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 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 August 8, 2000
--------------------- -----------------------------
Common Stock, $0.01 par value 12,691,398
1
<PAGE>
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
As of July 2, 2000 and January 2, 2000 3
Condensed Consolidated Statements of Operations
For the Thirteen and Twenty Six Weeks Ended
July 2, 2000 and July 4, 1999 5
Condensed Consolidated Statements of Cash Flows
For the Twenty Six Weeks Ended July 2, 2000
and July 4, 1999 6
Notes to Condensed Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations 12
Item 3. Qualitative and Quantitative Disclosures About Market Risk 17
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
2
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
SOS STAFFING SERVICES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
(in thousands)
July 2, 2000 January 2, 2000
--------- ---------
(Unaudited)
CURRENT ASSETS
<S> <C> <C>
Cash and cash equivalents $ 920 $ 2,577
Accounts receivable, less allowances of
$2,239 and $1,606, respectively 52,781 50,070
Current portion of workers' compensation deposit 239 600
Prepaid expenses and other 1,632 973
Deferred income tax asset 4,552 3,666
Income tax receivable 244 676
--------- ---------
Total current assets 60,368 58,562
--------- ---------
PROPERTY AND EQUIPMENT, at cost
Computer equipment 8,231 6,806
Office equipment 4,717 4,520
Leasehold improvements and other 1,919 1,967
--------- ---------
14,867 13,293
Less accumulated depreciation and amortization (6,765) (5,454)
--------- ---------
Total property and equipment, net 8,102 7,839
--------- ---------
OTHER ASSETS
Workers' compensation deposit, less current portion 106 106
Intangible assets, less accumulated amortization
of $13,782 and $10,959, respectively 132,077 131,995
Deposits and other assets 3,283 2,122
--------- ---------
Total other assets 135,466 134,223
--------- ---------
Total assets $ 203,936 $ 200,624
========= =========
</TABLE>
The accompanying notes to condensed consolidated financial
statements are an integral part of these condensed
consolidated balance sheets.
3
<PAGE>
SOS STAFFING SERVICES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
(in thousands, except per share data)
<TABLE>
<CAPTION>
July 2, 2000 January 2, 2000
-------- --------
(Unaudited)
CURRENT LIABILITIES
<S> <C> <C>
Accounts payable $ 1,899 $ 2,521
Accrued payroll costs 10,006 7,213
Current portion of workers' compensation reserve 4,669 4,223
Accrued liabilities 7,929 5,912
Accrued acquisition costs and earnouts 250 310
Line of credit borrowings - short term 587 --
Current portion of notes payable 420 414
-------- --------
Total current liabilities 25,760 20,593
-------- --------
LONG-TERM LIABILITIES
Notes payable, less current portion 53,093 55,273
Workers' compensation reserve, less current portion 1,060 973
Deferred income tax liability 3,245 2,923
Deferred compensation liabilities 891 776
-------- --------
Total long-term liabilities 58,289 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 28,067 28,266
-------- --------
Total shareholders' equity
-------- --------
Total liabilities and shareholders' equity $203,936 $200,624
======== ========
</TABLE>
The accompanying notes to condensed consolidated financial
statements are an integral part of these condensed
consolidated balance sheets.
4
<PAGE>
SOS STAFFING SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
(in thousands, except per share data)
Thirteen Weeks Ended Twenty Six Weeks Ended
July 2, July 4, July 2, July 4,
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
SERVICE REVENUES $ 94,603 $ 92,419 $ 83,566 $ 76,462
DIRECT COST OF SERVICES 73,482 70,041 41,920 34,315
-------- -------- -------- --------
Gross profit 21,121 22,378 41,646 42,147
-------- -------- -------- --------
OPERATING EXPENSES:
Selling, general and administrative 18,379 17,437 36,896 34,612
Intangible amortization 1,430 1,347 2,865 2,630
-------- -------- -------- --------
Total operating expenses 19,809 18,784 39,761 37,242
-------- -------- -------- --------
INCOME FROM OPERATIONS 1,312 3,594 1,885 4,905
-------- -------- -------- --------
OTHER INCOME (EXPENSE):
Interest expense (1,025) (1,000) (2,119) (1,964)
Interest income 28 29 85 77
Other, net (84) 27 (94) 51
-------- -------- -------- --------
Total, net (1,081) (944) (2,128) (1,836)
-------- -------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES 231 2,650 (243) 3,069
INCOME TAX BENEFIT (PROVISION) (150) (1,047) 44 (1,123)
-------- -------- -------- --------
NET INCOME (LOSS) $ 81 $ 1,603 $ (199) $ 1,946
======== ======== ======== ========
NET INCOME (LOSS) PER COMMON SHARE:
Basic $ 0.01 $ 0.13 $ (0.02) $ 0.15
Diluted 0.01 0.13 (0.02) 0.15
WEIGHTED AVERAGE COMMON SHARES:
Basic 12,691 12,691 12,691 12,691
Diluted 12,691 12,691 12,691 12,732
</TABLE>
Theaccompanying notes to condensed consolidated
financial statements are an integral part of these
condensed consolidated statements.
5
<PAGE>
SOS STAFFING SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Twenty Six Weeks Ended
July 20 July 4,
2000 1999
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (199) $ 1,946
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation and amortization 4,279 3,672
Deferred income taxes (564) (550)
Gain on disposition of assets (7) --
Changes in operating assets and liabilities:
Accounts receivable, net (2,712) (5,000)
Workers' compensation deposit 361 (138)
Prepaid expenses and other (659) (344)
Deposits and other assets 204 47
Accounts payable (622) 228
Accrued payroll costs 2,816 759
Workers' compensation reserve 533 1,322
Accrued liabilities 2,102 539
Income taxes payable/receivable 432 790
-------- --------
Net cash provided by operating activities 5,964 3,271
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for acquisitions of businesses -- (32)
Cash paid for equity investment in common stock (1,250) --
Purchases of property and equipment (1,680) (2,898)
Payments of acquisition earnouts (3,104) (19,504)
-------- --------
Net cash used in investing activities $ $(22,434)
-------- --------
The accompanying notes to condensed consolidated financial
statements are an integral part of these condensed
consolidated statements.
6
<PAGE>
SOS STAFFING SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Unaudited)
(in thousands)
Twenty Six Weeks Ended
July 2, July 4
2000 1999,
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of employee stock options $ -- $ 22
Proceeds from credit facility 11,587 18,850
Payments on credit facility (13,174) (4,154)
-------- --------
Net cash provided by (used in) financing activities (1,587) 14,718
-------- --------
NET DECREASE IN CASH
AND CASH EQUIVALENTS (1,657) (4,445)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 2,577 5,315
-------- --------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 920 $ 870
======== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 1,938 $ 1,772
Income taxes 84 431
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 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 on Form 10-K/A.
The results of operations for the interim periods presented 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 (loss) 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 July 2, 2000 Thirteen Weeks Ended July 4, 1999
------------------------------------- ---------------------------------------
Per Share Per Share
Net Income Shares Amount Net Income Shares Amount
------------------------------------- ---------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS $ 81 12,691 $ 0.01 $ 1,603 12,691 $ 0.13
Effect of stock options -- --
--------- -------- ----------- -----
Diluted EPS $ 81 12,691 $ 0.01 $ 1,603 12,691 $ 0.13
========= ======== =========== =====
Twenty Six Weeks Ended July 2, 2000 Twenty Six Weeks Ended July 4, 1999
------------------------------------- ----------------------------------------
Per Share Per Share
Net Loss Shares Amount Net Income Shares Amount
------------------------------------- ----------------------------------------
Basic EPS $ (199) 12,691 $ (0.02) $ 1,946 12,691 $ 0.15
Effect of stock options -- 41
---------- ------ ------------ -------
Diluted EPS $ (199) 12,691 $ (0.02) $ 1,946 12,732 $ 0.15
========== ====== ============ =======
</TABLE>
At the end of the 13-week period ended July 2, 2000, there were
outstanding options to purchase approximately 1,222,000 shares of common stock
that were not included in the computation of Diluted EPS because the exercise
prices of the options were greater than the average market price of the common
shares. At the end of the 26-week period ended July 2, 2000 there were
outstanding options to purchase approximately 1,222,000 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 13 and 26 weeks ended July 4,
1999, there were outstanding options to purchase approximately 1,192,000 and
682,000 shares of common stock, respectively, that were not included in the
computation of Diluted EPS because the exercise prices of the options were
greater than the average market price of the common shares.
8
<PAGE>
Note 3. Acquisitions
Acquisition Costs and Earnouts - During the 13 and 26 weeks ended July
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 26 weeks ended July
2, 2000 the Company paid acquisition earnouts totaling approximately $3.1
million. As of July 2, 2000 accrued acquisition costs and earnouts totaled $0.3
million.
Note 4. Intangible Assets
Intangible assets consist of the following amounts as of July 2, 2000
and January 2, 2000 (in thousands):
<TABLE>
<CAPTION>
July 2, 2000 January 2, 2000
-------------------- --------------------
<S> <C> <C>
Goodwill $ 120,480 $ 117,530
Trademarks and tradenames 20,943 20,943
Non-compete agreements 2,984 2,984
Other intangible assets 1,452 1,497
-------------------- --------------------
Total 145,859 142,954
Less:
Accumulated amortization goodwill (8,993) (6,998)
Accumulated amortization trademarks and tradenames (1,843) (1,494)
Accumulated amortization non-competes (2,084) (1,739)
Accumulated amortization other (862) (728)
-------------------- --------------------
Net intangible assets $ 132,077 $ 131,995
==================== ====================
</TABLE>
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
Inteliant 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.
9
<PAGE>
Note 6. Credit Facilities and Notes Payable
The Company has an unsecured revolving credit facility with certain
banks that provides for maximum borrowings of $40.0 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 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 2, 2000, the Company had approximately $0.6 million in
short-term borrowings and $18.0 million in long-term borrowings outstanding
($9.0 million at 8.25% and $9.0 million at 8.22%). 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 July 2, 2000, $14.3
million was available for borrowings or additional letters of credit.
The Company also has outstanding $35 million of senior unsecured notes
consisting of two tranches. The first tranche 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 tranche
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 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 $0.5
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
services 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 13 and 26-week periods ended July 2, 2000 and July 4, 1999 is as follows (in
thousands):
10
<PAGE>
<TABLE>
<CAPTION>
Segment Service Revenues & Operating Profit
Thirteen Weeks Ended Twenty Six Weeks Ended
July 2, July 4, July 2, July 4,
2000 1999 2000 1999
--------- --------- --------- ---------
Service Revenues (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Commercial $ 72,159 $ 66,351 $ 139,195 $ 127,075
IT 22,444 27,935 44,385 52,300
Other -- (1,867) (14) (2,913)
--------- --------- --------- ---------
$ 94,603 $ 92,419 $ 183,566 $ 176,462
--------- --------- --------- ---------
Income (Loss) from Operations
Commercial $ 3,318 $ 2,434 $ 5,569 $ 3,677
IT (853) 2,035 (1,312) 3,199
Other (unallocated) (1,153) (875) (2,372) (1,971)
--------- --------- --------- ---------
$ 1,312 $ 3,594 $ 1,885 $ 4,905
--------- --------- --------- ---------
</TABLE>
Segment Assets
July 2, 2000 January 2, 2000
---------------- ------------------
Identifiable Assets (Unaudited)
Commercial $ 93,841 $ 98,520
IT 104,953 97,055
Other (unallocated) 5,142 5,049
---------------- ------------------
$ 203,936 $ 200,624
---------------- ------------------
Note 8. Other Matters
Inteliant 2000 Stock Option Plan - In February 2000, the Company, as
the sole shareholder of Inteliant, approved the Inteliant 2000 Stock Option Plan
(the "Plan"). The Plan, which is administered by Inteliant's board of directors,
allows for the grant of incentive or non-qualified options to purchase a maximum
of 10,000,000 shares of Inteliant common stock. The intent of the Company is to
use the Plan to attract and retain skilled IT professionals needed to implement
the Company's business plan. Inteliant's board of directors establishes the
number and type of options to be granted, the vesting schedule of such grants
and other conditions of each grant. As of July 2, 2000 the company had granted
approximately 4.5 million options to purchase common shares of Inteliant. For
the 13 and 26-week period ended July 2, 2000 the options granted under the Plan
were not included in the computation of the Company's Diluted EPS because the
exercise prices of the options were greater than the average market price of the
common shares.
11
<PAGE>
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction
with the condensed consolidated financial statements of the Company and notes
thereto appearing elsewhere in this report. The Company's fiscal year consists
of a 52-or 53-week period ending on the Sunday closest to December 31.
Business Segments
The Company's operations are grouped into two identifiable operating
segments: commercial staffing and information technology ("IT"). The commercial
staffing segment provides staffing services 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 Twenty Six Weeks Ended
---------------------------------- ----------------------------------
Consolidated July 2, 2000 July 4, 1999 July 2, 2000 July 4, 1999
----------------- ---------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Service revenues 100.0% 100.0% 100.0% 100.0%
Direct cost of services 77.7 75.8 77.3 76.1
----------------- ---------------- ---------------- -----------------
Gross profit 22.3 24.2 22.7 23.9
----------------- ---------------- ---------------- -----------------
Operating expenses:
Selling, general and administrative expenses 19.4 18.9 20.1 19.6
Intangible amortization 1.5 1.5 1.6 1.5
----------------- ---------------- ---------------- -----------------
Total operating expenses 20.9 20.4 21.7 21.1
----------------- ---------------- ---------------- -----------------
Income from operations 1.4% 3.8% 1.0% 2.8%
----------------- ---------------- ---------------- -----------------
Commercial Staffing Segment
Service revenues 100.0% 100.0% 100.0% 100.0%
Direct cost of services 79.1 78.6 78.9 79.0
----------------- ---------------- ---------------- -----------------
Gross profit 20.9 21.4 21.1 21.0
----------------- ---------------- ---------------- -----------------
Operating expenses:
Selling, general and administrative expenses 15.3 16.7 16.2 17.1
Intangible amortization 0.9 0.9 0.9 1.0
----------------- ---------------- ---------------- -----------------
Total operating expenses 16.2 17.6 17.1 18.1
----------------- ---------------- ---------------- -----------------
Income from operations 4.7% 3.8% 4.0% 2.9%
----------------- ---------------- ---------------- -----------------
IT Segment
Service revenues 100.0% 100.0% 100.0% 100.0%
Direct cost of services 72.9 70.6 72.4 70.4
----------------- ---------------- ---------------- -----------------
Gross profit 27.1 29.4 27.6 29.6
----------------- ---------------- ---------------- -----------------
Operating expenses:
Selling, general and administrative expenses 27.5 19.5 27.1 20.8
Intangible amortization 3.4 2.6 3.5 2.7
----------------- ---------------- ---------------- -----------------
Total operating expenses 30.9 22.1 30.6 23.5
----------------- ---------------- ---------------- -----------------
Income (loss) from operations (3.8%) 7.3% (3.0%) 6.1%
----------------- ---------------- ---------------- -----------------
</TABLE>
12
<PAGE>
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 13 weeks ended July 2, 2000
increased $2.2 million, or 2.4%, to $94.6 million, compared to sales of $92.4
million for the 13 weeks ended July 4, 1999. Of the $2.2 million increase, $3.9
million was from comparable offices offset by a loss of revenues from offices
that have been closed subsequent to the 13 weeks ended July 4, 1999 (net of new
office openings) of $1.7 million. Service revenues for the 26 weeks ended July
2, 2000 increased approximately $7.1 million, or 4.0%, to $183.6 million,
compared to service revenues of $176.5 million for the 26 weeks ended July 4,
1999. Of the $7.1 million increase, $10.7 million was from comparable offices
offset by a loss of revenues from offices that have been closed subsequent to
the 26 weeks ended July 4, 1999 (net of new office openings) of $3.6 million.
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.
Gross profit margin for the 13 weeks ended July 2, 2000 and July 4,
1999 was 22.3% and 24.2%, respectively, and for the 26 weeks ended July 2, 2000
and July 4, 1999, gross profit margin was 22.7% and 23.9%, respectively. The
margin decline from the comparable periods of the prior year were primarily a
result of lower IT-segment margins attributable to a reduction in higher-margin
outsourcing business as well as increased costs associated with retaining
existing personnel to implement the practice-based solutions focus of the IT
group.
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 13 weeks
ended July 2, 2000 were 20.9%, compared to 20.4% for the 13 weeks ended July 4,
1999. For the 26 weeks ended July 2, 2000 operating expenses were 21.7%,
compared to 21.1% for the 26 weeks ended July 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 for the 13 weeks ended
July 2, 2000, was approximately $1.3 million, a decrease of approximately $2.3
million, from $3.6 million for the 13 weeks ended July 4, 1999. For the 26 weeks
ended July 2, 2000, income from operations was approximately $1.9 million, a
decrease of approximately $3.0 million, from $4.9 million for the 26 weeks ended
July 4, 1999. Operating margin, as a percentage of revenues, was 1.4% and 1.0%
for the 13 and 26 weeks ended July 2, 2000, respectively, compared to 3.8% and
2.8% for the 13 and 26 weeks ended July 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: The effective combined federal and state income tax rate
was 64.9% for the 13 weeks ended July 2, 2000, compared to 39.5% for the 13
weeks ended July 4, 1999. The increase in the effective tax rate was due
primarily to the non-deductible portion of intangible amortization as a
percentage of income coupled with a reduction in government sponsored tax
credits. During the 26 weeks ended July 2, 2000 the Company recognized a tax
benefit of approximately 18.1%. The tax benefit was due primarily to the net
loss incurred by the Company, coupled with government sponsored tax credits.
13
<PAGE>
Commercial Staffing Segment
Service Revenues: Service revenues generated from temporary assignments
are recognized as income at the time service is provided, service revenues
generated from permanent placement services are recognized at the time the
candidate begins working for the customer. Service revenues for the commercial
staffing segment increased by $5.8 million, or 8.8%, to $72.2 million for the 13
weeks ended July 2, 2000, compared to $66.4 million for the 13 weeks ended July
4, 1999. Of the $5.8 million increase, $4.8 million was from internal growth in
comparable offices, while $1.0 million was contributed by new offices (net of
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. For the 26 weeks ended July 2, 2000, service revenues
for the commercial staffing segment increased by $12.1 million, or 9.5%, to
$139.2 million, compared to $127.1 million for the 26 weeks ended July 4, 1999.
Of the $12.1 million increase, $10.2 million was from internal growth in
comparable offices, while an additional $1.9 million was contributed by new
offices (net of office closures).
Gross Profit: Gross profit margin was 20.9% for the 13 weeks ended July
2, 2000, compared to 21.4% for the 13 weeks ended July 4, 1999. The decrease in
gross profit margin was due primarily to a reduction in higher margin permanent
placement business coupled with an increase in lower margin sales to national
accounts. For the 26-week period ended July 2, 2000, gross profit margin was
21.1%, compared to 21.0% for the 26 weeks ended July 4, 1999.
Operating Expenses: Operating expenses, excluding intangible
amortization, as a percentage of service revenues were 15.3 % for the 13 weeks
ended July 2, 2000, compared to 16.7% for the 13 weeks ended July 4, 1999. For
the 26-week period ended July 2, 2000, operating expenses, excluding intangible
amortization, as a percentage of service revenues were 16.2%, compared to 17.1%
for the 26 weeks ended July 4, 1999. The decrease in operating expenses was due
primarily to the decrease in the amount of credit losses taken, and improved
operating efficiencies created by maintaining fixed costs, such as facility
costs, in association with increased sales.
Intangible amortization as a percentage of service revenues was 0.9%
for the 13 weeks ended July 2, 2000 and July 4, 1999. For the 26 weeks ended
July 2, 2000 and July 4, 1999, intangible amortization as a percentage of sales,
was 0.9% and 1.0%, respectively.
Income from Operations: Income from operations for the 13 weeks ended
July 2, 2000 was 4.7%, compared to 3.8% for the 13 weeks ended July 4, 1999.
Income from operations for the 26 weeks ended July 2, 2000 was 4.0%, compared to
2.9% for the 26 weeks ended July 4, 1999. The increase in income from operations
was due largely to maintaining selling, general and administrative expenses and
intangible amortization at essentially constant levels.
IT Segment
Service Revenues: Service revenues for the 13 weeks ended July 2, 2000
were approximately $22.4 million, a decrease of $5.5 million, or 19.7%, from
$27.9 million for the 13 weeks ended July 4, 1999. Approximately $2.7 million of
the decrease was attributable to offices that have been closed subsequent to the
13 weeks ended July 4, 1999, while the remaining decrease was primarily
attributable to a reduction in revenues associated with Y2K legacy work and a
slower than expected development of the segment's consulting and outsourcing
practices. For the 26 weeks ended July 2, 2000, service revenues were
approximately $44.4 million, a decrease of $7.9 million, or 15.1%, from $52.3
million for the 26 weeks ended July 4, 1999. Approximately $5.5 million of the
decrease was attributable to offices that have been closed subsequent to the 26
weeks ended July 4, 1999, while the remaining decrease was primarily
attributable to a reduction in revenues associated with Y2K legacy work and a
slower than expected development of the segment's consulting and outsourcing
practices.
Gross Profit: Gross profit margin for the 13 weeks ended July 2, 2000
was 27.1%, compared to 29.4% for the 13 weeks ended July 4, 1999. Gross profit
margin for the 26 weeks ended July 2, 2000 was 27.6%, compared to 29.6% for the
26 weeks ended July 4, 1999. The decrease in gross profit was primarily a result
of a reduction in higher margin consulting and outsourcing business, as well as
increased costs associated with retaining existing personnel to implement the
practice-based solutions.
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Operating Expenses: Operating expenses, excluding intangible
amortization, as a percentage of service revenues were 27.5 % and 19.5% for the
13 weeks ended July 2, 2000 and July 4, 1999, respectively. For the 26 weeks
ended July 2, 2000, operating expenses, excluding intangible amortization, as a
percentage of sales were 27.1%, compared to 20.8% for the 26 weeks ended July 4,
1999. The increase in operating expenses, as a percentage of sales, 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 3.4 % for the
13 weeks ended July 2, 2000 and 2.6% for the 13 weeks ended July 4, 1999.
Intangible amortization as a percentage of revenues was 3.5% for the 26 weeks
ended July 2, 2000 and 2.7% for the 26 weeks ended July 4, 1999. The change was
due primarily to increased goodwill related to payments on acquisition earnouts
coupled with the decrease in service revenues.
Income (Loss) from Operations: For the 13 weeks ended July 2, 2000,
operating loss as a percentage of sales was (3.8%), compared to an operating
margin of 7.3% for the 13 weeks ended July 4, 1999. Operating loss, as a
percentage of sales was (3.0%) for the 26 weeks ended July 2, 2000, compared to
an operating margin of 6.1% for the 26 weeks ended July 4, 1999. The decrease in
operating results was due primarily to the reduction in gross profit coupled
with the increase in operating expenses.
Liquidity and Capital Resources
For the 26 weeks ended July 2, 2000 net cash provided by operating
activities was $6.0 million, compared to $3.3 million for the 26 weeks ended
July 4, 1999. The change in operating cash flow was primarily a result of a net
increase in cash provided from certain working capital accounts.
The Company's investing activities for the 26 weeks ended July 2, 2000
used approximately $6.0 million, compared to $22.4 million for the 26 weeks
ended July 4, 1999. During the 26 weeks ended July 2, 2000, the Company's
investing activities used approximately $1.7 million to purchase property and
equipment, approximately $3.1 million for payments on acquisition earnouts, and
approximately $1.2 million for equity investment in common stock. By comparison,
the Company used approximately $2.9 million to purchase property and equipment,
and approximately $19.5 million in acquisition costs and earnouts during the 26
weeks ended July 4, 1999.
For the 26 weeks ended July 2, 2000, the Company's financing activities
used approximately $1.6 million, primarily for payments on the Company's
revolving credit facility, compared to cash provided of $14.7 million for the 26
weeks ended July 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 (9.50% at July 2, 2000). Long-term borrowings bear
interest at LIBOR plus an "applicable margin" (currently 1.6%) dependent on
certain financial ratios (average rate of 8.24% at July 2, 2000). As of July 2,
2000, $14.3 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.
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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 report 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 implement
successfully its operating model, the Company's ability to integrate the
operations of acquired businesses, the Company's ability to continue
successfully to develop the Company's IT 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.
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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 2,
2000, the Company's outstanding borrowings on its credit facility were $18.0
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 July 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 July 2,
2000, the carrying amount of $35.0 million is reflected in the condensed
consolidated balance sheets. The estimated fair value of the obligation on the
unsecured notes, using a discount rate of 9.5% over the expected maturities of
the obligations, is approximately $31.5 million.
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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 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 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 4. Submission of Matters to a Vote of Security Holders
On May 17, 2000, the Company held its Annual Meeting of Shareholders
(the "Annual Meeting"). At the Annual Meeting, the shareholders of the Company
elected three directors of the Company, R. Thayne Robson, Thomas K. Sansom and
Richard J. Tripp, each of whom was elected to serve until the 2003 annual
meeting of the Company's shareholders. With respect to the election of
directors, there were 10,391,780 votes cast in favor of the election of Mr.
Robson, 10,394,815 votes cast in favor of the election of Mr. Sansom and
10,390,815 votes cast in favor of the election of Mr. Tripp.
In addition to the election of Messrs. Robson, Sansom, and Tripp,
Samuel C. Freitag, 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 Stanley R. deWaal and Randolph K. Rolf continue to serve as
directors of the Company, with terms expiring at the Company's 2002 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 December 31, 2000. The number of votes cast in favor
of the proposal was 10,485,640, the number of votes opposed was 14,789 and the
number of abstentions and broker non-votes was 4,660.
Item 6. Exhibits and Reports on Form 8-K.
a) Exhibit 27 - Financial Data Schedule, filed herewith.
b) Exhibit 99.1 - Stock purchase agreement by and between BioLynx.Com,
Inc. and SOS Staffing Services, Inc., filed herewith.
c) Exhibit 99.2 - Amended and Restated Marketing Representative Agreement
by and between BioLynx.Com, Inc. and SOS Staffing Services, Inc., filed
herewith.
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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 16, 2000 /s/ JoAnn W. Wagner
-------------------
JoAnn W. Wagner
Chairman, President and
Chief Executive Officer
Dated: August 16, 2000 /s/ Brad L. Stewart
-------------------
Brad L. Stewart
Executive Vice President and
Chief Financial Officer
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