<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 30, 1999
COMMISSION FILE NUMBER 000-27130
------------------------
WESTAFF, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 94-1266151
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation and organization)
</TABLE>
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 $65,280,567 as of December 31, 1999, 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, 1999 the Registrant had outstanding 15,875,879 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 May 17, 2000 are incorporated by reference into this
Form 10-K Report.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
INDEX
WESTAFF, INC.
<TABLE>
<CAPTION>
PAGE NO.
---------
<S> <C> <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 CONDITION AND RESULTS OF OPERATIONS..... 21
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.......................... 32
36
SIGNATURES................................................................................
</TABLE>
2
<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 Annual Report on Form 10-K. This Form 10-K
for the fiscal year ended October 30, 1999 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 30, 1999, operated through over 360
business services offices in 45 states, the District of Columbia and five
foreign countries. As of October 30, 1999, approximately 72.7% of these offices
were owned by the Company, 20.7% were operated by franchise agents and 6.6% 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"). 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.
3
<PAGE>
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 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 is implementing a long-term strategic plan
for its next generation management information and support systems by
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,
4
<PAGE>
retrieve, process and manage information. As a result, the Company believes it
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.
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 12.9%, 8.0% and 3.6% in fiscal 1997, fiscal 1998 and fiscal 1999,
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 AND ON-LOCATION PROGRAMS. The Company has taken
advantage of industry trends by developing a new "On-Location" program and
by continuing to promote its on-site (also referred to as
"vendor-on-premises") programs. As of October 30, 1999, the Company had
nine On-Location sites and 36 on-site 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.
The On-Location program provides for an independent branch office located
at the customer's facility. It is intended for large on-site accounts with
more than $500,000 in annual revenue. A manager level person is assigned
to the On-Location facility and this program is not seasonal. 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-
5
<PAGE>
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. As of
October 30, 1999, the Company operated 55 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 18.5% in fiscal 1998
compared to fiscal 1997 and 19.6% in fiscal 1999 compared to fiscal 1998.
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. In the future, the Company may also pursue
opportunities for growth through acquisitions in existing as well as new
markets.
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 secondary markets and compatible
corporate philosophies and culture. 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 1999, the
Company has acquired a total of six 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 30, 1999, the
Company's domestic and international business services operations comprised over
360 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 and On-Location 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,
6
<PAGE>
billboard and other creative advertising are used in certain markets to enhance
the Company's name recognition.
As of October 30, 1999, the Company's international operations comprised 55
Company-owned offices: 17 in Australia; 23 in the United Kingdom; six in Norway;
five 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 1998 and
fiscal 1999, 12.4% and 13.4%, respectively, of total system revenues from
continuing operations were derived from the Company's international operations.
Same store sales for international operations increased 6.5% and 12.3% for
fiscal 1998 and fiscal 1999, respectively, as compared to the same prior year
periods. A total of 23 offices in the United Kingdom and 17 offices in Australia
have certification under ISO 9002, a total quality management program.
OPERATIONS
As of October 30, 1999, the Company operated through a network of over 360
business services offices in 45 states, the District of Columbia and five
foreign countries. The Company sold its Guamanian operations in the third
quarter of fiscal 1999. 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.
<TABLE>
<CAPTION>
OCT. 28, NOV. 2, NOV. 1, OCT. 31, OCT. 30,
1995 1996 1997 1998 1999
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Number of Offices by Ownership:(1)
Company-owned.................................................... 196 217 226 267 264
Franchise agent.................................................. 90 103 103 82 75
Licensed......................................................... 21 7 11 25 24
--------- --------- --------- --------- ---------
Total.......................................................... 307 327 340 374 363
========= ========= ========= ========= =========
Number of Offices by Location(1):
Domestic......................................................... 263 280 288 315 308
International.................................................... 44 47 52 59 55
--------- --------- --------- --------- ---------
Total.......................................................... 307 327 340 374 363
========= ========= ========= ========= =========
</TABLE>
- ------------------------
(1) Excludes Company-owned recruiting offices and medical services.
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, 1999, there were three zone managers and 11 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
7
<PAGE>
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 30,
1999, the Company's 35 business services franchise agents operated 75 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 1997, 1998 and
1999, franchise agents offices represented 26.0%, 21.6% and 20.2%, 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 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 three actions to enforce the
non-competition covenants. All of those actions were resolved in the Company's
favor, and none 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
8
<PAGE>
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 30, 1999, the Company's 10
business services licensees operated 24 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 13 of the
15 states that require registration in order to offer franchises or licenses. In
two 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.
The Company is in the process of implementing a long-term strategic plan for
its next generation management information and support systems. In connection
with this process, the Company entered into agreements 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
9
<PAGE>
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 in a multi-phased approach to
deliver incremental productivity and efficiency gains. The initial phase was to
replace the Company's back-office financial accounting and reporting systems in
order to resolve certain Year 2000 compliance issues in its old systems as well
as provide its field offices with more real-time access to branch and regional
operating information. This was successfully completed during the second quarter
of fiscal 1999. Concurrent with this project, the Company has been implementing
a frame relay network which will allow Company-wide access to a centrally
managed office and productivity software suite for enhanced communication and
data transmission capabilities among the field and corporate offices. As of the
end of fiscal 1999, the wide area network rollout was approximately 80%
complete.
The new system will also deliver a full featured branch office tool designed
to assist in order management, candidate search and recruiting, customer service
management and sales management. The initial pilot for this front-end system was
completed during the third quarter of fiscal 1999 and roll out to all
Company-owned domestic business services offices is currently underway. The
Company expects to complete the roll out of the system to domestic Company-owned
offices by the end of fiscal 2000. During the first quarter of fiscal 2000, the
Company also implemented a new billing and activities management system. The
final phase will involve the implementation of a new temporary payroll system
along with a process to fully integrate the front-office systems, payroll,
billing and back office systems. The Company expects to complete the
implementation of this final phase by the end of fiscal 2000. The Company
anticipates incurring capital expenditures of approximately $13.0 million
including costs of hardware, software and internal and external costs associated
with implementation of this project, of which $6.2 was incurred during fiscal
1998, $4.9 million was incurred in fiscal 1999, and $1.9 million is expected to
be incurred in fiscal 2000.
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
10
<PAGE>
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 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 a 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., RemedyTemp, Inc., 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.
11
<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 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 operations, cash flows or financial condition. See "Factors
Affecting Future Operating Results--Highly Competitive Market."
EMPLOYEES
The Company estimates that as of October 30, 1999 it had approximately
36,500 temporary employees on assignment through its business services division
and employed approximately 1,170 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 Westaff-Registered Trademark-, Be a
Temp-Registered Trademark- and Western Staff Services-Registered Trademark-. The
Company's applications to federally register the service marks USA Temp(SM), The
Essential Support Services Leader,(SM) On Location & Essential(SM) and Westaff
Wave(SM) are pending.
MEDICAL SERVICES
In November 1998, the Company announced its plan to sell Western Medical.
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 had
and likely would have had on the ability of the Company to operate profitably in
the medical sector. The disposition of the medical operations enables the
Company to focus on business services, where management believes that long-term
growth prospects are more attractive.
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 Sheets at
October 30, 1999 and October 31, 1998, the operating results of the discontinued
operations in the Consolidated Statements of Operations for fiscal 1999, fiscal
1998 and fiscal 1997 and the
12
<PAGE>
cash flows from discontinued operations in the Consolidated Statements of Cash
Flows for fiscal 1999 and fiscal 1998. 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. The Company completed the sale of the
remaining medical business in the fourth quarter of fiscal 1999, retaining the
trade and Medicare accounts receivable and due from licensee balances. After-tax
losses of $6.6 million relating to discontinued operations were recorded during
fiscal 1999, primarily representing additional reserves for trade and Medicare
accounts receivable and due from licensee balances as well as additional
operating losses due to the extended period required to close the sale and a
reduction in estimated sales proceeds. The Company is attempting to complete the
collection of the remaining trade and Medicare accounts receivable and due from
licensee balances. The estimated costs and write-offs required to collect those
receivables and balances and the estimated costs to be incurred in filing and
settling all remaining Medicare costs reports will affect the estimated loss on
disposal of the medical operations.
During fiscal 1998, the Company recorded an after-tax loss of $6.3 million
from discontinued operations, primarily related to miscellaneous Medicare
matters, increases in allowances for doubtful accounts and other charges. In
addition, during fiscal 1998, the Company recorded an after-tax charge of
$3.5 million on the planned disposal of its medical operations. This included an
estimated charge for the write down of assets to estimated net realizable value,
estimated costs to sell the operations and estimated operating losses during the
disposal period. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Discontinued Operations."
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. The Company has
historically experienced significant growth, principally through internal growth
and, more recently, through acquisitions. However, in fiscal 1999, internal
growth rates decreased as compared to prior years. 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 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. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "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
13
<PAGE>
store, retrieve, process and manage significant amounts of data, and
periodically to expand and upgrade its information processing abilities. The
Company is in the process of implementing a long-term strategic plan for its
next generation management information and support systems. These systems have
been and will continue to be introduced 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 entered into an employment agreement with
Mr. Stover effective January 1, 1999 for continuing employment until he chooses
to retire or until his death; moreover, the Company 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.
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.
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, particularly in the
14
<PAGE>
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
15
<PAGE>
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.
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, 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."
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 the 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."
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
16
<PAGE>
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 1998 and 1999, 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 1998 and 1999, 24.7% and 20.6%,
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 1999 (based on sales volume) accounted
for 10.6% 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 three
actions to enforce the non-competition covenants. All of those actions were
resolved in the Company's favor, and none 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.
YEAR 2000 COMPLIANCE. The Company implemented a comprehensive plan to
address the Year 2000 issue in fiscal 1999, 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, which could result in a major systems failure or
miscalculations. The Company believes that it was successful in implementing its
plan, but 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 ACQUISITIONS. In fiscal 1999, the Company scaled back its
near-term acquisition plans and made no acquisitions other than franchise agent
buybacks. Accordingly, sales growth from fiscal 1999 acquisitions was minimal.
There can be no assurance that the Company will be able to expand its current
market presence or successfully enter other markets through acquisitions.
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
17
<PAGE>
addition, the Company is subject to certain limitations on the incurrence of
additional indebtedness under its credit facilities, which may 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" and
"Business--Growth Strategy."
ITEM 2. PROPERTIES.
The executive offices of the Company are located at 301 Lennon Lane, Walnut
Creek, California. As of December 31, 1999, the Company owned six buildings,
totaling approximately 75,985 square feet, which house its corporate
headquarters. Certain of these buildings were subject to a trust deed that has
been fully repaid. The Company is in the process of selling one of the six
buildings consisting of approximately 3,696 square feet. The Company is still
considering selling the entire 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.
Not applicable.
18
<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 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 ended January 23, 1999....................................... 11.63 5.94
Second Quarter ended April 17, 1999........................................ 8.25 4.69
Third Quarter ended July 10, 1999.......................................... 7.50 5.06
Fourth Quarter ended October 30, 1999...................................... 9.06 5.50
Fiscal 2000:
First Quarter through January 27, 2000..................................... 8.63 5.63
</TABLE>
On December 31, 1999, the last reported sales price on the Nasdaq National
Market for the Common Stock was $8.25 per share. As of December 31, 1999, there
were approximately 1,682 beneficial owners of the Common Stock.
19
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
<TABLE>
<CAPTION>
FISCAL YEAR
----------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS
AND NUMBER OF OFFICES)
<S> <C> <C> <C> <C> <C>
Sales of services and license fees................... $ 650,752 $ 599,709 $ 530,076 $ 441,808 $ 361,768
Operating income..................................... 25,350 24,020 15,523 13,757 11,249
Income from continuing operations.................... $ 14,007 $ 13,748 $ 9,210 $ 2,725 $ 10,348
========== ========== ========== ========== ==========
Diluted earnings per share--continuing operations.... $ 0.88 $ 0.87 $ 0.60 $ 0.19 $ 0.78
========== ========== ========== ========== ==========
Pro forma income from continuing operations(1)....... $ 8,203 $ 7,042
========== ==========
Diluted pro forma earnings per share--continuing
operations(1)...................................... $ 0.57 $ 0.53
========== ==========
BALANCE SHEET DATA (AT END OF PERIOD):
Working capital...................................... $ 59,853 $ 57,702 $ 45,184 $ 31,982 $ 17,349
Total assets......................................... 190,830 197,145 154,530 120,780 96,169
Short-term debt...................................... 14,100 20,423 21,298 11,193 16,838
Long-term debt (excluding current portion)........... 41,608 44,708 17,631 3,603 5,623
Stockholders' equity................................. 74,941 67,483 57,296 49,252 31,792
OTHER OPERATING DATA:
Number of offices (at end of period)
Company-owned...................................... 264 267 226 217 196
Franchise agent.................................... 75 82 103 103 90
Licensed........................................... 24 25 11 7 21
---------- ---------- ---------- ---------- ----------
Total............................................ 363 374 340 327 307
========== ========== ========== ========== ==========
SYSTEM REVENUE DATA (EXCLUDING LICENSE FEES):
Domestic business services......................... $ 597,874 $ 549,689 $ 473,192 $ 418,546 $ 384,202
International business services.................... 92,438 77,492 72,554 58,872 48,528
---------- ---------- ---------- ---------- ----------
Total............................................ $ 690,312 $ 627,181 $ 545,746 $ 477,418 $ 432,730
========== ========== ========== ========== ==========
</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.
20
<PAGE>
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 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 significant 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
"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 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
21
<PAGE>
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 Sheets at October 30, 1999
and October 31, 1998, the operating results of the discontinued operations in
the Consolidated Statements of Operations for fiscal 1999, fiscal 1998 and
fiscal 1997 and the cash flows from discontinued operations in the Consolidated
Statements of Cash Flows for fiscal 1999 and fiscal 1998 (see Note 3 of Notes to
Consolidated Financial Statements).
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 balances as well as the due from
licensee balances. During fiscal 1999, the Company recorded after-tax losses
relating to discontinued operations of $6.6 million or $0.42 per share. These
losses primarily represent reserves for trade and Medicare accounts receivable
and due from licensee balances. The losses also include additional operating
losses resulting from the extended period required to close the sale and a
reduction in the estimated proceeds from the sale. The amount of the estimated
loss on disposal of the medical operations is based on a number of assumptions.
These include the estimated costs and write-offs required to collect the
remaining trade and Medicare accounts receivable and due from licensee balances
and estimated costs to be incurred in filing and settling all remaining Medicare
cost reports. There can be no assurance that the Company will be able to
complete the 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 differ materially from those estimated by
management, the Company would record additional losses (or gains) in future
periods.
During fiscal 1998, the Company recorded an after-tax loss from discontinued
operations of $6.3 million or $0.40 per share. This loss was related primarily
to reduced revenues in connection with Medicare's Interim Payment System enacted
as part of the Balanced Budget Act of 1997, reduced revenues as a result of
settlement of a prior year Medicare audit, additional reserves for Medicare
accounts receivable, increases in allowances for doubtful accounts and other
charges. In addition, during fiscal 1998 the Company recorded an after-tax
charge on the planned disposal of its medical operations of $3.5 million or
$0.23 per share. This included an estimated charge for the write down of assets
to estimated net realizable value, estimated costs to sell the operations and
estimated operating losses during the disposal period.
22
<PAGE>
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
-------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Sales of services.................................................... 99.5% 99.7% 99.8%
License fees......................................................... 0.5% 0.3% 0.2%
--------- --------- ---------
Total sales of services and license fees............................. 100.0% 100.0% 100.0%
Costs of services.................................................... 78.8% 78.8% 79.9%
--------- --------- ---------
Gross profit......................................................... 21.2% 21.2% 20.1%
Franchise agents' share of gross profit.............................. 2.6% 2.8% 3.3%
Selling and administrative expenses.................................. 13.4% 13.2% 12.9%
Depreciation and amortization........................................ 1.3% 1.2% 1.0%
--------- --------- ---------
Operating income from continuing operations.......................... 3.9% 4.0% 2.9%
Interest expense..................................................... 0.4% 0.3% 0.1%
Interest income...................................................... -0.1% -0.1% -0.1%
--------- --------- ---------
Income from continuing operations before income taxes................ 3.6% 3.8% 2.9%
Provision for income taxes........................................... 1.4% 1.5% 1.2%
--------- --------- ---------
Income from continuing operations.................................... 2.2% 2.3% 1.7%
========= ========= =========
</TABLE>
FISCAL 1999 COMPARED TO FISCAL 1998
SALES OF SERVICES AND LICENSE FEES. Sales of services increased $49.9 million,
or 8.3%, for fiscal 1999 as compared to fiscal 1998. The increase resulted from
a 4.6% increase in billed hours and a 3.6% 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 3.6% for fiscal 1999 as compared to fiscal 1998.
Acquisitions accounted for approximately $27.9 million of the increase in sales
of services. Sales of services for fiscal 1999 increased 6.7% and 19.3%,
respectively, for domestic business services and international business services
as compared to fiscal 1998. Excluding the effect of foreign currency rate
fluctuations, sales of services increased 19.6% for international business
services. The increase in average billing rates 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 $1.2 million, or 56.7%, for fiscal 1999 as compared to fiscal 1998
primarily due to internal growth and to conversions of franchise agents to the
license program. During fiscal 1998, nine franchise agents converted to the
license program and two licensees purchased the Company's interest in their
licenses and became independent.
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
$40.0 million, or 8.5%, for fiscal 1999 as compared to fiscal 1998. Gross margin
was 21.2% in both fiscal 1999 and fiscal 1998. Gross margin for domestic
business services increased from 20.8% in fiscal 1998 to 20.9% in fiscal 1999.
Gross margin for international business services decreased from 21.5% in fiscal
1998 to 20.2% in fiscal 1999, 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
23
<PAGE>
productivity levels for this contract resulting in significantly lower gross
margins to date for the Australia operations. This contract will continue for
the first three quarters of fiscal 2000 and will likely result in continued
lower margins for the international operations. 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 3.0% of payroll for fiscal 1999 and 3.2% for
fiscal 1998. 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 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 $370,000, or 2.2%,
for fiscal 1999 as compared to fiscal 1998. As a percentage of sales of services
and license fees, franchise agents' share of gross profit declined from 2.8%
during fiscal 1998 to 2.6% for fiscal 1999. This decrease is primarily the
result of franchise conversions to the license program in fiscal 1998 as noted
above.
SELLING AND ADMINISTRATIVE EXPENSES (INCLUDING DEPRECIATION AND
AMORTIZATION). Selling and administrative expenses increased $9.3 million, or
10.8%, for fiscal 1999 as compared to fiscal 1998. As a percentage of sales of
services and license fees, selling and administrative expenses increased from
14.4% for fiscal 1998 to 14.7% for fiscal 1999. The increase in selling and
administrative expenses as a percentage of sales of services and license fees
was primarily due to higher costs incurred in connection with the Company's
management information system initiatives, increased bad debts, higher medical
plan costs and higher amortization costs resulting from acquisitions. The
increased costs associated with the Company's information system initiatives
include higher communication costs in connection with the implementation of the
Company's wide area network, increased depreciation costs and higher maintenance
costs associated with the new software products. 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.
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 Company-owned domestic
business services offices is currently underway. The Company expects to complete
the roll out of the system to Company-owned domestic offices by the end of
fiscal 2000. The Company expects to incur training and roll out costs of
approximately $1.4 million during fiscal 2000 in connection with this project.
The Company is also implementing a wide area network which will allow enhanced
communication and data transmission capabilities among the field and corporate
offices. As of the end of fiscal 1999, the wide area network roll out was
approximately 80% complete.
During the first quarter of fiscal 2000, the Company implemented 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.
24
<PAGE>
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 and productivity gains 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 $961,000, or 61.5%, for fiscal
1999 as compared to fiscal 1998, reflecting higher average borrowings
outstanding during fiscal 1999 required to support the Company's internal
growth, capital expenditures and acquisitions.
PROVISION FOR INCOME TAXES. The provision for income taxes for both fiscal 1998
and fiscal 1999 was $9.2 million. The effective income tax rate for fiscal 1999
was 39.5% as compared to 40.0% in fiscal 1998. The Company currently estimates
that the effective income tax rate for fiscal 2000 will be approximately 39.5%.
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.
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 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.
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.
25
<PAGE>
During the third quarter of fiscal 1998, the Company evaluated the loss
development trends and historical accruals for policy years 1994 through 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.
FRANCHISE AGENTS' SHARE OF GROSS PROFIT. 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.
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%.
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 financing
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. 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 1999 and fiscal 1998.
Fiscal 1997 cash flows are presented on a consolidated basis.
Net cash provided by (used in) operating activities was $15.4 million,
$4.4 million, ($5.3) million for fiscal 1999, fiscal 1998 and fiscal 1997,
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,
accounts payable and accrued expense balances, the
26
<PAGE>
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 $9.2 million in fiscal 1997 to $13.7 million and $14.0 million in
fiscal 1998 and fiscal 1999, respectively. Cash flows provided by discontinued
operations were $10.9 million in fiscal 1999 primarily due to the collection of
receivables. 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 from continuing operations increased
$7.5 million and $9.1 million in fiscal 1999 and fiscal 1998, respectively,
primarily due to growth.
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. As a
result of these invoicing delays, the Company expects accounts receivable
balances to be higher as of the end of the first quarter of fiscal 2000 when
compared to the first quarter of fiscal 1999 and expects a slight increase in
interest expense for the first quarter of fiscal 2000.
Income taxes payable and deferred income taxes have also impacted cash
flows. In fiscal 1997 and fiscal 1998, a portion of the deferred taxes relating
to the Company's 1996 change from the cash basis to the accrual basis for income
tax purposes was paid (taxes relating to this change were payable over a
four-year period), resulting in reduced cash flows. Also during fiscal 1999 and
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
$8.2 million, $8.9 million and $5.8 million for fiscal 1999, fiscal 1998 and
fiscal 1997, respectively. The increase in capital expenditures during fiscal
1999 and fiscal 1998 is 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 incurred $11.1 million of such
capital expenditures through the end of fiscal 1999 and expects to spend
approximately $1.9 million during fiscal 2000.
During fiscal 1999, fiscal 1998 and fiscal 1997, cash outflows for new
acquisitions and for contingent payments under existing acquisitions totaled
$1.7 million, $15.4 million, and $7.7 million, respectively. 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 of $1.7 million was received in fiscal 1999 in connection with the sale
of the medical operations with additional proceeds of $500,000 due in fiscal
2000 and $500,000 due in fiscal 2001. Cash outflows in fiscal 1998 of
$2.6 million from the discontinued medical operations primarily represented
payments for acquisitions and capital expenditures.
During fiscal 1999, the Company reduced borrowings by a net $9.4 million
primarily as a result of collections of discontinued medical receivables. 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. 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 used for
working capital and general corporate purposes. Under the senior secured notes
payable, the Company is required to
27
<PAGE>
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 30, 1999. Distributions to stockholders
totaled $2.5 million in 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 1999, fiscal 1998 and fiscal 1997, the Company repurchased
100,000, 180,000 and 178,500 shares of common stock on the open market for
aggregate cash consideration of $675,000, $3.0 million and $1.2 million,
respectively. During fiscal 1999, fiscal 1998 and fiscal 1997, 136,000, 186,000
and 64,623 shares were reissued under the employee stock option and purchase
plans with aggregate cash proceeds of $822,000, $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 30, 1999, the Company had $8.6 million in outstanding letters of credit
and had borrowed $11.0 million under the revolving agreement. The Company was in
compliance with these debt covenants as of October 30, 1999.
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 420,000 shares
have been issued.
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 30, 1999,
options to purchase an aggregate of 746,000 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
During fiscal 1999, the Company completed the implementation of 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 included 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 were not in place prior to January 1, 2000.
28
<PAGE>
During the implementation of its plan for its domestic operations, the
Company identified one group of non-compliant mission critical back-office
systems and completed the installation of Year 2000 compliant replacement
systems during the second quarter of fiscal 1999. The Company identified one
additional mission critical system (the Billing and A/R system) that was not
fully Year 2000 compliant and completed the installation of the new Billing and
A/R system in December 1999. While the Company has experienced some minor
initial system problems with respect to the implementation of the new Billing
and A/R system, the new system has not experienced any significant Year 2000
issues. The remainder of the Company's domestic operations systems have not been
significantly affected by the Year 2000 issue. 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 general management
information systems.
For the international operations, the Company replaced or upgraded the
payroll/billing systems in two of its international operations and also upgraded
or replaced a number of back office support systems. The Company finalized the
required system upgrades and replacements for its international operations in
December 1999. The Company has experienced some minor initial system problems
associated with the implementation of these systems; however, the Company has
not experienced significant Year 2000 issues in its international operations.
Capitalized costs incurred to implement the Year 2000 compliant systems for
international operations totaled approximately $650,000.
The Company has not experienced significant Year 2000 issues with respect to
third-party suppliers, vendors, key financial institutions, major customers or
landlords.
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 incurred material costs of addressing the
euro formation, but 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.
After the Audit Committee of the Company's Board of Directors initiated a
process of screening accounting firms based on responses to a request for
proposal, the previous independent accountants of Westaff, Inc. (the "Company"),
PricewaterhouseCoopers LLP, resigned on May 20, 1999. On July 14, 1999,
following the completion of this selection process, the Company selected Arthur
Andersen LLP as the Company's independent accountants. Arthur Andersen LLP
accepted the engagement on August 18, 1999.
For the Company's two most recent fiscal years ended November 1, 1997 and
October 31, 1998 and the subsequent interim period prior to its engagement of
Arthur Andersen LLP, neither the Company nor anyone acting on its behalf
consulted with Arthur Andersen LLP regarding application of accounting
principles to a specified transaction, either completed or proposed; or the type
of audit opinion that might
29
<PAGE>
be rendered on the Company's financial statements, and no written report or oral
advice was provided to the Company that the new accountants concluded was an
important factor considered by the Company in reaching a decision as to
accounting, auditing or financial reporting issues. The Company never consulted
with Arthur Andersen LLP prior to its engagement concerning any disagreement or
reportable event, as those terms are defined in Item 304(a) of Securities and
Exchange Commission Regulation S-K.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The following table sets forth certain information as of January 27, 2000
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)................. 78 Chairman of the Board of Directors
Michael K. Phippen(3)..................... 47 President, Chief Executive Officer and Director
Paul A. Norberg........................... 59 Executive Vice President, Chief Financial Officer and Director
Robin A. Herman........................... 48 Senior Vice President, General Counsel and Secretary
Michael W. Ehresman....................... 42 Senior Vice President and Treasurer
Dirk A. Sodestrom......................... 42 Senior Vice President and Controller
Ronald C. Picco........................... 51 Senior Vice President, Operations
Elizabeth P. Bade......................... 52 Vice President, Information Services
Gilbert L. Sheffield(1)(2)(3)............. 70 Director
Jack D. Samuelson(1)(2)(3)................ 75 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
30
<PAGE>
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 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
31
<PAGE>
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 May 17, 2000 (the "Proxy
Statement"), is incorporated herein by reference.
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.
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.
1. Financial Statements
<TABLE>
<S> <C>
Report of Independent Public Accountants.............................. F-1
Report of Former Independent Accountants.............................. F-2
Consolidated Balance Sheets--As of the Fiscal Year Ended October 30,
1999 and the Fiscal Year Ended October 31, 1998..................... F-3
Consolidated Statements of Operations--For the Three-Year Period Ended
October 30, 1999.................................................... F-4
Consolidated Statements of Stockholders' Equity--For the Three-Year
Period Ended October 30, 1999....................................... F-5
Consolidated Statements of Cash Flows--For the Three-Year Period Ended
October 30, 1999.................................................... F-6
Notes to Consolidated Financial Statements............................ F-8
</TABLE>
32
<PAGE>
2. Financial Statement Schedules. The following Financial Statement
Schedule of the Registrant is filed as part of this report:
Schedule II: Valuation and Qualifying Accounts
(included at page after financials
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.
3. Exhibits. The following exhibits are filed as a part of, or
incorporated by reference into, this report:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- ---------------------------------------------------------------------------------------------
<S> <C>
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.(10)
3.2 The Company's Restated Bylaws.(1)
3.2.1 Amendment of the Amended and Restated Bylaws, dated as of March 26, 1998.(10)
3.2.2 Amendment of the Amended and Restated Bylaws, effective September 24, 1998.(10)
3.2.3 Third Amendment of the Amended and Restated Bylaws, effective March 30, 1999
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)
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)
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)
</TABLE>
33
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- ---------------------------------------------------------------------------------------------
<S> <C>
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)
10.8.12 Third Amendment to Credit Agreement dated as of January 22, 1999.(11)
10.8.13 Second Amendment to Note Purchase Agreement and Transaction Documents.(12)
10.8.14 Consent to Asset Sale and Release of Liens.(12)
10.8.15 Fourth Amendment to Credit Agreement dated as of December 15, 1999.
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)
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)
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- ---------------------------------------------------------------------------------------------
<S> <C>
21.1 Subsidiaries of the Company.
23.1 Consent of Arthur Andersen LLP, current independent public accountants.
23.2 Consent of PricewaterhouseCoopers LLP, former independent accountants;
24.1 Power of Attorney (see page 37).
27.1 Financial Data Schedule.
</TABLE>
- ------------------------
(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.
(10) 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
October 31, 1998.
(11) 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
January 23, 1999.
(12) 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 10, 1999.
(b) Reports on Form 8-K
Current Report on Form 8-K dated May 27, 1999 filed with the Securities
and Exchange Commission on May 27, 1999.
Current Report on Form 8-K dated August 25, 1999 filed with the
Securities and Exchange Commission on September 1, 1999.
35
<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.
<TABLE>
<S> <C> <C>
WESTAFF, INC.
By: /s/ MICHAEL K. PHIPPEN
-----------------------------------------
Michael K. Phippen
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Date: January 27, 2000
</TABLE>
36
<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
--------- ----- ----
<C> <S> <C>
/s/ W. ROBERT STOVER
------------------------------------------- Chairman of the Board January 27, 2000
W. Robert Stover
President, Chief Executive
/s/ MICHAEL K. PHIPPEN Officer and Director
------------------------------------------- (Principal Executive January 27, 2000
Michael K. Phippen Officer)
/s/ PAUL A. NORBERG Executive Vice President,
------------------------------------------- Chief Financial Officer and January 27, 2000
Paul A. Norberg Director
/s/ DIRK A. SODESTROM Senior Vice President and
------------------------------------------- Controller (Principal January 27, 2000
Dirk A. Sodestrom Accounting Officer)
/s/ GILBERT L. SHEFFIELD
------------------------------------------- Director January 27, 2000
Gilbert L. Sheffield
/s/ JACK D. SAMUELSON
------------------------------------------- Director January 27, 2000
Jack D. Samuelson
</TABLE>
37
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of Westaff, Inc.:
We have audited the accompanying consolidated balance sheet of
Westaff, Inc. and its subsidiaries as of October 30, 1999 and the related
consolidated statements of operations, stockholders' equity and cash flows for
the year then ended. These financial statements and the schedule referred to
below are the responsibility of the Company's management. Our responsibility is
to express an opinion on these financial statements and schedule based on our
audit. The financial statements of Westaff, Inc. as of October 31, 1998 and for
the year ended November 1, 1997, were audited by other auditors whose report
dated January 22, 1999 expressed an unqualified opinion on those statements.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Westaff, Inc. and its
subsidiaries as of October 30, 1999, and the results of its operations and its
cash flows for the year then ended in conformity with generally accepted
accounting principles.
Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. Schedule II "Valuation and Qualifying
Accounts and Reserves" is presented for purposes of additional analysis and is
not a required part of the basic financial statements. This information has been
subjected to the auditing procedures applied in our audit of the basic financial
statements and, in our opinion, is fairly stated in all material respects in
relation to the basic financial statements taken as a whole.
/s/ ARTHUR ANDERSEN LLP
- ---------------------------------------------
ARTHUR ANDERSEN LLP
San Francisco, California
December 22, 1999
F-1
<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 on page 32 present fairly, in all material respects,
the financial position of Westaff, Inc. and its subsidiaries at October 31, 1998
and the results of their operations and their cash flows for each of the two
years in the period ended October 31, 1998, in conformity with accounting
principles generally accepted in the United States of America. In addition, in
our opinion, the financial statement schedule listed in the index appearing
under Item 14(a)2 on page 31 presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements. These financial statements and financial
statement schedule are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits. We conducted our audits of
these statements in accordance with auditing standards generally accepted in the
United States of America, 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
San Francisco, California
January 22, 1999
F-2
<PAGE>
WESTAFF, INC.
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
OCTOBER 30, OCTOBER 31,
1999 1998
--------------- ---------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................................... $ 3,048 $ 4,651
Trade accounts receivable, less allowance for doubtful accounts of $1,654 and
$786......................................................................... 92,414 87,552
Due from licensees........................................................... 4,993 3,235
Deferred income taxes........................................................ 9,826 6,725
Net assets of discontinued operations........................................ 4,234 23,753
Other current assets......................................................... 8,658 5,705
----------- -----------
Total current assets......................................................... 123,173 131,621
Property, plant and equipment, net............................................. 23,671 21,320
Deferred income taxes.......................................................... 4,434 3,981
Intangible assets, net of accumulated amortization of $10,187 and $7,773....... 37,238 37,678
Other long-term assets......................................................... 2,314 2,545
----------- -----------
$ 190,830 $ 197,145
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings........................................................ $ 11,000 $ 15,600
Current portion of loans payable............................................. 3,100 3,851
Current portion of note payable to related party............................. 972
Accounts payable and accrued expenses........................................ 48,917 52,787
Income taxes payable......................................................... 303 709
----------- -----------
Total current liabilities.................................................. 63,320 73,919
Loans payable.................................................................. 41,608 44,708
Other long-term liabilities.................................................... 10,961 11,035
----------- -----------
Total liabilities.............................................................. 115,889 129,662
----------- -----------
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 30, 1999 and October 31, 1998..................... 159 159
Additional paid-in-capital................................................... 37,382 37,341
Retained earnings............................................................ 38,795 32,679
Accumulated other comprehensive income....................................... (900) (774)
----------- -----------
75,436 69,405
----------- -----------
Less treasury stock at cost, 72 shares at October 30, 1999
and 108 shares at October 31, 1998......................................... 495 1,922
----------- -----------
Total stockholders' equity................................................... 74,941 67,483
----------- -----------
$ 190,830 $ 197,145
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
WESTAFF, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-------------------------------------
OCTOBER 30, OCTOBER 31, NOVEMBER 1,
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Sales of services......................................................... $ 647,469 $ 597,614 $ 529,042
License fees.............................................................. 3,283 2,095 1,034
--------- --------- ---------
Total sales of services and license fees.................................. 650,752 599,709 530,076
Costs of services......................................................... 512,790 472,783 423,334
--------- --------- ---------
Gross profit.............................................................. 137,962 126,926 106,742
Franchise agents' share of gross profit................................... 17,079 16,709 17,307
Selling and administrative expenses....................................... 87,367 79,245 68,368
Depreciation and amortization............................................. 8,166 6,952 5,544
--------- --------- ---------
Operating income from continuing operations............................... 25,350 24,020 15,523
Interest expense.......................................................... 2,524 1,563 600
Interest income........................................................... (330) (457) (413)
--------- --------- ---------
Income from continuing operations before income taxes..................... 23,156 22,914 15,336
Provision for income taxes................................................ 9,149 9,166 6,126
--------- --------- ---------
Income from continuing operations......................................... 14,007 13,748 9,210
--------- --------- ---------
Discontinued operations:
(Loss) income from discontinued operations, net of income taxes (6,275) 346
Loss on disposal, net of income taxes..................................... (6,611) (3,543)
--------- --------- ---------
Total discontinued operations, net of income taxes........................ (6,611) (9,818) 346
--------- --------- ---------
Net income................................................................ $ 7,396 $ 3,930 $ 9,556
========= ========= =========
Earnings (loss) per share:
Continuing operations:
Basic................................................................. $ 0.88 $ 0.88 $ 0.60
========= ========= =========
Diluted............................................................... $ 0.88 $ 0.87 $ 0.60
========= ========= =========
Discontinued operations:
Basic................................................................. $ (0.42) $ (0.63) $ 0.02
========= ========= =========
Diluted............................................................... $ (0.42) $ (0.62) $ 0.02
========= ========= =========
Net income:
Basic................................................................. $ 0.47 $ 0.25 $ 0.62
========= ========= =========
Diluted............................................................... $ 0.47 $ 0.25 $ 0.62
========= ========= =========
Weighted average shares outstanding--basic................................ 15,862 15,569 15,420
========= ========= =========
Weighted average shares outstanding--diluted.............................. 15,863 15,774 15,424
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
WESTAFF, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL CUMULATIVE TREASURY STOCK
---------------------- PAID-IN RETAINED CURRENCY --------------------
SHARES AMOUNT CAPITAL EARNINGS TRANSLATION SHARES AMOUNT
--------- ----------- ----------- --------- ------------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at November 2, 1996............. 15,507 $ 103 $ 29,068 $ 19,527 $ 554
Comprehensive income:
Net income.......................... 9,556
Currency translation adjustments.... (643)
Total comprehensive income............
Purchase of treasury stock............ $ 179 $ (1,179)
Stock issued under employees' stock
purchase and option plans........... 5 (89) (65) 394
--------- --------- --------- --------- --------- --------- ---------
Balance at November 1, 1997............. 15,507 103 29,073 28,994 (89) 114 (785)
Comprehensive income:
Net income.......................... 3,930
Currency translation adjustments.... (685)
Total comprehensive income............
Three-for-two common stock split...... 52 (52)
Purchase of treasury stock............ 180 (3,026)
Stock issued under employees' stock
purchase and option plans........... 20 169 (245) (186) 1,889
Stock issued in connection with
acquisitions........................ 421 4 7,996
Other................................. 155
--------- --------- --------- --------- --------- --------- ---------
Balance at October 31, 1998............. 15,948 159 37,341 32,679 (774) 108 (1,922)
Comprehensive income:
Net income.......................... 7,396
Currency translation adjustments.... (126)
Total comprehensive income............
Purchase of treasury stock............ 100 (675)
Stock issued under employees' stock
purchase and option plans........... (1,280) (136) 2,102
Other................................. 41
--------- --------- --------- --------- --------- --------- ---------
Balance at October 30, 1999............. 15,948 $ 159 $ 37,382 $ 38,795 $ (900) 72 $ (495)
========= ========= ========= ========= ========= ========= =========
<CAPTION>
TOTAL
---------
<S> <C>
Balance at November 2, 1996............. $ 49,252
Comprehensive income:
Net income..........................
Currency translation adjustments....
Total comprehensive income............ 8,913
Purchase of treasury stock............ (1,179)
Stock issued under employees' stock
purchase and option plans........... 310
---------
Balance at November 1, 1997............. 57,296
Comprehensive income:
Net income..........................
Currency translation adjustments....
Total comprehensive income............ 3,245
Three-for-two common stock split......
Purchase of treasury stock............ (3,026)
Stock issued under employees' stock
purchase and option plans........... 1,813
Stock issued in connection with
acquisitions........................ 8,000
Other................................. 155
---------
Balance at October 31, 1998............. 67,483
Comprehensive income:
Net income..........................
Currency translation adjustments....
Total comprehensive income............ 7,270
Purchase of treasury stock............ (675)
Stock issued under employees' stock
purchase and option plans........... 822
Other................................. 41
---------
Balance at October 30, 1999............. $ 74,941
=========
</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 30, OCTOBER 31, NOVEMBER 1,
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.............................................................. $ 7,396 $ 3,930 $ 9,556
Adjustments to reconcile net income to net cash from operating
activities:
Loss from discontinued operations................................... 6,611 9,818
Depreciation........................................................ 5,729 5,241 4,642
Amortization of intangible assets................................... 2,437 1,711 1,370
Provision for losses on doubtful accounts........................... 2,458 1,094 1,170
Deferred income taxes............................................... (3,552) (8,451) (4,089)
Other non-cash charges.............................................. 153
Changes in assets and liabilities:
Trade accounts receivable......................................... (7,502) (9,086) (23,379)
Due from licensees................................................ (1,759) (1,192) (3,260)
Other assets...................................................... (3,201) (2,451) 741
Accounts payable and accrued expenses............................. (3,680) 13,100 4,970
Income taxes payable.............................................. (378) (4,160) 1,683
Other long-term liabilities....................................... (72) 905 1,306
--------- ---------
Net cash provided by continuing operations................................ 4,487 10,612
Net cash provided by (used in) discontinued operations.................... 10,935 (6,185)
--------- --------- ---------
Net cash provided by (used in) operating activities....................... 15,422 4,427 (5,290)
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures.................................................... (8,205) (8,946) (5,831)
Decrease (increase) in notes receivable................................. 72 (2,080) 50
Payments for intangibles and other investments.......................... (1,660) (15,386) (7,672)
Investing activities of discontinued operations......................... 1,675 (2,645)
Other, net.............................................................. 472 724 95
--------- --------- ---------
Net cash used in investing activities..................................... (7,646) (28,333) (13,358)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net (repayments) borrowings under line of credit agreements............. (4,600) (4,100) 10,900
Repayments of note to related party..................................... (972) (973) (973)
Proceeds from issuance of loans payable................................. 50,900 15,626
Principal payments on loans payable..................................... (3,847) (20,824) (1,420)
Issuance of common stock................................................ 822 1,813 310
Repurchase of common stock.............................................. (675) (3,026) (1,179)
Distributions to stockholders........................................... (2,500)
--------- --------- ---------
Net cash (used in) provided by financing activities....................... (9,272) 23,790 20,764
--------- --------- ---------
Effect of exchange rate on cash........................................... (107) (29) (169)
--------- --------- ---------
Net change in cash and cash equivalents................................... (1,603) (145) 1,947
Cash and cash equivalents at beginning of year............................ 4,651 4,796 2,849
--------- --------- ---------
Cash and cash equivalents at end of year.................................. $ 3,048 $ 4,651 $ 4,796
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
WESTAFF, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
---------------------------------------
OCTOBER 30, OCTOBER 31, NOVEMBER 1,
1999 1998 1997
----------- ----------- -------------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest.............................................................. $ 4,266 $ 2,478 $ 1,783
Income taxes (net of refunds)......................................... 12,429 15,373 8,148
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Common stock issued for acquisitions.................................... $ 8,000
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<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.), a
Delaware corporation, 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 Sheets at October 30, 1999 and
October 31, 1998, has segregated the operating results of the discontinued
operations in the Consolidated Statements of Operations for fiscal 1999,
fiscal 1998 and fiscal 1997 and has segregated cash flows from discontinued
operations in the Consolidated Statements of Cash Flows for fiscal 1999 and
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.
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 1999, 1998 and 1997 each included 52
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.
CASH AND CASH EQUIVALENTS
The Company considers all investments with initial maturities at purchase of
three months or less to be cash equivalents.
F-8
<PAGE>
WESTAFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 $5,713 and $5,132 at October 30, 1999 and October 31,
1998, respectively, as collateral for such advances. Sales from continuing
operations generated by license offices were $42,843, $29,567 and $16,704 for
fiscal 1999, 1998 and 1997, 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. The Company capitalizes internal and external costs
incurred in connection with developing or obtaining internal use software in
accordance with Statement of Position (SOP) 98-1 "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use".
F-9
<PAGE>
WESTAFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
During fiscal years 1999, 1998 and 1997 and the Company consummated
acquisitions with total purchase prices of $887, $25,724 and $7,053,
respectively. Tangible assets and specifically identifiable intangible assets
associated with these acquisitions amounted to $118 for fiscal 1999 and $931
for fiscal 1998. 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 (net $35,152 and $34,809
at October 30, 1999 and October 31, 1998, 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 1999 and 1998 on acquisitions
consummated during fiscal 1998 and 1997 totaled $1,018 and $1,597,
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 1999, 1998 and 1997. 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 in other long-term
liabilities at October 30, 1999 and October 31, 1998.
F-10
<PAGE>
WESTAFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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
The functional currency for each of the Company's foreign operations is the
applicable local currency. 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.
COMPREHENSIVE INCOME
Effective November 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS 130).
SFAS 130 requires presentation of comprehensive income (net income plus all
other changes in net assets from nonowner sources) and its components in the
financial statements. The Company has changed the format of its consolidated
statements of stockholders' equity to present comprehensive income.
Accumulated other comprehensive income shown in the consolidated balance
sheets at October 30, 1999 and October 31, 1998 is solely comprised of
cumulative foreign currency translations. Income taxes have not been provided
on foreign currency translation adjustments since such taxes would be
immaterial.
3. DISCONTINUED OPERATIONS
In November 1998, the Company announced its decision to sell Western Medical,
a wholly owned subsidiary providing 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 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 balances as well as the
due from licensee balances. As of October 30, 1999, the Company has received
$1,689 in cash proceeds from the sale with additional proceeds due of $1,046.
F-11
<PAGE>
WESTAFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
3. DISCONTINUED OPERATIONS (CONTINUED)
During fiscal 1999, the Company recorded after-tax losses relating to
discontinued operations of $6,611. These losses primarily represent reserves
for trade and Medicare accounts receivable and due from licensee balances. The
losses also include additional operating losses resulting from the extended
period required to close the sale and a reduction in the estimated proceeds
therefrom.
During fiscal 1998, the Company recorded an after-tax loss from discontinued
operations of $6,275. This loss was related primarily to reduced revenues in
connection with Medicare's Interim Payment System enacted as part of the
Balanced Budget Act of 1997, reduced revenues as a result of settlement of a
prior year Medicare audit, additional reserves for Medicare accounts
receivable, increases in allowances for doubtful accounts and other charges.
In addition, during fiscal 1998 the company recorded an after-tax charge on
the planned disposal of its medical operations of $3,543 which included an
estimated charge for the write down of assets to estimated net realizable
value, estimated costs to be incurred in selling the operation and estimated
operating losses to be incurred during the disposal period.
Summarized information on the discontinued operations is as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-------------------------------------
OCTOBER 30, OCTOBER 31, NOVEMBER 1,
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Income statement data:
Revenues................................................................ $ 54,904 $ 46,732
Costs and expenses...................................................... 65,268 46,145
--------- ---------
Operating (loss) income................................................. (10,364) 587
Income tax (benefit) expense............................................ (4,089) 241
--------- ---------
(Loss) income from discontinued operations, net of income taxes......... (6,275) 346
--------- ---------
Estimated loss on disposal.............................................. $ (10,987) (6,000)
Income tax benefit...................................................... (4,376) (2,457)
--------- ---------
Estimated loss on disposal, net of income taxes......................... (6,611) (3,543)
--------- ---------
Total discontinued operations........................................... $ (6,611) $ (9,818) $ 346
========= ========= =========
Balance sheet data:
Current assets (primarily receivables).................................. $ 4,588 $ 21,675
Property, plant and equipment, net...................................... 2,085
Intangible assets, net.................................................. 5,712
Other assets............................................................ 108 285
Current liabilities..................................................... (449) (5,930)
Noncurrent liabilities.................................................. (13) (74)
--------- ---------
Net assets of discontinued operations................................... $ 4,234 $ 23,753
========= =========
</TABLE>
F-12
<PAGE>
WESTAFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
4. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings
per share:
<TABLE>
<CAPTION>
OCTOBER 30, OCTOBER 31, NOVEMBER 1,
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Income from continuing operations.......................................... $ 14,007 $ 13,748 $ 9,210
--------- --------- ---------
Denominator for basic earnings per share--
weighted average shares................................................ 15,862 15,569 15,420
Effect of dilutive securities:
Stock options............................................................ 1 205 4
--------- --------- ---------
Denominator for diluted earnings per share--
adjusted weighted average shares and assumed conversions............... 15,863 15,774 15,424
========= ========= =========
Basic earnings per share................................................... $ 0.88 $ 0.88 $ 0.60
========= ========= =========
Diluted earnings per share................................................. $ 0.88 $ 0.87 $ 0.60
========= ========= =========
Antidilutive weighted shares
excluded from diluted earnings per share............................... 742 610
========= ========= =========
</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.
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 $52, $149 and $180,
respectively, for fiscal 1999, 1998 and 1997. 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. Lease payments under this obligation for fiscal 2000
are $336. The lease terminates in October, 2000 and it is not anticipated that
the Parent will renew the lease. 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 $4,413 through fiscal 1999.
F-13
<PAGE>
WESTAFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
<TABLE>
<CAPTION>
OCTOBER 30, OCTOBER 31,
1999 1998
----------- -----------
<S> <C> <C>
Land.................................................................................... $ 1,366 $ 1,366
Buildings............................................................................... 7,610 7,493
Equipment, furniture and fixtures....................................................... 41,459 34,765
--------- ---------
50,435 43,624
Less accumulated depreciation and amortization.......................................... (26,764) (22,304)
--------- ---------
$ 23,671 $ 21,320
========= =========
</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.
Short-term borrowings outstanding at October 30, 1999 and October 31, 1998
under the revolving credit agreement were $11,000 and $15,600, respectively,
with weighted average interest rates of 6.8% at October 30, 1999 and 6.4% at
October 31, 1998. At October 30, 1999, the Company had irrevocable standby
letters of credit totaling $8,550 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 30, 1999, the Company was in compliance with
these covenants.
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
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 30, 1999.
F-14
<PAGE>
WESTAFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
7. SHORT-TERM BORROWINGS AND LOANS PAYABLE (CONTINUED)
Loans payable consist of the following:
<TABLE>
<CAPTION>
OCTOBER 30, OCTOBER 31,
1999 1998
----------- -----------
<S> <C> <C>
Variable rate term loan issued under a senior secured credit facility, collateralized by
the assets of the Company, interest 6.6% at October 30, 1999 and 6.1% at October 31,
1998.................................................................................. $ 13,250 $ 16,250
Senior secured notes payable, collateralized by the assets of the Company with
semi-annual interest payments at 6.8% per annum....................................... 30,000 30,000
Variable and fixed rate note payable, collateralized by deeds of trust, interest 7.3% at
October 30, 1999, due monthly to 2001................................................. 1,458 1,559
Other................................................................................... 750
--------- ---------
44,708 48,559
Less current portion.................................................................... (3,100) (3,851)
--------- ---------
$ 41,608 $ 44,708
========= =========
</TABLE>
The fair value of the loans payable approximates the carrying value as of
October 30, 1999 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: 2000--$3,100; 2001--$4,358; 2002--$7,286; 2003--$7,286;
2004--$5,536 and thereafter; $17,142.
8. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
<TABLE>
<CAPTION>
OCTOBER 30, OCTOBER 31,
1999 1998
----------- -----------
<S> <C> <C>
Accounts payable........................................................................ $ 2,899 $ 4,105
Checks outstanding in excess of bank balances........................................... 8,665 8,424
Accrued payroll and payroll taxes....................................................... 20,463 19,587
Accrued insurance/workers' compensation................................................. 9,928 11,052
Other................................................................................... 6,962 9,619
--------- ---------
$ 48,917 $ 52,787
========= =========
</TABLE>
F-15
<PAGE>
WESTAFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
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 30, OCTOBER 31, NOVEMBER 1,
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Domestic.................................................................. $ 22,722 $ 21,400 $ 13,004
Foreign................................................................... 434 1,514 2,332
--------- --------- ---------
Income from continuing operations before income taxes................... $ 23,156 $ 22,914 $ 15,336
========= ========= =========
</TABLE>
The provision (benefit) for income taxes from continuing operations consists
of the following:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-------------------------------------
OCTOBER 30, OCTOBER 31, NOVEMBER 1,
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
CURRENT:
State and local......................................................... $ 3,806 $ 3,190 $ 1,618
Federal................................................................. 12,746 13,811 7,743
Foreign................................................................. 649 836 767
--------- --------- ---------
17,201 17,837 10,128
--------- --------- ---------
DEFERRED:
State and local......................................................... (2,079) (1,379) (832)
Federal................................................................. (5,447) (7,181) (3,165)
Foreign................................................................. (526) (111) (5)
--------- --------- ---------
(8,052) (8,671) (4,002)
--------- --------- ---------
$ 9,149 $ 9,166 $ 6,126
========= ========= =========
</TABLE>
The difference between income taxes at the statutory federal income tax rate
and income taxes reported in the Consolidated Statements of Operations is as
follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
---------------------------------------------------
OCTOBER 30, OCTOBER 31, NOVEMBER 1,
1999 1998 1997
--------------- --------------- -----------------
<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............................ 6 5 5
Other..................................................................... (1) (1) 1
--------- --------- ---------
Effective income tax rate................................................. 40% 40% 40%
========= ========= =========
</TABLE>
F-16
<PAGE>
WESTAFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
9. INCOME TAXES (CONTINUED)
The approximate tax effect of temporary differences and carryforwards that
give rise to deferred tax balances are as follows:
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Workers' compensation....................................................................... $ 8,628 $ 11,033
Accruals relating to discontinued operations................................................ 3,443 2,351
Other liabilities and accruals.............................................................. 1,833 1,536
State and foreign net operating loss carryforwards.......................................... 1,443
Other....................................................................................... 169
--------- ---------
Gross deferred tax assets................................................................. 15,347 15,089
--------- ---------
Depreciation and amortization............................................................... 724 954
S corporation cash basis accounting adjustment.............................................. 3,136
Other....................................................................................... 363 293
--------- ---------
Gross deferred tax liabilities............................................................ 1,087 4,383
--------- ---------
Net deferred tax asset...................................................................... $ 14,260 $ 10,706
========= =========
</TABLE>
No valuation allowance has been established for temporary differences. 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 30, 1999, the Parent had cumulative undistributed earnings from
foreign subsidiaries of approximately $1,628. 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 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.
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.
Contributions for continuing operations were $297, $249, and $250 for fiscal
1999, 1998 and 1997, respectively.
11. STOCKHOLDERS' EQUITY
TREASURY STOCK
During fiscal 1999, the Company repurchased 100 shares of common stock on the
open market for aggregate cash consideration of $675. The repurchased shares
may be used for reissuance under the Company's stock option and employee
stock purchase plans. During fiscal 1999, the Company reissued 136 shares
with aggregate cash proceeds of $822. 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
F-17
<PAGE>
WESTAFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
11. STOCKHOLDERS' EQUITY (CONTINUED)
acquisition cost over the proceeds from reissuance, determined on a first-in
first-out basis, is 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 10 shares are outstanding at October 31,
1999. 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 $1,002, $965 and $788 for
fiscal 1999, 1998 and 1997, respectively, and earnings per share for those
years would have been reduced by $0.06, $0.06 and $0.05, 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 1999,
1998 and 1997, respectively: zero dividend yield, expected volatility of
74.0%, 69.0% and 63.0%, expected lives of 6 years; and risk-free interest
rates of 5.4%, 5.7% and 6.6%.
F-18
<PAGE>
WESTAFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
11. STOCKHOLDERS' EQUITY (CONTINUED)
The following summarizes the stock option transactions under the two plans:
<TABLE>
<CAPTION>
NOVEMBER 1,
OCTOBER 31, 1998
OCTOBER 30, 1999 -------------------------- 1997
---------------------------- WEIGHTED -----------
WEIGHTED AVERAGE
AVERAGE EXERCISE
SHARES EXERCISE PRICE SHARES PRICE SHARES
---------------------------- -------------------------- -----------
<S> <C> <C> <C> <C> <C>
Options outstanding, beginning of year.............. 786 $ 9.91 648 $ 9.13 650
Granted........................................... 11 6.18 295 11.16 26
Exercised......................................... (11) 6.41 (127) 9.19 (2)
Cancelled......................................... (40) 9.38 (30) 8.34 (26)
---------------------------- -------------------------- -----------
Options outstanding, end of year.................... 746 $ 9.93 786 $ 9.91 648
============================ ========================== ===========
Options exercisable, end of year.................... 457 $ 9.39 288 $ 9.09 238
============================ ========================== ===========
Options available for grant, end of year............ 687 658 929
============================ ========================== ===========
Weighted average fair value of options granted
during the year................................. $ 4.27 $ 7.42
========= =========
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE PRICE
<S> <C>
Options outstanding, beginning of year.............. $ 9.24
Granted........................................... 6.35
Exercised......................................... 9.33
Cancelled......................................... 9.29
Options outstanding, end of year.................... $ 9.13
Options exercisable, end of year.................... $ 9.08
Options available for grant, end of year............
Weighted average fair value of options granted
during the year................................. $ 4.08
=========
</TABLE>
The following table summarizes information about stock options outstanding at
October 30, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------------- ------------------------------
WEIGHTED AVERAGE
REMAINING
CONTRACTUAL LIFE WEIGHTED AVERAGE WEIGHTED AVERAGE
EXERCISE PRICE EXERCISE PRICE
RANGE OF EXERCISE PRICES SHARES SHARES
- ------------------------------------------ --------------------------------------------------- ------------------------------
<S> <C> <C> <C> <C> <C>
$ 6.00-- 8.50 42 6.84 $ 6.95 20 $ 6.90
$ 9.33-- 9.50 427 6.32 9.34 351 9.34
$ 9.58--16.17 277 8.31 11.30 86 10.19
--------- --------- --------- --------- ---------
$ 6.00--16.17 746 7.09 $ 9.93 457 $ 9.39
========= ========= ========= ========= =========
</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, 1999 shares issued under the plan totaled 267. 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 $4,880 in fiscal 1999, $4,337 in fiscal 1998 and $3,382 in fiscal
1997. Rental expense for foreign subsidiaries was $1,222
F-19
<PAGE>
WESTAFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
12. LEASES (CONTINUED)
in fiscal 1999, $1,080 in fiscal 1998 and $999 in fiscal 1997. The Company
also receives rental income from owned property and 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, 1999 are as
follows:
<TABLE>
<CAPTION>
FISCAL YEAR
<S> <C>
2000................................................................................................... $ 4,896
2001................................................................................................... 3,653
2002................................................................................................... 2,141
2003................................................................................................... 1,063
2004................................................................................................... 411
Thereafter............................................................................................. 308
---------
Total minimum lease payments........................................................................... $ 12,472
=========
</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 domestic 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
has discontinued 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. Domestic assets relating to the generation of the
royalties, 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.
F-20
<PAGE>
WESTAFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
13. OPERATING SEGMENTS (CONTINUED)
The following summarizes reporting segment data for fiscal years 1999, 1998
and 1997:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED OCTOBER 30, 1999
------------------------------------------------------
DOMESTIC INTERNATIONAL ADJUSTMENTS(1) CONSOLIDATED
---------- ------------ -------------- ------------
<S> <C> <C> <C> <C>
Total sales of services and license fees................. $ 558,314 $ 92,438 $ 650,752
Operating income from continuing operations.............. 24,700 650 25,350
Depreciation and amortization............................ 7,524 642 8,166
Expenditures for puchases of fixed assets................ 6,762 1,443 8,205
Payments for intangibles and other....................... 1,609 51 1,660
---------- ---------- ----------
Total expenditures for long lived assets................. $ 8,371 $ 1,494 $ 9,865
========== ========== ==========
Total long lived assets.................................. $ 56,426 $ 4,483 $ 60,909
========== ========== ==========
Total assets............................................. $ 168,028 $ 21,808 $ 994 $ 190,830
========== ========== ========== ==========
</TABLE>
<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
========== ========== ========== ==========
</TABLE>
<TABLE>
<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
========== ========== ========== ==========
</TABLE>
- ------------------------
(1) Adjustments reflect assets and expenditures related to discontinued
operations and elimination of domestic investments in international
subsidiaries.
F-21
<PAGE>
WESTAFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(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 30, 1999 and October 31, 1998. The fourth
quarter of fiscal years 1999 and 1998 consist of 16 weeks while all other
quarters consist of 12 weeks.
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
FISCAL YEAR ENDED OCTOBER 30, 1999
Sales of services and license fees................................. $ 137,082 $ 142,649 $ 150,044 $ 220,977
Gross profit....................................................... 28,738 30,164 32,191 46,869
Income from continuing operations.................................. 2,340 2,866 3,514 5,287
Loss from discontinued operations.................................. -- (1,315) (2,820) (2,476)
--------- --------- --------- ---------
Net income......................................................... $ 2,340 $ 1,551 $ 694 $ 2,811
========= ========= ========= =========
Basic and diluted income (loss) per common share
Income from continuing operations................................ $ 0.15 $ 0.18 $ 0.22 $ 0.33
========= ========= ========= =========
Loss from discontinued operations................................ $ -- $ (0.08) $ (0.18) $ (0.16)
========= ========= ========= =========
Net income....................................................... $ 0.15 $ 0.10 $ 0.04 $ 0.18
========= ========= ========= =========
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)
========= ========= ========= =========
</TABLE>
- --------------------------
(1) Fiscal 1998 quarterly financial information has been restated to reflect the
Company's medical operations as discontinued operations.
F-22
<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 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
Fiscal Year Ended October 30,
1999
Allowance for doubtful
accounts..................... $ 786 $ 2,458 $ 0 $ 1,590 $1,654
Reserve on notes receivable.... 254 0 0 80 174
Allowance for doubtful
accounts--discontinued
operations................... 1,888 5,713 0 0 7,601
Disposal of discontinued
operations................... 6,000 5,274 0 10,397 877
</TABLE>
<PAGE>
Exhibit 3.2.3
THIRD AMENDMENT OF THE
AMENDED AND RESTATED BYLAWS OF
WESTAFF, INC.
Pursuant to a resolution of the Board of Directors of the Corporation,
the Amended and Restated Bylaws of the Corporation are further amended as
follows:
RESOLVED: That effective March 30, 1999, Article 3, Section 3.3 of the
Amended And Restated Bylaws of the Corporation be amended as follows:
"3.3 QUALIFICATION. The Chairman must be an officer of the
Corporation. The Vice Chairman need not be an officer of the
Corporation. The Chief Executive Officer need not be a
director. No officer need be a shareholder. Any two or more
offices may be held by the same person."
WESTAFF, INC.
By: /s/ Robin A. Herman
-------------------
Robin A. Herman, Secretary
<PAGE>
Exhibit 10.8.15
FOURTH AMENDMENT TO CREDIT AGREEMENT
THIS FOURTH AMENDMENT TO CREDIT AGREEMENT (the
"AMENDMENT"), dated as of December 15, 1999, is entered into by and among
WESTAFF (USA), INC. ("WSS"), WESTERN MEDICAL SERVICES, INC. ("WMS" and
together with WSS, collectively, the "BORROWERS" and individually, a
"BORROWER"), BANK OF AMERICA, N.A., as agent for itself and the Banks (the
"AGENT"), and the several financial institutions party to the Credit
Agreement (collectively, the "BANKS").
RECITALS
A. The Borrowers, Banks, and Agent are parties to a Credit
Agreement dated as of March 4, 1998, and amendments thereto dated as of May
15, 1998, July 23, 1998, and January 22, 1999 (collectively, the "CREDIT
AGREEMENT") pursuant to which the Agent and the Banks have extended certain
credit facilities to the Borrowers.
B. The Borrowers have requested that the Banks agree to
certain amendments of the Credit Agreement.
C. The Banks are willing to amend the Credit Agreement,
subject to the terms and conditions of this Amendment.
AGREEMENT
NOW, THEREFORE, for valuable consideration, the receipt and
adequacy of which are hereby acknowledged, the parties hereto hereby agree as
follows:
1. DEFINED TERMS. Unless otherwise defined herein,
capitalized terms used herein shall have the meanings, if any, assigned to
them in the Credit Agreement.
2. AMENDMENTS TO CREDIT AGREEMENT.
(a) The first sentence of Section 8.13 of the
Credit Agreement is amended to read as follows:
The Borrowers shall not, and shall not permit any
other Loan Party to, make or commit to make Capital
Expenditures in excess of an aggregate of Eight
Million Five Hundred Thousand Dollars ($8,500,000)
for the fiscal year ending October 30, 1999, and
Eight Million Dollars ($8,000,000) for each
subsequent fiscal year.
3. REPRESENTATIONS AND WARRANTIES. The Borrowers each
hereby represent and warrant to the Agent and the Banks as follows:
(a) No Default or Event of Default has occurred and
is continuing, except those Defaults or Events of Default, if any, that
have been disclosed in writing to the Agent and the Banks or waived in
writing by the Agent and the Banks.
- 1 -
<PAGE>
(b) The execution, delivery and performance by the
Borrowers of this Amendment have been duly authorized by all necessary
corporate and other action and do not and will not require any
registration with, consent or approval of, notice to or action by, any
Person (including any Governmental Authority) in order to be effective
and enforceable. The Credit Agreement as amended by this Amendment
constitutes the legal, valid and binding obligations of the Borrowers,
enforceable against each of them in accordance with its respective
terms, without defense, counterclaim or offset.
(c) All representations and warranties of the
Borrowers contained in the Credit Agreement are true and correct.
(d) Each of the Borrowers is entering into this
Amendment on the basis of its own investigation and for its own
reasons, without reliance upon the Agent and the Banks or any other
Person.
4. EFFECTIVE DATE. This Amendment will become effective as of
October 30, 1999 (the "EFFECTIVE DATE"), PROVIDED that each of the following
conditions precedent is satisfied on or before December 15, 1999:
(a) The Agent has received this Amendment duly
executed by the Borrowers, the Agent, the Issuing Bank and each of the
Banks, together with a duly executed Guarantor Acknowledgment and
Consent in the form attached hereto.
(b) The Agent has received from WMS, Western Medical
Services (NY), Inc., as a guarantor, and Alternative Billing Services,
Inc., as a guarantor, a certificate of incumbency setting forth the
names and specimen signatures of the authorized officers of each such
corporation, certified by the Secretary or an Assistant Secretary of
such corporation as of the date hereof.
5. RESERVATION OF RIGHTS. Each of the Borrowers
acknowledges and agrees that the execution and delivery by the Agent and the
Banks of this Amendment shall not be deemed to create a course of dealing or
otherwise obligate the Agent or the Banks to forbear or execute similar
amendments under the same or similar circumstances in the future.
6. MISCELLANEOUS.
(a) Except as herein expressly amended, all terms,
covenants and provisions of the Credit Agreement are and shall remain
in full force and effect and all references therein to such Credit
Agreement shall henceforth refer to the Credit Agreement as amended by
this Amendment. This Amendment shall be deemed incorporated into, and a
part of, the Credit Agreement.
(b) This Amendment shall be binding upon and inure to
the benefit of the parties hereto and thereto and their respective
successors and assigns. No third party beneficiaries are intended in
connection with this Amendment.
(c) This Amendment shall be governed by and construed
in accordance with the law of the State of California.
- 2 -
<PAGE>
(d) This Amendment may be executed in any number of
counterparts, each of which shall be deemed an original, but all such
counterparts together shall constitute but one and the same instrument.
Each of the parties hereto understands and agrees that this document
(and any other document required herein) may be delivered by any party
thereto either in the form of an executed original or an executed
original sent by facsimile transmission to be followed promptly by
mailing of a hard copy original, and that receipt by the Agent of a
facsimile transmitted document purportedly bearing the signature of a
Bank or the Borrower or WMS shall bind such Bank or the Borrower or
WMS, respectively, with the same force and effect as the delivery of a
hard copy original. Any failure by the Agent to receive the hard copy
executed original of such document shall not diminish the binding
effect of receipt of the facsimile transmitted executed original of
such document of the party whose hard copy page was not received by the
Agent.
(e) This Amendment, together with the Credit
Agreement, contains the entire and exclusive agreement of the parties
hereto with reference to the matters discussed herein and therein. This
Amendment supersedes all prior drafts and communications with respect
thereto. This Amendment may not be amended except in accordance with
the provisions of Section 11.01 of the Credit Agreement.
(f) If any term or provision of this Amendment shall
be deemed prohibited by or invalid under any applicable law, such
provision shall be invalidated without affecting the remaining
provisions of this Amendment or the Credit Agreement, respectively.
(g) Each of the Borrowers covenants to pay to or
reimburse the Agent, upon demand, for all costs and expenses (including
allocated costs of in-house counsel) incurred in connection with the
development, preparation, negotiation, execution and delivery of this
Amendment, including without limitation appraisal, audit, search and
filing fees incurred in connection therewith.
IN WITNESS WHEREOF, the parties hereto have executed and
delivered this Amendment as of the date first above written.
WESTAFF (USA), INC.
By /s/ Paul A. Norberg
------------------------
Paul A. Norberg
Executive Vice President and
Chief Financial Officer
By /s/ Michael W. Ehresman
------------------------
Michael W. Ehresman
Senior Vice President and
Treasurer
- 3 -
<PAGE>
WESTERN MEDICAL SERVICES, INC.
By /s/ Gary A. Kittleson
------------------------
Gary A. Kittleson
Executive Vice President,
Chief Financial Officer
By /s/ Gary A. Kittleson
------------------------
Gary A. Kittleson
Secretary
BANK OF AMERICA, N.A., as Agent
By /s/ David Price
------------------------
David Price
Vice President
BANK OF AMERICA, N.A., as a Bank and as
Issuing Bank
By /s/ Lisa M. Thomas
------------------------
Lisa M. Thomas
Vice President
COMERICA BANK-CALIFORNIA, as a Bank
By /s/ Scott T. Smith
------------------------
Scott T. Smith
Vice President
SANWA BANK CALIFORNIA, as a Bank
By /s/ Rochelle Dineen
------------------------
Rochelle Dineen
Vice President
- 4 -
<PAGE>
GUARANTOR ACKNOWLEDGMENT AND CONSENT
The undersigned, each a guarantor or third party pledgor with
respect to the Borrowers' obligations to the Agent and the Banks under the
Credit Agreement, each hereby (i) acknowledges and consents to the execution,
delivery and performance by the Borrowers of the foregoing Fourth Amendment
to Credit Agreement (the "AMENDMENT"), and (ii) reaffirms and agrees that the
respective guaranty, third party pledge or security agreement to which the
undersigned is party and all other documents and agreements executed and
delivered by the undersigned to the Agent and the Banks in connection with
the Credit Agreement are in full force and effect, without defense, offset or
counterclaim. (Capitalized terms used herein have the meanings specified in
the Amendment.)
WESTAFF, INC.
Dated: as of December 15, 1999 By /s/ Paul A. Norberg
----------------------- ----------------------------
Paul A. Norberg
Executive Vice President
and Chief Financial Officer
By /s/ Michael W. Ehresman
------------------------
Michael W. Ehresman
Senior Vice President and Treasurer
WESTERN MEDICAL SERVICES (NY), INC.
Dated: as of December 15, 1999 By /s/ Gary A. Kittleson
----------------------- ----------------------------
Gary A. Kittleson
Executive Vice President and
Chief Financial Officer
By /s/ Gary A. Kittleson
----------------------------
Gary A. Kittleson
Secretary
WESTERN TECHNICAL SERVICES, INC.
Dated: as of December 15, 1999 By /s/ Paul A. Norberg
----------------------- ----------------------------
Paul A. Norberg
Executive Vice President and
Chief Financial Officer
By /s/ Michael W. Ehresman
----------------------------
Michael W. Ehresman
Senior Vice President and Treasurer
- 5 -
<PAGE>
MEDIAWORLD INTERNATIONAL
Dated: as of December 15, 1999 By /s/ Paul A. Norberg
----------------------- ----------------------------
Paul A. Norberg
Executive Vice President and
Chief Financial Officer
By /s/ Michael W. Ehresman
----------------------------
Michael W. Ehresman
Senior Vice President and Treasurer
WESTAFF (GUAM), INC.
Dated: as of December 15, 1999 By /s/ Paul A. Norberg
----------------------- ----------------------------
Paul A. Norberg
Executive Vice President and
Chief Financial Officer
By /s/ Michael W. Ehresman
----------------------------
Michael W. Ehresman
Senior Vice President and Treasurer
ALTERNATIVE BILLING SERVICES, INC.
Dated: as of December 15, 1999 By /s/ Gary A. Kittleson
----------------------- ----------------------------
Gary A. Kittleson
Executive Vice President and
Chief Financial Officer
By /s/ Gary A. Kittleson
----------------------------
Gary A. Kittleson
Secretary
- 6 -
<PAGE>
BEST TEMPORARIES, INC.
Dated: as of December 15, 1999 By /s/ Paul A. Norberg
----------------------- ----------------------------
Paul A. Norberg
Executive Vice President and
Chief Financial Officer
By /s/ Michael W. Ehresman
----------------------------
Michael W. Ehresman
Senior Vice President and Treasurer
BEST TEMPORARIES FEDERAL SYSTEMS, INC.
Dated: as of December 15, 1999 By /s/ Paul A. Norberg
----------------------- ----------------------------
Paul A. Norberg
Executive Vice President and
Chief Financial Officer
By /s/ Michael W. Ehresman
----------------------------
Michael W. Ehresman
Senior Vice President and Treasurer
-7-
<PAGE>
SUBSIDIARIES OF THE COMPANY
ACTIVE DOMESTIC SUBSIDIARIES
Westaff (USA), Inc.
Western Medical Services, Inc.
MediaWorld International
Westaff Support, Inc.
Westaff (GP), Inc.
Westaff (LP), Inc.
Westaff (CA), Inc.
INACTIVE DOMESTIC SUBSIDIARIES
Western Medical Services (NY), Inc.
Alternative Billing Services, Inc.
Western Technical Services, Inc.
Western Legal Services, Inc.
Western Permanent Services Agency, Inc.
Kontorservice, Inc.
Best Temporaries, Inc.
Best Temporaries Federal Systems, Inc.
FOREIGN SUBSIDIARIES
Australia:
Westaff (Australia) Pty. Ltd.
Western Personnel Services Pty. Ltd.
Western Temporary Services Pty. Limited
Denmark:
Westaff A/S
New Zealand:
Westaff NZ Limited
Norway:
Westaff AS
Kontorservice A/S
Singapore:
Westaff (Singapore) Pte Ltd
United Kingdom:
Westaff (U.K.) Limited
<PAGE>
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent accountants, we hereby consent to the incorporation of our
reports included (or incorporated by reference) in this Form 10-K, into
the Company's previously filed 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).
/s/ Arthur Andersen LLP
- -----------------------
San Francisco, California
January 27, 2000
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in 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, relating to the consolidated financial statements and
financial statement schedule, which appears in this Form 10-K.
/s/ PricewaterhouseCoopers LLP
San Francisco, California
January 28, 2000
<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 on page 32 present fairly, in all material
respects, the financial position of Westaff, Inc. and its subsidiaries at
October 31, 1998 and the results of their operations and their cash flows for
each of the two years in the period ended October 31, 1998, in conformity
with accounting principles generally accepted in the United States of
America. In addition, in our opinion, the financial statement schedule listed
in the index appearing under Item 14(a)2 on page 33 presents fairly, in all
material respects, the information set forth therein when read in conjunction
with the related consolidated financial statements. These financial
statements and financial statement schedule are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits. We
conducted our audits of these statements in accordance with auditing
standards generally accepted in the United States of America, 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
San Francisco, California
January 22, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF OCTOBER 30, 1999; THE CONSOLIDATED STATEMENT OF
OPERATIONS FOR THE FISCAL YEAR ENDED OCTOBER 30, 1999; AND THE CONSOLIDATED
STATEMENT OF CASH FLOWS FOR THE FISCAL YEAR ENDED OCTOBER 30, 1999 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-30-1999
<PERIOD-START> NOV-01-1998
<PERIOD-END> OCT-30-1999
<CASH> 3048
<SECURITIES> 0
<RECEIVABLES> 94068
<ALLOWANCES> 1654
<INVENTORY> 0
<CURRENT-ASSETS> 123173
<PP&E> 50435
<DEPRECIATION> 26764
<TOTAL-ASSETS> 190830
<CURRENT-LIABILITIES> 63320
<BONDS> 0
0
0
<COMMON> 159
<OTHER-SE> 74782
<TOTAL-LIABILITY-AND-EQUITY> 190830
<SALES> 647469
<TOTAL-REVENUES> 650752
<CGS> 512790
<TOTAL-COSTS> 625402
<OTHER-EXPENSES> (330)
<LOSS-PROVISION> 2458
<INTEREST-EXPENSE> 2524
<INCOME-PRETAX> 23156
<INCOME-TAX> 9149
<INCOME-CONTINUING> 14007
<DISCONTINUED> (6611)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7396
<EPS-BASIC> 0.47
<EPS-DILUTED> 0.47
</TABLE>
