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 October 3, 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 November 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
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
<S> <C>
As of October 3, 1999 and January 3, 1999 3
Condensed Consolidated Statements of Income
For the Thirteen and Thirty-nine Weeks Ended October 3, 1999 and September 27, 1998 5
Condensed Consolidated Statements of Cash Flows
For the Thirty-nine Weeks Ended October 3, 1999 and September 27, 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 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>
SOS STAFFING SERVICES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<CAPTION>
ASSETS
(000's)
October 3, 1999 January 3, 1999
--------------- ---------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 1,128 $ 5,315
Accounts receivable, less allowances of
$1,481 and $762, respectively 56,236 44,627
Current portion of workers' compensation deposit 600 462
Prepaid expenses and other 960 1,054
Deferred income tax asset 3,024 1,849
Income tax receivable -- 571
--------- ---------
Total current assets 61,948 53,878
--------- ---------
PROPERTY AND EQUIPMENT, at cost
Computer equipment 5,961 5,977
Office equipment 4,520 2,917
Leasehold improvements and other 1,864 1,553
--------- ---------
12,345 10,447
Less accumulated depreciation and amortization (4,773) (3,103)
--------- ---------
Total property and equipment, net 7,572 7,344
--------- ---------
OTHER ASSETS
Workers' compensation deposit, less current portion 106 106
Intangible assets, less accumulated amortization
of $9,524 and $5,872, respectively 133,077 119,709
Deposits and other assets 1,853 1,872
--------- ---------
Total other assets 135,036 121,687
--------- ---------
Total assets $ 204,556 $ 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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<TABLE>
SOS STAFFING SERVICES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
(000's)
<CAPTION>
October 3, 1999 January 3, 1999
--------------- ---------------
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable $ 3,081 $ 3,350
Accrued payroll costs 9,453 6,805
Current portion of workers' compensation reserve 3,885 2,358
Accrued liabilities 4,253 2,163
Accrued acquisition costs and earnouts 3,577 11,900
Current portion of notes payable 333 313
Income taxes payable 215 --
------- -------
Total current liabilities 24,797 26,889
------- -------
LONG-TERM LIABILITIES
Notes payable, less current portion 57,360 39,612
Workers' compensation reserve, less current portion 478 478
Deferred income tax liability 2,168 927
Deferred compensation liabilities 638 397
------- -------
Total long-term liabilities 60,644 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 91,588 91,564
Retained earnings 27,400 22,915
------- -------
Total shareholders' equity 119,115 114,606
------- -------
Total liabilities and shareholders' equity $204,556 $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>
SOS STAFFING SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(000's except per share data)
<CAPTION>
Thirteen Weeks Ended Thirty-nine Weeks Ended
October 3, 1999 September 27, 1998 October 3, 1999 September 27, 1998
-------------- ----------------- --------------- ------------------
<S> <C> <C> <C> <C>
SERVICE REVENUES $ 98,725 $ 87,385 $ 275,187 $ 239,958
DIRECT COST OF SERVICES 75,836 67,169 210,151 184,762
--------- --------- --------- ---------
Gross Profit 22,889 20,216 65,036 55,196
--------- --------- --------- ---------
OPERATING EXPENSES
Selling, general and administrative 16,323 13,380 50,936 37,540
Intangibles amortization 1,380 995 4,009 2,647
--------- --------- --------- ---------
Total operating expenses 17,703 14,375 54,945 40,187
--------- --------- --------- ---------
INCOME FROM OPERATIONS 5,186 5,841 10,091 15,009
--------- --------- --------- ---------
OTHER INCOME (EXPENSE)
Interest expense (941) (627) (2,905) (900)
Interest income 11 68 88 286
Other, net (90) (2) (39) (30)
--------- --------- --------- ---------
Total, net (1,020) (561) (2,856) (584)
--------- --------- --------- ---------
INCOME BEFORE PROVISION FOR
INCOME TAXES 4,166 5,280 7,235 14,425
PROVISION FOR INCOME TAXES (1,627) (1,876) (2,750) (5,589)
--------- --------- --------- ---------
NET INCOME $ 2,539 $ 3,404 $ 4,485 $ 8,836
========= ========= ========= =========
NET INCOME PER COMMON SHARE
Basic $ 0.20 $ 0.27 $ 0.35 $ 0.70
Diluted 0.20 0.27 0.35 0.69
WEIGHTED AVERAGE COMMON SHARES
Basic 12,691 12,681 12,691 12,671
Diluted 12,693 12,808 12,702 12,842
</TABLE>
The accompanying notes to condensed consolidated financial statements
are an integral part of these condensed consolidated statements.
5
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<TABLE>
SOS STAFFING SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Increase (Decrease) in Cash and Cash Equivalents
(in 000's)
<CAPTION>
Thirty-nine Weeks Ended
October 3, 1999 September 27, 1998
--------------- ------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 4,485 $ 8,836
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 5,781 3,659
Deferred income taxes 67 465
Loss on disposition of assets 9 10
Changes in operating assets and liabilities:
Accounts receivable, net (11,886) (9,895)
Workers' compensation deposit (138) 14
Prepaid expenses and other 95 (899)
Deposits and other assets 112 (364)
Accounts payable (269) 1,830
Accrued payroll costs 2,649 1,210
Workers' compensation reserve 1,527 657
Accrued liabilities 1,942 (624)
Income taxes payable/receivable 787 (404)
-------- --------
Net cash provided by operating activities 5,161 4,495
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash paid for acquisitions of businesses (32) (41,080)
Purchases of property and equipment (3,734) (2,555)
Payments of acquisition costs and earnouts (24,971) (13,168)
Proceeds from sale of property and equipment 1,598 60
-------- --------
Net cash used in investing activities $(27,139) $(56,743)
-------- --------
</TABLE>
The accompanying notes to condensed consolidated financial statements
are an integral part of these condensed consolidated statements.
6
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<TABLE>
SOS STAFFING SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS CONTINUED
(Unaudited)
<CAPTION>
Increase (Decrease) in Cash and Cash Equivalents
(in 000's)
The accompanying notes to condensed consolidated financial statements
Thirty-nine Weeks Ended
October 3, 1999 September 27, 1998
--------------- ------------------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from exercise of employee stock options $ 24 $ 368
Proceeds from long-term borrowings 22,000 35,000
Payments on long-term borrowings (4,233) --
-------- --------
Net cash provided by financing activities 17,791 35,368
-------- --------
NET DECREASE IN CASH
AND CASH EQUIVALENTS (4,187) (16,880)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 5,315 20,463
-------- --------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 1,128 $ 3,583
======== ========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ 3,102 $ 873
Income taxes 2,394 5,500
</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.
In accordance with industry practice, during the thirty-nine weeks
ended October 3, 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
amounts reclassified for the thirteen and thirty-nine week periods ended
September 27, 1998 were approximately $0.3 and $0.6 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 period. 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 October 3, 1999 Thirteen Weeks Ended September 27, 1998
-----------------------------------------------------------------------------------
Per Share Per Share
<S> <C> <C> <C> <C> <C> <C>
Net Income Shares Amount Net Income Shares Amount
-----------------------------------------------------------------------------------
Basic EPS $ 2,539 12,691 $ 0.20 $ 3,404 12,681 $ 0.27
Effect of Stock Options 2 127
-------------------- --------------------
Diluted EPS $ 2,539 12,693 $ 0.20 $ 3,404 12,808 $ 0.27
==================== ====================
Thirty-nine Weeks Ended October 3, 1999 Thirty-nine Weeks Ended September 27, 1998
-----------------------------------------------------------------------------------
Per Share Per Share
Net Income Shares Amount Net Income Shares Amount
-----------------------------------------------------------------------------------
Basic EPS $ 4,485 12,691 $ 0.35 $ 8,836 12,671 $ 0.70
Effect of Stock Options 11 171
-------------------- --------------------
Diluted EPS $ 4,485 12,702 $ 0.35 $ 8,836 12,842 $ 0.69
==================== ====================
</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 thirty-nine weeks ended October
3, 1999 the Company paid acquisition costs and earnouts totaling approximately
million. As of October 3, 1999 accrued acquisition costs and earnouts totaled
million.
Note 4. Legal Matters
In the ordinary course of its business, the Company is
periodically threatened with or named as a defendant in various lawsuits or
administrative actions. The Company maintains insurance in such amounts and with
such coverages and deductibles as management believes to be reasonable and
prudent; however, there can be no assurance that such insurance will be adequate
to cover all risks to which the Company may be exposed. The principal risks
covered by insurance include worker's compensation, personal injury, bodily
injury, property damage, errors and omissions, fidelity and crime losses,
employer practices liability and general liability.
In September 1999, Interliant, Inc. ("Plaintiff") commenced an action
in the United States District Court for the Southern District of Texas, Houston
Division, against the Company and its wholly owned subsidiary, Inteliant
Corporation. The lawsuit alleges, among other things, that the Company's use of
the "Inteliant" mark infringes upon Plaintiff's mark, "Interliant." In addition
to the federal trademark infringement claims, Plaintiff alleges unfair
competition based on the Company's use of the Inteliant mark, common law
infringement and dilution. In the Complaint, Plaintiff has made a demand for an
unspecified amount of damages, as well as for an injunction prohibiting the
Company's use of the Inteliant mark. Based on information from its trademark
counsel, the Company believes that it has valid substantive and equitable
defenses to the lawsuit, including that the Inteliant mark is phonetically
dissimilar to Interliant, the use of the Inteliant mark does not infringe upon
the Plaintiff's mark, and its use is not confusing or likely to cause confusion.
Notwithstanding the Company's belief, the outcome of any litigation, including
this action, is not certain. If Plaintiff were to prevail in the action, the
Company would be required to stop the use of the Inteliant mark and to possibly
pay damages. The Company does not believe that the cost of changing the mark or
the amount of any damages would have a material adverse impact on the Company's
financial condition or results of operations.
There is no other 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.
Note 5. Equity Transactions
During the thirty-nine weeks ended October 3, 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 142,000
shares of common stock to certain employees during the thirty-nine weeks ended
October 3, 1999.
Note 6. 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 credit 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
2.0%. 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 October 3, 1999, the Company had $22.0 million in long-term
borrowings outstanding ($13.0 million at 6.97% and $9.0 million at 7.38%). The
9
<PAGE>
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 October 3, 1999, $11.8 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 October 3, 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 with a balance of approximately $0.7
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 payee.
Note 7. Segment Reporting
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.
Information concerning continuing operations by operating segment for
each of the thirteen and thirty-nine week periods ended October 3, 1999 and
September 27, 1998 is as follows (in 000's):
Segment Service Revenues & Operating Profit
(Unaudited)
<TABLE>
<CAPTION>
Thirteen Weeks Ended Thirty-nine Weeks Ended
-------------------- -----------------------
October 3, 1999 September 27, 1998 October 3, 1999 September 27, 1998
--------------- ------------------ --------------- ------------------
<S> <C> <C> <C> <C>
Revenues
Commercial $ 72,697 $ 65,805 $ 199,772 $ 183,669
IT 26,028 21,580 75,415 56,289
--------------------------------- -----------------------------------
$ 98,725 $ 87,385 $ 275,187 $ 239,958
================================= ===================================
Operating Profit
Commercial $ 4,098 $ 4,003 $ 7,487 $ 10,155
IT 1,935 2,400 5,134 6,343
Other (unallocated) (847) (562) (2,530) (1,489
--------------------------------- -----------------------------------
$ 5,186 $ 5,841 $ 10,091 $ 15,009
================================= ===================================
Segment Assets
October 3, 1999 January 3, 1999
--------------- ---------------
Identifiable Assets (Unaudited)
Commercial $ 97,179 $ 97,339
IT 103,646 82,552
Other (unallocated) 3,731 3,018
-------------------------------------------
$ 204,556 $ 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 both
temporary and permanent clerical, industrial, light-industrial, engineering, and
professional services. The IT segment provides staffing (both temporary and
permanent), 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 Thirty-nine Weeks Ended
===========================================================
Consolidated October 3 September27 October 3 September27
1999 1998 1999 1998
-----------------------------------------------------------
<S> <C> <C> <C> <C>
Service revenues 100.0% 100.0% 100.0% 100.0%
Direct cost of services 76.8 76.9 76.4 77.0
-----------------------------------------------------------
Gross profit 23.2 23.1 23.6 23.0
-----------------------------------------------------------
Operating expenses:
Selling, general and administrative expenses 16.5 15.3 18.5 15.6
Intangibles amortization 1.4 1.1 1.5 1.1
-----------------------------------------------------------
Total operating expenses 17.9 16.4 20.0 16.7
-----------------------------------------------------------
Operating income 5.3% 6.7% 3.6% 6.3&
===========================================================
Commercial Staffing Segment
Service revenues 100.0% 100.0% 100.0% 100.0%
Direct cost of services 78.9 79.4 79.0 79.3
-----------------------------------------------------------
Gross profit 21.1 20.6 21.0 20.7
-----------------------------------------------------------
Operating expenses:
Selling, general and administrative expenses 14.6 13.9 16.3 14.5
intangible amortization 0.9 0.6 0.9 0.6
-----------------------------------------------------------
Total operating expenses 15.5 14.5 17.2 15.1
-----------------------------------------------------------
Operating income 5.6% 6.1% 3.8% 5.6%
===========================================================
IT Segment
Service revenues 100.0% 100.0% 100.0% 100.0%
Direct cost of services 70.8 69.1 69.4 69.4
-----------------------------------------------------------
Gross profit 29.2 30.9 30.6 30.6
-----------------------------------------------------------
Operating expenses:
Selling, general and administrative expenses 18.9 17.0 20.9 16.8
Intangible amortization 2.9 2.7 2.9 2.6
-----------------------------------------------------------
Total operating expenses 21.8 19.7 23.8 19.4
-----------------------------------------------------------
Operating income 7.4% 11.2% 6.8% 11.2%
===========================================================
</TABLE>
11
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Consolidated
Service Revenues: Service revenues for the thirteen weeks ended October 3, 1999
were million, an increase of million, or , compared to sales of million for the
thirteen weeks ended September 27, 1998. Of the million increase, $2.1 million
was contributed by businesses acquired that do not have a comparable operating
period to the prior year period, and $9.2 million was from internal growth
(including new offices offset by office closures). For the thirty-nine weeks
ended October 3, 1999, service revenues were million, an increase of million or
, compared to sales of million for the thirty-nine weeks ended September 27,
1998. The increase in sales was attributable to $19.6 million in sales
contributed by businesses acquired that do not have a comparable operating
period to the prior year period, while $15.6 million was from internal growth
(including new offices offset by office closures).
Gross Profit: In accordance with industry practice, during the thirty-nine weeks
ended October 3, 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
amounts reclassified for the thirteen and thirty-nine week periods ended
September 27, 1998 were approximately $0.3 and $0.6 million, respectively.
Gross profit for the thirteen weeks ended October 3, 1999 and September 27, 1998
was million and million, respectively, an increase of million or . For the
thirteen weeks ended October 3, 1999 and September 27, 1998, gross profit margin
was 23.2% and 23.1%, respectively. For the thirty-nine weeks ended October 3,
1999 gross profit increased million, or , to million from million for the
thirty-nine weeks ended September 27, 1998. For the thirty-nine weeks ended
October 3, 1999 gross profit margin was 23.6% compared to 23.0% for the
thirty-nine weeks ended September 27, 1998. The margin improvement over the
comparable periods of last year is primarily a result of increased pricing due
to a Company-wide price-management program implemented by management.
Operating Expenses: Total operating expenses, as a percentage of revenues, for
the thirteen weeks ended October 3, 1999 increased to 17.9% from 16.4% for the
thirteen weeks ended September 27, 1998. For the thirty-nine weeks ended October
3, 1999, total operating expenses, as a percentage of revenues, were 20.0%
compared to 16.7% for the thirty-nine weeks ended September 27, 1998. The change
was due primarily to operating expenses of acquired companies which have higher
operating cost structures than the remainder of the Company's operations,
increased amortization expense from acquisitions and earnouts, and an increase
in the Company's credit losses during the first half of the year.
Operating Income: Operating income decreased approximately million, or , to
million, for the thirteen weeks ended October 3, 1999, from million for the
thirteen weeks ended September 27, 1998. Operating margin, as a percentage of
revenues, was 5.3% for the thirteen weeks ended October 3, 1999, compared to
6.7% for the thirteen weeks ended September 27, 1998. For the thirty-nine weeks
ended October 3, 1999 operating income was million, a decrease of approximately
million, or , from million for the thirty-nine weeks ended September 27, 1998.
Operating margin, as a percentage of revenues, for the thirty-nine week period
ended October 3, 1999 was 3.6% compared to 6.3% for the thirty-nine week period
ended September 27, 1998. 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 for the
thirteen weeks ended October 3, 1999 was , compared to for the thirteen weeks
ended September 27, 1998. The increase in the combined tax rate was due
primarily to fewer government-sponsored tax credits earned compared to the
thirteen weeks ended September 27, 1998, as well as an increase in
non-deductible amortization relating to certain acquisitions. For the
thirty-nine weeks ended October 3, 1999, the effective combined federal and
state income tax rate was compared to for the thirty-nine weeks ended September
27, 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 and increased
operations in states which assess higher state tax rates.
12
<PAGE>
Commercial Staffing Segment
Service Revenues: Substantially all of the Company's commercial staffing service
revenues are generated from the time worked by the Company's 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 the customer agrees to
hire a candidate supplied by the Company. Service revenues for the commercial
staffing segment increased by million, or , to million for the thirteen weeks
ended October 3, 1999, compared to million for the thirteen weeks ended
September 27, 1998. Of the million increase, $2.1 million was attributable to
offices acquired that do not have a comparable operating period to the prior
year, and $4.8 million was from internal growth (including new offices offset by
office closures). For the thirty-nine weeks ended October 3, 1999, service
revenues for the commercial staffing segment increased by million, or , to
million compared to million for the thirty-nine weeks ended September 27, 1998.
The million increase was attributable primarily to internal growth of $5.8
million and $10.3 million contributed by businesses acquired that do not have a
comparable operating period to the prior year.
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 21.1% for the thirteen
weeks ended October 3, 1999, compared to 20.6% for the thirteen weeks ended
September 27, 1998. For the thirty-nine weeks ended October 3, 1999 and
September 27, 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 Company's acquisitions as well as increases relating to the margin
improvement programs initiated by management.
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 were14.6% for the thirteen weeks ended October 3, 1999,
compared to 13.9% for the thirteen weeks ended September 27, 1998. The increase
was due primarily to an increased operating cost structure related to operations
of acquired businesses; additionally, the Company realized increased
depreciation costs associated with its information systems upgrade. Operating
expenses, excluding intangibles amortization, as a percentage of service
revenues were16.3% for the thirty-nine weeks ended October 3, 1999, compared to
14.5% for the thirty-nine weeks ended September 27, 1998. The increase was
attributable to the operations of acquired businesses with higher operating cost
structures than the remainder of the Company's operations, an increase in credit
losses experienced in the first half of the year, and an increase in
depreciation.
Intangibles amortization as a percentage of service revenues was 0.9%
and 0.6% for the thirteen weeks ended October 3, 1999 and September 27, 1998,
respectively. For the thirty-nine weeks ended October 3, 1999 and September 27,
1998, intangibles amortization, as a percentage of service revenues, was 0.9%
and 0.6%, respectively. The increase was due primarily to increased acquisitions
and earnouts for 1998 and 1999.
Operating Income: Operating margin for the thirteen weeks ended October 3, 1999
was 5.6%, compared to 6.1% for the thirteen weeks ended September 27, 1998.
Operating margin for the thirty-nine weeks ended October 3, 1999 was 3.8%,
compared to 5.6% for the thirty-nine weeks ended September 27, 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 million, or , to million for the thirteen weeks ended October 3, 1999,
from million for the thirteen weeks ended September 27, 1998. The increase was
attributable to internal growth of $4.4 million. For the thirty-nine weeks ended
October 3, 1999, IT service revenues amounted to million, an increase of
13
<PAGE>
million, or , from million for the thirty-nine weeks ended September 27, 1998.
The increase was due in part to the operation of acquired businesses, which
accounted for approximately $9.3 million. Internal growth (including new offices
offset by office closures) accounted for approximately $9.8 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 for
the thirteen weeks ended October 3, 1999 was 29.2%, compared to 30.9% for the
thirteen weeks ended September 27, 1998. The decrease in gross profit is
primarily a result of additional employee benefits as well as increased costs
associated with contractor labor. Gross profit margin was 30.6%, for the
thirty-nine weeks ended October 3, 1999 and September 27, 1998.
Operating Expenses: Operating expenses, excluding intangibles amortization, as a
percentage of service revenues were 18.9% and 17.0% for the thirteen weeks ended
October 3, 1999 and September 27, 1998, respectively. The increase for the
thirteen weeks ended October 3, 1999 was due primarily to an increase in
operating cost structure due to acquisitions. Operating expenses, excluding
intangibles amortization, as a percentage of service revenues were20.9% and
16.8% for the thirty-nine weeks ended October 3, 1999 and September 27, 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 was2.9% for the
thirteen weeks ended October 3, 1999 and 2.7% for the thirteen weeks ended
September 27, 1998. For the thirty-nine weeks ended October 3, 1999 and
September 27, 1998, intangibles amortization was2.9% and 2.6%, respectively. The
change was due primarily to increased IT acquisitions and earnouts for 1999 and
1998.
Operating Income: Operating margin was 7.4% for the thirteen weeks ended October
3, 1999, compared to 11.2% for the thirteen weeks ended September 27, 1998.
Operating margin for the thirty-nine weeks ended October 3, 1999 was 6.8%
compared to operating margin of 11.2% for the thirty-nine weeks ended September
27, 1998. The decrease in operating income was due primarily to the increase in
operating expenses.
Liquidity and Capital Resources
For the thirty-nine weeks ended October 3, 1999 net cash provided by
operating activities was million, compared to million for the thirty-nine weeks
ended September 27, 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 and other accrued liabilities.
The Company's investing activities for the thirty-nine weeks ended
October 3, 1999 used $27.1 million, compared to $56.7 million for the
thirty-nine weeks ended September 27, 1998. The Company's investing activities
used approximately $3.7 million to purchase property and equipment, and
approximately $25.0 million for acquisition costs and earnouts during the
thirty-nine weeks ended October 3, 1999. In September 1999, the Company sold
certain fixed assets for $1.6 million.
The Company's financing activities provided net proceeds of million,
primarily from borrowings against the Company's revolving credit facility
compared to million for the thirty-nine weeks ended September 27, 1998. 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 (8.25%
at October 3, 1999). Long-term borrowings bear interest at LIBOR plus an
"applicable margin" (currently 2.0%) dependent on certain financial ratios
(total rate of 7.38% at October 3, 1999). As of October 3, 1999, $11.8 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.
14
<PAGE>
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 systems being
designed to recognize the year portion of a date as two rather than four digits,
which means that a year coded "00" is 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. Testing of the Company`s information
system for its primary commercial staffing operations is principally completed
and is believed to be Y2K compliant. The Company has implemented new financial
system software that has been warranted by the developer to be Y2K compliant;
furthermore, the Company is performing independent verification of the Y2K
compatibility of the financial systems, such verification will continue through
the end of the year and beyond. Additionally, testing of the Company's
information systems of its Inteliant subsidiary and certain other independent
systems is, for the most part, completed. 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 has verified through
applicable vendors that peripheral equipment such as telephone and voicemail
systems, faxes, copiers, and HVAC units and thermostats are Y2K compliant. Where
recommended, the systems have been upgraded. The Company believes that its
program for assessing imbedded chip technology will be completed by the end of
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's contingency plan, in the event of a critical systems
failure due to Y2K issues, has been developed. Management and the Company's Y2K
internal task force are currently evaluating the plan for adequacy.
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.
15
<PAGE>
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, which are not purely historical,
are forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Such statements encompass the Company's beliefs,
expectations, hopes or intentions regarding future events. Words such as
"expects," "intends," "believes," "anticipates," "likely" and other words of
similar meaning also identify forward-looking statements. All forward-looking
statements included in this release are made as of the date hereof and are based
on information available to the Company as of such date. The Company assumes no
obligation to update any forward-looking statement. 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
ability to attract and retain skilled employees needed to implement the
Company's business plan and meet customer needs, the Company's ability to
successfully implement its operating model, the Company's acquisition efforts
and its ability to integrate the operations of acquired businesses, economic
fluctuations, existing and emerging competition, the outcome of pending or
threatened litigation, unanticipated effects of year 2000 problems, and changes
in demands for the Company's services. Risk factors, cautionary statements and
other conditions, including economic, competitive, governmental, and technology
factors, which could cause actual results to differ from the Company's current
expectations are discussed in the Company's Annual Report on Form 10-K and other
reports filed with 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 October 3,
1999, the Company's outstanding borrowings on its credit facility were $22.0
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 October 3, 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.
In September 1999, Interliant, Inc. ("Plaintiff") commenced an action
in the United States District Court for the Southern District of Texas, Houston
Division, against the Company and its wholly owned subsidiary, Inteliant
Corporation. The lawsuit alleges, among other things, that the Company's use of
the "Inteliant" mark infringes upon Plaintiff's mark, "Interliant." In addition
to the federal trademark infringement claims, Plaintiff alleges unfair
competition based on the Company's use of the Inteliant mark, common law
infringement and dilution. In the Complaint, Plaintiff has made a demand for an
unspecified amount of damages, as well as for an injunction prohibiting the
Company's use of the Inteliant mark. Based on information from its trademark
counsel, the Company believes that it has valid substantive and equitable
defenses to the lawsuit, including that the Inteliant mark is phonetically
dissimilar to Interliant, the use of the Inteliant mark does not infringe upon
the Plaintiff's mark, and its use is not confusing or likely to cause confusion.
Notwithstanding the Company's belief, the outcome of any litigation, including
this action, is not certain. If Plaintiff were to prevail in the action, the
Company would be required to stop the use of the Inteliant mark and to possibly
pay damages. The Company does not believe that the cost of changing the mark or
the amount of any damages would have a material adverse impact on the Company's
financial condition or results of operations.
There is no other 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.
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: November 16, 1999 /s/ JoAnn W. Wagner
-------------------
JoAnn W. Wagner
Chairman, President and
Chief Executive Officer
Dated: November 16, 1999 /s/ Gary B. Crook
-----------------
Gary B. Crook
Executive Vice President and
Chief Financial Officer
18
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