**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D. C.  20549**

 

**FORM 10-Q**

 
| **(MARK  ONE)**                     |
|-------------------------------------|
|                                |   |
| **ý**                          | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.** |
|                                |   |
|                                | **For the quarterly period ended****April 19,  2003** |
|                                |   |
| **o**                               | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|                                |   |
|                                | **For the transition period from                       to                     ** |
|                                |   |
| **Commission  file number 0-24990** |

 

**WESTAFF,INC.**

(Exact name ofregistrant as specified in its charter)

 

| **Delaware**                                                     |   | **94-1266151**                          |
|------------------------------------------------------------------|--------|-----------------------------------------|
| (State or other  jurisdiction  of incorporation or organization) |   | (I.R.S.employer  identification number) |
|                                                             |   |                                    |
| **298  North Wiget LaneWalnut Creek, California 94598-2453**     |
| (Address of  registrant’s principal executive offices)      |
|                                                             |   |                                    |
| **(925)  930-5300**                                         |
| (Registrant’s telephone  number)                            |

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.     Yes   ý   No   o

 

Indicate by check markwhether the registrant is an accelerated filer (as defined in Rule 12b-2 of theExchange Act).    Yes   o   No   ý

 

Indicate the number ofshares outstanding of each of the issuer’s classes of common stock, as of thelatest practicable date:

 

| **Class**                     |   | **Outstanding  at June 3, 2003** |
|-------------------------------|--------|----------------------------------|
|                          |   |                             |
| Common Stock,  $.01 par value |   | 15,995,375  shares               |

 

 

----

 

##### **WESTAFF,INC. AND SUBSIDIARIES**

 

**INDEX**

 
| **Part I.**    | **Financial Information**                                                                                   |
|----------------|-------------------------------------------------------------------------------------------------------------|
|           |                                                                                                        |
| Item 1.        | Financial Statements  (Unaudited)                                                                           |
|           |                                                                                                        |
|           | Condensed  Consolidated Balance Sheets -  April 19, 2003 and November 2, 2002                               |
|           |                                                                                                        |
|           | Condensed  Consolidated Statements of Operations -  12 and 24 weeks ended April 19, 2003 and April 20, 2002 |
|           |                                                                                                        |
|           | Condensed  Consolidated Statements of Cash Flows -  24 weeks ended April 19, 2003 and April 20, 2002        |
|           |                                                                                                        |
|           | Notes  to Condensed Consolidated Financial Statements                                                       |
|           |                                                                                                        |
| Item  2.       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                 |
|           |                                                                                                        |
| Item  3.       | Quantitative  and Qualitative Disclosures About Market Risk                                                 |
|           |                                                                                                        |
| Item 4.        | Controls and  Procedures                                                                                    |
|           |                                                                                                        |
| **Part II.**   | **Other Information**                                                                                       |
|           |                                                                                                        |
| Item 1.        | Legal Proceedings                                                                                           |
|           |                                                                                                        |
| Item 2.        | Changes in Securities                                                                                       |
|           |                                                                                                        |
| Item 3.        | Defaults upon  Senior Securities                                                                            |
|           |                                                                                                        |
| Item  4.       | Submission  of Matters to a Vote of Security Holders                                                        |
|           |                                                                                                        |
| Item 5.        | Other Information                                                                                           |
|           |                                                                                                        |
| Item 6.        | Exhibits and Reports  on Form 8-K                                                                           |
|           |                                                                                                        |
| Signatures     |
|           |                                                                                                        |
| Certifications |

 

----

 

**Part l.  Financial Information**

** **

**Item 1.  Financial Statements**

 

**Westaff,Inc.**

 

**Condensed Consolidated Balance Sheets(Unaudited)**

**(Inthousands except per share amounts)**

 
|                                                                                                                                                     |   | **April 19,  2003** |    | **November 2,  2002** |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------|---------|-----------------------|--------|
| **ASSETS**                                                                                                                                               |   |                |    |                  |   |
| Current  assets:                                                                                                                                         |   |                |    |                  |   |
| Cash  and cash equivalents                                                                                                                               |   | $                   | 4,230   |                  | $      | 5,484 |   |
| Trade  accounts receivable, less allowance for doubtful accounts of $1,341 and  $1,316                                                                   |   | 59,424              |    | 70,861                |   |
| Income  taxes receivable                                                                                                                                 |   | 489                 |    | 5,227                 |   |
| Prepaid  expenses                                                                                                                                        |   | 5,327               |    | 5,373                 |   |
| Other  current assets                                                                                                                                    |   | 3,082               |    | 4,500                 |   |
| Total  current assets                                                                                                                                    |   | 72,552              |    | 91,445                |   |
|                                                                                                                                                     |   |                |    |                  |   |
| Property  and equipment, net                                                                                                                             |   | 14,365              |    | 15,778                |   |
| Goodwill,  net                                                                                                                                           |   | 11,488              |    | 12,034                |   |
| Other  long-term assets                                                                                                                                  |   | 2,413               |    | 2,698                 |   |
| Total  Assets                                                                                                                                            |   | $                   | 100,818 |                  | $      | 121,955 |   |
|                                                                                                                                                     |   |                |    |                  |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                            |   |                |    |                  |   |
| Current  liabilities:                                                                                                                                    |   |                |    |                  |   |
| Short-term  borrowings                                                                                                                                   |   | $                   | 190     |                  | $      | 9,667 |   |
| Current  portion of long-term debt and capital lease obligations                                                                                         |   | 10,415              |    | 4,500                 |   |
| Note  payable to related party                                                                                                                           |   |                |    | 1,000                 |   |
| Accounts  payable                                                                                                                                        |   | 1,616               |    | 2,657                 |   |
| Accrued  expenses                                                                                                                                        |   | 30,816              |    | 38,165                |   |
| Income  taxes payable                                                                                                                                    |   | 483                 |    | 779                   |   |
| Net  liabilities of discontinued operations                                                                                                              |   | 680                 |    | 605                   |   |
| Total  current liabilities                                                                                                                               |   | 44,200              |    | 57,373                |   |
|                                                                                                                                                     |   |                |    |                  |   |
| Note  payable to related party                                                                                                                           |   | 2,000               |    | 2,000                 |   |
| Long-term  debt and capital lease obligations                                                                                                            |   | 825                 |    | 10,000                |   |
| Other  long-term liabilities                                                                                                                             |   | 17,948              |    | 13,632                |   |
| Total  liabilities                                                                                                                                       |   | 64,973              |    | 83,005                |   |
|                                                                                                                                                     |   |                |    |                  |   |
| Commitments  and contingencies                                                                                                                           |   |                |    |                  |   |
|                                                                                                                                                     |   |                |    |                  |   |
| Stockholders’  equity:                                                                                                                              |   |                |    |                  |   |
| Preferred  stock, $.01 par value; authorized and unissued: 1,000 shares                                                                                  |   |                |    |                  |   |
| Common  stock, $.01 par value; authorized: 25,000 shares; issued and outstanding:  15,995 shares at April 19, 2003 and 15,972 shares at November 2, 2002 |   | 160                 |    | 160                   |   |
| Additional  paid-in capital                                                                                                                              |   | 36,670              |    | 36,627                |   |
| Retained  earnings                                                                                                                                       |   | 999                 |    | 4,680                 |   |
| Accumulated  other comprehensive loss                                                                                                                    |   | (1,984              | )       | (2,517                | )      |
| Total  stockholders’ equity                                                                                                                         |   | 35,845              |    | 38,950                |   |
| Total  Liabilities and Stockholders’ Equity                                                                                                         |   | $                   | 100,818 |                  | $      | 121,955 |   |

 

See accompanyingnotes to condensed consolidated financial statements.

 

3

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**Westaff,Inc.**

 

**Condensed Consolidated Statements ofOperations (Unaudited)**

**(Inthousands except per share amounts)**

 
|                                                                                                          |   | **12 Weeks Ended**  |    | **24 Weeks Ended**  |   |
|---------------------------------------------------------------------------------------------------------------|--------|---------------------|---------|---------------------|--------|
|                                                                                                          |   | **April 19,  2003** |    | **April 20,  2002** |   | **April 19,  2003** |   | **April 20,  2002** |   |
|                                                                                                          |   |                |    |                |   |   |   |   |   |
| Revenues                                                                                                      |   | $                   | 116,442 |                | $      | 109,676 |   | $ | 234,275 |   | $ | 216,669 |   |
|                                                                                                          |   |                |    |                |   |   |   |   |   |
| Costs  of services                                                                                            |   | 96,632              |    | 89,049              |   | 194,095 |   | 176,039 |   |
|                                                                                                          |   |                |    |                |   |   |   |   |   |
| Gross  profit                                                                                                 |   | 19,810              |    | 20,627              |   | 40,180 |   | 40,630 |   |
|                                                                                                          |   |                |    |                |   |   |   |   |   |
| Franchise  agents’ share of gross profit                                                                 |   | 3,562               |    | 3,339               |   | 6,973 |   | 6,468 |   |
| Selling  and administrative expenses                                                                          |   | 17,226              |    | 16,851              |   | 33,114 |   | 34,612 |   |
| Depreciation  and amortization                                                                                |   | 1,310               |    | 1,577               |   | 2,591 |   | 3,094 |   |
| Restructuring  charges                                                                                        |   |                |    |                |   |   |   | 1,896 |   |
|                                                                                                          |   |                |    |                |   |   |   |   |   |
| Operating  loss from continuing operations                                                                    |   | (2,288              | )       | (1,140              | )      | (2,498 | ) | (5,440 | ) |
|                                                                                                          |   |                |    |                |   |   |   |   |   |
| Interest  expense                                                                                             |   | 356                 |    | 669                 |   | 822 |   | 1,136 |   |
| Interest  income                                                                                              |   | (49                 | )       | (104                | )      | (101 | ) | (216 | ) |
|                                                                                                          |   |                |    |                |   |   |   |   |   |
| Loss  from continuing operations before income taxes and cumulative effect of  change in accounting principle |   | (2,595              | )       | (1,705              | )      | (3,219 | ) | (6,360 | ) |
| Provision  (benefit) for income taxes                                                                         |   | 68                  |    | (3,101              | )      | 109 |   | (3,103 | ) |
|                                                                                                          |   |                |    |                |   |   |   |   |   |
| Income  (loss) from continuing operations before cumulative effect of change in accounting  principle         |   | (2,663              | )       | 1,396               |   | (3,328 | ) | (3,257 | ) |
|                                                                                                          |   |                |    |                |   |   |   |   |   |
| Income  from discontinued operations                                                                          |   |                |    |                |   | 316 |   |   |   |
|                                                                                                          |   |                |    |                |   |   |   |   |   |
| Cumulative  effect of change in accounting principle                                                          |   |                |    |                |   | (670 | ) |   |   |
|                                                                                                          |   |                |    |                |   |   |   |   |   |
| Net  income (loss)                                                                                            |   | $                   | (2,663  | )                   | $      | 1,396 |   | $ | (3,682 | ) | $ | (3,257 | ) |
|                                                                                                          |   |                |    |                |   |   |   |   |   |
| Earnings  (loss) per share - basic and diluted:                                                               |   |                |    |                |   |   |   |   |   |
|                                                                                                          |   |                |    |                |   |   |   |   |   |
| Continuing  operations before cumulative effect of change in accounting principle                             |   | $                   | (0.17   | )                   | $      | 0.09 |   | $ | (0.21 | ) | $ | (0.20 | ) |
|                                                                                                          |   |                |    |                |   |   |   |   |   |
| Discontinued  operations                                                                                      |   | $                   | —  |                | $      | — |   | $ | 0.02 |   | $ | — |   |
|                                                                                                          |   |                |    |                |   |   |   |   |   |
| Cumulative  effect of change in accounting principle                                                          |   | $                   | —  |                | $      | — |   | $ | (0.04 | ) | $ | — |   |
|                                                                                                          |   |                |    |                |   |   |   |   |   |
| Net  income (loss)                                                                                            |   | $                   | (0.17   | )                   | $      | 0.09 |   | $ | (0.23 | ) | $ | (0.20 | ) |
|                                                                                                          |   |                |    |                |   |   |   |   |   |   |   |   |   |
| Weighted  average shares outstanding—basic                                                               |   |                | 15,994  |                |   | 15,945 |   |   | 15,983 |   |   | 15,929 |   |
|                                                                                                          |   |                |    |                |   |   |   |   |   |   |   |   |   |
| Weighted  average shares outstanding—diluted                                                             |   |                | 15,994  |                |   | 15,971 |   |   | 15,983 |   |   | 15,929 |   |

 

See accompanyingnotes to condensed consolidated financial statements.

 

4

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**Westaff,Inc.**

 

**Condensed Consolidated Statements ofCash Flows (Unaudited)**

**(Inthousands)**

 
|                                                                                    |   | **24 Weeks Ended**  |   |
|-----------------------------------------------------------------------------------------|--------|---------------------|--------|
|                                                                                    |   | **April 19,  2003** |   | **April 20,  2002** |   |
| **Cash flows from operating activities**                                                |   |                |   |   |   |
| Net  loss                                                                               |   | $                   | (3,682 | ) | $ | (3,257 | ) |
| Adjustments  to reconcile net loss to net cash provided (used) by operating activities: |   |                |   |   |   |
| Income  from discontinued operations                                                    |   | (316                | )      |   |   |
| Loss  from cumulative effect of change in accounting principle                          |   | 670                 |   |   |   |
| Restructuring  charges, net of payments                                                 |   |                |   | 1,589 |   |
| Depreciation  and amortization                                                          |   | 2,591               |   | 3,094 |   |
| Provision  for losses on doubtful accounts                                              |   | 291                 |   | 262 |   |
| (Gain)  loss on sale or disposal of assets                                              |   | (9                  | )      | 131 |   |
| Other                                                                                   |   | (62                 | )      |   |   |
| Changes  in assets and liabilities:                                                     |   |                |   |   |   |
| Trade  accounts receivable                                                              |   | 12,486              |   | 12,649 |   |
| Other  assets                                                                           |   | 1,023               |   | (6,161 | ) |
| Accounts  payable and accrued expenses                                                  |   | (5,286              | )      | (8,835 | ) |
| Income  taxes payable                                                                   |   | (300                | )      | (366 | ) |
| Other  liabilities                                                                      |   | 17                  |   | (34 | ) |
|                                                                                    |   |                |   |   |   |
| Net  cash provided (used) by continuing operations                                      |   | 7,423               |   | (928 | ) |
| Net cash  provided by discontinued operations                                           |   | 391                 |   | 37 |   |
|                                                                                    |   |                |   |   |   |
| Net  cash provided (used) by operating activities                                       |   | 7,814               |   | (891 | ) |
|                                                                                    |   |                |   |   |   |
| **Cash flows from investing activities**                                                |   |                |   |   |   |
| Capital  expenditures                                                                   |   | (1,439              | )      | (1,582 | ) |
| Proceeds  from sales of affiliate operations                                            |   | 272                 |   | 160 |   |
| Proceeds  from sales of assets                                                          |   | 7,386               |   |   |   |
| Payments  for intangibles                                                               |   |                |   | (223 | ) |
| Other,  net                                                                             |   |                |   | 390 |   |
|                                                                                    |   |                |   |   |   |
| Net  cash provided (used) by investing activities                                       |   | 6,219               |   | (1,255 | ) |
|                                                                                    |   |                |   |   |   |
| **Cash flows from financing activities**                                                |   |                |   |   |   |
| Net  repayments under line of credit agreements                                         |   | (9,718              | )      |   |   |
| Principal  payments on long-term debt and capital lease obligations                     |   | (4,629              | )      |   |   |
| Proceeds  from note payable to related party                                            |   |                |   | 2,000 |   |
| Payment  of note payable to related party                                               |   | (1,000              | )      |   |   |
| Issuance  of common stock                                                               |   | 43                  |   | 71 |   |
| Repurchase  of common stock                                                             |   |                |   | (13 | ) |
|                                                                                    |   |                |   |   |   |
| Net  cash (used) provided by financing activities                                       |   | (15,304             | )      | 2,058 |   |
|                                                                                    |   |                |   |   |   |
| Effect  of exchange rate changes on cash                                                |   | 17                  |   | (47 | ) |
|                                                                                    |   |                |   |   |   |
| Net  change in cash and cash equivalents                                                |   | (1,254              | )      | (135 | ) |
| Cash  and cash equivalents at beginning of period                                       |   | 5,484               |   | 6,443 |   |
| Cash  and cash equivalents at end of period                                             |   | $                   | 4,230  |   | $ | 6,308 |   |

 

See accompanyingnotes to condensed consolidated financial statements.

 

5

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**Westaff,Inc.**

 

**Notes to Condensed ConsolidatedFinancial Statements (Unaudited)**

**(Inthousands except per share amounts)**

 

**1.****              Basisof Presentation**

 

The accompanyingcondensed consolidated financial statements of Westaff, Inc. and its domesticand foreign subsidiaries (together, the Company), as of and for the 12 and 24week periods ended April 19, 2003 and April 20, 2002 are unaudited.Intercompany accounts and transactions have been eliminated.

 

The condensedconsolidated financial statements, in the opinion of management, reflect alladjustments, which are of a normal recurring nature, necessary for a fairpresentation of the financial position, results of operations and cash flowsfor the periods presented.  Thecondensed consolidated balance sheet at November 2, 2002, presented herein, hasbeen derived from the audited balance sheet included in the Company’s AnnualReport on Form 10-K for the fiscal year ended November 2, 2002.

 

Certain financialinformation which is normally included in annual financial statements preparedin accordance with accounting principles generally accepted in the UnitedStates, but which is not required for interim reporting purposes, has beencondensed or omitted.  The accompanyingcondensed consolidated financial statements should be read in conjunction withthe financial statements and notes thereto included in the Company’s AnnualReport on Form 10-K for the fiscal year ended November 2, 2002.

 

The Company’sfiscal year is a 52 or 53 week period ending the Saturday nearest the end ofOctober.  For interim reportingpurposes, the first three fiscal quarters comprise 12 weeks each, while thefourth fiscal quarter consists of 16 or 17 weeks.  The results of operations for the 12 and 24 week periods ended April19, 2003 are not necessarily indicative of the results to be expected for thefull fiscal year or for any future period.

 

During fiscal year1999, the Company sold its medical business, primarily operated through WesternMedical Services, Inc. (Western Medical), a wholly-owned subsidiary of theCompany (see Note 3).  As a result, theCompany has classified its medical operations as discontinued in thesecondensed consolidated financial statements and notes thereto.

 

The Company hasreclassified certain amounts in the April 20, 2002 financial statements toconform to the presentation in the periods ended April 19, 2003.

 

**2.****             ****Goodwill**

 

Effective November3, 2002, the Company adopted Statement of Financial Accounting Standards (SFAS)No. 142 “Goodwill and Other Intangible Assets”.  SFAS No. 142 provides that goodwill and other intangible assetswith indefinite lives are no longer amortized, but rather are evaluated forimpairment by applying a fair-value based test.  Under the transitional provisions of SFAS No. 142, the first stepis to identify if a potential impairment exists.  This step must be measured as of the beginning of the fiscal yearin which the statement is adopted.  Ifrequired from the results of step 1, the second step of the

 

6

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goodwillimpairment test measures the amount of the impairment loss, if any. Anyimpairment loss identified during the transitional evaluation is to berecognized in the first interim period of the year of adoption as a cumulativeeffect of a change in accounting principle. Any impairment loss incurred subsequent to the initial evaluationrequired by the adoption of SFAS No. 142 is recorded as a charge to currentperiod earnings.

 

In completing thefirst step, the Company identified its reporting units. The carrying value ofeach was then determined.  Using anindependent appraisal firm, the fair value of each reporting unit wasestablished based on both the discounted present value of expected future cashflows and the comparable market prices of select competitors.  Upon completion of this first step, it wasdetermined that an impairment may have existed in the Australia reporting unitand, therefore, the Company was required to perform step two.

 

In completing thesecond step, the Company compared the implied fair value of Australia’sgoodwill to its carrying value and determined that an impairment of $670existed.  The impairment was largely theresult of a significant decrease in Australia’s profitability.  The impairment charge has been classified asa cumulative effect of a change in accounting principle and resulted in arestatement of the Company’s net loss for the fiscal quarter ended January 25,2003.  The effect of the change was toincrease the $348 net loss for the quarter by $670 and to increase the net lossper share of $0.02 by $0.04 per share.

 

The followingtable presents pro-forma reconciliations of net income (loss) and net income(loss) per share as if the provisions of SFAS No. 142 had been applied to allperiods presented:

 
|                                         |   | **12 Weeks Ended**  |   | **24 Weeks Ended**  |   |
|----------------------------------------------|--------|---------------------|--------|---------------------|--------|
|                                         |   | **April 19,  2003** |   | **April 20,  2002** |   | **April 19,  2003** |   | **April 20,  2002** |   |
|                                         |   |                |   |                |   |   |   |   |   |
| Reported  net income (loss)                  |   | $                   | (2,663 | )                   | $      | 1,396 |   | $ | (3,682 | ) | $ | (3,257 | ) |
| Goodwill  amortization                       |   |                |   | 195                 |   |   |   | 389 |   |
| Adjusted  net income (loss)                  |   | $                   | (2,663 | )                   | $      | 1,591 |   | $ | (3,682 | ) | $ | (2,868 | ) |
|                                         |   |                |   |                |   |   |   |   |   |
| Basic  and diluted earnings (loss) per share |   | $                   | (0.17  | )                   | $      | 0.09 |   | $ | (0.23 | ) | $ | (0.20 | ) |
| Goodwill  amortization                       |   |                |   | 0.01                |   |   |   | 0.02 |   |
| Adjusted  earnings (loss) per share          |   | $                   | (0.17  | )                   | $      | 0.10 |   | $ | (0.23 | ) | $ | (0.18 | ) |

 

The changes in thecarrying amount of goodwill for the 24 weeks ended April 29, 2003 are asfollows:

** **

**7**

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** **
|                                                 |   | **Domestic  Business Services** |   | **Other  International** |   | **Total** |   |
|------------------------------------------------------|--------|---------------------------------|--------|--------------------------|--------|-----------|--------|
|                                                 |   |                            |   |                     |   |      |   |
| Balance  at November 2, 2002                         |   | $                               | 10,788 |                     | $      | 1,246     |   | $ | 12,034 |   |
| Cumulative  effect of change in accounting principle |   |                            |   | (670                     | )      | (670      | )      |
| Foreign  currency translation adjustments            |   |                            |   | 124                      |   | 124       |   |
|                                                 |   |                            |   |                     |   |      |   |
| Balance  at April 19, 2003                           |   | $                               | 10,788 |                     | $      | 700       |   | $ | 11,488 |   |

 

**3.****             ****Discontinued Operations**

 

During fiscal1999, the Company sold certain of its franchise agent and Company-owned medicaloffices and entered into a termination agreement with one of its medicallicensees. During the fourth quarter of fiscal 1999, the Company completed thesale of the remaining medical business to Intrepid U.S.A. Inc. (Intrepid) underan asset purchase agreement. Under the terms of the sale, the Company retainedthe majority of accounts receivable, including trade and Medicare accountsreceivable balances.

 

Prior to fiscal2003,  the Company appealed WesternMedical’s 1996 Medicare cost report settlement.  During the first quarter of fiscal 2003, the appeal was settledand Western Medical received additional cost reimbursements.  As a result of the favorable appealsettlement, the Company recognized $316 of income from discontinued operationsin the fiscal quarter ended January 25, 2003.

 

As of April 19,2003, the remaining current liabilities of the discontinued medical operationsare for pending legal claims of $350, malpractice/liability claims of  $355 and other costs of $2.

 
|                                        |   | **April 19,  2003** |   | **November 2,  2002** |   |
|---------------------------------------------|--------|---------------------|--------|-----------------------|--------|
|                                        |   |                |   |                  |   |
| Current  assets (primarily receivables)     |   | $                   | 27     |                  | 130    |   |
| Current  liabilities                        |   | (707                | )      | (735                  | )      |
| Net  liabilities of discontinued operations |   | $                   | (680   | )                     | $      | (605 | ) |
|                                             |        |                     |        |                       |        |  |  |

 

 

**4.****              RestructuringCharges**

 

During fiscal2002, the Company implemented a restructuring plan designed to improve theCompany’s profitability.  Therestructuring plan resulted in a fiscal 2002 pre-tax charge to operations of$1,896. Of this amount, $993 was the result of abandoning front and back officemanagement information systems that were under development with two softwarevendors.  One of these vendors chose tocease further development of its portion of the project and that caused thecontinued development of these systems to no longer be cost-effective

 

8

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for theCompany.  In conjunction with thisabandonment, the Company recognized the historical fees paid to vendors, feespaid to consultants and certain in-house development costs as expenses, all ofwhich had been previously capitalized. An additional $629 resulted fromseverance and other employment termination costs due to planned personnelreductions.  Finally, as of the date therestructuring plan was finalized, the Company decided to close 18 officeswithin the United States and the resulting termination costs, including leaseterminations, were estimated to be $274. At April 19, 2003, only lease obligations of $37 remain unpaid.

 

**5.****              Earnings (Loss) Per Share**

 

The followingtable sets forth the computation of basic and diluted earnings (loss) pershare:

 
|                                                                                                                                |   | **12 Weeks Ended**  |   | **24 Weeks Ended**  |   |
|-------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------|--------|---------------------|--------|
|                                                                                                                                |   | **April 19,  2003** |   | **April 20,  2002** |   | **April 19,  2003** |   | **April 20,  2002** |   |
|                                                                                                                                |   |                |   |                |   |   |   |   |   |
| Income  (loss) from continuing operations before cumulative effect of change in  accounting principle                               |   | $                   | (2,663 | )                   | $      | 1,396 |   | $ | (3,328 | ) | $ | (3,257 | ) |
|                                                                                                                                |   |                |   |                |   |   |   |   |   |
| Denominator  for basic earnings per share - weighted average shares                                                                 |   | 15,994              |   | 15,945              |   | 15,983 |   | 15,929 |   |
|                                                                                                                                |   |                |   |                |   |   |   |   |   |
| Effect  of dilutive securities - Stock options                                                                                      |   |                |   | 26                  |   |   |   |   |   |
| Denominator  for diluted earnings per share - adjusted weighted average shares and assumed  conversions                             |   | 15,994              |   | 15,971              |   | 15,983 |   | 15,929 |   |
|                                                                                                                                |   |                |   |                |   |   |   |   |   |
| Basic  and diluted earnings (loss) per share from continuing operations before  cumulative effect of change in accounting principle |   | $                   | (0.17  | )                   | $      | 0.09 |   | $ | (0.21 | ) | $ | (0.20 | ) |
|                                                                                                                                |   |                |   |                |   |   |   |   |   |
| Anti-dilutive  weighted shares excluded from diluted loss per share                                                                 |   | 1,102               |   | 552                 |   | 1,101 |   | 425 |   |

 

**6.****              ComprehensiveIncome**

 

Comprehensiveincome (loss) consists of the following:

 
|                              |   | **12 Weeks Ended**  |       | **24 Weeks Ended** |       |
|-----------------------------------|--------|---------------------|------------|--------------------|------------|
|                              |   | **April 19,  2003** |       | **April 20  2002** |       | **April 19,  2003** |   | **April 19,  2002** |   |
|                              |   |                | ** ** |               | ** ** |   | ** ** |   | ** ** |
| Net  income (loss)                |   | $                   | (2,663     | )                  | $          | 1,396 |   | $ | (3,682 | ) | $ | (3,257 | ) |
| Currency  translation adjustments |   | 24                  |       | 461                |       | 533 |   | 279 |   |
| Comprehensive  income (loss)      |   | $                   | (2,639     | )                  | $          | 1,857 |   | $ | (3,149 | ) | $ | (2,978 | ) |

 

9

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**7.****              Stock-BasedCompensation**

 

The Companyaccounts for its stock-based compensation plans under Accounting PrinciplesBoard Opinion No. 25, “Accounting for Stock Issued to Employees”.  Accordingly, compensation cost is notrecognized for options granted at fair market value.  The following table presents pro forma net income (loss) and proforma earnings (loss) per share as if compensation cost had been determinedusing the fair value method prescribed by SFAS No. 123, “Accounting for StockBased Compensation”.

 
|                                                             |   | **12 Weeks Ended**  |   | **24 Weeks Ended**  |   |
|------------------------------------------------------------------|--------|---------------------|--------|---------------------|--------|
|                                                             |   | **April 19,  2003** |   | **April 20,  2002** |   | **April 19,  2003** |   | **April 20,  2002** |   |
|                                                             |   |                |   |                |   |   |   |   |   |
| Net  income (loss) as reported                                   |   | $                   | (2,663 | )                   | $      | 1,396 |   | $ | (3,682 | ) | $ | (3,257 | ) |
| Stock  based compensation determined under the fair value method |   | (126                | )      | (45                 | )      | (254 | ) | (275 | ) |
|                                                             |   |                |   |                |   |   |   |   |   |
| Proforma  net income (loss)                                      |   | $                   | (2,789 | )                   | $      | 1,351 |   | $ | (3,936 | ) | $ | (3,532 | ) |
|                                                             |   |                |   |                |   |   |   |   |   |
| Earnings  (loss) per common share:                               |   |                |   |                |   |   |   |   |   |
| Basic  and diluted - as reported                                 |   | $                   | (0.17  | )                   | $      | 0.09 |   | $ | (0.23 | ) | $ | (0.20 | ) |
| Basic  and diluted - proforma                                    |   | $                   | (0.17  | )                   | $      | 0.08 |   | $ | (0.25 | ) | $ | (0.22 | ) |

 

**8.****              LeaseTransactions**

 

On December 12, 2002, the Company entered into a sale-leasebacktransaction whereby the Company sold and leased back its administrativeoffices’ land and buildings.  The resultof the sale was a net pre-tax gain of approximately $5,500 which the Companydeferred and is amortizing as an offset to rent expense over the seven yearlease term.  A portion of the netproceeds from the sale of $6,866 was used to repay the outstanding principaland interest under a term loan of $4,515. Additionally, the Company used $1,020 of the net proceeds to pay theoutstanding principal and interest of a promissory note payable to theCompany’s President and Chief Executive Officer (see Note 10).  The remainder of the net proceeds was usedto repay outstanding borrowings under the Company’s revolving creditfacilities.

 

The lease, which is being accounted for as an operating lease, has aterm of seven years with an option to renew the lease for an additional fiveyears.  In connection with the leaseagreement, the Company issued a $700 irrevocable standby letter of credit as asecurity deposit.  The minimum leasepayments required by the lease over the remaining lease term are as follows:  remainder of fiscal 2003 - $414; fiscal 2004- $799; fiscal 2005 - $825; fiscal 2006 - $852; fiscal 2007 - $879; fiscal 2008- $908; fiscal 2009 - $938 and fiscal 2010 - $103.

 

10

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In December 2002, the Company entered into a lease transaction for certaininformation technology equipment.  Thislease, which has a term of 37 months, is being accounted for as a capitallease. As a part of this lease transaction, the Company sold equipment whichwas then leased back.  Net proceeds of$413 on the sale were used to pay down additional outstanding borrowings underthe Company’s domestic revolving credit facility. The capital asset and relatedlease obligation included in property and equipment and capital leaseobligations are as follows:

 
|                                              |   | **April 19,  2003** |   |
|---------------------------------------------------|--------|---------------------|--------|
|                                              |   |                |   |
| Capital  lease equipment                          |   | $                   | 1,369  |   |
| Less  accumulated amortization                    |   | (133                | )      |
| Net  capital lease equipment                      |   | $                   | 1,236  |   |
| Minimum  lease payments:                          |   |                |   |
| Fiscal  2003                                      |   | $                   | 313    |   |
| Fiscal  2004                                      |   | 493                 |   |
| Fiscal  2005                                      |   | 537                 |   |
| Fiscal  2006                                      |   | 134                 |   |
| Total  minimum lease payments                     |   | 1,477               |   |
| Plus  prepayments                                 |   | 9                   |   |
| Less  executory costs                             |   | (121                | )      |
| Net  minimum capital lease payments               |   | 1,365               |   |
| Less  amount representing interest                |   | (125                | )      |
| Present  value of net minimum lease payments      |   | 1,240               |   |
| Less  current portion of capital lease obligation |   | (415                | )      |
| Long-term  capital lease obligation               |   | $                   | 825    |   |

 

Capital lease amortization expense of $133 is included in depreciationand amortization in the April 19, 2003 Statement of Operations.

 

**9.****              CreditAgreement**

 

At April 19, 2003 the Company was not in compliance with one of thefinancial covenants under its Multicurrency Credit Agreement.  The Company is currently working with itslenders on an amendment to the agreement which includes a waiver of thisnon-compliance.  Due to the fact theamendment was not finalized as of the date of the filing of this QuarterlyReport on Form 10-Q, the Company has classified the long-term portion of itsborrowings under the credit facility as current.

 

In addition, the amendment will set a more restrictive calculation foravailable borrowings, reset certain financial covenants on a prospective basisand extend the date to July 1, 2004 for applicable interest rate margins tobecome subject to downward adjustment.

 

11

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**10.****       RelatedParty Transactions**

 

The Company has anunsecured subordinated promissory note payable to its principal stockholder andChairman of the Board of Directors in the amount of $2,000 with a maturity dateof August 18, 2007 and an interest rate equal to an indexed rate as calculatedunder the Company’s credit facilities plus seven percent, compounded monthlyand payable 60 calendar days after the end of each of the Company’s fiscalquarters.  The interest rate in effecton April 19, 2003 was 11.75%.  Paymentof interest is contingent on the Company meeting minimum availabilityrequirements under its credit facilities. Additionally, payments of principalor interest are prohibited in the event of any default under the creditfacilities.  Interest paid on this notewas $125 during the 24 week period ended April 19, 2003.

 

In May 2002 the Companyexecuted an unsecured subordinated promissory note payable to its President andChief Executive Officer in the amount of $1,000 with a maturity date of August18, 2007 and provisions for accelerated maturity under certaincircumstances.  The accelerated maturityprovisions were met in conjunction with the Company’s December 12, 2002sale-leaseback transaction (see Note 8) and on December 13, 2002 theoutstanding principal and interest balance on the note of $1,020 was paid.

 

**11.****       OperatingSegments**

 

The following tablesummarizes reporting segment data :

 

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|                                                                                                            |   | **Domestic  Business Svcs** |    | **United  Kingdom  Operations** |   | **Other  International** |   | **Total  Continuing  Operations** |   |
|-----------------------------------------------------------------------------------------------------------------|--------|-----------------------------|---------|---------------------------------|--------|--------------------------|--------|-----------------------------------|--------|
|                                                                                                            |   |                        |    |                            |   |                     |   |                              |   |
| **12 Weeks Ended April 19, 2003**                                                                               |   |                        |    |                            |   |                     |   |                              |   |
|                                                                                                            |   |                        |    |                            |   |                     |   |                              |   |
| Revenues                                                                                                        |   | $                           | 94,371  |                            | $      | 7,167                    |   | $                                 | 14,904 |   | $ | 116,442 |   |
| Operating  income (loss) from continuing operations before cumulative effect of change  in accounting principle |   | $                           | (2,190  | )                               | $      | 192                      |   | $                                 | (290   | ) | $ | (2,288 | ) |
|                                                                                                            |   |                        |    |                            |   |                     |   |                              |   |
| **12 Weeks Ended April 20, 2002**                                                                               |   |                        |    |                            |   |                     |   |                              |   |
|                                                                                                            |   |                        |    |                            |   |                     |   |                              |   |
| Revenues                                                                                                        |   | $                           | 91,132  |                            | $      | 5,719                    |   | $                                 | 12,825 |   | $ | 109,676 |   |
| Operating  income (loss) from continuing operations before cumulative effect of change  in accounting principle |   | $                           | (912    | )                               | $      | 74                       |   | $                                 | (302   | ) | $ | (1,140 | ) |
|                                                                                                            |   |                        |    |                            |   |                     |   |                              |   |
| **24 Weeks Ended April 19, 2003**                                                                               |   |                        |    |                            |   |                     |   |                              |   |
|                                                                                                            |   |                        |    |                            |   |                     |   |                              |   |
| Revenues                                                                                                        |   | $                           | 190,866 |                            | $      | 13,646                   |   | $                                 | 29,763 |   | $ | 234,275 |   |
| Operating  income (loss) from continuing operations before cumulative effect of change  in accounting principle |   | $                           | (2,266  | )                               | $      | 295                      |   | $                                 | (527   | ) | $ | (2,498 | ) |
|                                                                                                            |   |                        |    |                            |   |                     |   |                              |   |
| **24 Weeks Ended April 20, 2002**                                                                               |   |                        |    |                            |   |                     |   |                              |   |
|                                                                                                            |   |                        |    |                            |   |                     |   |                              |   |
| Revenues                                                                                                        |   | $                           | 179,142 |                            | $      | 11,379                   |   | $                                 | 26,148 |   | $ | 216,669 |   |
| Operating  loss from continuing operations before cumulative effect of change in  accounting principle          |   | $                           | (4,795  | )                               | $      | (56                      | )      | $                                 | (589   | ) | $ | (5,440 | ) |

 

**12.****       Commitments andContingencies**

 

The principal risks thatthe Company insures against are workers’ compensation, general liability,automobile liability, property damage, alternative staffing errors andomissions, fiduciary liability and fidelity losses.

 

From time to time theCompany is threatened with or is named as a defendant in lawsuits, includingcountersuits brought by former franchise agents or licensees, andadministrative claims and lawsuits brought by employees or formeremployees.  The Company does not believethe outcome of any proceedings on these actions would have a material adverseeffect on its financial position, results of operations or cash flows.  The Company is not currently a party to anymaterial litigation, except as disclosed below.

 

On March 9, 2000, SynergyStaffing, Inc. (Synergy) filed a complaint against the Company alleging, amongother things, that they were fraudulently induced to sell the assets of ThePersonnel Connection, Inc.  During theCompany’s fiscal year 2002, an arbitration panel awarded Synergy $1,424 forcompensatory damages, attorneys’ fees and other related costs.  During the fourth quarter of fiscal 2001,the Company recorded an accrued liability and related pretax charge of $3,600for the estimated cost of the arbitration award, attorney’s fees and relatedexpenses.  The estimate was based on management’sassumptions as to the

 

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ultimate outcome offuture events surrounding the arbitration. In connection with the final outcome of the arbitration award in fiscal2002, some of these events were resolved in the Company’s favor and $693 of theestimated liabilities were no longer required. This reduction was included in the second quarter of fiscal 2002Condensed Consolidated Statement of Operations.

 

On May 14, 2003 Synergyfiled an appellate brief with the California Court of Appeal seeking to void an$800 modification of the arbitration award in the Company’s favor.  The Company will file its reply briefshortly.

 

**11.****       RecentAccounting Pronouncements**

 

Effective November 3,2002, the Company adopted SFAS No. 144, “Accounting for the Impairment orDisposal of Long-Lived Assets”.  The newstandard supercedes SFAS No. 121, “Accounting for the Impairment of Long-LivedAssets and for Long-Lived Assets to be Disposed of”.  The new standard also supercedes the provisions of AccountingPrinciples Board No. 30, “Reporting the Results of Operations – Reporting theEffects of Disposal of a Segment of a Business, and Extraordinary, Unusual andInfrequently Occurring Events and Transactions”.  The standard requires expected future operating losses fromdiscontinued operations to be displayed in discontinued operations in theperiod(s) in which the losses are incurred, rather than as of the measurementdate as presently required.  Adoption ofthe new standard did not have a material impact on the Company’s financialstatements.

 

Effective January 1,2003, the Company adopted SFAS No. 146, “Accounting for Costs Associated withExit or Disposal Activities.”  SFAS No.146 addresses financial accounting and reporting for costs associated with exitor disposal activities and nullifies EITF Issue No. 94-3, “LiabilityRecognition for Certain Employee Termination Benefits and Other Costs to Exitan Activity (including Certain Costs Incurred in a Restructuring).”  SFAS No. 146 requires recognition of aliability for a cost associated with an exit or disposal activity when theliability is incurred, as opposed to when the entity commits to an exit plan,which was a requirement under EITF Issue No. 94-3.  Adoption of the new standard did not have a material impact onthe Company’s financial statements, but may affect the amount and timing offuture restructuring costs.

 

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**Item2.  Management’s Discussion and Analysisof Financial Condition and Results of Operations**

 

Thefollowing discussion is intended to assist in the understanding and assessmentof significant changes and trends related to the results of operations andfinancial condition of Westaff, Inc., together with its consolidatedsubsidiaries. This discussion and analysis should be read in conjunction withthe Company’s Consolidated Financial Statements and Notes thereto included inthe Company’s Annual Report on Form 10-K for the fiscal year ended November 2,2002.

 

Inaddition to historical information, this discussion and analysis includescertain forward-looking statements regarding events and financial trends thatmay affect the Company’s future operating results and financial position. Thisnotice is intended to take advantage of the “safe harbor” provided by thePrivate Securities Litigation Reform Act of 1995 with respect to suchforward-looking statements. These forward-looking statements include, but arenot limited to, statements regarding credit facilities and related financialcovenants, liquidity and financing, sales, goodwill impairment, gross margin, workers’ compensation and generalliability costs, selling and administrative expenses, interest expense, incometaxes, capital expenditures, capital resources, medical operations andacquisitions. Readers are cautioned not to place undue reliance on theseforward-looking statements, which are made based on information available as ofthe date hereof; actual results may differ materially. The Company undertakesno obligation to publicly release the results of any revisions to theseforward-looking statements to reflect events or circumstances after the datehereof or to reflect the occurrence of unanticipated events, except as requiredby applicable laws and regulations.

 

Theforward-looking statements included herein are also subject to a number ofother risks and uncertainties that could cause the Company’s actual results andfinancial position to differ materially from those anticipated in theforward-looking statements. Such risks and uncertainties include, but are notlimited to: compliance with debt covenants, changes in liquidity, possibleadverse effects of fluctuations in the general economy, reliance on executivemanagement, ability to continue and manage growth, control by a significantshareholder, reliance on management information systems, risk related tointernational operations, variability of employee-related costs includingworkers’ compensation liabilities, risks associated with customers, variabilityof operating results and the seasonality of the business cycle, ability toattract and retain the services of qualified temporary personnel, a highlycompetitive market, reliance on field management, employer liability risks andrisks related to franchise agent and licensed operations.  Due to the foregoing factors, it is possiblethat in some future period the Company’s results of operations may be below theexpectations of public market analysts and investors.  In addition, the Company’s results of operations havehistorically been subject to quarterly and seasonal fluctuations.  These and other risks and uncertaintiesrelated to the Company’s business are described in detail in  Item 1, “Factors Affecting FutureOperating Results.” in the Company’s Annual Report on Form 10-K for thefiscal year ended November 2, 2002.

 

15

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**CriticalAccounting Policies**

 

Thepreparation of the Company’s financial statements in conformity with generallyaccepted accounting principles in the United States of America requiresmanagement to make estimates and assumptions affecting the amounts anddisclosures reported within those financial statements.  These estimates are evaluated on an ongoingbasis by management and generally affect revenue recognition, collectibility ofaccounts receivable, workers’ compensation costs,  income taxes and contingencies and litigation.  Management’s estimates and assumptions arebased on historical experiences and other factors believed to be reasonableunder the circumstances.  However,actual results under circumstances and conditions different than those assumedcould result in differences from the estimated amounts in the financialstatements.

 

TheCompany’s critical accounting policies are described in Item 7 “Management’sDiscussion and Analysis of Financial Condition and Results of Operations” andin the notes to the consolidated financial statements in the Company’spreviously filed Annual Report on Form 10-K for the fiscal year ended November2, 2002.  Excluding the adoption of SFASNo. 142 noted below, the Company did not make any changes to these policiesduring the 24 week period ended April 19, 2003.

 

**Goodwill**

 

Effective November 3, 2002, the Company adoptedStatement of Financial Accounting Standards (SFAS) No. 142 “Goodwill and OtherIntangible Assets”.  SFAS No. 142provides that goodwill and other intangible assets with indefinite lives are nolonger amortized, but rather are evaluated for impairment by applying afair-value based test.  Under thetransitional provisions of SFAS No. 142, the first step is to identify if apotential impairment exists.  This stepmust be measured as of the beginning of the fiscal year in which the statementis adopted.  If required from theresults of step 1, the second step of the goodwill impairment test measures theamount of the impairment loss, if any. Any impairment loss identified duringthe transitional evaluation is to be recognized in the first interim period ofthe year of adoption as a cumulative effect of a change in accountingprinciple.  Any impairment loss incurredsubsequent to the initial evaluation required by the adoption of SFAS No. 142is recorded as a charge to current period earnings.

 

In completing the first step, the Company identifiedits reporting units. The carrying value of each was then determined.  Using an independent appraisal firm, thefair value of each reporting unit was established based on both the discountedpresent value of expected future cash flows and the comparable market prices ofselect competitors.  Upon completion ofthis first step, it was determined that an impairment may have existed in theAustralia reporting unit, therefore the Company was required to perform steptwo.

 

In completing the second step, the Company comparedthe implied fair value of Australia’s goodwill to its carrying value anddetermined that an impairment of $0.7 million existed.  The impairment was largely the result of asignificant decrease in Australia’s profitability.  The impairment charge has been classified as a cumulative effectof a change in accounting principle and resulted in a restatement of theCompany’s net loss for the fiscal quarter ended January 25, 2003.  The effect of the change was to increase the$0.3 million net loss for the quarter by $0.7 million and to increase the lossper share of $0.02 by $0.04 per share.

 

16

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In accordance with SFAS No. 142, the Company is required to perform anadditional test for goodwill impairment before the end of fiscal 2003 and atleast annually thereafter.  It ispossible that further impairments will be identified in future evaluations andbe recorded as a charge to earnings.

 

**RecentDevelopments**

 

In December 2002 the Company completed a sale and leaseback of thebuildings housing its administrative offices, which provided $6.9 million ofnet cash proceeds.  All of theseproceeds were used to repay outstanding borrowings.

 

On November 1, 2002 the Company executed a new agreement with itsworkers’ compensation/general liability insurance carrier for the fiscal 2003policy year.  Under the terms of theagreement, the Company will pay its carrier $16.0 million during fiscal 2003for the currently estimated ultimate cost of the policy year’s claims andrelated expenses.

 

See “Liquidity and Capital Resources” for further information on theserecent developments.

 

**Discontinued Operations**

 

During fiscal 1999, the Company sold certain of its franchise agent andCompany-owned medical offices and entered into a termination agreement with oneof its medical licensees. During the fourth quarter of fiscal 1999 the Companycompleted the sale of the remaining medical business to Intrepid U.S.A. Inc.under an asset purchase agreement. Under the terms of the sale, the Companyretained the majority of accounts receivable, including trade and Medicareaccounts receivable balances.

 

Prior to fiscal 2003,  theCompany appealed Western Medical’s 1996 Medicare cost report settlement.  During the first quarter of fiscal 2003, theappeal was settled and Western Medical received additional costreimbursements.  As a result of thefavorable appeal settlement, the Company recorded $0.3 million in income fromdiscontinued operations in the first fiscal quarter of 2003.

 

Currently, management believes it has adequate reserves for estimatedliabilities related to the medical business, which primarily relate to pendinglegal or malpractice liability claims. However, if actual resolution costsdiffer materially from those estimated by management, the Company would recordadditional losses (or gains) in future periods.

 

**Results of Continuing Operations**

 

**Fiscal Quarter Ended April 19, 2003 compared to FiscalQuarter Ended April 20, 2002**

 

*Revenues.* Total revenues increased $6.8 million, or 6.2%for the fiscal 2003 quarter as compared to the fiscal 2002 quarter.  Billed hours for the fiscal 2003 quarterincreased 2.5% over the comparable

 

17

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fiscal2002 quarter, but the Company continued to encounter intense pricing competitionin the light industrial and clerical/administrative sectors of the domesticstaffing industry which has limited its ability to increase average bill rates.

 

Overall,domestic revenues increased 3.6%; however, domestic revenues decreased 2.1%when compared to the first quarter of fiscal 2003.  This decrease is primarily due to a reduction in business with ahigh-volume, low-margin governmental agency. It is currently anticipated that domestic revenues for the third fiscalquarter of 2003 will be below those of the fiscal 2002 third quarter as aresult of this reduction in business. Domestic same branch revenues increased 8.4% over the prior year fiscalquarter predominately as a result of select on-location accounts.

 

Internationalrevenues increased 19.0% largely due to changes in exchange rates.  Absent the exchange rate effect,international revenues increased 3.8%. International same branch revenues increased 4.2% in the second quarterof fiscal 2003 as compared to the fiscal 2002 period.

 

*Costs of Services*. Costs of services include hourly wages of temporary employees, employerpayroll taxes, state unemployment and workers’ compensation insurance and otheremployee-related costs. Costs of services increased $7.6 million, or 8.5%,in the 2003 fiscal quarter as compared to 2002.  In the 2003 fiscal quarter, the Company recorded $750,000 inadditional charges for workers’ compensation and general liability claims as aresult of unfavorable trends in claims development. Gross margin declined from18.8% in the second quarter of fiscal 2002 to 17.0% in the second quarter offiscal 2003.  The decrease in grossmargin in the fiscal 2003 quarter, as compared to fiscal 2002, is primarily theresult of domestic pricing competition and the workers’ compensation /generalliability charges, as well as increased state unemployment insurance costs.

 

TheCompany is striving to improve gross margin by focusing on moreclerical/administrative services, its direct hire program and also by replacingthe low-margin government agency account mentioned above with higher marginbusiness.  However, with continuedcompetitive pressures on domestic prices and increasing costs, theopportunities available to increase gross margin may be limited, and there canbe no assurance that gross margin will not continue to decrease in futureperiods.

 

Domesticworkers’ compensation costs were 4.8% of direct labor in the second quarter offiscal 2003.  The Company expects thesecost to be approximately 4.8% to 5.0% of direct labor for the remainder of thefiscal year.  The Company reviewsinterim actuarial estimates and monitors accrual rates to ensure that theyremain appropriate in light of loss trends; however, there can be no assurancethat the Company’s programs to control workers’ compensation costs will beeffective or that loss development trends will not require additional increasesin workers’ compensationaccruals infuture periods.

 

*Franchise Agents’ Share of GrossProfit.*  Franchise agents’ share of gross profitrepresents the net distribution paid to franchise agents based either on apercentage of sales or of gross profit generated by the franchise agents’operations. Franchise agents’ share of gross profit increased$0.2 million, or 6.7%, for the second quarter of fiscal 2003 ascompared to the second quarter of

 

18

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fiscal 2002, primarilydue to increased revenues. As a percentageof revenues, franchise agents’ share of gross profit was 3.1% for the fiscal2003 quarter and 3.0% for the fiscal 2002 quarter.

 

*Selling and Administrative Expenses.*Selling and administrative expenses increased$0.4 million, or 2.2% for the fiscal quarter ended April 19, 2003as compared to the fiscal quarter ended April 20, 2002.  This increase is primarily due to higherexchange rates for international operations in the fiscal 2003 quarter.  As a percent of revenues, selling andadministrative expenses decreased from 15.4% in the fiscal 2002 quarter to14.8% in the second quarter of fiscal 2003, largely as the result of  cost savings realized from personnelreductions and office consolidations. TheCompany has recently initiated a restructuring of its domestic company-ownedfield organization designed to streamline the reporting structure, strengthen itsgeographic sales team and reduce costs. Additionally, the Company has instituted company-wide policieslimiting domestic full-time employee hiring and wage increases in response tothe decline in its margins.  The Companycontinues to closely monitor its variable costs and evaluate the performance offield offices.  If warranted, additionalunder-performing offices may be closed or consolidated in future periods andadditional cost saving measures may be implemented.  However, there can be no assurance that the cost savingsimplemented from such actions, if enacted, would be sufficient to offset anypotential future declines in gross margin.

 

*Depreciation and amortization.*Depreciation and amortization decreased $0.3million or 16.9%, primarily due to the cessation of goodwill amortization asnoted in “Goodwill” above.

 

*Interest.*Interest expense was $0.4 million and $0.7 million for the fiscal 2003and fiscal 2002 quarters, respectively. The fiscal 2002 quarter interest expense includes the write-off of  $0.2 million in deferred debt issue costs inconjunction with the termination of the Company’s former credit facilities.

 

*Provision (Benefit) for Income Taxes.*For the first quarter of fiscal 2003, the Company recorded an income tax provision of$68,000 on a pre-tax loss of $2.6 million.  The tax provision primarily reflects certain state andinternational income taxes.  The Companyrecognized a 100% valuation allowance against its second quarter 2003 incometax benefit resulting from its net loss. The tax benefit of $3.1 million in the fiscal 2002 quarter resulted fromnet loss carrybacks which the Company recognized as a result of changes in taxlegislation which increased the net operating loss carryback term from two tofive years.  At April 19, 2003, theCompany had $16.6 million of gross deferred tax assets.

 

**24 Weeks Ended April 19, 2003 compared to 24 Weeks EndedApril 20, 2002**

 

*Revenues.* Revenues increased $17.6 million, or 8.1%, forthe 24 week period ended April 19, 2003 as compared to the 24 week period endedApril 20, 2002.  Bill hours increased4.2% and average billing rates per hour increased 1.3%.

 

Domesticrevenues increased 6.6% as a result of moderate increases in bill hours andbill rates.  International revenuesincreased 15.7% due primarily to changes in exchange rates.  Absent the

 

19

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exchangerate effect, international revenues increased 1.3% reflecting modest increasesin all international operations except Norway.

 

*Costs of Services*. Costs of services increased $18.1 million, or 10.3%, in the 2003fiscal period as compared to 2002. Gross margin decreased from 18.8% in the fiscal 2002 period to 17.2% in2003, primarily due to increased workers compensation and state unemploymentinsurance costs, as well as to a growth in pay rates which outpaced theincrease in bill rates due to competitive pricing pressures.

 

*Franchise Agents’ Share of Gross Profit*. Franchise agents’ share of gross profitincreased $0.5 million, or 7.8%, for the 24 week period in fiscal2003 as compared to the comparable fiscal 2002 period.  As a percentage of revenues,franchise agents’ share of gross profit was 3.0% for both periods.

 

*Selling and Administrative Expenses.*Selling and administrative expenses decreased$1.5 million, or 4.3% in the 2003 fiscal period compared to fiscalquarter 2002.  The decrease reflectscost savings from office closures, personnel reductions and other concertedcost containment measures, partially offset by higher foreign currency exchangerates.

 

*Restructuring Charges*. During the first quarter of fiscal 2002, theCompany implemented a restructuring plan designed to improve the Company’sprofitability.  This restructuring planresulted in a fiscal 2002 first quarter pre-tax charge of $1.9 million.  The plan included costs associated with theabandonment of certain management information systems which were underdevelopment of $1.0 million, severance and other termination costs of $0.6million and lease termination costs of $0.3 million, related to the Company’sannounced layoffs and office closures.

 

*Depreciation and amortization.*Depreciation and amortization decreased $0.5million or 16.3%, for the same reason as noted in the discussion for the secondquarter above.

 

*Interest.*Interest expense was $0.8 million and $1.1 million for the fiscal 2003and fiscal 2002 periods, respectively. The Company significantly reduced its debt during the first half offiscal 2003 and anticipates interest expense for the fiscal year to be belowfiscal 2002 levels.

 

*Provision (Benefit) for Income Taxes.*For the 24 week period of fiscal 2003 the Company recorded an income tax provision of$0.1 million on a pre-tax loss of $3.2 million, primarily reflectingcertain state and international income taxes. See the discussion of the quarterly *Provision (Benefit) for Income Taxes*abovefor further details.

 

**Liquidity and Capital Resources**

 

Historically,the Company has financed its operations through cash generated by operatingactivities and through various forms of debt and equity financing. TheCompany’s principal use of cash is for financing accounts receivable,particularly during periods of economic upswings and growth and during periodswhere sales are seasonally high. Temporary personnel are generally paid on aweekly basis while payments from customers are generally received 30 to60 days after billing. As a result

 

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ofseasonal fluctuations, accounts receivable balances are historically higher inthe fourth fiscal quarter and are generally at their lowest during the firstfiscal quarter. Accordingly, short-term borrowings used to finance accountsreceivable generally follow a similar seasonal pattern.

 

Netcash provided by operating activities was $7.8 million for the 24 weeks endedApril 19, 2003, an increase of  $8.7million from net cash used by operating activities for the same period infiscal 2002.  The increase is primarilythe result of net changes in working capital items.

 

Cashused for capital expenditures, which are primarily for management informationsystems initiatives, other software, computers and peripherals, and officefurniture and equipment, totaled $1.4 million for the 24 weeks ended April 19,2003 as compared to $1.6 million for the same period in fiscal 2002.  The Company is completing the in-housedevelopment of a new front-office system which, when implemented, is expectedto improve productivity.  The Companycurrently anticipates that total fiscal 2003 cash outflows for management informationsystems and other capital expenditures will be above the fiscal 2002 level of$2.1 million.

 

On December 12, 2002, the Company entered into a sale-leasebacktransaction whereby the Company sold and leased back the land and buildingshousing its administrative offices.  Theresult of the sale was a net pre-tax gain of approximately $5.5 million whichthe Company deferred and is amortizing as an offset to rent expense over theseven year lease term.  A portion of thenet proceeds from the sale of $6.9 million was used to repay the outstandingprincipal and interest under a term loan of $4.5 million.  Additionally, the Company paid theoutstanding principal  and accrued interestof $1.0 million on a promissory note payable to the Company’s President andChief Executive Officer.  The remainderof the net cash proceeds was used to repay outstanding borrowings under theCompany’s domestic revolving credit facilities.

 

The minimum lease payments required by the lease over the remaininglease term are:  remainder of fiscal2003 - $0.4 million; fiscal 2004 - $0.8 million; fiscal 2005 - $0.8 million;fiscal 2006 - $0.9 million; fiscal 2007 - $0.9 million; fiscal 2008 - $0.9million; fiscal 2009 - $0.9 million and fiscal 2010 - $0.1 million. Inconnection with the lease agreement, the Company issued a $0.7 millionirrevocable standby letter of credit as a security deposit.

 

In December 2002, theCompany entered into a lease transaction for certain information technologyequipment.  This lease, which has a termof 37 months, is being accounted for as a capital lease.  As a part of this lease transaction, theCompany sold equipment which was then leased back.  Net proceeds of $0.4 million on the sale were used to pay downadditional outstanding borrowings under the Company’s domestic revolving creditfacility.  Future minimum lease paymentobligations for this capital lease are: $0.3 million in the remainder of fiscal 2003; $0.5 million in fiscal2004; $0.5 million in fiscal 2005 and $0.1 million in fiscal 2006.

 

On November 1, 2002, theCompany executed a new agreement with its workers’ compensation/generalliability insurance carrier for the fiscal 2003 policy year.  Under the terms of the agreement, theCompany is paying its carrier $16.0 million during fiscal 2003 for the

 

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current estimatedultimate cost of the fiscal 2003 policy year’s claims and relatedexpenses.  As of April 19, 2003, theCompany has made total payments of $8.9 million.

 

During the 24 week periodof fiscal 2003, the Company reduced borrowings by $15.3 million, which includepayments in full on the Company’s outstanding term loan and on a note payableto the Company’s Chief Executive Officer. At April 19, 2003, the Company’s remaining debt consists of a $2.0million note payable to the Company’s principal stockholder and Chairman of theBoard of Directors and $10.2 million outstanding under the Company’s revolvingcredit facilities.

 

At April 19, 2003 theCompany was not in compliance with one of the financial covenants under itsMulticurrency Credit Agreement.  TheCompany is currently working with its lenders on an amendment to the agreementwhich includes a waiver of this non-compliance.  Due to the fact that the amendment was not finalized as of thedate of the filing of this Quarterly Report on Form 10-Q, the Company hasclassified the long-term portion of its borrowings under the credit facility ascurrent.  In addition, the amendmentsets a more restrictive calculation for available borrowings, resets certainfinancial covenants on a prospective basis and extends the date to July 1, 2004for applicable interest rate margins to become subject to downwardadjustments.  At April 19, 2003 theCompany had approximately $10.5 million borrowing availability under its creditfacility.  The more restrictivecalculation in the proposed amendment would have reduced this amount by $2million.

 

The Company has $18.0million of irrevocable standby letters of credit outstanding, primarily insupport of its workers’ compensation program. The Company also has anoutstanding financial guarantee bond in the amount of $11.8 million whichexpires on November 1, 2003 that secures a portion of its workers’ compensationpremium and deductible obligations.  Dueto the change in the Company’s fiscal 2003 policy year premium and claims costfunding noted above, the Company does not currently anticipate that this bondwill require renewal at its expiration.

 

In February 2003 the Company received approximately $4.7 million infederal income tax refunds arising from a net operating loss carryback in aprior year.  The cash refunds were usedto pay down outstanding borrowings under the Company’s revolving creditfacility.  At April 19, 2003 the Companyhas additional income tax refunds of $0.5 million which it anticipatesreceiving during the remainder of fiscal 2003.

 

The Company believes that cash reserves, cash generated from operationsand the Company’s current borrowing capacity will be sufficient to meetanticipated needs for working capital and capital expenditures at least throughthe next twelve months.

 

**Item3.  Quantitative and QualitativeDisclosures About Market Risk**

 

The Company is exposed tocertain market risks from transactions that are entered into during the normalcourse of business. The Company’s primary market risk exposure relates tointerest rate risk.  At April 19, 2003,the Company’s outstanding debt under variable-rate interest borrowings wasapproximately $12.2 million.  A changeof 2% in the interest rates would cause a change in interest expense ofapproximately $0.2 million on an annual basis. The Company’s exposure to

 

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market risk for changesin interest rates is not significant with respect to interest income, as itsinvestment portfolio is not material to its consolidated balance sheet.

 

During the 24 weeks endedApril 19, 2003 the Company’s international operations comprised 18.5% of itsrevenues and, as of the end of that period, 20.9% of its total assets.  The Company is exposed to foreign currencyrisk primarily due to its investments in foreign subsidiaries.  The Company’s multicurrency credit facility,which allows the Company’s Australia and United Kingdom subsidiaries to borrowin local currencies, partially mitigates the exchange rate risk resulting fromforeign currency denominated net investments in these subsidiaries fluctuatingin relation to the U.S. dollar. The Company does not currently hold any marketrisk sensitive instruments entered into for hedging transaction risks relatedto foreign currencies.  In addition, theCompany has not entered into any transactions with derivative financialinstruments for trading purposes.

 

**Item 4.  Controls and Procedures**

 

Withinthe 90 days prior to the filing of this Quarterly Report on Form 10-Q, theCompany carried out an evaluation, under the supervision and with theparticipation of the Company’s management, including the Company’s ChiefExecutive Officer and Chief Financial Officer, of the effectiveness of thedesign and operation of the Company’s disclosure controls and procedures.  Based on this evaluation, the ChiefExecutive Officer and Chief Financial Officer concluded that the Company’sdisclosure controls and procedures are effective in alerting them on a timelybasis to material information required to be included in this report.  There have been no significant changes inthe Company’s internal controls or in other factors that could significantlyaffect internal controls subsequent to the date of the most recent evaluation.

 

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**Part II.  Other Information**

 

**Item 1.  Legal Proceedings**

 

As previously reported inthe Company’s Annual Report on Form 10-K for the fiscal year ended November 2,2002, on March 9, 2000, Synergy Staffing, Inc. (Synergy) filed a complaintagainst the Company alleging, among other things, that they were fraudulentlyinduced to sell the assets of The Personnel Connection, Inc.  During the Company’s fiscal year 2002, anarbitration panel awarded Synergy $1.4 million for compensatory damages,attorneys’ fees and other related costs. During the fourth quarter of fiscal 2001, the Company recorded anaccrued liability and related pretax charge of $3.6 million for the estimatedcost of the arbitration award, attorney’s fees and related expenses.  The estimate was based on management’sassumptions as to the ultimate outcome of future events surrounding thearbitration.  In connection with thefinal outcome of the arbitration award in fiscal 2002, some of these eventswere resolved in the Company’s favor and $693,000 of the estimated liabilitieswere no longer required.  This reductionwas included in the second quarter of fiscal 2002 Condensed ConsolidatedStatement of Operations.

 

On May 14, 2003 Synergyfiled an appellate brief with the California Court of Appeal seeking to void an$800,000 modification of the arbitration award in the Company’s favor.  The Company will file its reply brief shortly.

 

Exceptas disclosed above, the Company is not currently a party to any materiallitigation. However, from time to time the Company has been threatened with, ornamed as a defendant in, lawsuits, including countersuits brought by formerfranchise agents or licensees, and administrative claims and lawsuits broughtby employees or former employees.

 

**Item 2.  Changes in Securities**

 

Not applicable.

 

**Item 3.  Defaults Upon Senior Securities**

 

Not applicable.

 

**Item 4.  Submission of Matters to a Vote of Security Holders**

 

Not applicable.

 

**Item 5.  Other Information**

 

Not applicable.

 

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**Item6.  Exhibits and Reports on Form 8-K**

 
|   | (a)    | Exhibits                                                                  |                                                                  |
|--------|--------|---------------------------------------------------------------------------|-----------------------------------------------------------------------|
|   |   |                                                                      |                                                                  |
|   |   | 99.1                                                                      | Certification of Chief  Executive Officer and Chief Financial Officer |
|   |   |                                                                      |                                                                  |
|   | (b)    | Reports on Form 8-K                                                       |                                                                  |
|   |   |                                                                      |                                                                  |
|   |   | No reports were filed  in or for the 24 week period ended April 19, 2003. |
|        |        |                                                                           |                                                                       |  |

 

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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.                                      |              |
|--------------|--------|--------|--------|--------|----------------------------------------------------|-------------------|
|         |   |   |   |   |                                               |              |
|         |   |   |   |   |                                               |              |
| June 3, 2003 |   |   |   |   | /s/  Dirk A. Sodestrom                        |              |
| Date         |   |   |   |   |                                               | Dirk A. Sodestrom |   |
|         |   |   |   |   | Senior Vice  President and Chief Financial Officer |              |
|              |        |        |        |        |                                                    |                   |  |  |  |

 

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**CERTIFICATIONS**

 

I, Dwight S. Pedersen,certify that:

 
| 1.     |   | I have reviewed this  quarterly report on Form 10-Q of Westaff, Inc.;                                                                                                                                                                                                                                                              |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                               |
| 2.     |   | Based on my knowledge,  this quarterly report does not contain any untrue statement of a material  fact or omit to state a material fact necessary to make the statements made,  in light of the circumstances under which such statements were made, not  misleading with respect to the period covered by this quarterly report; |
|   |   |                                                                                                                                                                                                                                                                                                                               |
| 3.     |   | Based on my knowledge,  the financial statements, and other financial information included in this  quarterly report, fairly present in all material respects the financial  condition, results of operations and cash flows of the registrant as of, and  for, the periods presented in this quarterly report;                    |
|   |   |                                                                                                                                                                                                                                                                                                                               |
| 4.     |   | The registrant’s other  certifying officer and I are responsible for establishing and maintaining  disclosure controls and procedures (as defined in Exchange Act Rules 13a-14  and 15d-14) for the registrant and we have:                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                               |
|   | A)     |                                                                                                                                                                                                                                                                                                                               | designed such  disclosure controls and procedures to ensure that material information  relating to the registrant, including its consolidated subsidiaries, is made  known to us by others within those entities, particularly during the period  in which this quarterly report is being prepared; |
|   |   |                                                                                                                                                                                                                                                                                                                               |   |
|   | B)     |                                                                                                                                                                                                                                                                                                                               | evaluated the  effectiveness of the registrant’s disclosure controls and procedures as of a  date within 90 days prior to the filing date of this quarterly report (the  “Evaluation Date”); and |
|   |   |                                                                                                                                                                                                                                                                                                                               |   |
|   | C)     |                                                                                                                                                                                                                                                                                                                               | presented in this  quarterly report our conclusions about the effectiveness of the disclosure  controls and procedures based on our evaluation as of the Evaluation Date; |
|   |   |                                                                                                                                                                                                                                                                                                                               |   |
| 5.     |   | The registrant’s other  certifying officer and I have disclosed, based on our most recent evaluation,  to the registrant’s auditors and the audit committee of registrant’s board of  directors (or persons performing the equivalent functions):                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                               |
|   | A)     |                                                                                                                                                                                                                                                                                                                               | all significant  deficiencies in the design or operation of internal controls which could  adversely affect the registrant’s ability to record, process, summarize and  report financial data and have identified for the registrant’s auditors any  material weaknesses in internal controls; and |
|   |   |                                                                                                                                                                                                                                                                                                                               |   |
|   | B)     |                                                                                                                                                                                                                                                                                                                               | any fraud, whether or  not material, that involves management or other employees who have a  significant role in the registrant’s internal controls; and |

 

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| 6. |   | The registrant’s other  certifying officer and I have indicated in this quarterly report whether or  not there were significant changes in internal controls or in other factors  that could significantly affect internal controls subsequent to the date of  our most recent evaluation, including any corrective actions with regard to  significant deficiencies and material weaknesses. |
|----|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 
| Date: June 3, 2003                     |
|----------------------------------------|
|                                   |
| /s/ Dwight S. Pedersen                 |   |
|                                   |
| Dwight S. Pedersen                     |
| President and Chief  Executive Officer |
| Westaff, Inc.                          |
| (Principal Executive  Officer)         |

 

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I, Dirk A. Sodestrom,certify that:

 
| 1.     |   | I have reviewed this  quarterly report on Form 10-Q of Westaff, Inc.;                                                                                                                                                                                                                                                              |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                               |
| 2.     |   | Based on my knowledge,  this quarterly report does not contain any untrue statement of a material  fact or omit to state a material fact necessary to make the statements made,  in light of the circumstances under which such statements were made, not  misleading with respect to the period covered by this quarterly report; |
|   |   |                                                                                                                                                                                                                                                                                                                               |
| 3.     |   | Based on my knowledge,  the financial statements, and other financial information included in this  quarterly report, fairly present in all material respects the financial  condition, results of operations and cash flows of the registrant as of, and  for, the periods presented in this quarterly report;                    |
|   |   |                                                                                                                                                                                                                                                                                                                               |
| 4.     |   | The registrant’s other  certifying officer and I are responsible for establishing and maintaining  disclosure controls and procedures (as defined in Exchange Act Rules 13a-14  and 15d-14) for the registrant and we have:                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                               |
|   | A)     |                                                                                                                                                                                                                                                                                                                               | designed such disclosure  controls and procedures to ensure that material information relating to the  registrant, including its consolidated subsidiaries, is made known to us by  others within those entities, particularly during the period in which this  quarterly report is being prepared; |
|   |   |                                                                                                                                                                                                                                                                                                                               |   |
|   | B)     |                                                                                                                                                                                                                                                                                                                               | evaluated the  effectiveness of the registrant’s disclosure controls and procedures as of a  date within 90 days prior to the filing date of this quarterly report (the  “Evaluation Date”); and |
|   |   |                                                                                                                                                                                                                                                                                                                               |   |
|   | C)     |                                                                                                                                                                                                                                                                                                                               | presented in this  quarterly report our conclusions about the effectiveness of the disclosure  controls and procedures based on our evaluation as of the Evaluation Date; |
|   |   |                                                                                                                                                                                                                                                                                                                               |   |
| 5.     |   | The registrant’s other  certifying officer and I have disclosed, based on our most recent evaluation,  to the registrant’s auditors and the audit committee of registrant’s board of  directors (or persons performing the equivalent functions):                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                               |
|   | A)     |                                                                                                                                                                                                                                                                                                                               | all significant  deficiencies in the design or operation of internal controls which could  adversely affect the registrant’s ability to record, process, summarize and  report financial data and have identified for the registrant’s auditors any  material weaknesses in internal controls; and |
|   |   |                                                                                                                                                                                                                                                                                                                               |   |
|   | B)     |                                                                                                                                                                                                                                                                                                                               | any fraud, whether or  not material, that involves management or other employees who have a  significant role in the registrant’s internal controls; and |

 

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| 6. |   | The registrant’s other  certifying officer and I have indicated in this quarterly report whether or  not there were significant changes in internal controls or in other factors  that could significantly affect internal controls subsequent to the date of  our most recent evaluation, including any corrective actions with regard to  significant deficiencies and material weaknesses. |
|----|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 
| Date: June 3, 2003                                 |
|----------------------------------------------------|
|                                               |
| /s/ Dirk A. Sodestrom                              |   |
|                                               |
| Dirk A. Sodestrom                                  |
| Senior Vice President  and Chief Financial Officer |
| Westaff, Inc.                                      |
| (Principal Financial  Officer)                     |

 

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