<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended October 31, 1998
Commission File Number 000-27130
WESTAFF, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-1266151
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation and organization)
301 LENNON LANE, WALNUT CREEK, CA 94598-2453
(Address of principal executive offices, including zip code)
(925) 930-5300
(Registrant's telephone number)
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.01 PAR VALUE PER SHARE
(Title of class)
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 X No __
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [ X ]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant was approximately $42,913,256 as of December 31, 1998, based on
the closing price of the Registrant's Common Stock on the Nasdaq National
Market reported for that trading day. Shares of Common Stock held by each
officer and director and by each person who owns 5% or more of the
outstanding Common Stock have been excluded from this computation in that
such persons may be deemed to be affiliates. This determination of affiliate
status is not necessarily a conclusive determination for other purposes.
As of December 31, 1998 the Registrant had outstanding 15,844,406 shares
of Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents (or portions thereof) are incorporated herein by
reference:
Portions of the Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held on March 30, 1999 are incorporated by reference into
this Form 10-K Report.
<PAGE>
INDEX
WESTAFF, INC.
<TABLE>
<CAPTION>
Page No.
<C> <S> <C>
PART I
ITEM 1. BUSINESS.................................................... 3
ITEM 2. PROPERTIES.................................................. 18
ITEM 3. LEGAL PROCEEDINGS........................................... 18
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......... 18
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS......................................... 19
ITEM 6. SELECTED FINANCIAL DATA..................................... 20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITIONAL AND RESULTS OF OPERATIONS....................... 20
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................. 29
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE...................... 29
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.......... 30
ITEM 11. EXECUTIVE COMPENSATION...................................... 32
ITEM 12. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT............................ 32
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS................................................ 32
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT
SCHEDULES, AND REPORTS ON FORM 8-K.......................... 33
SIGNATURES.................................................. 38
</TABLE>
<PAGE>
PART I
ITEM 1. BUSINESS.
The following Business Section contains forward-looking statements that
involve risks and uncertainties. The Company's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors including those set forth under "Factors Affecting
Future Operating Results" beginning on page 13 below and elsewhere in, or
incorporated by reference into, this Form 10-K. This Annual Report on Form
10-K for the year ended October 31, 1998 contains service marks of the
Company.
GENERAL
The Company provides temporary staffing services primarily in suburban
and rural markets ("secondary markets"), as well as in the downtown areas of
major urban centers ("primary markets"), in the United States and selected
international markets. Through its network of Company-owned, franchise agent
and licensed offices, the Company offers a wide range of temporary staffing
solutions, including replacement, supplemental and on-site programs to
businesses and government agencies. The Company has over 50 years of
experience in the staffing industry and, as of October 31, 1998, operated
through over 370 business services offices in 45 states, the District of
Columbia, Guam and five foreign countries. As of October 31, 1998,
approximately 71% of these offices were owned by the Company, 22% were
operated by franchise agents and 7% were operated by licensees. The Company
differentiates itself from other large temporary staffing companies by
focusing on recruiting and placing essential support personnel in secondary
markets. Essential support personnel often fill clerical, light industrial
and light technical positions such as word processing, data entry, reception,
customer service and telemarketing, warehouse labor, manufacturing, assembly
and lab assistance. These assignments can support either core or non-core
functions of the customer's business, but are always "essential" to daily
operations. The Company believes that businesses are increasingly willing to
outsource or supplement large portions of these essential support functions
with temporary staffing personnel.
In November 1998, the Company announced its plan to sell its medical
business, primarily operating through Western Medical Services, Inc., a
wholly-owned subsidiary of the Company ("Western Medical"). The Company is
currently involved in discussions with a number of parties who have expressed
an interest in Western Medical. As a result of this decision, the Company
has classified its medical operations as discontinued operations in the
Company's Consolidated Financial Statements and provided a separate
discussion of the medical operations in this Business Section. See
"--Medical Services" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Discontinued Operations."
The Company was founded in 1948 and incorporated in California in 1954.
In October 1995, the Company reincorporated in Delaware. The Company's
corporate name was changed to Westaff, Inc. in September 1998. The Company's
executive offices are located at 301 Lennon Lane, Walnut Creek, California
94598-2453, and its telephone number is (925) 930-5300. The Company transacts
business through its subsidiaries, the largest of which is Westaff (USA),
Inc., a California corporation, that is the primary operating entity.
References in this Form 10-K to (i) the "Company" or "Westaff" refer to
Westaff, Inc., its predecessor and their respective subsidiaries, unless the
context otherwise requires, and (ii) "franchise agents" refer to the
Company's franchisees in their roles as limited agents of the Company in
recruiting job applicants, soliciting job orders, filling those orders and
handling collection matters upon request, but otherwise refer to the
Company's franchisees in their roles as independent contractors of the
Company.
BUSINESS STRATEGY
The Company's objective is to become a leading provider of essential
support services in secondary markets throughout the United States and in
selected international markets. The key elements of the Company's business
strategy include:
FOCUS ON SALES WITHIN THE ESSENTIAL SUPPORT SERVICES SECTOR. The
Company focuses on placing essential support personnel in the growing markets
for clerical, light industrial and light technical temporary staffing. The
Company believes
<PAGE>
that essential support services are the foundation of the temporary staffing
industry and will remain so for the foreseeable future. The Company also
believes that employees performing essential support functions are, and will
remain, an integral part of the labor market in local, regional and national
economies around the world. The Company believes that it is well-positioned
to capitalize on the anticipated growth in these business segments because of
its ability to attract and retain essential support personnel and its
specialized knowledge of the staffing needs of customers.
ENHANCE RECRUITING OF QUALIFIED PERSONNEL. The Company believes that a
key component of the Company's success is its ability to recruit and maintain
a pool of qualified essential support personnel and regularly place them into
desirable positions. The Company uses comprehensive methods to assess, select
and, when appropriate, train its temporary employees in order to maintain a
pool of qualified personnel to satisfy ongoing customer demand. The Company
believes one of its key competitive advantages in attracting and retaining
essential support personnel is its "quick pay" system, which provides it with
the ability to print payroll checks at most of its branch offices within 24
hours after receipt of a time card. The Company also offers its temporary
employees comprehensive benefit, retention and recognition packages,
including bonuses, vacation pay, holiday pay and opportunities to participate
in the Company's contributory 401(k) plan and discounted employee stock
purchase plan.
EMPHASIZE SECONDARY MARKETS. The Company's strategy is to capitalize on
its presence in secondary markets and to build market share by targeting
small to mid-sized customers, including divisions of Fortune 500 companies.
The Company believes that in many cases, such markets are less competitive
and less costly in which to operate than the more central areas of
metropolitan markets, where a large number of staffing services companies
frequently compete for business and occupancy costs are relatively high. In
addition, the Company believes that secondary markets are more likely to
provide the opportunity to sell retail and recurring business that is
characterized by relatively higher gross margins. The Company focuses on this
type of business while also selectively servicing strategic national and
regional contracts.
MAINTAIN ENTREPRENEURIAL AND DECENTRALIZED OFFICES WITH STRONG CORPORATE
SUPPORT. The Company seeks to foster an entrepreneurial environment by
operating each office as a separate profit center, by giving managers and
staff considerable operational autonomy and financial incentives and by
establishing franchise agent and licensed offices in appropriate markets. The
Company has designed programs to encourage a "team" approach in all aspects
of sales and recruiting, to improve productivity and to maximize profits. The
Company believes that this structure allows it to recruit and retain highly
motivated managers who have demonstrated the ability to succeed in a
competitive environment. This structure also allows managers and staff to
focus on branch operations while relying on corporate headquarters for
support in back-office operations, such as risk management programs and
unemployment insurance, credit, collections, advice on legal and regulatory
matters, quality standards and marketing.
ENHANCE INFORMATION SYSTEMS. The Company believes its management
information systems are instrumental to the success of its operations. The
Company's business depends on its ability to store, retrieve, process and
manage significant amounts of data and periodically expand or upgrade its
information processing capabilities. The Company has finalized a long-term
strategic plan for its next generation management information and support
systems and is introducing these systems in a number of phases through
replacements of, and enhancements to, various aspects of its current systems.
The Company believes that these replacements and enhancements will increase
management's ability to store, retrieve, process and manage information. As a
result, the Company will be able to improve service to its customers and
employees by reducing errors and speeding the resolution of inquiries, while
more efficiently allocating resources devoted to developing and maintaining
the Company's information technology infrastructure. See "Factors Affecting
Future Operating Results--Reliance on Management Information Systems."
CONTROL COSTS THROUGH EMPHASIS ON RISK MANAGEMENT. Workers'
compensation and unemployment insurance premiums are significant expenses in
the temporary staffing industry. Workers' compensation costs are particularly
high in the light industrial sector. The Company has developed risk
management programs that it believes improve management's ability to control
these employee-related costs through pre-employment safety training, safety
assessment and precautions in the work place, post-accident procedures and
return to work programs. The Company also has created strong financial
incentives for branch offices to implement its risk management procedures.
The Company believes that its emphasis on controlling employee-related costs
enables branch office managers to price services more competitively and
improve profitability.
<PAGE>
GROWTH STRATEGY
The Company's growth strategy comprises two elements: continued
immediate focus on internal growth and future pursuit of strategic and
complementary acquisitions.
INTERNAL GROWTH. A principal element of the Company's growth strategy
has been its focus on internal growth. Same store sales from continuing
operations increased 14.4%, 12.9% and 8.0% in fiscal 1996, fiscal 1997 and
fiscal 1998, respectively, as compared to the prior annual periods. The
Company's internal growth strategy consists of the following:
- INCREASE SALES AND PROFITABILITY AT EXISTING OFFICES. The Company
believes that a substantial opportunity exists to increase sales of
services and profitability in existing offices. The Company has
implemented incentive compensation plans to encourage branch office
managers and staff to increase productivity and profits at the branch
level, such as the Company's incentive program based on gross profit
per full-time equivalent (FTE) staff for most of its business services
field personnel as well as a return on sales bonus program for
managers. In addition, the Company has restructured its
corporate-level branch management function to establish and monitor
branch office performance targets and develop programs to support
branch operations.
- SELECTIVELY EXPAND ON-SITE PROGRAMS. The Company has taken advantage
of industry trends by expanding its on-site (also referred to as
"vendor-on-premises") programs. Since its initial public offering, the
Company has substantially increased the number of its on-site programs
and, as of October 31, 1998, had 45 such programs. Under these
programs, the Company can assume administrative responsibility for
coordinating all essential staffing services throughout a customer's
location, including skills testing and training. On-site relationships
provide customers with dedicated account management which can more
effectively meet the customer's changing staffing needs with high
quality, consistent service. These programs tend to have lower gross
margins than those for retail customers, higher volumes, comparatively
lower operating expenses and relatively longer customer relationships.
These programs also may provide an office with sufficient gross profit
dollars to cover fixed expenses as well as conduct activities to
generate name recognition for recruiting and marketing purposes.
- PURSUE EXPANSION BY ESTABLISHMENT OF NEW OFFICES. The Company seeks
to open new Company-owned offices primarily in existing markets to
benefit from common area management, cross-marketing opportunities and
leveraging of administrative expenses. The Company's corporate and
operating management jointly develop expansion plans for new offices
based upon various criteria, including market demand, availability of
qualified personnel, the regulatory environment in the relevant market
and whether a new office would complement or broaden the Company's
current geographic network. The Company expects to limit expansion of
its franchise agent and licensed programs to proven industry
professionals interested in pursuing markets that are not strategic to
the Company.
- EXPAND INTERNATIONAL PRESENCE. The Company intends to expand its
international presence primarily through internal growth and, to a
lesser extent, by pursuing selected acquisition opportunities. As of
October 31, 1998, the Company operated 59 offices in Australia, the
United Kingdom, Norway, New Zealand and Denmark, and has experienced
growth in its international markets, with sales of services, excluding
the effect of foreign currency rate fluctuations, increasing 24.6% in
fiscal 1997 compared to fiscal 1996 and 18.5% in fiscal 1998 compared
to fiscal 1997. The Company believes that its established
international presence will enable it to take advantage of growing
overseas markets where the high cost of maintaining permanent
employees encourages the use of temporary personnel.
PURSUIT OF COMPLEMENTARY AND STRATEGIC ACQUISITIONS. The Company
currently intends to focus on internal growth at least through the second
quarter of fiscal 1999. In the future, the Company may also pursue
opportunities for growth through acquisitions in existing as well as new
markets. However, the Company has scaled back its near-term acquisition
plans and, accordingly, sales growth from additional acquisitions will likely
be minimal at least through the first two quarters of fiscal 1999 and
possibly throughout fiscal 1999. In evaluating potential acquisition
candidates, the Company focuses on independent staffing companies with a
history of profitable operations, a strong management team, a recognized
presence in
<PAGE>
secondary markets and compatible corporate philosophies and
culture. In fiscal 1998, the Company completed 14 business services
acquisitions. See "Factors Affecting Future Operating Results--Uncertain
Ability to Continue and Manage Growth; Risks Related to Acquisitions."
The Company has established a team of corporate officers and department
heads responsible for identifying prospective acquisitions, performing due
diligence, negotiating contracts and subsequently integrating the acquired
companies. The integration of newly acquired companies generally involves
standardizing each company's accounting and financial procedures with those
of the Company. Acquired companies are brought under the Company's uniform
risk management program and key personnel of acquired companies often become
part of field management. Marketing, sales, field operations and personnel
programs are reviewed and, where appropriate, conformed to the best practices
of the Company's existing operations.
In addition to external acquisitions, the Company also may engage in
"internal" acquisitions, i.e., the purchase of existing franchise agent and
licensed operations. The Company has a right of first refusal on any sale of
franchise agent or licensed operations. Since the beginning of fiscal 1998,
the Company has acquired a total of seven business services franchise agent
offices.
SERVICES
The Company's business services division places essential support
personnel in clerical, light industrial and light technical positions through
an international network of offices. Essential support personnel often fill
clerical, light industrial and light technical positions such as word
processing, data entry, reception, customer service and telemarketing,
warehouse labor, manufacturing, assembly and lab assistance. As of October
31, 1998, the Company's domestic and international business services
operations comprised over 370 offices.
The Company markets its temporary personnel services to local and
regional customers through a network of Company-owned, franchise agent and
licensed offices, as well as through its on-site service locations. The
Company coordinates sales and marketing efforts through its corporate
headquarters in cooperation with branch and regional offices and targets
small to mid-size companies in secondary markets. New customers are obtained
through personal sales presentations, telemarketing, direct mail
solicitation, referrals from other customers and advertising in a variety of
regional and local media, including the yellow pages, newspapers, magazines
and trade publications. In addition, local radio, billboard and other
creative advertising are used in certain markets to enhance the Company's
name recognition.
As of October 31, 1998, the Company's international operations comprised
59 Company-owned offices: 20 in Australia; 23 in the United Kingdom; six in
Norway; six in New Zealand; and four in Denmark. Through these offices, the
Company provides regular and temporary personnel services in the clerical and
light industrial support areas. The Company employs a managing director for
each foreign country who oversees all operations in that country. For fiscal
1997 and fiscal 1998, 13.3% and 12.4%, respectively, of total system revenues
from continuing operations were derived from the Company's international
operations. Same store sales for international operations increased 18.2% and
6.5% for fiscal 1997 and fiscal 1998, respectively, as compared to the same
prior year periods. A total of 23 offices in the United Kingdom and 22
offices in Australia have certification under ISO 9002, a total quality
management program.
OPERATIONS
As of October 31, 1998, the Company operated through a network of over
370 business services offices in 45 states, the District of Columbia, Guam
and five foreign countries. In addition, the Company from time to time
establishes recruiting offices both for recruiting potential temporary
employees and for testing demand for its services in new market areas. The
Company's operations are decentralized, with branch, area, regional and zone
managers and franchise agents and licensees enjoying considerable autonomy in
hiring, determining business mix and advertising.
The following table sets forth information as to the number of business
services offices in operation as of the dates indicated.
<PAGE>
<TABLE>
<CAPTION>
OCT. 29, OCT. 28, NOV. 2, NOV. 1, OCT. 31,
-------- -------- ------- ------- --------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Number of Offices by Ownership:(1)
Company-owned....................... 168 196 217 226 267
Franchise agent..................... 89 90 103 103 82
Licensed............................ 16 21 7 11 25
---- ---- ---- ---- ----
Total........................... 273 307 327 340 374
---- ---- ---- ---- ----
---- ---- ---- ---- ----
Number of Offices by Location(1):
Domestic............................ 232 263 280 288 315
International....................... 41 44 47 52 59
---- ---- ---- ---- ----
Total................................... 273 307 327 340 374
---- ---- ---- ---- ----
---- ---- ---- ---- ----
- --------------
</TABLE>
(1) Excludes Company-owned recruiting offices and medical services offices.
COMPANY-OWNED OFFICES. Employees of each Company-owned office report to
a manager who is responsible for day-to-day operations and the profitability
of that office. Office managers generally report to area and/or regional
managers. As of December 31, 1998, there were two zone managers and 15
regional managers in the Company's business services division. All domestic
and some international employees in the Company's business services branch
offices may earn commissions based on the gross profit dollars per FTE
employee. This program is designed to motivate employees to maximize the
growth and profitability of their offices. In addition, office, area,
regional and zone managers are eligible to participate in a return on sales
incentive plan that compensates them based on the net income achieved in
their office, area, region or zone. The Company believes that its
incentive-based compensation plans encourage employees in its Company-owned
offices to increase sales and profits, resulting in an entrepreneurial,
creative and committed team.
FRANCHISE AGENT OFFICES. The Company's franchise agents have the
exclusive right by contract to sell certain of the Company's services and to
use the Company's service marks, business names and systems in a specified
territory. The Company's franchise agent agreements generally allow franchise
agents to open multiple offices within their exclusive territories. As of
October 31, 1998, the Company's 43 business services franchise agents
operated 82 franchise agent offices. The Company designs its franchise agent
program to provide attractive terms to franchise agents. Sales generated by
franchise agent operations and related costs are included in the Company's
consolidated sales of services and cost of services, respectively, and during
fiscal 1996, 1997 and 1998, franchise agents offices represented 30.0%, 26.0%
and 21.6%, respectively, of the Company's sales of services.
Under the Company's franchise agent program, the franchise agent, as an
independent contractor, is responsible for establishing and maintaining an
office and paying related administrative and operating expenses, such as
rent, utilities and salaries of its branch office staff. Each franchise agent
functions as a limited agent of the Company in recruiting job applicants,
soliciting job orders, filling those orders and handling collection matters
upon request, but otherwise functions as an independent contractor. As
franchisor, the Company is the employer of the temporary employees and the
owner of the customer accounts receivable. The Company is responsible for
providing start-up materials and supplies, training the franchise agent and
occasionally assisting on-site, aiding in bids for national accounts and
paying the wages of the temporary employees and all related payroll taxes and
insurance. As a result, the Company provides a substantial portion of the
working capital needed for the franchise agent operations. The Company also
provides the use of the Company's payroll and information services to manage
information regarding temporary employees and customers. Franchise agent
agreements have an initial term of five years and are renewable for multiple
five-year terms.
Franchise agents are required to follow the Company's operating
procedures and standards in recruiting, screening, classifying and retaining
temporary personnel. Under the Company's name, the franchise agent solicits
orders for temporary employees from customers and assigns the Company's
temporary employees to customers in response to such orders. In an effort to
control liability associated with workers' compensation claims, the Company's
risk management department works closely with franchise agent offices in
evaluating job assignments and seeking to promote sales while effectively
managing risks. The Company handles all government withholding, quarterly
reports and W-2s, and maintains comprehensive
<PAGE>
insurance coverage for all temporary employees sent on assignment by
franchise agent offices. In addition, through on-site safety and quality
assurance inspections, franchise agent offices evaluate risks and check
compliance with state and federal safety regulations. In some cases, the
Company may, in conjunction with the Company's insurance carrier, employ the
services of a professional loss control engineer.
The Company's franchise agent and license agreements contain two-year
non-competition covenants which the Company vigorously seeks to enforce.
Efforts to enforce the non-competition covenants have resulted in litigation
brought by the Company following termination of certain franchise agent
agreements. In the past five fiscal years, the Company has commenced four
actions to enforce the non-competition covenants. Three of those actions were
resolved in the Company's favor, and one is presently pending. See "Factors
Affecting Future Operating Results--Risks Related to Franchise Agent and
Licensed Operations."
LICENSED OFFICES. Under the Company's license program, the licensee is
the employer of the temporary employees and the owner of the customer
accounts receivable. The Company typically grants licensees the exclusive
right to establish an office to market and provide light industrial and
clerical temporary personnel or light technical temporary personnel within a
designated geographic area. Licensees receive the same basic training from
the Company as franchise agents and attend seminars, participate in marketing
programs and use the Company's sales literature. The Company also assists its
licensees in obtaining business from its national accounts and provides them
with national, regional and cooperative local advertising.
Licensees operate within the framework of the Company's policies and
standards. They recruit and employ temporary employees according to the
Company's guidelines, and pay these employees using the Company's payroll
procedures. However, licensees must obtain their own workers' compensation,
liability, fidelity bonding and state unemployment coverage, which determine
their payroll costs. The Company bills all licensees' customers and collects
their remittances. License agreements are for a term of five years and are
renewable for multiple five-year terms. As of October 31, 1998, the Company's
10 business services licensees operated 25 licensed offices.
As a service to its licensees, the Company finances the licensees'
temporary employee payroll, payroll taxes and insurance. This indebtedness is
secured by a pledge of the licensees' accounts receivable, tangible and
intangible assets, and the license agreements. Borrowings under the lines of
credit bear interest at a rate equal to the reference rate of the Bank of
America NT & SA plus two percentage points. Interest is charged on the
borrowings only if the outstanding balance exceeds certain specified limits.
The Company's sale of franchises and licenses is regulated by the
Federal Trade Commission and by state business opportunity and franchise
laws. The Company has either registered, or been exempted from registration,
in 14 of the 15 states that require registration in order to offer franchises
or licenses. In one of the 15 states, the Company has not yet sought
registration and is therefore not currently authorized to offer franchise or
license arrangements.
MANAGEMENT INFORMATION SYSTEMS
The Company believes that its management information systems are
instrumental to the success of its operations. The Company's management
information systems include a billing and payroll application which is
designed to provide timely and accurate payment for temporary employees and
billing to the Company's customers. Under this system, centralized computer
server systems, interfaced with personal computers in branch offices, support
branch office operations with daily, weekly, monthly and quarterly reports
that provide information ranging from customer activity to office
profitability. Office automation provides the branch offices with direct
access to data for a variety of purposes, such as mailings, ad hoc customer
queries and accounts receivable monitoring. These systems provide the Company
with the ability to print checks at most of its offices within 24 hours after
receipt of the time card. Most of the employees of the domestic
Company-owned, franchise agent and licensed offices are served by the
Company's systems of remote site personal computers. The few offices that are
not currently linked by personal computer to the systems submit billing and
payroll information by facsimile or overnight delivery services to the
Company's headquarters for processing. The remote site systems are supported
by the Company's in-house technical support department, which is responsible
for computer installations, training and technical support.
<PAGE>
In the third quarter of fiscal 1998, the Company finalized its long-term
strategic plan for its next generation management information and support
systems. In connection with this process, the Company has entered into
agreements or is in discussion with various software and hardware providers
to purchase the required hardware and software and to assist in the design
and implementation of the new systems. The Company anticipates that these
systems will be easier to maintain and allow the Company to realize
efficiencies in managing information technology resources. These systems
should provide management with enhanced abilities to acquire daily, weekly,
monthly and quarterly reports on office and Company performance and improve
the mechanisms for distribution of these reports to field personnel. These
systems are designed to more tightly integrate the Company's payroll and
customer billing activities, and should also offer enhanced candidate
recruiting and customer data management and search capabilities that will
integrate directly with the Company's payroll and billing functions and
thereby reduce both the incidence of errors and the time necessary to
research billing and payroll issues. When fully implemented, these systems
should permit the Company's customers to review their own billing, accounts
receivable and job activity records as well as conduct research and place
orders on-line, and allow Company employees and temporary staff to review
their own payroll, benefits and human resource information, all via the use
of the Internet. These systems are also designed to enable the Company's
temporary employees to receive their paychecks essentially on demand.
The long-term strategic plan calls for a systematic conversion from the
Company's current systems to the new systems over the next 24 months in a
multi-phased approach to deliver incremental productivity and efficiency
gains. The first phase will be to replace the Company's back-office financial
accounting and reporting system. The Company believes this conversion will
resolve certain Year 2000 compliance issues in its existing systems, as well
as provide its field offices with more real-time access to branch and
regional operating information. Concurrent with this project, the Company
intends to implement a frame relay network which will allow a Company-wide
access to a centrally managed office and productivity software suite. The
second phase will deliver a full featured branch office tool designed to
assist in order management, candidate search and recruiting, customer service
management and sales management, which should fully integrate with the
Company's existing and future payroll and billing systems. The third phase
will involve the implementation of a payroll, billing and activities
management system integrating both branch office systems and financial
systems. The Company anticipates incurring capital expenditures of
approximately $12.0 million in connection with this project, of which $6.2
was incurred during fiscal 1998, $4.8 million is expected to be incurred in
fiscal 1999, and $1.0 million is expected to be incurred in fiscal 2000.
The Company believes that its existing management information systems,
with minor modifications and planned software upgrades and enhancements, will
be adequate to handle the needs of the Company through the end of fiscal
2000, prior to which time the new systems are expected to become fully
operational. The Company believes that the new enterprise-wide systems will
provide significant operating efficiencies for both field and corporate
office personnel. However, there can be no assurance that the Company will
meet anticipated completion dates for system replacements and enhancements
consisting of next generation management information and support systems,
that such replacements and enhancements will be completed in a cost-effective
manner or that such replacements and enhancements will support the Company's
future growth or provide significant gains in efficiency and productivity.
The failure of the replacements and enhancements to meet these expected goals
could result in increased system costs and could have a material adverse
effect on the Company's business, results of operations, cash flows or
financial condition.
See "Factors Affecting Future Operating Results--Reliance on Management
Information Systems" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
RISK MANAGEMENT PROGRAMS
The Company is responsible for all employee-related expenses for the
temporary staff employees of its Company-owned and franchise agent offices
including workers' compensation, unemployment insurance, social security
taxes, state and local taxes, and other general payroll expenses.
The Company's risk management programs employ a variety of loss
prevention and loss control strategies, financial incentives and aggressive
claims management techniques to help control and reduce risks, particularly
with respect to workers' compensation programs. The Company's loss control
strategies include actively screening work sites to ensure that temporary
employees are placed within the Company's strict safety guidelines. The
Company carefully monitors the job assignments to prevent placing employees
in certain high risk jobs that are prohibited under the Company's guidelines.
In
<PAGE>
addition, the Company requires general and specific safety orientation
training as well as appropriate personal protective equipment in certain
assignments. Safety equipment includes back supports, safety glasses,
protective footwear and cut-proof gloves. Each accident is carefully reviewed
by the Company to ensure that safety procedures were followed and that
additional safety considerations are implemented to avoid any future injuries
at a customer's work site.
The Company has also developed financial incentives for field offices to
ensure that risk management remains a high priority. Each Company-owned and
franchise agent office is charged workers' compensation premiums through an
internal experience modifier program which is based largely upon the local
office's claims experience. The Company also employs a dividend program for
its franchise agent offices which will return a portion of their premiums in
the event of positive claims experience. The Company believes that its
experience modifier and dividend programs provide strong incentives to the
field offices to control workers' compensation risks.
The Company also employs a number of claims management techniques to
help control losses. In the event of an actual workers' compensation injury,
for example, post-accident drug testing is performed as part of the initial
examination. In some circumstances, if the claimant tests positive for
illegal drug usage, the claim may be denied in its entirety. If the injury
prevents the employee from returning to work immediately, the Company moves
forward with aggressive claims management. The Company has maintained a
long-term relationship with its insurance carrier and claims administrator.
This long-standing relationship has helped the Company to ensure consistency
in applying its risk management programs. The Company's corporate claims
management team, as well as all regional managers, have frequent meetings and
conference calls with the claims administrator, and can examine the claims
adjusters' notes within 24 hours. On an ongoing basis, the Company's
workers' compensation specialists actively analyze claims to determine
compensability issues, the appropriateness of medical treatment and whether
reserve balances are properly established. The Company also considers
whether or not the customer or a third party may be a source for subrogation
in the event civil recoveries are allowable to the injured employee.
Due to the nature of temporary work, state unemployment insurance costs
can rise to the maximum statutory rates if not properly managed. Through
appropriate payroll tax planning, as well as utilization of an internally
developed comprehensive claims management system, the Company believes it has
developed methods to minimize these costs. There can be no assurance,
however, that such methods will be successful. Any increase in such costs
could have a material adverse effect on the Company's business, results of
operations, cash flows or financial condition. See "Factors Affecting Future
Operating Results--Variability of Employee-Related Costs."
COMPETITION
The temporary staffing industry is highly competitive with few barriers
to entry. The Company believes that the majority of commercial temporary
staffing companies are local, full-service or specialized operations with
less than five offices. Within local markets, typically no single company has
a dominant share of the market. The Company also competes for qualified
temporary personnel and customers with larger, national full-service and
specialized competitors in local, regional, national and international
markets. The principal national competitors are Adecco SA, Interim Services,
Inc. (commercial services division), Kelly Services, Inc., Manpower Inc.,
Norrell Corporation (commercial services division), RemedyTemp, Inc., The
Olsten Corporation (commercial services division) and Personnel Group of
America, Inc.. Many of the Company's principal competitors have greater
financial, marketing and other resources than the Company. In addition,
there are a number of medium-sized firms which compete with the Company in
certain markets where they may have a stronger presence, such as regional or
specialized markets.
The Company believes that the competitive factors in obtaining and
retaining customers include understanding customers' specific job
requirements, providing temporary personnel in a timely manner, monitoring
quality of job performance and pricing of services. The Company has
experienced pricing pressure in all areas of its business and expects these
pressures to continue. The Company believes that the primary competitive
factors in obtaining qualified candidates for temporary employment
assignments are wages, benefits and flexibility of work schedules. In
addition, the entire staffing industry is faced with recruiting challenges
due to low unemployment rates. There can be no assurance that the Company
will not encounter increased competition in the future, which could limit the
Company's ability to maintain or increase its market share or gross margin,
and which could have a material adverse effect on the Company's business,
results of
<PAGE>
operations, cash flows or financial condition. See "Factors
Affecting Future Operating Results--Highly Competitive Market."
EMPLOYEES
The Company estimates that as of October 31, 1998 it had approximately
37,000 temporary employees on assignment through its business services
division and employed approximately 1,266 regular staff in its business
services division. The Company's employees are not covered by any collective
bargaining agreements. The Company believes that its relationships with its
employees are good.
The Company, as employer, is responsible for and pays the regular and
temporary payrolls, Social Security taxes (FICA), federal and state
unemployment taxes, workers' compensation insurance and other direct labor
costs relating to its temporary employees (including temporary employees
assigned by franchise agents). The Company offers various insurance programs
and other benefits for certain of its temporary employees which are made
available at the option of regional or branch office managers or franchise
agents and licensees. As part of health care reform, federal and certain
state legislative proposals have from time to time included provisions that
would extend health insurance benefits to temporary employees who are not
currently provided with such benefits. Due to the uncertainty associated
with the ultimate enactment of any such health care reform initiatives and
the form and content of any such initiatives once enacted, the Company is
unable to estimate the impact any extension of health insurance benefits
would have on its business, results of operations, cash flows or financial
condition.
SERVICE MARKS
The Company has various service marks registered with the United States
Patent and Trademark Office, with the State of California and in various
foreign countries. Federal and state service mark registrations may be
renewed indefinitely as long as the underlying mark remains in use. The
Company's service marks include, Western Staff Services-Registered
Trademark-, Western Temporary Services-Registered Trademark-, Western
Technical Services-Registered Trademark-, Westaff-Registered Trademark-,
Westemp-Registered Trademark- and Be a Temp-Registered Trademark-. The
Company's applications to federally register the service marks USA Temp-SM-
and The Essential Support Services Leader-SM- are pending.
MEDICAL SERVICES
In November 1998, the Company announced its plan to sell Western
Medical. The Company is currently involved in discussions with a number of
parties who have expressed an interest in Western Medical. As a result of
this decision, the Company has classified its medical operations as
discontinued operations and, accordingly, has segregated the net assets of
the discontinued operations in the Consolidated Balance Sheet at October 31,
1998, the operating results of the discontinued operations in the
Consolidated Statements of Operations for fiscal 1998, fiscal 1997 and fiscal
1996 and the cash flows from discontinued operations in the Consolidated
Statement of Cash Flows for fiscal 1998. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Discontinued
Operations."
Through Western Medical, the Company provides temporary health care
personnel to serve an array of home care and institutional health care needs,
including registered nurses, licensed practical/vocational nurses, physical,
occupational and speech therapists, medical social workers, certified home
health and personal care aides, home care companions, and allied health
personnel, such as pharmacists, medical technicians and phlebotomists.
Approximately half of the medical services division's personnel are licensed.
As of October 31, 1998, the medical services division comprised 56 domestic
offices, with two regional managers. The medical services division sales of
services and license fees for fiscal 1997 and fiscal 1998 were $46.7 million
and $54.9 million, respectively.
In home care, a registered nurse or appropriate home care professional
initially assesses the home care case, then devises a plan of treatment for
doctor approval, provides the necessary treatment, examines and records the
patient's progress, and makes periodic reports to the physician or case
manager. The medical services division also provides health care personnel
for institutional staffing in hospitals, nursing homes, clinics, other health
care facilities and prisons. Institutional staffing consists mainly of RNs,
LPNs/LVNs, certified nurse aides and allied health personnel such as
pharmacists, phlebotomists and x-ray and lab technicians. To maintain quality
control, the medical services division sets policy and procedures for
Company-owned, franchise agent and licensed offices through its own internal
oversight
<PAGE>
authority. These procedures include guidelines for compliance with local,
state and federal regulations, improving quality of service, hiring criteria,
training programs and professional guidance.
The Company began to serve Medicare patients in fiscal 1992.
Approximately 28.5% and 15.3%, respectively, of the Company's medical
services sales in fiscal 1997 and fiscal 1998 were attributable to Medicare
services. Over half the total of 35 Company-owned offices in the medical
services division were certified to provide home health care services to
Medicare patients as of October 31, 1998.
FRANCHISE AGENT OFFICES. Franchise agents in the medical services
division enter into agreements similar to those in the business services
division. However, the agreements relating to the medical services division
contain a separate agreement that covers home health agency business. As of
October 31, 1998, the Company had 12 medical services franchise agents
operating a total of 13 offices.
LICENSED OFFICES. Under the Company's license program, the licensee is
the employer of the temporary employees and the owner of the customer
accounts receivable. In addition, the medical licensee retains the home
health agency license and Medicare certification, if any, in its name. The
Company retains 8.0% of the non-Medicare gross sales as a service fee and
charges a service fee per visit for Medicare services. As of October 31,
1998, the Company's 4 medical services licensees operated a total of 8
offices.
MANAGEMENT INFORMATION SYSTEMS. The Company's medical services division
is largely independent from the Company's general information systems.
During the first quarter of fiscal 1998, the medical services division
completed the conversion to, and currently uses, a comprehensive,
industry-specific clinical and financial accounting and reporting system,
acquired from a nationally known medical information system company. It is
designed to organize and present information in a manner that facilitates the
ability of the Company to obtain appropriate and timely reimbursement under
Medicare and other programs through electronic billing, while integrating the
financial and clinical information which is vital to future managed care
controls. The Company is currently working on additional enhancements to the
systems of the medical services division to improve efficiency and
performance.
GOVERNMENTAL REGULATION. Legislative changes affecting the health care
industry have been proposed, from time to time, in Congress and various
states. Changes in the government's support of health care services, the
methods by which such services are delivered and the prices for such services
could each have a material adverse effect on the Company's business, results
of operations, cash flows and financial condition.
A number of states have adopted laws regulating companies that provide
health care services. In many of the states, the Company need only be
licensed. In 20 states, a certificate of need ("CON") from the state must be
obtained to be a Medicare provider. CON laws restrict the types of care that
may be provided and can limit or prohibit the Company's ability to provide
certain services and to establish or expand its medical operations. CON
requirements and restrictions vary substantially from state to state.
Joint Commission on Accreditation of Healthcare Organizations ("JCAHO")
accreditation has become an important criterion in providing home health care
services. As of December 31, 1998, 11 of the Company-owned offices, two
franchise agent offices and four licensed offices were accredited by JCAHO,
and an application for one JCAHO accreditation was pending for one franchise
agent office. Failure to obtain such accreditation or delays in the
accreditation process could adversely affect the ability of the Company to
compete in the home health care services area.
On August 5, 1997, President Clinton signed into law the Balanced Budget
Act of 1997 (the "Budget Act"), resulting in significant changes to
cost-based reimbursement for Medicare services provided by home health care
providers, including the reduction of cost limits. Under the Interim Payment
System ("IPS"), home health agencies will be reimbursed the lowest of: (i)
the actual costs of operating the agency's Medicare services; (ii) a reduced
aggregate cost per visit rate; or (iii) an aggregate per beneficiary limit.
The Budget Act requires the Health Care Financing Administration of the
U.S. Department of Health and Human Services ("HCFA") to implement a
Prospective Payment System ("PPS") for fiscal years beginning on or after
October 1, 1999 to replace this cost-based system. Under the PPS, home health
agencies will be paid a fixed amount for services
<PAGE>
rendered without regard to the cost of providing such services. There can be
no assurance that such reimbursement rates will cover the costs incurred by
the Company to provide Medicare home health care services. See "Factors
Affecting Future Operating Results--Governmental Regulation Relating to
Health Care Providers" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
EMPLOYEES. As of October 31, 1998, the Company had approximately 2,219
temporary employees on assignment in the medical services division, and
employed approximately 159 regular staff in connection with the division.
The Company's medical services employees are not covered by any collective
bargaining agreements. The Company believes that its relationships with
these employees are good.
As with its business services employees, the Company, as employer, is
responsible for and pays the regular and temporary payrolls, Social Security
taxes (FICA), federal and state unemployment taxes, workers' compensation
insurance and other direct labor costs relating to its temporary employees
(including temporary employees assigned by franchise agents). The Company
offers various insurance programs and other benefits for certain of its
temporary employees which are made available at the option of regional or
branch office managers or franchise agents and licensees. In addition,
temporary employees performing health care services are covered by
professional liability insurance. As part of health care reform, federal and
certain state legislative proposals have from time to time included
provisions that would extend health insurance benefits to temporary employees
who are not currently provided with such benefits. Due to the uncertainty
associated with the ultimate enactment of any such health care reform
initiatives and the form and content of any such initiatives once enacted,
the Company is unable to estimate the impact any extension of health
insurance benefits would have on its business, results of operations, cash
flows or financial condition.
SERVICE MARKS. The Company's medical services division has various
service marks registered with the United States Patent and Trademark Office
and with the State of California. Federal and state service mark
registrations may be renewed indefinitely as long as the underlying mark
remains in use. With respect to the medical services division, the Company's
service marks include, Western Medical Services-Registered Trademark- and
Western Medical Services Home Health Agency-Registered Trademark-. The
Company's pending application to federally register the service mark Western
Independent Living-SM- is on hold.
FACTORS AFFECTING FUTURE OPERATING RESULTS
This Form 10-K contains forward-looking statements concerning the
Company's future products, expenses, revenue, liquidity and cash needs as
well as the Company's plans and strategies. These forward-looking statements
are based on current expectations and the Company assumes no obligation to
update this information. Numerous factors could cause actual results to
differ significantly from the results described in these forward-looking
statements, including the following risk factors.
POSSIBLE ADVERSE EFFECTS OF FLUCTUATIONS IN THE GENERAL ECONOMY.
Demand for the Company's staffing services is significantly affected by the
general level of economic activity and unemployment in the United States and
the countries in which the Company operates. Companies use temporary staffing
services to manage personnel costs and staffing needs. When economic activity
increases, temporary employees are often added before full-time employees are
hired. However, as economic activity slows, many companies reduce their
utilization of temporary employees before releasing full-time employees. In
addition, the Company may experience less demand for its services and more
competitive pricing pressure during periods of economic downturn. Therefore,
any significant economic downturn could have a material adverse effect on the
Company's business, results of operations, cash flows or financial condition.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations."
UNCERTAIN ABILITY TO CONTINUE AND MANAGE GROWTH; RISKS RELATED TO
ACQUISITIONS. The Company has experienced significant growth, principally
through internal growth and, more recently, through acquisitions. However,
the Company has scaled back its near-term acquisition plans and, accordingly,
sales growth from additional acquisitions will likely be minimal at least
through the first two quarters of fiscal 1999 and possibly throughout fiscal
1999. There can be no assurance that the Company will be able to expand its
current market presence or successfully enter other markets through
acquisitions or the opening of new offices. The Company's ability to continue
its growth and profitability will depend on a number of factors, including:
(i) the strength of demand for temporary employees in the Company's markets;
(ii) the availability of capital to
<PAGE>
fund acquisitions; (iii) the ability to maintain or increase profit margins
despite pricing pressures; and (iv) existing and emerging competition. The
Company must also adapt its infrastructure and systems to accommodate growth
and recruit and train additional qualified personnel. Competition for
acquisitions may increase to the extent other temporary services firms, many
of which have significantly greater financial resources than the Company,
seek to increase their market share through acquisitions. In addition, the
Company is subject to certain limitations on the incurrence of additional
indebtedness under its credit facilities, which currently restrict the
Company's ability to finance acquisitions. Further, there can be no assurance
that the Company will be able to identify suitable acquisition candidates or,
if identified, complete such acquisitions or successfully integrate such
acquired businesses into its operations. Acquisitions also involve special
risks, including risks associated with unanticipated problems, liabilities
and contingencies, diversion of management's attention and possible adverse
effects on earnings resulting from increased goodwill amortization, interest
costs and workers' compensation costs, as well as difficulties related to the
integration of the acquired businesses, such as retention of management.
Furthermore, once integrated, acquisitions may not achieve comparable levels
of revenue or profitability as the Company's existing locations. In addition,
to the extent that the Company consummates acquisitions in which a portion of
the consideration is in the form of Common Stock, current shareholders may
experience dilution. The failure to identify suitable acquisitions, to
complete such acquisitions or successfully integrate such acquired businesses
into its operations could have a material adverse effect on the Company's
business, results of operations, cash flows or financial condition. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business--Growth Strategy."
RELIANCE ON MANAGEMENT INFORMATION SYSTEMS. The Company believes its
management information systems are instrumental to the success of its
operations. The Company's business depends on its ability to store,
retrieve, process and manage significant amounts of data, and periodically to
expand and upgrade its information processing abilities. In the third
quarter of fiscal 1998, the Company finalized its long-term strategic plan
for its next generation management information and support systems. The
Company anticipates introducing these systems in a number of phases through
replacements of, and enhancements to, various aspects of its current
management information and support systems. The Company has, in the past,
discovered problems in implementing new systems and may, in the future,
experience delays or increased costs to correct such defects. There can be
no assurance that the Company will meet anticipated completion dates for
system replacements and enhancements consisting of next generation management
information and support systems, that such replacements and enhancements will
be completed in a cost-effective manner, or that such replacements and
enhancements will support the Company's future growth or provide significant
gains in efficiency. The failure of the replacements and enhancements to meet
these expected goals could result in increased system costs and could have a
material adverse effect on the Company's business, results of operations,
cash flows or financial condition. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and "Business--Management
Information Systems."
RELIANCE ON EXECUTIVE MANAGEMENT. The Company is highly dependent on
its senior executives, including W. Robert Stover, now its Chairman and
founder, and formerly its Chief Executive Officer, Michael K. Phippen, now
its Chief Executive Officer and President, and Paul A. Norberg, its Executive
Vice President and Chief Financial Officer, and on the other members of its
executive management team. The Company has entered into a new employment
agreement with Mr. Stover for continuing employment until he chooses to
retire or until his death; moreover, the Company has entered into a five-year
employment agreement with Mr. Phippen pursuant to which he became Chief
Executive Officer effective January 1, 1999 and receives a specified
compensation package. Employment arrangements with all of the Company's other
executive officers are at-will. The loss of the services of any of these key
executive personnel could have a material adverse effect on the Company's
business, results of operations, cash flows or financial condition.
VARIABILITY OF OPERATING RESULTS; SEASONALITY. The Company has
experienced significant fluctuations in its operating results and anticipates
that these fluctuations may continue. Operating results may fluctuate due to
a number of factors, including the demand for the Company's services, the
level of competition within its markets, the Company's ability to increase
the productivity of its existing offices, control costs and expand
operations, the timing and integration of acquisitions and the availability
of qualified temporary personnel. In addition, the Company's results of
operations could be, and have in the past been, adversely affected by severe
weather conditions. The Company's fourth fiscal quarter consists of 16 or 17
weeks, while its first, second and third fiscal quarters consist of 12 weeks
each. Moreover, the Company's results of operations have also historically
been subject to seasonal fluctuations. Demand for temporary staffing
historically has been greatest during the Company's fourth fiscal quarter due
largely to the planning cycles of many of its customers. Furthermore, sales
for the first fiscal quarter are typically lower due to national holidays as
well as plant shutdowns during and after the holiday season. These shutdowns
and post-holiday season declines negatively impact job orders received by the
Company,
<PAGE>
particularly in the light industrial sector. Due to the foregoing factors,
the Company has experienced in the past, and may possibly experience in the
future, results of operations below the expectations of public market
analysts and investors. The occurrence of such an event could likely have a
material adverse effect on the price of the Common Stock. See "--Variability
of Employee-Related Costs" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Results of Continuing
Operations."
ABILITY TO ATTRACT AND RETAIN THE SERVICES OF QUALIFIED TEMPORARY
PERSONNEL. The Company depends upon its ability to attract and retain
qualified personnel who possess the skills and experience necessary to meet
the staffing requirements of its customers. During periods of increased
economic activity and low unemployment, the competition among temporary
staffing firms for qualified personnel increases. Many regions in which the
Company operates are experiencing historically low rates of unemployment and
the Company has experienced, and may continue to experience, significant
difficulties in hiring and retaining sufficient numbers of qualified
personnel to satisfy the needs of its customers. Furthermore, the Company may
face increased competitive pricing pressures during such periods. Based on
the current economic environment, competition for individuals with the
requisite skills is expected to remain strong for the foreseeable future.
There can be no assurance that qualified personnel will continue to be
available to the Company in sufficient numbers and on terms of employment
acceptable to the Company. The Company must continually evaluate and upgrade
its base of available qualified personnel to keep pace with changing customer
needs and emerging technologies. Furthermore, a substantial number of the
Company's temporary employees during any given year will terminate their
employment with the Company to accept regular staff employment with customers
of the Company. The inability to attract and retain qualified personnel could
have a material adverse effect on the Company's business, results of
operations, cash flows or financial condition. See "Business--Operations."
VARIABILITY OF EMPLOYEE-RELATED COSTS. The Company is responsible for
all employee-related expenses for the temporary employees of its
Company-owned and franchise agent offices, including workers' compensation,
unemployment insurance, social security taxes, state and local taxes and
other general payroll expenses. The Company maintains workers' compensation
insurance for all claims in excess of a loss cap of $500,000 per incident,
except with respect to locations in states where private insurance is not
permitted and which are covered by state insurance funds. The Company accrues
for workers' compensation costs based upon payroll dollars paid to temporary
employees. The accrual rates vary based upon the specific risks associated
with the work performed by the temporary employee. At the beginning of each
policy year, the Company reviews the overall accrual rates with its outside
actuaries and makes changes to the rates as necessary based primarily upon
historical loss trends. Each year, the Company evaluates its historical
accruals based on an actuarially developed estimate of the ultimate cost for
each open policy year and adjusts such accruals as necessary. These
adjustments can either be increases or decreases to workers' compensation
costs, depending upon the actual loss experience of the Company. Although
management believes that the Company's accruals for workers' compensation
obligations are adequate, there can be no assurance that the actual cost of
workers' compensation obligations will not exceed the accrued amounts. In
addition, there can be no assurance that the Company's programs to control
workers' compensation and other payroll-related expenses will be effective or
that loss development trends will not require a charge to costs of services
in future periods to increase workers' compensation accruals. Unemployment
insurance premiums are set by the states in which the Company's employees
render their services. A significant increase in these premiums or in
workers' compensation-related costs could have a material adverse effect on
the Company's business, results of operations, cash flows or financial
condition. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Business--Risk Management Programs."
HIGHLY COMPETITIVE MARKET. The temporary staffing industry is highly
competitive with few barriers to entry. The Company believes that the
majority of clerical, light industrial and light technical temporary staffing
companies are local, full-service or specialized operations with fewer than
five offices. Within local markets, typically no single company has a
dominant share of the market. The Company also competes for qualified
temporary personnel and customers with larger, national, full-service and
specialized competitors in local, regional, national and international
markets. Many of the Company's principal competitors have greater financial,
marketing and other resources than the Company. In addition, there are a
number of medium-sized firms which compete with the Company in certain
regional or specialized markets where such firms may have a stronger
presence. Furthermore, certain of its current and prospective customers may
decide to fulfill their staffing needs independently.
<PAGE>
The Company believes that the competitive factors in obtaining and
retaining customers include understanding customers' specific job
requirements, providing temporary personnel in a timely manner, monitoring
quality of job performance and pricing of services. The Company has
experienced pricing pressures in all areas of its business and expects these
pressures to continue. The Company believes that the primary competitive
factors in obtaining qualified candidates for temporary employment
assignments are wages, benefits and flexibility of work schedules. In
addition, the entire staffing industry is faced with recruiting challenges
due to low unemployment rates. There can be no assurance that the Company
will not encounter increased competition in the future, which could limit the
Company's ability to maintain or increase its market share or gross margin,
and which could have a material adverse effect on the Company's business,
results of operations, cash flows or financial condition. See
"Business--Competition."
RELIANCE ON FIELD MANAGEMENT. The Company is dependent on the
performance and productivity of its local managers, particularly branch
office, area, regional and zone managers. The loss of some of the Company's
key managers could have an adverse effect on the Company's operations,
including the Company's ability to establish and maintain customer
relationships. The Company's ability to attract and retain business is
significantly affected by local relationships and the quality of services
rendered by branch, area, regional and zone managerial personnel. If the
Company is unable to attract and retain key employees to perform these
services, the Company's business, results of operations, cash flows or
financial condition could be adversely affected. Furthermore, the Company may
be dependent on the senior management of companies that may be acquired in
the future. If any of these individuals do not continue in their management
roles, there could be a material adverse effect on the Company's business,
results of operations, cash flows or financial condition. See
"Business--Operations."
YEAR 2000 COMPLIANCE. The Company is in the process of implementing a
comprehensive plan to address the Year 2000 issue. The Year 2000 issue is
the result of computer programs being written using two digits, rather than
four, to define the applicable year. Any programs that have time-sensitive
software may recognize a date using "00" as the year 1900 rather than the
year 2000, which could result in a major systems failure or miscalculations.
There can be no assurance that the Company will be successful in implementing
its plan, or that such plan, if implemented, will fully ensure Year 2000
compliance. In addition, the Year 2000 issue may impact other entities with
which the Company transacts business. There can be no assurance that such
impact, or issues arising from the Company's own systems, will not have a
material adverse effect on the business, results of operations, cash flows or
financial condition of the Company. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Year 2000."
RISKS RELATED TO INTERNATIONAL OPERATIONS. The Company presently has
operations in Australia, the United Kingdom, Norway, New Zealand and Denmark.
Operations in foreign markets are inherently subject to certain risks,
including, in particular, different cultures and business practices,
overlapping or differing tax structures, economic and political uncertainties
and compliance issues associated with accounting and reporting requirements
and changing and, in some cases, complex or ambiguous foreign laws and
regulations, particularly as they relate to employment. All of the Company's
sales outside of the United States are denominated in local currencies and,
accordingly, the Company is subject to risks associated with fluctuations in
exchange rates which could cause a reduction in the Company's profits. There
can be no assurance that any of these factors will not have a material
adverse effect on the Company's business, results of operations, cash flows
or financial condition.
RISKS OF EURO INTRODUCTION. Beginning in January 1999, a new currency
called the "euro" was introduced in certain European countries that are part
of the Economic and Monetary Union ("EMU"). During calendar year 2002, all
EMU countries are expected to be operating with the euro as their single
currency. A significant amount of uncertainty exists as to the effect the
euro will have on the marketplace. Additionally, all of the rules and
regulations have not yet been defined and finalized by the European
Commission with regard to the euro currency. Currently, the Company does not
operate in any countries that are part of the EMU; however, the Company
operates in the United Kingdom and Denmark, which may join the EMU at a
future date. The Company is assessing the effect the euro formation will
have on its internal systems and the sales of its services. The Company
expects to take appropriate actions based on the results of such assessment.
The Company has not yet determined the costs of addressing this issue and
there can be no assurance that this issue and its related costs will not have
a material adverse effect on the Company's business, results of operations,
cash flows or financial condition. See "Business--Services" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--European Currency."
<PAGE>
EMPLOYER LIABILITY RISKS. Providers of temporary staffing services
place people in the work places of other businesses. An inherent risk of such
activity includes possible claims of errors and omissions, discrimination or
harassment, theft of customer property, misappropriation of funds, misuse of
customers' proprietary information, employment of illegal aliens, other
criminal activity or torts, claims under health and safety regulations and
other claims. There can be no assurance that the Company will not be subject
to these types of claims, which may result in negative publicity and the
payment by the Company of monetary damages or fines and which, if
substantial, could have a material adverse effect on the Company's business,
results of operations, cash flows or financial condition.
RISKS RELATED TO CUSTOMERS. As is common in the temporary staffing
industry, the Company's engagements to provide services to its customers are
generally of a non-exclusive, short-term nature and subject to termination by
the customer with little or no notice. During fiscal 1997 and 1998, no single
customer of the Company accounted for more than 1.0% of the Company's sales
of services. Nonetheless, the loss of any of the Company's significant
customers could have an adverse effect on the Company's business, results of
operations, cash flows or financial condition. The Company is also subject to
credit risks associated with its trade receivables. Should any of the
Company's principal customers default on their large receivables, the
Company's business, results of operations, cash flows or financial condition
could be adversely affected. See "Business--Services."
RISKS RELATED TO FRANCHISE AGENT AND LICENSED OPERATIONS. Franchise
agent and licensed operations comprise a significant portion of the Company's
sales of services and license fees. For fiscal 1997 and 1998, 26.1% and
24.7%, respectively, of the Company's total sales of services and license
fees were derived from franchise agent and licensed operations. In addition,
the Company's ten largest franchise agents for fiscal 1998 (based on sales
volume) accounted for 9.8% of the Company's sales of services. The loss of
one or more of the Company's franchise agents or licensees, and any
associated loss of customers and sales, could have a material adverse effect
on the Company's business, results of operations, cash flows or financial
condition. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
The Company's franchise agent and license agreements contain two-year
non-competition covenants, which the Company vigorously seeks to enforce.
Efforts to enforce the non-competition covenants have resulted in litigation
brought by the Company following termination of certain franchise agent
agreements. In the past five fiscal years, the Company has commenced four
actions to enforce the non-competition covenants. Three of those actions were
resolved in the Company's favor, and one is presently pending. Should former
franchise agents prevail at trial of such actions, or successfully appeal,
the Company's ability to prevent franchise agents or licensees from operating
competitive temporary staffing businesses, could be adversely affected. The
Company has incurred, and may continue to incur, substantial attorneys' fees
and litigation expenses for such lawsuits, both in furtherance of the
Company's role as plaintiff and in defense of counterclaims or
cross-complaints, for which insurance coverage typically is not available.
GOVERNMENTAL REGULATION RELATING TO HEALTH CARE PROVIDERS. As a
provider of home care services in connection with the Company's medical
services division, the Company is subject to changing federal and state
regulations relating to the licensing and certification of its offices and
the sale and delivery of its services. Changes in the law and regulations, as
well as new interpretations enforced by the relevant regulatory agencies,
could have a material adverse effect on the Company's business, results of
operations, cash flows or financial condition. On August 5, 1997, President
Clinton signed into law the Budget Act, resulting in significant changes to
cost-based reimbursement for Medicare services provided by home health care
providers, including the reduction of cost limits. Under the IPS, home health
agencies will be reimbursed the lowest of: (i) the actual costs of operating
the agency's Medicare services; (ii) a reduced aggregate cost per visit rate;
or (iii) an aggregate per beneficiary limit.
The Budget Act also requires the HCFA to implement a PPS for fiscal
years beginning on or after October 1, 1999 to replace this cost-based
system. Under the PPS, home health agencies will be paid a fixed amount for
services rendered without regard to the costs of providing such services.
There can be no assurance that such prospective payments will cover the costs
incurred by the Company to provide Medicare home health care services.
Additionally, a number of states have adopted laws regulating companies
that provide health care services. In many of the states, the Company need
only be licensed. In 20 states, a CON from the state must be obtained in
order to be a Medicare provider. CON laws restrict the types of care that may
be provided and can limit or prohibit the Company's ability
<PAGE>
to provide certain services and to establish or expand its medical
operations. CON requirements and restrictions vary substantially from state
to state. In addition to individual state regulation, JCAHO accreditation has
become important in providing home health care services. As of December 31,
1998, 11 of the Company-owned offices, two franchise agent offices and four
licensed offices were accredited by JCAHO. and an application for JCAHO
accreditation was pending for one franchise agent office. Failure of the
Company to obtain the necessary certification or accreditation could have a
material adverse effect on the Company's business, results of operations,
cash flows or financial condition. See "Business--Medical Services" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Discontinued Operations."
ITEM 2. PROPERTIES.
The executive offices of the Company are located at 301 Lennon Lane,
Walnut Creek, California. The Company owns six buildings, totaling
approximately 75,585 square feet, which house its corporate headquarters.
Certain of these buildings are subject to a trust deed. The Company is
currently considering selling its current corporate headquarters and using
the proceeds to retire debt and may lease new space to house its corporate
headquarters.
In addition, the Company leases space for its Company-owned offices in
the United States and abroad. The leases generally are for terms of one to
five years and contain customary terms and conditions. The Company believes
that its facilities are adequate for its current needs and does not
anticipate any difficulty replacing such facilities or locating additional
facilities, if needed.
ITEM 3. LEGAL PROCEEDINGS.
In the ordinary course of its business, the Company is periodically
threatened with or named as a defendant in various lawsuits. The principal
risks that the Company insures against are workers' compensation, bodily
injury, property damage, professional malpractice, errors and omissions and
fidelity losses. No pending litigation exists which the Company anticipates
will have a material adverse effect on the Company's business, results of
operations, cash flows or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On August 13, 1998, the Stockholders of the Company held a Special
Meeting in order to vote upon a change in the name of the Company from
"Western Staff Services, Inc." to "Westaff, Inc." Effective September 24,
1998, 9,044,485 votes were cast in favor of the name change and no votes were
cast against it. No proxies were solicited.
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Common Stock has been included for quotation in the Nasdaq National
Market under the symbol "WSTF" since April 30, 1996. The following table sets
forth, for the periods indicated, the high and low closing sales prices of
the Common Stock as reported on the Nasdaq National Market, adjusted to
reflect a three-for-two Common Stock split effected in the form of a stock
dividend paid on May 29, 1998 to shareholders of record at the close of
business on May 18, 1998.
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
Fiscal 1997:
First Quarter ended January 25, 1997 . . . . . . . . . . . . 10.00 6.08
Second Quarter ended April 19, 1997. . . . . . . . . . . . . 6.92 4.83
Third Quarter ended July 12, 1997. . . . . . . . . . . . . . 7.50 5.75
Fourth Quarter ended November 1, 1997. . . . . . . . . . . . 11.83 7.17
Fiscal 1998:
First Quarter ended January 24, 1998 . . . . . . . . . . . . 11.42 9.17
Second Quarter ended April 18, 1998. . . . . . . . . . . . . 17.42 11.17
Third Quarter ended July 11, 1998. . . . . . . . . . . . . . 21.33 15.83
Fourth Quarter ended October 31, 1998. . . . . . . . . . . . 19.00 8.00
Fiscal 1999:
First Quarter through January 28, 1999 . . . . . . . . . . . 11.63 5.94
</TABLE>
On December 31, 1998, the last reported sales price on the Nasdaq National
Market for the Common Stock was $6.25 per share. As of December 31, 1998, there
were 2,159 beneficial owners of the Common Stock.
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
<TABLE>
<CAPTION>
FISCAL YEAR
--------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(Amounts in thousands except per share amounts and number of offices)
<S> <C> <C> <C> <C> <C>
Sales of services and license fees $599,709 $530,076 $441,808 $361,768 $301,024
Operating income 24,020 15,523 13,757 11,249 8,439
Income from continuing operations $13,748 $9,210 $2,725 $10,348 $8,536
--------------------------------------------------------
--------------------------------------------------------
Diluted earnings per share - continuing operations $0.87 $0.60 $0.19 $0.78 $0.64
--------------------------------------------------------
--------------------------------------------------------
Pro forma income from continuing operations (1) $8,203 $7,042 $5,159
--------------------------------
--------------------------------
Diluted pro forma earnings per share - continuing operations (1) $0.57 $0.53 $0.39
--------------------------------
--------------------------------
BALANCE SHEET DATA (AT END OF PERIOD):
Working capital $57,702 $45,184 $31,982 $17,349 $24,293
Total assets 197,145 154,530 120,780 96,169 76,367
Short-term debt 20,423 21,298 11,193 16,838 3,895
Long-term debt (excluding current portion) 44,708 17,631 3,603 5,623 4,776
Stockholders' equity 67,483 57,296 49,252 31,792 29,911
OTHER OPERATING DATA:
Number of offices (at end of period)
Company-owned 267 226 217 196 168
Franchise agent 82 103 103 90 89
Licensed 25 11 7 21 16
--------------------------------------------------------
Total 374 340 327 307 273
--------------------------------------------------------
--------------------------------------------------------
SYSTEM REVENUE DATA (EXCLUDING LICENSE FEES):
Domestic business services $549,689 $473,192 $418,546 $384,202 $327,193
International business services 77,492 72,554 58,872 48,528 35,641
--------------------------------------------------------
Total $627,181 $545,746 $477,418 $432,730 $362,834
--------------------------------------------------------
--------------------------------------------------------
</TABLE>
(1) Adjusted to reflect the effects of federal and state income taxes as if
the Company had been subject to income taxation as a C corporation
during each of the periods presented.
ITEM 7. 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 Westaff, Inc., together with its
consolidated subsidiaries. This discussion and analysis should be read in
conjunction with the Company's Consolidated Financial Statements and Notes
thereto included herein.
In addition to historical information, this management's discussion
and analysis includes certain forward-looking statements regarding events and
financial trends that may affect the Company's future operating results and
financial position. These forward-looking statements include, but are not
limited to, statements regarding sales, acquisitions, gross margin, workers'
compensation costs, selling and administrative expenses, interest expense,
income taxes, capital
<PAGE>
expenditures, capital resources, management information systems, Year 2000
issues and medical operations. 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 results
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.
The forward-looking statements included herein are also subject to a
number of other 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 risks and uncertainties include, but
are not limited to: demand for the Company's services, the competition
within its markets, the loss of a principal customer and the Company's
ability to increase the productivity of its existing offices, to control
costs, to expand operations and the availability of sufficient personnel.
There are also significant risks and uncertainties relating to the ability of
the Company to dispose of its medical operations in a timely and cost
effective manner. 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 public market analysts and investors. In addition, the
Company's results of operations have historically been subject to quarterly
and 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, in part, to national holidays as well as to plant shutdowns
during and after the holiday season. These and other risks and uncertainties
related to the Company's business are described in detail in "Factors
Affecting Future Operating Results."
OVERVIEW
The Company provides temporary staffing services primarily in suburban
and rural markets ("secondary markets"), as well as in the downtown areas of
major urban centers ("primary markets"), in the United States and selected
international markets. Through its network of Company-owned, franchise agent
and licensed offices, the Company offers a wide range of temporary staffing
solutions, including replacement, supplemental and on-site programs to
businesses and government agencies. The Company has over 50 years of
experience in the staffing industry and operates over 370 business services
offices in 45 states, the District of Columbia, Guam and five foreign
countries.
The Company differentiates itself from other large temporary staffing
companies by focusing on recruiting and placing essential support personnel
in secondary markets. Essential support personnel often fill clerical, light
industrial and light technical positions such as word processing, data entry,
reception, customer service and telemarketing, warehouse labor,
manufacturing, assembly and lab assistance. These assignments can support
either core or non-core functions of the customer's business, but are always
"essential" to daily operations.
Demand for the Company's staffing services is significantly affected
by the general level of economic activity and unemployment in the United
States and the countries in which the Company operates. Companies use
temporary staffing services to manage personnel costs and staffing needs.
When economic activity increases, temporary employees are often added before
full-time employees are hired. During these periods of increased economic
activity and generally higher levels of employment, the competition among
temporary staffing firms for qualified temporary personnel is intense. There
can be no assurance that during these periods the Company will be able to
recruit the temporary personnel necessary to fill its customers' job orders
in which case the Company's business, results of operations, cash flows or
financial condition may be adversely affected. As economic activity slows,
many companies reduce their utilization of temporary employees before
releasing full-time employees. In addition, the Company may experience less
demand for its services and more competitive pricing pressure during periods
of economic downturn. Therefore, any significant economic downturn could
have a material adverse effect on the Company's business, results of
operations, cash flows or financial condition.
DISCONTINUED OPERATIONS
In November 1998, the Company announced its plan to sell Western
Medical. As a result of this decision, the Company has classified its
medical operations as discontinued operations and, accordingly, has
segregated the net assets of the discontinued operations in the Consolidated
Balance Sheet at October 31, 1998, the operating results of the discontinued
operations in the Consolidated Statements of Operations for fiscal 1998,
fiscal 1997 and fiscal 1996 and the cash flows from discontinued operations
in the Consolidated Statement of Cash Flows for fiscal 1998 (see Note 3 of
Notes to Consolidated Financial Statements).
<PAGE>
The Company reported an after-tax loss from discontinued operations of
$6.3 million or $0.40 per share in fiscal 1998. The loss is related primarily
to reduced revenues in connection with Medicare's Interim Payment System
enacted as part of the Budget Act, reduced revenues as a result of settlement
of a prior year Medicate audit, additional reserves for Medicare accounts
receivable, increases in allowances for doubtful accounts and other charges.
During the fourth quarter of fiscal 1998, the Company recorded an
additional after-tax charge on the planned disposal of its medical operations
of $3.5 million or $0.23 per share. This after-tax charge includes $2.5
million for the write down of assets to estimated net realizable value,
$240,000 of estimated costs to be incurred in selling the operation, and
$740,000 of estimated operating losses to be incurred during the disposal
period. The Company is actively marketing its medical operations and is
currently involved in discussions with a number of parties who have expressed
an interest in the medical operations. The Company's goal is to complete the
sale of its medical operations by the end of the third quarter of fiscal
1999. However, there can be no assurance that the Company will be able to
complete the sale of its medical operations by that time. Furthermore, the
amount of the loss on disposal of the medical operations is based on a number
of assumptions including the estimated net realizable value of the
operations, estimated selling expenses, estimated operating losses to be
incurred during the disposal period and the length of time estimated to
dispose of the operation. There can be no assurance that the Company will be
able to dispose of the medical operations on terms and costs similar to those
estimated by the Company. Should the actual sale period, terms or costs
differ materially from those estimated by management, the Company would
record additional losses (or gains) in future periods.
The Company's decision to sell the medical operations was prompted in
large measure by the increasingly complex and unfavorable regulatory
environment affecting the Medicare business and the impact that changes in
regulations have had and will likely continue to have on the ability of the
Company to operate profitably in the medical sector. The disposition of the
medical operations will enable the Company to focus on business services,
where management believes that long-term growth prospects are more
attractive.
RESULTS OF CONTINUING OPERATIONS
The table below sets forth, for the three most recent fiscal years,
certain results of continuing operations data as a percentage of sales of
services and license fees.
<TABLE>
<CAPTION>
FISCAL YEAR
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Sales of services 99.7% 99.8% 99.4%
License fees 0.3% 0.2% 0.6%
---------------------------
Total sales of services and license 100.0% 100.0% 100.0%
Costs of services 78.8% 79.9% 79.1%
---------------------------
Gross profit 21.2% 20.1% 20.9%
Franchise agents' share of gross 2.8% 3.3% 3.7%
Selling and administrative expenses 13.2% 12.9% 13.1%
Depreciation and amortization 1.2% 1.0% 1.0%
---------------------------
Operating income from continuing
operations 4.0% 2.9% 3.1%
Interest expense 0.3% 0.1% 0.1%
Interest income -0.1% -0.1% -0.1%
---------------------------
Income from continuing operations
before income taxes 3.8% 2.9% 3.0%
Provision for income taxes 1.5% 1.2% 2.4%
---------------------------
Income from continuing operations 2.3% 1.7% 0.6%
---------------------------
---------------------------
</TABLE>
<PAGE>
FISCAL 1998 COMPARED TO FISCAL 1997
SALES OF SERVICES AND LICENSE FEES. Sales of services increased $68.6
million, or 13.0%, for fiscal 1998 as compared to fiscal 1997. The increase
resulted from a 9.5% increase in billed hours and a 3.2% increase in average
billing rates per hour. Billed hours increased primarily due to
acquisitions, increased demand for the Company's services in existing offices
and new office openings. Same store sales increased approximately 8.0% for
fiscal 1998 as compared to fiscal 1997. Acquisitions accounted for
approximately $38.1 million of the increase in sales of services. Sales of
services for fiscal 1998 increased 13.9% and 6.8%, respectively, for
domestic business services and international business services as compared to
fiscal 1997. Excluding the effect of foreign currency rate fluctuations,
sales of services increased 18.5% for international business services. The
increase in average billing rates reflects the ongoing effects of the
Company's gross profit improvement program, changes in the Company's overall
business mix and inflationary factors. In recent months the Company has seen
a slowing in the rate of sales growth from levels experienced earlier in
fiscal 1998. This slowing is consistent with industry trends and is likely
to continue into fiscal 1999. Furthermore, the Company has scaled back its
near-term acquisition plans and, accordingly, sales growth from additional
acquisitions will likely be minimal at least through the first two quarters
of fiscal 1999 and possibly throughout fiscal 1999.
License fees are charged to licensed offices based either on a
percentage of sales or of gross profit generated by the licensed offices.
License fees increased $1.1 million, or 102.6%, for fiscal 1998 as compared
to fiscal 1997. During the period from November 2, 1997 to October 31, 1998
nine franchise agents converted to the license program and two licensees
purchased the Company's interest in their licenses and became independent
such that they are no longer affiliated with the Company.
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 $49.4 million, or 11.7%, for fiscal 1998 as compared to fiscal
1997. Gross margin increased from 20.1% in fiscal 1997 to 21.2% in fiscal
1998, primarily due to the Company's gross profit improvement program
implemented during the first quarter of fiscal 1997 for its domestic business
services offices and lower workers' compensation and unemployment insurance
costs as a percentage of sales of services and license fees. During the
first quarter of fiscal 1997 the Company initiated a nationwide program
designed to maximize gross margin by increasing prices to select customers
and focusing on higher margin business. Primarily as a result of this
program, the Company generated progressively higher gross margin throughout
fiscal 1997. Gross margin increased from 19.3% in the first quarter of
fiscal 1997 to 19.8%, 20.1%, and 20.9% for the second, third and fourth
quarters, respectively, of fiscal 1997. Gross margin dropped slightly to
20.4% for the first quarter of fiscal 1998 as compared to the fourth quarter
of fiscal 1997 due to increased holiday pay and seasonal factors; however,
gross margin once again increased to 21.0%, 21.3% and 21.6% for the second,
third and fourth quarters, respectively, of fiscal 1998. Gross margin for
international business services decreased from 21.9% in fiscal 1997 to 21.5%
in fiscal 1998, primarily due to increased sales of lower margin business in
Australia. The Company will continue its efforts to improve gross margin
where feasible; however, within the current business climate, the Company
believes that there are fewer opportunities available to increase gross
margin, and, in some areas, the Company anticipates increased downward
pressures on margins due to competition. There can be no assurance that the
Company will be successful in either increasing or maintaining gross margin.
Workers' compensation costs were 3.2% of payroll for fiscal 1998 and
3.5% for fiscal 1997. These costs tend to vary depending upon the mix of
business between clerical staffing and light industrial staffing. During the
third quarter of fiscal 1998, the Company evaluated the loss development
trends and historical accruals for policy years 1994, 1995 and 1997 as well
as the preliminary trends for policy year 1998. As a result of improvements
in loss development trends for these years, during the third quarter of
fiscal 1998, the Company reduced its current accrual rates related to
workers' compensation costs. The Company currently estimates that the
accrual rates for workers' compensation costs will be in the range of 3.0% to
3.3% of direct labor for fiscal 1999. These rates will be evaluated
throughout fiscal 1999 to ensure that they remain appropriate in light of the
Company's loss trends. There can be no assurance that the Company's
programs to control workers' compensation expenses will be effective or that
loss development trends will not require a charge to costs of services in
future periods to increase workers' compensation accruals.
<PAGE>
FRANCHISE AGENTS' SHARE OF GROSS PROFIT. Franchise agents' share of
gross profit represents the net distribution paid to franchise agents based
either on a percentage of sales or of gross profit generated by the franchise
agents' operation. Franchise agents' share of gross profit decreased
$598,000 or 3.5%, for fiscal 1998 as compared to fiscal 1997. As a
percentage of sales of services and license fees, franchise agents' share of
gross profit declined from 3.3% during fiscal 1997 to 2.8% for fiscal 1998.
This decrease is primarily the result of franchise conversions to the license
program as noted above and to a decrease in the proportion of sales and gross
profit attributable to franchise agent offices as compared to Company-owned
offices.
SELLING AND ADMINISTRATIVE EXPENSES (INCLUDING DEPRECIATION AND
AMORTIZATION). Selling and administrative expenses increased $12.3 million,
or 16.6%, for fiscal 1998 as compared to fiscal 1997. As a percentage of
sales of services and license fees, selling and administrative expenses
increased from 13.9% for fiscal 1997 to 14.4% for fiscal 1998. The increase
in selling and administrative expenses as a percentage of sales of services
and license fees was primarily due to higher incentive compensation costs, a
higher proportion of business generated through licensed offices and
Company-owned offices as compared to franchise agent offices, and higher
amortization costs resulting from increased acquisition activity. The
Company's incentive compensation plans are directed towards increasing gross
profit and operating income. These incentive costs increased during fiscal
1998 as a direct result of the significant increases in both gross profit and
operating income for fiscal 1998 as compared to fiscal 1997. The relative
volume of franchise business also affects the overall selling and
administrative costs. As the proportion of franchise sales and gross profit
declines relative to total sales (due to conversions from franchise agent
offices to licensed offices or Company-owned offices), franchise agents'
share of gross profit declines as a percentage of sales of services and
license fees, and selling and administrative costs tend to increase as a
percentage of sales of services and license fees.
Selling and administrative expenses are also impacted by the Company's
management information systems. In the third quarter of fiscal 1998, the
Company finalized its long-term strategic plan for its next generation
management information and support systems. This plan calls for a phased
migration from the Company's existing systems to the new systems over a 24
month period. Capital expenditures under the plan are expected to be
approximately $12.0 million including costs of hardware, software and
internal and external costs associated with the implementation of the
project.
The initial phase will be to replace the Company's back-office
financial reporting systems and should be completed during the second quarter
of fiscal 1999. Since the Company's existing back-office financial reporting
systems are fully depreciated, the implementation of the new back-office
systems will result in increased depreciation expenses starting in the second
quarter of fiscal 1999. The second phase will be the implementation and
roll-out of a new branch office integrated search and retrieval and remote
data capture module. The initial pilot for this front-end system is expected
to be completed during the second quarter of fiscal 1999, with roll-out to
all domestic business services offices estimated to take approximately 18 to
24 months. The Company has also begun implementation and roll-out of a wide
area network (WAN), which will allow enhanced communication and data
transmission capabilities among the field and corporate offices. The Company
completed a pilot set-up of the WAN during the fourth quarter of fiscal 1998.
The actual roll-out of the network to the remaining field offices is planned
to be completed over the next 6 to 12 months. As the individual branch
offices are converted to the new integrated front-office system and network,
the Company expects to incur increased training and depreciation costs.
Furthermore, as each office is connected to the WAN, the Company will incur
increased telecommunication costs. The Company expects to realize
productivity gains as a result of the enhanced communication capabilities and
features of the front-end systems which may offset the incremental costs from
the system; however, there can be no assurance that such productivity gains
or cost savings will be realized.
The final phase of the new systems will be the implementation of new
payroll, billing and activities management systems integrating both branch
office systems and back-office financial systems. The Company has reduced the
estimated useful life of its existing payroll/billing system to conform to
the replacement schedule; however, the incremental additional depreciation
as a result of the reduced system life is immaterial to the Company's results
of operations. The Company anticipates completion of this project in fiscal
2000 with a phased roll-out to offices over a 12 month period. As this final
phase is implemented, the Company expects to incur additional expenses for
training and depreciation. In addition, during the roll-out period, the
Company will be required to operate the old payroll/billing systems and new
integrated systems concurrently, which will result in higher administrative
expenses.
<PAGE>
The Company believes that the new enterprise-wide systems will provide
significant operating efficiencies for both field and corporate office
personnel. However, there can be no assurance that the Company will meet
anticipated completion dates for system replacements and enhancements
consisting of next generation management information and support systems,
that such replacements and enhancements will be completed in a cost-effective
manner or that such replacements and enhancements will support the Company's
future growth or provide significant gains in efficiency and productivity.
The failure of the replacements and enhancements to meet these expected goals
could result in increased system costs and could have a material adverse
effect on the Company's business, results of operations, cash flows or
financial condition.
INTEREST EXPENSE. Interest expense increased $963,000, or 160.5%, for
fiscal 1998 as compared to fiscal 1997, reflecting higher average borrowings
outstanding during fiscal 1998 required to support the Company's internal
growth and acquisitions.
PROVISION FOR INCOME TAXES. The provision for income taxes for fiscal
1998 was $9.2 million as compared to $6.1 million for fiscal 1997. This
increase was due primarily to the increase in income before income taxes of
$7.6 million. The effective income tax rate for both fiscal 1998 and fiscal
1997 was 40.0%. The Company currently estimates that the effective income tax
rate for fiscal 1999 will be approximately 40.0%.
FISCAL 1997 COMPARED TO FISCAL 1996
SALES OF SERVICES AND LICENSE FEES. Sales of services increased $89.7
million, or 20.4%, in fiscal 1997 as compared to fiscal 1996. The increase
resulted from a 16.9% increase in billed hours and a 3.0% increase in average
billing rates per hour. Billed hours increased primarily due to increased
demand for the Company's services in existing offices, acquisitions and new
office openings. Same store sales increased approximately 12.9% for fiscal
1997 as compared to fiscal 1996. Acquisitions accounted for approximately
$30.3 million of the increase in sales of services. This increase includes
sales of services from offices of one of the Company's licensees, which were
acquired and converted to Company-owned offices in the third quarter of
fiscal 1996. Sales of services for fiscal 1997 increased 20.0% and 23.2%,
respectively, for the Company's domestic business services and international
business services as compared to fiscal 1996. The increase in average
billing rates reflects inflationary factors, the effects of the Company's
gross profit improvement program implemented during the first quarter of
fiscal 1997 and changes in the Company's overall business mix. Fiscal 1996
included 53 weeks while fiscal 1997 included 52 weeks.
License fees decreased $1.5 million, or 58.9%, for fiscal 1997 as
compared to fiscal 1996. Approximately $472,000 of the license fees for
fiscal 1996 was associated with a major customer of one of the Company's
licensees. The contract with this licensee's customer was completed on
December 31, 1995. License fees also decreased due to the acquisition of one
of the Company's licensees during the third quarter of fiscal 1996 as noted
above. During fiscal 1997, three franchise agents converted to the license
program and one licensee converted from the license program to the franchise
program.
COSTS OF SERVICES. Costs of services increased $74.0 million, or
21.2%, in fiscal 1997 as compared to fiscal 1996. Gross margin decreased
from 20.9% in fiscal 1996 to 20.1% in fiscal 1997 due to downward competitive
pressures on margins, particularly within the light industrial and clerical
segments in which the Company operates, a decrease in license fees noted
above and higher workers' compensation costs. Gross margin for
international business services decreased from 22.5% in fiscal 1996 to 21.9%
in fiscal 1997 due to similar competitive pressures.
Workers' compensation costs increased to 3.5% of direct labor in
fiscal 1997 as compared to 3.1% of direct labor during fiscal 1996. This
increase was primarily due to increases in the basic accrual rates for fiscal
1997.
FRANCHISE AGENTS' SHARE OF GROSS PROFIT. Franchise agents' share of
gross profit increased $978,000, or 6.0%, for fiscal 1997 as compared to
fiscal 1996. As a percentage of sales of services and license fees, franchise
agents' share of gross profit declined from 3.7% during fiscal 1996 to 3.3%
for fiscal 1997. This decrease is primarily the result of a decrease in the
proportion of sales and gross profits for franchise offices as compared to
Company-owned offices. During fiscal 1996 and fiscal 1997, the Company
acquired the operations of six of its franchise agents and converted these
offices to Company-owned offices.
<PAGE>
SELLING AND ADMINISTRATIVE EXPENSES (INCLUDING DEPRECIATION AND
AMORTIZATION). Selling and administrative expenses increased $11.5 million,
or 18.4%, for fiscal 1997 as compared to fiscal 1996. As a percentage of
sales of services and license fees, selling and administrative expenses were
14.1% in fiscal 1996 and 13.9% in fiscal 1997. Fiscal 1997 included
approximately $618,000 in severance costs associated with staff reductions in
an effort to reduce costs. The relative volume of franchise business also
affects the overall selling and administrative costs. As the proportion of
franchise sales and gross profits declines relative to total sales, franchise
agents' share of gross profit declines as a percentage of sales of services
and license fees, and selling and administrative costs tend to increase as a
percentage of sales of services and license fees.
Selling and administrative costs for fiscal years 1995 through 1997
were affected by the implementation of the payroll and billing portion of the
Company's management information systems. Due to the comprehensive scope of
the systems, which affected all major processing functions within the
Company, and the need to operate both the old and new systems during the
conversion period, the Company incurred increased expenses to administer and
implement the new systems. As of November 1997, the Company had completed
the conversion of essentially all its domestic business services processing
sites to the payroll and billing portion of the new system.
INTEREST EXPENSE. Interest expense increased $40,000 or 7.1% for
fiscal 1997 as compared to fiscal 1996, reflecting higher average borrowings
outstanding during the fiscal 1997 period to support acquisitions and
internal growth.
PROVISION FOR INCOME TAXES. Provision for income taxes decreased from
$10.7 million for fiscal 1996 to $6.1 million for fiscal 1997. On April 30,
1996 and in conjunction with the Company's initial public offering, the
Company elected to terminate its S corporation status. In connection with
this termination, the Company was 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 resulted in a
non-recurring net income tax charge of $7.5 million in fiscal 1996. This
charge was primarily due to temporary differences resulting from the
Company's historical use of the cash method of accounting for income tax
purposes. The effective income tax rate decreased from 79.7% for fiscal 1996
to 40.0% for fiscal 1997. The fiscal 1996 effective rate was higher due to
the termination of the S corporation status of the Company.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has financed its operations through cash
generated by operating activities and through various forms of debt and
equity financings and bank lines of credit. The Company's principal use of
cash is for financing of accounts receivable, particularly during periods of
growth and, in recent years, for acquisitions. Temporary personnel are
generally paid on a weekly basis while payments from customers are generally
received 30 to 60 days after billing for business services. 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. Accordingly, short-term borrowings used to finance
accounts receivable generally follow a similar seasonal pattern. For
purposes of the following discussion of cash flows, the cash flows from
discontinued operations have been segregated for fiscal 1998. Fiscal 1997
and fiscal 1996 cash flows are presented on a consolidated basis.
Net cash provided by (used in) operating activities was $4.4 million,
($5.3) million and $2.2 million for fiscal 1998, fiscal 1997 and fiscal 1996,
respectively. The fluctuations in cash from operating activities is
primarily due to increases in income from continuing operations, the effects
of the discontinued medical operations, changes in accounts receivable
balances, the effect of the Company's change from an S corporation to a C
corporation for income tax reporting purposes, changes in due from licensee
balances and increases in depreciation and amortization resulting from
increased capital expenditures and acquisition activity. Income from
continuing operations increased from $2.7 million in fiscal 1996 to $9.2
million and $13.7 million in fiscal 1997 and fiscal 1998, respectively. In
fiscal 1998, cash flows decreased $6.2 million for discontinued medical
operations. This decrease primarily relates to operating losses and the
estimated loss on the disposal of the operations, partially offset by
increases in accrued liabilities. Accounts receivable balances increased
$21.1 million and $23.4 million in fiscal 1996 and fiscal 1997, primarily due
to sales growth and to increases in the average number of days outstanding
for the accounts receivable, largely due to the timing of Medicare
reimbursements. Accounts receivable from continuing operations increased
$9.1 million in fiscal 1998 primarily due to growth. Income taxes payable and
deferred income taxes have also impacted cash flows. In fiscal 1996, cash
flows relating to income taxes increased primarily due to the deferral of tax
payments relating to the Company's change from the cash basis to the accrual
basis for income tax
<PAGE>
purposes (taxes relating to this change were payable over a four-year
period). In fiscal 1997 and fiscal 1998, a portion of these deferred taxes
were paid resulting in reduced cash flows. Also during fiscal 1998,
additional deferred tax assets were established in connection with the
Company's workers' compensation program and in connection with the estimated
loss on the sale of the medical operations. Cash flows relating to due from
licensees have fluctuated primarily due to changes in the number of licensees
and the volume of licensee sales.
Cash used for capital expenditures, which are generally for software,
computers and peripherals, and office furniture and equipment, totaled $8.9
million, $5.8 million and $6.4 million for fiscal 1998, fiscal 1997 and
fiscal 1996, respectively. The increase in capital expenditures during
fiscal 1998 is associated with initial payments for the Company's next
generation management information and support systems. Capital expenditures
for these systems are expected to be approximately $12.0 million including
costs of hardware, software and internal and external costs associated with
implementation of the project. The Company incurred $6.2 million of such
capital expenditures during fiscal 1998 and expects to spend approximately
$4.8 million during fiscal 1999 and approximately $1.0 million during fiscal
2000.
During fiscal 1998, fiscal 1997 and fiscal 1996, cash outflows for new
acquisitions and for contingent payments under existing acquisitions totaled
$15.4 million, $7.7 million and $4.8 million, respectively. Payments of $2.3
million and $30,000 related to acquisitions are due for fiscal 1999 and
fiscal 2000, respectively, with additional consideration contingent on sales,
gross profit or pre-tax income of the acquired businesses in future periods.
During fiscal 1998, notes receivable increased by a net $2.1 million,
primarily as a result of advances to a licensee to assist in financing an
acquisition of an independent temporary staffing company as well as advances
to franchise agents and licensees to support their operations and internal
growth. Cash outflows of $2.6 million from the discontinued medical
operations primarily represented payments for acquisitions and capital
expenditures.
During fiscal 1998 and fiscal 1997 the Company increased borrowings by
a net $25.0 million and $24.1 million, respectively, primarily to fund
acquisitions and capital expenditures and to support the Company's internal
growth. Net proceeds to the Company in fiscal 1996 from its initial public
offering were approximately $19.0 million. Net cash used for debt reduction
totaled $7.7 million in fiscal 1996. On May 20, 1998, the Company executed
private placements of 10-year senior secured notes totaling $30.0 million
payable in equal annual installments beginning in the year 2002. Proceeds
from the notes were used to repay outstanding borrowings under the revolving
agreement of $22.6 million, with the remainder to be used for working capital
and general corporate purposes. Under the senior secured notes payable, the
Company is required to comply with certain financial and other covenants, the
most restrictive of which is the maximum total debt to capitalization ratio.
The Company was in compliance with these covenants as of October 31, 1998.
Distributions to stockholders totaled $2.5 million in each of fiscal 1996 and
fiscal 1997 representing the remaining undistributed S corporation earnings
of the Company. The Company does not anticipate declaring or paying any cash
dividends on its common stock in the foreseeable future.
During fiscal 1998 and fiscal 1997, the Company repurchased 180,000
and 178,500 shares of common stock on the open market for aggregate cash
consideration of $3.0 million and $1.2 million, respectively. During fiscal
1998 and fiscal 1997, 186,000 and 64,623 shares were reissued under the
employee stock option and purchase plans with aggregate cash proceeds of $1.8
million and $310,000, respectively.
The Company has senior secured credit facilities for up to $108.0
million consisting of a $90.0 million, five-year revolving agreement and an
$18.0 million six-year term loan for working capital needs and general
corporate purposes, including capital expenditures and acquisitions. Direct
advances under the revolving credit agreement are limited by outstanding
irrevocable standby letters of credit up to a maximum amount of $20.0
million. Total advances are also limited under formulas based on earnings
before interest, taxes, depreciation and amortization (EBITDA) and total debt
to total capitalization. The credit facility contains covenants which,
among other things, require the Company to maintain certain financial ratios
and generally restrict, limit or, in certain circumstances, prohibit the
Company with respect to capital expenditures, disposition of assets,
incurrence of debt, mergers and acquisitions, loans to affiliates and
purchases of investments. As of October 31, 1998, the Company had $10.0
million in outstanding letters of credit and had borrowed $15.6 million under
the revolving agreement. At October 31, 1998, the Company was not in
compliance with the EBITDA and certain other financial covenants, primarily
as a result of charges related to the discontinuation of its medical
operations. The Company was also not in compliance with the capital
expenditure covenants. The Company has received waivers with respect to all
such covenants from its bank lenders.
<PAGE>
The Company is currently marketing its medical operations with a goal
to complete the sale of these operations by the end of the third quarter of
fiscal 1999. Proceeds from the sale will be used to pay off debt.
On June 2, 1998, the Company filed a Form S-4 shelf registration
statement with the Securities and Exchange Commission registering 1.5 million
shares of its $.01 par value common stock which may be offered in the future
in connection with the Company's acquisition program, of which approximately
1.1 million shares remain available for issuance.
The Company has filed registration statements under the Securities Act
with respect to an aggregate of 2.3 million shares of common stock reserved
for issuance under its equity incentive plans, thus permitting the resale of
such shares by non-affiliates in the public market without restriction under
the Securities Act upon the exercise of stock options. As of October 31,
1998, options to purchase an aggregate of 785,814 shares of common stock were
outstanding under the Company's equity incentive plans.
The Company believes that cash from operations and the Company's
current borrowing capacity will be sufficient to meet anticipated needs for
working capital and capital expenditures at least through the next twelve
months.
YEAR 2000
The Company is in the process of implementing a comprehensive plan to
address the Year 2000 issue, particularly with respect to its mission
critical systems. Mission critical systems are those whose failure poses a
risk of disruption to the Company's ability to provide employment to its
temporary employees and temporary staffing services to its customers. The
Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any programs that
have time-sensitive software may recognize a date using "00" as the year 1900
rather than the year 2000. This could result in a major system failure or
miscalculations. The Company's plan includes three phases; (i) a complete
inventory and evaluation of all mission critical systems including both
information technology (IT) systems and non-IT systems such as hardware
containing embedded technology, for Year 2000 compliance; (ii) modification
or replacement of hardware and software affected by the Year 2000 issue; and
(iii) testing of the modified systems and formulation of a contingency plan
in the event non-compliant systems are not in place prior to January 1, 2000.
The Company is using both internal and external resources to assess its
systems, develop and implement its plan.
The Company has essentially completed its initial system inventory and
evaluation phase. For its domestic operations, the Company has identified
one group of non-compliant mission critical back-office systems and is in the
process of installing Year 2000 compliant replacement systems. The Company
expects that these systems will be implemented during the second quarter of
fiscal 1999. The Company identified one additional mission critical system
that is not fully Year 2000 compliant and is in the process of modifying this
system to bring it into compliance. The Company estimates that it has
completed approximately 50% of the remediation efforts with respect to this
system and expects to complete all modifications and testing of this system
by the end of April 1999. The Company expects to bring its domestic
operations systems to full Year 2000 compliance by the end of the second
quarter of fiscal 1999. For the international operations, the Company will
be required to replace or upgrade the payroll/billing systems in two of its
international operations and will also be required to upgrade or replace a
number of back office support systems. The Company is currently in the
process of making these changes and/or making final selection of the
replacement systems. The Company currently plans to have all international
operations fully compliant during the fourth quarter of fiscal 1999.
Although the Company does not expect that the impact of the Year 2000 issue
will be material to the Company's domestic or international operations, there
can be no assurance that the Company will not discover additional Year 2000
issues that would have a material adverse effect on the Company's business,
results of operations, cash flows or financial condition.
Testing of modified systems, along with quantification of the impact,
if any, of failure to complete any necessary corrective action, is expected
to be completed by the end of the third quarter of fiscal 1999, along with
the completion of contingency plans. Although the Company cannot currently
estimate the magnitude of the impact if mission critical systems have not
been made Year 2000 compliant prior to the end of calendar year 1999, if such
systems are not compliant, there would be a material adverse effect on the
Company's business, results of operations, cash flows or financial condition.
<PAGE>
Estimated costs associated with the replacement of the domestic
back-office systems are included in the cost estimates as discussed above
relating to the Company's next generation management information systems. To
date, the remaining costs incurred by the Company with respect to domestic
Year 2000 compliance have not been material and are not expected to be
material for fiscal 1999. For international operations, costs incurred to
date are not material. Total estimated costs to be incurred for international
operations, including costs associated with upgrading and replacing hardware
and software, are currently estimated to be $650,000. The Company believes
that cash from operations and the Company's current borrowing capacity will
be sufficient to cover the costs of Year 2000 compliance efforts.
The Company has also begun to survey third-party suppliers and
vendors, including key financial institutions, as well as major customers and
landlords, for Year 2000 compliance. The Company expects to complete this
survey in the second quarter of fiscal 1999. At this time the Company cannot
estimate the effect, if any, that non-compliant systems at these entities
could have on the Company's business, results of operations, cash flows or
financial condition, and there can be no assurance that the impact, if any,
will not be material.
EUROPEAN CURRENCY
Beginning in January 1999, a new currency called the "euro" was
introduced in certain European countries that are part of the Economic and
Monetary Union (EMU). During calendar year 2002, all EMU countries are
expected to be operating with the euro as their single currency. A
significant amount of uncertainty exists as to the effect the euro will have
on the marketplace. Additionally, all of the rules and regulations have not
yet been defined and finalized by the European Commission with regard to the
euro currency. Currently, the Company does not operate in any countries that
are part of the EMU; however, the Company operates in the United Kingdom and
Denmark, which may join the EMU at a future date. The Company is assessing
the effect the euro formation will have on its internal systems and the sales
of its services. The Company expects to take appropriate actions based on
the results of such assessment. The Company has not yet determined the costs
of addressing this issue and there can be no assurance that this issue and
its related costs will not have a material adverse effect on the Company's
business, results of operations, cash flows and financial condition.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Financial Statements and Supplementary Data of the Company
required by this item are set forth at the pages indicated at item 14(a).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The following table sets forth certain information as of January 29,
1999 with respect to each person who is a director or executive officer of the
Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
W. Robert Stover(1)(2)(3)....... 77 Chairman of the Board of Directors
Michael K. Phippen.............. 46 President, Chief Executive Officer and Director
Paul A. Norberg................. 58 Executive Vice President, Chief Financial Officer and Director
Robin A. Herman................. 47 Senior Vice President, General Counsel and Secretary
Michael W. Ehresman............. 41 Senior Vice President and Treasurer
Dirk A. Sodestrom............... 41 Senior Vice President and Controller
Ronald C. Picco................. 50 Senior Vice President, Operations
Elizabeth P. Bade............... 51 Vice President, Information Services
Gilbert L. Sheffield(1)(2)(3)... 69 Director
Jack D. Samuelson(1)(2)(3)...... 74 Director
- ---------------
</TABLE>
(1) Member of the Audit Committee of the Board of Directors.
(2) Member of the Compensation Committee of the Board of Directors.
(3) Member of the Strategic Planning Committee of the Board of
Directors.
DIRECTORS AND EXECUTIVE OFFICERS
Set forth below is a description of the backgrounds of the directors
and executive officers of the Company. There are no family relationships
among any of the Company's directors and executive officers.
W. ROBERT STOVER. Mr. Stover founded the Company in 1948 and has been
continuously involved in the management of the Company since that time. Since
the Company's incorporation in 1954, Mr. Stover has held the position of
Chairman of the Board of Directors. From 1954 to 1985, Mr. Stover served as
President of the Company, and from 1985 to the end of calendar year 1998 as
Chief Executive Officer.
MICHAEL K. PHIPPEN. Mr. Phippen joined the Company in October 1995 as
an Executive Vice President. Mr. Phippen became President, Chief Operating
Officer and a director of the Company in January 1996. As of January 1, 1999,
Mr. Phippen became President and Chief Executive Officer of the Company. Mr.
Phippen directed the operations of the Company's corporate office and all
operating divisions of the Company from July 1997, at which time the Company
announced a management restructuring, to December 31, 1998. From October 1995
to January 1996, he directed the daily field operations of all light
industrial, clerical and light technical offices in the United States, as
well as the Company's planning, sales, marketing and franchise operations.
Mr. Phippen's affiliation with the Company began in 1987 with the opening of
his first franchise. Under his leadership, the affiliate group, Merbco Inc.,
grew to encompass 14 offices. The Company acquired the assets of Merbco Inc.
in October 1995. From 1977 to 1987, Mr. Phippen served in various positions
for Kelly Services, Inc., including as Branch Manager and Regional Manager.
PAUL A. NORBERG. Mr. Norberg has been employed by the Company since
1979, initially as Vice President and Chief Financial Officer, then in 1985
as Senior Vice President and since 1988 as Executive Vice President.
Previously he had been employed by Liken Home Furnishings Division of
Beatrice Foods Co., a manufacturer of window coverings, from 1973
<PAGE>
to 1979 in the position of Controller and, subsequently, Vice President,
Finance. He is a certified public accountant on inactive status.
ROBIN A. HERMAN. Ms. Herman has been employed by the Company as a
lawyer since February 1986 after leaving private practice. She was employed
by the Company initially as Litigation Counsel and in January 1991 was
elected to the position of Vice President and named Assistant General
Counsel. In March 1992, she became General Counsel and was elected to the
additional position of Secretary. In May 1996, Ms. Herman was named a Senior
Vice President of the Company.
MICHAEL W. EHRESMAN. Mr. Ehresman joined the Company in July 1992 as
Director of Corporate Taxes. In October 1995, Mr. Ehresman assumed the
positions of Vice President and Treasurer. In June 1998, Mr. Ehresman was
named a Senior Vice President of the Company. From 1988 to 1992, Mr. Ehresman
was with Price Waterhouse LLP, most recently as a Senior Tax Manager. From
1982 to 1988, Mr. Ehresman was employed by KPMG Peat Marwick. He is a
certified public accountant on inactive status.
DIRK A. SODESTROM. Mr. Sodestrom joined the Company as Controller in
February 1991 In December 1992, he was elected to the additional position of
Vice President. In June 1998, Mr. Sodestrom was named a Senior Vice President
of the Company. Mr. Sodestrom was employed from 1980 to 1991 by Price
Waterhouse LLP, most recently as a Senior Audit Manager. He is a certified
public accountant on inactive status.
RONALD C. PICCO. Mr. Picco joined the Company in September 1995 as
Vice President, Office Development, and was named Senior Vice President,
Operations in November 1996. In November 1998, Mr. Picco was made responsible
for interim oversight of the Company's medical subsidiary in anticipation of
its sale. Mr. Picco was employed by Interim Services Inc. from April 1992 to
February 1995, most recently as Vice President, Branch Operations. From
January 1991 to January 1992, Mr. Picco served as President of Alliance
Hospital Services, which contracted to provide hospital-based home care
agency management, and from 1985 to 1991 he held various corporate and
regional positions with Adia Services, Inc., a temporary staffing services
company.
ELIZABETH P. BADE. Ms. Bade joined the Company in September 1995 as
Applications Manager. She held that position until November 1998, when she
was promoted to Vice President, Information Services. Ms. Bade's previous
employer was Computer Associates (ASK Corporation), where she was employed
for over eight years from March 1987 until September 1995, most recently as
IS Applications Manager.
GILBERT L. SHEFFIELD. Mr. Sheffield has been a director of the
Company since March 1995. He has served in a number of capacities in the
telecommunications industry, most recently as the President, Chief Executive
Officer and a director of PacTel Communications Companies from 1987 to 1990.
Mr. Sheffield began his career in 1953 with Pacific Telephone and Telegraph,
where he was employed until 1969, when he was appointed the first Director of
the California Department of Human Resources Development. In 1971, Mr.
Sheffield returned to Pacific Telephone and Telegraph, from which he retired
in 1984 as Executive Vice President of Operations. Following two years in the
real estate investment business, he returned to Pacific Telesis in 1986 as
Executive Vice President and Chief Operating Officer of PacTel Corporation.
Mr. Sheffield is now retired.
JACK D. SAMUELSON. Mr. Samuelson has been a director of the Company
since March 1995. Mr. Samuelson co-founded Samuelson Brothers in 1957 to
engage in general construction and commercial real estate development. Mr.
Samuelson has been its President and Chairman of the Board from incorporation
to the present. Samuelson Brothers sold its construction business in 1979 and
since then has continued to develop industrial and commercial real estate.
Mr. Samuelson is also a director of Nationwide Health Properties, Inc., a New
York Stock Exchange-listed real estate investment trust focused on
healthcare-related properties.
Information concerning directors and executive officers under the
caption "Election of Directors," "Board Meetings and Committees," "Security
Ownership of Certain Beneficial Owners and Management" and "Compliance with
Section 16(a) of the Securities Exchange Act of 1934" in the Company's Proxy
Statement for the Annual Meeting of Stockholders to be held on March 30, 1999
(the "Proxy Statement"), is incorporated herein by reference.
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION.
The information included in the Company's Proxy Statement under the
captions "Directors' Compensation," "Executive Compensation," "Aggregate
Option Exercises and Fiscal Year End Values," "Compensation Committee
Interlocks and Insider Participation" and "Employment Agreements" is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information included in the Company's Proxy Statement under the
captions "Security Ownership of Certain Beneficial Owners and Management" and
"Employment Agreements" is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
See Note 5 of "Notes to Consolidated Financial Statements" under Item
14 of this Form 10-K. In addition, the information included in the Company's
Proxy Statement under the caption "Certain Transactions" is incorporated
herein by reference.
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) The following documents have been filed as a part of this Annual
Report on Form 10-K.
<TABLE>
<S> <C>
1. Financial Statements
Report of Independent Accountants........... F-1
Consolidated Balance Sheets--As of the
Fiscal Year Ended October 31, 1998 and the
Fiscal Year Ended November 1, 1997.......... F-2
Consolidated Statements of Operations--For
the Three-Year Period Ended October 31,
1998........................................ F-3
Consolidated Statements of Stockholders'
Equity--For the Three-Year Period Ended
October 31, 1998............................ F-4
Consolidated Statements of Cash Flows--For
the Three-Year Period Ended October 31,
1998........................................ F-5
Notes to Consolidated Financial Statements.. F-7
2. Financial Statement Schedules. The following Financial Statement
Schedule of the Registrant is filed as part of this report:
</TABLE>
Schedule II: Valuation and Qualifying Accounts (included at page 61)
All other schedules are omitted because they are not applicable
or not required or because the required information is included
in the Consolidated Financial Statements or the Notes thereto.
<PAGE>
3. Exhibits. The following exhibits are filed as a part of, or
incorporated by reference into, this report:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
-------- ------------------------------------------------------------------
<C> <S>
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. (1)
3.1 The Company's Third Amended and Restated Certificate of
Incorporation.(1)
3.1.1 Certificate of Amendment of the Company's Third Amended and Restated
Certificate of Incorporation.
3.2 The Company's Restated Bylaws. (1)
3.2.1 Amendment of the Amended and Restated Bylaws, dated as of March 26,
1998.
3.2.2 Amendment of the Amended and Restated Bylaws, effective September
24, 1998.
4.1 Form of Specimen Certificate for the Company's Common Stock. (1)
4.1.1 Form of New Specimen Certificate for the Company's Common Stock.
10.1 Form of Indemnification Agreement between the Company and the
Officers and Key Employees of the Company. (1)
10.2 Form of Indemnification Agreement between the Company and the
Directors of the Company. (1)
10.3 Employment Agreement between the Company and W. Robert Stover. (1)
10.3.1 Amendment to the Employment Agreement between the Company and W.
Robert Stover. (2)
10.3.2 Second Amendment to the Employment Agreement between the Company and
W. Robert Stover. (2)
10.3.3 Employment Agreement between the Company and Michael K. Phippen. (8)
10.3.4 Employment Agreement with W. Robert Stover.
10.5 Nonstatutory Stock Option Agreement for fiscal 1989.(1)
10.6 Nonstatutory Stock Option Agreement for fiscal 1990.(1)
10.7 Western Staff Services, Inc. 1996 Stock Option/Stock Issuance Plan.
(9)
10.7.1 Form of Notice of Grant of Stock Option. (9)
10.7.2 Form of Stock Option Agreement. (9)
10.7.3 Form of Addendum to Stock Option Agreement (Involuntary Termination
Following a Corporate Transaction). (2)
<PAGE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
-------- ------------------------------------------------------------------
<C> <S>
10.7.4 Form of Notice of Grant of Automatic Stock Option. (2)
10.7.5. Form of Automatic Stock Option Agreement. (2)
10.7.6. Form of Stock Issuance Agreement. (2)
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.(1)
10.8.1 Waiver and First Amendment to Credit Agreement dated as of June 9,
1996 (3)
10.8.2 Waiver and Second Amendment to Credit Agreement dated as of
September 30, 1996. (2)
10.8.3 Third Amendment to Credit Agreement and Assumption Agreement dated
as of March 31, 1997. (4)
10.8.4 Waiver and Fourth Amendment to Credit Agreement dated as of August
22, 1997. (5)
10.8.5 Waiver and Fifth Amendment to Credit Agreement dated as of September
30, 1997. (5)
10.8.6 Waiver and Sixth Amendment to Credit Agreement dated as of November
14, 1997. (5)
10.8.7 Credit Agreement dated as of March 4, 1998. (6)
10.8.8 First Amendment to Credit Agreement dated as of May 15, 1998. (7)
10.8.9 Note Purchase Agreement dated May 15, 1998. (7)
10.8.10 Second Amendment to Credit Agreement dated as of July 23, 1998. (8)
10.8.11 First Amendment to Note Purchase Agreement dated as of November 16,
1998.
10.9 Deed of Trust & Assignment of Rents dated June 21, 1994 by and
between Western Staff Services, Inc., First Bancorp and Sanwa Bank
California.(1)
10.9.1 Tax Indemnification Agreement by and among the Company and the
current stockholders of the Company.(1)
10.9.2 Amendment of Commercial Credit Agreement and Modification of Deed of
Trust as of June 6, 1996.(2)
10.10 Form of Tax Indemnification Agreement by and among the Company and
certain stockholders of the Company.(1)
10.11 Western Staff Services, Inc. 1996 Employee Stock Purchase Plan. (2)
10.11.1 Stock Purchase Agreement for 1996 Employee Stock Purchase Plan. (2)
<PAGE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
-------- ------------------------------------------------------------------
<C> <S>
10.11.2 Form of Enrollment/Change Form for 1996 Employee Stock Purchase
Plan. (2)
10.11.3 International Employee Stock Purchase Plan. (2)
10.11.4 Stock Purchase Agreement for International Employee Stock Purchase
Plan. (2)
10.11.5 Form of Enrollment/Change Form for International Employee Stock
Purchase Plan. (2)
10.12 Exchange Agreement between the Company and W. Robert Stover.(1)
10.13 Form of Employment Contract with certain Named Executive
Officers.(1)
21.1 Subsidiaries of the Company.
23.1 Consent of PricewaterhouseCoopers LLP, independent accountants.
24.1 Power of Attorney. (see page 39)
27.1 Financial Data Schedule.
(1) Incorporated herein by reference to the exhibit with the same number
filed with Company's Registration Statement on Form S-1 (File No.
33-85536) declared effective by the Securities and Exchange
Commission on April 30, 1996.
(2) Incorporated herein by reference to the exhibit with the same number
filed with the Company's Annual Report on Form 10-K for the fiscal
year ended November 2, 1996.
(3) Incorporated herein by reference to the exhibit with the same number
filed with the Company's Quarterly Report on Form 10-Q for the
quarter ended July 6, 1996.
(4) Incorporated herein by reference to the exhibit with the same number
filed with the Company's Quarterly Report on Form 10-Q for the
quarter ended July 6, 1996.
(5) Incorporated herein by reference to the Company's Annual Report on
Form 10-K for the fiscal year ended November 1, 1997.
(6) Incorporated herein by reference to the exhibit with the same number
filed with the Company's Quarterly Report on Form 10-Q for the
quarter ended March 10, 1998.
(7) Incorporated herein by reference to the exhibit with the same number
filed with the Company's Quarterly Report on Form 10-Q for the
quarter ended June 2, 1998.
(8) Incorporated herein by reference to the exhibit with the same number
filed with the Company's Quarterly Report on Form 10-Q for the
quarter ended August 25, 1998.
(9) Incorporated herein by reference to Exhibit A to the Company's Proxy
Statement for its 1998 Annual Meeting of Stockholders.
(b) Reports on Form 8-K
</TABLE>
<PAGE>
There were no Reports filed on Form 8-K by the Company during the
fiscal year ended October 31, 1998.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
WESTAFF, INC.
By: /s/ Michael K. Phippen
--------------------------------
President and Chief Executive Officer
Date: January 29, 1999
<PAGE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS:
That the undersigned officers and directors of Westaff, Inc., a
Delaware corporation, do hereby constitute and appoint Michael K. Phippen and
Paul A. Norberg, and each of them, the lawful attorneys-in-fact, each with
full power of substitution, for him or her in any and all capacities, to sign
any amendments to this report on Form 10-K and to file the same, with
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that
each of said attorneys-in-fact or their substitute or substitutes may do or
cause to be done by virtue hereof.
IN WITNESS WHEREOF, each of the undersigned has executed this Power of
Attorney as of the date indicated.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
----------------------------- ----------------------------------------- ----------------
<S> <C> <C>
/s/ W. Robert Stover Chairman of the Board January 29, 1999
- ----------------------------
W. Robert Stover
/s/ Michael K. Phippen President, Chief Executive Officer and January 29, 1999
- ---------------------------- Director (Principal Executive Officer)
Michael K. Phippen
/s/ Paul A. Norberg Executive Vice President, Chief January 29, 1999
- ---------------------------- Financial Officer and Director
Paul A. Norberg
/s/ Dirk A. Sodestrom Senior Vice President and Controller January 29, 1999
- ---------------------------- (Principal Accounting Officer)
Dirk A. Sodestrom
/s/ Gilbert L. Sheffield Director January 29, 1999
- ----------------------------
Gilbert L. Sheffield
/s/ Jack D. Samuelson Director January 29, 1999
- ----------------------------
Jack D. Samuelson
</TABLE>
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of Westaff, Inc.
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) and (2) on page 33 present fairly, in all
material respects, the financial position of Westaff, Inc. and its
subsidiaries at October 31, 1998 and November 1, 1997, and the results of
their operations and their cash flows for each of the three years in the
period ended October 31, 1998, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of
the Company's management; our responsibility is to express an opinion on
these financial statements based on our audits. We conducted our audits of
these statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
- ------------------------------
PRICEWATERHOUSECOOPERS LLP
San Francisco, California
January 22, 1999
F-1
<PAGE>
WESTAFF, INC.
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
OCTOBER 31, NOVEMBER 1,
1998 1997
------------------- -------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 4,651 $ 4,796
Trade accounts receivable, less allowance for doubtful
accounts of $786 and $879 87,552 96,502
Due from licensees 3,235 6,825
Deferred income taxes 6,725 2,511
Net assets of discontinued operations 23,753
Other current assets 5,705 3,421
------------------- -------------------
Total current assets 131,621 114,055
Property, plant and equipment, net 21,320 19,583
Deferred income taxes 3,981 143
Intangible assets, net of accumulated amortization of $7,773 and $6,818 37,678 19,181
Other long-term assets 2,545 1,568
------------------- -------------------
$ 197,145 $ 154,530
------------------- -------------------
------------------- -------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 15,600 $ 19,700
Current portion of loans payable 3,851 625
Current portion of note payable to related party 972 973
Accounts payable and accrued expenses 52,787 42,787
Income taxes payable 709 4,786
------------------- -------------------
Total current liabilities 73,919 68,871
Loans payable 44,708 16,659
Note payable to related party 972
Deferred income taxes 494
Other long-term liabilities 11,035 10,238
------------------- -------------------
Total liabilities 129,662 97,234
------------------- -------------------
Commitments and contingencies (Notes 2, 12 and 14)
Stockholders' equity:
Preferred stock, $.01 par value; authorized and unissued: 1,000 shares
Common stock, $.01 par value; authorized: 25,000 shares; issued: 15,948
shares at October 31, 1998 and 15,507 shares at November 1, 1997 159 103
Additional paid-in-capital 37,341 29,073
Retained earnings 32,679 28,994
Cumulative currency translation (774) (89)
------------------- -------------------
69,405 58,081
Less treasury stock at cost, 108 shares at October 31, 1998 and
114 shares at November 1, 1997 1,922 785
------------------- -------------------
Total stockholders' equity 67,483 57,296
------------------- -------------------
$ 197,145 $ 154,530
------------------- -------------------
------------------- -------------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE>
WESTAFF, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
------------------------------------
OCTOBER 31, NOVEMBER 1, NOVEMBER 2,
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Sales of services $ 597,614 $ 529,042 $ 439,294
License fees 2,095 1,034 2,514
--------- --------- ---------
Total sales of services and license fees 599,709 530,076 441,808
Costs of services 472,783 423,334 349,300
--------- --------- ---------
Gross profit 126,926 106,742 92,508
Franchise agents' share of gross profit 16,709 17,307 16,329
Selling and administrative expenses 79,245 68,368 57,929
Depreciation and amortization 6,952 5,544 4,493
--------- --------- ---------
Operating income from continuing operations 24,020 15,523 13,757
Interest expense 1,563 600 560
Interest income (457) (413) (251)
--------- --------- ---------
Income from continuing operations before income taxes 22,914 15,336 13,448
Provision for income taxes 9,166 6,126 10,723
--------- --------- ---------
Income from continuing operations 13,748 9,210 2,725
--------- --------- ---------
Discontinued operations:
(Loss) income from discontinued operations, net of income taxes (6,275) 346 558
Estimated loss on disposal, net of income taxes (3,543)
--------- --------- ---------
Total discontinued operations, net of income taxes (9,818) 346 558
--------- --------- ---------
Net income $ 3,930 $ 9,556 $ 3,283
--------- --------- ---------
--------- --------- ---------
Earnings (loss) per share:
Continuing operations:
Basic $ 0.88 $ 0.60 $ 0.19
--------- --------- ---------
Diluted $ 0.87 $ 0.60 $ 0.19
--------- --------- ---------
Discontinued operations:
Basic $ (0.63) $ 0.02 $ 0.04
--------- --------- ---------
Diluted $ (0.62) $ 0.02 $ 0.04
--------- --------- ---------
Net income:
Basic $ 0.25 $ 0.62 $ 0.23
--------- --------- ---------
Diluted $ 0.25 $ 0.62 $ 0.23
--------- --------- ---------
Weighted average shares outstanding - basic 15,569 15,420 14,373
--------- --------- ---------
Weigthed average shares outstanding - diluted 15,774 15,424 14,388
--------- --------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
WESTAFF, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(AMOUNTS IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
-------------------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS
------------- ----------- ------------- -------------
<S> <C> <C> <C> <C>
Balance at October 28, 1995 13,257 $ 50 $ 3,999 $ 27,386
Net income 3,283
Distributions to stockholders (5,000)
Transfer of undistributed
S corporation earnings 6,142 (6,142)
Currency translation adjustments
Common stock offering 2,250 53 18,927
------------- ----------- ------------- -------------
Balance at November 2, 1996 15,507 103 29,068 19,527
Net income 9,556
Purchase of treasury stock
Stock issued under employees' stock
purchase and option plans 5 (89)
Currency translation adjustments
------------- ----------- ------------- -------------
Balance at November 1, 1997 15,507 103 29,073 28,994
Net income 3,930
Three-for-two common stock split 52 (52)
Purchase of treasury stock
Stock issued under employees' stock
purchase and option plans 20 169 (245)
Stock issued in connection with
acquisitions 421 4 7,996
Currency translation adjustments
Other 155
------------- ----------- ------------- -------------
Balance at October 31, 1998 15,948 $ 159 $ 37,341 $ 32,679
------------- ----------- ------------- -------------
------------- ----------- ------------- -------------
<CAPTION>
CUMULATIVE TREASURY STOCK
CURRENCY --------------------------
TRANSLATION SHARES AMOUNT TOTAL
------------- ----------- -------------- --------------
<S> <C> <C> <C> <C>
Balance at October 28, 1995 $ 357 $ $ 31,792
Net income 3,283
Distributions to stockholders (5,000)
Transfer of undistributed
S corporation earnings
Currency translation adjustments 197 197
Common stock offering 18,980
------------- ----------- -------------- --------------
Balance at November 2, 1996 554 49,252
Net income 9,556
Purchase of treasury stock 179 (1,179) (1,179)
Stock issued under employees' stock
purchase and option plans (65) 394 310
Currency translation adjustments (643) (643)
------------- ----------- -------------- --------------
Balance at November 1, 1997 (89) 114 (785) 57,296
Net income 3,930
Three-for-two common stock split
Purchase of treasury stock 180 (3,026) (3,026)
Stock issued under employees' stock
purchase and option plans (186) 1,889 1,813
Stock issued in connection with
acquisitions 8,000
Currency translation adjustments (685) (685)
Other 155
------------- ----------- -------------- --------------
Balance at October 31, 1998 $ (774) 108 $ (1,922) $ 67,483
------------- ----------- -------------- --------------
------------- ----------- -------------- --------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
WESTAFF, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
--------------------------------------------------------
OCTOBER 31, NOVEMBER 1, NOVEMBER 2,
1998 1997 1996
----------------- ---------------- -----------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 3,930 $ 9,556 $ 3,283
Adjustments to reconcile net income to net cash
from operating activities:
Loss from discontinued operations 9,818
Depreciation 5,241 4,642 3,855
Amortization of intangible assets 1,711 1,370 825
Provision for losses on doubtful accounts 1,094 1,170 466
Deferred income taxes (8,451) (4,089) 3,339
Other non-cash charges 153
Changes in assets and liabilities:
Trade accounts receivable (9,086) (23,379) (21,031)
Due from licensees (1,192) (3,260) 3,578
Other assets (2,451) 741 (838)
Accounts payable and accrued expenses 13,100 4,970 5,267
Income taxes payable (4,160) 1,683 2,118
Other long-term liabilities 905 1,306 1,374
-----------------
Net cash provided by continuing operations 10,612
Net cash used in discontinued operations (6,185)
----------------- ---------------- -----------------
Net cash provided by (used in) operating activities 4,427 (5,290) 2,236
----------------- ---------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (8,946) (5,831) (6,437)
(Increase) decrease in notes receivable (2,080) 50 (148)
Payments for intangibles and other investments (15,386) (7,672) (4,825)
Investing activities of discontinued operations (2,645)
Other, net 724 95 188
----------------- ---------------- -----------------
Net cash used in investing activities (28,333) (13,358) (11,222)
----------------- ---------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net (repayments) borrowings under line of credit
agreements (4,100) 10,900 (3,800)
Repayments of note to related party (973) (973) (1,495)
Proceeds from issuance of loans payable 50,900 15,626
Principal payments on loans payable (20,824) (1,420) (2,371)
Issuance of common stock 1,813 310 18,980
Repurchase of common stock (3,026) (1,179)
Distributions to stockholders (2,500) (2,500)
----------------- ---------------- -----------------
Net cash provided by financing activities 23,790 20,764 8,814
----------------- ---------------- -----------------
Effect of exchange rate on cash (29) (169) 7
----------------- ---------------- -----------------
Net change in cash and cash equivalents (145) 1,947 (165)
Cash and cash equivalents at beginning of year 4,796 2,849 3,014
----------------- ---------------- -----------------
Cash and cash equivalents at end of year $ 4,651 $ 4,796 $ 2,849
----------------- ---------------- -----------------
----------------- ---------------- -----------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
WESTAFF, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
--------------------------------------------------------
OCTOBER 31, NOVEMBER 1, NOVEMBER 2,
1998 1997 1996
----------------- ---------------- -----------------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest $ 2,478 $ 1,783 $ 1,235
Income taxes (net of refunds) 15,373 8,148 5,096
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Common stock issued for acquisitions $ 8,000
Increase in distributions payable to stockholders $ 2,500
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
WESTAFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
1. BASIS OF PRESENTATION
BASIS OF PRESENTATION
Westaff, Inc. (the Parent and formerly Western Staff Services, Inc.) and
its domestic and foreign subsidiaries (together, the Company), provide
temporary staffing services in the United States, the United Kingdom,
Denmark, Australia, New Zealand and Norway. The consolidated financial
statements include the accounts of Westaff, Inc. and its domestic and
foreign subsidiaries. Material intercompany accounts and transactions have
been eliminated.
DISCONTINUED OPERATIONS
In November 1998, the Company announced its plan to sell its medical
business, primarily operating through Western Medical Services, Inc.
(Western Medical), a wholly owned subsidiary of the Company (see Note
3). As a result of this decision, the Company has classified its
medical operations as discontinued operations and, accordingly, has
segregated the net assets of the discontinued operations in the
Consolidated Balance Sheet at October 31, 1998, has segregated the
operating results of the discontinued operations in the Consolidated
Statements of Operations for fiscal 1998, fiscal 1997 and fiscal 1996
and has segregated cash flows from discontinued operations in the
Consolidated Statement of Cash Flows for fiscal 1998. The Notes to
Consolidated Financial Statements reflect the classification of the
medical operations as discontinued operations.
COMMON STOCK SPLIT
On May 7, 1998, the Board of Directors declared a three-for-two common
stock split effected in the form of a stock dividend payable on May 29,
1998 to shareholders of record at the close of business on May 18, 1998.
All share and per share data in the consolidated financial statements and
notes thereto have been retroactively adjusted for the stock split.
INITIAL PUBLIC OFFERING OF COMMON STOCK
On May 3, 1996, the Company completed an initial public offering (the IPO)
of 3,450 shares of common stock at $9.33 per share, of which 2,250 shares
were sold by the Company and 1,200 shares were sold by certain of the
Company's stockholders. The net proceeds to the Company from the sale of
the 2,250 shares of common stock, after deduction of associated expenses,
were $18,980.
Prior to the consummation of the IPO, the Company declared a dividend
payable to its then current stockholders consisting of the lesser 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 - see Note 2) which were subject to taxation at the
stockholder level, or $5,000. The final undistributed earnings of the
Company from November 1, 1987 to April 30, 1996 totaled $11,142. The
difference between the actual distribution of $5,000 and the undistributed
earnings of $11,142 has been reclassified for financial reporting purposes
from retained earnings to additional paid-in-capital.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
FISCAL YEAR
The Company's fiscal year is a 52 or 53 week period ending the Saturday
nearest the end of October. Fiscal years 1998 and 1997 each included 52
weeks while fiscal 1996 included 53 weeks. For interim reporting purposes,
the first three fiscal quarters comprise 12 weeks each while the fourth
fiscal quarter consists of 16 or 17 weeks.
F-7
<PAGE>
WESTAFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS
The Company considers all investments with initial maturities at purchase
of three months or less to be cash equivalents.
CONCENTRATIONS OF CREDIT RISK
The Company's financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of trade receivables.
However, concentrations of credit risk are limited due to the large number
of customers comprising the Company's customer base and their dispersion
across different business and geographic areas. Furthermore, the Company
routinely assesses the financial strength of its customers.
REVENUE RECOGNITION
Revenue from the sale of services is recognized at the time the service is
performed. A portion of the Company's sales of services and license fees
is derived from affiliate operations which consist of franchise agent and
license operations.
Revenues generated by franchise agents and related costs of services are
included as part of the Company's consolidated sales of services and costs
of services, respectively, since the Company has the direct contractual
relationships with the customers, holds title to the related customer
receivables and is the legal employer of the temporary employees. The net
distribution paid to the franchise agent for services rendered is based
either on a percentage of sales or of the gross profit generated by the
franchise agent's operation and is reflected as franchise agents' share of
gross profit.
The Company also has a licensing program in which the licensee has the
direct contractual relationships with the customers, holds title to the
related customer receivables and is the legal employer of the temporary
employees. Accordingly, sales and costs of services generated by the
license operation are not included in the Company's consolidated financial
statements. The Company advances funds to the licensee for payroll,
payroll taxes, insurance and other related items. Fees are paid to the
Company based either on a percentage of sales or of gross profit generated
by the licensee and such license fees are recorded by the Company as
license fees. Due from licensees represents advances made under these
financing agreements. These advances are secured by a pledge of the
licensee's trade receivables, tangible and intangible assets and the
license agreement. Advances due from licensees bear interest at prime plus
two percent but only to the extent the aggregate advances exceed the amount
of qualified trade receivables securing the outstanding advances. Under
the terms of a lockbox arrangement between the Company and the licensee,
the advances are reduced as remittances are received related to the
licensee trade accounts receivable. Licensees have pledged trade
receivables of $5,132 and $7,687 at October 31, 1998 and November 1, 1997,
respectively, as collateral for such advances. Sales from continuing
operations generated by license offices were $29,567, $16,704, and $38,124
for fiscal 1998, fiscal 1997 and fiscal 1996, respectively.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost. Depreciation is computed
using the straight-line method over the estimated useful lives of the
related assets, which are twenty-five to thirty-one years for buildings and
three to ten years for furniture and equipment. Major improvements to
leased office space are capitalized and amortized over the shorter of their
useful lives or the terms of the leases.
ACQUISITION AND AMORTIZATION
Business acquisitions have been accounted for under the purchase method of
accounting. The Company considers acquisitions under its "acquisition and
franchise back" program to be business combinations within the meaning of
Accounting Principles Board Opinion No. 16. Under the terms of these
arrangements, the Company acquires an existing temporary staffing service
business and the acquired business becomes a franchise agent upon
acquisition.
F-8
<PAGE>
WESTAFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
During fiscal years 1998, 1997 and 1996 the Company consummated
acquisitions with total purchase prices of $25,724, $7,053 and $3,802,
respectively. Tangible assets and specifically identifiable intangible
assets associated with these acquisitions amounted to $931 for fiscal 1998
and $1,125 for fiscal 1997. The remaining purchase prices for these
acquisitions were allocated to goodwill. Specifically identifiable
intangible assets consist primarily of covenants not to compete and are
amortized on a straight-line basis over the stated term of the agreement.
Goodwill ($34,809 and $17,211 at October 31, 1998 and November 1, 1997,
respectively) is amortized over the useful life of the specific acquired
entity and ranges from 20 to 40 years. Certain of these acquisitions
included additional consideration contingent on sales, gross profits or
pre-tax income of the acquired businesses in future periods. When such
contingencies are earned, the additional cost is added to the affected
intangible assets and amortized over the remaining life of the asset.
Contingencies earned during fiscal 1998 and 1997 on acquisitions
consummated during fiscal 1997 and 1996 totaled $1,597 and $645,
respectively. Unaudited pro forma information regarding revenues and net
income has not been provided since the effect of these acquisitions was not
material.
IMPAIRMENT OF LONG-LIVED ASSETS
Management of the Company assesses the recoverability of its long-lived
assets by determining whether the amortization of the asset's balance over
its remaining life can be recovered through projected undiscounted future
cash flows from operations. Management of the Company continually
evaluates the existence of potential impairment by analyzing operating
results, trends and prospects of its acquired operating offices.
Management also takes into consideration any other events or circumstances
that might indicate potential impairment. Based upon these evaluations,
the Company has determined that no impairment of recorded intangible and
other long-lived assets from continuing operations has occurred.
WORKERS' COMPENSATION
The Company self-insures the deductible amount related to workers'
compensation claims under its paid loss retrospective program. The
deductible amount was $500 per claim for policy years 1998 and 1997 and
$350 per claim for policy year 1996. The Company accrues the estimated
costs of workers' compensation claims based upon the expected loss rates
incurred within the various temporary employment categories provided by the
Company. Annually, the Company obtains an independent actuarially
determined calculation of the estimated costs of claims incurred and
reported and claims incurred but not reported, based on the Company's
historical loss development trends. The amounts calculated may be
subsequently revised by the actuary based on developments relating to such
claims. In order to give recognition to obligations associated with the
Company's workers' compensation program which are not expected to be paid
in the following fiscal year, the Company has included $10,600 and $9,800
in other long-term liabilities at October 31, 1998 and November 1, 1997,
respectively.
INCOME TAXES
The Company records income taxes using an asset and liability approach that
requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been recognized in the
Company's financial statements or tax returns. In estimating future tax
consequences, the Company generally considers all expected future events
other than enactments of changes in the tax law or rates.
Beginning with fiscal 1988, the Parent elected to be taxed as an
S corporation for federal and state income tax purposes. Pursuant to this
election, earnings or losses up to the date of the IPO were subject to tax
at the stockholder level rather than the corporate level. Therefore, no
provision was made for federal income tax on earnings or losses of the
Parent prior to the IPO. State taxes were provided according to relative
state tax laws. On April 30, 1996 and in conjunction with the IPO, the
Company elected to terminate its S corporation status. In connection with
the termination, the Company was required by the Internal Revenue Code to
change its method of accounting for income tax reporting purposes from the
cash basis to the accrual basis. The termination resulted in a
non-recurring net charge to earnings of $7,460 in the third quarter of
fiscal 1996. This charge was due primarily to temporary differences
resulting from the Company's historical use of the cash method of
accounting for income tax purposes.
F-9
<PAGE>
WESTAFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
Prior to April 30, 1996, certain subsidiaries of the Parent had not elected
S corporation status and were subject to federal and state income taxes at
the Company level.
ACCOUNTING FOR STOCK BASED COMPENSATION
The Company measures compensation cost for employee stock options and
similar equity instruments using the intrinsic value-based method of
accounting prescribed by Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees"(APB 25).
TRANSLATION OF FOREIGN CURRENCIES
All assets and liabilities that are denominated in foreign currencies are
translated into U.S. dollars at year-end exchange rates and all revenue and
expense accounts are translated using weighted average exchange rates.
Translation adjustments and gains or losses on intercompany foreign
currency transactions that are of a long-term investment nature are
included as a separate component of stockholders' equity.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information" (SFAS 131). SFAS 131
requires disclosure of certain financial and descriptive information for
each reportable operating segment based on management's internal
organizational decision-making structure. SFAS 131 is effective for fiscal
years ending after December 15, 1998. SFAS 131 allows, and the Company has
elected, early adoption of this statement for the fiscal year ended October
31, 1998 (see Note 13).
In February 1997, the FASB issued Statement of Financial Accounting
Standards No. 128, "Earnings Per Share" (SFAS 128). SFAS 128 establishes
new standards for computing and disclosing earnings per share (EPS). SFAS
128 is effective for both interim and annual periods ending after December
15, 1997. SFAS 128 required the Company to replace its traditional EPS
disclosures with a dual presentation of "Basic" and "Diluted" EPS and to
restate all prior period EPS data presented (see Note 4).
RECLASSIFICATIONS
The Company has reclassified certain amounts in the fiscal 1997 and fiscal
1996 consolidated financial statements in order to conform to the
presentation adopted for fiscal 1998 and as required with respect to
discontinued operations.
3. DISCONTINUED OPERATIONS
In November 1998, the Company announced its decision to sell Western
Medical. Western Medical provides temporary health care personnel to serve
an array of home care and institutional health care needs, including
Medicare patients, through a network of geographically dispersed
company-owned, franchise agent and license offices. The Company has
solicited buyers and is in the process of evaluating responses from several
interested parties, each of whom have signed confidentiality agreements.
During the fourth quarter of fiscal 1998, the Company recorded an
after-tax charge on the planned disposal of its medical operations of
approximately $3,480 or $0.23 per share. This after-tax charge includes
$2,500 for the write down of assets to estimated net realizable value,
$240 of estimated costs to be incurred in selling the operation, and
$740 of estimated operating losses to be incurred during the disposal
period. Summarized information on the discontinued operations is as
follows:
F-10
<PAGE>
WESTAFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
--------------------------------------------------
OCTOBER 31, NOVEMBER 1, NOVEMBER 2,
1998 1997 1996
--------------- -------------- --------------
<S> <C> <C> <C>
Income statement data:
Revenues $ 54,904 $ 46,732 $ 40,265
Costs and expenses 65,268 46,145 39,333
--------------- -------------- --------------
Operating (loss) income (10,364) 587 932
Income tax (benefit) expense (4,089) 241 374
--------------- -------------- --------------
(Loss) income from discontinued operations, net of income taxes (6,275) 346 558
--------------- -------------- --------------
Estimated loss on disposal (6,000)
Income tax benefit (2,457)
---------------
Estimated loss on disposal, net of income taxes (3,543)
--------------- -------------- --------------
Total discontinued operations $ (9,818) $ 346 $ 558
--------------- -------------- --------------
--------------- -------------- --------------
Balance sheet data:
Current assets (primarily receivables) $ 21,675
Property, plant and equipment, net 2,085
Intangible assets, net 5,712
Other assets 285
Current liabilities (5,930)
Noncurrent liabilities (74)
---------------
Net assets of discontinued operations $ 23,753
---------------
---------------
</TABLE>
4. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-------------------------------------------------------
OCTOBER 31, NOVEMBER 1, NOVEMBER 2,
1998 1997 1996
---------------- ----------------- ----------------
<S> <C> <C> <C>
Income from continuing operations $ 13,748 $ 9,210 $ 2,725
---------------- ----------------- ----------------
Denominator for basic earnings per share -
weighted average shares 15,569 15,420 14,373
Effect of dilutive securities:
Stock options 205 4 15
---------------- ----------------- ----------------
Denominator for diluted earnings per share - adjusted
weighted average shares and assumed conversions 15,774 15,424 14,388
---------------- ----------------- ----------------
---------------- ----------------- ----------------
Basic earnings per share $ 0.88 $ 0.60 $ 0.19
---------------- ----------------- ----------------
---------------- ----------------- ----------------
Diluted earnings per share $ 0.87 $ 0.60 $ 0.19
---------------- ----------------- ----------------
---------------- ----------------- ----------------
Antidilutive weighted shares excluded from diluted
earnings per share - 610 -
---------------- ----------------- ----------------
---------------- ----------------- ----------------
</TABLE>
Antidilutive weighted shares represent options to purchase shares of common
stock which were outstanding but were not included in the computation of
diluted earnings per share because the options' exercise price was greater
than the average market price of the common shares during the period, and
therefore the effect would be antidilutive.
F-11
<PAGE>
WESTAFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
5. TRANSACTIONS WITH RELATED PARTIES
The Company has a management agreement with Western Video Images, Inc.
(WVI), a company wholly owned by the Chairman of the Board and principal
stockholder of the Parent, whereby the Company provides certain accounting,
tax, legal, administrative and management services to WVI and charges a fee
based upon the gross sales of WVI. Management fees charged to WVI were
$149, $180, and $197, respectively, for fiscal 1998, 1997 and 1996. The
Parent is also the lessee for one of the facilities in which WVI operates;
however, WVI is charged for all costs of the lease. Future minimum lease
payments under this obligation are as follows: fiscal 1999 - $367 and
fiscal 2000 - $336.
During October 1995, the Company bought the operations of one of its
franchise agents for a total purchase price of $5,913. Of this purchase
price, $5,793 was allocated to goodwill, $25 was allocated to covenants not
to compete and $95 was allocated to property, plant and equipment. This
franchise agent became an employee of the Company as a result of this
transaction. The Company paid $1,500 in cash on the closing date and paid
an additional $3,441 during fiscal 1996, 1997 and 1998. The balance of
$972 is payable in fiscal 1999. The note payable bears interest at 6.5%.
The fair value of this note approximates the carrying value as of October
31, 1998 based on the current rates available to the Company for debt with
similar terms.
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
<TABLE>
<CAPTION>
OCTOBER 31, NOVEMBER 1,
1998 1997
------------------ ------------------
<S> <C> <C>
Land $ 1,366 $ 1,366
Buildings 7,493 7,514
Equipment, furniture and fixtures 34,765 29,563
------------------ ------------------
43,624 38,443
Less accumulated depreciation and amortization (22,304) (18,860)
------------------ ------------------
$ 21,320 $ 19,583
------------------ ------------------
------------------ ------------------
</TABLE>
7. SHORT-TERM BORROWINGS AND LOANS PAYABLE
As of March 4, 1998, the Company entered into an agreement with its
existing syndicated bank group to provide senior secured credit facilities
totaling $108,000. The facilities consist of a $90,000 five-year revolving
credit agreement and an $18,000 six-year term loan to provide working
capital needs and for general corporate purposes, including capital
expenditures and acquisitions. The new credit facility replaced the credit
facility existing as of November 1, 1997 which was to expire on March 31,
1998.
On May 20, 1998, the Company completed a private placement of 10-year
senior secured notes totaling $30,000 payable in equal annual installments
beginning in the year 2002. Proceeds from the notes were used to repay
outstanding borrowings of $22,600 under the revolving credit agreement,
with the remainder to be used for working capital and general corporate
purposes. Under the senior secured notes payable, the Company is required
to comply with certain financial and other covenants, the most restrictive
of which is a maximum total debt to capitalization ratio of 55%. The
Company was in compliance with these covenants as of October 31, 1998.
F-12
<PAGE>
WESTAFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
Short-term borrowings outstanding at October 31, 1998 and November 1, 1997
amounted to $15,600 and $19,700, respectively, with weighted average
interest rates of 6.4% at October 31, 1998 and 6.8% at November 1, 1997.
At October 31, 1998, the Company had irrevocable standby letters of credit
totaling $10,000 outstanding as collateral to support the workers'
compensation program. These letters of credit expire one year from date of
issuance, but are automatically renewed for one additional year unless
written notice is given to the holder.
The credit facility contains covenants which, among other things, require
the Company to maintain certain financial ratios and generally restrict,
limit or, in certain circumstances, prohibit the Company with respect to
capital expenditures, disposition of assets, incurrence of debt, mergers
and acquisitions, loans to affiliates and purchases of investments. Direct
advances under the revolving credit agreement are limited by outstanding
irrevocable standby letters of credit up to a maximum of $20,000. Total
advances are also limited under formulas based on total debt to total
capitalization and on earnings before interest, taxes, depreciation and
amortization (EBITDA). At October 31, 1998, the Company was not in
compliance with the EBITDA and certain other financial covenants, primarily
as a result of charges related to the discontinuance of its medical
operations (see Note 3). The Company was also not in compliance with the
capital expenditures covenant. The Company has received waivers with
respect to all such covenants from its bank lenders.
Loans payable consist of the following:
<TABLE>
<CAPTION>
OCTOBER 31, NOVEMBER 1,
1998 1997
------------------ -----------------
<S> <C> <C>
Variable and fixed rate notes payable, collateralized by deeds of trust,
interest 7.4% at October 31, 1998, due monthly
to 2001 $ 1,559 $ 1,659
Variable rate term loan, collateralized by the assets of the Company,
weighted average interest 6.1% at October 31, 1998 and 7.8% at
November 1, 1997 16,250 15,100
Senior secured notes payable, collateralized by the assets of the Company
with semi-annual interest payments at 6.8% per annum 30,000
Other 750 525
------------------ -----------------
48,559 17,284
Less current portion (3,851) (625)
------------------ -----------------
$ 44,708 $ 16,659
------------------ -----------------
------------------ -----------------
</TABLE>
The fair value of the loans payable approximates the carrying value as of
October 31, 1998 based on current rates available to the Company for debt
with similar terms. Maturities of loans payable for each of the next five
fiscal years are as follows: 1999 - $3,851; 2000 - $3,100; 2001 - $4,358;
2002 - $7,286; 2003 - $7,286; and thereafter; $22,678.
8. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
F-13
<PAGE>
WESTAFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
OCTOBER 31, NOVEMBER 1,
1998 1997
------------------ ------------------
<S> <C> <C>
Accounts payable $ 4,105 $ 2,605
Checks outstanding in excess of bank balances 8,424 6,189
Accrued payroll and payroll taxes 19,587 16,552
Accrued insurance/workers' compensation 11,052 10,186
Other 9,619 7,255
------------------ ------------------
$ 52,787 $ 42,787
------------------ ------------------
------------------ ------------------
</TABLE>
9. INCOME TAXES
The domestic and foreign components of income from continuing operations
before income taxes are as follows:
<TABLE>
<CAPTION>
Fiscal year ended
------------------------------------------------------
October 31, November 1, November 2,
1998 1997 1996
----------------- ----------------- ----------------
<S> <C> <C> <C>
Domestic $ 21,400 $ 13,004 $ 11,730
Foreign 1,514 2,332 1,718
----------------- ----------------- ----------------
Income from continuing operations before income taxes $ 22,914 $ 15,336 $ 13,448
----------------- ----------------- ----------------
----------------- ----------------- ----------------
</TABLE>
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
------------------------------------------------------
OCTOBER 31, NOVEMBER 1, NOVEMBER 2,
1998 1997 1996
----------------- ----------------- ----------------
<S> <C> <C> <C>
CURRENT:
State and local $ 3,190 $ 1,618 $ 1,376
Federal 13,811 7,743 5,389
Foreign 836 767 442
----------------- ----------------- ----------------
17,837 10,128 7,207
----------------- ----------------- ----------------
DEFERRED:
State and local (1,379) (832) 130
Federal (7,181) (3,165) 3,274
Foreign (111) (5) 112
----------------- ----------------- ----------------
(8,671) (4,002) 3,516
----------------- ----------------- ----------------
$ 9,166 $ 6,126 $ 10,723
----------------- ----------------- ----------------
----------------- ----------------- ----------------
</TABLE>
The difference between income taxes at the statutory federal income tax
rate and income taxes reported in the Consolidated Statements of Operations
are as follows:
F-14
<PAGE>
WESTAFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
------------------------------------------------------
OCTOBER 31, NOVEMBER 1, NOVEMBER 2,
1998 1997 1996
----------------- ----------------- ----------------
<S> <C> <C> <C>
Federal statutory income tax rate 35% 35% 35%
Tax on income of foreign subsidiaries 1 (1)
State taxes, net of federal income tax benefit 5 5 4
S corporation income not subject to federal
income taxes (11)
Effect of termination of S corporation election 52
Effect of IRS examination (2)
Other (1) 1 2
----------------- ----------------- ----------------
Effective income tax rate 40% 40% 80%
----------------- ----------------- ----------------
----------------- ----------------- ----------------
</TABLE>
The approximate tax effect of temporary differences and carryforwards that
give rise to deferred tax balances are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
------------------------------------
OCTOBER 31, NOVEMBER 1,
1998 1997
----------------- -----------------
<S> <C> <C>
Workers' compensation $ 11,033 $ 8,597
Accruals relating to discontinued operations 2,351
Other liabilities and accruals 1,536 1,201
Foreign net operating loss carryforwards 64
Other 169
----------------- -----------------
Gross deferred tax assets 15,089 9,862
Valuation allowance (64)
----------------- -----------------
15,089 9,798
----------------- -----------------
Depreciation and amortization 954 1,705
S corporation cash basis accounting adjustment 3,136 5,806
Other 293 127
----------------- -----------------
Gross deferred tax liabilities 4,383 7,638
----------------- -----------------
Net deferred tax asset $ 10,706 $ 2,160
----------------- -----------------
----------------- -----------------
</TABLE>
No valuation allowance has been established for temporary differences other
than foreign net operating loss carryforwards. Based on historical income,
internal forecasts and industry trends, management believes that it is more
likely than not that the Company will generate future pretax income in
sufficient amounts to realize the full benefit of these temporary
differences.
At October 31, 1998, the Parent had cumulative undistributed earnings from
foreign subsidiaries of approximately $3,547. Income taxes have not been
provided on the undistributed earnings because they have been permanently
reinvested in the foreign subsidiary. These earnings could become subject
to additional tax if
F-15
<PAGE>
WESTAFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
they were remitted as dividends, or if foreign earnings were lent to the
Company. However, such income taxes would not be material to the Company's
financial position or results of operations. Income taxes have not been
provided on foreign currency translation adjustments since such taxes would
be immaterial.
10. SAVINGS PLANS
The Company has a nonqualified deferred savings plan for highly compensated
employees and a 401(k) savings plan for eligible employees. Under both the
deferred and 401(k) savings plans, employees may elect to contribute up to
15% of their annual compensation, with the Company matching 25% of
participant contributions up to the first 10% of annual compensation.
11. STOCKHOLDERS' EQUITY
TREASURY STOCK
During fiscal 1998, the Company repurchased 180 shares of common stock on
the open market for aggregate cash consideration of $3,026. The
repurchased shares may be used for reissuance under the Company's stock
option and employee stock purchase plans. During fiscal 1998, the Company
reissued 186 shares with aggregate cash proceeds of $1,813. When treasury
shares are reissued, any excess of the proceeds over the acquisition cost
of the shares is credited to additional paid-in-capital. Excess
acquisition cost over the proceeds from reissuance is first charged to
additional paid-in-capital to the extent of previous net "gains", and then
to retained earnings.
STOCK OPTION PLANS
The Company has two stock option plans (the Plans). The 1989/1990 Stock
Option Plan provides for the granting of nonqualified options to executives
and key employees to purchase the Company's common stock. The options
vested during fiscal 1994 and fiscal 1995 and are exercisable at $6.40 per
share for options granted in fiscal 1989 and $7.01 per share for options
granted in fiscal 1990. Options must be exercised within five years
subsequent to the vesting date. Options to purchase 16 shares are
outstanding at October 31, 1998. No further grants may be made under the
1989/1990 plan.
The 1996 Stock Option/Stock Issuance Plan provides for the granting of
incentive and nonqualified stock options and stock appreciation rights.
The plan has authorized 1,551 shares of common stock for issuance.
Incentive stock options may be granted at a price not less than 100% of the
fair market value of the Company's common stock at the date of grant.
Nonqualified options may be granted at a price not less than 85% of the
fair market value of the Company's common stock at the date of grant. The
options' vesting schedules vary subject to the participant's period of
future service or to the Company's or the option holder's attainment of
designated performance goals, or otherwise at the discretion of the Board
of Directors. No option may have a term in excess of 10 years. No stock
appreciation rights have been granted under the plan.
The Company applies APB 25 and related interpretations in accounting for
the Plans. Accordingly, compensation cost is not recognized for incentive
and nonqualified stock options. Pro forma information regarding net income
and earnings per common share is required by Statement of Financial
Accounting Standards No. 123 (SFAS 123) as if the Company had accounted for
its employee stock options under the fair value method rather than the
intrinsic method under APB 25. If compensation cost had been determined
under SFAS 123, the Company's net income would have been reduced by $965,
$788 and $421 for fiscal 1998, 1997 and 1996, respectively, and earnings
per share for those years would have been reduced by $0.06, $0.05 and
$0.03, respectively. Since stock options generally become exercisable over
several years and additional grants are likely to be made in future years,
the pro forma amounts for compensation cost may not be indicative of the
effects on net income and earnings per share for future years.
The fair value of each option included in the following table is estimated
on the date of grant using the Black-Scholes option-pricing model with the
following weighted average assumptions for options granted in fiscal
F-16
<PAGE>
WESTAFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
1998, 1997 and 1996, respectively: zero dividend yield, expected
volatility of 69.0%, 63.0% and 63.0%, expected lives of 6 years; and
risk-free interest rates of 5.7%, 6.6% and 6.4% .
The following summarizes the stock option transactions under the two plans:
<TABLE>
<CAPTION>
October 31, 1998 November 1, 1997 November 2, 1996
------------------------------ ---------------------------- ---------------------------
Weighted Weighted Weighted
average average average
Shares exercise price Shares exercise price Shares exercise price
------------------------------ ---------------------------- ---------------------------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding, beginning of year 648 $ 9.13 650 $ 9.24 23 $ 6.73
Granted 295 11.16 26 6.35 644 9.33
Exercised (127) 9.19 (2) 9.33
Cancelled (30) 8.34 (26) 9.29 (17) 9.33
------------------------------ ---------------------------- ---------------------------
Options outstanding, end of year 786 $ 9.91 648 $ 9.13 650 $ 9.24
------------------------------ ---------------------------- ---------------------------
------------------------------ ---------------------------- ---------------------------
Options exercisable, end of year 288 $ 9.09 238 $ 9.08 23 $ 6.73
------------------------------ ---------------------------- ---------------------------
------------------------------ ---------------------------- ---------------------------
Options available for grant, end of year 658 929 929
------------------------------ ---------------------------- ---------------------------
------------------------------ ---------------------------- ---------------------------
Weighted average fair value of options
granted during the year $ 7.42 $ 4.08 $ 5.92
</TABLE>
The following table summarizes information about stock options outstanding
at October 31, 1998:
<TABLE>
<CAPTION>
Options outstanding Options exercisable
------------------------------------------------------ ----------------------------------
Weighted average
Range of remaining Weighted average Weighted average
exercise prices Shares contractual life exercise price Shares exercise price
- --------------------- -------------------------------------------------------- ----------------------------------
<S> <C> <C> <C> <C> <C>
$ 6.08 - 8.50 41 6.24 $ 7.03 26 $ 6.59
$ 9.33 - 9.50 460 7.50 9.35 262 9.34
$ 9.58 - 16.17 285 9.30 11.25
- --------------------- -------------------------------------------------------- ----------------------------------
$ 6.08 - 16.17 786 8.09 $ 9.91 288 $ 9.09
- --------------------- -------------------------------------------------------- ----------------------------------
- --------------------- -------------------------------------------------------- ----------------------------------
</TABLE>
EMPLOYEE STOCK PURCHASE PLAN
Under the Company's 1996 Employee Stock Purchase Plan, eligible employees
may authorize payroll deductions of up to 10% of eligible compensation for
the purchase of stock during each semi-annual purchase period. The
purchase price will equal the lower of 85% of the fair market value at the
beginning of the purchase period or on the last day of the purchase period.
The plan provides for the issuance of up to 750 shares of the Company's
common stock. As of October 31, 1998 shares issued under the plan totaled
141. The effect of this plan on the pro forma disclosures under SFAS 123
has not been included as the impact on net income and earnings per share is
not material.
12. LEASES
The Company leases real and personal property under operating leases which
expire on various dates. Some of these leases have renewal options for
periods ranging from one to five years and contain provisions for
escalation based on increases in certain costs incurred by the landlord and
on Consumer Price Index adjustments. U.S. rental expense from continuing
operations amounted to $4,337 in fiscal 1998, $3,382 in fiscal 1997, and
$2,631 in fiscal 1996. Rental expense for foreign subsidiaries was $1,080
in fiscal 1998, $999 in fiscal 1997, and $937 in fiscal 1996. The Company
also receives rental income from owned property and
F-17
<PAGE>
WESTAFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
subleases which expire on various dates. Sublease income was not material
to the Company's results of operations for any periods presented.
Future minimum lease payments for all leases at October 31, 1998 are as
follows:
<TABLE>
<CAPTION>
FISCAL YEAR
<S> <C>
1999 $ 4,330
2000 3,065
2001 1,916
2002 815
2003 320
Thereafter 178
----------------
Total minimum lease payments $ 10,624
----------------
----------------
</TABLE>
13. OPERATING SEGMENTS
The Company has three reportable segments: domestic business services,
international business services and medical services. Domestic business
services provides temporary staffing services in clerical, light industrial
and light technical positions through a network of company-owned, franchise
agent and licensed offices. The segment consists of 18 geographically
diverse company regions under the direction of regional managers and one
combined franchise region, each identified as an operating segment.
Revenues from domestic business services are derived wholly from the United
States and its territories. The operating segments meet the aggregation
criteria specified under SFAS 131 for reporting purposes. International
business services comprises company-owned offices providing clerical and
light industrial temporary staffing services in Australia, New Zealand,
Norway, Denmark and the United Kingdom. The Company employs a managing
director for each country who oversees all operations in that country.
Revenues are attributed to each country based on the location of the
respective country's principal offices. International operations have been
combined into one reportable segment under the provisions of SFAS 131 as
they share a majority of the aggregation criteria and are not individually
reportable. The Company is discontinuing the operations of its medical
services segment (see Notes 1 and 3).
The Company evaluates the performance of and allocates resources to the
reportable segments based on operating income. The accounting policies of
the segments are the same as those described in Note 2. Certain operating
expenses of the Company's corporate headquarters, which are included in
domestic business services, are charged to international business services
in the form of royalties. Assets relating to these costs, primarily
property, plant and equipment, have not been allocated due to
impracticality and are not considered material for purposes of assessing
performance and making operating decisions.
The following summarizes reporting segment data for fiscal years 1998, 1997
and 1996:
F-18
<PAGE>
WESTAFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Fiscal Year Ended October 31, 1998
------------------------------------------------------------------------
Domestic International Adjustments (1) Consolidated
---------------- ---------------- ------------- ----------------
<S> <C> <C> <C> <C>
Total sales of services and license fees $ 522,217 $ 77,492 $ 599,709
Operating income from continuing operations 22,428 1,592 24,020
Depreciation and amortization 6,348 604 6,952
Expenditures for puchases of fixed assets 8,441 505 8,946
Payments for intangibles and other 13,953 1,433 15,386
---------------- ---------------- ----------------
Total expenditures for long lived assets $ 22,394 $ 1,938 $ 24,332
---------------- ---------------- ----------------
---------------- ---------------- ----------------
Total long lived assets $ 55,254 $ 3,744 $ 58,998
---------------- ---------------- ----------------
---------------- ---------------- ----------------
Total assets $ 160,496 $ 18,774 $ 17,875 $ 197,145
---------------- ---------------- ------------- ----------------
---------------- ---------------- ------------- ----------------
<CAPTION>
Fiscal Year Ended November 1, 1997
------------------------------------------------------------------------
Domestic International Adjustments (1) Consolidated
---------------- ---------------- ------------- ----------------
<S> <C> <C> <C> <C>
Total sales of services and license fees $ 457,521 $ 72,555 $ 530,076
Operating income from continuing operations 13,073 2,450 15,523
Depreciation and amortization 5,024 520 5,544
Expenditures for puchases of fixed assets 4,174 649 $ 1,008 5,831
Payments for intangibles and other 2,915 917 3,840 7,672
---------------- ---------------- ------------- ----------------
Total expenditures for long lived assets $ 7,089 $ 1,566 $ 4,848 $ 13,503
---------------- ---------------- ------------- ----------------
---------------- ---------------- ------------- ----------------
Total long lived assets $ 30,096 $ 2,811 $ 5,857 $ 38,764
---------------- ---------------- ------------- ----------------
---------------- ---------------- ------------- ----------------
Total assets $ 115,528 $ 15,870 $ 23,132 $ 154,530
---------------- ---------------- ------------- ----------------
---------------- ---------------- ------------- ----------------
<CAPTION>
Fiscal Year Ended November 2, 1996
------------------------------------------------------------------------
Domestic International Adjustments (1) Consolidated
---------------- ---------------- ------------- ----------------
<S> <C> <C> <C> <C>
Total sales of services and license fees $ 382,936 $ 58,872 $ 441,808
Operating income 11,930 1,827 13,757
Depreciation and amortization 4,042 451 4,493
Expenditures for puchases of fixed assets 5,586 468 $ 383 6,437
Payments for intangibles and other 3,673 347 805 4,825
---------------- ---------------- ------------- ----------------
Total expenditures for long lived assets $ 9,259 $ 815 $ 1,188 $ 11,262
---------------- ---------------- ------------- ----------------
---------------- ---------------- ------------- ----------------
</TABLE>
(1) Adjustments reflect assets and expenditures related to discontinued
operations and elimination of domestic investments in international
subsidiaries
F-19
<PAGE>
WESTAFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
14. 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 where 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, results of operations or cash flows of the Company and that such
obligations, if any, would be adequately covered by insurance.
15. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following is a summary of the unaudited quarterly financial information
for the fiscal years ended October 31, 1998 and November 1, 1997. The
fourth quarter of fiscal years 1998 and 1997 consist of 16 weeks while all
other quarters consist of 12 weeks.
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter (2) Quarter
----------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
FISCAL YEAR ENDED OCTOBER 31, 1998 (1)
Sales of services and license fees $ 127,248 $ 128,338 $ 134,209 $ 209,914
Gross profit 25,969 26,999 28,640 45,318
Income from continuing operations 2,003 2,532 3,194 6,019
Income (loss) from discontinued operations 233 168 (606) (9,613)
----------------- ---------------- ---------------- ----------------
Net income $ 2,236 $ 2,700 $ 2,588 $ (3,594)
----------------- ---------------- ---------------- ----------------
----------------- ---------------- ---------------- ----------------
Income (loss) per common share
Income from continuing operations
Basic $ 0.13 $ 0.16 $ 0.21 $ 0.38
----------------- ---------------- ---------------- ----------------
----------------- ---------------- ---------------- ----------------
Diluted $ 0.13 $ 0.16 $ 0.20 $ 0.38
----------------- ---------------- ---------------- ----------------
----------------- ---------------- ---------------- ----------------
Income (loss) from discontinued operations
Basic $ 0.02 $ 0.01 $ (0.04) $ (0.61)
----------------- ---------------- ---------------- ----------------
----------------- ---------------- ---------------- ----------------
Diluted $ 0.02 $ 0.01 $ (0.04) $ (0.60)
----------------- ---------------- ---------------- ----------------
----------------- ---------------- ---------------- ----------------
Net income
Basic $ 0.15 $ 0.17 $ 0.17 $ (0.23)
----------------- ---------------- ---------------- ----------------
----------------- ---------------- ---------------- ----------------
Diluted $ 0.15 $ 0.17 $ 0.16 $ (0.22)
----------------- ---------------- ---------------- ----------------
----------------- ---------------- ---------------- ----------------
FISCAL YEAR ENDED NOVEMBER 1, 1997 (1)
Sales of services and license fees $ 109,238 $ 113,586 $ 120,990 $ 186,262
Gross profit 21,069 22,489 24,305 38,879
Income from continuing operations 1,043 1,260 1,948 4,959
Income from discontinued operations 95 82 35 134
----------------- ---------------- ---------------- ----------------
Net income $ 1,138 $ 1,342 $ 1,983 $ 5,093
----------------- ---------------- ---------------- ----------------
----------------- ---------------- ---------------- ----------------
Basic and diluted income per common share
Income from continuing operations $ 0.06 $ 0.08 $ 0.13 $ 0.32
----------------- ---------------- ---------------- ----------------
----------------- ---------------- ---------------- ----------------
Income from discontinued operations $ 0.01 $ 0.01 $ - $ 0.01
----------------- ---------------- ---------------- ----------------
----------------- ---------------- ---------------- ----------------
Net income $ 0.07 $ 0.09 $ 0.13 $ 0.33
----------------- ---------------- ---------------- ----------------
</TABLE>
(1) Fiscal 1997 and fiscal 1998 quarterly financial information has been
restated to reflect the Company's medical operations as discontinued
operations.
(2) The discontinued medical operations for the third quarter of fiscal
1998 have been restated to correct for certain procedural and clerical
errors that occurred during the third quarter in connection with the
calculation of the interim estimated fiscal 1998 Medicare revenues.
This restatement has no effect on continuing operations. The effect
of the restatement on amounts reported on the Company's Quarterly
F-20
<PAGE>
WESTAFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
Report on Form 10-Q for the period ended July 11, 1998 was to reduce net income
by $565 or $0.03 per basic share.
F-21
<PAGE>
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
SCHEDULE II
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
----------------------------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS AND OTHER END OF
DESCRIPTION OF YEAR EXPENSES ACCOUNTS DEDUCTIONS YEAR
- --------------------------------------------- ---------- -------- -------- ---------- ------
<S> <C> <C> <C> <C> <C>
Fiscal Year Ended November 2, 1996
Allowance for doubtful accounts $ 823 $ 466 $ 0 $ 520 $ 769
Reserve on notes receivable 620 0 0 570 50
Valuation allowance on deferred tax asset 123 0 0 50 73
Fiscal Year Ended November 1, 1997
Allowance for doubtful accounts $ 769 $1,170 $ 0 $1,060 $ 879
Reserve on notes receivable 50 0 0 0 50
Valuation allowance on deferred tax asset 73 0 0 9 64
Fiscal Year Ended October 31, 1998
Allowance for doubtful accounts $ 729 $ 900 $ 0 $ 843 $ 786
Reserve on notes receivable 50 0 244 40 254
Valuation allowance on deferred tax asset 64 0 0 64 0
Allowance for doubtful accounts -
discontinued operations 150 1,854 0 116 1,888
Disposal of discontinued operations 0 6,000 0 0 6,000
</TABLE>
<PAGE>
PAGE 1
STATE OF DELAWARE
OFFICE OF THE SECRETARY OF STATE
--------------------------------
I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO HEREBY
CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF AMENDMENT
OF "WESTERN STAFF SERVICES, INC.", CHANGING ITS NAME FROM "WESTERN STAFF
SERVICES, INC." TO "WESTAFF, INC.", FILED IN THIS OFFICE ON THE TWENTY-FOURTH
DAY OF SEPTEMBER, A.D. 1998, AT 8:30 O'CLOCK A.M.
A FILED COPY OF THIS CERTIFICATE HAS BEEN FORWARDED TO THE NEW CASTLE
COUNTY RECORDER OF DEEDS.
[SEAL] /s/ Edward J. Freel
-----------------------------------
EDWARD J. FREEL, SECRETARY OF STATE
2433384 8100 AUTHENTICATION: 9318671
981369616 DATE: 09-24-98
<PAGE>
CERTIFICATE OF AMENDMENT
OF
THE THIRD AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
WESTERN STAFF SERVICES, INC.
Western Staff Services, Inc., a corporation organized and existing
under and by virtue of the General Corporation Law of the State of Delaware,
does hereby certify:
1. That by a unanimous written consent of the Board of Directors of
Western Staff Services, Inc. (the "Corporation"), dated as of July 16, 1998,
resolutions were duly adopted setting forth a proposed amendment of the Third
Amended And Restated Certificate Of Incorporation of the Corporation, declaring
that amendment to be advisable and calling a special meeting of the stockholders
of the Corporation for consideration thereof. The resolution setting forth the
proposed amendment is as follows:
RESOLVED, that, subject to the approval of the stockholders
of the Corporation, Article FIRST of the Third Amended And
Restated Certificate Of Incorporation of the Corporation be,
and it hereby is, amended to read in full as follows:
"FIRST. The name of the Corporation is Westaff, Inc. (the
Corporation")."
2. That thereafter, pursuant to resolution of its Board of
Directors, a special meeting of the stockholders of the Corporation was duly
called and held, upon notice in accordance with Section 222 of the General
Corporation Law of the State of Delaware at which meeting the necessary number
of shares as required by statute was voted in favor of the amendment.
3. That the amendment was duly adopted in accordance with the
provisions of Section 242 of the General Corporation Law of the State of
Delaware.
IN WITNESS WHEREOF, the Corporation has caused this certificate to be
signed by Robin A. Herman, Senior Vice President and Secretary, and Bonnie A.
McDonald, Vice President and Assistant Secretary, respectively, of the
Corporation, on this 31st day of August, 1998.
/s/ Robin A. Herman
-------------------------------------
Robin A. Herman,
Senior Vice President and Secretary
Attest: /s/ Bonnie A. McDonald
------------------------------------
Bonnie A. McDonald
Vice President and Assistant Secretary
<PAGE>
AMENDMENT OF THE
AMENDED AND RESTATED BYLAWS OF
WESTERN STAFF SERVICES, INC.
Pursuant to a resolution of the Board of Directors at a regular meeting
held on March 26, 1998, the Amended And Restated Bylaws of the corporation are
further amended as follows:
All references to the eliminated position of "Chief Administrative
Officer" are stricken , including those in Article 3, Sections 3.1 and
3.2, and in Article 6, Sections 6.3 and 6.5; and Article 3, Section
3.9 in its entirety.
WESTERN STAFF SERVICES, INC.
By: /s/ Robin A. Herman
----------------------------------
Robin A. Herman, Secretary
<PAGE>
AMENDMENT OF THE
AMENDED AND RESTATED BYLAWS OF
WESTERN STAFF SERVICES, INC.
By unanimous written consent of the Board of Directors of the Corporation
dated as of July 16, 1998, and by majority vote of the shareholders of the
corporation at a special meeting held August 13, 1998, the name of the
Corporation was changed to Westaff, Inc., effective September 24, 1998.
Also by unanimous written consent of the Board of Directors of the
Corporation dated as of July 16, 1998, the officers of the Corporation were
authorized and directed to execute all instruments, documents, agreements and
certificates and to take all such other actions deemed necessary, advisable, or
property to carry out the purposes and intent of the resolutions regarding the
corporation name change.
Therefore, the Amended And Restated Bylaws of the Corporation are further
amended to be titled:
"AMENDED AND RESTATED BYLAWS
OF
WESTAFF, INC.,
(a Delaware corporation)"
WESTAFF, INC.
By: /s/ Robin A. Herman
--------------------------
Robin A. Herman, Secretary
<PAGE>
<TABLE>
<S><C>
COMMON STOCK COMMON STOCK
NUMBER SHARES
WS
WESTAFF-Registered Trademark-
INCORPORATED UNDER THE LAWS OF SEE REVERSE FOR CERTAIN DEFINITIONS
THE STATE OF DELAWARE AND A STATEMENT AS TO THE RIGHTS,
PREFERENCES, PRIVILEGES AND
RESTRICTIONS ON SHARES
THIS CERTIFIES THAT CUSIP 957070 10 5
[SPECIMEN]
IS THE OWNER OF
FULLY PAID AND NONASSESSABLE SHARES OF THE COMMON STOCK, PAR VALUE $.01 PER SHARE, OF
WESTAFF, INC.
[CERTIFICATE OF STOCK]
transferable on the books of the Corporation by the holder hereof in person or duly authorized attorney upon surrender of this
Certificate properly endorsed. This Certificate is not valid until countersigned and registered by the Transfer Agent and
Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile signatures of its duly authorized officers.
Dated:
/s/ W. Robert Stover [SEAL] /s/ Robin A. Herman
[SPECIMEN] [SPECIMEN]
Chairman Senior Vice President and Secretary
Countersigned and Registered:
AMERICAN STOCK TRANSFER & TRUST COMPANY
Transfer Agent and Registrar
By
Authorized Signature
</TABLE>
<PAGE>
<TABLE>
WESTAFF, INC.
<S><C>
A statement of the powers, designations, preferences and relative, participating, optional or other special rights of each
class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights as
established, from time to time, by the Certificate of Incorporation of the Corporation and by any certificate of determination, the
number of shares constituting each class and series, and the designations thereof, may be obtained by the holder hereof upon request
and without charge from the Secretary of the Corporation at the principal office of the Corporation.
The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they
were written out in full according to applicable laws or regulations:
TEN COM - as tenants in common UNIF GIFT MIN ACT - ...............Custodian ....................
TEN ENT - as tenants by the entireties (Cust) (Minor)
JT TEN - as joint tenants with right of under Uniform Gifts to Minors
survivorship and not as tenants Act..........................................
in common (State)
UNIF TRF MIN ACT - .................Custodian (until age..........)
(Cust)
......................under Uniform Transfers
(Minor)
to Minors Act................................
(State)
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, ______________________________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- ---------------------------------------
- ---------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
Shares
- ------------------------------------------------------------------------------------------------------------------------
of the common stock represented by the within Certificate, and do hereby irrevocably constitute and appoint
Attorney
- ------------------------------------------------------------------------------------------------------------------------
to transfer the said Shares on the books of the within named Corporation with full power of substitution in the premises.
Dated
------------------------------------------
X
-------------------------------------------
X
-------------------------------------------
NOTICE: THE SIGNATURE(S) TO THIS ASSIGNMENT MUST
CORRESPOND WITH THE NAME(S) AS WRITTEN UPON THE
FACE OF THE CERTIFICATE IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE
WHATEVER.
Signature(s) Guaranteed
By
------------------------------------------------------------------
THE SIGNATURE(S) MUST BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION
(BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS
WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM),
PURSUANT TO S.E.C. RULE 17Ad-15.
</TABLE>
<PAGE>
EMPLOYMENT AGREEMENT
BETWEEN
WESTAFF (USA), INC. AND W. ROBERT STOVER
THIS AGREEMENT between WESTAFF (USA), INC., a California corporation
("Employer") and W. ROBERT STOVER ("Employee") shall be effective as of January
1, 1999. Employer and Employee agree to the following terms and conditions of
employment as of that date.
1. PERIOD OF EMPLOYMENT. The term of employment shall be of indefinite
duration and shall continue unless Employee chooses to retire or until his
death.
2. POSITION AND RESPONSIBILITIES. As of December 31, 1998 Employee has
chosen to step down from his position as Chief Executive Officer of Employer and
Employer's parent company, Westaff, Inc. (collectively, "Westaff") and the
various wholly-owned domestic subsidiaries of Westaff of which he has been Chief
Executive Officer, but he shall retain the role and job title of Chairman of the
Board. In addition, he shall continue serving as Chairman of the Boards of
Directors of the foreign subsidiaries of Westaff. His duties shall be
appropriate for an officer serving in his position. In particular, his duties
shall include presiding at regular quarterly meetings and at special meetings,
if any, of the Board of Directors of Westaff, Inc.; conducting the annual
meeting of stockholders of Westaff, Inc.; presiding at meetings of the Boards
of Directors of Employer and all the subsidiary companies mentioned above; and
otherwise his duties shall be as directed or reasonably required by the Boards
of Directors of any or all of those corporations from time to time. Employee
shall be expected to travel if necessary or advisable in order to fulfill the
duties of his position.
3. COMPENSATION. In consideration of the services to be rendered under
this Agreement, and in recognition that Employee is the founder of the business
operated by Employer, Employer's compensation shall be as follows:
(a) Employee's annual salary shall be Seventy-Five Thousand Dollars
($75,000) payable in installments pursuant to the procedures regularly
established by Employer and as they may be amended by Employer in its sole
discretion during the period of employment. All compensation to be paid to
Employee under this Agreement shall be less withholdings required by law. This
base salary figure may be adjusted upward or downward with the mutual agreement
of the parties.
(b) Employee shall not be eligible for a bonus or other incentive
compensation nor shall he be entitled to vacation pay.
(c) Employer shall pay for the relocation of Employee's office and
that of his executive assistant from Employer's executive office building to
suitable leased premises elsewhere, as approved by the Compensation Committee of
the Board of Directors of Westaff, Inc. and as renegotiated from time to time.
Employer shall be the
1
<PAGE>
lessor of such premises and all related lease obligations shall be at Employer's
expense, including monthly rent, parking, utilities, and janitorial services.
(d) During the term of this Agreement, Employer shall compensate
Employer's executive assistant as a regular staff employee of Employer.
Employee shall consult with the Compensation Committee of the Board of Directors
of Westaff, Inc. before making salary decisions relative to setting or
increasing his executive assistant's annual salary from time to time. Such
decisions shall be made in accordance with Employer's employment policies, as
they may be amended in Employer's discretion from time to time, including any
severance or termination pay policies. Such executive assistant shall be
entitled to vacation pay, subject to Employer's policies with respect to maximum
annual accruals. Such executive assistant shall be paid by Employer pursuant to
the procedures regularly established, and as they may be amended, by Employer in
its sole discretion. Such executive assistant shall have the right to
participate in and to receive benefits from all present and future benefit plans
specified in Employer's policies and generally made available to full-time
employees of Employer. The amount and extent of benefits to which such
executive assistant shall be entitled shall be governed by the specific benefit
plan, as amended. The foregoing benefit plans presently include group health,
life, supplemental life, long-term disability, accidental death and
dismemberment insurance, a 401(k) savings plan and a deferred savings plan. The
foregoing obligations of Employer shall terminate upon reassignment of
Employee's executive assistant to other duties for Employer or upon termination
of Employee's employment, except with respect to any then applicable severance
or termination pay obligations or unless Employer negotiates a satisfactory
arrangement to the contrary in its sole discretion.
4. BENEFITS. During the term of this Agreement, Employee shall be
entitled to the following benefits:
(a) Employee shall have the right to participate in and to receive
benefits from all present and future benefit plans specified in Employer's
policies and generally made available to full-time employees of Employer.
(b) The amount and extent of benefits to which Employee is or shall
be entitled shall be governed by the specific benefit plan, as amended. The
foregoing benefit plans presently include group health, life, supplemental life,
long-term disability, accidental death and dismemberment insurance, a 401(k)
savings plan and a deferred savings plan.
5. EXPENSES. Employer shall reimburse Employee for reasonable travel
and other business expenses incurred by Employee in the performance of his
duties, in accordance with Employer's policies, as they may be amended in its
sole discretion. Employee shall submit expense reports with reasonably detailed
itemization of such expenses to Employer's Chief Executive Officer or Chief
Financial Officer.
6. ARBITRATION. All disputes between Employee (and his attorneys,
successors and assigns) and Employer (and its parent company, affiliates,
shareholders, directors, officers, employees, agents, successors, attorneys and
assigns) relating in any manner whatsoever to the employment of Employee
including, without limitation, disputes relating to Employee's other obligations
under this Agreement ("Arbitrable Claims") shall be resolved by arbitration in
accordance with the National Rules for the Resolution of
2
<PAGE>
Employment Disputes of the American Arbitration Association, as amended ("AAA
Employment Rules") and shall be decided by a single arbitrator selected by
mutual agreement of the parties or otherwise decided in accordance with the AAA
Employment Rules if they cannot agree on an arbitrator within thirty (30) days
of the effective date of the notice initiating the arbitration. The fees of the
arbitrator shall be split between both parties equally. The arbitrator shall
have exclusive authority to resolve all Arbitrable Claims, including, but not
limited to, whether any particular claim is arbitrable and whether all or any
part of this Agreement is void or unenforceable.
7. INTEGRATION. This Agreement is intended to be the final, complete and
exclusive statement of the terms of Employee's employment by Employer as of the
above-stated effective date. This Agreement supersedes all other prior and
contemporaneous agreements and statements, whether written or oral, express or
implied, pertaining in any manner to the employment of Employee. This Agreement
may not be contradicted by evidence of any prior or contemporaneous statements
or agreements. To the extent that the practices, policies or procedures of
Employer, now or in the future, apply to Employee or his executive assistant and
are inconsistent with the terms of this Agreement, the provisions of this
Agreement shall control.
8. AMENDMENTS; WAIVER. This Agreement may not be amended except by an
instrument in writing, signed by each of the parties. No failure to exercise
and no delay in exercising any right, remedy or power under this Agreement shall
operate as a waiver thereof, nor shall any single or partial exercise of any
rights, remedy, or power under this Agreement preclude any other or further
exercise thereof, or the exercise of any other right, remedy or power provided
herein or by law or in equity.
9. ASSIGNMENT; SUCCESSORS AND ASSIGNS. Employee agrees that he will not
assign, sell, transfer, delegate, or otherwise dispose of, whether voluntarily
or involuntarily, or by operation of law, any rights or obligations under this
Agreement. Any such purported assignment, transfer or delegation shall be null
and void. Nothing in this Agreement shall prevent the consolidation of
Employer with or its merger into, any other entity, or the sale by Employer of
all or substantially all of its assets, or otherwise lawful assignment by
Employer of any rights or obligations under this Agreement. Subject to the
foregoing, this Agreement shall be binding upon and shall inure to the benefit
of the parties and their respective heirs, legal representatives, successors,
and permitted assigned, and shall not benefit any person or entity other than
those specifically enumerated in this Agreement.
10. SEVERABILITY. If any provision of this Agreement, or its application
to any person, place, or circumstance, is held by an arbitrator or a court of
competent jurisdiction to be invalid, unenforceable, or void, such provision
shall be enforced to the greatest extent permitted by law, and the remainder of
this Agreement and such provision as applied to other persons, places, and
circumstances shall remain in full force and effect.
11. ATTORNEYS' FEES. In any legal action, arbitration, or other
proceeding brought to enforce or interpret the terms of this Agreement, the
prevailing party shall be entitled to recover reasonable attorneys' fees and
costs.
12. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the law of the State of California.
3
<PAGE>
13. INTERPRETATION. This Agreement shall be construed as a whole,
according to its fair meaning, and not in favor of or against any party. By way
of example and not in limitation , this Agreement shall not be construed in
favor of the party receiving a benefit nor against the party responsible for any
particular language in this Agreement. Captions are used for reference purposes
only and should be ignored in the interpretation of this Agreement.
14. EMPLOYEE ACKNOWLEDGMENT. Employee acknowledges that he has had the
opportunity to consult legal counsel in regard to this Agreement, that he has
read and understands this Agreement, that he is fully aware of its legal effect,
and that he has entered into it freely and voluntarily and based on his own
judgment and not on any representations or promises other than those contained
in this Agreement.
The parties have duly executed this Agreement as of the date first written
above.
EMPLOYER:
WESTAFF (USA), INC.
By: /s/ Michael K. Phippen
-----------------------------------------
Title: CEO
---------------------------------------
Dated: 1-4-99
--------------------------------------
EMPLOYEE:
/s/ W. Robert Stover
- --------------------------------------------
W. Robert Stover
Dated: Dec 30, 1998
--------------------------------------
4
<PAGE>
WESTAFF (USA), INC.
WESTERN MEDICAL SERVICES, INC.
FIRST AMENDMENT TO NOTE PURCHASE AGREEMENT AND TRANSACTION DOCUMENTS
This FIRST AMENDMENT TO NOTE PURCHASE AGREEMENT AND TRANSACTION DOCUMENTS
(this "AMENDMENT"), dated as of November 16, 1998, is among Westaff (USA), Inc.,
a California corporation formerly known as Western Staff Services (USA), Inc.
("WSS"), and Western Medical Services, Inc., a California corporation ("WMS")
(WSS and WMS sometimes hereinafter are referred to individually as a "CO-ISSUER"
and collectively as "CO-ISSUERS") and the purchasers listed in Schedule A to
the Note Purchase Agreement (as defined below). Capitalized terms used and not
otherwise defined herein shall have the meanings ascribed thereto in the Note
Purchase Agreement.
R E C I T A L S
1. The Co-Issuers entered into a Note Purchase Agreement dated May 15,
1998 (the "NOTE PURCHASE AGREEMENT") in connection with the issue of certain
6.77% Senior Secured Notes (the "ORIGINAL NOTES") to the purchasers listed in
Schedule A to the Note Purchase Agreement.
2. The Co-Issuers and the holders of the Notes desire to make certain
corrective amendments to the Original Notes, the Note Purchase Agreement and the
Transaction Documents. Therefore, the Co-Issuers have issued certain Amended and
Restated 6.77% Senior Notes Due May 20, 2008 of even date herewith (the "AMENDED
AND RESTATED NOTES") and the parties hereto are entering into this Amendment.
A G R E E M E N T
NOW, THEREFORE, in consideration of the mutual agreements contained herein,
the Co-Issuers and the holders of the Notes agree as follows:
1. AMENDMENTS TO NOTE PURCHASE AGREEMENT. The Note Purchase Agreement
is hereby amended as follows:
A. SECTION 1.1. THE NOTES. Each reference to the term "Notes," as
such term is defined in Section 1 and used throughout the Note Purchase
Agreement, is hereby amended to mean the Amended and Restated Notes.
B. SECTION 8.1. REQUIRED PREPAYMENTS. Each reference in Section 8.1
of the Note Purchase Agreement to the date "May 15" of any year is hereby
amended to read "May 20" of such year.
2. AMENDMENTS TO TRANSACTION DOCUMENTS. Each reference to the term
"Notes" or "Senior Notes," as such term is defined in any of the Transaction
Documents and used throughout each such document, is hereby amended to mean the
Amended and Restated Notes.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Amendment on the
date hereinabove written.
WESTAFF (USA), INC.
By: /s/ Paul A. Norberg
---------------------------------
Paul A. Norberg
Executive Vice President and
Chief Financial Officer
WESTERN MEDICAL SERVICES, INC.
By: /s/ Ted A. Sleight
---------------------------------
Ted A. Sleight
Executive Vice President and
Chief Financial Officer
PPM AMERICA, INC., AS ATTORNEY IN FACT,
ON BEHALF OF JACKSON NATIONAL LIFE
INSURANCE COMPANY
By /s/ James D. Young
-------------------------------------
James D. Young
Managing Director
2
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Amendment on the
date hereinabove written.
WESTAFF (USA), INC.
By: /s/ Paul A. Norberg
---------------------------------
Paul A. Norberg
Executive Vice President and
Chief Financial Officer
WESTERN MEDICAL SERVICES, INC.
By: /s/ Ted A. Sleight
---------------------------------
Ted A. Sleight
Executive Vice President and
Chief Financial Officer
NATIONWIDE LIFE INSURANCE COMPANY
By: /s/ Mark W. Poppelman
-------------------------------
Name Mark W. Poppelman
-------------------------
Title Authorized Signatory
-------------------------
3
<PAGE>
SUBSIDIARIES OF THE COMPANY
ACTIVE DOMESTIC SUBSIDIARIES
Westaff (USA), Inc.
Western Medical Services, Inc.
Western Medical Services (NY), Inc.
Mediaworld International
Westaff (Guam), Inc.
Alternative Billing Services, Inc,
Best Temporaries, Inc.
Best Temporaries Federal Systems, Inc.
INACTIVE DOMESTIC SUBSIDIARIES
Western Technical Services, Inc.
Western Legal Services, Inc.
Western Television News, Inc.
Western Permanent Services Agency, Inc.
Western Staff Services (CA), Inc.
Western Service, Inc.
Kontorservice, Inc.
FOREIGN SUBSIDIARIES
Australia:
Westaff (Australia) Pty. Ltd.
Western Personnel Services Pty. Ltd.
Western Temporary Services Pty. Ltd.
Denmark:
Western Service A/S
New Zealand:
Westaff NZ Limited
Norway:
Western Staff Services A/S
Kontorservice A/S
United Kingdom:
Western Staff Services (U.K.) Limited
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus
constituting part of the Registration Statement on Form S-4 (No. 333-55831)
and in the Registration Statements on Form S-8 (Nos. 333-10429 and 333-48143)
of Westaff, Inc. of our report dated January 22, 1999, appearing on page F-1
of this Annual Report on Form 10-K.
/s/ PricewaterhouseCoopers LLP
San Francisco, California
January 29, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF OCTOBER 31, 1998; THE CONSOLIDATED STATEMENT OF
OPERATIONS FOR THE FISCAL YEAR ENDED OCTOBER 31, 1998; AND THE CONSOLIDATED
STATEMENT OF CASH FLOWS FOR THE FISCAL YEAR ENDED OCTOBER 31, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-START> NOV-2-1997
<PERIOD-END> OCT-31-1998
<CASH> 4,651
<SECURITIES> 0
<RECEIVABLES> 88,338
<ALLOWANCES> 786
<INVENTORY> 0
<CURRENT-ASSETS> 131,621
<PP&E> 43,624
<DEPRECIATION> 22,304
<TOTAL-ASSETS> 197,145
<CURRENT-LIABILITIES> 73,919
<BONDS> 0
0
0
<COMMON> 159
<OTHER-SE> 67,324
<TOTAL-LIABILITY-AND-EQUITY> 197,145
<SALES> 597,614
<TOTAL-REVENUES> 599,709
<CGS> 472,783
<TOTAL-COSTS> 575,689
<OTHER-EXPENSES> (457)
<LOSS-PROVISION> 1,094
<INTEREST-EXPENSE> 1,563
<INCOME-PRETAX> 22,914
<INCOME-TAX> 9,166
<INCOME-CONTINUING> 13,748
<DISCONTINUED> (9,818)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,930
<EPS-PRIMARY> 0.25
<EPS-DILUTED> 0.25
</TABLE>
