SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the quarterly period ended April 2, 2000
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 April 30, 2000
--------------------- -----------------------------
Common Stock, $0.01 par value 12,691,398
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 April 2, 2000 and January 2, 2000 3
Condensed Consolidated Statements of Operations
For the Thirteen Weeks Ended April 2, 2000 and April 4, 1999 5
Condensed Consolidated Statements of Cash Flows
For the Thirteen Weeks Ended April 2, 2000 and April 4, 1999 6
Notes to Condensed Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations 11
Item 3. Qualitative and Quantitative Disclosures About Market Risk 15
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
</TABLE>
2
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
SOS STAFFING SERVICES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
(in thousands)
April 2, 2000 January 2, 2000
------------------- -------------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 413 $ 2,577
Accounts receivable, less allowances of
$2,108 and $1,606, respectively 48,183 50,070
Current portion of workers' compensation deposit 239 600
Prepaid expenses and other 1,422 973
Deferred income tax asset 4,132 3,666
Income tax receivable 666 676
------------------- -------------------
Total current assets 55,055 58,562
------------------- -------------------
PROPERTY AND EQUIPMENT, at cost
Computer equipment 7,637 6,806
Office equipment 4,601 4,520
Leasehold improvements and other 1,974 1,967
------------------- -------------------
14,212 13,293
Less accumulated depreciation and amortization (6,078) (5,454)
------------------- -------------------
Total property and equipment, net 8,134 7,839
------------------- -------------------
OTHER ASSETS
Workers' compensation deposit, less current portion 106 106
Intangible assets, less accumulated amortization
of $12,351 and $10,959, respectively 131,345 131,995
Deposits and other assets 2,129 2,122
------------------- -------------------
Total other assets 133,580 134,223
------------------- -------------------
Total assets $ 196,769 $ 200,624
=================== ===================
</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>
<CAPTION>
SOS STAFFING SERVICES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
(in thousands, except per share data)
April 2, 2000 January 2, 2000
------------------- -------------------
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable $ 2,707 $ 2,521
Accrued payroll costs 7,862 7,213
Current portion of workers' compensation reserve 4,268 4,223
Accrued liabilities 4,763 5,912
Accrued acquisition costs and earnouts 800 310
Current portion of notes payable 422 414
------------------- -------------------
Total current liabilities 20,822 20,593
------------------- -------------------
LONG-TERM LIABILITIES
Notes payable, less current portion 51,183 55,273
Workers' compensation reserve, less current portion 1,033 973
Deferred income tax liability 3,099 2,923
Deferred compensation liabilities 827 776
------------------- -------------------
Total long-term liabilities 56,142 59,945
------------------- -------------------
COMMITMENTS AND CONTINGENCIES
(Note 5)
SHAREHOLDERS' EQUITY
Common stock $0.01 par value 20,000 shares authorized;
12,691 shares issued and outstanding 127 127
Additional paid-in capital 91,693 91,693
Retained earnings 27,985 28,266
------------------- -------------------
Total shareholders' equity 119,805 120,086
------------------- -------------------
Total liabilities and shareholders' equity $ 196,769 $ 200,624
==================== ===================
</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 OPERATIONS
(Unaudited)
(in thousands, except per share data)
Thirteen Weeks Ended
April 2, 2000 April 4, 1999
-------------------- ----------------------
<S> <C> <C>
SERVICE REVENUES $ 88,963 $ 84,043
DIRECT COST OF SERVICES 68,438 64,274
-------------------- ----------------------
Gross profit 20,525 19,769
-------------------- ----------------------
OPERATING EXPENSES:
Selling, general and administrative 18,518 17,176
Intangible amortization 1,435 1,282
-------------------- ----------------------
Total operating expenses 19,953 18,458
-------------------- ----------------------
INCOME FROM OPERATIONS 572 1,311
-------------------- ----------------------
OTHER INCOME (EXPENSE):
Interest expense (1,112) (964)
Interest income 57 49
Other, net 8 22
-------------------- ----------------------
Total, net (1,047) (893)
-------------------- ----------------------
INCOME (LOSS) BEFORE INCOME TAXES (475) 418
INCOME TAX BENEFIT (PROVISION) 194 (75)
-------------------- ----------------------
NET INCOME (LOSS) $ (281) $ 343
==================== ======================
NET INCOME (LOSS) PER COMMON SHARE:
Basic $ (0.02) $ 0.03
Diluted (0.02) 0.03
WEIGHTED AVERAGE COMMON SHARES:
Basic 12,691 12,690
Diluted 12,691 12,808
</TABLE>
The accompanying notes to condensed consolidated financial statements
are an integral part of these condensed consolidated statements.
5
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<TABLE>
<CAPTION>
SOS STAFFING SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Thirteen Weeks Ended
April 2, 2000 April 4, 1999
----------------------- -----------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income (loss) $ (281) $ 343
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation and amortization 2,113 1,789
Deferred income taxes (290) (452)
Gain on disposition of assets (1) --
Changes in operating assets and liabilities:
Accounts receivable, net 1,886 (642)
Workers' compensation deposit 361 (139)
Prepaid expenses and other (449) (84)
Deposits and other assets 43 (181)
Accounts payable 187 (1,836)
Accrued payroll costs 672 (13)
Workers' compensation reserve 105 809
Accrued liabilities (1,071) (98)
Income taxes payable/receivable 10 (160)
----------------------- -----------------------
Net cash provided by (used in) operating activities 3,285 (664)
----------------------- -----------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for acquisitions of businesses -- (32)
Purchases of property and equipment (975) (1,406)
Payments of acquisition costs and earnouts (392) (14,280)
----------------------- -----------------------
Net cash used in investing activities $ (1,367) $ (15,718)
----------------------- -----------------------
</TABLE>
The accompanying notes to condensed consolidated financialstatements
are an integral part of these condensed consolidated statements.
6
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<TABLE>
<CAPTION>
SOS STAFFING SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Unaudited)
(in thousands)
Thirteen Weeks Ended
April 2, 2000 April 4, 1999
----------------------- -----------------------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of employee stock options $ -- $ 22
Proceeds from long-term borrowings -- 16,500
Payments on long-term borrowings (4,082) (4,076)
----------------------- -----------------------
Net cash provided by (used in) financing activities (4,082) 12,446
----------------------- -----------------------
NET DECREASE IN CASH
AND CASH EQUIVALENTS (2,164) (3,936)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 2,577 5,315
----------------------- -----------------------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 413 $ 1,379
======================= =======================
SUPPLEMENTAL CASH FLOW INFORMATION Cash paid during the period for:
Interest $ 1,642 $ 1,450
Income taxes 86 235
</TABLE>
The accompanying notes to condensed consolidated financial statements
are an integral part of these condensed consolidated statements.
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 accounting
principles generally accepted in the United States, 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.
During the second quarter of 1999, in accordance with industry
practice, the Company reclassified 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 for the
thirteen-week period ended April 4, 1999 was approximately $0.6 million. 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 (Loss) Per Common Share
Basic net income (loss) 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 thousands
except per share amounts):
<TABLE>
<CAPTION>
Thirteen Weeks Ended April 2, 2000 Thirteen Weeks Ended April 4, 1999
-------------------------------------------------------------------------------------------
Per Share Per Share
Net (Loss) Shares Amount Net Income Shares Amount
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS $ (281) 12,691 $ (0.02) $ 343 12,690 $ 0.03
Effect of Stock Options -- 118
---------------------------- --------------------------------
Diluted EPS $ (281) 12,691 $ (0.02) $ 343 12,808 $ 0.03
---------------------------- --------------------------------
</TABLE>
At the end of the thirteen weeks ended April 2, 2000 there were
outstanding options to purchase approximately 1,338,000 shares of common stock
that were not included in the computation of Diluted EPS because of the
Company's net loss position. At the end of the thirteen weeks ended April 4,
1999, there were outstanding options to purchase approximately 592,000 shares of
common stock that were not included in the computation of Diluted EPS because
the options' exercise prices were greater than the average market price of the
common shares.
Note 3. Acquisitions
Acquisition Costs and Earnouts - During the thirteen weeks ended April
2, 2000 the Company made no material acquisitions. 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 thirteen weeks ended
April 2, 2000 the Company paid acquisition costs and earnouts totaling
approximately million. As of April 2, 2000 accrued acquisition costs and
earnouts totaled million.
8
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Note 4. Intangible Assets
Intangible assets consist of the following amounts as of April 2, 2000
and January 2, 2000 (in thousands):
April 2, 2000 January 2, 2000
-------------------- ------------------
Goodwill $ 118,317 $ 117,530
Trademarks and tradenames 20,943 20,943
Non-compete agreements 2,984 2,984
Other intangible assets 1,452 1,497
-------------------- ------------------
Total 143,696 142,954
Less: Accumulated amortization (12,351) (10,959)
-------------------- ------------------
$ 131,345 $ 131,995
-------------------- ------------------
Goodwill and trademarks and tradenames are amortized, using the
straight-line method, over 30 years; non-compete agreements and other intangible
assets are generally being amortized using the straight-line method over three
to six years.
Note 5. 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
proceedings. The Company maintains insurance in such amounts and with such
coverage and deductibles as management believes to be reasonable and prudent.
The principal risks covered by insurance include workers' compensation, personal
injury, bodily injury, property damage, errors and omissions, fidelity 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 has alleged 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
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 possibly to
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 litigation that the Company currently
anticipates will have a material adverse effect on the Company's financial
condition or results of operations.
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.
9
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At April 2, 2000, the Company had $16.0 million in long-term borrowings
outstanding ($9.0 million at 8.17% and $7.0 million at 8.13%). The Company also
had letters of credit of $7.1 million outstanding for purposes of securing its
workers' compensation premium obligation. The aggregate amount of such letters
of credit reduces the borrowing availability on the line of credit. At April 2,
2000, million was available for borrowings or additional letters of credit.
The Company also has outstanding $35 million of senior unsecured notes
consisting of two pieces. The first piece consists of senior unsecured notes in
the aggregate amount of $30 million with a final ten-year maturity and an
average maturity of seven years at a 6.95% coupon rate. The second piece
consists of senior unsecured notes in the aggregate amount of $5 million with a
coupon rate of 6.72% due in a single payment in 2003.
The Company's unsecured revolving credit facility and its senior
unsecured note agreement contain certain restrictive covenants including certain
debt ratios, maintenance of a minimum net worth and restrictions on the sale of
capital assets. As of April 2, 2000, 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 $0.6
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 equal quarterly
installments through September 2001.
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 e-business solutions (including
customer relationship management, enterprise resource planning, and Internet
technology), technology solutions, outsourcing, management consulting, and
staffing services.
Information concerning continuing operations by operating segment for
the thirteen week periods ended April 2, 2000 and April 4, 1999 is as follows
(in thousands):
Segment Service Revenues & Operating Profit
Thirteen Weeks Ended
---------------------------------------------
--------------------- ---------------------
April 2, 2000 April 4, 1999
--------------------- ---------------------
Service Revenues (Unaudited)
Commercial $ 67,036 $ 60,724
IT 21,941 24,352
Other (14) (1,033)
---------------------------------------------
$ 88,963 $ 84,043
=============================================
Income from Operations
Commercial $ 2,252 $ 1,237
IT (459) 1,164
Other (unallocated) (1,221) (1,090)
---------------------------------------------
$ 572 $ 1,311
=============================================
Segment Assets
April 2, 2000 January 2, 2000
--------------------- ---------------------
Identifiable Assets (Unaudited)
Commercial $ 91,761 $ 98,520
IT 99,865 97,055
Other (unallocated) 5,143 5,049
--------------------- ---------------------
$ 196,769 $ 200,624
===================== =====================
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 e-business solutions (including customer
relationship management, enterprise resource planning, and Internet technology),
technology solutions, outsourcing, management consulting, and staffing services.
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
----------------------------------
<S> <C> <C>
Consolidated April 2, 2000 April 4, 1999
----------------- ----------------
Service revenues 100.0% 100.0%
Direct cost of services 76.9 76.5
----------------- ----------------
Gross profit 23.1 23.5
----------------- ----------------
Operating expenses:
Selling, general and administrative expenses 20.8 20.4
Intangible amortization 1.6 1.5
----------------- ----------------
Total operating expenses 22.4 21.9
----------------- ----------------
Income from operations 0.7% 1.6%
================= ================
Commercial Staffing Segment
Service revenues 100.0% 100.0%
Direct cost of services 78.6 79.5
----------------- ----------------
Gross profit 21.4 20.5
----------------- ----------------
Operating expenses:
Selling, general and administrative expenses 17.1 17.5
Intangible amortization 1.0 1.0
----------------- ----------------
Total operating expenses 18.1 18.5
----------------- ----------------
Income from operations 3.3% 2.0%
================= ================
IT Segment
Service revenues 100.0% 100.0%
Direct cost of services 71.8 68.7
----------------- ----------------
Gross profit 28.2 31.3
----------------- ----------------
Operating expenses:
Selling, general and administrative expenses 26.8 23.4
Intangible amortization 3.5 2.9
----------------- ----------------
Total operating expenses 30.3 26.3
----------------- ----------------
Income (loss) from operations (2.1%) 5.0%
================= ================
</TABLE>
11
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Consolidated
Service Revenues: Substantially all of the Company's service revenues
are generated from the time worked by the Company's consulting and temporary
staffing employees on customer engagements and from permanent placement of
personnel with customers. Service revenues for the thirteen weeks ended April 2,
2000 were $89.0 million, an increase of $5.0 million, or 6.0%, compared to sales
of $84.0 million for the thirteen weeks ended April 4, 1999. Of the $5.0 million
increase, $4.7 million was from comparable offices while an additional $0.3
million was contributed by new offices offset by office closures. The increase
in revenue was generally consistent with an increase in both average bill rates
and hours billed from the commercial staffing segment, offset by a reduction in
outsourcing and staffing revenues from the IT segment.
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 consultants, temporary
staffing employees and permanent placement counselors; costs related to outside
consultants and independent contractors utilized by the Company; and other
direct costs associated with any consulting engagement. In accordance with
industry practice, commissions related to permanent placement revenues are
classified as a component of direct cost of services rather than as selling,
general and administrative expenses. The amount of commission reclassified for
the thirteen week period ended April 4, 1999 was approximately $0.6 million.
Gross profit for the thirteen weeks ended April 2, 2000 and April 4,
1999 was $20.5 million and $19.8 million, respectively, an increase of $0.7
million or 3.5%. For the thirteen weeks ended April 2, 2000 and April 4, 1999,
gross profit margin was 23.1% and 23.5%, respectively. The margin decline from
the comparable period of the prior year was primarily a result of lower
IT-segment margins attributable to a reduction in higher-margin outsourcing
business as well as increased costs associated with retraining existing
personnel and attracting new consultants to implement the practice-based
solutions focus of the group. The decrease in IT-segment margins was partially
offset by an increase in commercial staffing margins, due to an implementation
of a price-management program.
Operating Expenses: Operating expenses include, among other things,
staff compensation, rent, recruitment and retention of consultants and temporary
staffing employees, costs associated with opening new offices, depreciation,
intangible amortization and advertising.
Total operating expenses, as a percentage of revenues, for the thirteen
weeks ended April 2, 2000 increased to 22.4% from 21.9% for the thirteen weeks
ended April 4, 1999. The change was due primarily to increased costs associated
with recruiting, training, and retaining the necessary resources to implement
the solutions-based practices focus of the IT-segment, coupled with increased
amortization expense from earnouts paid on acquisitions.
Income from Operations: Income from operations decreased approximately
$0.7 million to $0.6 million, for the thirteen weeks ended April 2, 2000, from
$1.3 million for the thirteen weeks ended April 4, 1999. Operating margin, as a
percentage of revenues, was 0.7% for the thirteen weeks ended April 2, 2000,
compared to 1.6% for the thirteen weeks ended April 4, 1999. The decrease in
operating margin was due primarily to the decrease in gross margins coupled with
the increase in operating expenses related to the Company's IT segment.
Income Taxes: During the thirteen weeks ended April 2, 2000 the Company
recognized a tax benefit of approximately 40.8%. The tax benefit was due
primarily to the net loss incurred by the Company, coupled with government
sponsored tax credits.
Commercial Staffing Segment
Service Revenues: 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 $6.3 million, or 10.4%, to
$67.0 million for the thirteen weeks ended April 2, 2000, compared to $60.7
million for the thirteen weeks ended April 4, 1999. Of the $6.3 million
increase, $5.3 million was from internal growth in comparable offices, while
$1.0 million was contributed by new offices offset by office closures. The
increase in service revenues from comparable offices was generally consistent
with an increase in both the average bill rate and the number of hours billed.
12
<PAGE>
Gross Profit: Gross profit margin was 21.4% for the thirteen weeks
ended April 2, 2000, compared to 20.5% for the thirteen weeks ended April 4,
1999. The increase in gross profit margin was primarily related to an increase
in the average bill rate and other margin improvement programs initiated by
management.
Operating Expenses: Operating expenses, excluding intangible amortization, as a
percentage of service revenues were 17.1 % for the thirteen weeks ended April 2,
2000, compared to 17.5% for the thirteen weeks ended April 4, 1999. The decrease
in operating expenses was due primarily to operating efficiencies created by
maintaining fixed costs, such as facility costs, in addition to decreasing the
amount of credit losses taken.
Intangible amortization as a percentage of service revenues was 1.0% for the
thirteen weeks ended April 2, 2000 and April 4, 1999, respectively.
Income from Operations: Operating margin for the thirteen weeks ended April 2,
2000 was 3.3%, compared to 2.0% for the thirteen weeks ended April 4, 1999. The
increase in operating margin was due largely to the increase in gross profit
margin, while selling, general and administrative expenses and intangible
amortization remained essentially constant.
IT Segment
Service Revenues: Service revenues decreased $2.5 million, or 10.2%, to
$21.9 million for the thirteen weeks ended April 2, 2000, from $24.4 million for
the thirteen weeks ended April 4, 1999. Approximately, $0.8 million of the
decrease was attributable to offices that have been closed subsequent to the
thirteen weeks ended April 4, 1999, while the remaining decrease was primarily
attributable to a reduction in revenues associated with Y2K legacy work and a
slower than expected recovery during the current quarter.
Gross Profit: Gross profit margin for the thirteen weeks ended April 2,
2000 was 28.2%, compared to 31.3% for the thirteen weeks ended April 4, 1999.
The decrease in gross profit was primarily a result of a reduction in higher
margin outsourcing business, as well as increased costs associated with
retraining existing personnel and attracting new consultants to implement the
practice-based solutions focus of the group.
Operating Expenses: Operating expenses, excluding intangible
amortization, as a percentage of service revenues were 26.8 % and 23.4% for the
thirteen weeks ended April 2, 2000 and April 4, 1999, respectively. The increase
for the thirteen weeks ended April 2, 2000 was due primarily to increased costs
related to continued implementation of common back-office systems throughout the
segment, additional marketing costs to promote the solutions-based practices
focus of the segment and staffing costs associated with recruiting, training,
and retaining the necessary resources to implement the operating model.
Intangible amortization as a percentage of revenues was 3.5 % for the
thirteen weeks ended April 2, 2000 and 2.9% for the thirteen weeks ended April
4, 1999. The change was due primarily to increased goodwill related to payments
on acquisition earnouts.
Income (Loss) from Operations: Operating loss as a percentage of sales
was (2.1%) for the thirteen weeks ended April 2, 2000, compared to an operating
margin of 5.0% for the thirteen weeks ended April 4, 1999. The decrease in
Income from Operations was due primarily to the reduction in gross profit
coupled with the increase in operating expenses.
Liquidity and Capital Resources
For the thirteen weeks ended April 2, 2000 net cash provided by
operating activities was $3.3 million, compared to net cashed used of $0.7
million for the thirteen weeks ended April 4, 1999. The change in operating cash
flow was primarily a result of a net increase in cash provided from certain
working capital accounts including accounts receivable, workers' compensation
and other liabilities.
The Company's investing activities for the thirteen weeks ended April
2, 2000 used approximately $1.4 million, compared to $15.7 million for the
thirteen weeks ended April 4, 1999. The Company's investing activities used
approximately $1.0 million to purchase property and equipment, and approximately
$0.4 million for payments on acquisition earnouts during the thirteen weeks
ended April 2, 2000. By comparison, the Company used approximately $1.4 million
to purchase property and equipment, and approximately $14.3 million in
acquisition costs and earnouts during the thirteen weeks ended April 4, 1999.
13
<PAGE>
The Company's financing activities used approximately $4.1 million,
primarily in payments on the Company's revolving credit facility, compared to
cash provided of $12.4 million for the thirteen weeks ended April 4, 1999. 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 (9.00%
at April 2, 2000). Long-term borrowings bear interest at LIBOR plus an
"applicable margin" (currently 2.0%) dependent on certain financial ratios
(average rate of 8.15% at April 2, 2000). As of April 2, 2000, $16.9 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.
Seasonality
The Company's business follows the seasonal trends of its customers'
business. Historically, the commercial staffing segment has experienced lower
revenues in the first quarter with revenues accelerating during the second and
third quarters and then slowing again during the fourth quarter. The IT segment
does not experience the same level of seasonality generally associated with the
commercial staffing segment.
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 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 ability to integrate the operations
of acquired businesses, the Company's ability to successfully continue to
migrate the Company's IT business from legacy staffing to practice based
technology consulting solutions, economic fluctuations, existing and emerging
competition, the outcome of pending or threatened litigation, 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.
14
<PAGE>
Item 3. Qualitative and Quantitative Disclosures About Market Risk
The Company is exposed to interest rate changes primarily in relation
to its revolving credit facility and its senior unsecured notes. At April 2,
2000, the Company's outstanding borrowings on its credit facility were $16.0
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 April 2, 2000, the fair value of the Company's long-term debt is
estimated by discounting expected cash flows at a bank's prime rate. At April 2,
2000, the carrying amount of $35.0 million is reflected in the condensed
consolidated balance sheets. The estimated fair value of the unsecured notes,
using a discount rate of 9.0% over the expected maturities of the obligations,
is approximately $32.1 million.
15
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
In the ordinary course of its business, the Company is periodically
threatened with or named as a defendant in various lawsuits or administrative
proceedings. The Company maintains insurance in such amounts and with such
coverage and deductibles as management believes to be reasonable and prudent.
The principal risks covered by insurance include workers' compensation, personal
injury, bodily injury, property damage, errors and omissions, fidelity 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 has alleged 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
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 possibly to
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 litigation that the Company currently
anticipates will have a material adverse effect on the Company's financial
condition or results of operations.
Item 6. Exhibits and Reports on Form 8-K.
a) Exhibit 27 - Financial Data Schedule, filed herewith.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
SOS STAFFING SERVICES, INC.
Registrant
Dated: May 15, 2000 /s/ JoAnn W. Wagner
-------------------
JoAnn W. Wagner
Chairman, President and
Chief Executive Officer
Dated: May 15, 2000 /s/ Brad L. Stewart
-------------------
Brad L. Stewart
Executive Vice President and
Chief Financial Officer
17
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