UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED OCTOBER 30, 2004
Commission File Number 000-24990
WESTAFF, INC.
(Exact name of registrant as specified in its charter)
DELAWARE |
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94-1266151 |
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(State or other jurisdiction of |
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(I.R.S. Employer Identification No.) |
298 NORTH WIGET LANE, WALNUT CREEK, CA 94598-2453
(Address of principal executive offices, including zip code)
(925) 930-5300
(Registrant’s telephone number, including area code)
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)
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 ý No o
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. ý
Indicate by check mark whether Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes o No ý
The aggregate market value of the voting and non-voting common stock held by non-affiliates based upon the last sales price for the registrant’s common stock on the Nasdaq National Market on April 16, 2004, the last business day of the registrant’s most recently completed second fiscal quarter, was $20,652,690.
As of January 27, 2005, the Registrant had outstanding 16,050,812 shares of Common Stock.
The following documents (or portions thereof) are incorporated herein by reference:
Portions of the Registrant’s Proxy Statement for the 2005 Annual Meeting of Stockholders are incorporated herein by reference into Part III of this Form 10-K Report.
WESTAFF, INC.
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Cautionary Note
This Annual Report contains forward-looking statements that involve risks and uncertainties regarding Westaff, Inc. (the “Company”). As discussed in greater detail under “Cautionary Statement” in Item 7, such statements are identified by terms expressing the Company’s future expectations or projections. 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 the heading “Factors Affecting Future Operating Results” beginning on page 9 below and elsewhere in, or incorporated by reference into, this Annual Report on Form 10-K. Forward-looking statements speak only as of the date of this report, and the Company undertakes no obligation to update or revise such statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events except as required by applicable laws and regulations. This Form 10-K for the fiscal year ended October 30, 2004, 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 certain 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 direct hire, replacement, supplemental and on-site programs to businesses and government agencies. The Company’s primary focus is on recruiting and placing temporary light industrial and clerical/administrative personnel. The Company has over 50 years of experience in the staffing industry and, as of October 30, 2004, operated through 256 offices in 44 states and five foreign countries. As of October 30, 2004, 73% of these offices were owned by the Company and 27% were operated by franchise agents and a licensee.
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 298 North Wiget 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, which is the primary operating entity.
During fiscal 1999, the Company sold its medical business, primarily operated through Western Medical Services, Inc., a wholly-owned subsidiary of the Company. As a result, the Company has classified its medical operations as discontinued operations in the Company’s consolidated financial statements and provides a separate discussion of the medical operations in this Business section.
References in this Form 10-K to (i) the “Company,” the “Registrant” 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.
Services
The Company’s service offerings are focused primarily on placing temporary light industrial and clerical/administrative staffing personnel and providing direct hire services.
Light Industrial Services. Light industrial services personnel are placed for a variety of assignments including general factory and manufacturing work (including production, assembly and support workers, merchandise packers and machine operators), warehouse work (such as general laborers, stock clerks, material handlers, order pickers, forklift operators and shipping/receiving clerks), technical work (such as lab technicians, inspectors, quality control technicians and drafters) and general services (such as maintenance and repair personnel, janitors and food service workers).
Clerical/Administrative Services. Clerical/administrative services personnel are placed for a broad range of general business positions including receptionists, administrative assistants, data entry operators, word processors, customer service representatives, telemarketers and various other general office, accounting, bookkeeping and clerical staff. Clerical/administrative positions also include call center agents, such as customer service, help desk and technical support staff.
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Direct Hire Services. Direct hire services are typically contingent, fee-based services to recruit and fill regular staff positions for customers. These services include locating, screening and assessing candidates on behalf of customers. If the candidate is hired by the customer, the Company is generally paid a contingent fee based on a percentage of the annual starting compensation for the candidate placed.
The Company believes that temporary light industrial and clerical/administrative staffing services are the foundation of the staffing industry and will remain a significant market for the foreseeable future. The Company also believes that employees performing temporary light industrial and clerical/administrative staffing functions are, and will remain, an integral part of the labor market in local, regional and national economies around the world.
The Company also provides other services within the light industrial and clerical/administrative staffing market such as temp-to-hire services, payrolling, on-site and on-location services, and other professional services including skills and behavioral assessments and coordination of drug testing and background checking:
•Temp-to-hire services represent the placement of temporary staff with a customer with the option to convert the temporary staff to a regular customer employee at a later date.
•Payrolling typically involves the transfer of a customer’s short-term seasonal or special use employees to the Company’s payroll for a designated period.
•On-site programs provide administrative services for the Company’s customers such as coordinating all temporary staffing services throughout a customer’s location, including skills assessment and training.
•On-location programs provide for an independent branch office located at the customer’s facility. They are typically intended for large non-seasonal accounts with more than $500,000 in annual revenue. The branch office is typically staffed by at least one manager-level employee.
Both on-site and on-location 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 comparatively lower operating expenses and relatively longer customer relationships.
To complement its service offerings, the Company utilizes a number of tools focused on increasing the pool of qualified candidates using advanced selection procedures for potential candidates (Talent Trak®) as well as technology-based management services that allow clients to maximize workforce productivity (Time Trak®). The Company believes that these tools enhance its competitive edge and position it to more effectively pursue high growth market niches such as financial services, customer interaction centers and high end administrative placement.
Talent Trak®. To ensure high quality placements for customers and employees, Westaff uses Talent Trak® to strengthen the quality of its selection process. This comprehensive selection process includes flexible recruiting methods, interviewing and reference checking. Westaff conducts advanced skills and behavioral assessments using Talent Trak®, and also provides the option for both background and drug testing that can be customized to meet a customer’s specific needs.
Time Trak®. This tool provides customers with a web-based management system to assist in maximizing workforce productivity. Time Trak® is a flexible system allowing customers access to information to track a variety of performance measurements such as workforce hours, labor costs, attendance and staff performance. Time Trak® also includes features to automate timecard and payroll processing.
Markets
The Company provides temporary staffing services primarily in “secondary markets”, as well as in the downtown areas of certain “primary markets” in the United States and selected international markets.
The Company’s strategy is to capitalize on its presence in secondary markets and to build market share by targeting small to medium-sized customers, including divisions of Fortune 500 companies. The Company believes that in many cases, such markets are less competitive and less costly to operate in than in the more central areas of primary 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 augments this concentration on secondary markets by also focusing on national contracts with
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customers having a large presence in these marketplaces. Such accounts include large clients in multiple locations supported by a dedicated corporate-level business relationship manager. The Company currently has existing national accounts across many different business sectors such as manufacturing, government, financial services, technology and communications. The Company maintains a professional sales team that services and leverages existing relationships to retain and grow these accounts. In addition, the Company continues to develop aggressive marketing programs to target and acquire additional clients that fit the Westaff branch system footprint. The Company believes that its geographic alignment allows it to effectively compete for some of these national contracts.
The Company markets its temporary staffing services to local and regional customers through a network of Company-owned and franchise agent offices, as well as through its on-site and on-location service locations and through one licensed office. The Company’s national marketing campaigns are coordinated through its corporate headquarters in cooperation with US field offices. Marketing efforts for regional and international markets are conducted at the local level. New customers are developed by the field offices primarily through direct sales efforts and referrals. The Company has a robust targeted marketing program and a consultative sales process that includes telemarketing and e-mail marketing.
Recruiting
The Company believes that a key component of its success is the ability to recruit and maintain a pool of qualified personnel and regularly place them into desirable and appropriate positions. The Company uses comprehensive methods to identify, assess, select and, when appropriate, measure the skills of its temporary employees to meet the needs of its customers. The Company believes one of its key competitive advantages in attracting and retaining temporary light industrial and clerical/administrative staffing personnel is its payroll system, which provides it with the ability to print payroll checks at virtually all of its branch offices within 24 hours after receipt of a timecard. Most Company-owned offices offer temporary employees a benefit package, including a service bonus and holiday pay. Franchise agent offices have the option to offer this benefit. All eligible temporary employees have the option to participate in the Company’s 401(k) plan and discounted employee stock purchase plan.
Operations
The Company operates each Company-owned office as a separate profit center and provides certain managers considerable operational autonomy and financial incentives. The Company also operates franchise agent offices in appropriate markets. Managers focus on business opportunities within markets and are provided centralized support to achieve success in those markets. 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 market development while relying on centralized services for support in back-office operations, such as risk management programs and unemployment insurance, credit, collections, accounting, advice on legal and regulatory matters, quality standards and marketing.
As of October 30, 2004, the Company operated through a network of 256 offices in 44 states and five foreign countries. In addition, the Company from time to time establishes recruiting offices both for recruiting potential temporary employees and for testing demand for its services in new market areas. The Company’s operations are decentralized, with branch/market, district/regional and zone managers and franchise agents enjoying considerable autonomy in hiring, determining business mix and advertising.
The following table sets forth information as to the number of offices in operation as of the dates indicated.
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Oct. 30, |
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Nov. 3, |
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Nov. 2, |
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Nov. 1, |
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Oct. 30, |
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Number of Offices by Ownership (1): |
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Company-owned |
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257 |
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254 |
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217 |
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197 |
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187 |
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Franchise agent |
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81 |
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85 |
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77 |
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72 |
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68 |
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Licensed |
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16 |
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10 |
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5 |
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1 |
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1 |
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Total |
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354 |
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349 |
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299 |
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270 |
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256 |
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Number of Offices by Location (1): |
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Domestic |
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299 |
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291 |
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246 |
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221 |
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207 |
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International |
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55 |
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58 |
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53 |
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49 |
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49 |
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Total |
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354 |
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349 |
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299 |
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270 |
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256 |
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(1) Excludes Company-owned recruiting offices.
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Company-Owned Offices. Employees of each Company-owned office typically report to a branch or market manager who is responsible for day-to-day operations and the profitability of a market that consists of one to several offices. Branch or market managers typically report to district or regional managers. District managers, regional managers and zone sales managers typically report to zone managers. As of December 31, 2004, there were three zone managers, three zone sales managers, six regional managers and nine district managers. 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 market, district, regional, zone sales and zone managers. These plans are designed to motivate employees to maximize the growth and profitability of their offices. The Company believes that its incentive-based compensation plans encourage employees in its Company-owned offices to increase sales and profits, resulting in a 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 geographic territory.
The Company’s franchise agent agreements generally allow franchise agents to open multiple offices within their exclusive territories. As of October 30, 2004, the Company’s 36 franchise agents operated 68 franchise agent offices. Sales generated by franchise agent operations and related costs are included in the Company’s consolidated revenue and costs of services, respectively, and during fiscal 2002, 2003, and 2004 franchise agent sales represented 24.1%, 26.4%, and 28.4% respectively, of the Company’s revenue.
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 assisting and cooperating with 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 and is responsible for 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.
Franchise agents are required to follow the Company’s operating procedures and standards in recruiting, screening, classifying and retaining temporary personnel.
Licensed Offices. As of October 30, 2004, one licensee operated one licensed office. The Company is no longer offering the license program. The licensee is the employer of the temporary employees and the owner of the customer accounts receivable. 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 agreement. Borrowings under the lines of credit bear interest at a rate equal to the reference rate of Bank of America, N.A. plus two percentage points. Interest is charged on the borrowings only if the outstanding balance exceeds certain specified limits. Licensees are required to operate within the framework of the Company’s policies and standards, but must obtain their own workers’ compensation, liability, fidelity bonding and state unemployment insurance coverage, which determines their payroll costs.
The Company’s franchise and license agreements have an initial term of five years and are renewable for multiple five-year terms. The agreements generally 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 and license agreements. In the past five fiscal years, the Company has commenced one action to enforce the non-competition covenants, which was resolved in the Company’s favor.
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 arrangements.
For financial information about operating segments for fiscal years 2002, 2003 and 2004, see Note 15 to the consolidated financial statements included in this Annual Report.
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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 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.
Customers
The Company services small and medium sized companies as well as divisions of Fortune 500 companies and local, state and federal government agencies. 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 2004, no single customer accounted for more than 4.5% of the Company’s revenue. The Company’s 10 highest volume customers in fiscal 2004 accounted for an aggregate of approximately 14.2% of the Company’s revenue.
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 Corporation (commercial staffing segment), Kelly Services, Inc. (U.S. commercial staffing and international segments), Manpower Inc., RemedyTemp, Inc. (clerical and light industrial services), Express Personnel Services, Inc., and Randstad North America. 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 qualified temporary personnel in a timely manner, monitoring quality of job performance and pricing of services. Due to competitive pressures it has been difficult for the Company to raise prices even though its costs have increased. The Company believes that the primary competitive factors in obtaining qualified candidates for temporary employment assignments are wages, benefits and flexibility and responsiveness of work schedules. The Company believes that within its primary light industrial and clerical/administrative markets, timeliness of pay is also a key competitive factor.
Management Information Systems
The Company’s domestic management information systems provide support to both branch office locations and the corporate back-office. Branch offices utilize a proprietary application designed to assist in candidate search, recruiting, customer order management, customer service, sales management and payroll entry and submission. The application also provides for the sharing of information between branch offices and corporate headquarters. Utilizing this system, field offices capture and input customer, employee, billing and payroll information. This information is electronically captured on centralized servers where payroll, billing and financial information is processed overnight. These systems allow the Company to print checks at its branch offices within 24 hours after receipt of the timecard. Invoices are also processed daily and distributed from the Company’s centralized corporate office. These systems also support branch office operations with daily, weekly, monthly and quarterly reports that provide information ranging from customer activity to office profitability.
Each of the Company’s international operations have implemented customized or third party front office and/or back office operating systems that are designed to meet the specific information technology and reporting requirements within the local jurisdiction.
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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 provides workers’ compensation insurance covering its domestic regular and temporary employees through a long-term relationship with St. Paul-Travelers Indemnity Company (“Travelers”). The Company is self-insured in the states of Ohio and Washington. For fiscal years 2002 and 2003, the Company retained a $500,000 deductible per occurrence for these policies. This retention increased to $750,000 per claim for fiscal 2004, but has been reduced back to $500,000 for fiscal 2005. The Company also purchases workers’ compensation insurance coverage based upon actual payroll classifications in the monopolistic states of Wyoming, North Dakota and West Virginia.
The Company is contractually required to collateralize its recorded obligations under the workers’ compensation insurance contracts with Travelers through irrevocable letters of credit, surety bonds or cash. As of October 30, 2004, the aggregate collateral requirements have been satisfied through $22.1 million of letters of credit and a $3.8 million surety bond.
The Company’s nationwide risk management program is managed by its Risk Management Department consisting of risk management and workers’ compensation professionals as well as claim administrators who monitor the disposition of all claims and oversee, through an on-line system, all workers’ compensation claim activity. The department utilizes a variety of creative and aggressive workers’ compensation loss prevention and claim management strategies. The risk management program includes claim strategy reviews with the carrier and third party administrator, a return-to-work modified duty program, pre-placement customer safety evaluations and light industrial job approvals, the use of personal protective equipment, and the use of individual local office expense allocation formulas.
Employees
As of October 30, 2004, the Company had approximately 28,000 temporary employees on assignment and employed 834 regular staff. The Company’s employees are not covered by any collective bargaining agreements. The Company believes that its relationships with its employees are good.
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, including its primary Westaff® service mark.
The Company also owns other service marks, including Westaff® (wave design), Talent Trak®, Time Trak®, Ms. Carmen Courtesy®, Accountants USA®, AUSA®, College Greens®, The Essential Support Services Leader®, E Team®, Job Squad®, On Location & Essential® and Staff for Business Jobs for People®. The Company has filed an application to register the service mark Learning Traksm.
Federal and state service mark registrations may be renewed indefinitely as long as the underlying mark remains in use. The Company also has service marks related to its former name “Western,” including Western Staff Services®, Western Accounting Services®, Western Legal Services®, and Western Marketing Services®.
Medical Services
During fiscal 1999, the Company discontinued its medical business (Western Medical) principally through a sale to Intrepid U.S.A. Inc. Under the terms of the sale, the Company retained the majority of accounts receivable, including the trade and Medicare accounts receivable balances.
Prior to fiscal 2003, the Company appealed Western Medical’s 1996 Medicare cost report settlement. During the first quarter of fiscal 2003, as a result of the favorable appeal settlement, the Company recorded $0.3 million in income from discontinued operations.
During the third quarter of fiscal 2004, the Company resolved certain significant legal and liability claims and evaluated future risks associated with remaining pending claims. As a result, $0.2 million of income from discontinued operations was recognized and is reflected in the Consolidated Statement of Operations for the fiscal year ended October 30, 2004.
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As of October 30, 2004, the remaining net current liabilities of the discontinued medical operations of $0.2 million are primarily for settled but unpaid legal claims. The Company believes it has adequately reserved for the reasonable outcome of future events; however, should actual costs differ materially from those estimated by management, the Company would record additional losses (or gains) in future periods.
Availability of Reports
Westaff makes its SEC filings, including financial reports on Form 10-K, 10-Q or 8-K, available free of charge on its web site at www.westaff.com as soon as practicable after filing. Furthermore, Westaff will provide electronic or paper copies of filings free of charge upon written request to the Company’s Chief Financial Officer or Investor Relations representative.
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, except as required by applicable laws and regulations. Numerous factors could cause actual results to differ significantly from the results described in these forward-looking statements, including the following risk factors.
Price competition in the staffing industry continues to be intense and pricing pressures from both competitors and customers may result in reduced sales and margins to the Company.
The temporary staffing industry is highly competitive with limited barriers to entry and continues to undergo consolidation. The Company expects the level of competition to remain high in the future, and increasing competitive pricing pressures will continue to make it difficult for the Company to raise its prices even though its costs have increased, and may have an adverse effect on the Company’s market share and operating margins. The Company competes in national, regional and local markets with full service agencies and with specialized temporary services agencies. Many competitors are smaller than the Company but may enjoy an advantage over the Company in discrete geographic markets because of their stronger local presence. Other competitors have greater marketing, financial and other resources than the Company that, among other things, could enable them to attempt to maintain or increase their market share by reducing prices. Furthermore, there has been an increase in the number of customers consolidating their staffing services purchases with a single provider or with a small number of providers. The trend to consolidate staffing services purchases has in some cases made it more difficult for Westaff to obtain or retain business.