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 1, 2001
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 (I.R.S. Employer ID No.)
of incorporation)
1415 South Main Street
Salt Lake City, Utah 84115
(Address of principal executive offices)
(801) 484-4400
(Telephone number)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filings
requirements for the past 90 days.
Yes [X} No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class of Common Stock Outstanding at May 4, 2001
--------------------- --------------------------
Common Stock, $0.01 par value 12,691,398
1
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
As of April 1, 2001 and December 31, 2000.............................3
Condensed Consolidated Statements of Operations
For the 13-week periods Ended April 1, 2001 and April 2, 2000.........5
Condensed Consolidated Statements of Cash Flows
For the 13-week periods Ended April 1, 2001 and April 2, 2000.........6
Notes to Condensed Consolidated Financial Statements...........................8
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations..............................13
Item 3. Qualitative and Quantitative Disclosures About Market Risk.....................18
PART II - OTHER INFORMATION
Item 1. Legal Proceedings..............................................................19
Item 6. Exhibits and Reports on Form 8-K...............................................19
Signatures.............................................................................20
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
SOS STAFFING SERVICES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
(in thousands)
April 1, 2001 December 31, 2000
------------------- ---------------------
(Unaudited)
CURRENT ASSETS
Cash and cash equivalents $ 3,841 $ 1,185
Accounts receivable, less allowances of
$3,413 and $2,916, respectively 29,936 44,488
Current portion of workers' compensation deposit 273 213
Prepaid expenses and other 1,175 1,032
Current portion of notes receivable 3,277 --
Deferred income tax asset 6,017 5,852
Income tax receivable 1,580 8,088
------------------- ---------------------
Total current assets 46,099 60,858
------------------- ---------------------
PROPERTY AND EQUIPMENT, at cost
Computer equipment 5,464 3,935
Office equipment 4,073 4,009
Leasehold improvements and other 1,894 1,834
------------------- ---------------------
11,431 9,778
Less accumulated depreciation and amortization (5,874) (5,456)
------------------- ---------------------
Total property and equipment, net 5,557 4,322
------------------- ---------------------
OTHER ASSETS
Intangible assets, less accumulated amortization
of $15,963 and $14,979, respectively 91,023 92,007
Notes receivable, less current portion -- 1,000
Deposits and other assets 1,721 3,201
------------------- ---------------------
Total other assets 92,744 96,208
------------------- ---------------------
Total assets $ 144,400 $ 161,388
=================== =====================
The accompanying notes to condensed consolidated financial
statements are an integral part of these condensed
consolidated balance sheets
3
SOS STAFFING SERVICES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)
LIABILITIES AND SHAREHOLDERS' EQUITY
(in thousands)
April 1, 2001 December 31, 2000
------------------- ---------------------
(Unaudited)
CURRENT LIABILITIES
Line of credit $ -- $ 9,000
Current portion of notes payable 8,184 8,273
Accounts payable 2,097 2,667
Accrued payroll costs 5,135 10,196
Current portion of workers' compensation reserve 4,488 4,689
Accrued liabilities 4,914 6,021
------------------- ---------------------
Total current liabilities 24,819 40,846
------------------- ---------------------
LONG-TERM LIABILITIES
Notes payable, less current portion 27,000 27,000
Workers' compensation reserve, less current portion 1,019 1,064
Deferred income tax liability 846 652
Deferred compensation liabilities 666 941
------------------- ---------------------
Total long-term liabilities 29,531 29,657
------------------- ---------------------
COMMITMENTS AND CONTINGENCIES
(Notes 5 and 6)
SHAREHOLDERS' EQUITY
Common stock 127 127
Additional paid-in capital 91,693 91,693
Accumulated deficit (1,769) (935)
------------------- ---------------------
Total shareholders' equity 90,050 90,885
------------------- ---------------------
Total liabilities and shareholders' equity $ 144,400 $ 161,388
=================== =====================
The accompanying notes to condensed consolidated financial
statements are an integral part of these condensed
consolidated balance sheets
4
SOS STAFFING SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands)
13 Weeks Ended
April 1, 2001 April 2, 2000
--------------------- ---------------------
SERVICE REVENUES $ 68,702 $ 80,301
DIRECT COST OF SERVICES 54,255 62,086
--------------------- ---------------------
Gross profit 14,447 18,215
--------------------- ---------------------
OPERATING EXPENSES:
Selling, general and administrative 13,043 15,778
Restructuring charges 245 --
Intangible amortization 984 1,079
--------------------- ---------------------
Total operating expenses 14,272 16,857
--------------------- ---------------------
INCOME FROM OPERATIONS 175 1,358
--------------------- ---------------------
OTHER INCOME (EXPENSE):
Interest expense (820) (1,094)
Interest income 120 57
Other, net 8 (10)
--------------------- ---------------------
Total, net (692) (1,047)
--------------------- ---------------------
(LOSS) INCOME BEFORE INCOME TAXES (517) 311
INCOME TAX BENEFIT (PROVISION) 209 (74)
--------------------- ---------------------
(LOSS) INCOME FROM CONTINUING OPERATIONS (308) 237
DISCONTINUED OPERATIONS
Loss from discontinued operations (net of income tax
benefit of $327 and $268, respectively) (526) (518)
--------------------- ---------------------
NET LOSS $ (834) $ (281)
===================== =====================
BASIC AND DILUTED (LOSS) INCOME PER COMMON SHARE:
(Loss) income from continuing operations $ (0.03) $ 0.02
Loss from discontinued operations (0.04) (0.04)
--------------------- ---------------------
Net loss $ (0.07) $ (0.02)
===================== =====================
WEIGHTED AVERAGE COMMON SHARES: 12,691 12,691
The accompanying notes to condensed consolidated financial
statements are an integral part of these condensed
consolidated statements
5
SOS STAFFING SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
13 Weeks Ended
April 1, 2001 April 2, 2000
----------------------- -----------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (834) $ (281)
Adjustments to reconcile net loss
to net cash provided by operating activities:
Depreciation and amortization 1,417 2,113
Deferred income taxes 29 (290)
Loss (gain) on disposition of assets 14 (1)
Changes in operating assets and liabilities:
Accounts receivable, net 14,552 1,886
Workers' compensation deposit (60) 361
Prepaid expenses and other (143) (449)
Deposits and other assets (44) 43
Accounts payable (570) 187
Accrued payroll costs (5,061) 672
Workers' compensation reserve (246) 105
Accrued liabilities (1,046) (1,071)
Income taxes receivable 6,508 10
----------------------- -----------------------
Net cash provided by operating activities 14,516 3,285
----------------------- -----------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Issuance of notes receivable (2,277) --
Purchases of property and equipment (439) (975)
Payments of acquisition costs and earnouts (55) (392)
----------------------- -----------------------
Net cash used in investing activities (2,771) (1,367)
----------------------- -----------------------
The accompanying notes to condensed consolidated financial
statements are an integral part of these condensed
consolidated statements
6
SOS STAFFING SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Unaudited)
(in thousands)
13 Weeks Ended
April 1, 2001 April 2, 2000
----------------------- -----------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term borrowings (9,089) (4,082)
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 2,656 (2,164)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 1,185 2,577
----------------------- -----------------------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 3,841 $ 413
======================= =======================
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid (received) during the period for:
Interest $ 1,456 $ 1,642
Income taxes (7,073) 86
Theaccompanying notes to condensed consolidated financial
statements are an integral part of these condensed
consolidated statements
7
20
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) that, 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.
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. Earnings Per Share
The following is a reconciliation of the numerator and denominator used
to calculate basic and diluted (loss) income from continuing operations per
common share for the periods presented (in thousands except per share amounts):
13 Weeks Ended April 1, 2001 13 Weeks Ended April 2, 2000
-------------------------------------------------------------------------------------------
Loss from Income from
continuing Per Share continuing Per Share
operations Shares Amount operations Shares Amount
-------------------------------------------------------------------------------------------
Basic $ (308) 12,691 $ (0.03) $ 237 12,691 $ 0.02
Effect of Stock Options -- --
---------------------------- --------------------------------
Diluted $ (308) 12,691 $ (0.03) $ 237 12,691 $ 0.02
============================ ================================
At the end of the 13-week period ended April 1, 2001 there were
outstanding options to purchase approximately 940,000 shares of common stock
that were not included in the computation of diluted loss from continuing
operations per common share because of the Company's loss from continuing
operations. At the end of the 13-week period 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 income from continuing
operations per common share because the exercise prices of such options were
greater than the average market price of the common shares.
Note 3. Discontinued Operations
On December 29, 2000, Inteliant, a wholly owned subsidiary of the
Company, sold to Herrick Douglass ("HD") its consulting division and related
tangible and intangible assets. The consulting division sold to HD consisted of
a full suite of information technology consulting, e-business and
telecommunication services, which services were marketed to Fortune 1000,
mid-tier and early stage companies, government agencies and educational
institutions.
Pursuant to the transaction, the Company retained approximately $9.0
million in accounts receivable attributable to the consulting division; as of
April 1, 2001 approximately $6.6 million had been collected. During the 13-week
period ended April 1, 2001, reserves for uncollectible accounts related to the
remaining accounts receivable increased approximately $600,000, to approximately
$1.4 million. The increase reflected a change in the estimate of the realization
of the receivables as a result of the insolvency of one of the primary accounts.
8
20
SOS STAFFING SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Additionally, as part of the sale of the consulting division, the
Company agreed to extend a one year subordinated loan to HD of up to a maximum
of $3.5 million to meet the operating needs of the newly formed business. The
note bears interest at 10% per annum on any outstanding principal and is due and
payable on or before December 31, 2001. At April 1, 2001, the Company had
advanced to HD approximately $3.3 million, which is reflected in the current
asset portion of the balance sheet.
Operating results of the discontinued consulting division for the
13-week period ended April 1, 2001 and the 13-week period ended April 2, 2000
have been classified as discontinued operations in the accompanying consolidated
financial statements as follows (in thousands):
2001 2000
----------------- ----------------
Revenues $ -- $ 8,662
Cost of sales -- 6,352
----------------- ----------------
Gross profit -- 2,310
Operating and other expenses 853 3,096
----------------- ----------------
Loss from discontinued operations before
income tax (853) (786)
Income tax benefit 327 268
----------------- ----------------
Loss from discontinued operations $ (526) $ (518)
----------------- ----------------
Note 4. Intangible Assets
Intangible assets consist of the following amounts as of April 1, 2001
and December 31, 2000 (in thousands):
April 1, 2001 December 31, 2000
-------------------- ----------------------
Goodwill $ 84,365 $ 84,365
Trademarks and tradenames 19,260 19,260
Non-compete agreements 2,507 2,507
Other intangible assets 854 854
-------------------- ----------------------
106,986 106,986
Less:
Accumulated amortization goodwill (11,042) (10,361)
Accumulated amortization trademarks and tradenames
(2,294) (2,135)
Accumulated amortization non-compete agreements
(2,027) (1,956)
Accumulated amortization other intangible assets (600) (527)
-------------------- ----------------------
$ 91,023 $ 92,007
-------------------- ----------------------
Goodwill and trademarks and trade names 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.
There is no pending litigation that the Company currently anticipates
will have a material adverse effect on the Company's financial condition or
results of operations.
9
20
SOS STAFFING SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 6. Credit Facility and Notes Payable
The Company has an unsecured revolving credit facility with certain
banks that provides for maximum borrowings of $30 million. The Credit Agreement,
which provides for any combination of both Floating Rate Advances and Fixed Rate
Advances (as defined in the Credit Agreement), expires on July 1, 2001. Floating
Rate Advances bear interest at a bank's prime rate; at April 1, 2001, such prime
rate was 8.0%. Fixed Rate Advances bear interest at LIBOR plus an applicable
margin, ranging from 1.0% to 2.0%, based upon certain financial ratios; the
current applicable margin is 2.0%. The Credit Agreement contains an annual
commitment fee of three-eighths of one percent on any unused portion, payable
quarterly. At April 1, 2001, the Company had no outstanding borrowings against
the credit facility. As of April 1, 2001, the Company had letters of credit of
$6.7 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 May 9, 2001 $15.5 million was
available for borrowings or additional letters of credit.
The Company has been informed by its lenders under the Credit Agreement
that such lenders are unwilling to renew the credit facility, which is currently
unsecured, upon its expiration on July 1, 2001, unless the Company grants to
such lenders a security interest in its assets, including accounts receivable.
To date, the Company has been unable to secure bank financing through alternate
lenders to fund its operations after July 1, 2001. The Company is currently
considering alternative sources of financing in the event that it is unable to
secure adequate credit facilities. In addition, the Company's existing Note
Purchase Agreement (as described below) with certain lenders contains provisions
that may make alternative financings difficult for the Company to secure. Under
such Note Purchase Agreement, the Company shall not incur, assume or suffer to
exist any Lien upon any of its assets currently or hereafter owned, or upon the
income or profits thereof, other than permitted Liens as defined under the Note
Purchase Agreement. In order to grant a security interest as is likely to be
required by lenders under a credit facility or under an alternative source of
financing, the Company must obtain the consent of the holders of the senior
unsecured notes to a waiver of such covenant of the Note Purchase Agreement. In
the event that the holders of the senior unsecured notes require that the
Company also grant a security interest to such holders as a condition to such
consent, the Company believes that it would have insufficient assets to fully
secure both debt obligations.
Management believes that it will be able to secure adequate financing
prior to the expiration of the current credit facility; however, there can be no
assurance that the Company will be able to obtain such financing. If such
financing is obtained, the Company expects that it may be required to pay higher
interest rates and/or additional fees to secure such financing. Failure by the
Company to secure such financing would have a material adverse effect on the
Company's results of operations and financial condition.
The Company also has outstanding $35 million of senior unsecured notes
consisting of two components. The first component 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 component
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. In connection with the
sale of certain assets, as described in Note 3, the Company entered into an
Amendment to Note Purchase Agreement (the "Amendment") to amend the Note
Purchase Agreement (the "Note Purchase Agreement") dated September 1, 1998 by
and among the Company and certain lenders (the "Lenders"), pursuant to which the
Lenders consented to the asset sale. Under the Amendment, the Company agreed to
amend the Note Purchase Agreement to reduce the minimum Consolidated Net Worth
(as defined in the Note Purchase Agreement) requirement of the Company. As
consideration for the Amendment, the Company agreed to pay the holders of the
notes 50% of: (i) the proceeds of the accounts receivable of approximately $9.0
million, retained in the transaction, of which approximately $6.6 million had
been collected as of April 1, 2001; (ii) contingent payments of approximately
$3.5 million as provided in the purchase agreement concerning the asset sale;
and (iii) estimated tax refunds of approximately $8.0 million, of which
approximately $7.0 million had been received as of April 1, 2001. Under the
Amendment, such prepayments are to be applied to reduce the principal amount of
the last required payments under the Note Purchase Agreement. As of May 9, 2001,
approximately $5.5 million had been paid to the noteholders in accordance with
terms of the Amendment.
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 1, 2001, the Company was in compliance with such
covenants.
10
20
SOS STAFFING SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
In connection with the terms and conditions of an acquisition, the
Company also has a promissory note payable with a balance of approximately $0.2
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 and professional services. The IT segment provides temporary
and contract-to-hire staffing services (including computer programming, system
design, analysis and administration, network and systems management and software
and documentation development).
Information concerning continuing operations by operating segment for
the 13-week periods ended April 1, 2001 and April 2, 2000 is as follows (in
thousands):
Segment Operations (unaudited)
13 Weeks Ended
--------------------- ---------------------
April 1, 2001 April 2, 2000
--------------------- ---------------------
Service Revenues
Commercial $ 58,610 $ 67,036
IT 10,092 13,279
Other -- (14)
---------------------------------------------
$ 68,702 $ 80,301
=============================================
Income from Operations
Commercial $ 1,124 $ 2,252
IT 29 327
Other (unallocated) (978) (1,221)
---------------------------------------------
$ 175 $ 1,358
=============================================
Segment Assets
April 1, 2001 December 31, 2000
--------------------- ---------------------
Identifiable Assets
Commercial $ 83,815 $ 94,901
IT 54,296 60,423
Other (unallocated) 6,289 6,064
--------------------- ---------------------
$ 144,400 $ 161,388
===================== =====================
11
20
SOS STAFFING SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 8. Restructuring Charges
To reduce costs and improve operating efficiencies, the Company is
streamlining its corporate structure and consolidating and/or eliminating branch
offices in under-performing markets. During the 13-week period ended April 1,
2001, the Company recorded a pre-tax restructuring charge of approximately $0.2
million related primarily to the closure or consolidation of eight
under-performing branch offices and the Company's estimate of future lease costs
to be incurred in relation to those offices. The future expected lease payments
are reflected in the condensed consolidated balance sheet as accrued
liabilities. The Company is endeavoring to lessen potential future lease
payments by (i) transferring the lease liability to other tenants, (ii)
subleasing the abandoned facilities or (iii) negotiating discounted buyouts of
the lease contracts. Consequently, the Company's estimates may change based on
its ability to effectively lessen such future lease payments.
Subsequent to April 1, 2001, the Company incurred approximately $0.4
million in additional restructuring charges, primarily severance pay related to
the elimination of a senior level executive position. Additionally, the Company
intends to continue to review strategic alternatives to eliminate additional
costs and improve profitability throughout the remainder of the fiscal year.
Note 9. Non-Cash Transactions
During fiscal 2000, the Company paid approximately $1.2 million for an
investment of 12.5% of the outstanding common stock of BioLynx, Inc.
("BioLynx"), an early stage enterprise that is developing a system of time and
attendance reporting through the Internet. The investment was included as other
long-term assets in the Company's consolidated balance sheet as of December 31,
2000 using the cost method. During the 13-week period ended April 1, 2001, as a
result of a strategic shift in market development by the management of BioLynx,
the Company determined to divest its investment in BioLynx. Accordingly, the
Company was able to negotiate with BioLynx the perpetual royalty-free licensing
rights to the technology (including all proprietary software and related
intellectual property and all source and object codes utilized to develop the
product), for use in conjunction with the Company's systems and as an additional
service to the Company's customers. Management has estimated the technology
value to approximate its previous investment in BioLynx. As such, the investment
was reclassified during the fiscal quarter ended April 1, 2001 from other
long-term assets to property, plant and equipment and is being amortized over
three years.
12
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
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 and professional services. The IT segment provides temporary
and contract-to-hire staffing services (including computer programming, system
design, analysis and administration, network and systems management and software
and documentation development).
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:
13 Weeks Ended
-----------------------------------
Consolidated April 1, 2001 April 2, 2000
----------------- -----------------
Service revenues 100.0% 100.0%
Direct cost of services 79.0 77.3
----------------- -----------------
Gross profit 21.0 22.7
----------------- -----------------
Operating expenses:
Selling, general and administrative expenses 19.0 19.6
Restructuring charges 0.4 --
Intangible amortization 1.4 1.3
----------------- -----------------
Total operating expenses 20.8 20.9
----------------- -----------------
Income from operations 0.2% 1.8%
================= =================
Commercial Staffing Segment
Service revenues 100.0% 100.0%
Direct cost of services 80.3 78.6
----------------- -----------------
Gross profit 19.7 21.4
----------------- -----------------
Operating expenses:
Selling, general and administrative expenses 17.1 17.1
Restructuring charges 0.4 --
Intangible amortization 1.0 1.0
----------------- -----------------
Total operating expenses 18.5 18.1
----------------- -----------------
Income from operations 1.2% 3.3%
================= =================
IT Segment
Service revenues 100.0% 100.0%
Direct cost of services 71.4 70.9
----------------- -----------------
Gross profit 28.6 29.1
----------------- -----------------
Operating expenses:
Selling, general and administrative expenses 24.1 23.6
Intangible amortization 4.2 3.0
----------------- -----------------
Total operating expenses 28.3 26.6
----------------- -----------------
Income from operations 0.3% 2.5%
================= =================
13
Consolidated
Service Revenues: Service revenues for the 13-week period ended April
1, 2001 were $68.7 million, a decrease of $11.6 million, or 14.4%, compared to
revenues of $80.3 million for the 13-week period ended April 2, 2000. The
Company experienced an overall reduction in all revenue categories due primarily
to a general economic slowdown. Additionally, the Company has experienced
significant underperformance in markets servicing predominately IT-oriented
clients and expects to see a continued softening in these markets through the
remainder of the 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 taxes), workers' compensation costs related to staffing employees and
permanent placement counselors and other temporary payroll benefits; costs
related to independent contractors utilized by the Company; and other direct
costs. Gross profit for the 13-week periods ended April 1, 2001 and April 2,
2000 was $14.4 million and $18.2 million, respectively, a decrease of $3.8
million, or 20.7%. For the 13-week periods ended April 1, 2001 and April 2,
2000, gross profit margin was 21.0% and 22.7%, respectively. The margin decline
over the comparable periods was primarily the result of a reduction in higher
margin permanent placement business in the commercial staffing segment as well
as increased pricing competition in the IT segment.
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.
Excluding restructuring costs incurred in the commercial staffing
segment, total operating expenses, as a percentage of revenues, for the 13-week
period ended April 1, 2001 decreased slightly to 20.4% from Error! Reference
source not found.% for the 13-week period ended April 2, 2000. Restructuring
charges added approximately 0.4% in additional operating expenses. The
restructuring charges were the result of the closure of eight unprofitable
offices and related costs, including additional lease costs incurred with
terminating the Company's contractual lease obligations on those facilities.
Income from Operations: Income from operations for the 13-week period
ended April 1, 2001 was $0.2 million, a decrease of $1.2 million, or 85.7%,
compared to income from operations of $1.4 million for the 13-week period ended
April 2, 2000. Operating margin, as a percentage of revenues, was 0.2% for the
13-week period ended April 1, 2001, compared to 1.8% for the 13-week period
ended April 2, 2000. The decrease in operating margin was due primarily to the
decrease in the Company's gross margins.
Other Expense: Other expense decreased approximately 34.0%, from $1.0
million for the 13-week period ended April 2, 2000 to $0.7 million for the
13-week period ended April 1, 2001. The decrease was due primarily to a decline
in interest expense as a result of an overall reduction in the amounts
outstanding on the Company's line of credit.
Income Taxes: During the 13-week period ended April 1, 2001, the
Company recognized a tax benefit of 40.4% on loss from continuing operations,
compared to a tax provision of 23.8% for the 13-week period ended April 2, 2000.
The tax benefit was due primarily to the net loss incurred by the Company.
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 were $58.6 million for the 13-week period
ended April 1, 2001, compared to $67.0 million for the 13-week period ended
April 2, 2000, a decrease of $8.4 million, or 12.6%. The decrease in revenues
was generally consistent with the general economic slowdown.
Gross Profit: Gross profit margin was 19.7% for the 13-week period
ended April 1, 2001, compared to 21.4% for the 13-week period ended April 2,
2000. The decrease in gross profit margin was primarily related to a reduction
in higher margin permanent placement business coupled with increased pricing
competition for staffing services due to the general economic slowdown.
14
Operating Expenses: Selling, general and administrative expenses as a
percentage of service revenues were 17.1 % for the 13-week periods ended April
1, 2001 and April 2, 2000, and intangible amortization as a percentage of
service revenues was 1.0% for the 13-week periods ended April 1, 2001 and April
2, 2000.
During the 13-week period ended April 1, 2001, the Company began
evaluating under-performing offices and markets in an effort to eliminate
additional operating expenses. The Company recognized approximately $0.2 million
in restructuring charges associated with the closure of eight offices in the
first quarter of fiscal 2001. The charges were primarily related to additional
lease costs incurred with exiting the Company's contractual lease obligations on
those facilities. Subsequent to April 1, 2001, the Company incurred
approximately $0.4 million in additional restructuring charges, primarily
severance pay, related to the elimination of a senior level executive position.
The Company anticipates that it will continue to evaluate under-performing
operations and make additional changes as needed.
Income from Operations: Operating margin for the 13-week period ended
April 1, 2001 was 1.2%, compared to 3.3% for the 13-week period ended April 2,
2000. The decrease in operating margin was due largely to the decrease in gross
profit margin, coupled with the increase in operating expenses associated with
restructuring charges.
IT Segment
Service Revenues: Service revenues for the 13-week period ended April
1, 2001 were $10.1 million, a decrease of $3.2 million, or 24.0%, compared to
service revenues of $13.3 million for the 13-week period ended April 2, 2000.
The decrease in revenues was generally consistent with the general economic
slowdown and more specifically with the sharper downturn in the IT sector of the
economy.
Gross Profit: Gross profit margin for the 13-week period ended April 1,
2001 was 28.6%, compared to 29.1% for the 13-week period ended April 2, 2000.
The decrease in gross profit was due primarily to increased price competition
for IT services as a result of the sharp decline in the IT sector of the
economy.
Operating Expenses: Operating expenses, excluding intangible
amortization, as a percentage of service revenues were 24.1 % and 23.6% for the
13-week periods ended April 1, 2001 and April 2, 2000, respectively. The
increase was due primarily to increased credit losses due to the downturn in the
IT sector.
Intangible amortization as a percentage of revenues was 4.2 % for the
13-week period ended April 1, 2001 and 3.0% for the 13-week period ended April
2, 2000. The change was due primarily to increased goodwill related to payments
on acquisition earnouts.
Income from Operations: Operating margin was 0.3% for the 13-week
period ended April 1, 2001, compared to an operating margin of 2.5% for the
13-week period ended April 2, 2000. The decrease in income from operations was
due primarily to the reduction in gross profit.
Liquidity and Capital Resources
For the 13-week period ended April 1, 2001, net cash provided by
operating activities was $14.5 million, compared to $3.3 million for the 13-week
period ended April 2, 2000. The change in operating cash flow was primarily a
result of a net increase in cash provided from certain working capital
components, primarily accounts receivable and income tax receivable.
The Company's investing activities for the 13-week period ended April
1, 2001 used approximately $2.8 million, compared to $1.4 million for the
13-week period ended April 2, 2000. The Company's investing activities used
approximately $0.4 million to purchase property and equipment and approximately
$2.3 million for notes receivable issued during the 13-week period ended April
1, 2001. By comparison, the Company used approximately $1.0 million to purchase
property and equipment and approximately $0.4 million in acquisition costs and
earnouts during the 13-week period ended April 2, 2000.
The Company's financing activities for the 13-week period ended April
1, 2001 used approximately $9.1 million, compared to $4.1 million for the
13-week period ended April 2, 2000, primarily for payments on the Company's
revolving credit facility.
15
On December 29, 2000 the Company entered into a Second Amendment to
Amended and Restated Credit Agreement (the "Second Amendment") with certain
lenders (the "Lenders") under its Amended and Restated Credit Agreement dated as
of July 27, 1998 (the "Credit Agreement"). Pursuant to the Second Amendment, the
Lenders agreed to amend certain financial covenants in the Credit Agreement. The
modified covenants included a decrease in the amount of Net Worth (as defined in
the Credit Agreement) required of the Company. The Second Amendment also
provided for a reduction in the amount available for borrowing under the Credit
Agreement from $40 million to $30 million. The agreement establishing the credit
facility, which provides for any combination of both Floating Rate Advances and
Fixed Rate Advances (as defined in the Credit Agreement), expires in July 2001.
Floating Rate Advances bear interest at a bank's prime rate and Fixed Rate
Advances bear interest at LIBOR plus an applicable margin, ranging from 1.0% to
2.0%, based upon certain financial ratios; the current applicable margin is
2.0%. The agreement contains an annual commitment fee of three-eighths of one
percent on the unused portion, payable quarterly. As of May 9, 2001, $15.5
million was available for borrowings or additional letters of credit.
The Company has been informed by its lenders under the Credit Agreement
that such lenders are unwilling to renew the credit facility, which is currently
unsecured, upon its expiration on July 1, 2001, unless the Company grants to
such lenders a security interest in its assets, including accounts receivable.
To date, the Company has been unable to secure bank financing through alternate
lenders to fund its operations after July 1, 2001. The Company is currently
considering alternative sources of financing in the event that it is unable to
secure adequate credit facilities. In addition, the Company's existing Note
Purchase Agreement (as described below) with certain lenders contains provisions
that may make alternative financings difficult for the Company to secure. Under
such Note Purchase Agreement, the Company shall not incur, assume or suffer to
exist any Lien upon any of its assets currently or hereafter owned, or upon the
income or profits thereof, other than permitted Liens as defined under the Note
Purchase Agreement. In order to grant a security interest as is likely to be
required by lenders under a credit facility or under an alternative source of
financing, the Company must obtain the consent of the holders of the senior
unsecured notes to a waiver of such covenant of the Note Purchase Agreement. In
the event that the holders of the senior unsecured notes require that the
Company also grant a security interest to such holders as a condition to such
consent, the Company believes that it would have insufficient assets to fully
secure both debt obligations.
Management believes that it will be able to secure adequate financing
prior to the expiration of the current credit facility; however, there can be no
assurance that the Company will be able to obtain such financing. If such
financing is obtained, the Company expects that it may be required to pay higher
interest rates and/or additional fees to secure such financing. Failure by the
Company to secure such financing would have a material adverse effect on the
Company's results of operations and financial condition.
The Company also has outstanding $35 million of senior unsecured notes
consisting of two components. The first component 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 component
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. In connection with the
sale of the IT consulting division, as described in Note 3 to the financial
statements contained herein, the Company entered into an Amendment to Note
Purchase Agreement (the "Amendment") to amend the Note Purchase Agreement (the
"Note Purchase Agreement") dated September 1, 1998 by and among the Company and
certain holders of notes, pursuant to which such noteholders consented to the
transaction. Under the Amendment, the Company agreed to amend the Note Purchase
Agreement to reduce the minimum Consolidated Net Worth (as defined in the Note
Purchase Agreement) requirement of the Company. As consideration for the
Amendment, the Company agreed to pay the noteholders 50% of: (i) the proceeds of
the accounts receivable of approximately $9.0 million retained in the
transaction, of which approximately $6.6 million had been collected as of April
1, 2001; (ii) contingent payments of approximately $3.5 million as provided in
the purchase agreement concerning the sale of the IT consulting division; and
(iii) estimated tax refunds of approximately $8.0 million, of which
approximately $7.0 million had been received as of April 1, 2001. Under the
Amendment, such prepayments are to be applied to reduce the principal amount of
the last required payments under the Note Purchase Agreement. As of May 9, 2001,
approximately $5.5 million had been paid to the note holders in accordance with
terms of the Amendment.
During the 13-week period ended April 1, 2001, the Company began
evaluating under-performing offices and markets in an effort to eliminate
additional operating expenses. The Company recorded a pre-tax restructuring
16
charge of approximately $0.2 million related primarily to the closure or
consolidation of eight under-performing branch offices and the Company's
estimate of future lease costs to be incurred in relation to those offices. The
Company is endeavoring to lessen potential future lease payments by (i)
transferring the lease liability to other tenants, (ii) subleasing the abandoned
facilities or (iii) negotiating discounted buyouts of the lease contracts.
Consequently, the Company's estimates may change based on its ability to
effectively lessen such future lease payments.
Subsequent to April 1, 2001, the Company incurred approximately $0.4
million in additional restructuring charges, primarily severance pay related to
the elimination of a senior level executive position. Additionally, the Company
intends to continue to review strategic alternatives to eliminate additional
costs and improve profitability throughout the remainder of the fiscal year.
Restructuring costs incurred to date and future anticipated
restructuring charges have not had and are not expected to have a material
impact on the liquidity or capital resources of the Company.
Seasonality
The Company's business follows the seasonal trends of its customers'
businesses. 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. All forward-looking statements involve risks and
uncertainties. Forward-looking statements contained in this report include
statements regarding the Company's opportunities, existing and proposed service
offerings, market opportunities, expectations, goals, revenues, financial
performance, strategies and intentions for the future and are indicated by the
use of words such as "believe," "expect," "intend," "anticipate," "likely,"
"plan" and other words of similar meaning. 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 implement its growth strategy, which, in turn, is dependent upon a
number of factors, including: the availability of working capital to support
such growth; failure of the Company to secure adequate finances to continue to
fund its current operations; plans to integrate and expand the Company's
offering of IT services; the Company's ability to integrate the operations of
acquired businesses; management's ability and resources to implement the growth
strategy; the Company's ability to attract and retain the staff, temporary and
other employees needed to implement the Company's business plan and meet
customer needs; and the successful hiring, training and retention of qualified
field management. Future results also could be affected by other factors
associated with the operation of the Company's business, including: the
Company's response to existing and emerging competition; demand for the
Company's services; the Company's ability to maintain profit margins in the face
of pricing pressures; the Company's efforts to develop and maintain customer and
employee relationships; economic fluctuations; employee-related costs; and the
unanticipated results of future litigation.
17
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. 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 manage
its market risk within its revolving credit facility, the Company is able to
borrow against the facility at either (i) the bank's prime rate, or (ii) LIBOR
plus an applicable margin for a fixed period of time. 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.
Revolving Credit Facility: The Credit Agreement, which provides for any
combination of both Floating Rate Advances and Fixed Rate Advances, expires in
July 2001. Floating Rate Advances bear interest at a bank's prime rate; at April
1, 2001, such prime rate was 8.0%. Fixed Rate Advances bear interest at LIBOR
plus an applicable margin, ranging from 1.0% to 2.0%, based upon certain
financial ratios; the current applicable margin is 2.0%. For the 13-week period
ended April 1, 2001, the Company had no advances outstanding under the revolving
credit facility.
Senior Notes: For the 13-week period ended April 1, 2001, the Company's
outstanding borrowings on the senior notes were $35.0 million, with a weighted
average fixed interest rate of 6.92%. The estimated fair value of the obligation
on the unsecured notes, using a discount rate of 8.0% over the expected
maturities of the obligations, is approximately $33.7 million. The fair value of
the Company's senior notes is estimated by discounting expected cash flows at a
bank's prime rate. If the discount rate were to increase by 10% to 8.8%, the
estimated fair value of the obligation on the unsecured notes would be
approximately $32.8 million. If the discount rate were to decrease by 10% to
7.2%, the estimated fair value of the obligation on the unsecured notes would be
approximately $34.7 million.
18
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.
There is no 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) None.
b) Current Report on Form 8-K dated December 29, 2000, filed January 12,
2001. Items reported included Item 2, Acquisition or Disposition of
Assets, and Item 7, Pro Forma Financial Information and Exhibits, which
included the Registrant's unaudited pro forma condensed consolidated
balance sheet as of October 1, 2000 and unaudited pro forma condensed
consolidated statements of operations for the 52 weeks ended January 2,
2000 and the 39 weeks ended October 1, 2000.
19
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.
Dated: May 15, 2001 /s/ JoAnn W. Wagner
-------------------
JoAnn W. Wagner
Chairman, President and
Chief Executive Officer
Dated: May 15, 2001 /s/ Kevin Hardy
---------------
Kevin Hardy
Senior Vice President and
Chief Financial Officer
20