#####  

 

##### **UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D. C.  20549**

 

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

 

**Amendment No. 1**

 

| **x**                                                  | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934.** |
|--------------------------------------------------------|----------------------------------------------------------------------------------------------------------|
|                                                   |                                                                                                     |
| **For the quarterly period ended  July 12, 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:

**CommonStock, $0.01 par value per share**

 

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.

 

| Large accelerated filer o                     |   | Accelerated filer o         |
|-----------------------------------------------|--------|----------------------------------|
|                                          |   |                             |
| Non-accelerated filer o                       |   | Smaller reporting company x |
| (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 August 25, 2008** |
|------------------------------------------|------------|-----------------------------------------|
| Common Stock, $0.01 par  value per share |       | 16,697,010 shares                       |

 

 

##### ** **

##### 

 

**EXPLANATORY NOTE**

 

This Amendment No. 1to the Quarterly Report on Form 10-Q of Westaff, Inc. (the“Registrant”) amends the Registrant’s Quarterly Report on Form 10-Q forthe quarterly period ended July 12, 2008 that was originally filed withthe Securities and Exchange Commission on August 26, 2008 (the “OriginalFiling”).  This Amendment No. 1 isbeing filed to make the following change:

 

·      Part II,Item 1A – Risk Factors

 

We changed the following sentence to correct atypographical item:

 

“As of July 12, 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 havebeen made to the Original Filing.  ThisAmendment No. 1 does not amend or update any other information set forthin the Original Filing including the information contained in the condensedconsolidated balance sheets, statements of operations and cash flows as of July 12,2008 and for the 12 and 36 weeks then ended, and the Registrant has not updateddisclosures contained therein to reflect any events subsequent to the filing ofthe Original Filing.  This Amendment No. 1consists solely of the preceding cover page, this explanatory note, Item 1A (asamended), the signature page and the certifications required to be filedas exhibits hereto.

 

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### **Item 1A.  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 the Company’s actual resultsand financial position to differ materially from those expressed or implied inforward-looking statements and to be below the expectations of public marketanalysts and investors. See “Cautionary Statement Regarding Forward-LookingStatements” in Part I, Item 2, “Management’s Discussion andAnalysis of Financial Condition and Results of Operations.” Any one of the following risks couldharm our operating results or financial condition and could result in asignificant decline in the value of an investment in us. Further, additionalrisks and uncertainties that have not yet been identified or which we currentlybelieve are immaterial may also harm our operating results and financialcondition.

 

*The recent economic downturn could result in ourcustomers using fewer staffing services, which could materially adverselyaffect our business.*

 

Demand for staffing services is significantly affectedby the general level of economic activity. We expect that the recent downturn in the economy will continue toimpact the demand for staffing services and the Company’s performance.  As economic activity slows, many customersreduce their utilization of temporary employees before undertaking layoffs oftheir regular full-time employees. Further, demand for permanent placement services also slows as the laborpool directly available to our customers increases, making it easier for themto identify new employees directly. Typically, we may experience increased pricing pressures from otherstaffing companies during periods of economic downturn, which could have amaterial adverse effect on our financial condition. Additionally, in geographicareas where we derive a significant amount of business, a regional or localizedeconomic downturn could adversely affect our operating results and financialposition.

 

*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 are generallypaid on a weekly basis while payments from customers are generally received 30to 60 days after billing. As a result, we must maintain sufficient cashavailability 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 ourbusiness.  There can be no assurance thatwe will be able to access the funds necessary for our liquidity requirements, especiallyin light of the recent downturn in the economy and dislocations in the creditand capital markets.

 

We finance our operations primarily through cashgenerated by our operating activities and through borrowings under ourrevolving credit facilities.  Our primarycredit facility is the Financing Agreement with U.S. Bank and Wells Fargo,which provides for a five-year revolving credit facility with an aggregatecommitment of up to $33.0 million.  Inaddition, our Australian subsidiary maintains an A$12.0 million Australiandollar facility agreement with GE Capital that expires in May 2009.  As of July 12, 2008, our total borrowingcapacity was $13.2 million, consisting of $5.3 million for our domesticoperations and $7.9 million for our Australian operations.

 

The amounts we are entitled to borrow under ourrevolving credit facilities are calculated daily and are dependent on eligibletrade accounts receivable generated from operations, which are affected byfinancial, business, economic and other factors, as well as by the daily timingof cash collections and cash outflows. If we experience a significant and sustained drop in operating profits,or if there are unanticipated reductions in cash inflows or increases in cashoutlays, we may be subject to cash shortfalls. If such a shortfall were to occur for even a brief period of time, itmay have a significant adverse effect on our business, financial condition orresults of operations.  Furthermore, ourreceivables may not be adequate to allow for borrowings for other corporatepurposes, such as capital expenditures or growth opportunities, and we would beless able to respond to changes in market or industry conditions.

 

We typically experience significant seasonal and otherfluctuations in our borrowings and borrowing availability, particularly in theUnited States, and aggressively manage our cash to ensure adequate funds tomeet working capital requirements.  Suchsteps include working to improve collections and adjusting the timing of cashexpenditures and reducing operating expenses where feasible.

 

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.

 

*We are currently in default under the primarycredit facility that we use to finance our operations.  If we are unable to obtain a waiver orcontinued forbearance with respect to this default, we may be unable to satisfyour liquidity requirements and continue our operations as a going concern.*

 

We finance our operations primarily through cashgenerated by our operating activities and through borrowings under ourrevolving line of credit with U.S. Bank, National Association (“U.S. Bank”) andWells Fargo Bank, National Association, as lenders.  On May 23, 2008, we received a notice ofdefault from U.S. Bank (as agent for itself and Wells Fargo Bank) stating that (1) anEvent of Default (as defined in the Financing Agreement) had occurred due toour failure to achieve a minimum required Fixed Charge Coverage Ratio (asdefined in the Financing Agreement) for our fiscal period ended April 19,2008; and (2) as a result of the Event of Default, effective May 21,2008, U.S. Bank increased the rate of interest to the default rate of intereston the borrowings outstanding under our line of credit. We had no borrowingsoutstanding under the Financing Agreement, but do have $27.3 million of lettersof credit outstanding supporting our workers’ compensation obligations.

 

On July 31, 2008, we entered into a ForbearanceAgreement with U.S. Bank and the lenders. Pursuant to the terms of the Forbearance Agreement, (i) the lendersagreed to forbear from exercising any of their default rights and remedies inresponse to the occurrence and continuance of the Event of Default commencingon the date of the Forbearance Agreement and ending on August 26, 2008, (ii) weagreed to a reduction in the aggregate amount of the commitments under our lineof credit from $50.0 million to $33.0 million effective as of June 23,2008, and (iii) U.S. Bank agreed to maintain a reserve against therevolving credit availability to cover our payroll and payroll tax obligations.

 

                Weare currently in discussions with U.S. Bank in order to seek a waiver orcontinued forbearance in respect to the Event of Default.  There can be no assurance that we will beable to obtain a waiver or continued forbearance on terms acceptable to us, orat all.  If we are unable to obtain awaiver and the lenders elect to pursue their remedies under the line of credit,such as limiting or terminating our right to borrow or electing not to renewletters of credit, we may be unable to obtain the liquidity we need to continueour operations as a going concern or obtain workers’ compensation insuranceneeded to operate.  Even if we are ableto obtain funds through the line of credit, it is possible that limitations onthe terms under which such borrowing may be made could adversely affect ourbusiness and operating results.

 

On August 25, 2008, we entered into a SubordinatedLoan Agreement with our principal stockholder, Delstaff, LLC, which provides aloan facility allowing us to request loan advances in an aggregate principalamount of up to $3.0 million.  Thematurity date of the Subordinated Loan Agreement is August 15, 2009 (the “MaturityDate”).

 

The unpaid principal balance due under theSubordinated Loan bears interest at an annual rate of twenty percent(20%).  Interest is payable-in-kind andaccrues monthly in arrears on the first day of each month as an increase in theprincipal amount of the Subordinated Loan. A default rate applies on all obligations under the Subordinated LoanAgreement from and after the Maturity Date and also during the existence of anEvent of Default (as defined in the Subordinated Loan Agreement) at an annualrate of ten percent (10%) also payable-in-kind over the then-existing applicableinterest rate and if principal is not repaid on the Maturity Date, anadditional 5% of outstanding principal must be paid along with the default rateinterest.  Our obligations under theSubordinated Loan Agreement are secured by a security interest in substantiallyall of our existing and future assets (the “Subordinated Collateral”).  The lien granted to the Subordinated Lenderin the Subordinated Collateral is subordinated to the lien in that samecollateral granted to U.S. Bank.  We mayuse the Subordinated Loan for working capital and general business purposes.  Any borrowings in excess of $1.0 millionrequire Subordinated Lender approval.  TheSubordinated Loan may be prepaid without penalty, subject to approval by U.S.Bank, and the terms of an Intercreditor Agreement.

 

Under certain circumstances, we must prepay all or aportion of any amounts outstanding under the Subordinated Loan Agreement,subject to the terms of the Intercreditor Agreement.

 

3

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Under the terms of the Subordinated Loan Agreement,the Company has agreed to pay to the Subordinated Lender a facility fee at theclosing which will be added to the principal of the Subordinated Loans at theclosing, but will not reduce the availability of the $3.0 million facility.

 

*We may be unable to adequately collateralize ourworkers’ compensation obligations at their current levels or at all.*

 

We are contractually obligated to collateralize ourworkers’ compensation obligations under our workers’ compensation programthrough irrevocable letters of credit, surety bonds or cash.  As of July 12, 2008, our aggregatecollateral requirements under these contracts have been secured through $27.3million of letters of credit obtained through our U.S. Bank facility.  Our workers’ compensation program expires November 1,2008, and as part of the renewal, could be subject to an increase incollateral.  These collateralrequirements are significant and place pressure on our liquidity and workingcapital capacity.  If we are not able toobtain a renewal of our letters of credit at a level sufficient to meet ourcollateral requirements, we could be unable to obtain sufficient workers’compensation coverage to support our operations.

 

*We have had significant turnover in our managementteam and further loss of any of our key personnel or failure to recruit  for key open positions could harm ourbusiness.*

 

We have experienced substantial, ongoing turnoveramong members of our senior management team since the middle of 2007.  This turnover and other staffing issues havesignificantly affected both our operations and finance organizations, and, inthe case of our finance organizations, directly contributed to the creation andexistence of a continuing material weakness in our disclosure controls andprocedures as discussed in Item 4T, “Controls and Procedures” included elsewhere in thisQuarterly Report on Form 10-Q.  Anyfurther loss of senior management personnel or difficulties in filling openpositions may harm our business.

 

On June 4, 2008, we announced the appointment ofMark Bierman as our Senior Vice President and Chief Information Officer.  On June 16, 2008, we hired a new ChiefOperating Officer, Stephen J. Russo, and Chief Financial Officer, Christa C. Leonard,both with significant industry and Company experience.  We continue to undertake a number of steps,including retaining executive search firms, to fill our vacant Controllerposition.

 

Our future financial performance is significantlyimpacted by our ability to attract, motivate and retain key managementpersonnel and other members of the senior management team.  Competition for qualified managementpersonnel is intense and in the event that we experience additional turnover insenior management positions, we cannot assure that we will be able to recruitsuitable replacements on a timely basis. We must also successfully integrate all new management and other keypositions within our organization to achieve our operating objectives.  Even if we are successful, turnover in keymanagement positions could temporarily harm our financial performance andresults of operations until the new management becomes familiar with ourbusiness.

 

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

 

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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 we do 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.

 

*Failureto implement our new strategies could impede our growth and result insignificant added costs.*

 

In fiscal 2007, we madesignificant changes to our field structure and hired several new key executiveslate in the fiscal year to seek to grow new business markets for theCompany.  Our failure to implement thesenew strategies could impede our growth and result in significant addedcosts.  Even if our new strategies aresuccessfully implemented, they may not have the favorable impact on ourbusiness 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 July 12, 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 our principal stockholder, DelStaff andits affiliates have the ability to significantly influence all matterssubmitted to our stockholders for approval, including the election ofdirectors, and to exert significant influence over our management andaffairs.  On April 30, 2007, weentered into a Governance Agreement with DelStaff, Mr. Willis and Mr. Stover.On May 9, 2007, pursuant to the terms of the Governance Agreement, weexpanded the size of our Board of Directors from five to nine directors andappointed the following DelStaff nominees to the Board: Michael T. Willis, JohnR. Black, Michael R. Phillips, Gerald E. Wedren and John G. Ball.  DelStaff also has the ability to stronglyinfluence any merger, consolidation, sale of substantially all of our assets orother strategic decisions affecting us or the market value of the stock.  This concentration of stock and voting powercould be used by DelStaff to delay or prevent an acquisition of Westaff orother strategic action or result in strategic decisions that could negativelyimpact the value and liquidity of our outstanding stock.

 

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*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 exactcalculation of liability and are affected by both internal and external events,such as adverse development on existing claims, changes in medical costs,claims handling 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 in fiscal2008 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.

 

*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 occurs dailyor weekly.  In addition, we establish anallowance for doubtful accounts for estimated losses resulting from theinability 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 accountsreceivable is used to secure our revolving credit facilities, which we rely onfor liquidity.  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.

 

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

 

Franchise agent operations comprise a significantportion of our revenue.  For the first 36weeks of 2008, franchisees represented 30.0% of gross receipts.  In addition, our ten largest franchise agentsfor the first 36 weeks of fiscal 2008 (based on sales volume) accounted for20.2% 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 26.5% of our revenue for 36-week period ended July 12,2008.  Operations in foreign markets areinherently subject to certain risks, including in particular:

 

·                  differences in cultures andbusiness practices;

 

·                  overlapping or differing taxlaws and regulations;

 

·                  economic and politicaluncertainties;

 

·                  differences in accountingand reporting requirements;

 

·                  changing, complex orambiguous foreign 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.

 

*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 half of fiscal 2008.  We have made progress in resolving thesespecific payroll and billing systems issues. However, any future interruption, impairment or loss of data integrityor malfunction of these systems could severely impact our business, especiallyour ability to timely and accurately pay employees and bill customers.

 

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* *

*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 placedpersonnel of discrimination and harassment directed at them, including claimsarising from the actions of our customers;

 

·                  workers’ compensation claimsand other similar claims;

 

·                  violations of wage and hourlaws and requirements;

 

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

 

·                  claims by our customersrelating to actions by our placed personnel, including property damage andpersonal injury, misuse of proprietary information and misappropriation ofassets or other similar 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 has been and may continue to be extremely volatile.*

 

The average daily trading volume for our common stockon the NASDAQ Global Market was approximately 16,500 shares during the 36 weeksended July 12, 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 difficult forstockholders 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.*

 

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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’s assessmenton our internal control over financial reporting beginning with our AnnualReport on Form 10-K for 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 EDD that its domestic operating subsidiaries unemploymenttax rates would be increased retroactively for both calendar years 2005 and2004, which would result in additional unemployment taxes of approximately $0.9million together with interest at applicable statutory rates. Managementbelieves that it has properly calculated its unemployment insurance tax and isin compliance with all applicable laws and regulations. The Company has timelyappealed the ruling by the EDD and is working with the outside counsel toresolve this matter.  Although we believethat we have properly calculated our unemployment insurance tax and are incompliance with all applicable laws and regulations, there can be no assurancesthis will be settled in our favor.

 

*We have assets on our balance sheet for which theirrealization is dependent on our future profitability.*

 

Asof July 12, 2008, we have intangibles of $3.5 million. During the Company’sthird quarter of fiscal year 2008 in light of the continued decline in revenuepartially due to a loss of a major customer and the continued decline in marketcapitalization for Westaff, the Company determined that an interim impairmenttest was necessary during the third quarter of 2008.  Based on the impairment evaluation as of July 12,2008, it was determined that the indefinite life franchise right intangible wasimpaired by $0.2 million.  Such animpairment charge was measured in accordance with SFAS 142 as the excess of thecarrying value over the fair value of the asset.   After completing the intangible assetimpairments, the Company compared the fair value of the US Reporting Unit toits carrying value and determined that the reporting unit was impaired.  Upon completion of step two of the impairmenttest, the Company recorded a goodwill impairment of $11.4 million in relationto its U.S. domestic services reporting unit.

 

A majority of the remaining intangible asset balanceof $3.5 million as of July 12, 2008 relates to an indefinite lifefranchise right intangible relating to the Houston market.  If we are unable to maintain our projectedlevels of profitability for this market, we may need to write off a portion orall of these assets which would result in a reduction of our assets andstockholders equity.

 

Under U.S. GAAP, we are required to evaluate therealizability of the deferred tax assets based on our ability to generatefuture taxable income.  During the secondquarter of fiscal 2008, the Company established a valuation allowance of $23.2million against deferred tax assets.   As of July 12, 2008 we had deferred tax assets after valuationallowance of $0.8 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 in thefuture, 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 onour business, 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 thatadequate replacement 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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**Item2.    Unregistered Sales of EquitySecurities and Use of Proceeds**

 

Not applicable.

 

**Item3.    Defaults Upon Senior Securities**

 

Not applicable.

 

**Item4.    Submission of Matters to a Vote ofSecurity Holders**

 

                None.

 

**Item5.    Other Information**

 

No events.

 

**Item6.    Exhibits**

 

Set forth below is a list of the exhibits included 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**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the Registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 
|                    |   | WESTAFF, INC.                                       |
|--------------------|--------|-----------------------------------------------------|
|               |   |                                                |
|               |   |                                                |
| November  21, 2008 |   | /s/ Christa C.  Leonard                             |
| Date               |   | Christa C.  Leonard                                 |
|               |   | Senior Vice  President and Chief Financial  Officer |

 

 

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