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 September 27, 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 November 9, 1998
--------------------- -------------------------------
Common Stock, $0.01 par value 12,686,718
1
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TABLE OF CONTENTS
Part I - Financial Information
Item 1. Financial Statements Page(s)
-------
Condensed Consolidated Balance Sheets
as of September 27, 1998 and December 28, 1997 3-4
Condensed Consolidated Statements of Income
For the Thirteen and Thirty-nine Weeks Ended
September 27, 1998 and September 28,1997 5
Condensed Consolidated Statements of Cash Flows
For the Thirty-nine Weeks Ended
September 27, 1998 and September 28, 1997 6-7
Notes to Condensed Consolidated Financial Statements 8-10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11-13
Item 3. Quantitative and Qualitative Discussion About Market Risk 13
Part II - Other Information
Item 1. Legal Proceedings 14
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
2
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
SOS STAFFING SERVICES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
September 27, December 28,
1998 1997
-------------------- --------------------
CURRENT ASSETS: (Unaudited)
<S> <C> <C>
Cash and cash equivalents $ 3,582,973 $ 20,462,647
Accounts receivable, net 45,658,228 32,982,075
Current portion of workers' compensation deposit 461,654 475,549
Prepaid expenses and other 1,724,529 729,697
Deferred tax asset 1,475,317 1,238,955
-------------------- --------------------
Total current assets 52,902,701 55,888,923
-------------------- --------------------
PROPERTY AND EQUIPMENT, at cost:
Computer equipment 3,865,622 2,852,320
Office equipment 3,780,259 2,241,392
Leasehold improvements and other 1,445,688 1,286,134
-------------------- --------------------
9,091,569 6,379,846
Less accumulated depreciation and amortization (3,115,688) (2,353,511)
-------------------- --------------------
Total property and equipment, net 5,975,881 4,026,335
-------------------- --------------------
OTHER ASSETS:
Workers' compensation deposit, less current portion 106,369 106,369
Intangible assets, net 110,871,977 57,456,417
Deposits and other assets 1,424,745 811,527
-------------------- --------------------
Total other assets 112,403,091 58,374,313
-------------------- --------------------
Total assets $ 171,281,673 $ 118,289,571
==================== ====================
</TABLE>
The accompanying notes to condensed consolidated financial statements
are an integral part of these condensed consolidated balance sheets.
3
<PAGE>
SOS STAFFING SERVICES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
September 27, December 28,
1998 1997
--------------------- --------------------
CURRENT LIABILITIES: (Unaudited)
<S> <C> <C>
Accounts payable $ 2,801,455 $ 971,775
Accrued payroll costs 4,777,082 3,566,859
Current portion of workers' compensation reserve 3,252,623 2,537,995
Accrued liabilities 1,055,181 663,042
Income taxes payable 543,231 946,611
Current portion of notes payable 300,000 -
Accrued acquisition costs and earnouts 7,564,876 4,412,658
--------------------- --------------------
Total current liabilities 20,294,448 13,098,940
--------------------- --------------------
LONG -TERM LIABILITIES:
Workers' compensation reserve, less current portion 477,982 535,580
Notes payable, less current portion 35,700,000 -
Deferred income tax liability 895,201 193,762
Deferred compensation liability 375,366 126,206
--------------------- --------------------
Total long-term liabilities 37,448,549 855,548
--------------------- --------------------
SHAREHOLDERS' EQUITY:
Common stock 126,810 126,530
Additional paid-in capital 91,519,786 91,152,122
Retained earnings 21,892,080 13,056,431
--------------------- --------------------
Total shareholders' equity 113,538,676 104,335,083
--------------------- --------------------
Total liabilities and shareholders' equity $ 171,281,673 $ 118,289,571
===================== ====================
</TABLE>
The accompanying notes to condensed consolidated financial statements
are an integral part of these condensed consolidated balance sheets.
4
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SOS STAFFING SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
13 Weeks Ended 39 Weeks Ended
-------------------------------------------- --------------------------------------------
September 27, 1998 September 28, 1997 September 27, 1998 September 28, 1997
-------------------- --------------------- --------------------- ---------------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
SERVICE REVENUES $ 87,385,215 $ 54,388,816 $ 239,957,514 $ 141,752,926
DIRECT COSTS OF SERVICES 66,889,652 42,035,527 184,199,250 110,482,801
-------------------- --------------------- --------------------- ---------------------
Gross profit 20,495,563 12,353,289 55,758,264 31,270,125
-------------------- --------------------- --------------------- ---------------------
OPERATING EXPENSES:
Selling, general and administrative 13,658,993 8,424,575 38,102,355 22,010,878
Intangibles amortization 995,299 336,103 2,646,972 901,765
-------------------- --------------------- --------------------- ---------------------
Total operating expenses 14,654,292 8,760,678 40,749,327 22,912,643
-------------------- --------------------- --------------------- ---------------------
INCOME FROM OPERATIONS 5,841,271 3,592,611 15,008,937 8,357,482
-------------------- --------------------- --------------------- ---------------------
OTHER INCOME (EXPENSE):
Interest expense (626,929) (146,553) (900,043) (220,623)
Interest income 67,985 173,107 286,009 411,230
Other, net (1,844) (45,265) 29,716 (12,196)
-------------------- --------------------- --------------------- ---------------------
Total other income (expense),net (560,788) (18,711) (584,318) 178,411
-------------------- --------------------- --------------------- ---------------------
INCOME BEFORE PROVISION
FOR INCOME TAXES 5,280,483 3,573,900 14,424,619 8,535,893
PROVISION FOR INCOME TAXES (1,876,451) (1,458,954) (5,588,970) (3,464,065)
-------------------- --------------------- --------------------- ---------------------
NET INCOME $ 3,404,032 $ 2,114,946 $ 8,835,649 $ 5,071,828
==================== ===================== ===================== =====================
NET INCOME PER COMMON SHARE:
Basic $ 0.27 $ 0.23 $ 0.70 $ 0.56
Diluted $ 0.27 $ 0.23 $ 0.69 $ 0.56
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING:
Basic 12,680,711 9,046,590 12,670,574 9,023,863
Diluted 12,807,657 9,183,184 12,842,151 9,125,360
</TABLE>
The accompanying notes to condensed consolidated financial statements
are an integral part of these condensed consolidated statements.
5
<PAGE>
SOS STAFFING SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash and Cash Equivalents
<TABLE>
<CAPTION>
39 Weeks Ended
---------------------------------
September 27, September 28,
1998 1997
---------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES: (Unaudited) (Unaudited)
<S> <C> <C>
Net income $ 8,835,649 $ 5,071,828
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 3,658,874 1,335,551
Deferred income taxes 465,077 (348,373)
Loss on disposition of assets 9,948 20,012
Changes in operating assets and liabilities:
Accounts receivable, net (9,895,319) (7,171,185)
Workers' compensation deposit 13,895 (100,001)
Prepaid expenses and other (898,686) (259,890)
Amounts due from related parties -- (48,168)
Deposits and other assets (364,058) (54,582)
Accounts payable 1,829,680 (359,606)
Accrued payroll costs 1,210,223 1,836,837
Workers' compensation reserve 657,030 606,418
Accrued liabilities (623,858) (233,293)
Income taxes payable (403,380) 162,433
------------ ------------
Net cash provided by operating activities 4,495,075 457,981
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (2,554,533) (1,189,646)
Cash paid for acquisitions and earnouts (54,248,160) (19,898,911)
Proceeds from sale of property and equipment 60,000 --
------------ ------------
Net cash used in investing activities $(56,742,693) $(21,088,557)
------------ ------------
</TABLE>
The accompanying notes to condensed consolidated financial statements
are an integral part of these condensed consolidated statements.
6
<PAGE>
SOS STAFFING SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash and Cash Equivalents
<TABLE>
<CAPTION>
39 Weeks Ended
--------------------------------
September 27, September 28,
1998 1997
-------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES: (Unaudited) (Unaudited)
<S> <C> <C>
Proceeds from issuance of common stock, net $ -- $ 3,004,300
Proceeds from exercise of employee stock options 367,944 141,374
Proceeds from long-term borrowings 35,000,000 13,000,000
------------ ------------
Net cash provided by financing activities 35,367,944 16,145,674
------------ ------------
NET DECREASE IN CASH
AND CASH EQUIVALENTS (16,879,674) (4,484,902)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 20,462,647 5,784,651
------------ ------------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 3,582,973 $ 1,299,749
============ ============
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ 872,666 $ 62,819
Income taxes $ 5,499,500 $ 2,651,457
</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 condensed
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 and thirty-nine week periods
ended September 27, 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 September 27, 1998 Thirteen Weeks Ended September 28, 1997
-------------------------------------------- -----------------------------------------
Per-Share Per-Share
Income Shares Amount Income Shares Amount
------------ ------------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS $3,404,032 12,680,711 $0.27 $2,114,946 9,046,590 $0.23
Effect of stock options -- 126,946 -- -- 136,594 --
------------ ------------- ---------- ----------- ---------- -----------
Diluted EPS $3,404,032 12,807,657 $0.27 $2,114,946 9,183,184 $0.23
============ ============= ========== =========== ========== ===========
</TABLE>
<TABLE>
<CAPTION>
Thirty-nine Weeks Ended September 27, 1998 Thirty-nine Weeks Ended September 28,
1997
-------------------------------------------- -----------------------------------------
Per-Share Per-Share
Income Shares Amount Income Shares Amount
------------ ------------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS $8,835,649 12,670,574 $0.70 $5,071,828 9,023,863 $0.56
Effect of stock options -- 171,577 .01 -- 101,497 --
------------ ------------- ---------- ----------- ---------- -----------
Diluted EPS $8,835,649 12,842,151 $0.69 $5,071,828 9,125,360 $0.56
============ ============= ========== =========== ========== ===========
</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 payments become probable which
also increases the amount of goodwill related to the acquisition.
8
<PAGE>
During the thirty-nine weeks ended September 27, 1998 the Company
acquired certain assets or stock and substantially all of the operations of
eleven businesses. The aggregate purchase price was approximately $44.2 million.
Seven of the acquisitions have contingent future earnouts up to a combined
maximum of $35.6 million. The excess of the initial purchase price (excluding
earnouts) over the estimated fair market value of the acquired assets, less
liabilities assumed, was approximately $41.5 million which has been allocated to
goodwill and other intangible assets.
Acquisition Costs and Earnouts - During the thirty-nine weeks ended
September 27, 1998 the Company paid earnouts totaling $13.2 million. As of
September 27, 1998 accrued acquisition costs and earnouts totaled $7.6 million.
Pro Forma Acquisition Information--Unaudited
The unaudited pro forma acquisition information for the thirty-nine
weeks ended September 27, 1998 and September 28, 1997 presents the results of
operations of material acquisitions which were completed during the thirty-nine
weeks ended September 27, 1998 as if the acquisitions had occurred at the
beginning of each thirty-nine 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 periods or of
the results which may occur in the future.
Unaudited pro forma results of operations
-----------------------------------------
(In thousands, except per share data)
39 Weeks Ended
--------------
September 27, September 28,
------------- -------------
1998 1997
---- ----
Service revenues $ 261,379 $ 185,646
Gross profit 63,717 43,066
Income from operations 19,166 12,833
Net income $ 10,411 $ 6,757
========== ===========
Net income per common share:
Basic $ 0.82 $ 0.68
============ ============
Diluted $ 0.81 $ 0.67
============ ============
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 or administrative
actions. The Company maintains insurance in such amounts and with such coverages
and deductibles as management believes to be reasonable and prudent; however,
there can be no assurance that such insurance will be adequate to cover all
risks to which the Company may be exposed. 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 alleging breach of contract, negligence, fraud and
misrepresentation. The plaintiff sought damages in excess of $7 million based
upon the alleged theft of surplus military goods from the former customer's
warehouse by a former temporary employee of the Company. In September 1998, the
Company entered into a settlement agreement with the former customer which
dismissed the Company with prejudice from the lawsuit. The Company did not admit
fault as part of the settlement. The settlement amount was paid by the Company's
insurance carriers. The Company paid $52,500 as deductible amounts under the
Company's insurance policies which was applied to defense costs. While the
matter was dismissed with prejudice with respect to the Company, the action
continues against certain third parties. The Company may have to respond to
discovery requests as a non-party and be a party to the litigation solely for
the purpose of apportioning fault; however, the Company would not be subject to
the payment of damages if the Company is assessed any responsibility for the
9
<PAGE>
former customer's loss. Any defense costs resulting from the continuation of the
litigation will be borne by the Company's insurance carriers.
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 thirty-nine weeks ended September 27, 1998, pursuant to the
terms of the Company's incentive stock option plan, options to purchase 28,016
shares of common stock were exercised by employees and the Company received
$367,944.
Note 6. Notes Payable
In September 1998, the Company made a private placement of $35 million
of senior unsecured debt, consisting of two pieces. The first piece is a series
of senior unsecured notes in the aggregate amount of $30 million with a final
ten year maturity and an average maturity of seven years at a 6.95% coupon rate.
The second piece is a series of senior unsecured notes in the aggregate amount
of $5 million with a coupon rate of 6.72% due in single payment in 2003. The
Company used the proceeds from the debt placement to pay off the current
long-term borrowings under the Company's revolving credit facility.
In connection with the terms and conditions of an acquisition, the
Company entered into a promissory note payable for $1.0 million. The note bears
interest at an annual rate of 8%. The principal amount of the note, together
with interest is due and payable in twelve equal quarterly installments
beginning in December 1998.
10
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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 39 Weeks Ended
-------------- --------------
September 27, September 28, September 27, September 28,
1998 1997 1998 1997
---------- ---------- ---------- -------
<S> <C> <C> <C> <C>
Service revenues 100.0% 100.0% 100.0% 100.0%
Direct cost of services 76.5 77.3 76.8 77.9
------ ------ ------ ------
Gross profit 23.5 22.7 23.2 22.1
------ ------ ------ ------
Operating expenses:
Selling, general and administrative 15.6 15.5 15.9 15.5
Intangibles amortization 1.2 0.6 1.1 0.7
------- ------- ------- -------
Total operating expenses 16.8 16.1 17.0 16.2
------ ------ ------ ------
Operating income 6.7% 6.6% 6.2% 5.9%
======== ======== ======== ========
</TABLE>
Service Revenues. Service revenues increased by $33.0 million, or
60.7%, to $87.4 million for the thirteen weeks ended September 27, 1998,
compared to $54.4 million for the thirteen weeks ended September 28, 1997. Of
the $33.0 million increase, approximately $28.7 million was attributable to
offices acquired during 1997 and 1998 and $4.3 million was attributable to
increased revenues from comparable offices. For the thirty-nine weeks ended
September 27, 1998 service revenues increased by $98.2 million, or 69.3%, to
$240.0 million, compared to $141.8 million for the thirty-nine weeks ended
September 27, 1997. Of the $98.2 million increase, approximately $81.0 million
was attributable to offices acquired during 1997 and 1998, $16.5 million was
attributable to increased revenues from comparable offices and $0.7 million was
attributable to opening new offices. 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 September 27, 1998 and September 28, 1997 was 23.5% and
22.7%, respectively. Gross profit as a percentage of service revenues for the
thirty-nine weeks ended September 27, 1998 and September 28, 1997 was 23.2% and
22.1%, 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 September 27, 1998 and September 28, 1997
were 16.8% and 16.1%, respectively. Operating expenses as a percentage of
service revenues for the thirty-nine weeks ended September 27, 1998 and
September 28, 1997 were 17.0% and 16.2%, respectively. The increase for the
thirteen and thirty-nine week periods was largely attributable to an increase in
the 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 segment, where cost structures are
higher.
Income Taxes. The effective combined Federal and state income tax rate
for the thirteen weeks ended September 27, 1998 and September 28, 1997 was 35.5%
and 40.8%, respectively. The effective combined federal and state income tax
rate for the thirty-nine weeks ended September 27, 1998 and September 28, 1997
11
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was 38.7% and 40.6%, respectively. The decrease in the effective tax rate for
both the thirteen weeks and thirty-nine weeks is a result of income tax credits
earned through specific government-sponsored hiring incentives. These programs
are expected to continue to decrease the Company's future effective tax rate to
a range of 35% to 37%, to the extent these programs or similar programs remain
in effect.
Liquidity and Capital Resources
For the thirty-nine weeks ended September 27, 1998 net cash provided by
operating activities was $4.5 million compared to net cash provided by operating
activities of $0.5 million for the thirty-nine weeks ended September 28, 1997.
The increase in operating cash flow was primarily a result of higher net income
and increased depreciation and amortization.
The Company's investing activities used $2.6 million to purchase
property and equipment, and $54.2 million to acquire businesses and to pay
acquisition earnouts
The Company's primary sources of short-term and long-term liquidity and
capital resources at September 27, 1998 were cash flows from operating
activities and a private placement of $35 million of senior unsecured debt,
consisting of two pieces. The first piece is a series of senior unsecured notes
in the aggregate amount of $30 million with a final ten year maturity and an
average maturity of seven years at a 6.95% coupon rate. The second piece is a
series of senior unsecured notes in the aggregate amount of $5 million with a
coupon rate of 6.72% due in single payment in 2003. The Company used the
proceeds from the debt placement to pay off the borrowings under the Company's
current revolving credit facility. Effective July 27, 1998 the Company's
revolving credit facility was amended and restated to increase the amount
available under the facility from $35 million to $40 million and to remove all
security interests. The Company also had letters of credit of $4.9 million
outstanding at September 27, 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 September 27, 1998,
$35.1million 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 and cash flow from operations will be sufficient to
fund the Company's operations and capital expenditure requirements. However, if
the Company were to expand its operations significantly, especially through
acquisitions, additional capital may be required. There can be no assurance that
the Company will be able to obtain additional capital at acceptable rates.
Year 2000 Compliance
The management of the Company believes that it is adequately addressing
the year 2000 ("Y2K") problem. In short, the Y2K problem is a result of
information technology and systems being designed to recognize the year portion
of a date as two rather than four digits, which means that years coded "00" are
recognized by many systems as the year 1900, not the year 2000. As a result,
certain hardware and software products may not properly function or may fail
beginning in year 2000.
As part of the Company's internal quality system based on the
principles of ISO 9002, the Company has formed an internal task force to
identify, address and remedy Y2K issues. The Company's information system for
its primary commercial staffing operations has been tested and is believed to be
Y2K compliant. Additionally, the Company is currently implementing new financial
system software which has been warranted by the developer to be Y2K compliant.
The Company is also in the process of assessing and testing the information
systems of its Inteliant subsidiary and certain other independent systems within
the Company. Such assessment and testing should be complete by mid 1999.
The Company has identified suppliers of critical services and products
and has sent questionnaires to each such supplier concerning Y2K compliance. The
Company will continue to monitor the compliance of each such supplier through
1999 and beyond. New vendors are also required to provide information concerning
Y2K compliance. The Company is following a similar process for its Inteliant
subsidiary and certain other independent operations within the Company.
The Company has also sent questionnaires to each of its major customers
regarding the status of Y2K compliance. The Company will continue to monitor the
compliance of each such customer through 1999 and beyond. The Company has
amended its credit application required for each new customer requesting
12
<PAGE>
disclosure of Y2K compliance. The Company is following a similar process for its
Inteliant subsidiary and certain other independent operations within the
Company.
The Company is currently developing an assessment program for each of
its branch offices to assess imbedded chip technology for Y2K compliance. Many
products or systems contain imbedded computer chips which may or may not be Y2K
compliant. Examples of such items include elevators, alarm systems, HVAC units
and thermostats, telephone and voicemail systems. The Company believes that its
assessment of imbedded chip technology will be complete by mid 1999.
Based on current information, the Company does not believe that its
internal systems will fail because of the Y2K problem or cause an interruption
in the delivery of services to its customers. In the event such systems fail,
the Company believes that it has adequate manual systems which would allow for
continued delivery of services to customers. Management does not foresee
significant liability to third parties if the Company's systems are not Y2K
compliant. However, the Company faces two major risks related to Y2K which could
have a material adverse affect on the business of the Company. The first major
Y2K risk is service disruption from third-party suppliers of critical services,
such as telephone, electrical and banking services. As part of its critical
suppliers' assessment, the Company is monitoring and is seeking Y2K compliance
from such suppliers. The second major risk is that the operations of the
customers of the Company will be disrupted by the Y2K problem (either internally
or because of third-party service providers) which could result in a decrease in
or the cessation of the need for the Company's services.
The Company has not yet approved a formal contingency plan for Y2K
issues. The Company expects to have a formal contingency plan in place during
fiscal 1999.
The costs related to the Company's Y2K compliance program have not been
and are not expected to have a material impact on the financial condition of the
Company, the results of operations or cash flows.
Forward-looking Statements
Statements contained in this report that are not purely historical are
"forward-looking statements" within the meaning of Section 21E of the Securities
Exchange Act of 1934, as amended. The Company assumes no obligation to update
any such forward-looking statements. Readers are cautioned that all
forward-looking statements involve risks, uncertainties and other factors that
could cause the Company's actual results to differ materially from those
anticipated in such statements, including but not limited to the Company's
efforts to expand its offering of services, the Company's acquisition efforts
and its ability to integrate the operations of acquired businesses, the recent
transition within the Company's management, economic fluctuations, existing and
emerging competition, unanticipated effects of year 2000 problems, and demand
for the Company's services. Other factors, including economic, competitive,
governmental, and technological factors, are discussed in the Company's Annual
Report on Form 10-K and other reports to the Securities and Exchange Commission.
Item 3. Qualitative and Quantitative Disclosures About Market Risk
Not Required
13
<PAGE>
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 or administrative
actions. The Company maintains insurance in such amounts and with such coverages
and deductibles as management believes to be reasonable and prudent; however,
there can be no assurance that such insurance will be adequate to cover all
risks to which the Company may be exposed. 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 alleging breach of contract, negligence, fraud and
misrepresentation. The plaintiff sought damages in excess of $7 million based
upon the alleged theft of surplus military goods from the former customer's
warehouse by a former temporary employee of the Company. In September 1998, the
Company entered into a settlement agreement with the former customer which
dismissed the Company with prejudice from the lawsuit. The Company did not admit
fault as part of the settlement. The settlement amount was paid by the Company's
insurance carriers. The Company paid $52,500 as deductible amounts under the
Company's insurance policies which was applied to defense costs. While the
matter was dismissed with prejudice with respect to the Company, the action
continues against certain third parties. The Company may have to respond to
discovery requests as a non-party and be a party to the litigation solely for
the purpose of apportioning fault; however, the Company would not be subject to
the payment of damages if the Company is assessed any responsibility for the
former customer's loss. Any defense costs resulting from the continuation of the
litigation will be borne by the Company's insurance carriers.
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.
14
<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: November 11, 1998 /s/ JoAnn W. Wagner
-------------------
JoAnn W. Wagner
Chairman and Chief Executive Officer
Dated: November 11, 1998 /s/ Gary B. Crook
-----------------
Gary B. Crook
Executive Vice President and
Chief Financial Officer
15
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