WSTF Westaff (MM)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D. C.  20549

FORM 10-Q

For the transition period from              to              

Commission file number 000-24990

WESTAFF, INC.

(Exact name of registrant as specified in its charter)

298 North Wiget Lane

Walnut Creek, California  94598-2453

(Address of registrant’s principal executive offices, including zip code)

(925) 930-5300

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Common Stock, $0.01 par value per share

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

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

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

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

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WESTAFF, INC.

FORM 10-Q

For the quarterly period ended July 12, 2008

INDEX

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Part l.  Financial Information

Item 1.  Financial Statements (Unaudited)

Westaff, Inc.

Condensed Consolidated Balance Sheets (Unaudited)

See accompanying notes to condensed consolidated financial statements.

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Westaff, Inc.

Condensed Consolidated Statements of Operations (Unaudited)

See accompanying notes to condensed consolidated financial statements.

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Westaff, Inc.

Condensed Consolidated Statements of Cash Flows (Unaudited)

See accompanying notes to condensed consolidated financial statements.

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Westaff, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

1.      Company background

Westaff, Inc. (together with its domestic and foreign subsidiaries, the “Company” or “Westaff”) provides staffing services primarily in suburban and rural markets (“secondary markets”), and in certain major urban centers (“primary markets”) in the United States (“US”), Australia and New Zealand.  On March 31, 2008, the Company sold its former United Kingdom operations and related subsidiary. The Company provides staffing solutions, including permanent placement, replacement, supplemental and on-site temporary programs to businesses and government agencies through its network of Company-owned, franchise agent and licensed offices.  Westaff’s primary focus is on recruiting and placing clerical/administrative and light industrial personnel. Its corporate headquarters provides support services to the field offices in marketing, human resources, risk management, legal, strategic sales, accounting, and information technology.

Basis of Presentation and Going Concern Considerations

The accompanying condensed consolidated financial statements of Westaff, Inc. and its domestic and foreign subsidiaries, as of July 12, 2008 and for the 12-week and 36-week periods ended July 12, 2008 and July 7, 2007 are unaudited.

The condensed consolidated financial statements, in the opinion of management, reflect all adjustments, which are of a normal recurring nature, necessary for a fair presentation of the financial position, results of operations and cash flows for the periods presented.  The condensed consolidated balance sheet as of November 3, 2007 presented herein, has been derived from the audited consolidated balance sheet included in the Company’s Annual Report on Form 10-K for the fiscal year ended November 3, 2007.

The Company’s primary credit facility is a financing agreement that the Company has (through its wholly-owned subsidiary Westaff (USA), Inc.) with U.S. Bank National Association (“U.S. Bank”), as agent for itself and Wells Fargo Bank, National Association (“Wells Fargo”), as lenders, which provides for a five-year revolving credit facility (the “Financing Agreement”).  As discussed in Note 9 the Company is currently in default under certain covenants of the Financing Agreement and has entered into a Forbearance Agreement with U.S. Bank and Wells Fargo that provides for a forbearance period ending on August 26, 2008.  While the Company is negotiating with its lenders for a waiver or continued forbearance in respect of this default, there can be no assurances that a waiver or continued forbearance can be obtained.  If the Company is unable to obtain a waiver or continued forbearance from U.S. Bank on acceptable terms, the Company may be unable to access the funds necessary for its liquidity requirements or may be unable to obtain letters of credit under the facility needed for the Company to obtain workers’ compensation insurance.  In that case, its business and operating results would be adversely affected, and the Company may be unable to continue its operations as a going concern.  In response to the continued default, the Company secured a $3.0 million subordinated loan facility subsequent to the end of the quarter and as described in Note 19.  This facility may be used by the Company for their working capital and general business purposes.

The Company’s critical accounting policies are described in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in the notes to the audited consolidated financial statements included in the Company’s previously-filed Annual Report on Form 10-K for the fiscal year ended November 3, 2007.  Except as disclosed herein, there were no changes to these policies during the 36-week period ended July 12, 2008.  Certain financial information normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States that is not required for interim reporting purposes has been condensed or omitted.  The accompanying condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended November 3, 2007.

The Company’s fiscal year is a 52 or 53-week period ending the Saturday nearest the end of October.  For interim reporting purposes, the first three fiscal quarters comprise 12 weeks each, while the fourth fiscal quarter consists of 16 or 17 weeks.  The results of operations for the 12-week and 36-week periods ended July 12, 2008 are not necessarily indicative of the results to be expected for the full fiscal year or for any future period.

On March 31, 2008, the Company sold its United Kingdom operations and related subsidiary.  The results of operations of the discontinued operations are separately stated in the accompanying condensed consolidated statements of operations for the 12-week and 36-week periods ended July 12, 2008 and for the same periods of fiscal 2007. The assets and liabilities of these discontinued operations have not been reclassified in the accompanying consolidated balance sheets and related notes.  The cash flows from discontinued operations are not separately classified in the Company’s consolidated statements of cash flows.

Accounts receivable as originally reported on the November 3, 2007 balance sheet have been increased by $962,000 to reflect unbilled amounts to customers related to services performed in the United Kingdom previously included in other current assets.  The Company’s policy is to record as trade accounts receivables the amounts earned for the final week of the period but not billed to customers.

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The Company has included as part of interest expense certain amounts paid to GE Capital for letters of credit issued to the Company’s insurance carrier to secure liabilities reflected on the balance sheet. These costs are charged based on a percentage of the outstanding letters of credit.  These costs during the fiscal year 2007 that were originally classified as selling and administrative expenses have been reclassified to interest expense to conform to the fiscal year 2008 presentation.  The reclassifications had no change to net income or earnings per share and are shown below:

2.     Out of period adjustment

During the 12 weeks ended April 19, 2008, the Company recorded $880,000 in depreciation expense and accumulated depreciation, relating to assets purchased prior to fiscal year 2004, which should have been depreciated over a 4 year period.  The depreciation expense and accumulated depreciation, however, were not previously recorded.  The Company reviewed this additional expense and considered the impact of the adjustment under Staff Accounting Bulletin No. 99 “Materiality”.  The Company concluded that reporting the $880,000 as an adjustment to current period depreciation expense and accumulated depreciation is not material to the current fiscal year 2008 or prior fiscal years.

3.     Restricted cash

During the 12 weeks ended July 12, 2008, the cash proceeds of $5.0 million from the sale of the U.K. operations was held as collateral for U.S. Bank related to the Financing Agreement, as described in Note 9.

4.     Adoption of recent pronouncement

During the first quarter of fiscal year 2008, the Company adopted the provisions of Financial Accounting Standards Board (“FASB”) Interpretation No. (“FIN”) 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109” (“FIN 48”) effective November 4, 2007.  FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes”, and prescribes a recognition threshold and measurement process for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.  FIN 48 also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.

As a result of the implementation of FIN 48, the Company made a comprehensive review of its portfolio of uncertain tax positions in accordance with recognition standards established by FIN 48, and concluded that there were no material uncertain tax positions requiring recognition in our financial statements at adoption or as of July 12, 2008.  The Company performed evaluations for the tax years ended 2007, 2006, 2005 and 2004, which were subject to examination by tax authorities.  Upon implementation of FIN 48, the Company adopted a methodology for recognition of interest and penalties accruals related to unrecognized tax benefits and penalties within its provision for income taxes.  The Company had no such interest and penalties accrued at July 12, 2008.

5.              Discontinued Operations

In March 2008, the Company sold its former United Kingdom operations and related subsidiary to Fortis Recruitment Group Limited, a recruiting and staffing company headquartered in England, for approximately $6.7 million. The Company recorded a pre-tax gain of $2.0 million ($1.2 million net of tax).  Cash payments received totaled $6.5 million and transaction costs totaled $0.2 million.  During the 12 weeks ended July 12, 2008, the Company reduced the gain on the sale by about $0.3 million ($0.2 million net of tax) as a result of an amendment to the original sales agreement to forgive Fortis Recruitment Group Limited of various payables and royalties due to Westaff in lieu of agreeing to any working capital adjustments.

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In accordance with the provisions of Statement of Financial Accounting Standard No. 144, “Accounting for Impairment or Disposal of Long-Lived Assets,” the gain recognized in conjunction with the sale of the UK, as well as the results of operations for the current and prior periods, have been reported as discontinued operations in the Company’s statements of operations. Summarized financial data on discontinued operations is as follows:

6.               Income Taxes and Related Valuation Allowance

For the 12 weeks ended July 12, 2008, the Company had an income tax provision from continuing operations of approximately $0.5 million on a pre-tax loss from continuing operations of $14.4 million, which represents an effective tax rate of -3.2%.  The tax provision was primarily generated from tax on foreign operations, and interim period adjustments to deferred tax assets related to federal and Australian net operating losses.

For the 36 weeks ended July 12, 2008, the Company had an income tax provision from continuing operations of approximately $20.2 million on a pre-tax loss from continuing operations of $21.8 million, which represents an effective tax rate of -92.5%.  The tax provision was primarily generated from the establishment of a valuation allowance during the second quarter of fiscal 2008 on its net deferred tax assets, with the exception of those deferred tax assets related to certain net operating losses because it believes it can realize this asset by carrying the net operating loss back to a prior period.  The Company has not set up a valuation allowance against deferred tax assets of  $0.8 million related to the estimated federal and Australian net operating loss because it believes these assets are more likely than not of being realized.  The foreign deferred tax assets relate to net operating losses in jurisdictions which have not experienced cumulative losses in recent periods.

7.              Goodwill and Intangibles

The Company’s goodwill represents the excess of the cost of businesses acquired over the fair value of the net assets acquired at the date of acquisition.  The primary other identifiable intangible assets of the Company with indefinite lives are reacquired franchise rights.  These assets are not amortized but rather tested for impairment at least annually in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets” and SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets”.  This test is generally performed by the Company during its fourth fiscal quarter or more frequently if the Company believes impairment indicators are present.  The Company determined its reporting units to be the same as its operating segments under SFAS 131 “Disclosures about Segments of an Enterprise and Related Information”.  See Note 17.

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During the Company’s second quarter several factors led management to consider whether its goodwill and other intangibles might be impaired. These factors included three possible indicators of impairment, including: a) a decline in the market capitalization of the company to a level below the book carrying value of its equity; 2) the sale of its UK subsidiary below the fair value as determined at September 1, 2007; and 3) unexpected revenue declines for its U.S. domestic reporting unit through the end of its second fiscal quarter.  As a result of these conditions, the Company performed the first step in the impairment test required by SFAS 142 which compares the fair value of a reporting unit to its carrying value, including goodwill and intangibles and concluded that the fair value of its US Domestic Reporting Unit exceeded the carrying value and market capitalization which indicated that the Company’s goodwill was not impaired.  Therefore the Company did not perform the second step of the impairment test and no impairment charge was recorded in the second quarter.  In light of the continued decline in revenue and market capitalization for Westaff, the Company determined that an interim impairment test was necessary during the third quarter of 2008.

Prior to performing Step 1 of the goodwill impairment testing process for a reporting unit under SFAS 142, if there is reason to believe that other non-goodwill related intangible assets may be impaired, these other intangible assets must first be tested for impairment under SFAS 142 or SFAS 144.  Assets governed by SFAS 144 require a recoverability test whereby the gross undiscounted cash flows are determined specific to the asset.  For non-goodwill related indefinite-lived assets, a fair value determination is made.  If the carrying value of the asset exceeds the fair value, then impairment occurs.  The carrying values of these assets are impaired as necessary to provide the appropriate carrying value for the goodwill impairment calculation.

Based on the impairment evaluation as of July 12, 2008, it was determined that the indefinite life franchise right intangible was impaired by $171,000.  Such an impairment charge was measured in accordance with SFAS 142 as the excess of the carrying value over the fair value of the asset.

After completing the intangible asset impairments, the Company compared the fair value of the US Reporting Unit to its carrying value and determined that the reporting unit was impaired.  Upon completion of step two of the impairment test, the Company recorded a goodwill impairment of $11.4 million in relation to its U.S. domestic services reporting unit.  The fair value of the Australia and New Zealand reporting units were greater than the net book value and accordingly, no second step was required.   The Company’s impairment evaluations were performed by management.  The evaluations for other goodwill and other intangible assets included reasonable and supportable assumptions and projections and were based on estimates of projected future cash flows.

The goodwill and intangible assets impairment charge is non-cash in nature and does not affect the Company’s liquidity, cash flows from operating activities, or debt covenants, or have any impact on future operations.

The following table shows the change to goodwill and intangible assets during the first three quarters of fiscal 2008.

Total estimated amortization expense for the remaining 16 weeks of fiscal year 2008 is $5,000 and for fiscal year 2009 is $17,000. 

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8.      Accrued Expenses

9.               Credit Agreements

On February 14, 2008, the Company (through its wholly-owned subsidiary Westaff (USA), Inc.) entered into a financing agreement with U.S. Bank National Association (“U.S. Bank”), as agent, and the lenders thereto, which provides for a five-year revolving credit facility that previously provided for an aggregate commitment of up to $50.0 million, including a letter of credit sub-limit of $35.0 million (the “Financing Agreement”).  Borrowings under the Financing Agreement bear interest, at the Company’s election, at either U.S. Bank’s prime rate or at LIBOR plus an applicable LIBOR rate margin ranging from 1.25% to 2.00%. The Financing Agreement provides that a default rate would apply on all loan obligations in the event of default under the Financing Agreement and related documents, at a rate per annum of 2.0% above the applicable interest rate.  Interest is payable on a monthly basis.

On May 23, 2008, the Company received a notice of default from U.S. Bank National Association (“U.S. Bank”) (as agent for itself and Wells Fargo Bank, National Association (“Wells Fargo”), as lenders, stating that (1) an Event of Default (as defined in the Financing Agreement) had occurred due to the Company’s failure to achieve a minimum required Fixed Charge Coverage Ratio (as defined in the Financing Agreement) for the fiscal period ended April 19, 2008; and (2) as a result of the Event of Default, effective May 21, 2008, U.S. Bank increased the rate of interest to the default rate of interest on the borrowings outstanding under the Financing Agreement.  The Company had $27.3 million of letters of credit supporting workers’ compensation obligations outstanding under the U.S. Bank credit facility at July 12, 2008, but no outstanding borrowings.

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

The Company is currently in discussions with U.S. Bank in order to seek a waiver or continued forbearance in respect of the Event of Default.  There can be no assurance that the Company will be able to obtain a waiver or continued forbearance or that such a waiver or continued forbearance would be on terms acceptable to the Company.  If the Company is unable to obtain a waiver or continued forbearance and the lenders elect to pursue remedies under the Financing Agreement, such as limiting or terminating the Company’s right to borrow under the Financing Agreement or electing not to renew letters of credit supporting the Company’s workers’ compensation insurance, it would have a material adverse effect on the Company’s business, financial condition, results of operations and cash flows.  In response to the continued default, the Company secured $3.0 million subordinated loan facility, subsequent to the end of the quarter and as described in Note 19.  This facility is available for working capital and general business purposes.

The Company’s Australian subsidiary maintains an A$12 million Australian dollar facility agreement (the “A$ Facility Agreement”) with GE Capital, as primary agent, expiring in May 2009.  The A$ Facility Agreement includes a letter of credit sub-facility.  The outstanding balance on the Australia Facility Agreement at July 12, 2008 was $3.1 million at a 10.31% rate per annum.

During the 36 weeks ended July 12, 2008, the Company recorded a charge to earnings for the previously capitalized costs associated with the former credit facility of approximately $0.4 million.

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10.        Related Party Transactions

The Company has an unsecured subordinated promissory note in an amount of $2.0 million, dated May 17, 2002 and payable to the former Chairman of the Board of Directors.  The note matured on August 18, 2007, is now past due and has an interest rate equal to an indexed rate as calculated under the Company’s credit facilities plus seven percent, compounded monthly and payable 60 calendar days after the end of each of the Company’s fiscal quarters.  The effective interest rate on July 12, 2008 was 12.0%. Payment of interest is contingent on the Company meeting minimum availability requirements under its credit facilities.  Additionally, payments of principal or interest are prohibited in the event of any default under the credit facilities.  Following a default under a prior loan facility at the end of the third quarter of fiscal 2007, a former lender exercised its right to prohibit repayment of the note at its maturity.  U.S. Bank has also exercised its right to prohibit repayment of this note during the 12-week period ended July 12, 2008.  Accrued and unpaid interest on this note at July 12, 2008 was $297,000 and is included in accrued expenses in the Company’s consolidated balance sheets.

11.        Commitments and Contingencies

In the ordinary course of its business, the Company is periodically threatened with or named as a defendant in various lawsuits, including, among other, litigation brought by former franchisees or licensees, and administrative claims and lawsuits brought by employees or former employees, etc.  The Company insures itself to cover principal risks like workers’ compensation, general liability, automobile liability, property damage, alternative staffing errors and omissions, fiduciary liability and fidelity losses. Management believes there are no matters that will have a material adverse effect on the Company’s consolidated financial statements.

During the fourth quarter of fiscal 2005, the Company was notified by the California Employment Development Department (“EDD”) that its domestic operating subsidiaries unemployment tax rates would be increased retroactively for both calendar years 2005 and 2004, which would result in additional unemployment taxes of approximately $0.9 million together with interest at applicable statutory rates.  Management believes that it has properly calculated its unemployment insurance tax and is in compliance with all applicable laws and regulations. The Company has timely appealed the ruling by the EDD and is working with outside counsel to resolve this matter.  A hearing officer has been assigned to the matter and a confirmation of a hearing date from the EDD is awaited.  Management believes the resolution of this matter will not have a material adverse effect on the Company’s consolidated financial statements.

12.        Workers’ Compensation

Domestically, the Company is responsible for and pays workers’ compensation costs for its temporary and regular employees and is self-insured for the deductible amount related to workers’ compensation claims.  The Company accrues the estimated costs of workers’ compensation claims based upon the expected loss rates within the various temporary employment categories provided by the Company.  At least annually, the Company obtains an independent actuarial valuation of the estimated costs of claims reported but not settled, and claims incurred but not reported (IBNR), and adjusts the accruals based on the results of the valuations.  The following summarizes the workers’ compensation liability as of July 12, 2008 and November 3, 2007:

As of July 12, 2008 and November 3, 2007, the current liabilities include $0.1 and $0.5 million respectively, in workers compensation expense related to Australia.

(1)The insurance carrier requires the Company to collateralize its recorded obligations through the use of irrevocable letters of credit, surety bonds or cash.

13.   Stock-Based Compensation

Stock Incentive Plan and Employee Stock Purchase Plan .  The Company has a stock incentive plan and an Employee Stock Purchase Plan.  Please refer to Note 14 of the Company’s audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended November 3, 2007 for additional information related to these stock-based compensation plans.

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Restricted Stock Units.  On May 30, 2008, the Company granted 90,000 restricted stock units to certain employees.  Each grant entitles the recipient to convert units to shares of common stock subject to terms of the awards.  The maximum units to be awarded, if all performance conditions are met, are 135,000 units.  The restricted stock units will vest, if all conditions are met, 50% on October 30, 2010 and 50% on October 29, 2011.  Besides the condition that the recipient must complete a period of continuous service to the Company through and including the vest dates, there is a performance condition and a market condition, both of which must be met.  First, for each of three fiscal years, beginning with fiscal 2008, the company must meet an EBITDA target and second, the company’s stock price must meet certain requirements as compared to a designated “peer” group’s average stock price.  As of July 12, 2008, the achievement of performance based criteria is not probable; therefore no compensation expense has been recognized.

Stock-based compensation .  Effective with the beginning of the first quarter of fiscal 2006, the Company adopted Statement of Financial Accounting Standards No. 123 (revised 2004) Share-Based Payment (“SFAS 123(R)”) using the modified prospective method of adoption.

For the 12-week and 36-week periods ended July 12, 2008 and July 7, 2007, the Company recognized stock-based compensation expense as follows:

Stock-based compensation expense is included in selling and administrative expenses.

The determination of the fair value of stock options, using the Black-Scholes model, is affected by the Company’s stock price as well as assumptions as to the Company’s expected stock price volatility over the term of the awards, actual and projected employee stock option exercise behavior, the risk-free interest rate, and expected dividends.

The Company estimates the volatility of the common stock by using historical volatility over a period equal to the award’s expected term. The risk-free interest rates that are used in the valuation models are based upon yields of the U.S. Treasury constant maturities at the time of grant having a term that approximates the expected life of the options. Dividend yield is zero as the Company did not declare or pay dividends during fiscal 2008 or fiscal 2007, and its current credit facilities prohibit payment of dividends.  The Company does not currently have plans to declare dividends in future years.

SFAS 123(R) requires companies to estimate future expected forfeitures at the date of grant and revise those estimates in subsequent periods if actual forfeitures differ from those estimates.  In previous years, the Company had recognized the impact of forfeitures as they occurred.  Under SFAS 123(R), the Company uses historical data to estimate pre-vesting forfeiture rates in determining the amount of stock-based compensation expense to recognize.  During the 36 weeks ended July 12, 2008, the Company increased its forfeiture rate by analyzing historic forfeiture rates and reviewing outstanding unvested option grants which resulted in a decrease to stock-based compensation expense. The 12 and 36 weeks ended July 7, 2007 included $373,000 of expense related to the acceleration of options and restricted stock awards upon the departure of a specific executive.  No such expense was present during the 12 and 36 weeks ended July 12, 2008.

All stock-based compensation awards are amortized on a straight-line basis over the requisite service periods of the awards.

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14.        Loss per share

Basic loss per share of common stock is computed as loss divided by the weighted average number of common shares outstanding for the period.  Diluted loss per share of common stock is computed as loss divided by the weighted average number of common shares and potentially dilutive common stock equivalents outstanding during the period.  Diluted loss per share reflects the potential dilution that could occur from common stock issuances as a result of stock option exercises. The following table sets forth the computation of basic and diluted (loss) earnings per share:

15.        Company Restructuring

In the third quarter of fiscal 2007, the Company approved a restructuring plan to, among other things, reduce its workforce and consolidate facilities.  Restructuring charges have been recorded to align the Company’s cost structure with changing market conditions and to create a more efficient organization.  The Company’s restructuring charges have been comprised primarily of: (i) severance and termination benefit costs related to the reduction of our workforce; and (ii) lease termination costs and costs associated with permanently vacating certain facilities.

The Company accounted for each of these costs in accordance with FASB 146, “Accounting for Costs Associated with Exit or Disposal Activities.”  In the third quarter of fiscal 2007, the Company started a series of changes to its operations that management believes will significantly reduce its costs. The Company terminated 86 positions at field and corporate offices and closed 26 branch offices.  The customers served by these closed offices have been transferred to other offices within the proximity of the closed offices.  The detail is as follows: