<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended APRIL 15, 2000
Commission file number 0-24990
WESTAFF, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-1266151
(State or other jurisdiction (I.R.S.employer
of incorporation or organization) identification number)
301 LENNON LANE
WALNUT CREEK, CALIFORNIA 94598-2453
(925) 930-5300
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Class Outstanding at May 29, 2000
---------- ---------------------------
Common Stock, $.01 par value 15,772,954 Shares
<PAGE>
WESTAFF, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
INDEX
PAGE
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<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
April 15, 2000 and October 30, 1999 3
Condensed Consolidated Statements of Operations -
12 and 24 weeks ended April 15, 2000 and April 17, 1999 4
Condensed Consolidated Statements of Cash Flows -
12 and 24 weeks ended April 15, 2000 and April 17, 1999 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 2. Changes in Securities 20
Item 3. Defaults upon Senior Securities 21
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 5. Other Information 21
Item 6. Exhibits and Reports on Form 8-K 21
Signatures 22
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WESTAFF, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
APRIL 15, OCTOBER 30,
2000 1999
---------- ----------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 5,087 $ 3,048
Trade accounts receivable, less allowance for doubtful
accounts of $1,512 and $1,654 85,602 92,414
Due from licensees 5,478 4,993
Deferred income taxes 7,504 9,826
Net assets of discontinued operations 3,611 4,234
Other current assets 7,716 8,658
---------- ----------
Total current assets 114,998 123,173
Property, plant and equipment, net 21,983 23,671
Deferred income taxes 4,589 4,434
Intangible assets, net 36,016 37,238
Other long-term assets 2,283 2,314
---------- ----------
$ 179,869 $ 190,830
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 5,100 $ 11,000
Current portion of loans payable 3,000 3,100
Accounts payable and accrued expenses 43,886 48,917
Income taxes payable 250 303
---------- ----------
Total current liabilities 52,236 63,320
Loans payable 39,000 41,608
Other long-term liabilities 11,096 10,961
---------- ----------
Total liabilities 102,332 115,889
---------- ----------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value; authorized and unissued: 1,000 shares
Common stock, $.01 par value; authorized: 25,000 shares; issued: 15,948
shares at April 15, 2000 and October 30, 1999 159 159
Additional paid-in-capital 36,582 37,382
Retained earnings 42,536 38,795
Cumulative currency translation (1,575) (900)
---------- ----------
77,702 75,436
Less treasury stock at cost, 25 shares at April 15, 2000 and
72 shares at October 30, 1999 165 495
---------- ----------
Total stockholders' equity 77,537 74,941
---------- ----------
$ 179,869 $ 190,830
========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
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WESTAFF, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
12 WEEKS ENDED 24 WEEKS ENDED
-------------------------- ---------------------------
APRIL 15, APRIL 17, APRIL 15, APRIL 17,
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Sales of services $ 148,549 $ 141,920 $ 295,258 $ 278,335
License fees 808 729 1,562 1,397
---------- ---------- ---------- ----------
Total sales of services and license fees 149,357 142,649 296,820 279,732
Costs of services 117,540 112,485 234,566 220,829
---------- ---------- ---------- ----------
Gross profit 31,817 30,164 62,254 58,903
Franchise agents' share of gross profit 4,012 3,698 7,673 7,000
Selling and administrative expenses 22,005 19,412 42,463 38,644
Depreciation and amortization 2,232 1,867 4,396 3,689
---------- ---------- ---------- ----------
Operating income from continuing operations 3,568 5,187 7,722 9,570
Interest expense 741 505 1,541 1,069
Interest income (77) (95) (124) (178)
---------- ---------- ---------- ----------
Income from continuing operations before income taxes 2,904 4,777 6,305 8,679
Provision for income taxes 1,147 1,911 2,491 3,471
---------- ---------- ---------- ----------
Income from continuing operations 1,757 2,866 3,814 5,208
Estimated loss on discontinued operations, net of income taxes (1,315) (1,315)
---------- ---------- ---------- ----------
Net income $ 1,757 $ 1,551 $ 3,814 $ 3,893
========== ========== ========== ==========
Earnings (loss) per share:
Continuing operations:
Basic $ 0.11 $ 0.18 $ 0.24 $ 0.33
========== ========== ========== ==========
Diluted $ 0.11 $ 0.18 $ 0.24 $ 0.33
========== ========== ========== ==========
Discontinued operations:
Basic $ $ (0.08) $ $ (0.08)
========== ========== ========== ==========
Diluted $ $ (0.08) $ $ (0.08)
========== ========== ========== ==========
Net income:
Basic $ 0.11 $ 0.10 $ 0.24 $ 0.25
========== ========== ========== ==========
Diluted $ 0.11 $ 0.10 $ 0.24 $ 0.25
========== ========== ========== ==========
Weighted average shares outstanding - basic 15,918 15,902 15,897 15,873
========== ========== ========== ==========
Weighted average shares outstanding - diluted 15,924 15,902 15,902 15,874
========== ========== ========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
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WESTAFF, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(AMOUNTS IN THOUSANDS)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
24 WEEKS ENDED
--------------------------
APRIL 15, APRIL 17,
2000 1999
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 3,814 $ 3,893
Adjustments to reconcile net income to net cash
from operating activities:
Depreciation 3,276 2,560
Amortization of intangible assets 1,120 1,129
Provision for losses on doubtful accounts 980 767
Deferred income taxes 2,155 (3,707)
Gain on sale of assets (153)
Changes in assets and liabilities:
Trade accounts receivable 5,160 7,334
Due from licensees (485) (1,079)
Other assets 570 (724)
Accounts payable and accrued expenses (4,806) (9,381)
Income taxes payable (36) 1,040
Other long-term liabilities 135 (50)
---------- ----------
Net cash provided by continuing operations 11,730 1,782
Net cash provided by discontinued operations 453 3,610
---------- ----------
Net cash provided by operating activities 12,183 5,392
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (1,588) (4,162)
Payments for intangibles and other investments (12) (994)
Proceeds from sale of assets 430
Investing activities of discontinued operations
Capital expenditures (44)
Proceeds from sale of assets 703
Payments on (increase in) notes receivable 31 (92)
Other, net 77 (40)
---------- ----------
Net cash used in investing activities (1,062) (4,629)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net (repayments)borrowings under line of credit agreements (5,900) 1,800
Principal payments on loans payable (2,708) (2,844)
Issuance of common stock 258 458
Repurchase of common stock (56)
Payment for stock acquisition contingency (800)
---------- ----------
Net cash (used in) provided by financing activities (9,150) (642)
---------- ----------
Effect of exchange rate on cash 68 (127)
---------- ----------
Net change in cash and cash equivalents 2,039 (6)
Cash and cash equivalents at beginning of period 3,048 4,651
---------- ----------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
WESTAFF, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
--------------------------------------------------------------------------------
1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements of Westaff,
Inc. and its domestic and foreign subsidiaries (together, the Company), as
of and for the 12 and 24 week periods ended April 15, 2000 and April 17,
1999 are unaudited. Material intercompany accounts and transactions have
been eliminated.
In November 1998, the Company announced its plan to sell its medical
business, primarily operating through Western Medical Services, Inc.
(Western Medical), a wholly-owned subsidiary. As a result of this decision,
the medical operations are classified as discontinued operations and
presented as such in these Condensed Consolidated Financial Statements and
notes thereto.
The condensed consolidated financial statements, in the opinion of
management, reflect all adjustments, which are of a normal recurring
nature, necessary for a fair presentation of the financial position,
results of operations and cash flows for the periods presented.
Certain financial information which is normally included in financial
statements prepared in accordance with generally accepted accounting
principles, but which is not required for interim reporting purposes, has
been condensed or omitted. The accompanying condensed consolidated
financial statements should be read in conjunction with the financial
statements and notes thereto included in the Company's Annual Report on
Form 10-K for the fiscal year ended October 30, 1999.
The Company's fiscal year is a fifty-two or fifty-three week period ending
the Saturday nearest the end of October. For interim reporting purposes,
the first three fiscal quarters comprise twelve weeks each while the fourth
fiscal quarter consists of sixteen or seventeen weeks. The results of
operations for the 12 and 24 week periods ended April 15, 2000 are not
necessarily indicative of the results to be expected for the full fiscal
year or for any future period.
Certain amounts in the October 30, 1999 financial statements have been
reclassified to conform to the presentation adopted for April 15, 2000.
2. DISCONTINUED OPERATIONS
In November 1998, the Company announced its decision to sell Western
Medical. Western Medical provided temporary health care personnel to serve
an array of home care and institutional health care needs, including
Medicare patients, through a network of geographically dispersed
company-owned, franchise agent and license offices.
During the first and second quarters of fiscal 1999 the Company completed
the sale of certain of its franchise agent and company-owned medical
offices and also entered into a termination
6
<PAGE>
WESTAFF, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
--------------------------------------------------------------------------------
agreement with one of its medical licensees. During the fourth quarter of
fiscal 1999, the Company completed the sale of the remaining medical
business. Under the terms of the sale, the Company retained the trade and
Medicare accounts receivable and due from licensee balances. During fiscal
1999, the Company recorded after-tax losses related to the medical
operations of $6,611 or $0.42 per share, primarily reflecting additional
operating losses resulting from the extended period required to close the
sale, a reduction in the estimated proceeds from the sale and additional
reserves for trade and Medicare accounts receivable and due from licensee
balances.
Revenues of the medical operations were $11,475 for the 12 weeks ended
April 17, 1999 and $23,956 for the 24 weeks ended April 17, 1999. Medical
operations' revenues are not included in sales of services and license fees
as reported in the Condensed Consolidated Statements of Operations.
Summarized balance sheet data for discontinued operations, which includes
the trade and Medicare accounts receivable and due from licensee balances
to be retained by the Company, is as follows:
<TABLE>
<CAPTION>
APRIL 15, OCTOBER 30,
2000 1999
------- -------
(Unaudited)
<S> <C> <C>
Current assets (primarily receivables) $ 4,563 $ 5,588
Other assets 108
Current liabilities (939) (1,449)
Noncurrent liabilities (13) (13)
------- -------
Net assets of discontinued operations $ 3,611 $ 4,234
------- -------
</TABLE>
3. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
7
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WESTAFF, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
12 WEEKS ENDED 24 WEEKS ENDED
------------------------- -------------------------
APRIL 15, APRIL 17, APRIL 15, APRIL 17,
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Income from continuing operations $ 1,757 $ 2,866 $ 3,814 $ 5,208
---------- ---------- ---------- ----------
Denominator for basic earnings per share -
weighted average shares 15,918 15,902 15,897 15,873
Effect of dilutive securities:
Stock options 6 5 1
---------- ---------- ---------- ----------
Denominator for diluted earnings per share - adjusted
weighted average shares and assumed conversions 15,924 15,902 15,902 15,874
========== ========== ========== ==========
Basic earnings per share $ 0.11 $ 0.18 $ 0.24 $ 0.33
========== ========== ========== ==========
Diluted earnings per share $ 0.11 $ 0.18 $ 0.24 $ 0.33
========== ========== ========== ==========
Anti-dilutive weighted shares excluded from diluted
earnings per share 791 758 798 750
---------- ---------- ---------- ----------
</TABLE>
Anti-dilutive weighted shares represent options to purchase shares of
common stock which were outstanding but were not included in the
computation of diluted earnings per share because the options' exercise
price was greater than the average market price of the common shares during
the period, and therefore the effect would be anti-dilutive.
4. COMPREHENSIVE INCOME
Comprehensive income consists of the following:
<TABLE>
<CAPTION>
12 WEEKS ENDED 24 WEEKS ENDED
-------------------------- --------------------------
APRIL 15, APRIL 17, APRIL 15, APRIL 17,
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net income $ 1,757 $ 1,551 $ 3,814 $ 3,893
Currency translation adjustments (1,027) (49) (675) 48
---------- ---------- ---------- ----------
Comprehensive income $ 730 $ 1,502 $ 3,139 $ 3,941
---------- ---------- ---------- ----------
</TABLE>
8
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WESTAFF, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
--------------------------------------------------------------------------------
5. OPERATING SEGMENTS
<TABLE>
<CAPTION>
Domestic International Consolidated
------------ ------------- ------------
<S> <C> <C> <C>
12 WEEKS ENDED APRIL 15, 2000
Sales of services and license fees $ 126,312 $ 23,045 $ 149,357
Operating income from continuing operations $ 2,954 $ 614 $ 3,568
12 WEEKS ENDED APRIL 17, 1999
Sales of services and license fees $ 123,325 $ 19,324 $ 142,649
Operating income from continuing operations $ 4,987 $ 200 $ 5,187
24 WEEKS ENDED APRIL 15, 2000
Sales of services and license fees $ 250,516 $ 46,304 $ 296,820
Operating income from continuing operations $ 6,989 $ 733 $ 7,722
24 WEEKS ENDED APRIL 17, 1999
Sales of services and license fees $ 240,978 $ 38,754 $ 279,732
Operating income from continuing operations $ 9,086 $ 484 $ 9,570
</TABLE>
6. STOCKHOLDERS' EQUITY
In July 1998 the Company acquired substantially all of the assets of The
Personnel Connection, Inc. Consideration for the acquisition consisted of
cash and common stock, with a contingent obligation to issue up to an
additional 100 shares of common stock dependent on the fair market value of
the Company's stock subsequent to the acquisition. On January 27, 2000 the
Company paid the selling parties $800 in lieu of issuing additional shares,
with an offsetting reduction in additional paid-in-capital.
7. COMMITMENTS AND CONTINGENCIES
The Company is subject to claims and other actions arising in the ordinary
course of business. Some of these claims and actions have resulted in
lawsuits in which the Company is a defendant. Most significant legal
proceedings are related to matters covered by insurance. Major
contingencies are discussed below.
On March 9, 2000, Synergy Staffing, Inc. filed a complaint in the Superior
Court of the State of California for the County of Los Angeles. Included
among the defendants named in the case are the Company, all members of its
Board of Directors and one of the executive officers.
9
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WESTAFF, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
--------------------------------------------------------------------------------
The complaint alleges, among other things, that the defendants fraudulently
induced plaintiffs to sell the assets of The Personnel Connection, Inc. The
plaintiff seeks to have the court grant a jury trial, and award the
plaintiff compensatory and punitive damages and attorneys' fees and other
costs. The Company has petitioned to compel arbitration and is evaluating
its potential cross-claims.
The Company believes that these lawsuits are without merit and that the
outcome of these lawsuits will not have a material adverse effect on its
earnings, cash flow or financial position.
8. SUBSEQUENT EVENTS
On May 3, 2000 the Company announced that a recapitalization agreement
signed on March 7, 2000 was terminated by mutual consent of all parties. In
connection with the termination, Michael K. Phippen, then President and
Chief Executive Officer, resigned and W. Robert Stover, Chairman of the
Board of Directors, assumed the position of interim President and Chief
Executive Officer. As a result of the recapitalization termination, the
Company incurred $638 in pre-tax charges during the fiscal quarter ended
April 15, 2000 and anticipates recording additional pre-tax charges of
approximately $1,100 in the third quarter of fiscal 2000.
On May 5, 2000 the Company announced that its Board of Directors approved
the repurchase of up to 1,000 shares of its outstanding common stock in the
open market at prevailing prices for use in the Company's employee stock
purchase plan, stock options plans and other corporate purposes. As of May
29, 2000, the Company had repurchased 150 shares for aggregate cash
consideration of $712.
10
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WESTAFF, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
--------------------------------------------------------------------------------
The following discussion is intended to assist in the understanding and
assessment of significant changes and trends related to the results of
operations and financial condition of Westaff, Inc., together with its
consolidated subsidiaries. This discussion and analysis should be read in
conjunction with the Company's Condensed Consolidated Financial Statements and
Notes thereto included herein and with the Consolidated Financial Statements and
Notes thereto included in the Company's Annual Report on Form 10-K for the
fiscal year ended October 30, 1999.
In addition to historical information, this management's discussion and analysis
includes certain forward-looking statements regarding events and financial
trends that may affect the Company's future operating results and financial
position. These forward-looking statements include, but are not limited to,
statements regarding sales, acquisitions, gross margin, workers' compensation
costs, selling and administrative expenses, interest expense, income taxes,
capital expenditures, capital resources, management information systems and
medical operations. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date hereof. The Company
undertakes no obligation to publicly release the results of any revisions to
these forward-looking statements to reflect events or circumstances after the
date hereof or to reflect the occurrence of unanticipated events.
The forward-looking statements included herein are also subject to a number of
other risks and uncertainties that could cause the Company's actual results and
financial position to differ materially from those anticipated in the
forward-looking statements. Such risks and uncertainties include, but are not
limited to: demand for the Company's services, the competition within its
markets, the loss of a principal customer and the Company's ability to increase
the productivity of its existing offices, to control costs, to expand operations
and the availability of sufficient personnel. There are also risks and
uncertainties relating to the ability of the Company to complete the realization
of the remaining medical assets in a timely and cost effective manner. Due to
the foregoing factors, it is possible that in some future period the Company's
results of operations may be below the expectations of public market analysts
and investors. In addition, the Company's results of operations have
historically been subject to quarterly and seasonal fluctuations. Demand for
temporary staffing is historically highest in the fourth fiscal quarter, due
largely to the planning cycles of many of the Company's customers, and typically
lower in the first fiscal quarter, due, in part, to national holidays as well as
to plant shutdowns during and after the holiday season. These and other risks
and uncertainties related to the Company's business are described in detail in
the "Factors Affecting Future Operating Results" section of the Company's Annual
Report on Form 10-K for the fiscal year ended October 30, 1999.
OVERVIEW
The Company provides temporary staffing services primarily in suburban and rural
markets ("secondary markets"), as well as in the downtown areas of major urban
centers ("primary markets"), in the United States and selected international
markets. Through its network of Company-owned, franchise agent and licensed
offices, the Company offers a wide range of
11
<PAGE>
temporary staffing solutions, including replacement, supplemental and
on-location programs to businesses and government agencies. The Company has over
50 years of experience in the staffing industry and operates through over 360
business services offices in 45 states, the District of Columbia and five
foreign countries.
The Company differentiates itself from other large temporary staffing companies
by focusing on recruiting and placing essential support personnel in secondary
markets. Essential support personnel often fill clerical, light industrial and
light technical positions such as word processing, data entry, reception,
customer service and telemarketing, warehouse labor, manufacturing, assembly and
lab assistance. These assignments can support either core or non-core functions
of the customer's business, but are always "essential" to daily operations.
The general level of economic activity and unemployment in the United States and
the countries in which the Company operates significantly affects demand for the
Company's staffing services. Companies use temporary staffing services to manage
personnel costs and staffing needs. When economic activity increases, temporary
employees are often added before full-time employees are hired. During these
periods of increased economic activity and generally higher levels of
employment, the competition among temporary staffing firms for qualified
temporary personnel is intense. There can be no assurance that during these
periods the Company will be able to recruit the temporary personnel necessary to
fill its customers' job orders in which case the Company's business, results of
operations, cash flows or financial condition may be adversely affected. As
economic activity slows, many companies reduce their utilization of temporary
employees before releasing full-time employees. In addition, the Company may
experience less demand for its services and more competitive pricing pressure
during periods of economic downturn. Therefore, any significant economic
downturn could have a material adverse effect on the Company's business, results
of operations, cash flows or financial condition.
RECENT DEVELOPMENTS
On May 3, 2000 the Company announced that a recapitalization agreement signed on
March 7, 2000 was terminated by mutual consent of all parties. In connection
with the termination, Michael K. Phippen, then President and Chief Executive
Officer, resigned and W. Robert Stover, Chairman of the Board of Directors,
assumed the position of interim President and Chief Executive Officer. As a
result of the recapitalization termination, the Company incurred $638,000 in
pre-tax charges during the fiscal quarter ended April 15, 2000 and anticipates
recording additional pre-tax charges of approximately $1.1 million in the third
quarter of fiscal 2000.
DISCONTINUED OPERATIONS
In November 1998, the Company announced its plan to sell its medical business,
primarily operating through Western Medical Services, Inc., a wholly-owned
subsidiary of the Company ("Western Medical"). As a result of this decision, the
Company has classified its medical
12
<PAGE>
operations as discontinued operations and, accordingly, has segregated the net
assets of the discontinued operations in the Condensed Consolidated Balance
Sheets at April 15, 2000 and October 30, 1999 and the operating results and cash
flows of the discontinued operations in the Condensed Consolidated Statements of
Operations and Condensed Consolidated Statements of Cash Flows for the 12 and 24
weeks ended April 15, 2000 and April 17, 1999.
During the first and second quarters of fiscal 1999 the Company completed the
sale of certain of its franchise agent and company-owned medical offices and
also entered into a termination agreement with one of its medical licensees.
During the fourth quarter of fiscal 1999, the Company completed the sale of the
remaining medical business. Under the terms of the sale, the Company retained
the trade and Medicare accounts receivable and due from licensee balances.
During fiscal 1999, the Company recorded after-tax losses related to the medical
operations of $6,611 or $0.42 per share, primarily reflecting additional
operating losses resulting from the extended period required to close the sale,
a reduction in the estimated proceeds from the sale and additional reserves for
trade and Medicare accounts receivable and due from licensee balances.
There can be no assurance that the Company will be able to complete the disposal
of the medical business and collection of the remaining trade and Medicare
accounts receivable and due from licensee balances on terms and costs similar to
those estimated by the Company. Should the actual costs or collections differ
materially from those estimated by management, the Company would record
additional losses (or gains) in future periods.
RESULTS OF CONTINUING OPERATIONS
FISCAL QUARTER ENDED APRIL 15, 2000 COMPARED TO FISCAL QUARTER ENDED APRIL 17,
1999
SALES OF SERVICES AND LICENSE FEES. Sales of services increased $6.6 million, or
4.7%, for the fiscal quarter ended April 15, 2000 as compared to the fiscal
quarter ended April 17, 1999. The increase resulted from a 1.2% increase in
billed hours and a 3.2% increase in average billing rates per hour. Billed hours
increased primarily due to internal growth through same store sales and new
office openings. The increase in average billing rates primarily reflects
inflationary factors. Same store sales increased approximately 4.8% for the
second quarter of fiscal 2000 as compared to the second quarter of fiscal 1999.
Same store system revenues, which take into account sales increases for licensed
offices, increased 5.2% for the second quarter of fiscal 2000 as compared to the
second quarter of fiscal 1999. Sales of services for the second quarter of
fiscal 2000 increased 2.4% and 19.3%, respectively, for domestic business
services and international business services as compared to the second quarter
of fiscal 1999. Excluding the effect of foreign currency rate fluctuations,
sales of services increased 23.5% for international business services. Sales of
services for domestic business services continue to be adversely affected by low
unemployment rates and competitive pressures.
13
<PAGE>
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 $79,000, or 10.8%, for the fiscal quarter ended April 15, 2000 as
compared to the fiscal quarter ended April 17, 1999 primarily as a result of
increased sales and gross profits for licensed offices.
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 $5.1
million, or 4.5%, for the fiscal quarter ended April 15, 2000 as compared to the
fiscal quarter ended April 17, 1999. Gross margin increased from 21.1% in the
second quarter of fiscal 1999 to 21.3% in the second quarter of fiscal 2000,
with improved margins in both domestic and international operations for the
fiscal 2000 quarter versus the fiscal 1999 quarter. Margins in Australia, which
had been down in connection with a large contract with fees based on productive
output, showed only a slight decrease from 16.1% for the fiscal quarter ended
April 17, 1999 to 16.0% for the fiscal quarter ended April 15, 2000. The Company
expects margins in Australia to continue at approximately the current levels
through the remainder of fiscal 2000. The Company will continue its efforts to
improve gross margin where feasible, however, within the current business
climate, the Company believes that there are fewer opportunities available to
increase gross margin, and, in some areas, the Company anticipates increased
downward pressures on margins due to competition. There can be no assurance that
the Company will be successful in either increasing or maintaining gross margin.
Workers' compensation costs were 3.4% of payroll for the fiscal quarter ended
April 15, 2000 as compared to 2.9% for the fiscal quarter ended April 17, 1999.
These costs tend to vary depending upon the mix of business between clerical
staffing and light industrial staffing. The Company currently estimates that the
accrual rates for workers' compensation costs will be in the range of 3.2% to
3.5% of direct labor for fiscal 2000. These rates will be evaluated throughout
the remainder of fiscal 2000 to ensure that they remain appropriate in light of
the Company's loss trends. There can be no assurance that the Company's programs
to control workers' compensation expenses will be effective or that loss
development trends will not require a charge to costs of services in future
periods to increase workers' compensation accruals.
FRANCHISE AGENTS' SHARE OF GROSS PROFIT. Franchise agents' share of gross profit
represents the net distribution paid to franchise agents based either on a
percentage of sales or of gross profit generated by the franchise agents'
operation. Franchise agents' share of gross profit increased $314,000, or 8.5%,
for the second quarter of fiscal 2000 as compared to the second quarter of
fiscal 1999. As a percentage of sales of services and license fees, franchise
agents' share of gross profit was 2.7% and 2.6% for the second quarters of
fiscal 2000 and fiscal 1999, respectively.
SELLING AND ADMINISTRATIVE EXPENSES (INCLUDING DEPRECIATION AND AMORTIZATION).
Selling and administrative expenses increased $3.0 million, or 13.9%, for the
second quarter of fiscal 2000 as compared to the second quarter of fiscal 1999.
As a percentage of sales of services and license fees, selling and
administrative expenses increased from 14.9% for the second quarter of fiscal
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1999 to 16.2% for the second quarter of fiscal 2000. Included in the fiscal 2000
quarter are $638,000 in pre-tax charges as a result of the terminated
recapitalization transaction discussed above and approximately $213,000 of
foreign currency transaction adjustments due to declining currency exchange
rates on intercompany balances with international subsidiaries. Selling and
administrative expenses in the second quarter of fiscal 1999 were reduced as a
result of United Kingdom advance corporation tax refunds and domestic gross
receipt tax refunds. Absent the combined effect of these items, selling and
administrative expenses as a percentage of sales of services and license fees
would be 15.7% for the fiscal quarter ended April 15, 2000 as compared to 15.6%
for the fiscal quarter ended April 17, 1999, with the increase primarily
attributable to higher depreciation as a result of management information
systems implementations.
As noted above, selling and administrative expenses are impacted by the
Company's management information systems. During fiscal 1999, the Company
replaced its back-office financial reporting systems and is currently in the
process of rolling out a new branch office search and retrieval and remote data
capture module. The initial pilot for this front-end system was completed during
the third quarter of fiscal 1999 and roll out to all domestic company-owned and
selected franchise agent and licensed offices is currently underway. The Company
currently expects to complete the roll out of the system during fiscal 2001. The
Company has also implemented a wide area network which provides enhanced
communication and data transmission capabilities among the field and corporate
offices. During the first quarter of fiscal 2000, the Company implemented the
initial phase of a new billing and activities management system. The final phase
will be the implementation of a new temporary payroll system, currently
estimated to be completed in fiscal 2001.
As a result of these system initiatives, the Company has incurred increased
costs for communications, depreciation and system maintenance. The Company
believes that the new enterprise-wide systems will provide significant operating
efficiencies for both field and corporate office personnel. However, there can
be no assurance that the Company will meet anticipated completion dates for its
system initiatives, that such systems will be completed in a cost-effective
manner or that such systems will support the Company's future growth or provide
significant gains in efficiency and productivity. The failure of these systems
to meet these expected goals could result in increased system costs and could
have a material adverse effect on the Company's business, results of operations,
cash flows or financial condition.
INTEREST EXPENSE. Interest expense increased $236,000 or 46.7%, for the second
quarter of fiscal 2000 as compared to the second quarter of fiscal 1999,
reflecting higher average borrowings outstanding required to support the
Company's internal growth and management information system initiatives.
PROVISION FOR INCOME TAXES. The provision for income taxes for the second
quarter of fiscal 2000 was $1.1 million as compared to $1.9 million for the
second quarter of fiscal 1999. This decrease was due primarily to the decrease
in income before income taxes of $1.8 million. The
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effective income tax rate for the 12 weeks ended April 15, 2000 was 39.5% as
compared to 40.0% for the 12 weeks ended April 17, 1999.
24 WEEK PERIOD ENDED APRIL 15, 2000 COMPARED TO 24 WEEK PERIOD ENDED APRIL 17,
1999
SALES OF SERVICES AND LICENSE FEES. Sales of services increased $16.9 million,
or 6.1%, for the 24 weeks ended April 15, 2000 as compared to the same period in
fiscal 1999. The increase resulted from a 3.2% increase in billed hours and a
2.7% increase in average billing rates per hour. Same store sales increased
approximately 6.8% for the 24 weeks ended April 15, 2000 as compared to the same
period in fiscal 1999. The increase in average billing rates primarily reflects
changes in the Company's overall business mix and inflationary factors. Sales of
services for the 24 weeks ended April 15, 2000 increased 3.9 % and 19.5%,
respectively, for domestic business services and international business services
as compared to the same period in fiscal 1999. Excluding the effect of foreign
currency rate fluctuations, sales of services increased 21.9% for international
business services.
License fees increased $165,000 or 11.8%, for the 24 week period ended April 15,
2000 as compared to the same period in fiscal 1999 a result of increased sales
and gross profits for licensed offices.
COSTS OF SERVICES. Costs of services increased $13.7 million, or 6.2%, for the
24 week period ended April 15, 2000 as compared to the same period in fiscal
1999. Gross margin decreased from 21.1% in the fiscal 1999 period to 21.0% for
the same period in fiscal 2000, primarily due to lower margins in the
international operations. Workers' compensation costs were 3.4% of payroll for
the 24 week period ended April 15, 2000 and 2.9% for the 24 week period ended
April 17, 1999.
FRANCHISE AGENTS' SHARE OF GROSS PROFIT. Franchise agents' share of gross profit
increased $673,000 or 9.6%, for the 24 weeks ended April 15, 2000 as compared to
the 24 weeks ended April 17, 1999. As a percentage of sales of services and
license fees, franchise agents' share of gross profit increased from 2.5% during
the fiscal 1999 period to 2.6% for the fiscal 2000 period.
SELLING AND ADMINISTRATIVE EXPENSES (INCLUDING DEPRECIATION AND AMORTIZATION).
Selling and administrative expenses increased $4.5 million, or 10.7%, for the 24
weeks ended April 15, 2000 as compared to the 24 weeks ended April 17, 1999. As
a percentage of sales of services and license fees, selling and administrative
expenses increased from 15.1% for the fiscal 1999 period to 15.8% for the fiscal
2000 period. The increase in selling and administrative expenses as a percentage
of sales of services and license fees was primarily due to the same factors as
noted above for the second quarter of fiscal 2000. Absent the combined effect of
the items noted for the second quarter, selling and administrative expenses as a
percentage of sales of services and license fees increased from 15.9% for the
fiscal 1999 period to 16.1% for fiscal 2000, primarily as a result of increased
depreciation and communication costs associated with the management information
system initiatives.
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INTEREST EXPENSE. Interest expense increased $472,000, or 44.2%, for the 24
weeks ended April 15, 2000 as compared to the 24 weeks ended April 17, 1999,
reflecting higher average borrowings outstanding required to support the
Company's systems implementations and internal growth.
PROVISION FOR INCOME TAXES. The provision for income taxes was $2.5 million for
the fiscal 2000 period as compared to $3.5 million for the same period in fiscal
1999, reflecting a decrease in pre-tax income from continuing operations of $2.4
million. The effective income tax rate for the 24 weeks ended April 15, 2000 was
39.5% as compared to 40.0% for the same period in fiscal 1999. The Company
currently estimates that the effective income tax rate for the remainder of
fiscal 2000 will be approximately 39.5%.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has financed its operations through cash generated by
operating activities and through various forms of debt and equity financings and
bank lines of credit. The Company's principal use of cash is for financing of
accounts receivable, particularly during periods of growth. Temporary personnel
are generally paid on a weekly basis while payments from customers are generally
received 30 to 60 days after billing for business services. As a result of
seasonal fluctuations, accounts receivable balances are historically higher in
the fourth fiscal quarter and are generally at their lowest during the first
fiscal quarter.
Net cash provided by operating activities was $12.3 million for the 24 weeks
ended April 15, 2000 and $5.4 million for the 24 weeks ended April 17, 1999. The
increase is primarily due to changes in deferred income taxes which reflect net
income tax benefits arising from the discontinued medical operations, increased
depreciation as a result of management information system implementations and
changes in due from licensee balances.
Cash used for capital expenditures, which are generally for software, computers
and peripherals, and office furniture and equipment, totaled $1.7 million for
the 24 weeks ended April 15, 2000 and $4.2 million for the 24 weeks ended April
17, 1999. Capital expenditures during each of the fiscal 2000 and 1999 periods
are primarily associated with payments for the Company's next generation
management information and support systems. Capital expenditures for these
systems are expected to be approximately $13.1 million including costs of
hardware, software and internal and external costs associated with
implementation of the project. The Company has incurred $11.5 million of such
capital expenditures through the end of the second quarter of fiscal 2000 and
expects to spend a total of approximately $1.6 million during the remainder of
fiscal 2000.
During the third quarter of fiscal 1999, the Company scaled back its near-term
acquisition plans and is currently focusing on internal growth. The Company has
no plans to make major
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acquisitions at this time but will be reviewing future expansion opportunities
through acquisitions in selected areas.
The Company decreased borrowings by a net $8.6 million during the 24 weeks ended
April 15, 2000. The Company's ability to maintain relatively lower levels of
short-term borrowings during the fiscal 2000 period is primarily attributable to
lower levels of sales growth and to reductions in capital expenditures for
management systems implementations, as compared to the 24 weeks ended April 17,
1999.
The Company's credit facility provides for a secured five-year revolving line of
credit up to $90.0 million with direct advances under the agreement limited by
outstanding irrevocable standby letters of credit up to a maximum amount of
$20.0 million. Total advances are also limited under formulas based on earnings
before interest, taxes, depreciation and amortization (EBITDA) and total debt to
total capitalization. The EBITDA formula is calculated on a rolling four-quarter
basis. As of April 15, 2000 the Company had $17.9 million available under its
revolving credit facility, with $5.1 million outstanding for direct advances and
$9.6 million outstanding for letters of credit.
The Company's debt facilities contain certain financial and other covenants, the
most restrictive of which is a total debt to capitalization ratio. The Company
was in compliance with these covenants as of April 15, 2000.
In July 1998 the Company acquired substantially all of the assets of The
Personnel Connection, Inc. Consideration for the acquisition consisted of cash
and common stock, with a contingent obligation to issue up to an additional
100,000 shares of common stock dependent on the fair market value of the
Company's stock subsequent to the acquisition. On January 27, 2000 the Company
paid the selling parties $800,000 in lieu of issuing additional shares, with an
offsetting reduction in additional paid-in-capital.
The Company has filed registration statements with the Securities and Exchange
Commission with respect to an aggregate of 2.3 million shares of common stock
reserved for issuance under its equity incentive plans and 1.5 million shares of
common stock for use in the Company's acquisition program. As of April 15, 2000,
options to purchase 819,391 shares of common stock were outstanding under the
Company's equity incentive plans and 420,499 shares of common stock had been
issued with respect to acquisitions.
On May 5, 2000 the Company announced that its Board of Directors approved the
repurchase of up to one million shares of its outstanding common stock in the
open market at prevailing prices for use in the Company's employee stock
purchase plan, stock options plans and other corporate purposes. As of May 29,
2000, the Company had repurchased 150,000 shares for aggregate cash
consideration of $712,126.
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The Company does not anticipate declaring or paying any cash dividends on its
common stock in the foreseeable future.
The Company believes that cash from operations and the Company's current
borrowing capacity will be sufficient to meet anticipated needs for working
capital and capital expenditures at least through the next twelve months.
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PART II. OTHER INFORMATION
--------------------------------------------------------------------------------
Item 1. LEGAL PROCEEDINGS
On March 9, 2000, a stockholder class action complaint was
filed in the Superior Court of the State of California, County
of Contra Costa, by Jeff Mucha, a stockholder purporting to
act individually and on behalf of all public stockholders of
Westaff, Inc., other than the defendants, who are similarly
situated. The defendants named in the case were Westaff, Inc.,
Jack D. Samuelson, Gilbert L. Sheffield, W. Robert Stover and
Michael K. Phippen and Does 1 - 25.
The complaint alleged, among other things, that the cash
merger consideration of $10.00 per share for the
recapitalization and merger transaction that the Company
announced in its press release on March 8, 2000 was inadequate
and unfair, and constituted self-dealing and a breach of
fiduciary duties. The plaintiff sought to have the court
certify the complaint as a class action, enjoin consummation
of the transactions until the Company ensured the highest
possible price for the shareholders, and award the plaintiff
and other alleged class members compensatory damages and
attorneys' fees and other costs. On May 22, 2000 the lawsuit
was dismissed without prejudice due to the termination of the
recapitalization transaction as described in Items 1 and 2
herein.
Also on March 9, 2000, Synergy Staffing, Inc. filed a
complaint in the Superior Court of the State of California for
the County of Los Angeles, Central District. The defendants
named in the case are Westaff, Inc., W. Robert Stover, Michael
K. Phippen, Paul A. Norberg, Jack D. Samuelson, Gilbert L.
Sheffield and Mike Ehresman and Does 1 - 10.
The complaint alleges, among other things, that the defendants
fraudulently induced plaintiffs to sell the assets of The
Personnel Connection, Inc. The plaintiff seeks to have the
court grant a jury trial, and award the plaintiff compensatory
and punitive damages and attorneys' fees and other costs. The
Company believes that the lawsuit is without merit and intends
to vigorously defend the action. The Company has petitioned to
compel arbitration and is evaluating its potential
cross-claims.
Except as disclosed above, the Company is not currently a
party to any litigation that is expected to have a material
adverse effect on its business, results of operations,
financial position or cash flows. However, from time to time
the Company has been threatened with, or named as a defendant
in, lawsuits, including countersuits brought by former
franchise agents, and administrative claims and lawsuits
brought by employees or former employees.
Item 2. CHANGES IN SECURITIES
Not applicable.
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Item 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
Item 5. OTHER INFORMATION
Not applicable.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT INDEX
Exhibit
Number Description
------- -----------
10.16 Mutual Termination and Release Agreement dated as of May 3,
2000 by and between Westaff Acquisition Corp., Westaff, Inc.,
The Stover Revocable Trust, The Stover 1999 Charitable
Remainder Unitrust, The Stover Foundation, Cornerstone Equity
Investors IV, L.P. and Centre Capital Investors III, L.P.
27.1 Financial Data Schedule
-----------------
(b) Reports on Form 8-K
Current Report on Form 8-K dated March 10,
2000 filed with the Securities and Exchange Commission on
March 10, 2000.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WESTAFF, INC.
May 30, 2000 /s/ Paul A. Norberg
------------ ------------------------
Date Paul A. Norberg
Executive Vice President and
Chief Financial Officer
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