WSTF Westaff (MM)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D. C.  20549

FORM 10-Q/A

Amendment No. 1

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:

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. (Check one):

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:

EXPLANATORY NOTE

This Amendment No. 1 to the Quarterly Report on Form 10-Q of Westaff, Inc. (the “Registrant”) amends the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended April 19, 2008 that was originally filed with the Securities and Exchange Commission on June 9, 2008 (the “Original Filing”).  This Amendment No. 1 is being filed to make the following changes:

·       Part I, Item 1 – Notes to Condensed Consolidated Financial Statements

Note 1 — We changed the reclassification table’s “Net loss” from $29 to the correct amount of $(261) for the 24 weeks ended April 14, 2007 for the columns labeled “As originally reported as adjusted for discontinued operations” and “As reclassified” in order to agree to the amount as presented on the Condensed Consolidated Statements of Operations.

Note 4 — We changed the “Operating loss from discontinued operations for the 12 weeks ended April 14, 2007” from $(216) to the correct amount of $(210) to correct a footing error.

Note 4 — We changed the Balance sheet of discontinued operations as of April 14, 2007 to the balance sheet as of November 3, 2007 as is required by the Statement of Financial Accounting Standard No. 144, “Accounting for Impairment or Disposal of Long-Lived Assets”.

Note 6 — We removed the table of “Unamortized intangible assets as of April 19, 2008 and November 3, 2007” and the table of “Estimated amortization expense for the fiscal years 2008 and 2009” since the information was included in sentence format below the table.

Note 7 — We changed the amount of  “Other” from $4,552 to the correct amount of $4,559 to correct a footing error to reconcile the amount of Accrued Expenses to the financial statements.

·       Part I, Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations:  Results of Operations – 24 weeks ended April 19, 2008 and April 14, 2007

 Selling and administrative expenses — We changed the sentence from “Our professional fees increased by $1.6 million” to “Our professional fees increased by $1.8 million” to agree to the financial statements.

Net interest expense — We changed the sentence “Net interest expense increased by $0.6 million or 58.7% to $1.6 million (previously stated as $1.7 million)” to agree to the financial statements.

·       Part I, Item 3 – Quantitative and Qualitative Disclosures about Market Risk

We changed the following sentences to reconcile to the financial statements:

“A change of two percentage points in the interest rates would cause a change in interest expense of approximately $0.1 million (previously stated as $0.2 million) on an annual basis.”

“For the 24 weeks ended April 19, 2008, our international operations comprised 25.9% of our gross revenue and, as of the end of that period 19.3% (previously stated as 17.0%) of our total assets.”

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No other changes have been made to the Original Filing. This Amendment No. 1 does not amend or update any other information set forth in the Original Filing including the information contained in the condensed consolidated balance sheets, statements of operations and cash flows as of April 19, 2008 and for the 12 and 24 weeks then ended, and the Registrant has not updated disclosures contained therein to reflect any events subsequent to the filing of the Original Filing. This Amendment No. 1 consists solely of the preceding cover page, this explanatory note, Item 1 (as amended), Item 2 (as amended), Item 3 (as amended), the signature page and the certifications required to be filed as exhibits hereto.

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Part l.  Financial Information

Item 1.  Financial Statements

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.  In March 2008, the Company sold its United Kingdom (“UK”) subsidiary operation. 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 April 19, 2008 and for the 12-week and 24-week periods ended April 19, 2008 and April 14, 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 balance sheet included in the Company’s Annual Report on Form 10-K for the fiscal year ended November 3, 2007.

The Company has a financing agreement through its wholly owned subsidiary with U.S. Bank which provides for a five year revolving credit facility for up to $50.0 million.  The Company is currently in default under certain covenants of this financing arrangement.  While the Company is negotiating with its lenders for a waiver or forbearance under this default, there can be no assurances that a waiver or forbearance can be obtained.  If such an agreement cannot be obtained on acceptable terms, the Company may be unable to access the funds needed to support its liquidity needs.  In that case, its business and operating results would be adversely affected and the Company might be unable to continue its operations as a going concern.

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 24-week period ended April 19, 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 24-week periods ended April 19, 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 the Westaff U.K. 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 24-week periods ended April 19, 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 current fiscal quarter, 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.    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 April 19, 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 April 19, 2008.

4.              Discontinued Operations

In March 2008, the Company sold its United Kingdom (“UK”) subsidiary operation 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 $204,000.  The sale of the UK subsidiary was an important part of the Company’s strategy of reviewing existing operations and selectively divesting non-core assets.

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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:

5.               Income Taxes and Related Valuation Allowance

For the second quarter of fiscal 2008, the Company had an income tax provision from continuing operations of approximately $20.3 million on a pre-tax loss from continuing operations of $5.3 million. The income tax provision resulted primarily from the establishment of a valuation allowance of $23.2 million in the current quarter against deferred tax assets.  These allowances were recorded against the deferred tax assets because the Company has recently reassessed the potential for their realization in future years.  The Company recorded a valuation allowance in the current quarter due to cumulative losses in recent periods and revised projections indicating continued losses for the remainder of fiscal 2008.  The Company has not set up a valuation allowance against deferred tax assets of $0.8 million from the estimated federal net operating loss generated for fiscal 2007 because it believes it can realize this asset by carrying the net operating loss back to a prior tax period.  The Company has not established a valuation allowance against its foreign deferred tax assets of $0.4 million because it believes these deferred tax assets are more likely than not of being realized.  These foreign deferred tax assets relate to net operating losses in jurisdictions which have not experienced cumulative losses in recent periods.  As of April 19, 2008 the Company had deferred tax assets of $24.4 million offset by a valuation allowance of $23.2 million, for a net deferred tax asset balance of $1.2 million.  Although it is possible these deferred tax assets could still be realized in the future, the Company believes it is more likely than not that these deferred tax assets will not be realized in the foreseeable future.  The Company intends to reevaluate its projections and the valuation allowance position periodically.

Absent the valuation allowance recognized, for the 12 week period ended April 19, 2008 the Company had an income tax benefit from continuing operations of $2.9 million, which represents an effective tax benefit rate of 53.6%.  The rate benefit was primarily generated from the generation of Work Opportunity Tax Credits (WOTC), offset by other permanent adjustments.

6.              Goodwill and Intangibles

The Company follows the provisions of SFAS 142 “Goodwill and Other Intangible Assets.” SFAS 142 provides that goodwill and other intangible assets with indefinite lives are evaluated for impairment at a reporting unit level by applying a fair-value based test. The primary other identifiable intangible assets of the Company with indefinite lives are reacquired franchise rights. The

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Company determined its reporting units as its operating segments under SFAS 131 “Disclosures about Segments of an Enterprise and Related Information”.

The first step in the impairment test compares the fair value of a reporting unit with its carrying value, including goodwill and other non amortizing intangibles. If the carrying value of a reporting unit exceeds its fair value, the second step of the impairment test is performed to determine the amount of any impairment loss by comparing the implied fair value of the reporting unit’s goodwill with the respective carrying value. This test is generally performed by the Company during its fourth fiscal quarter or more frequently if the Company believes impairment indicators are present.

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 US 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 which in this case totaled $11,369,000 assigned to its US Domestic Services Reporting Unit. To perform this test, the Company used assumptions about future cash flows and growth rates based upon budgets and long term plans. Such assumptions, including associated discount rates used in the analysis, are based upon the Company’s assessment of the risks inherent in those plans and projections. The Company concluded that the fair value of its US Domestic Reporting Unit exceeded 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 second quarter. The Company intends to seek an independent valuation of its goodwill during next quarter. Should revenues continue to decline in future periods or other indicators suggest that an impairment may have taken place, all or a portion of the recorded goodwill may need to be written off in future periods.

The following table shows the change to goodwill during the first two quarters of fiscal 2008.

The following table shows the change to the definite life intangible assets during the first two quarters ended April 19, 2008.

Total estimated amortization expense for fiscal year 2008 is $20,000 and for fiscal year 2009 is $17,000.  Unamortized intangible assets include franchise rights which as of April 19, 2008 and November 3, 2007 total $3,658,000.

7.  Accrued Expenses

8.               Credit Agreements

On February 14, 2008, Westaff (USA), Inc., a wholly-owned subsidiary of the Company (the “Borrower”), and the Company, as guarantor, entered into a financing agreement (the “Financing Agreement”) with U.S. Bank National Association (“U.S. Bank”)

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and Wells Fargo Bank National Association (collectively the “Banks”) which provides for a new five year $50.0 million revolving credit facility.  On February 28, 2008, the Borrower was advanced credit in the form of letters of credit issued and loans advanced in an aggregate amount of approximately $29.6 million under the Financing Agreement.  The Borrower used the proceeds from the extension of credit to repay amounts outstanding under the then-existing Multicurrency Credit Agreement, dated as of May 17, 2002, among the Company, the Borrower, certain other subsidiaries of the Company, certain lenders party thereto and General Electric Capital Corporation, as amended, to replace or cash collateralize letters of credit issued under such Multicurrency Credit Agreement, and for working capital needs.

The Financing Agreement provides for a five-year $50.0 million revolving credit facility, which includes a letter of credit sub-limit of $35.0 million. The Company and its following subsidiaries are guarantors under the new credit facility: Westaff (USA), Inc., Westaff Support, Inc., and MediaWorld International (together with the Company, collectively, the “Guarantors”). The maximum borrowing availability under the Financing Agreement is based upon a percentage of certain eligible billed and unbilled accounts receivables. 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%. A default rate would apply on all loan obligations in the event of default under the Credit Documents, at a rate per annum of 2.0% above the applicable interest rate. Interest is payable on a monthly basis. The credit obligations under the financing agreement are secured by a first priority security interest in the assets of the Borrower, the Company and the other Guarantors, with certain exceptions set forth in the Financing Agreement and the other Credit Documents. The proceeds of the extensions of credit under the Financing Agreement may be used by the Borrower for any lawful purpose.

The financial covenants under the Financing Agreement include a Fixed Charge Coverage Ratio (as defined in the Financing Agreement) requirement, measured as of the end of each fiscal quarter, and a minimum liquidity (as defined in the Financing Agreement) measured until the Company’s financial statements for the second fiscal quarter are delivered to U.S. Bank.

On May 23, 2008, the Company received a notice of default from U.S. Bank stating that (1) an Event of Default (as defined in the Financing Agreement) had occurred due to the Borrower’s failure to achieve a 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.  Unless waived by U.S. Bank, the Event of Default gives U.S. Bank the right to prohibit additional borrowing under the Financing Agreement, accelerate the Company’s indebtedness thereunder, and take other actions as provided for in the Financing Agreement.

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

In addition, the Company’s Australian subsidiary maintains a A$12 million Australian dollar facility agreement (the “A$ Facility Agreement”) with GE Capital, as primary agent, expiring in May 2009.  The agreement includes a letter of credit sub-facility.

During the second quarter, the Company recorded a charge to earnings for the previously capitalized costs associated with the former credit facility of approximately $0.4 million.

9.               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 April 19, 2008 was 12.25%. 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 our default at the end of the third quarter of fiscal 2007, the former lender exercised their right to prohibit repayment of the note at its maturity.  U.S. Bank has also exercised their right to prohibit repayment of the note during the second quarter of fiscal 2008.  Accrued and unpaid interest at April 19, 2008 was $234,000, included under Accrued Expenses.

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10.        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.

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 financial statements.

11.        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 April 19, 2008 and November 3, 2007:

As of April 19, 2008 and November 3, 2007, the current liabilities include $0.2 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.

12.  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 financial statements, which are 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.

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.

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For the 12-week and 24-week periods ended April 19, 2008 and April 14, 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 12 weeks ended April 19, 2008, the Company revised its forfeiture rate from 5.0% to 21.9% by analyzing historic forfeiture rates and reviewing outstanding unvested option grants.  The change in forfeiture rate resulted in an adjustment to reduce $99,000 of stock-based compensation expense.

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

13.        (Loss) earnings 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:

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14.        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 :

During the 24 weeks ended April 19, 2008, the Company successfully negotiated early termination agreements for eight locations and entered into a sublease for two locations, the effects of which resulted in a $150,000 reduction in accrual.  The Company is still responsible for lease payments on 14 locations and is actively negotiating early terminations, where possible, and sublease opportunities to mitigate its obligation.  The restructuring accrual, representing rent expense under non-cancellable leases has been reduced by the current estimated future sublease income.

15.        Comprehensive loss

Comprehensive loss consists of the following:

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16.  Operating Segments

The following table summarizes reporting segment data: