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 April 4, 1999
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 May 2, 1999
--------------------- --------------------------
Common Stock, $0.01 par value 12,691,382
1
<PAGE>
TABLE OF CONTENTS
<TABLE>
PART I - FINANCIAL INFORMATION
<CAPTION>
Item 1. Financial Statements
Condensed Consolidated Balances Sheets
<S> <C>
As of April 4, 1999 and January 3, 1999 3
Condensed Consolidated Statements of Income
For the Thirteen Weeks Ended April 4, 1999 and March 29, 1998 5
Condensed Consolidated Statements of Cash Flows
For the Thirteen Weeks Ended April 4, 1999 and March 29, 1998 6
Notes to Condensed Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations 11
Item 3. Qualitative and Quantitative Disclosures About Market Risk 15
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 6. Exhibits and Reports on Form 8-K. 16
Signatures 17
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
SOS STAFFING SERVICES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
(000's)
<CAPTION>
April 4, January 3,
1999 1999
---------------------- ----------------------
<S> <C> <C>
CURRENT ASSETS (Unaudited)
Cash and cash equivalents $ 1,379 $ 5,315
Accounts receivable, less allowances of
$1,256 and $762, respectively 44,992 44,627
Current portion of workers' compensation deposit 600 462
Prepaid expenses and other 1,139 1,054
Deferred income tax asset 2,572 1,849
Income tax receivable 731 571
---------------------- ----------------------
Total current assets 51,413 53,878
---------------------- ----------------------
PROPERTY AND EQUIPMENT, at cost
Computer equipment 6,932 5,977
Office equipment 3,055 2,917
Leasehold improvements and other 2,063 1,553
---------------------- ----------------------
12,050 10,447
Less accumulated depreciation and amortization (3,807) (3,103)
---------------------- ----------------------
Total property and equipment, net 8,243 7,344
---------------------- ----------------------
OTHER ASSETS
Workers' compensation deposit, less current portion 106 106
Intangible assets, less accumulated amortization
of $7,093 and $5,872, respectively 124,268 119,709
Deposits and other assets 1,948 1,872
---------------------- ----------------------
Total other assets 126,322 121,687
---------------------- ----------------------
Total assets $ 185,978 $ 182,909
====================== ======================
</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
<TABLE>
LIABILITIES AND SHAREHOLDERS' EQUITY
(000's, except per share data)
<CAPTION>
April 4, January 3,
1999 1999
---------------------- ----------------------
<S> <C> <C>
CURRENT LIABILITIES (Unaudited)
Accounts payable $ 1,467 $ 3,350
Accrued payroll costs 6,793 6,805
Current portion of workers' compensation reserve 3166 2,358
Accrued liabilities 2,065 2,163
Current portion of notes payable 320 313
Line of credit borrowings - short term 2,500 -
Accrued acquisition costs and earnouts 3,005 11,900
---------------------- ----------------------
Total current liabilities 19,316 26,889
---------------------- ----------------------
LONG-TERM LIABILITIES
Notes payable, less current portion 49,576 39,612
Workers' compensation reserve, less current portion 478 478
Deferred income tax liability 1,198 927
Deferred compensation liabilities 439 397
---------------------- ----------------------
Total long-term liabilities 51,691 41,414
---------------------- ----------------------
SHAREHOLDERS' EQUITY
Common stock $0.01 par value 20,000 shares
authorized 12,691 and 12,689 shares issued and
outstanding, respectively 127 127
Additional paid-in capital 91,586 91,564
Retained earnings 23,258 22,915
---------------------- ----------------------
Total shareholders' equity 114,971 114,606
---------------------- ----------------------
Total liabilities and shareholders' equity $ 185,978 $ 182,909
==================== ====================
</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
(000's, except per share data)
<CAPTION>
13 Weeks Ended
April 4, 1999 March 29, 1998
---------------------- ----------------------
(Unaudited) (Unaudited)
<S> <C> <C>
SERVICE REVENUES $ 84,043 $ 70,158
DIRECT COST OF SERVICES 63,632 54,152
---------------------- ----------------------
Gross Profit 20,411 16,006
---------------------- ----------------------
OPERATING EXPENSES:
Selling, general and administrative 17,818 11,354
Intangibles amortization 1,282 760
---------------------- ----------------------
Total operating expenses 19,100 12,114
---------------------- ----------------------
INCOME FROM OPERATIONS 1,311 3,892
---------------------- ----------------------
OTHER INCOME (EXPENSE):
Interest expense (964) (33)
Interest income 49 110
Other, net 22 61
---------------------- ----------------------
Total, net (893) 138
---------------------- ----------------------
INCOME BEFORE PROVISION FOR
INCOME TAXES 418 4,030
PROVISION FOR INCOME TAXES (75) (1,633)
---------------------- ----------------------
NET INCOME $ 343 $ 2,397
==================== ====================
NET INCOME PER COMMON SHARE:
Basic $ 0.03 $ 0.19
Diluted 0.03 0.19
WEIGHTED AVERAGE COMMON SHARES:
Basic 12,690 12,660
Diluted 12,808 12,849
The accompanying notes to the condensed consolidated financial statements
are an integral part of these condensed consolidated statements.
</TABLE>
5
<PAGE>
<TABLE>
SOS STAFFING SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(000's)
<CAPTION>
13 Weeks Ended
April 4, 1999 March 29, 1998
---------------------- ----------------------
CASH FLOWS FROM OPERATING ACTIVITIES: (Unaudited) (Unaudited)
<S> <C> <C>
Net income $ 343 $ 2,397
Adjustments to reconcile net income
to net cash provided by (used in) operating activities:
Depreciation and amortization 1,789 1,035
Deferred income taxes (452) 24
Loss on disposition of assets - (39)
Changes in operating assets and liabilities:
Accounts receivable, net (642) (1,740)
Workers' compensation deposit (139) 14
Prepaid expenses and other (84) (275)
Deposits and other assets (181) 173
Accounts payable (1,836) 333
Accrued payroll costs (13) 331
Workers' compensation reserve 809 182
Accrued liabilities (98) (425)
Income taxes payable/receivable (160) 541
---------------------- ----------------------
Net cash provided by (used in)
operating activities (664) 2,551
---------------------- ----------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for acquisitions of businesses
(32) (20,528)
Purchases of property and equipment
(1,406) (1,019)
Payments on acquisition earnouts
(14,280) -
Proceeds from sale of property and equipment
- 60
---------------------- ----------------------
Net cash used in investing activities $ (15,718) $ (21,487)
---------------------- ----------------------
</TABLE>
Theaccompanying 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
(000's)
<CAPTION>
13 Weeks Ended
April 4, 1999 March 29, 1998
------------------------ -------------------------
CASH FLOWS FROM FINANCING ACTIVITIES: (Unaudited) (Unaudited)
<S> <C> <C>
Proceeds from exercise of employee stock options $ 22 $ 154
Proceeds from short term borrowings 2,500 -
Proceeds from long-term borrowings 14,000 -
Payments on long-term borrowings (4,076) -
------------------------ -------------------------
Net cash provided by financing activities 12,446 154
------------------------ -------------------------
NET DECREASE IN CASH
AND CASH EQUIVALENTS (3,936) (18,782)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 5,315 20,463
------------------------ -------------------------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 1,379 $ 1,681
------------------------ -------------------------
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 1,450 $ 197
Income taxes 235 1,134
</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 April 4,
1999 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 for the periods presented (in 000's except
per share amounts):
<TABLE>
<CAPTION>
Net Income Shares Per-Share
(Numerator) (Denominator) Amount
---------------- ----------------- --------------
<S> <C> <C> <C>
Quarter Ended April 4, 1999
Basic EPS $ 343 12,690 $ .03
Effect of stock options 118
---------------- -----------------
Diluted EPS $ 343 12,808 $ .03
================ =================
Quarter Ended March 29, 1998
Basic EPS $ 2,397 12,660 $ .19
Effect of stock options 189
---------------- -----------------
Diluted EPS $ 2,397 12,849 $ .19
================ =================
</TABLE>
Note 3. Acquisitions
Acquisition Costs and Earnouts - During the thirteen weeks ended April
4, 1999 the Company paid acquisition costs and earnouts totaling $14.3 million.
As of April 4, 1999 accrued acquisition costs and earnouts totaled $3.0 million.
Note 4. Equity Transactions
During the thirteen weeks ended April 4, 1999, pursuant to the terms of
the Company's incentive stock option plan, options to purchase 2,780 shares of
8
<PAGE>
common stock were exercised by employees and the Company received approximately
$22,000. The Company also granted options to purchase 121,000 shares of common
stock to certain employees during the thirteen weeks ended April 4, 1999.
Note 5. Credit Facilities and Notes Payable
The Company has an unsecured revolving credit facility with certain
banks that provides for maximum borrowings of $40 million. The agreement, which
provides for both short-term and long-term borrowings, expires in July 2001.
Short-term borrowings bear interest at a bank's prime rate (7.75% at April 4,
1999) and long-term borrowings bear interest at LIBOR plus 1.6% (6.54% at April
4, 1999). The rate related to the amount over LIBOR may increase based upon
certain financial ratios. The agreement contains an annual commitment fee of
three-eighths of one percent on the unused portion payable quarterly. At April
4, 1999, the Company had $16.5 million in borrowings outstanding: $14.5 million
long-term and $2.5 million short-term. The Company also had letters of credit of
$5.8 million outstanding 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 April 4, 1999, $17.7 million
was available for borrowings or additional letters of credit.
The Company also has outstanding $35 million of senior unsecured notes
consisting of two pieces. The first piece consists 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
consists of senior unsecured notes in the aggregate amount of $5 million with a
coupon rate of 6.72% due in a single payment in 2003.
The Company's unsecured revolving credit facility and its senior
unsecured note agreement contain certain restrictive covenants including certain
debt ratios, maintenance of a minimum net worth and restrictions on the sale of
capital assets. As of April 4, 1999, the Company was in compliance with the
covenants.
In connection with the terms and conditions of an acquisition the
Company also has a promissory note payable for approximately $0.9 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 through September 2001. The note is subject to set-off for any
indemnification claims the Company may have against the bearer.
Note 6. Segment Reporting
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information," effective for periods beginning after
December 15, 1997. Pursuant to SFAS No. 131, an operating segment is defined as
"a component of an enterprise: 1) that engages in business activities from which
it may earn revenues and incur expenses, 2) for which discrete financial
information is available, and 3) that is regularly reviewed by the enterprise's
chief operating decision maker to make decisions about allocation of resources.
Based on the types of services offered to customers, the Company has
identified two reportable operating segments: commercial staffing and
information technology ("IT") segments. The commercial staffing segment provides
staffing solutions to companies by furnishing temporary clerical, industrial,
light-industrial, technical, and professional services. The IT segment provides
staffing, outsourcing, and consulting services in IT related fields.
Information concerning continuing operations by operating segment for
each of the thirteen weeks ended April 4, 1999 and March 29, 1998 is as follows
(in 000's):
9
<PAGE>
Segment Service Revenues & Operating Profit
(Unaudited)
Thirteen Weeks Ended
April 4, 1999 March 29, 1998
------------------------- --------------------------
Revenues
Commercial $ 60,724 $ 54,714
IT 23,319 15,444
------------------------- --------------------------
$ 84,043 $ 70,158
========================= ==========================
Operating Profit
Commercial $ 952 $ 2,092
IT 1,164 2,107
Other (unallocated) (805) (307)
------------------------- --------------------------
$ 1,311 $ 3,892
========================= ==========================
Segment Assets
April 4, 1999 January 3, 1999
------------------------- ------------------------
Identifiable Assets (Unaudited)
Commercial $ 91,688 $ 97,339
IT 90,280 82,552
Other (unallocated) 4,010 3,018
------------------------- ------------------------
$ 185,978 $ 182,909
======================== ========================
10
<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.
Business Segments
The Company's operations are grouped into two identifiable operating
segments: commercial staffing and information technology ("IT"). The commercial
staffing segment provides staffing solutions to companies by furnishing
temporary clerical, industrial, light-industrial, engineering, and professional
services. The IT segment provides staffing, outsourcing, and consulting services
in IT related fields.
Results of Operations
<TABLE>
The following table sets forth, for the periods indicated, the
percentage relationship to service revenues of selected income statement items
for the Company on a consolidated basis and by operating segment:
<CAPTION>
Thirteen Weeks Ended
--------------------------------
April 4, March 29, 1998
Consolidated 1999
--------------- ----------------
<S> <C> <C>
Service revenues 100.0% 100.0%
Direct cost of services 75.7 77.2
--------------- ----------------
Gross profit 24.3 22.8
--------------- ----------------
Operating expenses:
Selling, general and administrative expenses 21.2 16.2
Intangibles amortization 1.5 1.1
--------------- ----------------
Total operating expenses 22.7 17.3
--------------- ----------------
Operating income 1.6% 5.5%
=============== ================
Commercial Staffing Segment
Service revenues 100.0% 100.0%
Direct cost of services 78.4 79.4
--------------- ----------------
--------------- ----------------
Gross profit 21.6 20.6
--------------- ----------------
--------------- ----------------
Operating expenses:
Selling, general and administrative expenses 19.0 16.0
Intangible amortization 1.0 0.8
--------------- ----------------
Total operating expenses 20.0 16.8
--------------- ----------------
Operating income 1.6% 3.8%
=============== ================
IT Segment
Service revenues 100.0% 100.0%
Direct cost of services 68.7 69.1
--------------- ----------------
--------------- ----------------
Gross profit 31.3 30.9
--------------- ----------------
--------------- ----------------
Operating expenses:
Selling, general and administrative expenses 23.4 15.2
Intangible amortization 2.9 2.1
--------------- ----------------
Total operating expenses 26.3 17.3
--------------- ----------------
--------------- ----------------
Operating income 5.0% 13.6%
=============== ================
</TABLE>
11
<PAGE>
Consolidated
Service Revenues: Service revenues for the thirteen weeks ended April 4, 1999
were $84.0 million, an increase of $13.9 million, or 19.8%, compared to sales of
$70.1 million for the thirteen weeks ended March 29, 1998. Of the $13.9 million
increase, $12.4 million was attributable to businesses acquired subsequent to
March 29, 1998 and $1.5 million was from internal growth (including new offices
offset by office closures).
Gross Profit: Gross profit for the thirteen weeks ended April 4, 1999 and March
29, 1998 was $20.4 million and $16.0 million, respectively, an increase of $4.4
million or 27.5%. Gross profit margin for the first quarter of 1999 was 24.3%,
compared to 22.8% for the first quarter of 1998, reflecting a company wide
margin improvement program implemented by management, coupled with an increased
mix of higher-margin IT business.
Operating Expenses: Total operating expenses, as a percentage of revenues,
increased from 17.3% to 22.7% for the thirteen weeks ended March 29, 1998 and
April 4, 1999, respectively. The increase was due primarily to acquisitions of
companies with higher operating costs, increased amortization expense from
acquisitions and an increase in the Company's credit losses, including
additional reserves against bad debt. The Company also realized additional costs
associated with management changes and continued costs associated with
integrating and relocating the Company's Inteliant subsidiary from New Mexico to
Salt Lake City, Utah.
Operating Income: Operating income decreased approximately $2.6 million, or
66.7% to $1.3 million, for the thirteen weeks ended April 4, 1999, from $3.9
million for the thirteen weeks ended March 29, 1998. Operating margin, as a
percentage of revenues, was 1.6% compared 5.5% for the quarter ended April 4,
1999 and March 29, 1998, respectively. The decrease in operating margin was due
primarily to the increase in operating expenses.
Income Taxes: The effective combined federal and state income tax rate was 18.0%
for the thirteen weeks ended April 4, 1999 compared to 40.5% for the thirteen
weeks ended March 29, 1998. The decrease in the combined tax rate was due to
lower earnings combined with income tax credits earned through specific
government-sponsored hiring incentives. The reduction offered by tax credits was
partially offset by an increase in non-deductible amortization relating to
certain acquisitions and increased operations in states which assess higher
state tax rates.
Commercial Staffing Segment
Service Revenues: Substantially all of the Company's service revenues are based
on the time worked by its temporary staffing employees on customer assignments
and from permanent placement of personnel with customers. Service revenues are
recognized as income at the time service is provided. Service revenues for the
commercial staffing segment increased by $6.0 million, or 11.0%, to $60.7
million for the quarter ended April 4, 1999, compared to $54.7 million for the
quarter ended March 29, 1998. Of the $6.0 million increase, $5.8 million was
attributable to offices acquired subsequent to March 29, 1998, and $0.2 million
was from internal growth.
Gross Profit: The Company defines gross profit as service revenues less the cost
of providing services, which includes wages, employer payroll taxes (FICA,
unemployment and other general payroll costs) and workers' compensation costs
related to temporary staffing employees. Gross profit margin was 21.6% for the
thirteen weeks ended April 4, 1999, compared to 20.6% for the thirteen weeks
ended March 29, 1998. The growth reflects an increase in higher-margin specialty
business contributed by some of the acquisitions.
Operating Expenses: Operating expenses include, among other things, staff
compensation, rent, recruitment and retention of temporary staffing employees,
costs associated with opening new offices, depreciation, intangible amortization
and advertising.
Operating expenses, excluding intangibles amortization, as a percentage of
service revenues were 16.0% compared to 19.0% for the thirteen weeks ended March
29, 1998 and April 4, 1999, respectively. The increase was attributable to
acquisitions of companies with higher operating cost structures, an increase in
credit losses, including additional reserves for uncollectible accounts, and an
increase in depreciation.
Intangibles amortization as a percentage of service revenues was 0.8% and 1.0%
for the quarter ended March 29, 1998 and April 4, 1999, respectively. The
increase is due to increased acquisitions and earnouts for 1998 and 1999.
Operating Income: Operating income for the quarter ended April 4, 1999 was $1.0
million, a reduction of $1.1 million, or 54.5%, from $2.1 million for the
quarter ended March 29, 1998. Operating margin for the quarter ended April 4,
1999 was 3.8%, compared to 1.6% for the quarter ended March 29, 1998. The
decrease in operating margin was due largely to the increase in selling, general
and administrative expenses and intangibles amortization.
12
<PAGE>
IT Segment
Service Revenues: IT segment service revenues are generally based on the time
worked by temporary staffing and consulting employees on customer assignments,
or when staff is placed on a permanent basis with the customer. Service revenues
increased $7.9 million, or 51.0%, to $23.3 million from $15.4 million for the
quarter ended April 4, 1999 and March 19, 1998, respectively. The change was
primarily attributable to offices acquired subsequent to the period ended March
29, 1998, which accounted for approximately $6.3 million of the increase.
Internal growth accounted for the remaining $1.6 million. The increase in
internal growth is generally consistent with an increase in billable hours.
Gross Profit: The Company defines gross profit as service revenues less the cost
of providing services. Such costs include wages, employer payroll taxes (FICA,
unemployment and other general payroll costs), and workers' compensation costs
related to temporary staffing and consulting employees; costs related to outside
consultants and independent contractors utilized by the Company; and other
direct costs associated with any consulting engagement. Gross profit for the
thirteen weeks ended April 4, 1999 was $7.3 million, an increase of $2.5
million, or 52.1%, compared to $4.8 million for the thirteen weeks ended March
29, 1998. Gross profit margin was 31.3%, compared to 30.9% for the quarter ended
April 4, 1999 and March 29, 1998, respectively.
Operating Expenses: Operating expenses, excluding intangibles amortization, as a
percentage of service revenues were 15.1% and 23.3% for the thirteen weeks ended
March 29, 1998 and April 4, 1999, respectively. The increase reflects the
acquisition of companies with higher operating cost structures, an increase in
credit losses, inlcuding additional reserves for uncollectible accounts, as well
as additional management changes and costs related to relocating the Company's
Inteliant subsidiary.
Intangibles amortization as a percentage of revenues was 2.1% for the thirteen
weeks ended March 29, 1998 and 2.9% for the thirteen weeks ended April 4, 1999.
The change was due to increased IT acquisitions and earnouts for 1998 and 1999.
Operating Income: Operating income for the thirteen weeks ended April 4, 1999
was $1.2 million, a decrease of $0.9 million, or 42.8%, from $2.1 million for
the thirteen weeks ended March 29, 1998. Operating margin was 5.0%, compared to
13.6% for the quarter ended April 4, 1999 and March 29, 1998, respectively. The
decrease in operating income was due primarily to the increase in operating
expenses.
Liquidity and Capital Resources
For the thirteen weeks ended April 4, 1999 net cash used in operating
activities was $0.6 million, compared to net cash provided by operating
activities of $2.6 million for the thirteen weeks ended March 29, 1998. The
change in operating cash flow was primarily a result of lower net income and a
reduction in accounts payable, offset by increased depreciation and
amortization.
The Company's investing activities used $1.4 million to purchase
property and equipment, and $14.3 million for acquisitions and earnouts during
the thirteen weeks ended April 4, 1999.
The Company's financing activities provided net proceeds of $12.5
million, primarily from borrowings against the Company's revolving credit
facility. The unsecured credit facility provides for maximum borrowings of $40
million. The agreement, which provides for both short-term and long-term
borrowings, expires in July 2001. Short-term borrowings bear interest at a
bank's prime rate (7.75% at April 4, 1999) and long-term borrowings bear
interest at LIBOR plus 1.6% (6.54% at April 4, 1999). As of April 4, 1999, $17.7
million was available for borrowings or additional letters of credit.
Management believes that the present credit facilities, together with
cash reserves and cash flow from operations, will be sufficient to fund the
Company's operations and capital expenditure requirements for at least the next
12 months. 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
Management of the Company believes that it is adequately addressing the
year 2000 ("Y2K") problem. In short, the Y2K problem is a result of IT and
13
<PAGE>
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 and other products using computer chip technology 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 that 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 completed 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
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 has developed 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 that 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
program for assessing imbedded chip technology will be completed 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 that 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 that 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 Company estimates that approximately $150,000 will be incurred in
verifying its Y2K compliance. The majority of costs will be directed to
independent sources for testing of the procedures the Company has implemented.
The costs related to the Company's Y2K compliance program have not had, and are
not expected to have, a material impact on the financial condition, the results
of operations or cash flows of the Company.
Seasonality
The Company's business follows the seasonal trends of its customers'
businesses. Historically, the Company has experienced lower revenues in the
first quarter due to the seasonal trends of its customers and lower overall
economic activity.
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
14
<PAGE>
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
The Company is exposed to interest rate changes primarily in relation
to its revolving credit facility and its senior unsecured notes. At April 4,
1999, the Company's outstanding borrowings on the Credit Facility were $16.5
million, while outstanding borrowings on the senior notes were $35.0 million.
The Company's interest rate risk management objective is to limit the impact of
interest rate changes on earnings and cash flows and to lower its overall
borrowing costs. To achieve this objective, the Company borrows against its
credit facility at variable interest rates. The Company's senior debt placement
bears interest at a fixed interest rate. For fixed rate debt, interest rate
changes generally affect the fair value of the debt, but not the earnings or
cash flows of the Company. Changes in the fair market value of fixed rate debt
generally will not have a significant impact on the Company unless the Company
is required to refinance such debt. At April 4, 1999, the carrying value of the
senior debt placement approximated its fair value.
15
<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 and crime losses, employer
practices liability and general liability.
There is no pending or threatened 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.
16
<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 14, 1999 /s/ JoAnn W. Wagner
-------------------
JoAnn W. Wagner
Chairman, President and
Chief Executive Officer
Dated: May 14, 1999 /s/ Gary B. Crook
--------------------
Gary B. Crook
Executive Vice President and
Chief Financial Officer
17
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