SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 29, 1998
OR
[ ] 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 0-26094
SOS STAFFING SERVICES, INC.
(Exact name of registrant as specified in its charter)
Utah 87-0295503
(State or other jurisdiction of incorporation) (I.R.S. Employer ID No.)
1415 South Main Street
Salt Lake City, Utah 84115
(Address of principal executive offices)
(801) 484-4400
(Telephone number)
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 and 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 filings
requirements for the past 90 days.
Yes____X______ No___________
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class of Common Stock Outstanding at March 29, 1998
--------------------- -----------------------------
Common Stock, $0.01 par value 12,665,462
1
<PAGE>
TABLE OF CONTENTS
Part I - Financial Information
Item 1. Financial Statements Page(s)
-------
Condensed Consolidated Balance Sheets
As of March 29, 1998 and December 28, 1997 3-4
Condensed Consolidated Statements of Income
For the Thirteen Weeks Ended
March 29, 1998 and March 30, 1997 5
Condensed Consolidated Statements of Cash Flows
For the Thirteen Weeks Ended
March 29, 1998 and March 30, 1997 6-7
Notes to Condensed Consolidated Financial Statements 8-9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10-11
Item 3. Quantitative and Qualitative Discussion About Market Risk 11
Part II - Other Information
Item 1. Legal Proceedings 11-12
Item 6. Exhibits and Reports on Form 8-K 12
Signatures 13
2
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
SOS STAFFING SERVICES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
<CAPTION>
March 29, December 28,
1998 1997
-------------------- --------------------
<S> <C> <C>
CURRENT ASSETS: (Unaudited)
Cash and cash equivalents $ 1,680,720 $ 20,462,647
Accounts receivable, net 35,279,857 32,982,075
Current portion of workers' compensation deposit 461,653 475,549
Prepaid expenses and other 1,017,826 729,697
Deferred tax asset 1,303,029 1,238,955
-------------------- --------------------
Total current assets 39,743,085 55,888,923
-------------------- --------------------
PROPERTY AND EQUIPMENT, at cost:
Computer equipment 3,032,850 2,852,320
Office equipment 3,397,372 2,241,392
Leasehold improvements and other 1,303,749 1,286,134
-------------------- --------------------
7,733,971 6,379,846
Less accumulated depreciation and amortization (2,671,730) (2,353,511)
-------------------- --------------------
Total property and equipment, net 5,062,241 4,026,335
-------------------- --------------------
OTHER ASSETS:
Workers' compensation deposit, less current portion 106,369 106,369
Intangible assets, net 72,584,595 57,456,417
Deposits and other assets 707,869 811,527
-------------------- --------------------
Total other assets 73,398,833 58,374,313
-------------------- --------------------
Total assets $ $
118,204,159 118,289,571
==================== ====================
</TABLE>
The accompanying notes to condensed consolidated financial statements
are an integral part of these condensed consolidated balance sheets.
3
<PAGE>
<TABLE>
SOS STAFFING SERVICES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
<CAPTION>
March 29, December 28,
1998 1997
--------------------- --------------------
<S> <C> <C>
CURRENT LIABILITIES: (Unaudited)
Accounts payable $ 1,305,047 $ 971,775
Accrued payroll costs 3,897,589 3,566,859
Current portion of workers' compensation reserve 2,625,533 2,537,995
Accrued liabilities 337,013 663,042
Income taxes payable 1,487,309 946,611
Accrued acquisition costs and earnouts 557,556 4,412,658
--------------------- --------------------
Total current liabilities 10,210,047 13,098,940
--------------------- --------------------
LONG-TERM LIABILITIES:
Workers' compensation reserve, less current portion 630,144 535,580
Deferred income tax liability 282,367 193,762
Deferred compensation liability 195,716 126,206
--------------------- --------------------
Total long-term liabilities 1,108,227 855,548
--------------------- --------------------
SHAREHOLDERS' EQUITY:
Common stock 126,655 126,530
Additional paid-in capital 91,306,050 91,152,122
Retained earnings 15,453,180 13,056,431
--------------------- --------------------
Total shareholders' equity 106,885,885 104,335,083
--------------------- --------------------
Total liabilities and shareholders' equity $ 118,204,159 $ 118,289,571
===================== ====================
</TABLE>
The accompanying notes to condensed consolidated financial statements
are an integral part of these condensed consolidated balance sheets.
4
<PAGE>
<TABLE>
SOS STAFFING SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
<CAPTION>
13 Weeks Ended
------------------------------------------------------------------
March 29, 1998 March 30, 1997
-------------------------- ----------------------------
(Unaudited) (Unaudited)
<S> <C> <C>
SERVICE REVENUES $ 70,158,302 $ 40,846,085
DIRECT COSTS OF SERVICES 54,141,982 32,139,009
-------------------------- ----------------------------
Gross profit 16,006,320 8,707,076
-------------------------- ----------------------------
OPERATING EXPENSES;
Selling, general and administrative 11,353,712 6,357,130
Intangibles amortization 760,087 274,993
-------------------------- ----------------------------
Total operating expenses 12,113,799 6,632,123
-------------------------- ----------------------------
INCOME FROM OPERATIONS 3,892,521 2,074,953
-------------------------- ----------------------------
OTHER INCOME (EXPENSE):
Interest expense (32,959) (36,861)
Interest income 109,802 83,641
Other, net 60,972 61,739
-------------------------- ----------------------------
Total, net 137,815 108,519
-------------------------- ----------------------------
INCOME BEFORE PROVISION
FOR INCOME TAXES 4,030,336 2,183,472
PROVISION FOR INCOME TAXES (1,633,587) (865,716)
-------------------------- ----------------------------
NET INCOME $ 2,396,749 $ 1,317,756
========================== ============================
NET INCOME PER COMMON SHARE:
Basic $ 0.19 $ 0.15
Diluted $ 0.19 $ 0.15
WEIGHTED AVERAGE COMMON SHARES:
Basic 12,660,209 8,986,774
Diluted 12,848,894 9,060,421
</TABLE>
The accompanying notes to condensed consolidated financial statements
are an integral part of these condensed consolidated statements.
5
<PAGE>
<TABLE>
SOS STAFFING SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash and Cash Equivalents
<CAPTION>
13 Weeks Ended
--------------------------------------------
March 29, March 30,
1998 1997
--------------------- --------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES: (Unaudited) (Unaudited)
Net income $ 2,396,749 $ 1,317,753
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 1,035,538 386,964
Deferred income taxes 24,531 (211,179)
Loss on disposition of assets (39,345) -
Changes in operating assets and liabilities:
Accounts receivable, net (1,740,025) 817,900
Workers' compensation deposit 13,896 (100,001)
Prepaid expenses and other (275,372) (163,517)
Amounts due from related parties - (93,400)
Deposits and other assets 173,168 (5,518)
Accounts payable 333,272 (365,430)
Accrued payroll costs 330,730 (354,121)
Workers' compensation reserve 182,102 305,350
Accrued liabilities (424,822) 26,791
Income taxes payable 540,698 532,406
--------------------- --------------------
Net cash provided by operating activities 2,551,120 2,093,998
--------------------- --------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (1,019,104) (269,200)
Cash paid in acquisitions and earnouts (20,527,996) (3,731,502)
Proceeds from sale of property and equipment 60,000 -
--------------------- --------------------
Net cash used in investing activities $ (21,487,100) $ (4,000,702)
--------------------- --------------------
</TABLE>
The accompanying notes to condensed consolidated financial statements
are an integral part of these condensed consolidated statements.
6
<PAGE>
<TABLE>
SOS STAFFING SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash and Cash Equivalents
<CAPTION>
13 Weeks Ended
--------------------------------------------
March 29, March 30,
1998 1997
--------------------- --------------------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES: (Unaudited) (Unaudited)
Proceeds from issuance of common stock, net $ - $ 3,004,300
Proceeds from exercise of employee stock options 154,053 11,700
--------------------- --------------------
Net cash provided by financing activities 154,053 3,016,000
--------------------- --------------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (18,781,927) 1,109,296
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 20,462,647 5,784,651
--------------------- --------------------
CASH AND CASH EQIVALENTS AT
END OF PERIOD $ 1,680,720 $ 6,893,947
===================== ====================
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ 196,519 $ 12,849
Income taxes $ 1,134,300 $ 496,000
</TABLE>
The accompanying notes to condensed consolidated financial statements
are an integral part of these condensed consolidated statements.
7
<PAGE>
SOS STAFFING SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Basis of Presentation
The accompanying condensed consolidated financial statements have been
prepared by the Company, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations. These condensed consolidated financial statements reflect
all adjustments (consisting only of normal recurring adjustments), which in the
opinion of management, are necessary to present fairly the results of operations
of the Company for the periods presented. It is suggested that these condensed
consolidated financial statements be read in conjunction with the consolidated
financial statements and the notes thereto included in the Company's Annual
Report to Shareholders on Form 10-K.
The results of operations for the thirteen week period ended March 29,
1998 are not necessarily indicative of the results to be expected for the full
year.
Note 2. Net Income Per Common Share
Basic net income per common share ("Basic EPS") excludes dilution and
is computed by dividing net income by the weighted-average number of common
shares outstanding during the year. Diluted net income per common share
("Diluted EPS") reflects the potential dilution that could occur if stock
options or other common stock equivalents were exercised or converted into
common stock.
The following is a reconciliation of the numerator and denominator used
to calculate Basic and Diluted EPS:
<TABLE>
<CAPTION>
Thirteen Weeks Ended March 29, 1998 Thirteen Weeks Ended March 30, 1997
-------------------------------------------- -----------------------------------------
Per-Share Per-Share
Income Shares Amount Income Shares Amount
------------ ------------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS $2,396,749 12,660,209 $0.19 $1,317,756 8,986,774 $0.15
Effect of stock options -- 188,685 -- -- 73,647 --
------------ ------------- ---------- ----------- ---------- -----------
Diluted EPS $2,396,749 12,848,894 $0.19 $1,317,756 9,060,421 $0.15
============ ============= ========== =========== ========== ===========
</TABLE>
Note 3. Acquisitions
All of the Company's acquisitions have been accounted for using the
purchase method. Certain acquisitions have contingent earnout components of the
purchase price. Earnout amounts are accrued when payment becomes probable and
increase the amount of goodwill related to the acquisition.
During the thirteen weeks ended March 29, 1998, the Company acquired
certain assets or stock and substantially all of the operations of five
businesses. The aggregate purchase price was approximately $15.0 million. Three
of the acquisitions have contingent future earnouts up to a combined maximum of
$6.8 million. The excess of the purchase price (excluding earnouts) over the
estimated fair value of the acquired assets, less liabilities assumed, was
approximately $14.2 million and has been allocated to goodwill and other
intangible assets.
Earnouts and Acquisition Costs - During the thirteen weeks ended March
29, 1998 the Company paid earnouts totaling $5.5 million. As of March 29, 1998
accrued acquisition costs and earnouts totaled $0.6 million.
8
<PAGE>
Pro Forma Acquisition Information--Unaudited
The unaudited pro forma acquisition information for the thirteen weeks
ended March 29, 1998 and March 30, 1997 presents the results of operations of
material acquisitions which were completed during the thirteen weeks ended March
29, 1998 as if the acquisitions had occurred at the beginning of each thirteen
week period. The results of operations give effect to certain adjustments,
including amortization of intangible assets, interest expense on debt borrowings
utilized to fund certain acquisitions, income taxes and shares outstanding. The
pro forma results have been prepared for comparative purposes only and do not
purport to be indicative of what would have occurred had the acquisitions been
made at the beginning of the applicable period or of the results which may occur
in the future.
<TABLE>
<CAPTION>
Unaudited pro forma results of operations
-----------------------------------------
(In thousands, except per share data)
13 Weeks Ended
--------------
March 29, 1998 March 30, 1997
-------------- --------------
<S> <C> <C>
Service revenues $ 74,086 $ 49,379
Gross profit 16,738 10,558
Income from operations 4,161 2,761
Net income $ 2,514 $ 1,645
============= =============
Net income per common share:
Basic $ 0.20 $ 0.17
============= =============
Diluted $ 0.20 $ 0.17
============= =============
</TABLE>
Note 4. Legal Matters
In the ordinary course of its business, the Company is periodically
threatened with or named as a defendant in various lawsuits. The Company
maintains insurance in such amounts and with such coverage and deductibles as
management believes to be reasonable and prudent. The principal risks covered by
insurance include worker's compensation, personal injury, bodily injury,
property damage, errors and omissions, fidelity losses and general liability.
In June 1997, a former customer of the Company commenced litigation
against the Company in the Second District Court, Davis County, state of Utah,
alleging breach of contract, negligence, fraud and misrepresentation. The
allegations are based upon the alleged theft of surplus military goods from the
former customer's warehouse by a former temporary employee of the Company. The
plaintiff is seeking special, general, consequential, punitive and other damages
in an amount in excess of $7.0 million. The Company believes the claim is
without merit and that the Company has valid defenses to all of the allegation
raised by the plaintiff.
There is no other pending litigation that the Company currently
anticipates will have a material adverse effect on the Company's financial
condition or results of operations.
Note 5. Equity Transactions
During the thirteen weeks ended March 29, 1998, options to purchase
12,460 shares of common stock were exercised by employees and the Company
received $154,053.
Note 6. Subsequent Events
Subsequent to March 29, 1998, the Company purchased certain assets and
substantially all of the operations of one business for an aggregate purchase
price of approximately $0.9 million.
9
<PAGE>
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction
with the condensed consolidated financial statements of the Company and notes
thereto appearing elsewhere in this report. The Company's fiscal year consists
of a 52-or 53-week period ending on the Sunday closest to December 31.
Results of Operations
The following table sets forth, for the periods indicated, the
percentage relationship to service revenues of selected items in the Company's
unaudited income statement.
<TABLE>
<CAPTION>
13 Weeks Ended
--------------
March 29, March 30,
1998 1997
---------- ---------
<S> <C> <C>
Service revenues 100.0% 100.0%
Direct cost of services 77.2% 78.7%
---------- ---------
Gross profit 22.8% 21.3%
---------- ---------
Operating expenses:
Selling, general and administrative 16.2% 15.5%
Intangibles amortization 1.1% 0.7%
---------- ---------
Total operating expenses 17.3% 16.2%
---------- ---------
Operating income 5.5% 5.1%
========== =========
</TABLE>
Service Revenues. Service revenues increased by $29.3 million or 71.8%
to $70.2 million for the thirteen weeks ended March 29, 1998 compared to $40.8
million for the thirteen weeks ended March 30, 1997. Of the $29.3 million
increase, approximately $22.4 million was attributable to offices acquired
during 1997 and 1998, $6.4 million was attributable to increased revenues from
comparable offices and $0.5 million was attributable to opening offices in new
markets. The increase in service revenues from comparable offices was also
generally consistent with increases in hours billed, customers served and
temporary staffing employees utilized.
Gross Profit. Gross profit as a percentage of service revenues for the
thirteen weeks ended March 29, 1998 and March 30, 1997 was 22.8% and 21.3%
respectively. The increase in gross profit was primarily due to a shift in
business mix towards the information technology business segment, which
typically generates higher gross margins.
Operating Expenses. Operating expenses as a percentage of service
revenues for the thirteen weeks ended March 29, 1998 and March 30, 1997 were
17.3% and 16.2%, respectively. The increase in operating expenses as a
percentage of service revenues was attributable to an increase in selling,
general and administrative expenses and amortization of intangible assets. The
increase in selling, general and administrative expenses as a percentage of
service revenues was attributable to a shift towards the information technology
business segment, where cost structures are higher. In addition, the Company
made investments in training, marketing and divisional support, as well as the
addition of a more competitive benefits package geared towards the information
technology and specialty area.
Income Taxes. The effective combined federal and state income tax rate
for the thirteen weeks ended March 29, 1998 and March 30, 1997 was 40.5% and
39.6%, respectively. The increased combined tax rate was due to an increase in
non-deductible amortization of intangible assets relating to certain
acquisitions and increasing profits generated in states which assess higher
state tax rates.
10
<PAGE>
Liquidity and Capital Resources
For the thirteen weeks ended March 29, 1998 net cash provided by
operating activities was $2.5 million compared to $2.1 million for the thirteen
weeks ended March 30, 1997. The increase in operating cash flow was a result of
higher net income and increased depreciation and amortization.
The Company's investing activities used $1.0 million to purchase
property and equipment, and $20.5 million to acquire businesses and to pay
acquisition earnouts. See Note 2 to the condensed consolidated financial
statements of the Company for a description of certain terms of these
acquisitions.
In October 1997, the Company completed a secondary public offering of
its common stock and issued 3,000,000 shares of common stock. In addition, at
this same time, the underwriters exercised their overallotment option to
purchase an additional 600,000 common shares. The proceeds received from the
offering and the exercise of the overallotment option, net of underwriting
commissions and offering costs, totaled approximately $56,832,000.
The Company's primary sources of short-term and long-term liquidity and
capital resources at March 29, 1998 were cash flows from operating activities.
The Company's revolving credit facility increased from $20 million to $35
million effective September 17, 1997. As of March 29, 1998, the Company had no
outstanding borrowings on the revolving credit facility. Short-term borrowings
bear interest at the prime rate charged by the Company's lender which is
periodically adjusted (at March 29, 1998, 8.50%), and long-term borrowings which
bear interest at LIBOR plus 1.75% (currently at approximately 7.53 %). The
Company also had letters of credit of $3.1 million outstanding at March 29,
1998, for purposes of securing its workers' compensation premium obligation. The
aggregate amount of such letters of credit reduces the borrowing availability on
the line of credit. At March 29, 1998, $31.9 million was available for
borrowings or additional letters of credit under the line of credit. Management
believes that the present credit facility, together with cash reserves, cash
flow from operations and completed financing activities, will be sufficient to
fund the Company's operations, capital expenditure requirements and acquisitions
presently anticipated for at least the next 12 months. However, if the Company
were to expand its operations significantly, especially through unanticipated
acquisitions, additional capital may be required. There can be no assurance that
the Company will be able to obtain additional capital at acceptable rates.
Item 3. Qualitative and Quantitative Disclosures About Market Risk
Not Required
PART II - OTHER INFORMATION
Item 1. Legal proceedings
In the ordinary course of its business, the Company is periodically
threatened with or named as a defendant in various lawsuits. The Company
maintains insurance in such amounts and with such coverage and deductibles as
management believes to be reasonable and prudent. The principal risks covered by
insurance include worker's compensation, personal injury, bodily injury,
property damage, errors and omissions, fidelity losses and general liability.
In June 1997, a former customer of the Company commenced litigation
against the Company in the Second District Court, Davis County, state of Utah,
alleging breach of contract, negligence, fraud and misrepresentation. The
allegations are based upon the alleged theft of surplus military goods from the
former customer's warehouse by a former temporary employee of the Company. The
plaintiff is seeking special, general, consequential, punitive and other damages
in an amount in excess of $7.0 million. The Company believes the claim is
without merit and that the Company has valid defenses to all of the allegation
raised by the plaintiff.
11
<PAGE>
There is no other pending litigation that the Company currently
anticipates will have a material adverse effect on the Company's financial
condition or results of operations.
Item 6. Exhibits and Reports on Form 8-K.
a) Exhibit 27 - Financial Data Schedule, filed herewith.
b) Reports on Form 8-K during the quarter for which this report is
filed.
None filed.
12
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
SOS STAFFING SERVICES, INC.
Registrant
Dated: May 12, 1998 /s/ Howard W. Scott
-------------------
Howard W. Scott
Chief Executive Officer
Dated: May 12, 1998 /s/ Gary B. Crook
-----------------
Gary B. Crook
Vice President,
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-03-1999
<PERIOD-END> MAR-29-1998
<CASH> 1680720
<SECURITIES> 0
<RECEIVABLES> 36051569
<ALLOWANCES> (771712)
<INVENTORY> 0
<CURRENT-ASSETS> 39743085
<PP&E> 7733971
<DEPRECIATION> (2671730)
<TOTAL-ASSETS> 118204159
<CURRENT-LIABILITIES> 10210047
<BONDS> 0
0
0
<COMMON> 126655
<OTHER-SE> 106759230
<TOTAL-LIABILITY-AND-EQUITY> 118204159
<SALES> 0
<TOTAL-REVENUES> 70158302
<CGS> 0
<TOTAL-COSTS> 54141982
<OTHER-EXPENSES> 12113799
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 32959
<INCOME-PRETAX> 4030336
<INCOME-TAX> 1633587
<INCOME-CONTINUING> 2396749
<DISCONTINUED> 0
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<NET-INCOME> 2396749
<EPS-PRIMARY> 0.19
<EPS-DILUTED> 0.19
</TABLE>
