1
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 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 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 6, 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 July 1, 2001 and December 31, 2000 3
Condensed Consolidated Statements of Operations
For the 13- and 26-week periods ended
July 1, 2001 and July 2, 2000 5
Condensed Consolidated Statements of Cash Flows
For the 26-week periods ended July 1, 2001
and July 2, 2000 6
Notes to Condensed Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations 14
Item 3. Qualitative and Quantitative Disclosures About Market Risk 21
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 22
Item 6. Exhibits and Reports on Form 8-K 22
Signatures 23
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
SOS STAFFING SERVICES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS
(in thousands)
July 1, December 31,
2001 2000
--------- ---------
CURRENT ASSETS
Cash and cash equivalents $ 17,248 $ 1,185
Accounts receivable, less allowances of
$2,200 and $2,916, respectively 28,681 44,488
Current portion of workers' compensation deposit 273 213
Prepaid expenses and other 1,335 1,032
Current portion of notes receivable 109 --
Current portion of deferred income tax asset 7,452 5,852
Income tax receivable 132 8,088
--------- ---------
Total current assets 55,230 60,858
--------- ---------
PROPERTY AND EQUIPMENT, at cost
Computer equipment 5,718 3,935
Office equipment 4,035 4,009
Leasehold improvements and other 1,941 1,834
--------- ---------
11,694 9,778
Less accumulated depreciation and amortization (6,373) (5,456)
--------- ---------
Total property and equipment, net 5,321 4,322
--------- ---------
OTHER ASSETS
Intangible assets, less accumulated amortization
of $15,963 and $14,979, respectively 93,696 92,007
Notes receivable, less current portion, less reserves of
$3,307 and $0, respectively -- 1,000
Deferred income tax asset, less current portion 114 --
Deposits and other assets 1,746 3,201
--------- ---------
Total other assets 95,556 96,208
--------- ---------
Total assets $ 156,107 $ 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)
(Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
(in thousands)
July 1, December 31,
2001 2000
--------- ---------
CURRENT LIABILITIES
Line of credit $ 18,990 $ 9,000
Current portion of notes payable 607 8,273
Accounts payable 1,270 2,667
Accrued payroll costs 5,032 10,196
Current portion of workers' compensation reserve 4,270 4,689
Accrued liabilities 3,588 5,966
Accrued acquisition earnouts 3,645 55
--------- ---------
Total current liabilities 37,402 40,846
--------- ---------
LONG-TERM LIABILITIES
Notes payable, less current portion 29,020 27,000
Workers' compensation reserve, less current portion 969 1,064
Deferred income tax liability -- 652
Deferred compensation liabilities 743 941
--------- ---------
Total long-term liabilities 30,732 29,657
--------- ---------
SHAREHOLDERS' EQUITY
Common stock 127 127
Additional paid-in capital 91,693 91,693
Accumulated deficit (3,847) (935)
--------- ---------
Total shareholders' equity 87,973 90,885
--------- ---------
Total liabilities and shareholders' equity $ 156,107 $ 161,388
--------- ---------
Theaccompanying notes to condensed consolidated financial
statements are an integral part of these condensed
consolidated statements.
4
SOS STAFFING SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands)
13 Weeks Ended 26 Weeks Ended
July 1, July 2, July 1, July 2,
2001 2000 2001 2000
--------- --------- --------- ---------
SERVICE REVENUES $ 67,612 $ 85,424 $ 136,314 $ 165,725
DIRECT COST OF SERVICES 52,829 66,942 107,083 129,027
--------- --------- --------- ---------
Gross profit 14,783 18,482 29,231 36,698
--------- --------- --------- ---------
OPERATING EXPENSES:
Selling, general and administrative 11,958 15,455 25,001 31,233
Restructuring charges 982 -- 1,227 --
Intangible amortization 975 1,076 1,959 2,155
--------- --------- --------- ---------
Total operating expenses 13,915 16,531 28,187 33,388
--------- --------- --------- ---------
INCOME FROM OPERATIONS 868 1,951 1,044 3,310
OTHER EXPENSE (788) (1,081) (1,481) (2,127)
--------- --------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES 80 870 (437) 1,183
INCOME TAX (PROVISION) BENEFIT (14) (323) 195 (398)
--------- --------- --------- ---------
INCOME (LOSS) FROM CONTINUING OPERATIONS 66 547 (242) 785
LOSS FROM DISCONTINUED OPERATIONS (net of
income tax benefit) (Note 3) (2,144) (466) (2,670) (984)
--------- --------- --------- ---------
NET (LOSS) INCOME $ (2,078) $ 81 $ (2,912) $ (199)
--------- --------- --------- ---------
BASIC (LOSS) INCOME PER COMMON SHARE:
(Loss) income from continuing operations $ 0.01 $ 0.04 $ (0.02) $ 0.06
Loss from discontinued operations (0.17) (0.03) (0.21) (0.08)
--------- --------- --------- ---------
Net (loss) income $ (0.16) $ 0.01 $ (0.23) $ (0.02)
--------- --------- --------- ---------
DILUTED (LOSS) INCOME PER COMMON SHARE:
(Loss) income from continuing operations $ 0.01 $ 0.04 $ (0.02) $ 0.06
Loss from discontinued operations (0.17) (0.03) (0.21) (0.08)
--------- --------- --------- ---------
Net (loss) income $ (0.16) $ 0.01 $ (0.23) $ (0.02)
--------- --------- --------- ---------
WEIGHTED AVERAGE COMMON SHARES:
Basic 12,691 12,691 12,691 12,691
Diluted 12,754 12,691 12,691 12,691
Theaccompanying 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)
26 Weeks Ended
July 1, July 2,
2001 2000
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (2,912) $ (199)
Adjustments to reconcile net loss
to net cash provided by operating activities:
Depreciation and amortization 2,969 4,279
Deferred income taxes (1,853) (564)
Loss (gain) on disposition of assets 42 (7)
Loss on disposal of discontinued operations 3,307 --
Changes in operating assets and liabilities:
Accounts receivable, net 15,807 (2,712)
Workers' compensation deposit (60) 361
Prepaid expenses and other (303) (659)
Deposits and other assets 8 204
Accounts payable (1,397) (622)
Accrued payroll costs (5,164) 2,816
Workers' compensation reserve (513) 533
Accrued liabilities (2,367) 2,102
Income taxes receivable 7,444 432
-------- --------
Net cash provided by operating activities 15,008 5,964
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for equity investment in common stock -- (1,250)
Issuance of notes receivable (2,416) --
Purchases of property and equipment (818) (1,680)
Payments on acquisition earnouts (55) (3,104)
-------- --------
Net cash used in investing activities (3,289) (6,034)
-------- --------
Theaccompanying 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)
26 Weeks Ended
July 1, July 2,
2001 2000
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings $ 26,990 $ 11,587
Principal payments on borrowings (22,646) (13,174)
-------- --------
Net cash provided by (used in) financing activities 4,344 (1,587)
-------- --------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 16,063 (1,657)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 1,185 2,577
-------- --------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 17,248 $ 920
-------- --------
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid (received) during the period for:
Interest $ 1,473 $ 1,938
Income taxes (7,444) 84
Theaccompanying notes to condensed consolidated financial
statements are an integral part of these condensed
consolidated statements.
7
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 July 1, 2001 13 Weeks Ended July 2, 2000
-------------------------------------------------------------------------------------------
Income from Income from
continuing Per Share continuing Per Share
operations Shares Amount operations Shares Amount
-------------------------------------------------------------------------------------------
Basic $ 66 12,691 $ 0.01 $ 547 12,691 $ 0.04
Effect of Stock Options 63 --
---------------------------- --------------------------------
Diluted $ 66 12,754 $ 0.01 $ 547 12,691 $ 0.04
---------------------------- --------------------------------
-------------------------------------------------------------------------------------------
26 Weeks Ended July 1, 2001 26 Weeks Ended July 2, 2000
-------------------------------------------------------------------------------------------
Loss from Income from
continuing Per Share continuing Per Share
operations Shares Amount operations Shares Amount
-------------------------------------------------------------------------------------------
Basic $ (242) 12,691 $ (0.02) $ 784 12,691 $ 0.06
Effect of Stock Options -- --
---------------------------- --------------------------------
Diluted $ (242) 12,691 $ (0.02) $ 784 12,691 $ 0.06
---------------------------- --------------------------------
At the end of the 13-week periods ended July 1, 2001 and July 2, 2000,
there were outstanding options to purchase approximately 869,000 and 1,222,000,
respectively, shares of common stock that were not included in the computation
of diluted income from continuing operations per common share because the
exercise price of the option was greater than the average market price of the
common shares. At the end of the 26-week period ended July 1, 2001, there were
outstanding options to purchase approximately 1,336,000 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 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 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.
8
SOS STAFFING SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 3. Discontinued Operations
On December 29, 2000, Inteliant Corporation, a wholly owned subsidiary
of the Company, sold to Herrick Douglas ("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.
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 promissory note from
HD evidencing the loan bears interest at 10% per annum on any outstanding
principal and is due and payable on or before December 31, 2001. The note was
amended in May 2001 to provide for an accumulated interest payment on December
31, 2001, with the principal balance to be paid in 36 monthly installments
beginning in January 2002 at an interest rate of 12% per anum. As of July 1,
2001, the Company had advanced to HD approximately $3.4 million. During the
13-week period ended July 1, 2001, the Company established a $3.3 million bad
debt reserve to reflect the Company's belief that it will not receive the
balance due on the note issued by HD.
Operating results of the discontinued consulting division for the 13-
and 26-week period ended July 1, 2001 and July 2, 2000 have been classified as
discontinued operations in the accompanying consolidated financial statements as
follows (in thousands):
13 Weeks Ended 26 Weeks Ended
July1, 2001 July 2, 2000 July 1, 2001 July 2, 2000
-------------- --------------- -------------- ---------------
Revenues $ -- $ 9,179 $ -- $ 17,841
Cost of sales -- 6,541 -- 12,893
-------------- --------------- -------------- ---------------
Gross profit -- 2,638 -- 4,948
Operating and other expenses 169 3,287 1,022 6,383
-------------- --------------- -------------- ---------------
Loss from discontinued operations before
income tax (169) (649) (1,022) (1,435)
Income tax benefit 65 183 392 451
-------------- --------------- -------------- ---------------
Loss from discontinued operations (104) (466) (630) (984)
-------------- --------------- -------------- ---------------
Loss on sale of discontinued operations (3,307) -- (3,307) --
Income tax benefit 1,267 -- 1,267 --
-------------- --------------- -------------- ---------------
(2,040) -- (2,040) --
-------------- --------------- -------------- ---------------
$ (2,144) $ (466) $ (2,670) $ (984)
-------------- --------------- -------------- ---------------
Note 4. Intangible Assets
Intangible assets consist of the following amounts as of July 1, 2001
and December 31, 2000 (in thousands):
July 1, 2001 December 31, 2000
--------------------- ---------------------
Goodwill $ 88,010 $ 84,365
Trademarks and trade names 19,260 19,260
Non-compete agreements 2,507 2,507
Other intangible assets 854 854
--------------------- ---------------------
110,631 106,986
Less:
Accumulated amortization goodwill (11,724) (10,361)
Accumulated amortization trademarks and trade names (2,453) (2,135)
Accumulated amortization non-compete agreements (2,119) (1,956)
Accumulated amortization other intangible assets (639) (527)
--------------------- ---------------------
$ 93,696 $ 92,007
--------------------- ---------------------
9
SOS STAFFING SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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.
In June 2001 the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 142 ("SFAS No. 142"), Goodwill and Other
Intangible Assets, effective for the Company's fiscal years ending after
December 30, 2001. With the adoption of SFAS No. 142, goodwill and intangible
assets with indefinite lives are no longer subject to amortization. Rather,
goodwill and intangible assets with indefinite lives will be subject to
assessment for impairment by applying a fair-value-based test rather than an
undiscounted cash flow approach currently used by the Company.
Additionally, under the new rules, an acquired intangible asset should
be separately recognized if the benefit of the intangible asset is obtained
through contractual or other legal rights, or if the intangible asset can be
sold, transferred, licensed, rented or exchanged; unless the intangible assets
identified have an indefinite life, those assets will be amortized over their
useful life. Assets of the Company that have been separately identified include,
but are not limited to, trademarks and trade names, non-compete agreements and
customer lists.
Under SFAS No. 142 the Company will continue to amortize existing
goodwill and intangible assets through the end of its current fiscal year.
However, any new goodwill acquired subsequent to June 30, 2001 will not be
amortized. Other separately identified intangible assets acquired subsequent to
June 30, 2001 may be amortized over their useful life depending on whether they
have a definite life. In addition to discontinuing amortization of existing
goodwill and other intangible assets with indefinite lives, the Company
anticipates adoption of SFAS No. 142 could result in an impairment of a
significant portion of the existing goodwill and assets with an indefinite life
currently carried on the balance sheet when subjected to a fair-value-based
test. However, the Company is assessing SFAS No. 142 and has not yet quantified
the impact adoption will have on its results of operations or financial
position. For the 26 weeks ended July 1, 2001, amortization related to goodwill
was approximately $1.3 million.
Note 5. Credit Facility and Notes Payable
As of June 29, 2001, the Company entered into a Third Amendment to
Amended and Restated Credit Agreement (the "Credit Amendment") with Wells Fargo
Bank Northwest, N.A. ("Wells Fargo") and Bank One, NA ("Bank One")
(collectively, the "Lenders") to extend the Company's line of credit, which
expired July 1, 2001. Pursuant to the Credit Amendment, the Company's line of
credit was reduced from $30 million to $18 million, $8 million of which is
available for borrowing in cash, with a maturity date of June 30, 2002, and $10
million of which is available under letters of credit to be issued solely as
required by the Company's workers' compensation insurance providers, with a
maturity date of January 1, 2003. Also pursuant to the Credit Amendment, certain
financial covenants of the credit facility were modified. The Credit Amendment
provides for borrowings at a federal reserve prime rate (6.75% as of July 1,
2001) plus 2.5 percentage points. The credit agreement contains an annual
commitment fee of three-eighths of one percent on any unused portion, payable
quarterly. As of July 1, 2001 the Company had approximately $19 million
outstanding under the credit agreement. The Company also had letters of credit
of $6.7 million outstanding for purposes of securing its workers' compensation
premium obligation. On July 5, 2001, the Company paid $12.5 million (the
"Payment") to the Lenders to reduce the amount of debt outstanding under the
credit facility in order to comply with the cash borrowing provisions of the
Credit Amendment. Additionally, the credit facility provides for an additional
fee of approximately $250,000 unless the Lenders are paid in full and their
credit commitment is terminated on or before June 15, 2002.
In conjunction with the Payment, the Company entered into a letter
agreement dated July 5, 2001 with the Lenders pursuant to which the Lenders
waived default under certain financial covenants of the Credit Amendment,
including the provision that outstanding cash borrowings under the credit
facility not exceed $8 million in the aggregate as of the date of the Credit
Amendment.
As a condition to the execution of the Credit Amendment, the Company
agreed to grant to the Lenders and to holders of the Company's senior unsecured
notes (the "Noteholders") a security interest in all of the Company's assets
including, without limitation, all accounts receivable. Pursuant to the Credit
Amendment, the collateralization of the Company's assets, which would include
allocation of such collateral between the Lenders and the Noteholders, was to
have been completed on or before July 30, 2001, and the Lenders and Noteholders
10
SOS STAFFING SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
were to have entered into an intercreditor agreement on or before such date. The
Company had previously been informed by the Lenders that they were unwilling to
renew the credit facility, which had been unsecured, upon its expiration unless
the Company granted to the Lenders a security interest in its assets. In order
to complete the transactions set forth in this paragraph, the Noteholders must
consent to a waiver or amendment of certain financial covenants set forth in the
Note Purchase Agreement dated September 1, 1998, as amended (the "Note Purchase
Agreement"). The Company is currently in the process of seeking such Noteholder
consent. Although the Lenders and the Noteholders have yet to execute an
intercreditor agreement, the Lenders and the Noteholders have both waived
default and agreed to extend the deadline for completion of the intercreditor
agreement and the collateralization transaction set forth in this paragraph to
August 31, 2001.
As of July 1, 2001 the Company also has outstanding approximately $29.5
million of senior unsecured notes consisting of two components. The first
component consists of senior unsecured notes in the aggregate amount of $25.3
million with a final nine-year maturity and an average maturity of six years.
The second component consists of senior unsecured notes in the aggregate amount
of $4.2 million due in a single payment in 2003. As a condition to obtaining
approval from the Noteholders to the execution of the Credit Amendment,
effective July 1, 2001 the effective rate on the notes outstanding was changed
as follows: the effective rate on the first component was increased from 6.95%
to 8.95% while the effective rate on the second component was increased from
6.72% to 8.72%. The change in the interest rate charged on the senior notes will
have an annual impact of approximately $0.6 million on the Company's financial
operations.
In connection with the sale of certain assets, as described in Note 3,
the Company entered into an Amendment to Note Purchase Agreement (the "Note
Amendment") to amend the Note Purchase Agreement pursuant to which the
Noteholders consented to the asset sale. Under the Note 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 Note 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 $7.1 million
had been collected as of July 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, associated with the sale, of approximately $7.2
million, of which approximately $7.1 million had been received as of July 1,
2001. However, under terms of the Note Amendments, the Company may use the
accounts receivable received to fund disbursements by it under the loan to HD,
in which case the Company will make the agreed prepayment in the quarter in
which HD repays the loan. During the 26-week period ended July 1, 2001 the
Company advanced to HD approximately $2.4 million. Under the Note Amendment,
such prepayments are to be applied to reduce the principal amount of the last
required payments under the Note Purchase Agreement. As of July 2, 2001,
approximately $5.5 million had been paid to the Noteholders in accordance with
terms of the Note Amendment. Subsequent to July 1, 2001 an additional $0.4
million was paid to the Noteholders in accordance with the terms of the Note
Amendment.
The Company's revolving credit facility and the Note Purchase Agreement
contain certain restrictive covenants including certain debt ratios, maintenance
of a minimum net worth and restrictions on the sale of capital assets. Except as
otherwise noted herein, as of July 1, 2001, the Company was in compliance with
such covenants.
In connection with the terms and conditions of an acquisition
consummated in 1998, the Company also has a promissory note payable with a
balance of approximately $0.1 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 September 2001.
Note 6. 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).
11
SOS STAFFING SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Information concerning continuing operations by operating segment for
the 13- and 26-week periods ended July 1, 2001 and July 2, 2000 is as follows
(in thousands):
Segment Operations
(unaudited)
13 Weeks Ended 26 Weeks Ended
-------------------------------------- -------------------------------------
July 1, 2001 July 2, 2000 July 1, 2001 July 2, 2000
------------------ ------------------ ----------------- -----------------
Service Revenues
Commercial $ 59,109 $ 72,159 $ 117,719 $ 139,195
IT 8,503 13,265 18,595 26,544
Other -- -- -- (14)
-------------------------------------- ----------------- -----------------
$ 67,612 $ 85,424 $ 136,314 $ 165,725
-------------------------------------- ----------------- -----------------
Income from Operations
Commercial $ 1,391 $ 3,316 $ 2,515 $ 5,568
IT (43) (204) (14) 123
Other (unallocated) (480) (1,161) (1,457) (2,381)
-------------------------------------- ----------------- -----------------
$ 868 $ 1,951 $ 1,044 $ 3,310
-------------------------------------- ----------------- -----------------
Segment Assets
July 1, 2001 December 31, 2000
------------------ ---------------------
Identifiable Assets
Commercial $ 91,768 $ 94,901
IT 56,500 60,423
Other (unallocated) 7,839 6,064
------------------ ---------------------
$ 156,107 $ 161,388
------------------ ---------------------
Note 7. Restructuring Charges
To align staff costs and branch office requirements with existing sales
volume, the Company is streamlining its corporate structure and consolidating
and/or eliminating branch offices in under-performing markets. During the
13-week period ended July 1, 2001, the Company recorded a pre-tax restructuring
charge of approximately $1.0 million related primarily to the closure or
consolidation of five unprofitable branch offices, and the Company's estimate of
future lease costs to be incurred in relation to those offices as well as
severance charges related to the elimination of various operational and senior
level positions. During the 26-week period ended July 1, 2001, the Company
recorded a pre-tax restructuring charge of approximately $1.2 million related
primarily to the closure or consolidation of 13 unprofitable branch offices, as
well as severance charges related to the elimination of various operational and
senior level positions. The future expected net lease payments and the accrued
severance payments, totaling approximately $535,000, are reflected in the
condensed consolidated balance sheet as accrued liabilities. The Company is
endeavoring to reduce 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 reduce such
future lease payments.
Note 8. Deferred Income Taxes
The components of the deferred income tax assets and liabilities at
July 1, 2001 and December 31, 2000 are as follows (in thousands):
12
SOS STAFFING SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
July 1, 2001 December 31, 2000
---------------- ----------------------
Deferred income tax assets:
Workers' compensation reserves $ 2,054 $ 2,068
Allowance for doubtful accounts 2,304 1,339
Government sponsored tax credits carryforward 1,484 1,300
Accrued liabilities 694 912
Net operating loss carryforwards 2,172 900
Other 1,366 1,231
---------------- ----------------------
10,074 7,750
---------------- ----------------------
Deferred income tax liabilities:
Depreciation and amortization (2,034) (2,050)
Other (474) (500)
---------------- ----------------------
(2,508) (2,550)
---------------- ----------------------
Net deferred income tax asset $ 7,566 $ 5,200
---------------- ----------------------
Balance sheet classification:
Current asset $ 7,452 $ 5,852
Long-term asset 114 --
Long-term liability (652)
---------------- ----------------------
$ 7,566 $ 5,200
---------------- ----------------------
The Company has determined that no valuation allowance is required with
respect to its deferred income tax assets as of July 1, 2001 and December 31,
2000. The Company believes that its future taxable income will be sufficient to
realize the net deferred tax assets. The Company's net deferred tax assets as of
July 1, 2000 are $7.6 million. Assuming an effective rate of 40%, the minimum
amount of future taxable income that would have to be generated would be
approximately $19.0 million. However, the Company's estimates could change in
the near term and it may become necessary to record a valuation allowance in
future periods, which would adversely affect the Company's results of
operations.
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 26-week period ended July 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. In exchange and as
consideration for the Company's common stock holdings, BioLynx agreed to a
perpetual royalty-free license for certain technology (including all proprietary
software and related intellectual property and all source and object codes
utilized to develop the product) used by the Company. Management has estimated
the technology value to approximate its investment in BioLynx. As such, the
investment was reclassified from other long-term assets to property, plant and
equipment and is being amortized over three years.
13
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 26 Weeks Ended
---------------------------------- ----------------------------------
Consolidated July 1, 2001 July 2, 2000 July 1, 2001 July 2, 2000
----------------- ---------------- ---------------- -----------------
Service revenues 100.0% 100.0% 100.0% 100.0%
Direct cost of services 78.1 78.4 78.6 77.9
----------------- ---------------- ---------------- -----------------
Gross profit 21.9 21.6 21.4 22.1
----------------- ---------------- ---------------- -----------------
Operating expenses:
Selling, general and administrative expenses 17.7 18.1 18.3 18.8
Restructuring charges 1.5 -- 0.9 --
Intangible amortization 1.4 1.3 1.4 1.3
----------------- ---------------- ---------------- -----------------
Total operating expenses 20.6 19.4 20.6 20.1
----------------- ---------------- ---------------- -----------------
Income from operations 1.3% 2.2% 0.8% 2.0%
----------------- ---------------- ---------------- -----------------
Commercial Staffing Segment
Service revenues 100.0% 100.0% 100.0% 100.0%
Direct cost of services 79.6 79.1 79.9 78.9
----------------- ---------------- ---------------- -----------------
Gross profit 20.4 20.9 20.1 21.1
----------------- ---------------- ---------------- -----------------
Operating expenses:
Selling, general and administrative expenses 15.4 15.3 15.9 16.0
Restructuring charges 1.7 -- 1.0 --
Intangible amortization 0.9 0.9 1.0 1.0
----------------- ---------------- ---------------- -----------------
Total operating expenses 18.0 16.2 17.9 17.0
----------------- ---------------- ---------------- -----------------
Income from operations 2.4% 4.7% 2.2% 4.1%
----------------- ---------------- ---------------- -----------------
IT Segment
Service revenues 100.0% 100.0% 100.0% 100.0%
Direct cost of services 67.9 74.0 69.8 72.4
----------------- ---------------- ---------------- -----------------
Gross profit 32.1 26.0 30.2 27.6
----------------- ---------------- ---------------- -----------------
Operating expenses:
Selling, general and administrative expenses 27.6 24.5 25.7 24.0
Intangible amortization 5.0 3.1 4.6 3.1
----------------- ---------------- ---------------- -----------------
Total operating expenses 32.6 27.6 30.3 27.1
----------------- ---------------- ---------------- -----------------
(Loss) Income from operations (0.5%) (1.6%) (0.1%) 0.5%
----------------- ---------------- ---------------- -----------------
14
Discontinued Operations
On December 29, 2000, Inteliant Corporation, 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.
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 promissory note from
HD evidencing the loan bears interest at 10% per annum on any outstanding
principal and is due and payable on or before December 31, 2001. The note was
amended in May 2001 to provide for an accumulated interest payment on December
31, 2001, with the principal balance to be paid in 36 monthly installments
beginning in January 2002 at an interest rate of 12% per anum. As of July 1,
2001, the Company had advanced to HD approximately $3.4 million. During the
13-week period ended July 1, 2001, the Company established a $3.3 million bad
debt reserve to reflect the Company's belief that it will not receive the
balance due on the note issued by HD. Additionally, as of July 1, 2001, the
Company has reserved approximately $1.0 million for un-collectible accounts
receivable retained in the transaction.
Consolidated
Service Revenues: Service revenues for the 13-week period ended July 1,
2001 were $67.6 million, a decrease of $17.8 million, or 20.8%, compared to
service revenues of $85.4 million for the 13-week period ended July 2, 2000. For
the 26-week period ended July 1, 2001, service revenues were $136.3, compared to
service revenues of $165.7 for the 26-week period ended July 2, 2001, a decrease
of $29.4 million, or 17.7%. 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 July 1, 2001 and July 2, 2000
was $14.8 million and $18.5 million, respectively, a decrease of $3.7 million,
or 20%. For the 13-week periods ended July 1, 2001 and July 2, 2000, gross
profit margin was 21.9% and 21.6%, respectively. The margin percentage increase
over the comparable periods was primarily the result of increased margins in the
Company's IT segment. This, in turn, was primarily due to increased utilization
of that segment's resources, rather than reliance on more costly subcontractors.
Gross profit for the 26-week periods ended July 1, 2001 and July 2, 2000 was
$29.2 million and $36.7 million, respectively, a decrease of $7.5 million, or
20.4%. For the 26-week periods ended July 1, 2001 and July 2, 2000, gross profit
margin was 21.4% and 22.1%, respectively. The decrease in gross margin
percentage between 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 for staffing services.
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 July 1, 2001 decreased slightly to 19.1% from 19.4% for the 13-week
period ended July 2, 2000. Restructuring charges added approximately 1.5% in
additional operating expenses. For the 26-week period ended July 1, 2001,
operating expenses, excluding restructuring charges, as a percentage of sales
was 19.7% compared to 20.1% for the 26-week period ended July 2, 2000.
Restructuring charges added approximately 0.9% in additional operating expenses.
The restructuring charges were the result of the closure or consolidation of
unprofitable branch offices and related costs, including additional lease costs
incurred with terminating the Company's contractual lease obligations on those
facilities, as well as severance charges related to the elimination of various
operational and senior level management positions.
15
Income from Operations: Income from operations for the 13-week period
ended July 1, 2001 was $0.9 million, a decrease of $1.1 million, or 55%,
compared to income from operations of $2.0 million for the 13-week period ended
July 2, 2000. Operating margin, as a percentage of revenues, was 1.3% for the
13-week period ended July 1, 2001, compared to 2.2% for the 13-week period ended
July 2, 2000. The decrease in operating margin was due primarily to the decrease
in the Company's gross margins coupled with the additional restructuring
charges. Income from operations for the 26-week period ended July 1, 2001 was
approximately $1.0 million, a decrease of $2.3 million, or 68%, compared to
income from operations of $3.3 million for the 26-week period ended July 2,
2000. Operating margin, as a percentage of revenues, was 0.8% for the 26-week
period ended July 1, 2001, compared to 2.0% for the 26-week period ended July 2,
2000.
Other Expense: Other expense decreased approximately 27.1%, from $1.1
million for the 13-week period ended July 2, 2000 to $0.8 million for the
13-week period ended July 1, 2001. For the 26-week period ended July 1, 2001,
other expense was approximately $1.5 million, a decrease of approximately $0.6
million, or 30.4% from approximately $2.1 million for the 26-week period ended
July 2, 2000. The decrease was due primarily to a decline in interest expense as
a result of an overall reduction in interest rates.
Income Taxes: During the 13-week period ended July 1, 2001, the
Company's effective combined federal and state income tax rate on income from
continuing operations was approximately 17.5%, compared to an effective combined
tax rate of 37.1% for the 13-week period ended July 2, 2000. The decrease in the
effective combined income tax rate was due primarily to the non-deductible
portion of intangible amortization . During the 26 weeks ended July 1, 2001, the
Company recognized a tax benefit of approximately 44.7%. The tax benefit was due
primarily to the net loss from operations 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 $59.1 million for the 13-week period
ended July 1, 2001, compared to $72.2 million for the 13-week period ended July
2, 2000, a decrease of $13.1 million, or 18.1%. For the 26-week period ended
July 1, 2001, service revenues for the commercial staffing segment were $117.7
million, a decrease of $21.5 million, or 15.4%, compared to services revenues of
$139.2 million for the 26-week period ended July 2, 2001. The decrease in
revenues was generally consistent with the general economic slowdown and the
resulting lower demand for the Company's services. The Company also has seen a
significant decrease in permanent placement revenues.
Gross Profit: Gross profit margin was 20.4% for the 13-week period
ended July 1, 2001, compared to 20.9% for the 13-week period ended July 2, 2000.
Gross profit margin was 20.1% for the 26-week period ended July 1, 2001,
compared to 21.1% for the 26-week period ended July 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.
Operating Expenses: Selling, general and administrative expenses as a
percentage of service revenues were 15.4 % and 15.3% for the 13-week periods
ended July 1, 2001 and July 2, 2000, respectively; intangible amortization as a
percentage of service revenues was 0.9% for each of the 13-week periods ended
July 1, 2001 and July 2, 2000.
16
During the 13- and 26-week periods ended July 1, 2001, the Company
continued to evaluate under-performing offices and markets in an effort to
eliminate additional operating expenses. The Company recognized restructuring
charges of approximately $1.0 million and $1.2 million, respectively, primarily
related to additional lease costs incurred with exiting the Company's
contractual lease obligations on closed facilities, as well as severance charges
related to the elimination of several operational positions and senior level
management positions. 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
July 1, 2001 was 2.4%, compared to 4.7% for the 13-week period ended July 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 July 1,
2001 were $8.5 million, a decrease of $4.8 million, or 36.1%, compared to
service revenues of $13.3 million for the 13-week period ended July 2, 2000.
Service revenues for the 26-week period ended July 1, 2001 were $18.6 million, a
decrease of $7.9 million, or 29.8%, compared to service revenues of $26.5
million for the 26-week period ended July 2, 2000. The decrease in service
revenues was generally consistent with the general economic slowdown and more
specifically with the sharper downturn in the IT sector of the economy and the
resulting lower demand for the segment's services.
Gross Profit: Gross profit margin for the 13-week period ended July 1,
2001 was 32.1%, compared to 26.0% for the 13-week period ended July 2, 2000.
Gross profit margin for the 26-week period ended July 1, 2001 was 30.2%,
compared to 27.6% for the 26-week period ended July 2, 2000. The increase in
gross profit percentage was due primarily to increased utilization of that
segment's resources, rather than reliance on more costly subcontractor labor.
Operating Expenses: Operating expenses, excluding intangible
amortization, as a percentage of service revenues were 27.6 % and 24.5% for the
13-week periods ended July 1, 2001 and July 2, 2000, respectively. Operating
expenses, excluding intangible amortization, as a percentage of service revenues
were 25.7 % and 24.0% for the 26-week periods ended July 1, 2001 and July 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 5.0 % for the
13-week period ended July 1, 2001 and 3.1% for the 13-week period ended July 2,
2000. Intangible amortization as a percentage of revenues was 4.6 % for the
26-week period ended July 1, 2001 and 3.1% for the 26-week period ended July 2,
2000. The change was due primarily to increased goodwill related to payments on
acquisition earnouts.
Loss from Operations: The operating margin was (0.5%) for the 13-week
period ended July 1, 2001, compared to an operating margin of (1.6%) for the
13-week period ended July 2, 2000. The operating margin was (0.1%) for the
26-week period ended July 1, 2001, compared to an operating margin of 0.5% for
the 26-week period ended July 2, 2000. The decrease in income from operations
was due primarily to the reduction in gross profit.
Liquidity and Capital Resources
For the 26-week period ended July 1, 2001, net cash provided by
operating activities was $15.0 million, compared to $6.0 million for the 26-week
period ended July 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 26-week period ended July 1,
2001 used approximately $3.3 million, compared to $6.0 million for the 26-week
period ended July 2, 2000. The Company's investing activities used approximately
$0.8 million to purchase property and equipment and approximately $2.4 million
for notes receivable issued during the 26-week period ended July 1, 2001. By
comparison, the Company used approximately $1.2 million to purchase a 12.5%
equity interest in BioLynx, Inc. common stock, $1.7 million to purchase property
and equipment and approximately $3.1 million in acquisition earnouts during the
26-week period ended July 2, 2000.
17
The Company's financing activities for the 26-week period ended July 1,
2001 provided approximately $4.3 million, compared to using $1.6 million for the
26-week period ended July 2, 2000, primarily from borrowings under the Company's
revolving credit facility.
As of June 29, 2001, the Company entered into a Third Amendment to
Amended and Restated Credit Agreement (the "Amendment") with Wells Fargo Bank
Northwest, N.A. ("Wells Fargo") and Bank One, NA ("Bank One") (collectively, the
"Lenders") to extend the Company's line of credit, which expired July 1, 2001.
Pursuant to the Amendment, the Company's line of credit was reduced from $30
million to $18 million, $8 million of which is available for borrowing in cash,
with a maturity date of June 30, 2002, and $10 million of which is available
under letters of credit to be issued solely as required by the Company's
workers' compensation insurance providers, with a maturity date of January 1,
2003. Also pursuant to the Amendment, certain financial covenants of the credit
facility were modified. The Amendment provides for borrowings at a federal
reserve prime rate (6.75% as of July 1, 2001) plus 2.5 percentage points. The
credit facility contains an annual commitment fee of three-eighths of one
percent on any unused portion, payable quarterly. As of July 1, 2001 the Company
had approximately $19 million outstanding under the credit facility. The Company
also had letters of credit of $6.7 million outstanding for purposes of securing
its workers' compensation premium obligation. On July 5, 2001, the Company paid
$12.5 million (the "Payment") to the Lenders to reduce the amount of debt
outstanding under the credit facility in order to comply with the cash borrowing
provisions of the Amendment. Additionally, the credit facility provides for an
additional fee of approximately $250,000 unless the Lenders are paid in full and
their credit commitment is terminated on or before June 15, 2002.
As a condition to the execution of the Amendment, the Company agreed to
grant to the Lenders and to holders of the Company's senior unsecured notes (the
"Noteholders") a security interest in all of the Company's assets including,
without limitation, all accounts receivable. Pursuant to the Amendment, the
collateralization of the Company's assets, which would include allocation of
such collateral between the Lenders and the Noteholders, was to have been
completed on or before July 30, 2001, and the Lenders and Noteholders were to
have entered into an intercreditor agreement on or before such date. The Company
had previously been informed by the Lenders that they were unwilling to renew
the credit facility, which had been unsecured, upon its expiration unless the
Company granted to the Lenders a security interest in its assets. In order to
complete the transactions set forth in this paragraph, the Noteholders must
consent to a waiver or amendment of certain financial covenants set forth in the
Note Purchase Agreement dated September 1, 1998, as amended. The Company is
currently in the process of seeking such Noteholder consent. Although the
Lenders and the Noteholders have yet to execute an intercreditor agreement, the
Lenders and the Noteholders have both waived default and agreed to extend the
deadline for completion of the intercreditor agreement and the collateralization
transaction set forth in this paragraph to August 31, 2001.
In conjunction with the Payment, the Company entered into a letter
agreement dated July 5, 2001 with the Lenders pursuant to which the Lenders
waived default under certain financial covenants of the Amendment, including the
provision that outstanding cash borrowings under the credit facility not exceed
$8 million in the aggregate as of the date of the Amendment.
The Company also has outstanding approximately $29.5 million of senior
unsecured notes consisting of two components. The first component consists of
senior unsecured notes in the aggregate amount of $25.3 million with a final
nine-year maturity and an average maturity of six years. The second component
consists of senior unsecured notes in the aggregate amount of $4.2 million due
in a single payment in 2003. As a condition to obtaining approval from the
Noteholders to the execution of the Amendment, effective July 1, 2001 the
effective rate on the notes outstanding was changed as follows: the effective
rate on the first component was increased from 6.95% to 8.95% while the
effective rate on the second component was increased from 6.72% to 8.72%. The
change in the interest rate charged on the senior notes will have an annual
impact of approximately $0.6 million on the Company's financial operations .
In connection with the sale of certain assets, as described in Note 3,
the Company entered into an Amendment to Note Purchase Agreement (the "Note
Amendment") to amend the Note Purchase Agreement (the "Note Purchase Agreement")
dated September 1, 1998 by and among the Company and certain noteholders (the
18
"Noteholders"), pursuant to which the Noteholders consented to the asset sale.
Under the Note 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 Note
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 $7.1 million had been collected as of
July 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, associated with the sale, of approximately $7.2 million, of which
approximately $7.1 million had been received as of July 1, 2001. However, under
terms of the Note Amendments, the Company may use the accounts receivable
received to fund disbursements by it under the loan to HD, in which case the
Company will make the agreed prepayment in the quarter in which HD repays the
loan. For the 26-week period ended July 1, 2001 the Company had advanced to HD
approximately $2.4 million. Under the Note Amendment, such prepayments are to be
applied to reduce the principal amount of the last required payments under the
Note Purchase Agreement. As of July 2, 2001, approximately $5.5 million had been
paid to the noteholders in accordance with terms of the Note Amendment.
Subsequent to July 2, 2001 an additional $0.4 million was paid to the
Noteholders in accordance with the terms of the Note Amendment.
To align staff costs and branch office requirements with existing sales
volume, the Company is streamlining its corporate structure and consolidating
and/or eliminating branch offices in under-performing markets. During the
13-week period ended July 1, 2001, the Company recorded a pre-tax restructuring
charge of approximately $1.0 million related primarily to the closure or
consolidation of five under-performing branch offices and the Company's estimate
of future lease costs to be incurred in relation to those offices, as well as
severance charges related to the elimination of several operational and senior
level positions. During the 26-week period ended July 1, 2001, the Company
recorded a pre-tax restructuring charge of approximately $1.2 million related
primarily to the closure or consolidation of under-performing branch offices, as
well as severance charges related to the elimination of several operational and
senior level positions. The future expected net lease payments and the accrued
severance payments, totaling approximately $535,000, 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.
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.
Recent Accounting Pronouncements
In June 2001 the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 142 ("SFAS No. 142"), Goodwill and Other
Intangible Assets, effective for the Company's fiscal years ending after
December 30, 2001. With the adoption of SFAS No. 142, goodwill and intangible
assets with indefinite lives are no longer subject to amortization. Rather,
goodwill and intangible assets with indefinite lives will be subject to
assessment for impairment by applying a fair-value-based test rather than an
undiscounted cash flow approach currently used by the Company.
Additionally, under the new rules, an acquired intangible asset should
be separately recognized if the benefit of the intangible asset is obtained
through contractual or other legal rights, or if the intangible asset can be
sold, transferred, licensed, rented or exchanged; unless the intangible assets
identified have an indefinite life, those assets will be amortized over their
useful life. Assets of the Company that have been separately identified include,
but are not limited to, trademarks and trade names, non-compete agreements and
customer lists.
19
Under SFAS No. 142 the Company will continue to amortize existing
goodwill and intangible assets through the end of its current fiscal year.
However, any new goodwill acquired subsequent to June 30, 2001 will not be
amortized. Other separately identified intangible assets acquired subsequent to
June 30, 2001 may be amortized over their useful life depending on whether or
not they have a definite life. In addition to discontinuing amortization of
existing goodwill and other intangible assets with indefinite lives, the Company
anticipates adoption of SFAS No. 142 could result in an impairment of a
significant portion of the existing goodwill and assets with an indefinite life
currently carried on the balance sheet when subjected to a fair-value-based
test. However, the Company is assessing SFAS No. 142 and has not yet quantified
the impact adoption will have on its results of operations or financial
position. For the 26 weeks ended July 1, 2001, amortization related to goodwill
was approximately $1.3 million.
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 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 implement its business strategy, which, in turn, is dependent upon a
number of factors, including: the availability of working capital to support
growth; failure of the Company to secure adequate financing 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 its business
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.
20
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. 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 Company's credit facility bears interest at a
federal reserve prime rate plus 2.5%; at July 1, 2001, such prime rate was
6.75%. For the 13-week period ended July 1, 2001, the Company had approximately
$19.0 million in advances outstanding under the revolving credit facility.
Subsequent to July 1, 2001, the Company paid $12.5 million to its lenders to
reduce the amount of debt outstanding under the credit facility in order to
comply with the cash borrowing provisions of the Amendment
Senior Notes: For the 26-week period ended July 1, 2001, the Company's
outstanding borrowings on the senior notes were $29.6 million, with a weighted
average fixed interest rate of 6.92%. The estimated fair value of the
obligations on the senior notes, using a discount rate of 8.75% over the
expected maturities of the obligations, is approximately $27.6 million. The fair
value of the Company's senior notes is estimated by discounting expected cash
flows at a federal reserve prime rate, (6.75% at July 1, 2001) plus 2%. If the
discount rate were to increase by 10% to 9.6%, the estimated fair value of the
obligation on the unsecured notes would be approximately $26.9 million. If the
discount rate were to decrease by 10% to 7.9%, the estimated fair value of the
obligation on the unsecured notes would be approximately $28.3 million.
Effective July 1, 2001, as a condition to obtaining approval from the
Noteholders in the execution of the Note Amendment, the effective rate on the
notes outstanding was changed as follows: the effective rate on the first
component of approximately $25.3 million, was increased from 6.95% to 8.95%
while the effective rate on the second component of approximately $4.3 million,
was increased from 6.72% to 8.72%. The estimated fair value of the notes, based
on the modified rate changes and using a discount rate of 8.75% (a federal
reserve prime rate plus 2%) over the expected maturities of the obligations, is
approximately $29.2 million. If the discount rate were to increase by 10% to
9.6%, the estimated fair value of the obligation on the unsecured notes would be
approximately $28.5 million. If the discount rate were to decrease by 10% to
7.9%, the estimated fair value of the obligation on the unsecured notes would be
approximately $30.0 million. As discussed in Note 5, however, although the
Lenders and the Noteholders have yet to execute an intercreditor agreement, the
Lenders and the Noteholders have both waived default and agreed to extend the
deadline for completion for the intercreditor agreement and the
collateralization transaction, referred to in Item 2 hereof, to August 31, 2001.
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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 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 July 5, 2001, filed January 12, 2001.
Items reported included Item 5, Other Events.
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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.
Dated: August 15, 2001 /s/ JoAnn W. Wagner
-------------------
JoAnn W. Wagner
Chairman, President and
Chief Executive Officer
Dated: August 15, 2001 /s/ Kevin Hardy
---------------
Kevin Hardy
Senior Vice President and
Chief Financial Officer
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