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 July 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 August 16, 1999
--------------------- ------------------------------
Common Stock, $0.01 par value 12,691,382
1
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<TABLE>
<CAPTION>
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
<S> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
As of July 4, 1999 and January 3, 1999 3
Condensed Consolidated Statements of Income
For the Thirteen and Twenty-six Weeks Ended July 4, 1999 and June 28, 1998 5
Condensed Consolidated Statements of Cash Flows
For the Twenty-six Weeks Ended July 4, 1999 and June 28, 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 16
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
</TABLE>
2
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
SOS STAFFING SERVICES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
(in 000's)
July 4, January 3,
1999 1999
--------- ---------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents 870 5,315
Accounts receivable, less allowances of
$1,349 and $762, respectively 49,350 44,627
Current portion of workers' compensation deposit 600 462
Prepaid expenses and other 1,398 1,054
Deferred income tax asset 2,800 1,849
Income tax receivable -- 571
--------- ---------
Total current assets 55,018 53,878
--------- ---------
PROPERTY AND EQUIPMENT, at cost
Computer equipment 8,135 5,977
Office equipment 3,393 2,917
Leasehold improvements and other 1,863 1,553
--------- ---------
13,391 10,447
Less accumulated depreciation and amortization (4,208) (3,103)
--------- ---------
Total property and equipment, net 9,183 7,344
--------- ---------
OTHER ASSETS
Workers' compensation deposit, less current portion 106 106
Intangible assets, less accumulated amortization
of $8,425 and $5,872, respectively 131,324 119,709
Deposits and other assets 1,840 1,872
--------- ---------
Total other assets 133,270 121,687
--------- ---------
Total assets $ 197,471 $ 182,909
========= =========
</TABLE>
The accompanying notes to condensed consolidated financial statements are
an integral part of these condensed consolidated balance sheets.
3
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SOS STAFFING SERVICES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
(000's, except per share data)
July 4, January 3,
1999 1999
---------- ----------
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable $ 3,578 $ 3,350
Accrued payroll costs 7,564 6,805
Current portion of workers' compensation reserve 3,626 2,358
Accrued liabilities 2,967 2,163
Accrued acquisition costs and earnouts 5,902 11,900
Line of credit borrowings - short term 1,807 --
Current portion of notes payable 326 313
Income taxes payable 219 --
-------- --------
Total Current liabilities 25,989 26,889
-------- --------
LONG-TERM LIABILITIES
Notes payable, less Current portion 52,489 39,612
Workers' compensation reserve, less current portion 532 478
Deterred income tax liability 1,327 927
Deferred compensation liabilities 560 397
-------- --------
Total long-term liabilities 54,908 41,414
-------- --------
SHAREHOLDERS' EQUITY
Common stock $0.01 I par value 20,000 shares authorized
12,69 1 and 12,689 shares issued and
outstanding, respectively 127 127
Additional paid-in capital 91,586 91,564
Retained earnings 24,861 22,915
-------- --------
Total shareholders' equity 116,574 114,606
-------- --------
Total liabilities and shareholders' equity $197,471 $182,909
======== ========
</TABLE>
The accompanying notes to condensed consolidated financial statements are
an integral part of these condensed consolidated balance sheets.
4
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<TABLE>
<CAPTION>
SOS STAFFING SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(000's, except per share data)
13 Weeks Ended 26 Weeks Ended
July 4, 1999 June 28, 1998 July4,1999 June 28,1998
------------ ------------- ---------- ------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
SERVICE REVENUES $ 92,419 $ 82,414 $ 176,462 $ 152,572
DIRECT COST OF SERVICES 70,041 63,290 134,315 117,593
--------- --------- --------- ---------
Gross Profit 22,378 19,124 42,147 34,979
--------- --------- --------- ---------
OPERATING EXPENSES
Selling, general and administrative 17,437 12,958 34,612 24,160
Intangibles amortization 1,347 891 2,630 1,652
--------- --------- --------- ---------
Total operating expenses 18,784 13,849 37,242 25,812
--------- --------- --------- ---------
INCOME FROM OPERATIONS 3,594 5,275 4,905 9,167
--------- --------- --------- ---------
OTHER INCOME (EXPENSE)
Interest expense (1,000) (240) (1,964) (273)
Interest income 29 108 77 218
Other, net 27 (29) 51 32
--------- --------- --------- ---------
Total, net (944) (161) (1,836) (23)
--------- --------- --------- ---------
INCOME BEFORE PROVISION FOR
INCOME TAXES 2,650 5,114 3,069 9,144
PROVISION FOR INCOME TAXES (1,047) (2,079) (1,123) (3,712)
--------- --------- --------- ---------
NET INCOME $ 1,603 $ 3,035 $ 1,946 $ 5,432
========= ========= ========= =========
NET INCOME PER COMMON SHARE
Basic $ 0.13 $ 0.24 $ 0.15 $ 0.43
Diluted $ 0.13 $ 0.24 $ 0.15 $ 0.42
WEIGHTED AVERAGE COMMON SHARES
Basic 12,691 12,671 12,691 12,666
Diluted 12,691 12,872 12,732 12,859
</TABLE>
The accompanying notes to condensed consolidated financial statements are
an integral part of these condensed consolidated balance sheets.
5
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<TABLE>
<CAPTION>
SOS STAFFING SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash and Cash Equivalents
(in 000's)
26 Weeks Ended
July 4,1999 June 28, 1998
----------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES: (Unaudited) (Unaudited)
<S> <C> <C>
Net income 1,946 5,432
Adjustments to reconcile net income
to net cash provided by (used in) operating activities:
Depreciation and amortization 3,672 2,274
Deferred income taxes (550) 95
Loss on disposition of assets -- 12
Changes in operating assets and liabilities:
Accounts receivable, net (5,000) (7,389)
Workers' compensation deposit (138) 14
Prepaid expenses and other (344) (312)
Deposits and other assets 47 177
Accounts payable 228 1,488
Accrued payroll costs 759 511
Workers' compensation reserve 1,322 (529)
Accrued liabilities 539 145
Income taxes payable/receivable 790 (854)
------- -------
Net cash provided by operating activities 3,271 1,064
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for acquisitions of businesses (32) (37,245)
Purchases of property and equipment (2,898) (2,033)
Payments on acquisition earnouts (19,504) --
Proceeds from sale of property and equipment -- 60
------- -------
Net cash used in investing activities (22,434) (39,218)
------- -------
</TABLE>
The accompanying notes to condensed consolidated financial statements are
an integral part of these condensed consolidated balance sheets.
6
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<TABLE>
<CAPTION>
SOS STAFFING SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
Increase (Decrease) in Cash and Cash Equivalents
(in 000's)
26 Weeks Ended
July 4,1999 June 28,1998
----------- --------------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES: (Unaudited) (Unaudited)
Proceeds from exercise of employee stock options $ 22 $ 312
Proceeds from long-term borrowings 18,850 23,000
Payments on long-term borrowings (4,154) --
----------- --------------
Net cash provided by financing activities 14,718 23,312
----------- --------------
NET DECREASE IN CASH
AND CASH EQUIVALENTS (4,445) (14,843)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 5,315 20,463
----------- --------------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 870 $ 5,620
=========== ==============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 1,772 $ 259
Income taxes $ 431 $ 4,471
</TABLE>
The accompanying notes to condensed consolidated financial statements are
an integral part of these condensed consolidated balance sheets.
7
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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.
In accordance with industry practice, during the thirteen weeks ended
July 4, 1999, the Company made the decision to classify commissions related to
permanent placement revenues as a component of direct cost of services rather
than as selling, general and administrative expenses. The amount reclassified in
the twenty-six week period ended July 4, 1999 financial information related to
the thirteen week period ended March 28, 1999 was approximately $0.7 million.
The amounts reclassified for the thirteen and twenty-six week periods ended June
28, 1998 were approximately $0.1 and $0.3 million, respectively. The
accompanying condensed statements of income reflect these reclassifications.
The results of operations for the interim periods indicated 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>
Thirteen Weeks Ended July 4,1999 Thirteen Weeks Ended June 28, 1998
------------------------------------------ --------------------------------------------
Per Share Per Share
Net Income Shares Amount Net Income Shares Amount
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS $ 1,603 12,691 $ 0.13 $ 3,035 12,671 $ 0.24
Effect of Stock Options -- 201
--------------------------- ----------------------------
Diluted EPS 1,603 12,691 $ 0.13 3,035 12,872 $ 0.24
=========================== ============================
Twenty-six Weeks Ended July 4, 1999 Twenty-six Weeks Ended June 28,1998
----------------------------------------- --------------------------------------------
Per Share Per Share
Net Income Shares Amount Net Income Shares Amount
--------------------------------------------------------------------------------------------
Basic EPS 1,946 12,691 $ 0.15 $ 5,432 12,666 $ 0.43
Effect of Stock Options 41 193
------------------------------------------ ----------------------------
Diluted EPS $ 1,946 12,732 $ 0.15 $ 5,432 12,859 $ 0.42
========================================== ============================
</TABLE>
8
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Note 3. Acquisitions
Acquisition Costs and Earnouts - Certain of the Company's 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 acquisitions. During the twenty-six weeks ended July 4,
1999 the Company paid acquisition costs and earnouts totaling $19.5 million. As
of July 4, 1999 accrued acquisition costs and earnouts totaled $5.9 million.
Note 4. Equity Transactions
During the twenty-six weeks ended July 4, 1999, pursuant to the terms
of the Company's incentive stock option plan, options to purchase 2,780 shares
of common stock were exercised by employees and the Company received
approximately $22,000. The Company also granted options to purchase 123,500
shares of common stock to certain employees during the twenty-six weeks ended
July 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. Long-term borrowings
bear interest at LIBOR plus an applicable margin, ranging from 1.0% to 2.0%,
dependent on certain financial ratios; the current applicable margin is 1.6%.
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 July 4, 1999, the Company had $18.8 million in borrowings
outstanding: $17.0 million long-term ($13.0 million at 6.97% and $4.0 million at
6.93%) and $1.8 million short-term (at 7.75%). The Company also had letters of
credit of $6.2 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 July 4, 1999, $15.0
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 July 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 $0.8 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," ("SFAS No. 131") 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"). The commercial staffing segment provides staffing
solutions to companies by furnishing temporary clerical, industrial,
light-industrial, technical, and professional services as well as permanent
placement services. The IT segment provides staffing, outsourcing, and
consulting services in IT related fields.
9
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Information concerning continuing operations by operating segment for
each of the thirteen and twenty-six week periods ended July 4, 1999 and June 28,
1998 is as follows (in 000's):
<TABLE>
<CAPTION>
Segment Service Revenues & Operating Profit
Thirteen Weeks Ended Twenty-six Weeks Ended
--------------------------------------- ---------------------------------------
July 4, 1999 June 28, 1998 July 4, 1999 June 28, 1998
--------------- --------------- ------------------ --------------
Revenues (Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Commercial $ 66,351 $ 63,149 $ 127,075 $ 117,863
IT 26,068 19,265 49,387 34,709
------------------------------------ ---------------------------------------
$ 92,419 $ 82,414 $ 176,462 $ 152,572
==================================== =======================================
Operating Profit
Commercial $ 2,434 $ 3,184 $ 3,390 $ 5,276
IT 2,035 2,711 3,199 4,818
Other (unallocated) (875) (620) (1,684) (926)
------------------------------------ ---------------------------------------
$ 3,594 $ 5,275 $ 4,905 $ 9,168
==================================== =======================================
Segment Assets
July 4, 1999 January 3, 1999
---------------- ---------------
Identifiable Assets (Unaudited)
Commercial $ 94,221 $ 97,339
IT 99,743 82,552
Other (unallocated) 3,507 3,018
----------------- ---------------
$ 197,471 $ 182,909
================= ===============
</TABLE>
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.
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
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:
<TABLE>
<CAPTION>
Thirteen Weeks Ended Twenty-Six Weeks Ended
---------------------------------- ----------------------------------
Consolidated July 4, 1999 June 28, 1998 July 4, 1999 June 28, 1998
----------------- --------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Service revenues 100.0% 100.0% 100.0% 100.0%
Direct cost of services 75.8 76.8 76.1 77.1
----- ----- ----- -----
Gross profit 24.2 23.2 23.9 22.9
----- ----- ----- -----
Operating expenses:
Selling, general and administrative expenses 18.9 15.7 19.6 15.9
Intangibles amortization 1.5 1.1 1.5 1.1
----- ----- ----- -----
Total operating expenses 20.3 16.8 21.1 17.0
----- ----- ----- -----
Operating income 3.9% 6.4% 2.8% 5.9%
----- ----- ----- -----
Commercial Staffing Segment
Service revenues 100.0% 100.0% 100.0% 100.0%
Direct cost of services 78.6 78.9 79.0 79.3
----- ----- ----- -----
Gross profit 21.4 21.1 21.0 20.7
----- ----- ----- -----
Operating expenses:
Selling, general and administrative expenses 16.7 15.4 17.3 15.5
Intangible amortization 0.9 0.7 1.0 0.7
----- ----- ----- -----
Total operating expenses 17.7 16.0 18.3 16.3
----- ----- ----- -----
Operating income 3.7% 5.0% 2.7% 4.5%
----- ----- ----- -----
IT Segment
Service revenues 100.0% 100.0% 100.0% 100.0%
Direct cost of services 68.5 69.9 68.6 69.5
----- ----- ----- -----
Gross profit 31.5 30.1 31.4 30.5
----- ----- ----- -----
Operating expenses:
Selling, general and administrative expenses 20.9 13.7 22.1 14.3
Intangible amortization 2.8 2.4 2.9 2.3
----- ----- ----- -----
Total operating expenses 23.7 16.1 24.9 16.6
----- ----- ----- -----
Operating income 7.8% 14.0% 6.5% 13.9%
----- ----- ----- -----
</TABLE>
11
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Consolidated
Service Revenues: Service revenues for the thirteen weeks ended July 4, 1999
were $92.4 million, an increase of $10.0 million, or 12.1%, compared to sales of
$82.4 million for the thirteen weeks ended June 28, 1998. Of the $10.0 million
increase, $6.2 million was attributable to businesses acquired and $3.8 million
was from internal growth (including new offices offset by office closures). For
the twenty-six weeks ended July 4, 1999, service revenues were $176.5 million,
an increase of $23.9 million or 15.7%, compared to sales of $152.6 million for
the twenty-six weeks ended June 28, 1998. The increase in sales was attributable
to $18.6 million in sales contributed by new acquisitions while $5.3 million was
from internal growth (including new offices offset by office closures).
Gross Profit: In accordance with industry practice, during the thirteen weeks
ended July 4, 1999, the Company made the decision to classify commissions
related to permanent placement revenues as a component of direct cost of
services rather than as selling, general and administrative expenses. The amount
reclassified in the twenty-six weeks ended July 4, 1999 financial information
related to the thirteen weeks ended March 28, 1999 was approximately $0.7
million. The amounts reclassified for the thirteen and twenty-six week periods
ended June 28, 1998 were approximately $0.1 and $0.3 million, respectively.
Gross profit for the thirteen weeks ended July 4, 1999 and June 28, 1998 was
$22.4 million and $19.1 million, respectively, an increase of $3.3 million or
17.3%. For the thirteen weeks ended July 4, 1999 and June 28, 1998, gross profit
margin was 24.2% and 23.2%, respectively. The margin improvement over last year
is primarily a result of an increase in pricing and new higher-margin business
supplied by the Company's Inteliant subsidiary, coupled with a company-wide
price-management program implemented by management. For the twenty-six weeks
ended July 4, 1999 gross profit increased $7.1 million, or 20.3%, to $42.1
million from $35.0 million for the twenty-six weeks ended June 28, 1998. For the
twenty-six weeks ended July 4, 1999 gross profit margin was 23.9% compared to
22.9% for the twenty-six weeks ended June 28, 1998.
Operating Expenses: Total operating expenses, as a percentage of revenues, for
the thirteen-weeks ended July 4, 1999 increased to 20.3% from 16.8% for the
thirteen weeks ended June 28, 1998. For the twenty-six weeks ended July 4, 1999,
total operating expenses, as a percentage of revenue, were 21.1% compared to
17.0% for the twenty-six weeks ended June 28, 1998. The change was due primarily
to acquisitions of companies with higher operating cost structures, increased
amortization expense from acquisitions and earnouts, and an increase in the
Company's credit losses.
Operating Income: Operating income decreased approximately $1.7 million, or
32.1%, to $3.6 million, for the thirteen weeks ended July 4, 1999, from $5.3
million for the twenty-six weeks ended June 28, 1998. Operating margin, as a
percentage of revenues, was 3.9% for the thirteen weeks ended July 4, 1999,
compared to 6.4% for the thirteen weeks ended June 28, 1998. For the twenty-six
weeks ended July 4, 1999 operating income was $4.9 million, a decrease of
approximately $4.3 million, or 46.7%, from $9.2 million for the twenty-six weeks
ended June 28, 1998. Operating margin, as a percentage of revenues, was 2.8%
compared 5.9% for the twenty-six week period ended July 4, 1999 and June 28,
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 39.5%
for the thirteen weeks ended July 4, 1999, compared to 40.7% for the thirteen
weeks ended June 28, 1998. The effective combined federal and state income tax
rate was 36.6% for the twenty-six weeks ended July 4, 1999 compared to 40.6% for
the twenty-six weeks ended June 28, 1998. The decrease in the combined tax rate
was due primarily 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 engagements
and from permanent placement of personnel with customers. Service revenues
generated from temporary assignments are recognized as income at the time
service is provided, while service revenues generated from permanent placement
services are recognized at the time of contract for those services. Service
revenues for the commercial staffing segment increased by $3.3 million, or 5.2%,
to $66.4 million for the thirteen weeks ended July 4, 1999, compared to $63.1
12
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million for the thirteen weeks ended June 28, 1998. Of the $3.3 million
increase, $2.3 million was attributable to offices acquired subsequent to June
28, 1998, and $1.0 million was from internal growth (including new offices
offset by office closures). For the twenty-six weeks ended July 4, 1999, service
revenues for the commercial staffing segment increased by $9.2 million, or 7.8%,
to $127.1 million compared to $117.9 million for the twenty-six weeks ended June
28, 1998. The $9.2 million increase was attributable primarily to internal
growth of $1.2 million and $8.0 million contributed by acquisitions.
Gross Profit: The Company defines gross profit as service revenues less the cost
of providing services, which includes wages and permanent placement commissions,
employer payroll taxes (FICA, unemployment and other general payroll costs) and
workers' compensation costs related to temporary staffing employees and
permanent placement counselors. Gross profit margin was 21.4% for the thirteen
weeks ended July 4, 1999, compared to 21.1% for the thirteen weeks ended June
28, 1998. For the twenty-six weeks ended July 4, 1999 and June 28, 1998, gross
profit margin was 21.0% and 20.7%, respectively. 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, intangibles
amortization and advertising.
Operating expenses, excluding intangibles amortization, as a percentage of
service revenues were 16.7% for the thirteen-weeks ended July 4, 1999, compared
to 15.4% for the thirteen weeks ended June 28, 1998. The increase was due
primarily to an increased operating cost structure related to acquisitions;
additionally, the company realized increased depreciation costs associated with
its information systems upgrade. Operating expenses, excluding intangibles
amortization, as a percentage of service revenues were 17.3% for the twenty-six
weeks ended July 4, 1999, compared to 15.5% for the twenty-six weeks ended June
28, 1998. The increase was attributable to acquisitions of companies with higher
operating cost structures, an increase in credit losses, and an increase in
depreciation.
Intangibles amortization as a percentage of service revenues was 0.9% and 0.7%
for the thirteen weeks ended July 4, 1999 and June 28, 1998, respectively. For
the twenty-six week period ended July 4, 1999 and June 28, 1998, intangibles
amortization, as a percentage of service revenues, was 1.0% and 0.7%,
respectively. The increase was due primarily to increased acquisitions and
earnouts for 1998 and 1999.
Operating Income: Operating margin for the thirteen weeks ended July 4, 1999 was
3.7%, compared to 5.0% for the thirteen weeks ended June 28, 1998. Operating
margin for the twenty-six weeks ended July 4, 1999 was 2.7%, compared to 4.5%
for the twenty-six weeks ended June 28, 1998. The decrease in operating margin
was due largely to the increase in selling, general and administrative expenses
and intangibles amortization.
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 $6.8 million, or 35.2%, to $26.1 million for the thirteen-weeks ended
July 4, 1999, from $19.3 million for the thirteen weeks ended June 28, 1998.
Offices acquired subsequent to the period ended June 28, 1998 accounted for
approximately $3.9 million of the increase, while internal growth accounted for
the remaining $2.9 million. For the twenty-six weeks ended July 4, 1999, service
revenues amounted to $49.4 million, an increase of $14.7 million, or 42.4%, from
$34.7 million for the twenty-six weeks ended June 28, 1998. The increase was due
primarily to acquisitions, which accounted for approximately $10.3 million.
Internal growth (including new offices offset by office closures) accounted for
approximately $4.4 million of the increase.
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 margin was
31.5%, compared to 30.1% for the thirteen weeks ended July 4, 1999 and June 28,
1998, respectively. Gross profit margin was 31.4%, compared to 30.5% for the
twenty-six weeks ended July 4, 1999 and June 28, 1998, respectively. The change
in gross margin was due to a higher percent of total revenues derived from
higher margin consulting and outsourcing engagements.
13
<PAGE>
Operating Expenses: Operating expenses, excluding intangibles amortization, as a
percentage of service revenues were 20.9% and 13.7% for the thirteen weeks ended
July 4, 1999 and June 28, 1998, respectively. The increase for the thirteen-week
periods ending July 4, 1999 and June 28, 1998 was due primarily to an increase
in operating cost structure due to acquisitions. Operating expenses, excluding
intangibles amortization, as a percentage of service revenues were 22.1% and
14.3% for the twenty-six weeks ended July 4, 1999 and June 28, 1998,
respectively. The increase reflects the acquisition of companies with higher
operating cost structures, an increase in credit losses as well as additional
management changes and costs related to relocating the Company's Inteliant
subsidiary.
Intangibles amortization as a percentage of revenues was 2.8% for the thirteen
weeks ended July 4, 1999 and 2.4% for the thirteen weeks ended June 28, 1998.
For the twenty-six weeks ended July 4, 1999 and June 28, 1998, intangibles
amortization was 2.9% and 2.3%, respectively. The change was due to increased IT
acquisitions and earnouts for 1998 and 1999.
Operating Income: Operating income for the thirteen weeks ended July 4, 1999 was
$2.0 million, a decrease of $0.7 million, or 25.9%, from $2.7 million for the
thirteen weeks ended June 28, 1998. Operating margin was 7.8%, compared to 14.0%
for the thirteen weeks ended July 4, 1999 and June 28, 1998, respectively. For
the twenty-six week periods ended July 4, 1999 and June 28, 1999, operating
income was $3.2 million and $4.8 million, respectively, a decrease of $1.6
million, or 33.3%. Operating margin for the twenty-six weeks ended July 4, 1999
was 6.5% compared to operating margin of 13.9% for the twenty-six weeks ended
June 28, 1998. The decrease in operating income was due primarily to the
increase in operating expenses.
Liquidity and Capital Resources
For the twenty-six weeks ended July 4, 1999 net cash provided by
operating activities was $3.3 million, compared to net cash provided by
operating activities of $1.1 million for the twenty-six weeks ended June 28,
1998. The change in operating cash flow was primarily a result of lower net
income offset by increased depreciation and amortization and a net increase in
certain working capital accounts, including workers' compensation reserves.
The Company's investing activities used $2.9 million to purchase
property and equipment, and $19.5 million for acquisitions and earnouts during
the twenty-six weeks ended July 4, 1999.
The Company's financing activities provided net proceeds of $14.7
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 July 4, 1999). Long-term borrowings bear interest at
LIBOR plus an "applicable margin" (currently 1.6%) dependent on certain
financial ratios (total rate of 6.97% at July 4, 1999). In June of 1999 the
Company amended its credit agreement to change certain negative covenants to
modify certain financial ratios and to increase the maximum applicable margin
from 1.6% to 2.0% based on applicable financial ratios. As of July 4, 1999,
$15.0 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
twelve 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 believes that it is adequately addressing the year 2000
("Y2K") problem. In short, the Y2K problem is a result of IT 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 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 is being tested and is believed to be
Y2K compliant. Additionally, the Company has implemented new financial system
14
<PAGE>
software that has been warranted by the developer to be Y2K compliant. The
Company is also testing the information systems of its Inteliant subsidiary and
certain other independent systems within the Company. As additional systems are
being added they are also being evaluated for Y2K compliance. During the course
of the testing performed to date, no material systems have been found to be out
of compliance.
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 during 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
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
15
<PAGE>
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 July 4,
1999, the Company's outstanding borrowings on the Credit Facility were $18.8
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 July 4, 1999, the carrying value of the
senior debt placement approximated its fair value.
16
<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 4. Submission of Matters to a Vote of Security Holders
On May 19, 1999, the Company held its Annual Meeting of Shareholders
(the "Annual Meeting"). At the Annual Meeting, the shareholders of the Company
elected two directors of the Company, Stanley R. deWaal and Randolf K. Rolf,
each of whom was elected to serve until the 2002 annual meeting of the Company's
shareholders. With respect to the election of directors, there were 10,768,041
votes cast in favor of the election of Mr. deWaal, 0 votes opposed and 32,329
abstentions and broker non-votes. There were 10,768,296 votes cast in favor of
the election of Mr. Rolf, 0 votes opposed and 32,079 abstentions and broker
non-votes.
In addition to the election of Messrs. deWaal and Rolf, Samuel C.
Freitag, Michael A. Jones and JoAnn W. Wagner continue to serve as directors of
the Company, with terms expiring at the Company's 2001 annual meeting of
shareholders, and R. Thayne Robson and Richard J. Tripp continue to serve as
directors of the Company, with terms expiring at the Company's 2000 annual
meeting of shareholders.
Additionally, the shareholders of the Company approved a proposal to
ratify the appointment of Arthur Andersen LLP as independent auditors of the
Company for the year ending January 2, 2000. The number of votes cast in favor
of the proposal was 10,787,733, the number of votes opposed was 6,990 and the
number of abstentions and broker non-votes was 5,652.
Item 6. Exhibits and Reports on Form 8-K.
a) Exhibit 27 - Financial Data Schedule, filed herewith.
b) First Amendment of Employment Agreement between the Company and
JoAnn W. Wagner, filed herewith.
c) First Amendment to Amended and Restated Credit Agreement dated June
3, 1999 by and among the Company and certain banks, filed herewith.
17
<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: August 17, 1999 /s/ JoAnn W. Wagner
----------------------------------------
JoAnn W. Wagner
Chairman, President and
Chief Executive Officer
Dated: August 17, 1999 /s/ Gary B. Crook
----------------------------------------
Gary B. Crook
Executive Vice President and
Chief Financial Officer
18
FIRST AMENDMENT TO
AMENDED AND RESTATED CREDIT AGREEMENT
THIS FIRST AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT
(the "First Amendment") is made and dated as of the 3rd day of June, 1999 by
and among SOS STAFFING SERVICES, INC., a Utah corporation (the "Borrower"),
the Guarantors, THE FIRST NATIONAL BANK OF CHICAGO, a national banking
association ("First Chicago") and FIRST SECURITY BANK, N.A., a national
banking association ("First Security"), as the current Lenders under the
Credit Agreement referred to below, First Chicago, as documentation agent for
the Lenders (in such capacity, the "Documentation Agent"), and First Security,
as administrative agent for the Lenders (in such capacity, the "Administrative
Agent").
RECITALS
A. Pursuant to that certain Amended and Restated Credit Agreement
dated as of July 27, 1998 by and among the Borrower, the Administrative Agent,
the Documentation Agent and the Lenders (as amended, extended and replaced
from time to time, the "Credit Agreement," and with capitalized terms not
otherwise defined herein used with the meanings given such terms in the Credit
Agreement), the Lenders agreed to make Loans to, and to cause Letters of
Credit to be issued for the account of, the Borrower on the terms and subject
to the conditions set forth therein.
B. The Borrower has requested that the Lenders agree to amend one of
the financial covenants set forth in the Credit Agreement and the Lenders have
agreed to do so on the terms and subject to the conditions set forth more
particularly herein.
NOW, THEREFORE, in consideration of the foregoing Recitals
and for other good and valuable consideration, the receipt and adequacy of
which are hereby acknowledged, the parties hereto hereby agree as follows:
AGREEMENT
1 . Amendment of Leverage Requirement. To effect the agreement of the
parties to modify the leverage covenant set forth in Section 6.19 of the
Credit Agreement, the ratio of "3.0: 1.0" set forth therein is hereby amended
to read "3.6: 1.0".
2. Modification of Pricing. To reflect the agreement of the parties to
modify certain pricing terms set forth in the Credit Agreement, the definition
of "Applicable Margin" set forth in Article I of the Credit Agreement is
hereby amended to delete the table set forth therein and to replace the same
with the following table:
<TABLE>
<CAPTION>
"Total Indebtedness / Adjusted Applicable Margin in connection Applicable Margin in connection
------------------------------ ------------------------------- -------------------------------
EBITDA Ratio with the Eurodollar Rate with the Floating Rate
------------ ------------------------ ----------------------
<S> <C> <C>
Less than or equal to 1.50: 1.00 1.000% 0%
Greater than 1.50: 1.00 but less 1.250% 0%
than or equal to 2.25: 1.00
Greater than 2.25: 1.00 but less 1.600% 0%
than or equal to 3.00: 1.00
Greater than 3.00: 1.00 2.000% 0%"
</TABLE>
<PAGE>
3. Reaffirmation of Loan Documents. The Borrower and each of
the Guarantors hereby affirms and agrees that the execution and delivery by
the Borrower of and the performance of its obligations under this First
Amendment shall not in any way amend, impair, invalidate or otherwise affect
any of the obligations of the Borrower or any Guarantor or the rights of the
Documentation Agent, the Administrative Agent or the Lenders under the Credit
Agreement or any other Loan Document or any other document or instrument made
or given by the Borrower or any Guarantor in connection therewith and that the
"Obligations" shall include all obligations of the Borrower under the Credit
Agreement as amended hereby.
4. Effective Date. This First Amendment shall be effective as of the date that
there shall have been delivered to the Administrative Agent, a copy of this
First Amendment, duly executed by all parties signatory hereto:
5. No Other Amendment. Except as expressly amended hereby,
the Credit Agreement and other Loan Documents shall remain in full force and
effect as written.
6. Counterparts. This First Amendment may be executed in any number of
counterparts, each of which when so executed shall be deemed to be an original
and all of which when taken together shall constitute one and the same
agreement.
7. Representations and Warranties. The Borrower and each of the Guarantors
hereby represents and warrants to the Documentation Agent, the Administrative
Agent and the Lenders as follows:
(a)The Borrower and each of the Guarantors have the corporate power and
authority and the legal right to execute, deliver and perform this First
Amendment and have taken all necessary corporate action to authorize the
execution, delivery and performance of this First Amendment. This First
Amendment has been duly executed and delivered on behalf of the Borrower and
each of the Guarantors and constitutes the legal, valid and binding obligation
of such Persons, enforceable against such Persons in accordance with its
terms.
(b)Both prior to and after giving effect to this First Amendment: (1) the
representations and warranties of the Borrower and the Guarantors contained in
the Loan Documents
2
<PAGE>
are accurate and complete in all material respects, and (2) there has not
occurred a Default or an Unmatured Default.
IN WITNESS WHEREOF, the parties hereto have caused this First
Amendment to be executed as of the day and year first above written.
SOS STAFFING SERVICES, INC., a Utah
corporation
By __________________________________________
Name ________________________________________
Title _______________________________________
THE FIRST NATIONAL BANK OF CHICAGO, a
national banking association, as
Documentation Agent and a Lender
By __________________________________________
Name ________________________________________
Title _______________________________________
FIRST SECURITY BANK, N.A., a national banking
association, as Administrative Agent and a
Lender
By __________________________________________
Name _______________________________________
Title _______________________________________
ACKNOWLEDGED AND AGREED TO as of the day and year first above written:
WOLFE & ASSOCIATES, INC.
By ____________________________________________
Name __________________________________________
Title _________________________________________
3
FIRST AMENDMENT TO
EMPLOYMENT, NONDISCLOSURE AND NON-COMPETITION AGREEMENT
This First Amendment to Employment, Nondisclosure and Non-Competition
Agreement (the "Amendment") is entered into between SOS Staffing Services, Inc.,
a Utah corporation (the "Company"), and JoAnn W. Wagner ("Wagner"):
RECITALS:
---------
A. On or about August 4, 1997, the Company and Wagner entered into that
certain Employment, Nondisclosure and Non-Competition Agreement (the "Employment
Agreement"), whereby, the Company agreed to employ Wagner as Vice Chairman on a
two-thirds time basis and Wagner agreed to accept such employment with the
Company under the terms and conditions contained therein.
B. In September 1997, Wagner was appointed Executive Vice President of
the Company.
C. On or about February 27, 1998, Wagner was appointed Chairman of the
Company's Board of Directors and the Company agreed to employ Wagner on a full
time basis and Wagner agreed to accept such employment.
D. On October 29, 1998, the Company appointed Wagner Chief Executive
Officer and Wagner accepted such appointment. On March 24, 1999, the Company
also appointed Wagner as President of the Company and Wagner agreed to accept
such appointment.
E. In connection with the foregoing, the parties wish to amend the
Employment Agreement as hereinafter provided.
AGREEMENTS:
-----------
IN CONSIDERATION of the mutual covenants, conditions, representations
and warrantees contained in the Employment Agreement and those hereinafter set
forth, the parties hereby agree as follows:
1. Article 1 of the Employment Agreement shall be deleted and the
following inserted in lieu thereof:
1. Employment, Duties and Acceptance.
1.1 Employment by the Company. The Company hereby agrees to
employ Wagner as an employee of the Company in the position and office of
Chairman, President and Chief Executive Officer, for the Term as hereinafter
defined, to render such services and to perform such duties as the Board of
Directors of the Company shall reasonably request. Such services shall be
provided on a full time basis. Notwithstanding the foregoing, Wagner's position
and duties may be reasonably modified or changed from time to time at the
<PAGE>
discretion of the Board of Directors. No substantial change to Wagner's position
or duties may be made without Wagner's consent. Wagner may also serve during all
or any part of the Term in any other office to which she may be appointed or
elected without any compensation therefor other than that specified in this
Agreement. Wagner may decline any such appointment or election.
1.2 Acceptance of Employment by Wagner. Wagner hereby accepts
such continued employment and shall render the services described above. Wagner
will faithfully, and at all times, and to the best of her ability, experience
and talents, perform all of the duties which are required of her under this
Agreement and shall keep free from conflicting enterprises or any other
activities which would be detrimental to or interfere with the business of the
Company or the devotion of all of her working time to the business of the
Company. Wagner agrees to use her best efforts to comply with any and all
instructions that the Board of Directors may give her from time to time, and to
promote and maintain the success, quality, professionalism and reputation of the
Company.
2. Article 2 of the Employment Agreement shall be deleted and the
following inserted in lieu thereof:
The term of Wagner's employment under the Employment Agreement (the
"Term") shall continue until December 31, 2003 or as otherwise terminated as
provided in Article 5 hereof. Thereafter, the Term shall be extended
automatically for successive one-(1) year periods unless either the Company or
Wagner give six (6) months written notice of its or her intent not to extend the
contract. As used in this Agreement, "Term" shall mean and include the period
described above and any extension thereof.
3. Article 3 of the Agreement shall be deleted in its entirety and the
following inserted in lieu thereof:
3.1 Compensation. As compensation for services to be rendered
pursuant to this Agreement, the Company shall pay Wagner, during the Term, a
salary of $300,000.00 per annum (the "Annual Salary"), subject to such increases
as the Board of Directors may, at its discretion, approve.
3.2 Expenses. Wagner shall be entitled to reimbursement of
her reasonable expenses incurred related to the performance of her duties
hereunder pursuant to the Company's expense reimbursement program. The expenses
covered by such policy include mileage reimbursement for business related travel
or reimbursement for actual allowable automobile expenses or mileage,
reimbursement for other business related travel, entertainment of potential and
current customers of the Company, etc. Wagner shall submit to the Company
receipts and the Company's expense reimbursement report. The Company shall
reimburse Wagner within a reasonable time after the appropriate Company employee
receives the expense reimbursement report and supporting documentation. Wagner
may additionally be reimbursed for other business expenses such as supplies and
equipment that cannot reasonably or timely be paid through the accounts payable
process. These expenses will normally be charged on her personal credit card
when the circumstances require the same.
2
<PAGE>
3.3 Bonus. Wagner shall also be eligible, during the Term, to
receive bonuses, to be paid annually or quarterly, in such amounts and upon such
terms and conditions as the Board of Directors (or a compensation committee
thereof) may, at its discretion, approve.
3.4 Other Compensation. Wagner shall be eligible for such
other compensation, whether in the form of additional stock options, stock
appreciation rights, restricted stock awards or otherwise, in such amounts and
upon such terms and conditions as the Board of Directors (or a compensation
committee thereof) may, at its discretion, approve. All compensations described
in Articles 3.2 through 3.4 shall be collectively referred to as "Additional
Compensation."
3.5 Payment. The Annual Salary and the Additional Compensation
shall be payable in accordance with the applicable payroll and/or other
compensation policies and plans of the Company as from time to time in effect,
less such deductions as shall be required to be withheld by applicable law and
regulations.
3.5.1 Payment upon Termination. Wagner shall be paid the amount
of Annual Salary or Additional Compensation as described in Article 5 of this
Agreement if her employment is terminated.
3.6 Participation in Employee Benefit Plans. Wagner shall be
permitted, during the Term to participate in any group life, hospitalization or
disability insurance plan, health program, pension plan, nonqualified deferred
compensation plan, similar benefit plan or other so-called "fringe benefits" of
the Company for which she may be eligible pursuant to the terms of such plans on
the same terms and conditions as other employees of the Company.
4. Article 4 of the Employment Agreement shall be deleted and the
following inserted in lieu thereof:
4.1 Acknowledgments. Wagner acknowledges that: (i) the
Company, including any subsidiaries and affiliates that may be formed or
incorporated during the Covenant Period (as defined in Section 4.2), is
currently engaged in the business of providing temporary staffing, consulting
and outsourcing services to customers in the Western United States and
elsewhere, including clerical, industrial, marketing, technical, telephony,
information systems and technology, professional, construction and manufacturing
personnel, as well as related services, including staff leasing, payrolling,
employee testing and risk management consulting, and does now and may in the
future expand its business during the Term of this Agreement to include other
activities and to operate in other states of the United States, provinces of
Canada or elsewhere (all states, provinces or territories in which the Company
operates and activities in which the Company engages, whether currently or in
the future during the Term of Wagner's employment with the Company, are
collectively referred to herein as the "Business"); (ii) she is one of a limited
number of persons who will perform a significant role in the management and
development of the Business, and whose services will be unique and
extraordinary, and will contribute to an enhance the goodwill of the Company;
(iii) her work for the Company will give her access to "know-how," trade
secrets, customer lists, details of client or consultant contracts, pricing
3
<PAGE>
policies, operational methods, marketing plans or strategies, business
acquisition plans, new personnel acquisition plans, and financial information
and general confidential business information (collectively, "Trade Secrets")
that are confidential and unique, not generally known in the industry, and which
will give the Company a competitive advantage and significantly enhance the
Company's goodwill; (iv) the agreements and covenants contained in this Article
4 are essential to protect the Business and goodwill of the Company, to prevent
competitors from acquiring, appropriating, or discovering the Company's Trade
Secrets, and to maintain and protect the Company's competitive advantage in the
industry; and (v) she has means to support himself and her dependents other than
by engaging in the Business, and the provisions of this Article 4 will not
appear such ability. Accordingly, Wagner covenants and agrees as follows:
4.2 Covenants and Reformation.
4.2.1. Non-Competition Covenants. For a period commencing on the
effective date of this Amendment and continuing until the earlier of (i) two
years after the date of termination of Wagner's employment with the Company, for
any reason, with or without cause, and whenever such termination may occur,
whether prior to, concurrently with, or after the expiration or early
termination of this Agreement, except for a termination related to the Company's
election not to extend the Term pursuant to Article 2 of this Amendment; or (ii)
one year after the termination of Wagner's employment due to the Company's
election not to extend the Term pursuant to Article 2 of this Amendment (the
"Covenant Period"), Wagner shall not, within any state in which the Company
conducts the Business, directly or indirectly, (i) engage in the Business or any
aspect of the Business for Wagner's own account in competition with the Company;
(ii) enter the employ of, or render any services to or consult with, any person
engaged in competition with the Company; (iii) become associated with or
interested in any such person in any capacity, including, without limitation, as
an individual, partner, shareholder, officer, director, principal, agent or
trustee; provided, however, Wagner may own, directly or indirectly, solely as an
investment, securities of any entity traded on any national securities exchange
or over-the-counter if Wagner is not a controlling person of, or a member of a
group which controls, such person and does not, directly or indirectly, own 5%
or more of any class of securities of such person; (iv) solicit or otherwise
deal with any client of the Company in a manner designed to (or that could) take
business away from the Company; (v) solicit or otherwise induce any employee of
the Company to terminate his/her employment with the Company; or (vi) hire or
solicit any consultant then under contract with the Company or encourage such
consultant to terminate such relationship.
4.2.1.1. Limitation on Non-Competition Covenants. If Wagner
voluntarily terminates her employment during the Term of the Agreement other
than for Good Reason due to a Change in Control, as hereinafter defined, then
the Covenant Period for items 4.2.1 (i), (ii) and (iii) shall be one year, but
Covenant Period described for items 4.2.1. (iv), (v) and (vi) shall remain as
stated in Section 4.2.1. above.
4.2.2. Reformation or "Blue-Pencilling". The Company intends to
restrict legitimate business under Section 4.2.1 only to the extent necessary to
protect the Company's legitimate business interests. Wagner and the Company
agree that the terms and conditions hereof should be enforced to the fullest
extent permitted by law. If any court determines that any provision of Section
4
<PAGE>
4.2.1, or any part thereof, is unenforceable because of the scope, duration or
geographic breadth of such provision, such court shall have the power to reform
such provision to the maximum scope, duration or geographical breadth, as the
case may be, that such court has determined is enforceable in accordance with
the law.
4.3 Nondisclosure Covenant. During the Covenant Period and
forever thereafter, Wagner shall not, without the prior written consent of the
Company, intentionally or unintentionally, reveal, make accessible, or
disseminate to any person not an employee of the Company, or to any other
entity, or use for the benefit of himself or others, the Trade Secrets and any
and all other confidential matters of the Company. Wagner covenants and agrees
that she shall not exploit for her own benefit, or the benefit of others,
personal relationships with customers, suppliers or agents of the Company in a
manner that would or may adversely affect the Company.
4.4 Property of the Company. All of the Company's Trade
Secrets, and all tangible items, including, without limitation, all memoranda,
notes, lists, records and other documents or papers (and all copies thereof),
including such items stored in computer memories, on microfiche or by any other
means, made or compiled by or on behalf of Wagner, or made available to Wagner
relating to the past, existing, or contemplated business or work of the Company,
other than purely personal matters, are and shall remain the Company's exclusive
property and shall be delivered to the Company promptly upon the termination of
Wagner's employment (whether for Cause or otherwise) or at any other time on
request of the Company.
4.5 Rights and Remedies upon Breach. If Wagner breaches, or
threatens to commit a breach of, any of the provisions of Sections 4.2.1, 4.3,
or 4.4 (collectively, the "Restrictive Covenants"), the Company shall have the
following rights and remedies, each of which rights and remedies shall be
independent of the others and severally enforceable, and each of which is in
addition to, and not in lieu of, any other rights and remedies available to the
Company under law or in equity:
4.5.1 Specific Performance. The right and remedy to
have the Restrictive Covenants specifically enforced by any court of competent
jurisdiction, it being agreed by the parties hereto that any breach or
threatened breach of the Restrictive Covenants would cause irreparable injury to
the Company and that money damages would not provide an adequate remedy to the
Company.
4.5.2 Accounting. The right and remedy to require
Wagner to account for and pay over to the Company all compensation, profits,
monies, accruals, increments or other benefits derived or received by Wagner as
the result of any transactions constituting a breach of the Restrictive
Covenants.
4.6 Severability of Covenants. Wagner acknowledges and agrees
that the Restrictive Covenants are reasonable and valid in scope, and
geographical and temporal breadth and in all other respects. If any court
determines that any of the Restrictive Covenants, or any part thereof, is
invalid or unenforceable, the remainder of the Restrictive Covenants shall not
thereby be affected and shall be given full effect, without regard to the
invalid portions.
5
<PAGE>
4.7 Enforceability in Jurisdictions. The Company and Wagner
intend to and hereby confer jurisdiction to enforce the Restrictive Covenants
upon the courts of any jurisdiction within the geographical scope of the
Restrictive Covenants. If the courts of any one or more of such jurisdictions
hold the Restrictive Covenants unenforceable by reason of their scope or
otherwise, it is the intention of the Company and Wagner that such determination
not bar or in any way affect the Company's right to the relief provided above in
the courts of any other jurisdiction within the geographical scope of the
Restrictive Covenants, as to breaches of such covenants in such other respective
jurisdictions, such covenants as they relate to each jurisdiction being, for
this purpose, severable into diverse and independent covenants.
5. Article 5 of the Employment Agreement shall be deleted and
the following inserted in lieu thereof:
5. Termination of Agreement and Employment.
5.1 Termination upon Death. If Wagner dies during the Term,
this Agreement and Wagner's employment hereunder shall terminate, except that
Wagner's legal representatives, successors, heirs or assigns shall be entitled
to receive the Annual Salary, the Additional Compensation and other accrued
benefits, if any, earned up to the date of Wagner's death; provided, however, if
any Additional Compensation or other benefits are governed by the provisions of
any written employee benefit plan or policy of the Company, any written
agreement contemplated thereunder, or any other separate written agreement
entered into between Wagner and the Company, the terms and conditions of such
plan, policy or agreement shall control in the event of any discrepancy or
conflict with the provisions of this Agreement regarding such Additional
Compensation or other benefit upon the death, termination or disability of
Wagner pursuant to this Article 5.
5.2 Termination for Cause. The Company has the right, at any
time during the Term, subject to all of the provisions hereof, exercisable by
serving notice, effective in accordance with its terms, to terminate this
Agreement and Wagner's employment hereunder and discharge Wagner for "Cause" (as
hereinafter defined). If such right is exercised, the Company's obligation to
Wagner shall be limited to the payment of any unpaid Annual Salary, Additional
Compensation and other benefits, if any, accrued up to the effective date (which
shall not be retroactive) specified in the Company's notice of termination. As
used in this Section 5.2, the term "Cause" shall mean and include (i) material
breach by Wagner of the terms of this Agreement, (ii) wrongful misappropriation
of any money or other assets or properties of the Company or any subsidiary or
affiliate of the Company, (iii) the conviction of Wagner for any felony or other
serious crime, (iv) use of illegal drugs, (v) use of alcohol if such use renders
Wagner unable to perform the essential functions of her job, (vi) Wagner's gross
moral turpitude relevant to her office or employment with the Company or any
subsidiary or affiliate of the Company, (vii) any act or omission by Wagner that
materially harms the Company's business reputation, trade name(s) or goodwill;
(viii) Wagner's violation of the Company's sexual harassment or
anti-discrimination policy, or (ix) Wagner's violation of other established
Company policies, whether currently in place or adopted during the Term, where
such violations ordinarily result in termination. The determination of whether
the Company has adequate Cause hereunder to terminate Wagner's employment shall
6
<PAGE>
be subject to the arbitration provision contained in Article 8.5 of the
Employment Agreement.
5.3 Suspension upon Disability. If during the Term, Wagner
becomes physically or mentally disabled, whether totally or partially, as
evidenced by the written statement of (2) competent physicians licensed to
practice medicine in the United States, so that Wagner is unable to
substantially perform her services hereunder for (i) a period of six consecutive
months, or (ii) for shorter periods aggregating six months during any
twelve-month period, the Company may at any time after the last day of the six
consecutive months of disability, or on the day on which the shorter periods of
disability equal an aggregate of six months, by written notice to Wagner,
suspend Wagner's employment and the performance of the Company's obligations
hereunder, including payments of the Annual Salary, Additional Compensation and
other benefits. If at any time Wagner shall no longer be disabled, as evidenced
by the written statement of two (2) competent physicians licensed to practice
medicine in the United States, the Company may, at its election, fully reinstate
this Agreement and Wagner's employment hereunder, and all of the terms of this
Agreement, including payment of the Annual Salary, shall resume in full force
for the balance of the Term. Nothing in this Section 5.3 shall be deemed,
however, to extend the Term. Additionally, nothing in this Section 5.3 shall
limit or diminish Company's obligations towards Wagner with respect to the
Americans with Disabilities Act of 1990, as amended, the Family and Medical
Leave Act of 1993, as amended, or any similar state laws.
5.3.1 Selection of Physicians. If there is a dispute as
to whether Wagner is disabled, then each party shall select one of the competent
physicians referenced above. If said physicians disagree as to whether Wagner is
disabled, then they shall select a third competent physician whose judgment
would be determinative.
5.4 Termination other than for Cause. If Wagner is terminated
other than for cause as defined in Article 5.2 herein or due to a change in
control as defined in Article 5.5 herein, then the Company shall pay Wagner an
amount equal to two year's of Annual Salary. Additionally, the Company shall pay
Wagner's health/dental/vision insurance continuation premiums under COBRA for a
period of two years or until Wagner is no longer eligible for COBRA if earlier.
If Wagner is terminated under this Article 5.4, the Company's liability shall be
limited to such payments.
5.5 Termination due to a Change in Control. If Wagner's
employment hereunder is Terminated Due to a Change in Control by the Company or
by Wagner for Good Reason, as each respective term is hereinafter defined, then
the Company shall pay Wagner, subject to the limitations contained in Article
5.5.3 herein, the greater of either an amount equal to the Annual Salary for the
remainder of the Term or an amount equal to two year's Annual Salary.
Additionally, the Company shall pay Wagner's health/dental/vision insurance
continuation premiums under COBRA for a period of two years or until Wagner is
no longer eligible for COBRA, if earlier. If Wagner's employment hereunder is
Terminated Due to a Change in Control by Wagner without Good Reason, then the
Company shall pay Wagner an amount equal to one year's Annual Salary and shall
pay Wagner's health/dental/vision insurance continuation premiums under COBRA
7
<PAGE>
for a period of one year or until Wagner is no longer eligible for COBRA, if
earlier. If Wagner is terminated under this Article 5.5, the Company's liability
shall be limited to such payments.
5.5.1 Change in Control. "Change in Control" shall mean
an acquisition or merger of the Company, sale of substantially all of the assets
of the Company or other change in control as defined in Article 17.5 of the
Company's May 5, 1995 Stock Incentive Plan.
5.5.2 Terminated Due to a Change in Control. As used in
this Agreement, "Terminated Due to a Change in Control" shall mean and is
defined as the termination of Wagner's employment by the Company for any reason,
except for Cause, within a one-year period following the effective date of a
Change in Control. "Terminated Due to a Change in Control" shall mean and is
also defined as the termination of Wagner's employment by Wagner for Good Reason
due to a Change in Control. Good Reason means any change in Wagner's position,
job duties or working conditions, including specifically, without limitation,
any reduction in Wagner's Annual Salary, Additional Compensation or other
benefits, or the relocation of Wagner, without Wagner's consent.
5.5.3 Limitation on Payments Related to a Termination
Due to a Change in Control. In no event shall the payments made to Wagner
pursuant to Article 5.5 be greater than 2.99 times Wagner's "annualized
includible compensation for the base period" as such term is defined by Section
280G(d) of the Internal Revenue Code.
5.6 Expiration of Term. If Wagner is terminated due to the
Company's election not to extend the Term pursuant to Article 2 of this
Amendment, then the Company shall pay Wagner one year's Annual Salary.
Additionally, the Company shall pay Wagner's health/dental/vision insurance
continuation premiums under COBRA for a period of one year or until Wagner is no
longer eligible for COBRA, if earlier. If Wagner is terminated under this
Article 5.6, the Company's liability shall be limited to such payments.
6. This Amendment shall be effective April 1, 1999.
7. This Amendment may be executed in multiple counterparts, each of
which shall, for all purposes, be deemed an original and all of which, taken
together, shall constitute one in the same agreement.
8. Except as expressly modified by this Amendment the Employment
Agreement remains unchanged and in full force in effect.
[THIS SPACE INTENTIONALLY LEFT BLANK - EXECUTION PAGE TO FOLLOW]
8
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Amendment.
DATED this day of July, 1999. DATED this day of July, 1999.
Company JoAnn W. Wagner
SOS Staffing Services, Inc., by:
- -------------------------------------- ---------------
Gary B. Crook, Executive Vice President JoAnn W. Wagner
and Chief Financial Officer
9
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