<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended JANUARY 22, 2000
Commission file number 0-24990
WESTAFF, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-1266151
(State or other jurisdiction (I.R.S.employer
of incorporation or organization) identification number)
301 LENNON LANE
WALNUT CREEK, CALIFORNIA 94598-2453
(925) 930-5300
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes /X/ No / /
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Class Outstanding at March 6, 2000
------------------ ----------------------------
Common Stock, $.01 par value 15,875,879 shares
<PAGE>
WESTAFF, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PAGE
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<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
January 22, 2000 and October 30, 1999 3
Condensed Consolidated Statements of Operations -
12 weeks ended January 22, 2000 and January 23, 1999 4
Condensed Consolidated Statements of Cash Flows -
12 weeks ended January 22, 2000 and January 23, 1999 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Changes in Securities 17
Item 3. Defaults upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
</TABLE>
<PAGE>
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WESTAFF, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
JANUARY 22, OCTOBER 30,
2000 1999
------------------- ------------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,482 $ 3,048
Trade accounts receivable, less allowance for doubtful
accounts of $1,992 and $1,654 89,926 92,414
Due from licensees 5,828 4,993
Deferred income taxes 8,596 9,826
Net assets of discontinued operations 3,964 4,234
Other current assets 7,901 8,658
------------------- ------------------
Total current assets 117,697 123,173
Property, plant and equipment, net 22,915 23,671
Deferred income taxes 4,589 4,434
Intangible assets, net 36,768 37,238
Other long-term assets 2,325 2,314
------------------- ------------------
$ 184,294 $ 190,830
=================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 12,500 $ 11,000
Current portion of loans payable 3,000 3,100
Accounts payable and accrued expenses 40,306 48,917
Income taxes payable 361 303
------------------- ------------------
Total current liabilities 56,167 63,320
Loans payable 39,750 41,608
Other long-term liabilities 11,027 10,961
------------------- ------------------
Total liabilities 106,944 115,889
------------------- ------------------
Commitments and contingencies
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 January 22, 2000 and October 30, 1999 159 159
Additional paid-in-capital 37,382 37,382
Retained earnings 40,852 38,795
Cumulative currency translation (548) (900)
------------------- ------------------
77,845 75,436
Less treasury stock at cost, 72 shares at January 22, 2000 and
October 30, 1999 495 495
------------------- ------------------
Total stockholders' equity 77,350 74,941
------------------- ------------------
$ 184,294 $ 190,830
=================== ==================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
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WESTAFF, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
12 WEEKS ENDED
--------------------------------------
JANUARY 22, JANUARY 23,
2000 1999
---------------- -------------------
<S> <C> <C>
Sales of services $ 146,709 $ 136,415
License fees 754 667
---------------- -------------------
Total sales of services and license fees 147,463 137,082
Costs of services 117,026 108,344
---------------- -------------------
Gross profit 30,437 28,738
Franchise agents' share of gross profit 3,661 3,302
Selling and administrative expenses 20,458 19,233
Depreciation and amortization 2,165 1,822
---------------- -------------------
Operating income from continuing operations 4,153 4,381
Interest expense 800 564
Interest income (47) (83)
---------------- -------------------
Income from continuing operations before income taxes 3,400 3,900
Provision for income taxes 1,343 1,560
---------------- -------------------
Net income $ 2,057 $ 2,340
================ ===================
Earnings per share:
Basic $ 0.13 $ 0.15
================ ===================
Diluted $ 0.13 $ 0.15
================ ===================
Weighted average shares outstanding - basic 15,876 15,843
================ ===================
Weigthed average shares outstanding - diluted 15,880 15,846
================ ===================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
WESTAFF, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
12 WEEKS ENDED
------------------------------------
JANUARY 22, JANUARY 23,
2000 1999
--------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 2,057 $ 2,340
Adjustments to reconcile net income to net cash
from operating activities:
Depreciation 1,605 1,262
Amortization of intangible assets 560 560
Provision for losses on doubtful accounts 384 209
Deferred income taxes 1,082 (1,428)
Changes in assets and liabilities:
Trade accounts receivable 2,483 8,439
Due from licensees (835) (877)
Other assets 665 681
Accounts payable and accrued expenses (8,685) (10,448)
Income taxes payable 64 1,257
Other long-term liabilities 67 (14)
--------------- ---------------
Net cash (used in) provided by continuing operations (553) 1,981
Net cash provided by (used in) discontinued operations 247 (408)
--------------- ----------------
Net cash(used in) provided by operating activities (306) 1,573
--------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (805) (2,817)
Payments for intangibles and other investments (861)
Investing activities of discontinued operations 23 (18)
Other, net 63 31
--------------- ----------------
Net cash used in investing activities (719) (3,665)
--------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings under line of credit agreements 1,500 4,300
Principal payments on loans payable (1,958) (1,869)
Issuance of common stock 32
--------------- ----------------
Net cash (used in) provided by financing activities (458) 2,463
--------------- ----------------
Effect of exchange rate on cash (83) (11)
--------------- ----------------
Net change in cash and cash equivalents (1,566) 360
Cash and cash equivalents at beginning of period 3,048 4,651
--------------- ----------------
Cash and cash equivalents at end of period $ 1,482 $ 5,011
=============== ================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
WESTAFF, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
- -------------------------------------------------------------------------------
1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements of Westaff,
Inc. and its domestic and foreign subsidiaries (together, the Company), as
of and for the 12 week periods ended January 22, 2000 and January 23, 1999
are unaudited. Material intercompany accounts and transactions have been
eliminated.
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. As a result of this decision,
the medical operations are classified as discontinued operations and
presented as such in these Condensed Consolidated Financial Statements and
notes thereto.
The condensed consolidated financial statements, in the opinion of
management, reflect all adjustments, which are of a normal recurring
nature, necessary for a fair presentation of the financial position,
results of operations and cash flows for the periods presented.
Certain financial information which is normally included in financial
statements prepared in accordance with generally accepted accounting
principles, but which is not required for interim reporting purposes, has
been condensed or omitted. The accompanying condensed consolidated
financial statements should be read in conjunction with the financial
statements and notes thereto included in the Company's Annual Report on
Form 10-K for the fiscal year ended October 30, 1999.
The Company's fiscal year is a fifty-two or fifty-three week period ending
the Saturday nearest the end of October. For interim reporting purposes,
the first three fiscal quarters comprise twelve weeks each while the fourth
fiscal quarter consists of sixteen or seventeen weeks. The results of
operations for the 12 week period ended January 22, 2000 are not
necessarily indicative of the results to be expected for the full fiscal
year or for any future period.
Certain amounts in the October 30, 1999 financial statements have been
reclassified to conform to the presentation adopted for January 22, 2000.
2. DISCONTINUED OPERATIONS
In November 1998, the Company announced its decision to sell Western
Medical. Western Medical provided 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.
During the first and second quarters of fiscal 1999 the Company completed
the sale of certain of its franchise agent and company-owned medical
offices and also entered into a termination
6
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WESTAFF, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
- -------------------------------------------------------------------------------
agreement with one of its medical licensees. During the fourth quarter of
fiscal 1999, the Company completed the sale of the remaining medical
business. Under the terms of the sale, the Company retained the trade and
Medicare accounts receivable and due from licensee balances. During fiscal
1999, the Company recorded after-tax losses related to the medical
operations of $6,611 or $0.42 per share, primarily reflecting additional
operating losses resulting from the extended period required to close the
sale, a reduction in the estimated proceeds from the sale and additional
reserves for trade and Medicare accounts receivable and due from licensee
balances.
Revenues of the medical operations were $0 and $12,481 for the 12 weeks
ended January 22, 2000 and January 23, 1999, respectively. Medical
operations' revenues are not included in sales of services and license fees
as reported in the Condensed Consolidated Statements of Operations.
Summarized balance sheet data for discontinued operations, which includes
the trade and Medicare accounts receivable and due from licensee balances
to be retained by the Company, is as follows:
<TABLE>
<CAPTION>
JANUARY 22, OCTOBER 30,
2000 1999
---------------- ----------------
(Unaudited)
<S> <C> <C>
Current assets (primarily receivables) $ 5,084 $ 5,588
Other assets 108 108
Current liabilities (1,215) (1,449)
Noncurrent liabilities (13) (13)
---------------- ----------------
Net assets of discontinued operations $ 3,964 $ 4,234
================ ================
</TABLE>
3. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
7
<PAGE>
WESTAFF, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
12 WEEKS ENDED
-------------------------------
JANUARY 22, JANUARY 23,
2000 1999
------------- -----------
<S> <C> <C>
Net income $ 2,057 $ 2,340
------------- -----------
Denominator for basic earnings per share -
weighted average shares 15,876 15,843
Effect of dilutive securities:
Stock options 4 3
------------- -----------
Denominator for diluted earnings per share - adjusted
weighted average shares and assumed conversions 15,880 15,846
============= ===========
Basic earnings per share $ 0.13 $ 0.15
============= ===========
Diluted earnings per share $ 0.13 $ 0.15
============= ===========
Anti-dilutive weighted shares excluded from diluted
earnings per share 804 745
------------- -----------
</TABLE>
Anti-dilutive 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 anti-dilutive.
4. COMPREHENSIVE INCOME
Comprehensive income consists of the following:
<TABLE>
<CAPTION>
12 WEEKS ENDED
--------------------------------
JANUARY 22, JANUARY 23,
2000 1999
-------------- --------------
<S> <C> <C>
Net income $ 2,057 $ 2,340
Currency translation adjustments 352 97
-------------- --------------
Comprehensive income $ 2,409 $ 2,437
-------------- --------------
</TABLE>
8
<PAGE>
WESTAFF, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
- -------------------------------------------------------------------------------
5. OPERATING SEGMENTS
<TABLE>
<CAPTION>
DOMESTIC INTERNATIONAL CONSOLIDATED
--------------- ------------- -------------
<S> <C> <C> <C>
12 WEEKS ENDED JANUARY 22, 2000
Sales of services and license fees $ 124,204 $ 23,259 $ 147,463
Operating income from continuing operations $ 4,034 $ 119 $ 4,153
12 WEEKS ENDED JANUARY 23, 1999
Sales of services and license fees $ 117,653 $ 19,429 $ 137,082
Operating income from continuing operations $ 4,098 $ 283 $ 4,381
</TABLE>
6. COMMITMENTS AND CONTINGENCIES
The Company is subject to claims and other actions arising in the ordinary
course of business. Some of these claims and actions have resulted in
lawsuits in which the Company is a defendant. Management believes that the
ultimate obligations, if any, which may result from unfavorable outcomes
of such lawsuits will not have a material adverse effect on the business,
financial position, results of operations or cash flows of the Company and
that such obligations, if any, would be adequately covered by insurance.
7. SUBSEQUENT EVENTS
In July 1998 the Company acquired substantially all of the assets of The
Personnel Connection, Inc.. Consideration for the acquisition consisted of
cash and common stock, with a contingent obligation to issue up to an
additional 100 shares of common stock dependent on the fair market value of
the Company's stock subsequent to the acquisition. On January 27, 2000 the
Company paid the selling parties $800 in lieu of issuing additional shares,
with an offsetting reduction in additional paid-in-capital.
On February 24, 2000 the Company announced it has received and is
evaluating a non-binding proposal from an investor group, which includes
members of Company management, to acquire the Company for $10 per share in
cash. The acquisition, if any, would be subject to the terms and conditions
of a definitive agreement, however, no such agreement has been entered into
as of the date of this Form 10-Q filing.
9
<PAGE>
WESTAFF, INC.
ITEM 2. 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 Condensed Consolidated Financial Statements and
Notes thereto included herein and with the Consolidated Financial Statements and
Notes thereto included in the Company's Annual Report on Form 10-K for the
fiscal year ended October 30, 1999.
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 expenditures, capital resources, management information systems 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 risks and
uncertainties relating to the ability of the Company to complete the realization
of the remaining medical assets 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. Demand for
temporary staffing is 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
the "Factors Affecting Future Operating Results" section of the Company's Annual
Report on Form 10-K for the fiscal year ended October 30, 1999.
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
10
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WESTAFF, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- -------------------------------------------------------------------------------
temporary staffing solutions, including replacement, supplemental and
on-location programs to businesses and government agencies. The Company has
over 50 years of experience in the staffing industry and operates through
over 360 business services offices in 45 states, the District of Columbia 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.
The general level of economic activity and unemployment in the United States and
the countries in which the Company operates significantly affects demand for the
Company's staffing services. 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.
RECENT DEVELOPMENTS
On February 24, 2000 the Company announced it has received and is evaluating a
non-binding proposal from an investor group, which includes members of Company
management, to acquire the Company for $10 per share in cash. The acquisition,
if any, would be subject to the terms and conditions of a definitive agreement,
however, no such agreement has been entered into as of the date of this Form
10-Q filing.
DISCONTINUED OPERATIONS
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"). 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
Condensed Consolidated Balance Sheets at January 22, 2000 and October 30, 1999
and the operating results and cash flows of the discontinued operations in the
11
<PAGE>
WESTAFF, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- -------------------------------------------------------------------------------
Condensed Consolidated Statements of Operations and Condensed Consolidated
Statements of Cash Flows for the 12 weeks ended January 22, 2000 and
January 23, 1999.
During the first and second quarters of fiscal 1999 the Company completed the
sale of certain of its franchise agent and company-owned medical offices and
also entered into a termination agreement with one of its medical licensees.
During the fourth quarter of fiscal 1999, the Company completed the sale of the
remaining medical business. Under the terms of the sale, the Company retained
the trade and Medicare accounts receivable and due from licensee balances.
During fiscal 1999, the Company recorded after-tax losses related to the medical
operations of $6,611 or $0.42 per share, primarily reflecting additional
operating losses resulting from the extended period required to close the sale,
a reduction in the estimated proceeds from the sale and additional reserves for
trade and Medicare accounts receivable and due from licensee balances.
There can be no assurance that the Company will be able to complete the disposal
of the medical business and collection of the remaining trade and Medicare
accounts receivable and due from licensee balances on terms and costs similar to
those estimated by the Company. Should the actual costs or collections differ
materially from those estimated by management, the Company would record
additional losses (or gains) in future periods.
RESULTS OF CONTINUING OPERATIONS
FISCAL QUARTER ENDED JANUARY 22, 2000 COMPARED TO FISCAL QUARTER ENDED JANUARY
23, 1999
SALES OF SERVICES AND LICENSE FEES. Sales of services increased $10.3 million,
or 7.5%, for the fiscal quarter ended January 22, 2000 as compared to the fiscal
quarter ended January 23, 1999. The increase resulted from a 5.2% increase in
billed hours and a 2.0% increase in average billing rates per hour. Billed hours
increased primarily due to internal growth through same store sales and new
office openings. Same store sales increased approximately 7.3% for the first
quarter of fiscal 2000 as compared to the first quarter of fiscal 1999. Same
store system revenues, which take into account sales increases for licensed
offices, increased 8.1% for the first quarter of fiscal 2000 as compared to the
first quarter of fiscal 1999. Sales of services for the first quarter of fiscal
2000 increased 5.5% and 19.7%, respectively, for domestic business services and
international business services as compared to the first quarter of fiscal 1999.
Excluding the effect of foreign currency rate fluctuations, sales of services
increased 20.3% for international business services. The increase in average
billing rates primarily reflects changes in the Company's overall business mix
and inflationary factors.
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 $87,000, or 13.0%, for the fiscal quarter ended January 22, 2000 as
compared to the fiscal quarter ended January 23, 1999 primarily as a result of
increased sales and gross profits for licensed offices.
12
<PAGE>
WESTAFF, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- -------------------------------------------------------------------------------
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 $8.7 million, or 8.0%, for the fiscal quarter ended January 22,
2000 as compared to the fiscal quarter ended January 23, 1999. Gross margin
decreased from 21.0% in the first quarter of fiscal 1999 to 20.6% in the
first quarter of fiscal 2000, primarily due to lower margins in Australia in
connection with a large contract with fees based on productive output. The
Company has not yet achieved its targeted productivity levels for this
contract resulting in significantly lower gross margins to date for the
Australia operations, although steps have been taken recently which the
Company anticipates will improve these margins. This contract will continue
through the second and third quarters of fiscal 2000 and will likely result
in lower margins for the international operations as compared to the prior
fiscal year. 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 3.4% of payroll for the first quarter of fiscal
2000 and 2.9% for the first quarter of fiscal 1999. These costs tend to vary
depending upon the mix of business between clerical staffing and light
industrial staffing. The Company currently estimates that the accrual rates for
workers' compensation costs will be in the range of 3.2% to 3.5% of direct labor
for fiscal 2000. These rates will be evaluated throughout the remainder of
fiscal 2000 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.
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 increased $359,000, or 10.9%,
for the first quarter of fiscal 2000 as compared to the first quarter of fiscal
1999. As a percentage of sales of services and license fees, franchise agents'
share of gross profit was 2.5% and 2.4% for the first quarters of fiscal 2000
and fiscal 1999, respectively.
SELLING AND ADMINISTRATIVE EXPENSES (INCLUDING DEPRECIATION AND AMORTIZATION).
Selling and administrative expenses increased $1.6 million, or 7.5%, for the
first quarter of fiscal 2000 as compared to the first quarter of fiscal 1999. As
a percentage of sales of services and license fees, selling and administrative
expenses decreased from 15.4% for the first quarter of fiscal 1999 to 15.3% for
the first quarter of fiscal 2000. Increased depreciation, communication and
maintenance costs associated with the Company's recent implementation of a wide
area network, replacement of its back-office financial reporting and billing
systems, and roll out of a new branch office search and retrieval and remote
data capture module were offset by lower incentive
13
<PAGE>
WESTAFF, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- -------------------------------------------------------------------------------
compensation and supplies costs, as a percentage of sales of services and
license fees, for the first quarter of fiscal 2000 as compared to the first
quarter of fiscal 1999.
As noted above, selling and administrative expenses are impacted by the
Company's management information systems. During fiscal 1999, the Company
replaced its back-office financial reporting systems and is currently in the
process of rolling out a new branch office search and retrieval and remote data
capture module. The initial pilot for this front-end system was completed during
the third quarter of fiscal 1999 and roll out to all domestic business services
offices is currently underway. The Company expects to complete the roll out of
the system before the end of fiscal 2000. The Company is also implementing a
wide area network which provides enhanced communication and data transmission
capabilities among the field and corporate offices. As of the end of the first
quarter of fiscal 2000, the wide area network roll out was essentially complete.
During the first quarter of fiscal 2000, the Company implemented the initial
phase of a new billing and activities management system. The final phase will be
the implementation of a new temporary payroll system by the end of fiscal 2000.
As a result of these system initiatives, the Company has incurred increased
costs for communications, depreciation and system maintenance. 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 its
system initiatives, that such systems will be completed in a cost-effective
manner or that such systems will support the Company's future growth or provide
significant gains in efficiency and productivity. The failure of these systems
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 $236,000, or 41.8%, for the first
quarter of fiscal 2000 as compared to the first quarter of fiscal 1999,
reflecting higher average borrowings outstanding required to support the
Company's internal growth and management information system initiatives.
PROVISION FOR INCOME TAXES. The provision for income taxes for the first quarter
of fiscal 2000 was $1.3 million as compared to $1.6 million for the first
quarter of fiscal 1999. This decrease was due primarily to the decrease in
income before income taxes of $500,000. The effective income tax rate was 39.5%
for the first quarter of fiscal 2000 and 40.0% for the first quarter of fiscal
1999. The Company currently estimates that the effective income tax rate for
fiscal 2000 will be approximately 39.5%.
14
<PAGE>
WESTAFF, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- -------------------------------------------------------------------------------
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.
Net cash (used in) provided by operating activities was ($306,000) for the 12
weeks ended January 22, 2000 and $1.6 million for the 12 weeks ended January 23,
1999. The decrease in cash from operating activities is primarily due to
decreases in accounts receivable collections partially offset by increased cash
flow from accounts payable and accrued expenses and deferred income taxes. The
changes in income taxes payable and deferred income taxes primarily reflect net
income tax benefits arising from the discontinued medical operations. Cash flows
provided by discontinued operations are primarily attributable to the collection
of receivables.
In December 1999, the Company converted to new billing systems in both the
United States and Australia. In connection with these conversions, the Company
experienced some delays in generating and mailing invoices to customers.
Primarily as a result of these invoicing delays, accounts receivable balances
are higher as of the end of the first quarter of fiscal 2000 when compared to
the first quarter of fiscal 1999. The higher fiscal 2000 accounts receivable
balances also contributed to the increase in interest expense for the first
quarter of fiscal 2000 noted above.
Cash used for capital expenditures, which are generally for software, computers
and peripherals, and office furniture and equipment, totaled $805,000 for the 12
weeks ended January 22, 2000 and $2.8 million for the 12 weeks ended January 23,
1999. Capital expenditures during each of the fiscal 2000 and 1999 periods are
primarily associated with payments for the Company's next generation management
information and support systems. Capital expenditures for these systems are
expected to be approximately $13.0 million including costs of hardware, software
and internal and external costs associated with implementation of the project.
The Company has incurred $11.4 million of such capital expenditures through the
end of the first quarter of fiscal 2000 and expects to spend a total of
approximately $1.6 million during the remainder of fiscal 2000.
Cash outflows for new acquisitions and for contingent payments under existing
acquisitions totaled $861,000 for the 12 weeks ended January 23, 1999. During
the third quarter of fiscal 1999, the Company scaled back its near-term
acquisition plans and currently intends to focus on internal growth. In the
future, the Company may again pursue opportunities for growth through
acquisitions.
15
<PAGE>
WESTAFF, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- -------------------------------------------------------------------------------
The Company decreased borrowings by a net $458,000 during the 12 weeks ended
January 22, 2000. During the 12 week period ended January 23, 1999, the Company
increased borrowings by a net $2.4 million, primarily to fund capital
expenditures and acquisitions.
The Company's credit facility provides for a secured five-year revolving line of
credit up to $90.0 million with direct advances under the agreement 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 EBITDA formula is calculated on a rolling four quarter
basis. As of January 22, 2000 the Company had $8.8 million available under its
revolving credit facility, with $12.5 million outstanding for direct advances
and $9.6 million outstanding for letters of credit.
The Company's debt facilities contain certain financial and other covenants, the
most restrictive of which is a total debt to capitalization ratio. The Company
was in compliance with these covenants as of January 22, 2000.
In July 1998 the Company acquired substantially all of the assets of The
Personnel Connection, Inc.. Consideration for the acquisition consisted of cash
and common stock, with a contingent obligation to issue up to an additional
100,000 shares of common stock dependent on the fair market value of the
Company's stock subsequent to the acquisition. On January 27, 2000 the Company
paid the selling parties $800,000 in lieu of issuing additional shares, with an
offsetting reduction in additional paid-in-capital.
The Company has filed registration statements with the Securities and
Exchange Commission with respect to an aggregate of 2.3 million shares of
common stock reserved for issuance under its equity incentive plans and 1.5
million shares of common stock for use in the Company's acquisition program.
As of January 22, 2000, options to purchase 826,000 shares of common stock
were outstanding under the Company's equity incentive plans and 420,000
shares of common stock had been issued with respect to acquisitions.
The Company does not anticipate declaring or paying any cash dividends on its
common stock in the foreseeable future.
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.
16
<PAGE>
PART II. OTHER INFORMATION
- -------------------------------------------------------------------------------
Item 1. LEGAL PROCEEDINGS
The Company is not currently a party to any
litigation that could have a material adverse effect on its
business, results of operations, financial position or cash
flows. However, from time to time the Company has been
threatened with, or named as a defendant in, lawsuits,
including countersuits brought by former franchise agents, and
administrative claims and lawsuits brought by employees or
former employees.
Item 2. CHANGES IN SECURITIES
Not applicable.
Item 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
Item 5. OTHER INFORMATION
Not applicable.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
- -------------
(b) Reports on Form 8-K
No reports on Form 8-K were filed in or for
the 12 week period ended January 22, 2000.
17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WESTAFF, INC.
March 7, 2000 /s/ Paul A. Norberg
------------- -------------------------
Date Paul A. Norberg
Executive Vice President and
Chief Financial Officer
18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
The Condensed Consolidated Balance Sheet as of January 22, 2000; the Condensed
Consolidated Statement of Operations for the 12 Weeks Ended January 22, 2000;
and the Condensed Consolidated Statement of Cash Flows for the 12 Weeks Ended
January 22, 2000
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> OCT-28-2000
<PERIOD-START> OCT-31-1999
<PERIOD-END> JAN-22-2000
<CASH> 1,482
<SECURITIES> 0
<RECEIVABLES> 91,918
<ALLOWANCES> 1992
<INVENTORY> 0
<CURRENT-ASSETS> 117,697
<PP&E> 51,141
<DEPRECIATION> 28,226
<TOTAL-ASSETS> 184,294
<CURRENT-LIABILITIES> 56,167
<BONDS> 0
0
0
<COMMON> 159
<OTHER-SE> 77,191
<TOTAL-LIABILITY-AND-EQUITY> 184,294
<SALES> 146,709
<TOTAL-REVENUES> 147,463
<CGS> 117,026
<TOTAL-COSTS> 143,310
<OTHER-EXPENSES> (47)
<LOSS-PROVISION> 384
<INTEREST-EXPENSE> 800
<INCOME-PRETAX> 3,400
<INCOME-TAX> 1,343
<INCOME-CONTINUING> 2,057
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,057
<EPS-BASIC> 0.13
<EPS-DILUTED> 0.13
</TABLE>
