax
assets. These amounts may be subject to change pending completion of the
actual calculation of the current and deferred income tax assets and
liabilities and the related income tax provision. The income tax liability
will be payable in quarterly installments due over four years. The initial
quarterly installment relating to such estimated tax liability is due on
July 15, 1996.
Prior to consummation of the Offering, the Company declared a dividend
payable to its current stockholders consisting of all of the remaining
undistributed earnings of the Company accumulated from November 1, 1987 to
April 30, 1996, the effective date of the Company's S corporation
termination, which were subject to taxation at the stockholder level. The
Company has not yet finalized its detailed calculation of the undistributed
earnings of the Company from November 1, 1987 to April 30, 1996. The Company
currently estimates that the undistributed earnings will be approximately
$9.0 million; however, this amount is subject to change pending completion of
the actual calculation. The Company has entered into an agreement which
limits the S corporation distribution to $5.0 million. The difference between
the actual distribution of $5.0 million and the undistributed earnings will
be reclassified for financial reporting purposes from retained earnings to
additional paid-in-capital in the third fiscal quarter of 1996. The
distribution will be paid in quarterly installments over a one-year period.
The Company believes that cash provided from operations and available
borrowings under the credit agreement will be sufficient to meet anticipated
needs for working capital and capital expenditures at least through the next
twelve months.
14
<PAGE>
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Not applicable.
Item 2. CHANGES IN SECURITIES
Not applicable.
Item 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
Item 5. OTHER INFORMATION
Not applicable.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT INDEX
Exhibit
Number Description
- ------- -----------
2.1 Agreement for Purchase and Sale of Stock of Western Video Images,
Inc. and Purchase and Sale of Promissory Notes dated as of
October 27, 1994 by and between Western Staff Services (USA),
Inc. and W. Robert Stover. *
3.1 Second Amended and restated Certificate of Incorporation of
Western Staff Services, Inc. *
3.2 Form of Third Amended and Restated Certificate of Incorporation
of Western Staff Services, Inc. (to be filed with the Delaware
Secretary of State at Closing). *
3.3 Form of By-Laws of Western Staff Services, Inc. *
4.1 Specimen of Stock Certificate. *
10.1 Form of Indemnification Agreement between the Company and
officers and key employees of the Company. *
10.2 Form of Indemnification Agreement between the Company and
directors of the Company. *
10.3 Employment Agreement between the Company and W. Robert Stover. *
15
<PAGE>
10.5 Form of Nonstatutory Stock Option Agreement for fiscal 1989. *
10.6 Form of Nonstatutory Stock Option Agreement for fiscal 1990. *
10.7 Form of Western Staff Services, Inc. 1996 Stock Option/Stock
Issuance Plan. *
10.8 Credit Agreement dated as of February 21, 1996 among Western
Staff Services, Inc., Bank of America National Trust and Savings
Association, Sanwa Bank California and certain other financial
institutions. *
10.9 Deed of Trust (Non-Construction) & Assignment of Rents dated June
21, 1994 by and between Western Staff Services, Inc., First
Bancorp and Sanwa Bank California. *
10.10 Form of Tax Indemnification Agreement by and among the Company
and certain stockholders of the Company. *
10.11 Form of Western Staff Services, Inc. 1996 Employee Stock Purchase
Plan. *
10.12 Form of Exchange Agreement between the Company and W. Robert
Stover. *
10.13 Form of Employment Contract with certain Named Executive
Officers. *
27.1 Financial Data Schedule
- -----------------
* Incorporated by reference to Registrant's Registration Statement on Form S-1
(File No. 33-85536).
(b) Reports on Form 8-K
No reports on Form 8-K were filed in the fiscal quarter ended
April 13, 1996.
16
<PAGE>
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.
WESTERN STAFF SERVICES, INC.
June 14, 1996 /s/ Paul A. Norberg
- ------------------------ -----------------------------------
Date Paul. A Norberg
Executive Vice President, Chief Financial
Officer and Director
(PRINCIPAL FINANCIAL OFFICER)
17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET AS OF APRIL 13, 1996, THE CONDENSED
CONSOLIDATED STATEMENT OF OPERATIONS FOR THE 24 WEEKS ENDED APRIL 13, 1996,
AND THE CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE 24 WEEKS ENDED
APRIL 13, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> NOV-02-1996
<PERIOD-START> OCT-29-1995
<PERIOD-END> APR-13-1996
<CASH> 4433
<SECURITIES> 0
<RECEIVABLES> 50330
<ALLOWANCES> 796
<INVENTORY> 0
<CURRENT-ASSETS> 63586
<PP&E> 32568
<DEPRECIATION> 14655
<TOTAL-ASSETS> 94208
<CURRENT-LIABILITIES> 46260
<BONDS> 0
0
0
<COMMON> 50
<OTHER-SE> 36120<F1><F2><F3><F4>
<TOTAL-LIABILITY-AND-EQUITY> 94208
<SALES> 193365
<TOTAL-REVENUES> 194965
<CGS> 152313
<TOTAL-COSTS> 189652
<OTHER-EXPENSES> (98)
<LOSS-PROVISION> 164
<INTEREST-EXPENSE> 762
<INCOME-PRETAX> 4649
<INCOME-TAX> 264<F1><F2><F3><F4>
<INCOME-CONTINUING> 4385<F1><F2><F3><F4>
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4385<F1><F2><F3><F4>
<EPS-PRIMARY> 0<F1><F2><F3><F4>
<EPS-DILUTED> 0
<FN>
<F1>ON MAY 3, 1996, THE COMPANY COMPLETED AN INITIAL PUBLIC OFFERING OF
2,300,000 SHARES OF COMMON STOCK AT $14.00 PER SHARE (THE OFFERING) OF WHICH
1,500,000 SHARES WERE SOLD BY THE COMPANY AND 800,000 SHARES WERE SOLD BY
CERTAIN OF THE COMPANY'S STOCKHOLDERS. PRIOR TO THE OFFERING, THERE WAS NO
PUBLIC MARKET FOR THE COMPANY'S COMMON STOCK. THE COMMON STOCK IS TRADED ON
THE NASDAQ NATIONAL MARKET UNDER THE SYMBOL "WSTF".
THE NET PROCEEDS TO THE COMPANY FROM THE SALE OF THE 1,500,000 SHARES OF COMMON
STOCK, AFTER DEDUCTION OF ASSOCIATED EXPENSES, WERE APPROXIMATELY $19,000. A
PORTION OF THE NET PROCEEDS WAS USED TO REPAY $13,800 OUTSTANDING UNDER THE
COMPANY'S REVOLVING CREDIT FACILITY, WITH THE REMAINING BALANCE RESERVED FOR
FURTHER DEBT REDUCTION OR FOR WORKING CAPITAL AND OTHER GENERAL CORPORATE USE.
THE COMPANY DID NOT RECEIVE ANY OF THE PROCEEDS FROM THE SALE OF THE SHARES OF
COMMON STOCK OFFERED BY THE STOCKHOLDERS.
CONCURRENT WITH THE OFFERING, THE COMPANY EFFECTED A 1,542.01 FOR 1 STOCK
SPLIT, ESTABLISHED A PAR VALUE OF $0.01 PER SHARE AND INCREASED THE AUTHORIZED
SHARES TO 25,000,000. THE COMPANY ALSO ISSUED 202,857 SHARES VALUED AT $2,800
TO THE COMPANY'S PRINCIPAL STOCKHOLDER IN EXCHANGE FOR THE CONTRIBUTION OF HIS
MINORITY INTERESTS IN EACH OF THE COMPANY'S FOREIGN AND DOMESTIC SUBSIDIARIES
AND THE CAPITAL STOCK OF THE NORWEGIAN BRANCH. IN ADDITION, THE COMPANY
ESTABLISHED A PREFERRED STOCK SERIES, $0.01 PAR VALUE PER SHARE AND
AUTHORIZED 1,000,000 SHARES. NO SHARES OF THE PREFERRED STOCK ARE OUTSTANDING.
THE EFFECT OF THE OFFERING ON THE COMPANY'S CAPITAL STRUCTURE WAS TO INCREASE
COMMON STOCK BY $53 (10,338,116 SHARES ISSUED AND OUTSTANDING) AND TO INCREASE
ADDITIONAL PAID-IN CAPITAL BY APPROXIMATELY $18,952.
<F2>ON APRIL 30, 1996, AND IN CONJUNCTION WITH THE OFFERING, THE COMPANY ELECTED TO
TERMINATE ITS S CORPORATION STATUS. IN CONNECTION WITH THE TERMINATION, THE
COMPANY IS REQUIRED BY THE INTERNAL REVENUE SERVICE CODE TO CHANGE ITS METHOD
OF ACCOUNTING FOR INCOME TAX REPORTING PURPOSES FROM THE CASH BASIS TO THE
ACCRUAL BASIS. THE TERMINATION WILL RESULT IN A NON-RECURRING NET CHARGE TO
EARNINGS IN THE THIRD QUARTER OF FISCAL 1996. THIS CHARGE IS DUE PRIMARILY TO
TEMPORARY DIFFERENCES RESULTING FROM THE COMPANY'S HISTORICAL USE OF THE CASH
METHOD OF ACCOUNTING FOR INCOME TAX PURPOSES AND WILL BE REFLECTED THROUGH AN
INCREASE IN CURRENT AND DEFERRED INCOME TAX LIABILITIES, PARTIALLY OFFSET BY AN
INCREASE IN THE COMPANY'S DEFERRED TAX ASSETS. THE ACTUAL CURRENT AND DEFERRED
INCOME TAX ASSETS AND LIABILITIES AND THE RELATED INCOME TAX PROVISION WILL BE
RECORDED IN THE THIRD QUARTER OF FISCAL 1996, BASED ON TEMPORARY DIFFERENCES AS
OF APRIL 30, 1996, THE EFFECTIVE DATE OF THE TERMINATION. THE COMPANY HAS NOT
YET FINALIZED ITS DETAILED CALCULATION OF THE CURRENT AND DEFERRED INCOME TAX
ASSETS AND LIABILITIES AND THE RELATED INCOME TAX PROVISION; HOWEVER, THE
COMPANY CURRENTLY ESTIMATES THAT THE NET CHARGE TO EARNINGS WILL BE
APPROXIMATELY $7,500 CONSISTING OF A $12,500 INCOME TAX LIABILITY PARTIALLY
OFFSET BY $5,000 OF DEFERRED TAX ASSETS. THESE AMOUNTS MAY BE SUBJECT TO
CHANGE PENDING COMPLETION OF THE ACTUAL CALCULATION OF THE CURRENT AND DEFERRED
INCOME TAX ASSETS AND LIABILITIES AND THE RELATED INCOME TAX PROVISION. THE
INCOME TAX LIABILITY WILL BE PAYABLE IN QUARTERLY INSTALLMENTS DUE OVER FOUR
YEARS. THE INITIAL QUARTERLY INSTALLMENT RELATING TO SUCH ESTIMATED TAX
LIABILITY IS DUE ON JULY 15, 1996.
<F3>THE COMPUTATION OF PRO FORMA NET INCOME PER COMMON SHARE REPRESENTS INCOME
BEFORE INCOME TAXES AFTER A PRO FORMA PROVISION FOR FEDERAL AND STATE INCOME
TAXES AS IF THE COMPANY HAD BEEN SUBJECT TO FEDERAL AND STATE INCOME TAXATION
AS A C CORPORATION DURING EACH OF THE PERIODS PRESENTED, DIVIDED BY THE PRO
FORMA WEIGHTED AVERAGE SHARES OF COMMON STOCK OUTSTANDING DURING THE PERIOD.
THE PRO FORMA WEIGHTED AVERAGE SHARES OUTSTANDING GIVES EFFECT TO THE COMMON
STOCK SPLIT AND THE ADDITIONAL SHARES ISSUED TO THE PRINCIPAL STOCKHOLDER.
HISTORICAL NET INCOME PER SHARE IS NOT PRESENTED IN VIEW OF PRIOR PERIOD S
CORPORATION STATUS.
<F4>PRIOR TO CONSUMMATION OF THE OFFERING, THE COMPANY DECLARED A DIVIDEND
PAYABLE TO ITS CURRENT STOCKHOLDERS CONSISTING OF ALL OF THE REMAINING
UNDISTRIBUTED EARNINGS OF THE COMPANY ACCUMULATED FROM NOVEMBER 1, 1987 TO
APRIL 30, 1996, THE EFFECTIVE DATE OF THE COMPANY'S S CORPORATION TERMINATION,
WHICH WERE SUBJECT TO TAXATION AT THE STOCKHOLDER LEVEL. THE COMPANY HAS NOT
YET FINALIZED ITS DETAILED CALCULATION OF THE UNDISTRIBUTED EARNINGS OF THE
COMPANY FROM NOVEMBER 1, 1987 TO APRIL 30, 1996. THE COMPANY CURRENTLY
ESTIMATES THAT THE UNDISTRIBUTED EARNINGS WILL BE APPROXIMATELY $9,000; HOWEVER,
THIS AMOUNT IS SUBJECT TO CHANGE PENDING COMPLETION OF THE ACTUAL CALCULATION.
THE COMPANY HAS ENTERED INTO AN AGREEMENT WHICH LIMITS THE S CORPORATION
DISTRIBUTION TO $5,000. THE DIFFERENCE BETWEEN THE ACTUAL DISTRIBUTION OF
$5,000 AND THE UNDISTRIBUTED EARNINGS WILL BE RECLASSIFIED FOR FINANCIAL
REPORTING PURPOSES FROM RETAINED EARNINGS TO ADDITIONAL PAID-IN-CAPITAL IN THE
THIRD FISCAL QUARTER OF 1996. THE DISTRIBUTION WILL BE PAID IN QUARTERLY
INSTALLMENTS OVER A ONE-YEAR PERIOD.
</FN>
</TABLE>
