Exhibit 10.1


 


FORBEARANCE AGREEMENT


 


THIS
FORBEARANCE AGREEMENT, dated as of July 31, 2008, is entered into by and
among the financial institutions identified on the signature pages hereto
(collectively, the “Lenders”), U.S. Bank National Association, as administrative
agent for the Lenders (in such capacity, the “Agent”), Westaff (USA), Inc.,
a California corporation (the “Borrower”), and Westaff, Inc., a
Delaware corporation and the sole shareholder of the Borrower, as parent
guarantor (the “Parent Guarantor”), with reference to
the following facts:


 


RECITALS


 


A.            The Borrower, the Parent Guarantor, the Agent and the
Lenders are parties to a Financing Agreement, dated as of February 14,
2008, as amended (collectively, the “Financing Agreement”), pursuant to
which the Agent and the Lenders provide certain credit facilities to the
Borrower.


 


B.            An Event of Default (the “Existing Event of Default”)
has occurred and is continuing under Section 11.1(b)(1) of the
Financing Agreement.  The Existing Event
of Default was caused by the Borrower’s failure to comply with Section 10.28
of the Financing Agreement, due to the Borrower’s failure to achieve a Fixed
Charge Coverage Ratio of at least 1.25 to 1.00 for the Applicable Period ended April 19,
2008.


 


C.            The Borrower and the Parent Guarantor have requested that
the Agent and the Lenders temporarily forbear from exercising their available
default rights and remedies under the Financing Agreement, the other Loan
Documents, applicable law and equity (collectively, “Default Rights and
Remedies”) in response to the occurrence and continuance of the Existing
Event of Default, and the Agent and the Lenders are willing to do so on the
terms and conditions set forth below.


 


NOW, THEREFORE, the parties
hereby agree as follows:


 


1.             Defined Terms. 
Any and all initially-capitalized terms used in this Agreement
(including, without limitation, in the recitals to this Agreement) without
definition shall have the respective meanings assigned thereto in the Financing
Agreement.


 


2.             Limited Forbearance Agreement.  So long as no additional Events of Default
occur during such period, the Agent and the Lenders hereby agree to forbear
from exercising any of their Default Rights and Remedies in response to the
occurrence and continuance of the Existing Event of Default throughout the
period commencing on the date of this Agreement and ending on August 26,
2008 (the “Forbearance Period”).


 


3.             No Waiver. 
The agreement of the Agent and the Lenders under Section 2 of this
Agreement conditionally to forbear from exercising their Default Rights and
Remedies throughout the Forbearance Period shall not constitute a waiver of any
of their Default Rights and Remedies, and the Agent and the Lenders hereby
expressly reserve all such Default Rights and Remedies.


 

















 


4.             Reduction of Revolving Credit Facility.  The aggregate amount of the Revolving Credit
Commitments of the Lenders has been reduced from $50,000,000 to $33,000,000,
effective as of June 23, 2008.


 


5.             Reserve
for Payroll and Payroll Taxes.  The
Agent shall maintain a reserve against Revolving Credit Availability to cover
the Borrower’s payroll and payroll tax obligations.  The required amount of such reserve shall be
based upon the assumptions that the Borrower’s weekly payroll obligations total
$4,400,000 and that the Borrower’s weekly federal and state payroll tax
obligations total $135,000.  The Agent
shall adjust the required amount of the reserve if the Borrower’s actual weekly
payroll obligations total materially more (or less) than $4,400,000 or if the
Borrower’s actual weekly unemployment taxes total materially more (or less)
than $135,000.  The Agent shall add
$135,000 to such reserve each week.  Upon
the Agent’s receipt of evidence of the Borrower’s payment of all of its weekly
federal and state payroll tax obligations for the preceding quarter, the Agent
shall relieve the entire amount of the cumulative weekly reserves imposed by
the Agent for such quarter and thereafter shall add $135,000 to the reserve for
each week of the following quarter. The reserve against Revolving Credit
Availability under this Section 5 shall be reduced by the $5,000,000 of
cash which the Borrower maintains in a deposit account at U.S. Bank National
Association.


 


6.             Field Examination.  The Borrower shall assist and cooperate with
the Agent’s field examiners in connection with the audit and examination of the
Borrower’s books and records currently being conducted by the Agent.


 


7.             FTI
Report.  FTI Consulting Inc. shall
complete and deliver to the Agent  its
final report on the Borrower’s operations no later than July 31,
2008.  Such report shall include a
13-week cash flow forecast and a 12-month projection, including a Borrowing
Base calculation.


 


8.             Return of Travelers Letter of Credit.  The Borrower shall use its best efforts to
cause The Travelers Indemnity Company (“Travelers”) as  promptly as practicable to return to the LC
Issuer the original, undrawn Letter of Credit in the face amount of
$27,000,0000 issued by the LC Issuer to Travelers.  The Borrower shall offer to provide Travelers
cash collateral in the amount of $27,000,000 in exchange for the Borrower’s
requested return of such Letter of Credit, and the Borrower shall obtain such
cash collateral by requesting a Revolving Loan under the Financing Agreement.


 


9.             Continued Imposition of Default Interest.  The Agent shall continue to assess interest
on the Obligations at the Default Rate throughout the Forbearance Period.


 


10.           Twice
Weekly Delivery of Borrowing Base Certificates; Updated Receivables Agings.  Notwithstanding anything to the contrary set
forth in Section 8.3 of the Financing Agreement, the Borrower shall
deliver a Borrowing Base Certificate to the Agent not less frequently than
twice each week.  With each such delivery
of a Borrowing Base Certificate, the Borrower shall deliver to the Agent an
aging of the Eligible Billed Receivables, so that the Agent can adjust the
amount of such Receivables that are outstanding more than 90 days after their
invoice date, in relation to the amount of such aged 


 

















 


Receivables reflected in the immediately preceding Borrowing Base
Certificate delivered by the Borrower to the Agent.


 


11.           General Release. 
In consideration of the agreement of the Agent and the Lenders to enter
into this Agreement and hereby conditionally forbear from exercising their
available Default Rights and Remedies throughout the Forbearance Period, the
Borrower and the Parent hereby release, discharge and acquit the Agent, each
Lender and their respective agents, servants, employees, successors and assigns
from any and all claims, demands, liabilities, obligations and causes of
action, whether known or unknown, against them, which the Borrower or the
Parent now own or hold, which the Borrower or the Parent has at any time
heretofore owned or held, or which the Borrower of the Parent hereafter may own
or hold, by reason of any action, matter, cause or thing whatsoever done prior
to the date of this Agreement, including specifically, but not limited to, any
and all claims, demands, rights and causes of action whatsoever arising out of
or which could be alleged to arise out of the Financing Agreement or any of the
other Loan Documents.


 


                It is the intention of the Borrower and the Parent in
executing this Agreement that the same shall be effective as a bar to each and
every claim, demand, and cause of action hereinabove specified, and in
furtherance of this intention the Borrower and the Parent each waives and
relinquishes all rights and benefits under Section 1542 of the Civil Code
of the State of California, which provides:


 


                “A general release does not extend to claims which
the creditor does not      know or suspect
to exist in his favor at the time of executing the release,      which if known by him might have
materially affected his settlement with                the
debtor.”


 


The Borrower and the Parent
acknowledge that each of them may hereafter discover facts different from or in
addition to those now known or believed to be true with respect to such claims,
demands, or causes of action and agree that this Agreement shall be and remain
effective in all respects notwithstanding any such differences or additional
facts.


 


12.           Forbearance Fee. 
In consideration of the agreement of the Agent and the Lenders to enter
into this Agreement and hereby conditionally forbear from exercising their
available Default Rights and Remedies throughout the Forbearance Period, the
Borrower shall pay to the Agent, for the ratable benefit of the Lenders, a
one-time forbearance fee in the amount of $50,000 (the “Forbearance Fee”).  The Forbearance Fee shall be fully-earned,
non-refundable and due and payable in one lump sum on the date of this
Agreement.  The Borrower and the Parent
Guarantor acknowledge and agree that the Agent shall effect payment of the
Forbearance Fee when due by charging the full amount thereof to the Borrower’s
Revolving Loans account.


 


13.           Conditions Precedent.  The effectiveness of this Agreement shall be
subject to the prior satisfaction of each of the following conditions:


 


                      (a)  This Agreement.  The Agent shall have received this Agreement,
duly executed by the Borrower, the Parent Guarantor and each of the Lenders;
and


 

















 


                (b)  Replacement Notes. The Agent shall
have received a replacement Note for each Lender, in the principal amount of
such Lender’s Revolving Credit Commitment, as reduced hereby, duly executed by
the Borrower, and each Lender shall have returned its original Note to the
Agent for cancellation and return to the Borrower.


 


14.           Reaffirmation
and Ratification.  The Borrower and
the Parent Guarantor hereby reaffirm, ratify and confirm their respective
Obligations under the Financing Agreement and the other Loan Documents,
acknowledge that all of the terms and conditions in the Financing Agreement
remain in full force and effect, and further acknowledge that the security
interests granted to Agent in the Collateral are valid and perfected.


 


15.           Integration. 
This Agreement constitutes the entire agreement of the parties in
connection with the subject matter hereof and cannot be changed or terminated
orally.  All prior agreements,
understandings, representations, warranties and negotiations regarding the
subject matter hereof, if any, are merged into this Agreement.


 


16.           Counterparts. 
This Agreement may be executed in multiple counterparts, each of which
when so executed and delivered shall be deemed an original, and all of which,
taken together, shall constitute but one and the same agreement.


 


17.           Governing Law. 
This Agreement shall be governed by, and construed and enforced in
accordance with, the internal laws (as opposed to the conflicts of law
principles) of the State of California.


 


[Rest of page intentionally
left blank; signature pages follow]


 

















 


IN WITNESS WHEREOF, the
parties hereto have executed this Agreement by their respective duly authorized
officers as of the date first above written.


 


 


	
   

  	
  WESTAFF
  (USA), INC.,

  
	
   

  	
  a
  California corporation,

  
	
   

  	
  as
  the Borrower

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/
  Christa C. Leonard

  
	
   

  	
  Name:

  	
  Christa
  C. Leonard

  
	
   

  	
  Title:

  	
  SVP
  CFO

  
	
   

  	
   

  	
   

  
	
   

  	
  WESTAFF,
  INC.,

  
	
   

  	
  a
  Delaware corporation,

  as the Parent Guarantor

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/
  Christa C. Leonard

  
	
   

  	
  Name:

  	
  Christa
  C. Leonard

  
	
   

  	
  Title:

  	
  SVP
  CFO

  



 

















 


	
   

  	
  U.S.
  BANK NATIONAL ASSOCIATION,

  
	
   

  	
  as
  the Agent

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/
  Daryl A. Jagstrp,

  
	
   

  	
   

  	
  Daryl
  A. Hagstrom

  
	
   

  	
   

  	
  Vice
  President

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  U.S.
  BANK NATIONAL ASSOCIATION,

  
	
   

  	
  as
  a Lender

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/
  Daryl A. Hagstrom

  
	
   

  	
   

  	
  Daryl
  A. Hagstrom

  
	
   

  	
   

  	
  Vice
  President

  



 

















 


	
   

  	
  WELLS
  FARGO BANK,

  
	
   

  	
  NATIONAL ASSOCIATION,

  
	
   

  	
  as a Lender

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Supremna Thurmond

  
	
   

  	
   

  	
  Supremna M. Thurmond

  
	
   

  	
   

  	
  Relationship Manager