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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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 28, 2000
COMMISSION FILE NUMBER 000-27130
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WESTAFF, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-1266151
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation and organization)
301 LENNON LANE, WALNUT CREEK, CA 94598-2453
(Address of principal executive offices, including zip code)
(925) 930-5300
(Registrant's telephone number)
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $0.01 PAR VALUE PER SHARE
(Title of class)
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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. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant was approximately $17,443,460 as of December 29, 2000, 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 29, 2000 the Registrant had outstanding 15,819,199 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 23, 2001 are incorporated by reference into this
Form 10-K Report.
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INDEX
WESTAFF, INC.
PAGE NO.
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PART I
ITEM 1. BUSINESS.................................................... 3
ITEM 2. PROPERTIES.................................................. 20
ITEM 3. LEGAL PROCEEDINGS........................................... 21
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......... 21
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS....................................... 22
ITEM 6. SELECTED FINANCIAL DATA..................................... 23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................. 23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................. 32
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.................................. 32
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.......... 33
ITEM 11. EXECUTIVE COMPENSATION...................................... 35
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT................................................ 35
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 35
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM
8-K....................................................... 36
SIGNATURES.................................................. IV-2
POWER OF ATTORNEY........................................... IV-3
2
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 15 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 28, 2000 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 28, 2000 operated through over 350
business services offices in 44 states, the District of Columbia and five
foreign countries. The Company is currently proceeding with arrangements to
operate in Mexico. As of October 28, 2000, approximately 72.6% of these offices
were owned by the Company, 22.9% were operated by franchise agents and 4.5% were
operated by licensees.
The Company differentiates itself from other large temporary staffing
companies by primarily 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.
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.
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, the Company's then President and Chief
Executive Officer resigned and its Chairman of the Board of Directors assumed
the position of interim President and Chief Executive Officer. The Company's
search for a new Chief Executive Officer is on-going.
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."
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References in this Form 10-K to (i) the "Company" or "Westaff" refer to
Westaff, Inc., its predecessor and their respective subsidiaries, unless the
context otherwise requires, and (ii) "franchise agents" refer to the Company's
franchisees in their roles as limited agents of the Company in recruiting job
applicants, soliciting job orders, filling those orders and handling collection
matters upon request, but otherwise refer to the Company's franchisees in their
roles as independent contractors of the Company.
BUSINESS STRATEGY
The Company's objective is to become a leading provider of essential support
services in secondary markets throughout the United States and in selected
international markets. Pending the completion of the Company's search for a new
Chief Executive Officer, 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 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 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
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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. The Company continually evaluates the quality,
functionality and performance of its systems in an effort to ensure that these
systems meet the operational needs of the Company. During fiscal 1999 and fiscal
2000, the Company completed the implementation and rollout of a frame relay
network, completed the conversion of the majority of its back-office functions
to an integrated enterprise resource planning ("ERP") application provided by
Lawson Software and is in the process of completing the rollout of the Westaff
Automated Visionary Enterprise ("WAVE"), a full-featured branch office tool
designed to assist in order management, candidate search and recruiting,
customer service management, and sales management that also allows for sharing
of information between offices. The Company is presently finalizing plans to
convert the temporary payroll functions to the Lawson system and expects to
complete this process during fiscal 2002. The Company continues to invest in
efforts to upgrade and improve the functionality, performance and utility of its
systems. Furthermore, the Company is currently working on a collaborative
agreement with Lawson Software to provide enhanced functionality to better meet
the needs of the temporary staffing industry. The Company believes that its
investments in information technology will increase management's ability to
store, 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" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
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. Furthermore, there can be significant volatility in
these costs. During fiscal 2000, the Company recorded additional charges of
$2.1 million to increase workers' compensation accruals as a result of medical
inflation, higher benefits costs and an increase in claims frequency. The
Company has developed risk management programs and loss control strategies 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 current growth strategy focuses on internal growth. In the
future, the Company may pursue strategic external and complementary
acquisitions.
INTERNAL GROWTH. The principal element of the Company's growth strategy has
been, and continues to be, its focus on internal growth. Same store sales from
continuing operations increased 8.0%, 3.6% and 3.3% in fiscal 1998, fiscal 1999
and fiscal 2000, 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 incentive compensation
plans to encourage branch office managers and staff to increase
productivity and profits at the branch level while maintaining
accountability for costs and
5
collections of accounts receivable. For account representatives, the
Company added a new commission plan for fiscal 2001 to encourage sales
growth. In addition, the Company has maintained its corporate-level branch
management function to establish and monitor branch office performance
targets and develop programs to support branch operations. The Company
eliminated a senior level management position in branch operations
following the cancellation of the recapitalization agreement in May 2000.
- SELECTIVELY EXPAND ON-SITE AND ON-LOCATION PROGRAMS. The Company has taken
advantage of industry trends by continuing to promote its "On-Location"
program and its on-site (also referred to as "vendor-on-premises")
programs. As of October 28, 2000, the Company had 18 On-Location sites and
34 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 typically 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 and franchise agent offices primarily in existing
markets to benefit from common area management, cross-marketing
opportunities and leveraging of administrative expenses. The Company's
corporate and operating management jointly develop expansion plans for new
offices based upon various criteria, including market demand, availability
of qualified personnel, the regulatory environment in the relevant market
and whether a new office would complement or broaden the Company's current
geographic network. In the past, the Company preferred to limit expansion
of its franchise agent program to proven industry professionals interested
in pursuing markets that are not strategic to the Company, but since the
third quarter of fiscal 2000 the Company has been willing to consider
other qualified franchise prospects as it plans to grow its franchise
program. The Company continues to support its current licensees, but it no
longer offers a license agreement to new prospects.
- DEVELOP LINES OF BUSINESS. While the Company intends to maintain its focus
on the essential services sector of the staffing industry, its growth
strategy includes expanding its permanent placement line of business and
developing additional lines of business such as accounting and finance
personnel. The Company believes that there are opportunities to enhance
its sales in complementary lines of business and position it to better
serve the multiple needs of its customers.
- EXPAND INTERNATIONAL PRESENCE. The Company intends to expand its
international presence primarily through internal growth. As of
October 28, 2000, the Company operated 55 offices in Australia, the United
Kingdom, Norway, New Zealand and Denmark, and had begun its expansion into
Mexico. The Company has experienced growth in its international markets,
with sales of services, excluding the effect of foreign currency rate
fluctuations, increasing 19.6% in fiscal 1999 compared to fiscal 1998 and
13.0% in fiscal 2000 compared to fiscal 1999. The Company believes that
its established international presence will enable it to take advantage of
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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. The Company did not pursue any strategic external acquisitions in
fiscal 2000 nor has it pursued any such acquisitions in fiscal 2001 to date. The
Company currently has no plans to pursue strategic acquisitions during fiscal
2001.
In evaluating potential acquisition candidates, the Company in the past has
focused 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 used, and may
continue to use, a team approach by making select 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 typically are brought under the
Company's uniform risk management program and key personnel of acquired
companies often became part of field management. Marketing, sales, field
operations and personnel programs must be reviewed and, where appropriate,
conformed to the best practices of the Company's existing operations.
In fiscal 2000, the Company engaged in a limited number of "internal"
acquisitions, i.e., the purchase of existing franchise agent or licensed
operations, and may continue doing so in fiscal 2001. The Company has a right of
first refusal on any sale of franchise agent or licensed operations. Since the
beginning of fiscal 2000, the Company has acquired one business services
licensed office, but it has not acquired the interests of any franchise agents.
The Company is currently negotiating with two licensees who wish to purchase the
Company's interests in their licensed operations.
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. During the first quarter of
fiscal 2001, the Company opened an Accounting Division to focus on placing
skilled accounting and finance personnel. As of October 28, 2000, the Company's
domestic and international business services operations comprised over 350
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, billboard and other creative advertising are used in
certain markets to enhance the Company's name recognition.
As of October 28, 2000, the Company's international operations comprised 55
Company-owned offices: 18 in Australia; 23 in the United Kingdom; six in Norway;
four 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 1999 and
fiscal 2000, 13.4% and 13.9% respectively, of total system revenues from
continuing operations were derived from the
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Company's international operations. Same store sales for international
operations increased 12.3% and 13.8% for fiscal 1999 and fiscal 2000,
respectively, as compared to the same prior year periods. A total of 23 offices
in the United Kingdom, 18 offices in Australia and six offices in Norway have
certification under ISO 9002, a total quality management program.
OPERATIONS
As of October 28, 2000, the Company operated through a network of over 350
business services offices in 44 states, the District of Columbia and five
foreign countries. The Company is currently proceeding to operate in Mexico in
fiscal 2001, and it incorporated a subsidiary there during the fourth quarter of
fiscal 2000. 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.
NOV. 2, NOV. 1, OCT. 31, OCT. 30, OCT. 28,
1996 1997 1998 1999 2000
-------- -------- -------- -------- --------
Number of Offices by Ownership(1):
Company-owned....................................... 217 226 267 264 257
Franchise agent..................................... 103 103 82 75 81
Licensed............................................ 7 11 25 24 16
--- --- --- --- ---
Total............................................. 327 340 374 363 354
=== === === === ===
Number of Offices by Location(1):
Domestic............................................ 280 288 315 308 299
International....................................... 47 52 59 55 55
--- --- --- --- ---
Total............................................. 327 340 374 363 354
=== === === === ===
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(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. Branch managers generally report to area and/or regional managers.
As of December 29, 2000, there were three zone managers and 13 regional managers
for the domestic Company-owned offices. The Company has a variety of incentive
plans in place for its domestic and international offices. One or more of these
plans may be offered to branch staff as well as branch, area, regional and zone
managers. These plans are designed to motivate employees to maximize the growth
and profitability of their offices, control costs and/or improve collections of
accounts receivable. The Company believes that its incentive-based compensation
plans should 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 28,
2000, the Company's 37 business services franchise agents operated 81 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
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cost of services, respectively, and during fiscal 1998, 1999, and 2000,
franchise agents offices represented 21.6%, 20.2%, and 19.8% 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 or license
agreements. In the past five fiscal years, the Company has commenced two actions
to enforce the non-competition covenants. One of those actions was resolved in
the Company's favor, and one is presently pending. See "Factors Affecting Future
Operating Results--Risks Related to Franchise Agent and Licensed Operations."
LICENSED OFFICES. Under the Company's license program, the licensee is the
employer of the temporary employees and the owner of the customer accounts
receivable. The Company typically grants licensees the exclusive right to
establish an office to market and provide light industrial and clerical
temporary personnel or light technical temporary personnel within a designated
geographic area. Licensees receive the same basic training from the Company as
franchise agents and attend seminars, participate in marketing programs and use
the Company's sales literature. The Company also assists its licensees in
obtaining business from its national accounts and provides them with national,
regional and cooperative local advertising.
Licensees operate within the framework of the Company's policies and
standards. They recruit and employ temporary employees according to the
Company's guidelines, and pay these employees using the Company's payroll
procedures. However, licensees must obtain their own workers' compensation,
liability, fidelity bonding and state unemployment coverage, which determine
their payroll costs. The Company bills all licensees' customers and collects
their remittances. License agreements are for a term of five years and are
renewable for multiple five-year terms. As of October 28, 2000, the Company's
six
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business services licensees operated 16 licensed offices. The Company is
currently negotiating with two licensees who wish to purchase the Company's
interests in their licensed operations. These two licensees operate a total of
four 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 and the Company continually
evaluates the quality, functionality and performance of its systems in an effort
to ensure that these systems meet the operational needs of the Company.
The Company's management information systems provide functionality in both
the field offices and in the corporate back-office to support the operations of
the Company. Field office functionality includes the WAVE, a full-featured
branch office tool, designed to assist in order management, candidate search and
recruiting, customer service management, and sales management that also allows
for sharing of information between offices. The Company began implementing the
WAVE in fiscal 1999. As of December 31, 2000, 201 offices were live on the WAVE.
The Company expects to complete the rollout of the WAVE by the end of the fourth
quarter of fiscal 2001. During the course of the rollout, the Company was
informed that the third party software vendor for the WAVE ceased operations.
The Company has acquired license rights to the source code for this application
and future development of this product is being handled by the Company's
internal Information Systems staff. The Company is currently developing
enhancements to allow customer and employee information on the WAVE to interface
directly with the billing and payroll applications to improve efficiency.
During fiscal 2000, the Company completed the implementation and rollout of
a frame relay network which allows Company-wide access to field and corporate
office applications, electronic mail, MS Office, Internet access, Westnet (the
Company's intranet) and also allows for enhanced communication and data
transmission capabilities among the field, corporate offices, customers and
essential employees. This functionality is provided down to the desktop level of
all branch office personnel utilizing thin-client technology. This design
affords high efficiency through low-cost, low bandwidth data lines. Thin-client
technology also affords the ability to deploy and upgrade applications very
quickly to all personnel. Since all applications reside within the two corporate
data centers, each desktop does not have to be touched when an upgrade is
performed. This will result in potential cost reductions in the future, as
personnel will not have to be dispatched to each office to perform any upgrades.
In addition, field offices use 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, field offices capture and
input customer, employee, billing and payroll information. This information is
transferred daily to centralized servers, where payroll, billing and financial
information is processed overnight. 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. Invoices are also processed daily and are mailed
10
from the Company's centralized corporate offices. This system also supports
branch office operations with daily, weekly, monthly and quarterly reports that
provide information ranging from customer activity to office profitability.
Most of the Company-owned, franchise agent and licensed offices are served
by the Company's new systems architecture. The few offices that are not
currently linked to the Company's corporate offices via the wide area network
("WAN") access these systems by either a dial-up virtual private network ("VPN")
or via dial-up access to the Company's remote file transfer servers to transmit
payroll data. All offices are supported by the Company's in-house technical
support department, which is responsible for computer installations, training
and technical support.
During fiscal 1999 and fiscal 2000, the Company converted the majority of
its back-office functions to an integrated ERP application provided by Lawson
Software. Presently, major back office functions including general ledger,
accounts payable, accounts receivable, purchasing, regular payroll and asset
management operate within the integrated Lawson system. These systems are
tightly integrated and provide for "drill-around" capabilities among the various
back-office applications. The Company also has implemented the Lawson system's
datamart capabilities that provide for ease of reporting and financial analysis
as well as the sharing of financial and operational information to zone and
regional managers via the Company's intranet. While not yet implemented, the
Lawson system also includes features to permit the Company's customers to review
their own billing and accounts receivable records via the Internet. Other
features will allow Company employees and, ultimately, temporary staff to review
their own payroll, benefits and human resource information, all via the use of
the Internet.
Currently, temporary payroll is processed on the Company's legacy payroll
system. The Company is finalizing plans to convert the temporary payroll
functions to the Lawson system during fiscal 2002. The Company continues to
invest in efforts to upgrade and improve the functionality, performance and
utility of its systems. Furthermore, the Company is currently working on a
collaborative agreement with Lawson Software to provide enhanced functionality
and seamless integration with front-office applications to better meet the needs
of the temporary staffing industry. 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.
Through the end of fiscal 2000, the Company incurred capital expenditures of
approximately $12.5 million in connection with the implementation of the WAN,
conversion to the Lawson system and implementation of the WAVE. This includes
costs of hardware, software and internal and external costs associated with
these projects, of which $6.2 million was incurred during fiscal 1998,
$4.9 million was incurred in fiscal 1999, and $1.4 million was incurred in
fiscal 2000. Capital expenditures relating to key information services projects
are currently estimated to be approximately $3.5 million for fiscal 2001. 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 workers'
compensation loss prevention and loss control strategies including: customer
safety evaluations, individual local office expense allocation formulas, and
aggressive claims management techniques to help control and reduce risks.
11
The Company's specific loss control strategies include a written screening
process for light industrial work sites to ensure that temporary employees are
placed within the Company's strict safety guidelines. A new Corporate Safety
Manager was hired to assist offices in all safety program areas including
inspections of high-profile account facilities. The Company requires general as
well as site-specific safety orientation training and appropriate personal
protective equipment in light industrial 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. In addition, the Company
carefully monitors the job assignments to prevent placing employees in certain
high-risk jobs that prove too risky or are prohibited under the Company's
guidelines.
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 that is based heavily upon the local
office's actual claims experience. The Company also employs a dividend program
for its franchise agent offices that 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 creative and aggressive claims
management techniques to help control losses. After each 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 or benefits
drastically reduced. 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, and this intricate 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 on-line. On an ongoing
basis, the Company's workers' compensation specialists actively analyze claims
to challenge 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, Spherion Corp. (commercial
12
staffing segment), 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.
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. Furthermore, the
United States economy is currently showing signs of a possible economic
slowdown. Should an economic slowdown or recession occur, competition for
customers in the staffing industry would increase. 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, in recent years the entire staffing industry has been 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 28, 2000 it had approximately
35,000 temporary employees on assignment through its business services division
and employed 1,130 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
Essential Support Services Leader-Registered Trademark-, On Location &
Essential-Registered Trademark-, and Accountants USA-Registered Trademark-. The
Company's applications to federally register the service marks Westaff Wave(SM)
and It's About Respect(SM) are pending. The Company is no longer pursuing a USA
Temp service mark.
13
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 accompanying Consolidated Financial
Statements and Notes thereto. In connection with the decision to discontinue the
medical operations, the Company recorded an after-tax loss in fiscal 1998 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.
During fiscal 1999, the Company sold certain of its franchise agent and
Company-owned medical offices and 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 as well as
due from licensee balances. In fiscal 1999, the Company recorded after-tax
losses relating to discontinued operations of $6.6 million or $0.42 per share.
These losses represented reserves for trade and Medicare accounts receivable and
due from licensee balances, and also included additional operating losses
resulting from the extended period required to close the sale and a reduction in
estimated proceeds from the sale.
During fiscal 2000, the Company recorded additional after-tax losses related
to discontinued operations of $784,000 or $0.05 per share. This charge was
primarily due to lower than expected settlements of Medicare cost reports. The
Company has appealed a number of cost report settlements and hopes to recover
additional funds in the future; however, there can be no assurance that the
Company will be successful in its appeals.
As of October 28, 2000, the Company had received $1.7 million in cash
proceeds from the sale of its medical operations, with an additional
$1.0 million due on the balance of the purchase price. The $1.0 million balance
due, plus interest thereon, is owed to the Company under a guaranteed promissory
note, which is in default. See Item 3, "Legal Proceedings."
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 Medicare accounts receivable and
due from licensee balances and estimated costs to be incurred in filling 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 Medicare
accounts receivable and due from licensee balances on terms and costs similar to
those estimated by the Company. Furthermore, there can be no assurance that the
Company will be successful in collecting the remaining $1.0 million outstanding
purchase price balance due on the sale of the medical business. Should actual
costs differ materially from those estimated by management, the Company would
record additional losses (or gains) in future periods. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Discontinued Operations."
14
FACTORS AFFECTING FUTURE OPERATING RESULTS
This Form 10-K contains forward-looking statements concerning the Company's
future programs, 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 ON 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; however, during recent fiscal years internal growth rates have been
slowing. Growth through acquisitions occurred prior to fiscal 1999, when the
Company scaled back its near-term acquisition plans other than franchise
buybacks. 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. Furthermore, the United States
economy is currently showing signs of a possible economic slowdown. Should an
economic slowdown or recession occur, competition for customers in the staffing
industry would increase and may adversely impact management's allocation of the
Company's resources and result in declining revenues. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business--Growth Strategy."
RELIANCE ON EXECUTIVE MANAGEMENT. The Company has retained an executive
search firm to identify suitable candidates for the position of Chief Executive
Officer, and the Company's Compensation Committee is screening and interviewing
candidates. The failure to find a suitable successor candidate for the position
of Chief Executive Officer, or the result of a prolonged search for that
candidate, could have a material adverse effect on the Company's ability to
manage its personnel and efficiently address changes in the business and its
operations. In addition, without a Chief Executive Officer, the Company would be
even more dependent on its senior executives and outside directors. The Company
is highly dependent on its senior executives, including W. Robert Stover, its
Chairman and founder, who has been serving as interim President and Chief
Executive since May 3, 2000, when the recapitalization agreement was terminated
and Michael K. Phippen resigned; Dirk A. Sodestrom, currently Senior Vice
President and Chief Financial Officer who has been serving in that capacity
since January 1, 2001, following Paul A. Norberg's retirement, and on the other
members of its senior 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 and that agreement remains in
effect as written, except for a subsequent salary increase when he assumed the
position of interim President and Chief Executive Officer. The Company has
entered into a new employment agreement with Mr. Sodestrom effective January 1,
2001 that contains a requirement for
15
six-months' advance notice of termination. Employment arrangements with all of
the Company's executive officers other than Mr. Stover are at-will. The loss of
the services of either Mr. Stover or Mr. Sodestrom and other senior executives
or other key executive personnel could have a material adverse effect on the
Company's business, results of operations, cash flows or financial condition.
RELIANCE ON MANAGEMENT INFORMATION SYSTEMS. The Company believes its
management information systems are instrumental to the success of its
operations. The Company's business depends on its ability to store, retrieve,
process and manage significant amounts of data. The Company continually
evaluates the quality, functionality and performance of its systems in an effort
to ensure that these systems meet the operational needs of the Company. During
fiscal 1999 and fiscal 2000, the Company completed the implementation and
rollout of a frame relay network, completed the conversion of the majority of
its back-office functions to an integrated ERP application provided by Lawson
Software and is in the process of completing the rollout of the WAVE, a
full-featured branch office tool, designed to assist in order management,
candidate search and recruiting, customer service management, and sales
management that also allows for sharing of information between offices. The
Company is presently finalizing plans to convert the temporary payroll functions
to the Lawson system and expects to complete this process during fiscal 2002.
The Company continues to invest in efforts to upgrade and improve the
functionality, performance and utility of its systems. Furthermore, the Company
is currently working on a collaborative agreement with Lawson Software to
provide enhanced functionality to better meet the needs of the temporary
staffing industry. The Company has, in the past, discovered problems in
implementing, upgrading or enhancing 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,
upgrades or enhancements, that such work will be completed in a cost-effective
manner, or that such replacements, upgrades and enhancements will support the
Company's future growth or provide significant gains in efficiency. The failure
of the replacements, upgrades 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."
RISKS RELATED TO INTERNATIONAL OPERATIONS. The Company presently has
operations in Australia, the United Kingdom, Norway, New Zealand and Denmark.
The Company began to establish operations in Mexico in the fourth quarter of
fiscal 2000, and it plans to operate there during fiscal 2001. 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 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
16
actuaries and makes changes to the rates as necessary based primarily upon
historical loss trends. Periodically, 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. During fiscal 2000, the Company
recorded charges of $2.1 million to increase workers' compensation accruals
based on loss exposure. 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."
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 1999 and 2000, no single
customer of the Company accounted for more than 1.0% and 3.0%, respectively, 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. During fiscal
1999 and fiscal 2000, the Company incurred costs of $2.5 million and
$4.0 million, respectively, for bad debts. 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."
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 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
17
low unemployment, the competition among temporary staffing firms for qualified
personnel increases. Many regions in which the Company operates have in the past
and may continue to experience 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. While the current
economic environment is facing uncertainties, 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."
HIGHLY COMPETITIVE MARKET. The temporary staffing industry is highly
competitive with few barriers to entry. The Company believes that the majority
of clerical, light industrial and light technical temporary staffing companies
are local, full-service or specialized operations with fewer than five offices.
Within local markets, typically no single company has a dominant share of the
market. The Company also competes for qualified temporary personnel and
customers with larger, national, full-service and specialized competitors in
local, regional, national and international markets. Many of the Company's
principal competitors have greater financial, marketing and other resources than
the Company. In addition, there are a number of medium-sized firms which compete
with the Company in certain regional or specialized markets where such firms may
have a stronger presence. Furthermore, certain of its current and prospective
customers may decide to fulfill their staffing needs independently.
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."
18
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 undocumented workers, other criminal
activity or torts, claims under health and safety regulations and other claims.
There can be no assurance that the Company will not be subject to these types of
claims, which may result in negative publicity and the payment by the Company of
monetary damages or fines 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 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 1999 and fiscal 2000, 20.6% and 20.1%,
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 2000 (based on sales volume) accounted
for 11.1% 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. The Company is
currently negotiating with two licensees who wish to purchase the Company's
interests in their licensed operations. These two licensees operate a total of
four licensed offices. 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 or
license agreements. In the past five fiscal years, the Company has commenced two
actions to enforce the non-competition covenants. One of those actions was
resolved in the Company's favor, and one is presently pending. Should former
franchise agents prevail at trial of such actions, or successfully appeal, the
Company's ability to prevent franchise agents or licensees from operating
competitive temporary staffing businesses, could be adversely affected. The
Company has incurred, and may continue to incur, substantial attorneys' fees and
litigation expenses for such lawsuits, both in furtherance of the Company's role
as plaintiff and in defense of counterclaims or cross-complaints, for which
insurance coverage typically is not available.
RISK OF NASDAQ DELISTING. There are several requirements for continued
listing on the Nasdaq National Market ("Nasdaq") including, but not limited to,
a minimum stock price of one dollar per share and $4.0 million in tangible net
worth. If the Company's Common Stock price closes below one dollar per share for
30 consecutive days, the Company may receive notification from Nasdaq that its
Common Stock will be delisted from the Nasdaq unless the stock closes at or
above one dollar per share for at least ten consecutive days during the 90-day
period following such notification. In the future, the Company's Common Stock
price or tangible net worth may fall below the Nasdaq listing requirements, or
the Company may not comply with other listing requirements, with the result
being that its Common Stock might be delisted. If its Common Stock is delisted,
the Company may list its Common Stock for trading over-the-counter or may apply
for listing on the Nasdaq Smallcaps Market, subject to Nasdaq's approval.
Delisting from the Nasdaq could adversely affect the liquidity and price of the
Company's Common Stock and it could have a long-term impact on the Company's
ability to raise future capital through a sale of its Common Stock. In addition,
it could make it more difficult for investors to obtain quotations or trade this
stock.
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"). The conversion rates between the euro
and the participating nations' currencies have been fixed irrevocably as of
January 1, 1999, with the participating national currencies being removed from
19
circulation between January 1 and June 30, 2002 and replaced by euro notes and
coinage. A significant amount of uncertainty exists as to the effect the euro
will have on the marketplace. Currently, the Company does not operate in any
countries that are part of the EMU; however, the Company operates in the United
Kingdom, Norway and Denmark, which may join the EMU at a future date. To date,
the Company has not incurred any material costs of addressing the euro formation
and does not anticipate incurring material costs in the future; however, the
Company will continue to assess the effect the euro formation may have on its
internal systems and the sales of its services and take appropriate actions
based on the results of such assessment. There can be no assurance that this
issue and its related costs will not have a material adverse effect on the
Company's future 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."
RISKS RELATED TO ACQUISITIONS. In fiscal 2000, the Company did not make any
strategic external acquisitions nor did it buy back the interests of any
franchise agents. Since the start of fiscal 2000, the Company made one internal
acquisition, a buyout of one licensee that the Company believes was not
material. The Company has no near-term acquisition plans other than possible
franchise agent buybacks or other licensee buyouts, and no such acquisition
transactions are presently pending.
In the event that the Company pursues acquisitions in the future, 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 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 29, 2000, the Company owned four buildings,
totaling approximately 66,000 square feet, which house its corporate
headquarters. Certain of these buildings were subject to a trust deed that has
been fully repaid. In fiscal 2000, the Company sold two buildings consisting of
approximately 10,000 total square feet for cash proceeds of $1.0 million and has
consolidated its corporate operations utilizing office space made available from
the discontinuation of its medical operations.
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.
20
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. 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,
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 sought to have the court grant a jury trial, and award the plaintiff
compensatory and punitive damages and attorneys' fees and other costs. The
Company's petition for an order compelling arbitration was granted, the Superior
Court lawsuit has been stayed, a demand for arbitration was made and an
arbitration proceeding is pending.
On or about August 18, 2000, Intrepid U.S.A. Inc. filed a demand for
arbitration with the American Arbitration Association in San Francisco,
California. The defendants named in the demand are Westaff (USA), Inc., Western
Medical Services, Inc. and two other subsidiary corporations that were involved
in the operation of the Company's medical business.
The demand alleges, among other things, that the defendants made
misrepresentations and otherwise breached the asset purchase agreement for the
sale of substantially all the assets of the Company's medical business. The
defendants filed an answering statement, counterclaim and demand against
guarantors, denying all liability and seeking payment for the accelerated
$1.0 million balance of the purchase price and other charges due to the Company.
The petitioner filed a reply in which it expanded its damages claim. Discovery
proceedings have been conducted and an arbitration hearing has been scheduled.
Except as disclosed above, the Company is not currently a party to any
material litigation. 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 or licensees, and administrative claims and lawsuits
brought by employees or former employees.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
21
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's 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.
HIGH LOW
-------- --------
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 ended January 22, 2000.................. 8.63 5.63
Second Quarter ended April 15, 2000................... 9.25 7.06
Third Quarter ended July 8, 2000...................... 8.38 3.86
Fourth Quarter ended October 28, 2000................. 5.06 3.00
Fiscal 2001:
First Quarter through January 25, 2001................ 3.25 1.50
On December 29, 2000, the last reported sales price on the Nasdaq National
Market for the Common Stock was $2.00 per share. As of December 29, 2000, there
were approximately 1,345 beneficial owners of the Common Stock.
On June 20, 2000, the Company's Board of Directors declared a special cash
dividend of $0.30 per share of Common Stock payable to shareholders of record as
of July 5, 2000. The distribution, totaling $4.7 million, was paid on July 18,
2000.
22
ITEM 6. SELECTED FINANCIAL DATA.
FISCAL YEAR
----------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE
AMOUNTS AND NUMBER OF OFFICES)
Sales of services and license fees.......................... $662,955 $650,752 $599,709 $530,076 $441,808
Operating income............................................ 14,793 25,350 24,020 15,523 13,757
Income from continuing operations........................... 7,235 14,007 13,748 9,210 2,725
======== ======== ======== ======== ========
Diluted earnings per share--continuing operations........... $ 0.46 $ 0.88 $ 0.87 $ 0.60 $ 0.19
======== ======== ======== ======== ========
Pro forma income from continuing operations(1).............. $ 8,203
========
Diluted pro forma earnings per share--continuing
operations(1)............................................. $ 0.57
========
BALANCE SHEET DATA (AT END OF PERIOD):
Working capital............................................. $ 61,767 $ 59,853 $ 57,702 $ 45,184 $ 31,982
Total assets................................................ 183,072 190,830 197,145 154,530 120,780
Short-term debt............................................. 13,250 14,100 20,423 21,298 11,193
Long-term debt (excluding current portion).................. 37,250 41,608 44,708 17,631 3,603
Stockholders' equity........................................ 73,166 74,941 67,483 57,296 49,252
OTHER OPERATING DATA:
Number of offices (at end of period)
Company-owned............................................. 257 264 267 226 217
Franchise agent........................................... 81 75 82 103 103
Licensed.................................................. 16 24 25 11 7
-------- -------- -------- -------- --------
Total................................................... 354 363 374 340 327
======== ======== ======== ======== ========
SYSTEM REVENUE DATA (EXCLUDING LICENSE FEES):
Domestic business services................................ $604,520 $597,874 $549,689 $473,192 $418,546
International business services........................... 97,375 92,438 77,492 72,554 58,872
-------- -------- -------- -------- --------
Total................................................... $701,895 $690,312 $627,181 $545,746 $477,418
======== ======== ======== ======== ========
- ------------------------------
(1) Adjusted to reflect the effects of federal and state income taxes as if the
Company had been subject to income taxation as a C corporation during each
of the periods presented.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion is intended to assist in the understanding and
assessment of significant changes and trends related to the results of
operations and financial condition of Westaff, Inc., together with its
consolidated subsidiaries. This discussion and analysis should be read in
conjunction with the Company's Consolidated Financial Statements and Notes
thereto included herein.
In addition to historical information, this 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, communication
costs, selling and administrative expenses, depreciation 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.
23
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, the availability of sufficient personnel, including the employment
and retention of a qualified Chief Executive Officer, and the ability of the
Company to complete the realization of the remaining medical assets. 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 350 business services offices in 44
states, the District of Columbia and five foreign countries.
The Company differentiates itself from other large temporary staffing
companies by primarily 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
24
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 second quarter of fiscal 2000
and recorded additional pre-tax charges of $1.3 million in the third fiscal
quarter ended July 8, 2000.
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 accompanying Consolidated Financial Statements
and Notes thereto. In connection with the decision to discontinue the medical
operations, the Company recorded an after-tax loss in fiscal 1998 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.
During fiscal 1999, the Company sold certain of its franchise agent and
Company-owned medical offices and 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. In fiscal 1999, the Company recorded
after-tax losses relating to discontinued operations of $6.6 million or $0.42
per share. These losses primarily represented reserves for trade and Medicare
accounts receivable and due from licensee balances, and also included additional
operating losses resulting from the extended period required to close the sale
and a reduction in the estimated proceeds from the sale.
During fiscal 2000, the Company recorded additional after-tax losses
relating to discontinued operations of $784,000 or $0.05 per share. This charge
was primarily due to lower than expected settlements of Medicare cost reports.
The Company has appealed a number of cost report settlements and hopes to
recover additional funds in the future; however, there can be no assurance that
the Company will be successful in its appeals.
As of October 28, 2000, the Company has received $1.7 million in cash
proceeds from the sale of its medical operations with an additional
$1.0 million due on the balance of the purchase price. The $1.0 million balance
due, plus interest thereon, is owed to the Company under a guaranteed promissory
note, which is in default. See Item 3. Legal Proceedings.
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 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 Medicare
accounts receivable and due from licensee balances on terms and costs similar to
those estimated by the Company. Furthermore, there can be no assurance that the
Company will be successful in collecting the remaining $1.0 million outstanding
purchase price balance due on the sale of the medical business. Should actual
costs differ materially from those estimated by management, the Company would
record additional losses (or gains) in future periods.
25
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.
FISCAL YEAR
------------------------------------
2000 1999 1998
-------- -------- --------
Sales of services........................................... 99.5% 99.5% 99.7%
License fees................................................ 0.5% 0.5% 0.3%
----- ----- -----
Total sales of services and license fees.................... 100.0% 100.0% 100.0%
Costs of services........................................... 79.4% 78.8% 78.8%
----- ----- -----
Gross profit................................................ 20.6% 21.2% 21.2%
Franchise agents' share of gross profit..................... 2.7% 2.6% 2.8%
Selling and administrative expenses......................... 14.4% 13.4% 13.2%
Depreciation and amortization............................... 1.3% 1.3% 1.2%
----- ----- -----
Operating income from continuing operations................. 2.2% 3.9% 4.0%
Interest expense............................................ 0.5% 0.4% 0.3%
Interest income............................................. -0.1% -0.1% -0.1%
----- ----- -----
Income from continuing operations before income taxes....... 1.8% 3.6% 3.8%
Provision for income taxes.................................. 0.7% 1.4% 1.5%
----- ----- -----
Income from continuing operations........................... 1.1% 2.2% 2.3%
===== ===== =====
FISCAL 2000 COMPARED TO FISCAL 1999
SALES OF SERVICES AND LICENSE FEES. Sales of services increased
$12.4 million, or 1.9%, for fiscal 2000 as compared to fiscal 1999. Average bill
rates increased 2.9% in fiscal 2000 as compared to fiscal 1999, while billed
hours declined slightly. Same store sales increased by 3.3% for fiscal 2000 as
compared to fiscal 1999. Sales of services increased 1.3% for domestic business
services and 5.3% for international business services. Fiscal 2000 domestic
sales of services have been adversely affected by competitive pressures for the
supply of temporary staff as a result of the low unemployment rates in the
United States economy during fiscal 2000 as well as more recent decreasing
demand for temporary staffing services in some sectors of the economy. Recent
trends in the United States economy are indicating a possible slowdown in
economic activity. Depending upon the extent of the economic slowdown, the
Company currently estimates that its sales will decline during at least the
first quarter of fiscal 2001, and quite likely beyond. Continued declines in
foreign currency exchange rates have negatively impacted the international
results as reported. Excluding the effect of these rate fluctuations, fiscal
2000 international sales of services increased 13.0% as compared to fiscal 1999.
Acquisitions did not have a significant effect on the increase in fiscal 2000
sales of services. During the fourth quarter of fiscal 2000, the Company
purchased the operations of one of its licensees. Fiscal 1999 acquisitions were
limited to buy backs and conversion of six of the Company's franchise agents'
operations to Company-owned offices.
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
decreased $199,000 or 6.1%, for fiscal 2000 as compared to fiscal 1999. During
the fourth quarter of fiscal 2000 the Company purchased the operations of one of
its licensees, two licensees converted to the Company's franchise agent program,
and two licensees essentially closed operations. The Company is currently in
negotiations with two of its licensees who wish to purchase the Company's
interest in their licensed operations. License fees for these two licensees in
fiscal 2000 were approximately $1.2 million. If these negotiations are
successful, the
26
Company would recognize a gain on the sale at the date of the closing; however,
future license fee income from these operations would cease.
COST 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
$13.7 million, or 2.7%, for fiscal 2000 as compared to fiscal 1999. Gross margin
declined from 21.2% in fiscal 1999 to 20.6% in fiscal 2000 primarily due to
higher workers' compensation costs and lower license fees. Additionally, the
Company has expanded its On-Location program accounts which generally carry
lower margins than traditional service accounts, and is experiencing increased
downward pressures on margins due to competition. The Company will continue its
efforts to improve gross margin where feasible, however, within the current
business climate and with increased workers' compensation costs, the Company
believes that there are fewer opportunities available to increase gross margin.
There can be no assurance that the Company will be successful in either
increasing or maintaining gross margin.
Workers' compensation costs were 4.0% of payroll for fiscal 2000 and 3.0%
for fiscal 1999. As a result of increases in the Company's actuarially estimated
ultimate losses for all open policy years, the Company recorded an additional
charge for workers' compensation costs of $2.1 million, or $0.08 per share, net
of taxes, during the fourth quarter of fiscal 2000. The Company currently
estimates that the accrual rates for workers' compensation costs will be in the
range of 4.2% to 4.8% of direct labor for fiscal 2001. These rates may change
depending upon the results of actuarial estimates. The Company will review
interim actuarial estimates throughout fiscal 2001 to ensure that accrual rates
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 $822,000, or 4.8%,
for fiscal 2000 as compared to fiscal 1999. As a percentage of sales of services
and license fees, franchise agents' share of gross profit increased from 2.6%
during fiscal 1999 to 2.7% for fiscal 2000.
SELLING AND ADMINISTRATIVE EXPENSES (INCLUDING DEPRECIATION AND
AMORTIZATION). Selling and administrative expenses increased $8.2 million, or
8.6%, for fiscal 2000 as compared to fiscal 1999. As a percentage of sales of
services and license fees, selling and administrative expenses increased from
14.7% for fiscal 1999 to 15.7% for fiscal 2000. As noted in Recent Developments
above, fiscal 2000 includes $1.9 million in pre-tax charges as a result of the
terminated recapitalization. Fiscal 2000 also reflects increased costs for bad
debts, increased communication costs in connection with the Company's wide area
network, higher depreciation and outside services costs for on-going management
information system initiatives (see Item 1. Business--Management Information
Systems) and increased foreign currency transaction losses due to the effect of
declining exchange rates with the Company's international operations.
Additionally, selling and administrative expenses for fiscal 1999 were lower as
a result of domestic gross receipt tax refunds and United Kingdom advance
corporation tax refunds. The Company has moved aggressively to tighten the
controls over credit granting and collections; however, there can be no
assurance that such actions will result in a reduction in bad debt levels in the
future.
As noted above, selling and administrative expenses are impacted by the
Company's management information systems. During fiscal 1999 and fiscal 2000,
the Company replaced its back-office financial reporting systems, implemented a
new billing and activities management system and implemented a wide area network
to allow for enhanced communication and data transmission capabilities among the
field and corporate offices. The Company has also been rolling out a new branch
office search and
27
retrieval and remote data capture module. As of October 28, 2000, 183 domestic
offices were live on the front-office system. The Company expects to complete
the initial roll-out of the front office system by the end of the fourth quarter
of fiscal 2001. The Company is currently working on system upgrades and
functional enhancements for its financial and billing systems and is developing
plans to convert its current temporary payroll system to a new system in fiscal
2002. The Company is also working with its key software vendor to build
additional functionality within the core product that will better serve the
needs of the temporary staffing industry.
As a result of these system initiatives, the Company incurred increased
costs for communications, depreciation and system maintenance during fiscal 1999
and fiscal 2000. As the wide area network is fully deployed, the Company expects
communications costs for fiscal 2001 to be similar to fiscal 2000. Furthermore,
the Company's temporary payroll system is now fully depreciated. Accordingly,
depreciation expense for fiscal 2001 is expected to decrease as compared to
fiscal 2000. The Company continues to invest in efforts to upgrade and improve
the functionality, performance and utility of its systems. Furthermore, the
Company's temporary payroll system is critical to the success of the Company and
the planned conversion to the new system will be key to enhancing the
performance and functionality of the payroll process. 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 $640,000, or 25.4%, for fiscal
2000 as compared to fiscal 1999 as a result of higher average borrowings for
domestic business services.
PROVISION FOR INCOME TAXES. The provision for income taxes for fiscal 2000
decreased $4.4 million, or 48.3%, as compared to fiscal 1999 reflecting the
decrease in pre-tax income from continuing operations of $11.2 million. The
effective income tax rate was 39.5% for both fiscal years. The Company currently
estimates that the effective income tax rate for fiscal 2001 will be
approximately 40.0%.
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 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.
COST OF SERVICES. 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
28
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, which had not yet achieved
its targeted productivity levels.
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.
FRANCHISE AGENTS' SHARE OF GROSS PROFIT. 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 (see Fiscal 2000 compared to Fiscal
1999--Selling and Administrative Expenses and Item 1. Business--Management