##### **UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D. C.  20549**

 

##### **FORM 10-Q/A**

#####  

**Amendment No. 2**

 

| **x**                                                   | ** ** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934.** |
|---------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|
|                                                    |       |                                                                                                     |
| **For the quarterly period ended  April 19, 2008** |
|                                                    |       |                                                                                                     |
| **o**                                                   | ** ** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |

 

**For the transition periodfrom              to              **

 

**Commissionfile number 000-24990**

 

**WESTAFF, INC.**

(Exact name of registrant as specified in itscharter)

 

| **Delaware**                       | ** ** | **94-1266151**         |
|------------------------------------|------------|------------------------|
| (State or other  jurisdiction      |       | (I.R.S. employer       |
| of incorporation or  organization) |       | identification number) |

 

##### **298 NorthWiget Lane**

##### **WalnutCreek, California  94598-2453**

##### (Address of registrant’sprincipal executive offices, including zip code)

#####  

**(925)930-5300**

(Registrant’s telephone number, including areacode)

 

Securities registered pursuant to Section 12(b) ofthe Act:

 

Indicate by check mark whether the registrant (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90days.    Yes x    No o

 

Indicate by check mark whether the registrant is a large acceleratedfiler, an accelerated filer, a non-accelerated filer, or a smaller reportingcompany. See definitions of “large accelerated filer,” “accelerated filer,” and“smaller reporting company” in Rule 12b-2 of the Exchange Act. (Checkone):

 

| Large accelerated filer o                     |   | Accelerated filer o         |
|-----------------------------------------------|--------|----------------------------------|
|                                          |   |                             |
| Non-accelerated filer x                       |   | Smaller reporting company o |
| (Do not check if a smaller reporting company) |   |                             |

 

Indicate by check mark whether the registrant is a shell company (asdefined in Rule 12b-2 of the ExchangeAct).    Yes o    No x

 

Indicate the number of shares outstanding of each of the issuer’sclasses of common stock, as of the latest practicable date:

 

| **Class**                     | ** ** | **Outstanding at June 5, 2008** |
|-------------------------------|------------|---------------------------------|
| Common Stock, $0.01 par value |       | 16,697,010 shares               |

 

 

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**EXPLANATORYNOTE**

This Amendment No. 2 to the Quarterly Report on Form10-Q of Westaff, Inc. (the “Registrant”) amends the Registrant’s QuarterlyReport on Form 10-Q for the quarterly period ended April 19, 2008 that wasoriginally filed with the Securities and Exchange Commission on June 9, 2008(the “Original Filing”).  This AmendmentNo. 2 is being filed to make the following change:

·      PartII, Item 1A – Risk Factors

We changed the following sentence to correct atypographical item:

“As of April 19, 2008, our principal stockholder,DelStaff LLC (“DelStaff’), together with its affiliates, controls approximately49.5% (previously stated as 44.1%) of the total outstanding shares of ourcommon stock.”

No other changes have been made to the OriginalFiling.  This Amendment No. 2 does notamend or update any other information set forth in the Original Filingincluding the information contained in the condensed consolidated balancesheets, statements of operations and cash flows as of April 19, 2008 and forthe 12 and 24 weeks then ended, and the Registrant has not updated disclosurescontained therein to reflect any events subsequent to the filing of theOriginal Filing.  This Amendment No. 2 consistssolely of the preceding cover page, this explanatory note, Item 1A (asamended), the signature page and the certifications required to be filed asexhibits hereto.

 

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### **Item1A.  Risk Factors**

###  

Investing in our common stock involves a high degreeof risk. The following risk factors, issues and uncertainties should becarefully considered before deciding to buy, hold or sell our common stock. Setforth below and elsewhere in this Quarterly Report on Form 10-Q, and inother documents that we file with the SEC, are risks and uncertainties that could cause theCompany’s actual results and financial position to differ materially from thoseexpressed or implied in forward-looking statements and to be below theexpectations of public market analysts and investors. See “Cautionary StatementRegarding Forward-Looking Statements” in Part I, Item 2 “Management’sDiscussion and Analysis of Financial Condition and Results of Operations.”Any one of thefollowing risks could harm our operating results or financial condition andcould result in a significant decline in the value of an investment in us.Further, additional risks and uncertainties that have not yet been identifiedor which we currently believe are immaterial may also harm our operatingresults and financial condition.

 

*We have significant working capital requirementsand are heavily dependent upon our ability to borrow money to meet theseworking capital requirements.*

 

We require significant amounts of working capital tooperate our business and to pay expenses relating to employment of temporaryemployees.  Temporary personnel aregenerally paid on a weekly basis while payments from customers are generallyreceived 30 to 60 days after billing. As a result, we must maintain sufficientcash availability to pay temporary personnel prior to receiving payment fromcustomers.  Any lack of access to liquidworking capital would have an immediate, material, and adverse impact on our business.

 

To date, we have financed, and expect to continue tofinance, our operations primarily through borrowings under our revolving creditfacilities and also through cash generated by our operating activities.  On February 14, 2008, we entered into a newFinancing Agreement with U.S. Bank and Wells Fargo Bank that provides for a newfive-year US$50 million revolving credit facility, which includes a letter ofcredit sub-limit of US$35 million.  Thenew Financing Agreement replaced the $55 million U.S. Revolving Loan Commitmentunder our credit facilities with GE Capital. Our Australian subsidiary continues to maintain a A$12 millionAustralian dollar facility agreement with GE Capital that expires in May 2009.  As of April 19, 2008, our totalborrowing capacity was $17.9 million, consisting of $11.7 million for thedomestic operations and $6.2 million for Australia.

 

The amounts we are entitled to borrow under ourrevolving credit facilities with US Bank and Wells Fargo Bank in the UnitedStates and with GE Capital in Australia are calculated daily and is dependenton eligible trade accounts receivable generated from operations, which areaffected by financial, business, economic and other factors, as well as by thedaily timing of cash collections and cash outflows.  If we experience a significant and sustaineddrop in operating profits, or if there are unanticipated reductions in cashinflows or increases in cash outlays, we may be subject to cash shortfalls.  If such a shortfall were to occur for even abrief period of time, it may have a significant adverse effect on our business,financial condition or results of operations. Furthermore, our receivables may not be adequate to allow for borrowingsfor other corporate purposes, such as capital expenditures or growthopportunities, and we would be less able to respond to changes in market orindustry conditions.

 

We typically experience significant seasonal and otherfluctuations in our borrowings and borrowing availability, particularly in theUnited States, and have, in the past, been required to aggressively manage ourcash to ensure adequate funds to meet working capital requirements.  Such steps included working to improvecollections and adjusting the timing of cash expenditures, reducing operating expenseswhere feasible and working to generate cash from a variety of other sources.

 

We have historically experienced periods of negativecash flow from operations and investment activities, especially during seasonalpeaks in revenue experienced in the third and fourth fiscal quarters of theyear.  In addition, we are required topledge amounts to secure letters of credit that collateralize certain workers’compensation obligations, and these amounts may increase in futureperiods.  Any such increase in pledgedamounts or sustained negative cash flows would decrease amounts available forworking capital purposes and could have a material adverse effect on ourliquidity and financial condition.

 

On May 23, 2008, the Company received a notice ofdefault from U.S. Bank stating that (1) an Event of Default (as defined inthe Financing Agreement) had occurred due to the Borrower’s failure to achievea Fixed Charge Coverage Ratio (as defined in the Financing Agreement) for thefiscal period ended April 19, 2008; and (2) as a result of the Eventof Default, effective May 21, 2008, U.S. Bank increased the rate ofinterest to the default rate of interest on the borrowings outstanding underthe Financing Agreement.  Unless waivedby U.S. Bank, the Event of Default gives U.S. Bank the right to prohibitadditional borrowing under the Financing Agreement, accelerate the Company’sindebtedness thereunder, and take other actions as provided for in theFinancing Agreement.

 

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The Company is currently in discussions with U.S. Bankin order to seek a waiver or forbearance of the Event of Default.  There can be no assurance that the Companywill be able to obtain a waiver or forbearance or that such a waiver orforbearance would be on terms acceptable to the Company.  If the Company is unable to obtain a waiverfrom U.S. Bank and the Bank elects to pursue remedies under the FinancingAgreement, such as limiting or terminating the Company’s right to borrow underthe agreement, it could have a material adverse effect on the Company’sbusiness, financial condition, results of operations and cash flows.

 

*The staffing industry is highly competitive withlimited barriers to entry which could limit our ability to maintain or increasemarket share.*

 

The staffing industry is highly competitive withlimited barriers to entry and continues to undergo consolidation.  We compete in regional and local markets withlarge full service agencies, specialized temporary and permanent placementservices agencies and small local companies. While some competitors are smaller than us, they may enjoy an advantagein discrete geographic markets because of a stronger local presence.  Other competitors have greater marketing,financial and other resources than us that, among other things, could enablethem to attempt to maintain or increase their market share by reducingprices.  Furthermore, in past years therehas been an increase in the number of customers consolidating their staffingservices purchases with a single provider or with a small number ofproviders.  The trend to consolidatestaffing services purchases has in some cases made it more difficult for us toobtain or retain business.

 

*Price competition in the staffing industrycontinues to be intense, and pricing pressures from both competitors andcustomers could adversely impact our financial decisions.*

 

We expect the level of competition to remain high inthe future, and competitive pricing pressures will continue to make itdifficult for us to raise our prices to immediately and fully offset increasedcosts of doing business, including increased labor costs, costs for workers’compensation and, domestically, state unemployment insurance.  If we are not able to effectively compete inour targeted markets, our operating margins and other financial results will beharmed and the price of our securities could decline.  We also face the risk that our current orprospective customers may decide to provide services internally.

 

*We have had significant turnover in our managementteam and further loss of any of our key personnel could harm our business.*

 

In the third quarter of 2007, our former ChiefExecutive Officer resigned from the Company and was replaced by Michael T. Willis.  In the first quarter of 2008, our VicePresident of Information Services, Eric Person, resigned.  In the third quarter of 2008, we hired aChief Information Officer with industry experience.

 

In the third quarter of 2007, our Chief FinancialOfficer resigned from the company.  Inthe fourth quarter of 2007, we hired a new Chief Financial Officer, Dawn M.Jaffray, as well as a new Controller.  Effective May 15, 2008, Dawn M. Jaffray and the Controller resignedfrom their respective positions.  We haveengaged Financial Leadership Group, LLC to provide interim senior financialmanagement while the Company completes its search for full time replacementsfor Ms. Jaffray and the Controller. The Company has identified turnover and staffing issues in itsaccounting department as having created a material weakness in its disclosurecontrols and procedures as of the end of the fiscal quarter which is thesubject of this report.

 

Effective May 22, 2008, Jeffrey A. Elias resignedfrom his position as Senior Vice President, Corporate Services.  Pursuant to an agreement reached with Mr. Elias,the Company will pay Mr. Elias $125,000 spread over 26 week period andalso pay for his health insurance benefits over that period.

 

On June 6, 2008, the Company announced theappointment of Mark Bierman as its Senior Vice President and Chief InformationOfficer.

 

*Our future financial performance is significantlyimpacted by our ability to attract, motivate and retain key managementpersonnel and other members of the senior management team.*

 

Competitionfor qualified management personnel is intense and in the event that weexperience additional turnover in senior management positions, we cannot assurethat we will be able to recruit suitable replacements on a timely basis.  We must also successfully integrate all newmanagement and other key positions within our organization to achieve ouroperating objectives.  Even if we aresuccessful, turnover in key management positions could temporarily harm ourfinancial performance and results of operations until the new managementbecomes familiar with our business.

 

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*Failure to implement our new strategies could impede our growth andresult in significant added costs.*

 

Infiscal 2007, we made significant changes to our field structure and hiredseveral new key executives late in the fiscal year to seek to grow new businessmarkets for the Company.  Our failure toimplement these new strategies could impede our growth and result insignificant added costs.  Even if our newstrategies are successfully implemented, they may not have the favorable impacton our business and operations that we anticipate.

 

*Our principal stockholder, together with itsaffiliates, controls a significant amount of our outstanding common stock thusallowing them to exert significant influence on our management and affairs.*

 

As of April 19, 2008, our principal stockholder,DelStaff LLC (“DelStaff’), together with its affiliates, controls approximately49.5% of the total outstanding shares of our common stock.  The members of DelStaff are H.I.G. Staffing,2007, Ltd., Alarian Associates, Inc. and Michael T. Willis. As ourprincipal stockholder, DelStaff and its affiliates have the ability tosignificantly influence all matters submitted to our stockholders for approval,including the election of directors, and to exert significant influence overour management and affairs.  On April 30,2007, we entered into a Governance Agreement with DelStaff, Mr. Willis andMr. Stover. On May 9, 2007, pursuant to the terms of the GovernanceAgreement, we expanded the size of our Board of Directors from five to ninedirectors and appointed the following DelStaff nominees to the Board: MichaelT. Willis, John R. Black, Michael R. Phillips, Gerald E. Wedren andJohn G. Ball.  DelStaff also has theability to strongly influence any merger, consolidation, sale of substantiallyall of our assets or other strategic decisions affecting us or the market valueof the stock.  This concentration ofstock and voting power could be used by DelStaff to delay or prevent anacquisition of Westaff or other strategic action or result in strategicdecisions that could negatively impact the value and liquidity of ouroutstanding stock.

 

*The amount of collateral that we are required to maintainto support our workers’ compensation obligations could increase, reducing theamount of capital that we have available to support and grow our fieldoperations.*

 

We are contractually obligated to collateralize ourworkers’ compensation obligations under our workers’ compensation programthrough irrevocable letters of credit, surety bonds or cash.  As of April 19, 2008, our aggregatecollateral requirements under these contracts have been secured through $27.3million of letters of credit.  Further, ourworkers’ compensation program expires November 1, 2008, and as part of therenewal, could be subject to an increase in collateral.  These collateral requirements are significantand place pressure on our liquidity and working capital capacity.  We believe that our current sources ofliquidity are adequate to satisfy our immediate needs for these obligations;however, our available sources of capital are limited.  Depending on future changes in collateralrequirements, we could be required to seek additional sources of capital in thefuture, which may not be available on commercially reasonable terms.

 

*Our reserves for workers’ compensation claims maybe inadequate to cover our ultimate liability, and we may incur additionalcharges if the actual amounts exceed the reserved amounts.*

 

We maintain reserves to cover our estimatedliabilities for workers’ compensation claims based upon actuarial estimates ofthe future cost of claims and related expenses which have been reported but notsettled, and that have been incurred but not yet reported.  The determination of these reserves is basedon a number of factors, including current and historical claims activity,medical cost trends and developments in existing claims.  Reserves do not represent an exact calculationof liability and are affected by both internal and external events, such asadverse development on existing claims, changes in medical costs, claimshandling procedures, administrative costs, inflation, legal trends andlegislative changes.  Reserves areadjusted as necessary to reflect new claims and existing claims development,and such adjustments are reflected in the results of the periods in which thereserves are adjusted.  While we believeour judgments and estimates are adequate, if our reserves are insufficient tocover our actual losses, an adjustment could be charged to expense that may bematerial to our earnings.

 

*Workers’ compensation costs for temporary employeesmay continue to rise and reduce margins and require more liquidity.*

 

In the United States, we are responsible for and payworkers’ compensation costs for our regular and temporary employees.  In recent years, these costs have risensubstantially as a result of increased claims, general economic conditions,increases in healthcare costs and governmental regulations.  The frequency of new claims has fallen infiscal 2008 as compared to prior years, yet the cost per claim continues toincrease.  Under our workers’compensation insurance program, we maintain “per occurrence” insurance, whichonly covers claims for a particular event above a deductible.  This deductible has been increased for ourpolicy year ending November 1, 2008 from $500,000 to $750,000 per claimfor fiscal 2008 claims.  Our workers’compensation insurance policy expires November 1, 2008 and we cannotguarantee that we will be able to successfully renew such policy.  Further, there are covenants associated withthe continuation of the policy and there can be no guarantee that we willcontinue to meet those covenants going forward. Should our workers’ compensation premium costs continue to increase inthe future, there can be no assurance that we will be able to increase the feescharged to our customers to keep pace with increased costs or if we were unableto obtain insurance on reasonable terms or forced to significantly increase ourdeductible per claim, our results of operations, financial condition andliquidity could be adversely affected.

 

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*Any significant economic downturn could result inour customers using fewer staffing services, which could materially adverselyaffect our business.*

 

Demand for staffing services is significantly affectedby the general level of economic activity. There are indications that the economy is currently softening, which weexpect will continue to impact the demand for staffing services and the Company’sperformance.  As economic activity slows,many customers reduce their utilization of temporary employees beforeundertaking layoffs of their regular full-time employees.  Further, demand for permanent placementservices also slows as the labor pool directly available to our customer’sincreases, making it easier for them to identify new employees directly.  Typically, we may experience increasedpricing pressures from other staffing companies during periods of economicdownturn, which could have a material adverse effect on our financialcondition. Additionally, in geographic areas where we derive a significantamount of business, a regional or localized economic downturn could adverselyaffect our operating results and financial position.

 

*We are exposed to credit risks on collections fromour customers due to, among other things, our assumption of the obligation tomake wage, tax, and regulatory payments to our temporary employees.*

 

We are exposed to the credit risk of some of ourcustomers.  Temporary personnel aretypically paid on a weekly basis while payments from customers are generallyreceived 30 to 60 days after billing.  Wegenerally assume responsibility for and manage the risks associated with ourpayroll obligations, including liability for payment of salaries and wages,payroll taxes as well as group health insurance.  These obligations are fixed and become aliability of ours, whether or not the associated client to whom these employeeshave been assigned makes payments required by our service agreement, whichexposes us to credit risks.  We attemptto mitigate these risks by billing on a frequent basis, which typically occursdaily or weekly.  In addition, weestablish an allowance for doubtful accounts for estimated losses resultingfrom the inability of our customers to make required and timely payments.  Further, we carefully monitor the timelinessof our customers’ payments and impose strict credit standards.  However, there can be no assurance that suchsteps will be effective in reducing these risks.  Finally, the majority of our accounts receivableis used to secure our revolving credit facilities, which we rely on forliquidity.  If we fail to adequatelymanage our credit risks associated with accounts receivable, our financialposition could be adversely impacted. Additionally, to the extent that recent turmoil in the credit marketsmakes it more difficult for some customers to obtain financing, those customers’ability to pay could be adversely impacted, which in turn could have a materialadverse effect on our business, financial condition or results of operations.

 

*We derive a significant portion of our revenue fromfranchise agent operations.*

 

Franchise agent operations comprise a significantportion of our revenue.  For the first 24weeks of 2008, franchisees represented 30.1% of gross receipts.  In addition, our ten largest franchise agentsfor the first 24 weeks of fiscal 2008 (based on sales volume) accounted for20.6% of our revenue.  There can be noassurances that we will be able to attract new franchisees or that we will beable to retain our existing franchisees. The loss of one or more of our franchise agents and any associated lossof customers and sales could have a material adverse effect on our results ofoperations.

 

*We are subject to business risks associated withinternational operations and fluctuating exchange rates.*

 

We presently have operations in Australia and NewZealand, which comprised 25.9% of our revenue for 24-week period ended April 19,2008.  Operations in foreign markets areinherently subject to certain risks, including in particular:

 

·                  differences in cultures and businesspractices;

 

·                  overlapping or differing tax laws andregulations;

 

·                  economic and political uncertainties;

 

·                  differences in accounting andreporting requirements;

 

·                  changing, complex or ambiguousforeign laws and regulations, particularly as they relate to employment; and

 

·                  litigation and claims.

 

All of our sales outside of the United States aredenominated in local currencies and, accordingly, we are subject to risksassociated with fluctuations in exchange rates, which could cause a reductionin our profits.  There can be noassurance that any of these factors will not have a material adverse effect onour business, results of operations, cash flows or financial condition.

 

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*Our success is impacted by our ability to attractand retain qualified temporary and permanent candidates.*

 

We compete with other staffing services to meet ourcustomers’ needs, and we must continuously attract reliable candidates to meetthe staffing requirements of our customers. Consequently, we must continuouslyevaluate and upgrade our base of available qualified personnel to keep pacewith changing customer needs and emerging technologies.  Furthermore, a substantial number of ourtemporary employees during any given year will terminate their employment withus and accept regular staff employment with our customers.  Competition for individuals with provenskills remains intense, and demand for these individuals is expected to remainstrong for the foreseeable future.  Therecan be no assurance that qualified candidates will continue to be available tous in sufficient numbers and on acceptable terms to us.  The failure to identify, recruit, train andplace candidates as well as retain qualified temporary employees over a longperiod of time could materially adversely affect our business.

 

*Our service agreements may be terminated on shortnotice, leaving us vulnerable to loss of a significant amount of customers in ashort period of time.*

 

Our service agreements are generally cancellable withlittle or no notice by the customer to us. As a result, our customers canterminate their agreement with us at any time, making us particularlyvulnerable to a significant decrease in revenue within a short period of timethat could be difficult to quickly replace.

 

*The cost of unemployment insurance for temporaryemployees may rise and reduce our margins.*

 

In the United States, we are responsible for and payunemployment insurance premiums for our temporary and regular employees.  At times, these costs have risen as a resultof increased claims, general economic conditions and governmentregulations.  Should these costs continueto increase, there can be no assurance that we will be able to increase thefees charged to our customers in the future to keep pace with the increasedcosts, and if we do not, our results of operations and liquidity could beadversely affected.

 

*Our information technology systems are critical tothe operations of our business.*

 

Our information management systems are essential fordata exchange and operational communications with branches spread across largegeographical distances.  We have replacedkey component hardware and software including backup systems within the pasttwelve months.  On November 12,2007, we implemented a new accounts receivable billing and temporary payrollsystem.  The new system receivesinformation from our custom built front office system.  We experienced technical issues afterconversion that were not detected during the testing phases.  These issues affected both the payroll andbilling systems.  We believe that we haveidentified and resolved the significant issues. These issues were disruptive to our business and could affect customerand employee relations.  Additionally,these issues required significant amount of management time that impacted ourability to sell new services during the first and second quarters of fiscal2008.  Continued interruption, impairmentor loss of data integrity or malfunction of these systems could severely impactour business, especially our ability to timely and accurately pay employees andbill customers.

 

*Our business is subject to extensive governmentregulation, which may restrict the types of employment services that we arepermitted to offer or result in additional tax or other costs that adverselyaffect our revenues and earnings.*

 

We are in the business of employing people and placingthem in the workplace of other businesses on either a temporary or permanentbasis.  As a result, we are subject toextensive laws and regulations relating to employment.  Changes in laws or government regulations mayresult in prohibition or restriction of certain types of employment services weare permitted to offer or the imposition of new or additional benefit,licensing or tax requirements that could reduce our revenues and earnings.  There can be no assurance that we will beable to increase the fees charged to our customers in a timely manner and in asufficient amount to cover increased costs as a result of any changes in lawsor government regulations.  Any futurechanges in laws or government regulations may make it more difficult orexpensive for us to provide staffing services and could have a material adverseeffect on our business, financial condition or results of operations.

 

*We may be exposed to employment-related claims andcosts that could materially adversely affect our business.*

 

The risks related to engaging in our business includebut are not limited to:

 

·                  claims by our placed personnel ofdiscrimination and harassment directed at them, including claims arising fromthe actions of our customers;

 

·                  workers’ compensation claims andother similar claims;

 

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·                  violations of wage and hour laws andrequirements;

 

·                  claims of misconduct, includingcriminal activity or negligence on the part of our placed personnel;

 

·                  claims by our customers relating toactions by our placed personnel, including property damage and personal injury,misuse of proprietary information and misappropriation of assets or othersimilar claims; and

 

·                  immigration related claims.

 

In addition, some or all of these claims may give riseto litigation, which could be time-consuming to our management team, andtherefore, could have a negative effect on our business, financial conditionsand results of operations. In some instances, we have agreed to indemnify ourcustomers against some or all of these types of liabilities.  We have policies and guidelines in place tohelp reduce our exposure to these risks and have purchased insurance policiesagainst certain risks in amounts that we currently believe to be adequate.  However, there can be no assurance that ourinsurance will be sufficient in amount or scope to cover these types ofliabilities or that we will be able to secure insurance coverage for such riskson affordable terms.  Furthermore, therecan be no assurance that we will not experience these issues in the future orthat they could have a material adverse effect on our business.

 

*The market for our stock may be limited, and thestock price may continue to be extremely volatile.*

 

The average daily trading volume for our common stockon the NASDAQ Global Market was approximately 19,000 shares during the 24 weeksended April 19, 2008.  Accordingly,the market price of our common stock is subject to significant fluctuationsthat have been, and may continue to be, exaggerated because an active tradingmarket has not developed for our common stock. We believe that the price of ourcommon stock has also been negatively affected by the fact that our commonstock is thinly traded and also due to the absence of analyst coverage.  The lack of analyst reports about our stockmay make it difficult for potential investors to make decisions about whetherto purchase our stock and may make it less likely that investors will purchasethe stock, thus further depressing the stock price.  These negative factors may make it difficultfor stockholders to sell our common stock, which may result in losses forinvestors.

 

*The compliance costs associated with Section 404and other requirements of the Sarbanes-Oxley Act of 2002 regarding internalcontrol over financial reporting could be substantial, while failure to achieveand maintain compliance could have an adverse effect on our stock price.*

 

Pursuant to Section 404 of the Sarbanes-Oxley Actof 2002 and current SEC regulations, beginning with our Annual Report on Form 10-Kfor the fiscal year ending November 1, 2008, we will be required tofurnish a report by our management on our internal control over financialreporting.  We will be required to haveour independent registered public accounting firm attest to management’sassessment on our internal control over financial reporting beginning with ourAnnual Report on Form 10-K for the fiscal year ending October 31,2009.  However, on February 1, 2008,the SEC proposed a one-year extension to the independent registered publicaccounting firm attestation requirement, which, if adopted, would require us tofirst comply with this requirement beginning with our Annual Report on Form 10-Kfor the fiscal year ending October 30, 2010.  The process of fully documenting and testingour internal control procedures in order to satisfy these requirements willresult in increased general and administrative expenses and may shiftmanagement time and attention from business activities to complianceactivities. Furthermore, during the course of our internal control testing, wemay identify deficiencies which we may not be able to remediate in time to meetthe reporting deadline under Section 404. Failure to achieve and maintain an effective internal controlenvironment or complete our Section 404 certifications could have amaterial adverse effect on our stock price.

 

*We are involved in an action taken by theCalifornia Employment Development Department.*

 

During the fourth quarter of fiscal 2005, the Companywas notified by the California Employment Development Department (“EDD”) that itsdomestic operating subsidiaries unemployment tax rates would be increasedretroactively for both calendar years 2005 and 2004, which would result inadditional unemployment taxes of approximately $0.9 million together withinterest at applicable statutory rates. Management believes that it hasproperly calculated its unemployment insurance tax and is in compliance withall applicable laws and regulations. The Company has timely appealed the rulingby the EDD and is working with the outside counsel to resolve this matter.  Although we believe that we have properlycalculated our unemployment insurance tax and are in compliance with allapplicable laws and regulations, there can be no assurances this will besettled in our favor.

 

*We have significant amounts of assets on ourbalance sheet for which their realization is dependent on our futureprofitability.*

 

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As of April 19, 2008, we have goodwill andintangibles of $16.3 million. During the Company’s second quarter severalfactors led management to consider whether its goodwill and other intangiblesmight be impaired. These factors included three possible indicators ofimpairment, including: a) a decline in the market capitalization of the companyto a level below the book carrying value of its equity; 2) the sale of its UKsubsidiary below the fair value as determined at September 1, 2007; and 3)unexpected revenue declines for its US Domestic Reporting Unit through the endof its second fiscal quarter. As a result of these conditions, the Companyperformed the first step in the impairment test required by SFAS 142 whichcompares the fair value of a reporting unit to its carrying value, includinggoodwill and intangibles which in this case totaled $11.4 million assigned toits US Domestic Services Reporting Unit. Although the Company concluded thatthe fair value of its US Domestic Reporting Unit exceeded carrying value andmarket capitalization which indicated that the Company’s goodwill was notimpaired, the estimated fair value of its intangibles will be influenced by ourfuture profitability. If we are unable to return to our historical levels ofprofitability, we may need to write off a portion or all of these assets whichwould result in a reduction of our assets and stockholders equity.

 

Under U.S. GAAP, we are required to evaluate therealizability of the deferred tax assets based on our ability to generatefuture taxable income.  For the secondquarter of fiscal 2008, the Company established a valuation allowance of $23.2million against deferred tax assets.   As of April 19, 2008 we have deferred tax assets after valuationallowance of $1.2 million.  Theseallowances were recorded against the deferred tax assets because the Companyhas recently reassessed the potential for their realization in future years.Although it is possible these deferred tax assets could still be realized inthe future, the Company believes that it is more likely than not that thesedeferred tax assets will not be realized in the foreseeable future.  The Company intends to reevaluate itsposition with respect to the valuation allowance in future periods.

 

*We are a defendant in a variety of litigation andother actions from time to time, which may have a material adverse effect on ourbusiness, financial condition and results of operations.*

 

We are regularly involved in a variety of litigationarising out of our business and, in recent years, have paid significant amountsas a result of adverse arbitration awards. We do not have insurance for some of these claims, and there can be noassurance that the insurance coverage we have will cover all claims that may beasserted against us.  Should the ultimatejudgments or settlements not be covered by insurance or exceed our insurancecoverage, they could have a material adverse effect on our results ofoperations, financial position and cash flows. There can also be no assurance that we will be able to obtainappropriate and sufficient types or levels of insurance in the future or that adequatereplacement policies will be available on acceptable terms, if at all.

 

*Improper disclosure of employee and customer datacould result in liability and harm to our reputation.*

 

Our business involves the use, storage andtransmission of information about our employees and their customers.  It is possible that our security controlsover personal data and other practices we and our third party service providersfollow may not prevent the improper access to or disclosure of personallyidentifiable information.  Suchdisclosure could harm our reputation and subject us to liability under ourcontracts and laws that protect personal data, resulting in increased costs orloss of revenue.  Further, data privacyis subject to frequently changing rules and regulations.  Our failure to adhere to or successfullyimplement processes in response to changing regulatory requirements in thisarea could result in legal liability or impairment to our reputation in themarketplace.

 

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**Item 2.    Unregistered Sales ofEquity Securities and Use of Proceeds**

 

Not applicable.

 

**Item 3.    Defaults Upon SeniorSecurities**

 

Not applicable.

 

**Item 4.    Submission of Mattersto a Vote of Security Holders**

 

                None.

 

**Item 5.    Other Information**

 

No events.

 

**Item 6.    Exhibits**

 

Set forth below is a list of the exhibitsincluded as part of this Quarterly Report:

 

| 31.1 |   | Certification of the Chief  Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of  2002. |
|------|--------|----------------------------------------------------------------------------------------------------------------|
| 31.2 |   | Certification of the Chief  Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of  2002. |

 

 

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**SIGNATURES**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the Registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 
|                                                      |   | WESTAFF, INC.                                           |
|------------------------------------------------------|--------|---------------------------------------------------------|
|                                                 |   |                                                    |   |
|                                                 |   |                                                    |   |
| November 20, 2008                                    |   |    /s/ Christa C. Leonard                |   |
|         Date |   |       Christa C.  Leonard |   |
|                                                 |   |                                                    | Senior Vice President and Chief Financial  Officer |
|                                                      |        |                                                         |  |  |

 

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