Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended January 2, 2000.
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
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 (I.R.S. Employer
incorporation or organization) Identification No.)
1415 South Main Street, Salt Lake City, Utah 84115
- -------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (801) 484-4400
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common stock, $0.01 par value
(Title of class)
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 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 filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the Common Stock held by non-affiliates of the
Registrant, on March 6, 2000, based upon the closing sales price of the Common
Stock of $5.13 per share on that date, as reported on the NASDAQ/NMS Stock
Market, was approximately $26,236,913. Shares of Common Stock held by each
officer and director and by each person who owns 5% or more of the outstanding
Common Stock have been excluded in that such persons may be deemed to be
affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes.
As of March 6, 2000, Registrant had outstanding 12,691,398 shares of Common
Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Annual Report to Shareholders for the fiscal year
ended January 2, 2000 are incorporated by reference into Parts II and IV of this
Report. Portions of the Proxy Statement for the Registrant's 2000 Annual Meeting
of Shareholders to be held May 17, 2000 are incorporated by reference in Part
III of this Report.
2
PART I
This Annual Report on Form 10-K contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act") and Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), that involve risks and uncertainties. The reader
is cautioned that the actual results of SOS Staffing Services, Inc. will differ
(and may differ materially) from the results discussed in such forward-looking
statements. Factors that could cause or contribute to such differences include
those factors discussed herein under "Factors That May Affect Future Results"
and elsewhere in this Report generally.
ITEM 1. BUSINESS
Development of Business
SOS Staffing Services, Inc. ("SOS" or the "Company") is a leading
provider of staffing and consulting services in the Western United States. As of
January 2, 2000, SOS operated a network of 150 offices located in 18 states. The
Company provides a broad range of commercial staffing and information technology
("IT") services. Commercial staffing services include light industrial,
clerical, industrial, technical, specialty and other professional services. IT
services consist of staffing, consulting and outsourcing services such as
systems design, programming, network and systems management and e-business
solutions.
The Company's commercial staffing offices are supported by centralized
functions at corporate headquarters that include marketing, recruiting, training
and retention, workers' compensation, insurance services, accounts payable,
purchasing, credit, legal and other administrative support services. Generally,
each staffing office has access to the Company's central management information
system and its proprietary software that provides information on customer
requirements, available applicants, staffing employees on assignment and other
information which facilitates efficient response to customer job orders.
The Company has consolidated its IT staffing, consulting and
outsourcing operations into Inteliant Corporation ("Inteliant"), a wholly-owned
subsidiary of the Company, and has developed a support system tailored to the
specific needs of IT customers. Inteliant has responsibility for accounting
(including accounts payable, accounts receivable, and purchasing), marketing,
recruiting, and training. Other functions such as workers' compensation and
other insurance services and legal review have been centralized at the Company's
corporate headquarters.
Segment Financial Information
The Company's operations are grouped into two identifiable operating
segments: commercial staffing and IT. The commercial staffing segment provides
staffing solutions to companies by furnishing temporary clerical, industrial,
light-industrial, engineering, and professional services. The IT segment
provides consulting services (including resource planning and implementation,
e-commerce, internet technology and management consulting), staffing, and
outsourcing (including help desk and data center operations) in IT-related
fields. Financial information concerning the Company is included in Item 8 in
Part II of this report.
Description of Business by Segment
Commercial Staffing
Principal services and markets: Historically, the Company's commercial
staffing segment customers have consisted primarily of small to mid-size
companies. Sales to these businesses are developed either locally or regionally.
Generally, the commercial staffing segment provides light industrial, clerical
and industrial services through SOS Staffing Services, Skill Staff, Industrial
Specialists, TOPS Staffing and Century Personnel offices. The commercial
staffing segment also offers other specialized services provided by offices such
as SOS Technical Services (engineers, chemists, geologists, designers, drafters,
illustrators, artists, writers and other technical personnel), AccountStaff
(accountants, bookkeepers, auditors, data entry personnel and financial
analysts), PAMS (medical administrative services), SOS Collections Services
2
(collection services and project billing for medical facilities), Devon & Devon
and Truex (high-end administrative staffing and permanent placement), CGS
Personnel (mining and mineral exploration engineers, geologists and
hydrologists) and Mortgage Staffing (loan servicing and loan production
professionals).
The Company's commercial staffing services also include professional
employer services such as payrolling, outsourcing, on-site and administrative
professional services:
- - Payrolling typically involves the transfer of a customer's short-term
seasonal or special use employees to the Company's payroll for a designated
period.
- - Outsourcing represents a growing trend among businesses to contract with
third parties to provide a particular function or business department for
an agreed price over a designated period.
- - On-site services involve locating a regular SOS employee at the customer's
place of business to manage the customer's entire temporary staffing
requirements.
- - Administrative professional services offer SOS customers skills testing,
drug testing and risk management services.
o Skills testing available to SOS customers include cognitive,
personality and psychological evaluations.
o Drug tests are confirmed through an independent certified laboratory.
o Risk management services include on-site safety inspection and
consulting services.
The Company also provides professional employer organization services
through the Company's ServCom Staff Management, Inc. subsidiary, on a limited
basis, which offers to SOS customers the benefits of employee leasing.
In the commercial staffing segment, SOS has focused on opening hub
offices in key metropolitan areas followed by establishing offices in
surrounding markets. This decentralized office management strategy locates
multiple offices in close proximity to customers and temporary staffing
employees. The Company believes this strategy has allowed it to rapidly gain
market share with low entry costs. Once a hub office has been established, the
Company focuses on leveraging hub office resources to market and deliver
services to surrounding smaller markets and to cross-sell IT and other specialty
staffing services. In these markets the Company has frequently achieved
significant penetration and has often become the dominant provider of staffing
services.
In order to develop a wider market presence, the Company initiated a
national marketing team whereby large multi-state companies are targeted. The
contacts for these national accounts are centralized at the Company's
headquarters in Salt Lake City, Utah. The accounts are serviced by local offices
in markets in which the Company has an established presence and subcontractors
where the Company has not established an office.
The Company provides commercial staffing services through a network of
131 offices located in 15 states. The Company currently operates at least one
office in every market in the mountain states (Arizona, Colorado, Idaho,
Montana, New Mexico, Nevada, Utah, and Wyoming) with a population base in excess
of 100,000 people. In larger markets, the Company generally provides light
industrial and clerical personnel through SOS Staffing Services offices, while
service-specific specialty offices provide specialty services. In smaller
markets, SOS offices offer a broader variety of commercial staffing services
including specialty services. The Company also has commercial staffing offices
in California, Hawaii, Kansas, Missouri, Oregon, Texas, and Washington.
Management believes the Company has substantial opportunities to expand
its office network and the range of services it offers to its customers. Since
completing its initial public offering in June 1995, the Company has added a net
total of 89 offices to its commercial staffing segment through internal growth
and acquisitions. The Company intends, for the foreseeable future, to
concentrate on strengthening its office network by focusing on internal growth.
3
Seasonality: The segment's business follows the seasonal trends of its
customers' business. Historically, the segment has experienced lower revenues in
the first quarter with revenues accelerating during the second and third
quarters and then starting to slow again during the fourth quarter due to
seasonal trends of its customers.
Trademarks: The Company uses a variety of trademarks and trade names
which are generally descriptive of the temporary staffing services offered,
including SOS Staffing Services(R), Century Personnel, Centech, Devon & Devon,
Skill Staff, AccountStaff, TSI, Industrial Specialists, SOS Technical Services,
ServCom, PAMS Employment Services, SOS Collections, CGS Personnel, Mortgage
Staffing, TOPS Staffing Services(R), and Truex. The Company has registered or
reserved the majority of these names in the appropriate states.
Customers: Historically, commercial staffing customers have consisted
primarily of small to mid-size customers. Management believes there remain
significant opportunities to deliver profitable commercial staffing services to
small and mid-size customers. However, as the Company expands its network into
larger markets and develops its national sales network, the Company anticipates
that it will provide commercial staffing services to larger customers.
No customer accounted for more than ten percent of the commercial
staffing segment's net service revenues during fiscal 1999, and the segment's
top ten customers accounted for less than eight percent of the segment's service
revenues during the same period.
Competition: The Company's competitors consist of national, regional
and local companies operating offices throughout the nation, making the industry
highly competitive and highly fragmented, with limited barriers to entry. The
Company faces intense competition from large national and international
companies with substantially greater financial and marketing resources, as well
as strong local and regional staffing companies.
The Company competes for qualified temporary staffing employees and for
customers who require the services of such employees. The principal competitive
factors in attracting and retaining qualified staffing employees are competitive
salaries and benefits, quality and frequency of assignments and responsiveness
to employee needs. The Company believes that many persons who seek temporary
employment are also seeking regular employment and that the availability of
temporary staffing assignments, which may lead to regular employment, is an
important factor in its ability to attract qualified staffing employees.
The principal competitive factors in obtaining customers are a strong
sales and marketing program, having qualified staffing employees to assign in a
timely manner, matching of customer requirements with available resources,
competitive pricing and satisfactory work production. The Company believes its
strong emphasis on providing service and value to its customers and employees
are important competitive advantage.
Information Technology
Principal services and markets: The Company's IT services consist of a full
suite of IT consulting, e-business, communications, and staffing services, which
are marketed to Fortune 1000, mid-tier, and early stage companies. The various
practices with in the Company's IT segment are complimentary to each other
allowing the Company to provide multiple services to clients.
- - e-business services are focused on providing integrated e-commerce
solutions, and typically include requirements analysis, best practices
application, commerce product evaluation, integration and implementation.
The company is able to deliver services that enable a complete e-business
strategy, including specific knowledge and skills with e-commerce
transaction products, integration with supply chain components,
architecture, platform and infrastructure, customer relationship management
("CRM"), web site design, and complete test and validation.
- - The CRM practice concentrates on the management, implementation, upgrade
and support of front office customer relationship solutions integrated with
internet and back office systems. This practice is marketed both as a part
of the Company's e-business suite, as well as on a standalone basis. The
Company's CRM practice delivers strategic consulting and also draws on the
Company's experience implementing customer interaction tools such as call
centers, interactive voice response systems, voice/data convergence, and
computer telephony integration.
4
- - Communications services deliver complete operational support services
design, implementation, and integration services, including order
management and converged billing, to major wireless and wire-line carriers,
competitive local exchange connections, and internet service providers. In
addition to specialized communications services, the Company's
communications practice bundles services and skills from a number of the
Company's other practices, including technology and e-business services for
delivery to communications clients.
- - Technology solutions provide both operational and technical engineering
solutions for IT-system related issues. These solutions include design and
implementation of architectures and frameworks for creating managed
operating environments, services for server and database design and
implementation, and process design utilizing "best-practice" processes to
assist companies in properly structuring and supporting their IT
organizations and processes.
- - Outsourcing services are provided to customers who turn over to Inteliant
the management and staffing of specific IT functions, including help desk
services and operation and administration of client information systems.
- - Staffing services include computer programming, system design, analysis and
administration, network and systems management and software and
documentation development. IT staffing services are similar in many
respects to commercial staffing services; however, IT services generally
require increased specialization and technical skill, carry significantly
higher hourly bill and pay rates and involve substantially longer job
assignments.
The Company provides IT services to companies throughout the U.S.
through its network of 19 offices located throughout the Western United States
and Massachusetts. The Company's IT consulting and staffing offices generally
serve larger geographic areas than the commercial staffing offices, principally
due to the increased specialization associated with IT services. The Company's
strategy of integrating and expanding its existing IT staffing and consulting
office network will include efforts to position IT offices in strategic
locations throughout the United States, rather than the "hub and spoke" approach
used by the Company to expand its network of commercial staffing offices.
Seasonality: This segment does not experience the level of seasonality
associated with the Company's commercial segment.
Customers: The Company's IT segment pursues customers who are generally
larger than many of the Company's commercial staffing customers. Many of the
Company's IT customers are Fortune 1000 companies, government agencies and
educational institutions. The Company focuses on smaller specialty projects at
these larger businesses or as support in larger projects. The Company believes
that it has developed competitive advantages in serving mid-sized and larger
businesses and projects by tailoring its operations to meet customer needs,
including the establishment of strong customer relationships through local
marketing efforts, quality service and community involvement.
No customer accounted for more than ten percent of the Company's IT
segment's service revenues. However, approximately 19% of the Company's service
revenues generated in the IT segment during fiscal 1999 were obtained from two
national customers within the telecommunications industry, and the top ten
customers in that segment accounted for approximately 36% of total segment
revenues. Management believes, however, that these customers do not represent a
substantial credit or business risk and feel that the segment has adequate
diversification and resources to be protected in the event of the loss of any of
these customers.
Competition: The Company's competitors consist of national, regional
and local companies operating offices throughout the nation, making the industry
highly competitive and highly fragmented, with limited barriers to entry. The
Company faces intense competition from large national and international
companies with substantially greater financial and marketing resources than
those of the Company, as well as strong local and regional staffing companies.
5
The Company competes for qualified staffing and consulting employees
and for customers who require the services of such employees. The principal
competitive factors in attracting and retaining qualified staffing employees are
competitive salaries and benefits, quality and frequency of assignments and
responsiveness to employee needs. The principal competitive factors in
attracting and retaining qualified consultants are salary, benefits, training
and career development.
The principal competitive factors in obtaining customers are a strong
sales and marketing program, having qualified staffing and consulting employees
to assign in a timely manner, matching of customer requirements with available
resources, competitive pricing and satisfactory work production. The Company
believes its strong emphasis on providing service and value to its customers and
employees are important competitive advantages.
Staff Employees
At January 2, 2000, the Company had approximately 1,400 staff
employees, of which, approximately 590 were billable consultants or technical
personnel. The Company's training department provides general and job specific
training to all staff employees, including continuing training with experienced
counterparts. None of the Company's staff employees are covered by collective
bargaining agreements. The Company considers its relationship with its staff
employees to be good.
Sales and Marketing
SOS generally markets its commercial staffing services through its
network of offices whose managers, supported by the Company's marketing staff,
make personal sales visits to all accounts and prospects. The Company emphasizes
long-term personal relationships with its customers and develops these
relationships through regular contact, periodic assessment of customer
requirements and consistent monitoring of employee performance. New customers
are obtained through customer referrals, telemarketing, cold calls and
advertising in a variety of local and regional media, including television,
radio, direct mail, Yellow Pages, newspapers, magazines and trade publications.
The Company is also a sponsor of job fairs and other community events. In
addition, the Company is increasingly using the Internet to support its
marketing efforts; clients can research the Company and order staffing services
on-line.
The Company's IT sales and marketing efforts may include the activities
described above, but are generally more focused to address IT staffing and
consulting needs which are typical of specific customers. Many of the Company's
existing and prospective IT customers routinely outsource IT functions, such as
programming, help desk and data-center monitoring. The Company's IT staffing and
consulting personnel seek to identify IT requirements of its customers and
promote IT services designed to meet those requirements. In addition to personal
sales visits, targeted mailings and telephone solicitations, the Company's IT
personnel actively promote the Company's services through cross-selling
complementary IT services to existing customers and participating in industry
trade associations.
Recruiting
The Company believes a key element of its growth and profitability has
been its ability to recruit and retain qualified staffing personnel. In an
effort to attract commercial staffing personnel, the Company employs recruiters
who regularly visit schools and professional associations and present career
development programs to various organizations. In addition, the Company obtains
applicants from referrals by its staffing employees and from advertising on
radio, television, in the Yellow Pages and through other print media. The
Company actively utilizes the Internet to recruit professional, IT and technical
staffing, and other employees. Each applicant for a commercial staffing position
is interviewed with emphasis on past work experience, personal characteristics
and individual skills. The Company utilizes the Dictionary of Occupational
Titles, published by the Department of Labor, to evaluate and assign staffing
employees. The Company maintains software-training programs at its offices for
applicants and employees.
The Company's efforts to recruit IT staffing and consulting personnel
frequently include some or all of the recruiting activities employed by the
Company's commercial staffing offices, but typically rely more heavily on
identifying potential employees who possess specialized education, training or
6
work experience. The Company follows a rigorous screening and interview process
before referring qualified candidates to customers for on-site interviews. The
Company's IT recruiting efforts also rely heavily upon industry contacts,
personal networks and referrals from existing and former IT personnel.
To promote loyalty and retention among its staffing employees, the
Company provides them with certain employee benefits, including access to a
Section 401(k) defined contribution plan, cafeteria plan, vacation pay and
health insurance programs. In addition, the Company has the ability to issue
paychecks to commercial staffing employees on a daily basis for work performed.
Risk Management
SOS is responsible for all employee-related expenses for its staff and
temporary employees including workers' compensation, unemployment insurance,
social security taxes, state and local taxes and other general payroll expenses.
The Company has implemented a deductible workers' compensation program through
ACE USA (formerly CIGNA Property and Casualty) with a loss cap of $300,000 per
occurrence, and an aggregate cap of approximately $11.0 million, adjusted based
on actual payroll. Employees in Washington, Wyoming, and North Dakota are
insured through those states' insurance funds because private insurance is not
permitted in those states. The Company employs a full-time professional risk
manager and staff who work closely with the insurance carrier to manage claims.
The Company has also developed workers' compensation loss control
programs that seek to limit claims through employee training and avoidance of
high-risk job assignments such as roofing or logging. Except where prohibited by
law, all employees are required to agree in advance to drug testing following
any work-related accident and all major accidents are investigated. The Company,
in cooperation with its insurer, monitors all claims and regularly reviews the
claims with an emphasis on early closure.
Information Systems
The Company's central management information system is linked to most
of the Company's commercial staffing offices. The centralized system is designed
to support Company-wide operations such as payroll, billing, accounting, sales
and management reports. The Company has some operations, obtained through
acquisition, that have their own centralized systems in place. Systems have been
implemented to automate the reporting of these entities to the Company.
The Company has recently upgraded the commercial staffing segment's
financial systems with plans to upgrade additional information processing
functions. The new system provides for greater flexibility in back office
functions while interfacing well with the front office operations at the branch
level. All files are backed up routinely and stored off-site. Critical files are
backed up on a daily basis. The present system has capacity to service the
Company's anticipated growth without significant capital expenditures for the
foreseeable future
The Company has developed a central management information system for
use by the Company's IT offices. All of the Company's 19 IT offices are linked
to a central management information system. The Company anticipates that its IT
system will be connected to the Company's existing system for certain common
functions; however, the IT system is designed to accommodate the different
business cycles and processes associated with the IT industry.
Factors that May Affect Future Results
The statements contained in this Report that are not purely historical
are "forward-looking statements" within the meaning of Section 27A of the
Securities Act and Section 21E of the Exchange Act. All forward-looking
statements involve various risks and uncertainties. Forward-looking statements
contained in this Report include statements regarding the Company's acquisition
plans and opportunities, existing and proposed service offerings, market
opportunities, expectations, goals, revenues, financial performance, strategies,
intentions for the future and any other statements to the effect that the
Company or its management "believes", "expects", "anticipates", "plans" or other
similar expressions. Such forward-looking statements are included under Item 1.
"Business", Item 2. "Properties", Item 3. "Legal Proceedings" and Item 7.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." All forward-looking statements included in this Report are made as
of the date hereof, based on information available to the Company as of such
date, and the Company assumes no obligation to update any forward-looking
7
statements. It is important to note that such statements may not prove to be
accurate, and that the Company's actual results and future events could differ
materially from those anticipated in such statements. Many factors could cause
actual results to differ materially from the Company's expectations, including,
without limitation, the factors identified below.
The Company's future results will be impacted by, among other factors,
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, 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 skilled 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 will also 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, effects associated with
the recent transition within the Company's senior management, 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 risks and expenses, and the
unanticipated results of pending or future litigation.
All subsequent written and oral forward-looking statements attributable
to the Company or persons acting on its behalf are expressly qualified in their
entirety by this section and other factors included elsewhere in this Report.
You also should consult other factors identified from time to time in the
Company's periodic reports to the Securities and Exchange Commission.
ITEM 2. PROPERTIES
----------
As of January 2, 2000, the Company provided services through 150
offices in 18 states. These offices typically consist of 1,200 to 5,000 square
feet and are generally leased by the Company for terms of three to five years.
Offices in larger or smaller markets may vary in size from the typical office.
The Company does not expect that maintaining or finding suitable lease space at
reasonable rates in its markets or in areas where the Company contemplates
expansion will be difficult.
The Company's executive and administrative offices are located in Salt
Lake City, Utah. The premises consist of approximately 15,600 square feet and
are leased from a related party for a term ending on March 31, 2005, with an
option to renew for 10 additional years (see "Certain Relationship and Related
Transactions"). The Company believes that the terms of the lease are at least as
favorable as could be obtained from any unrelated third party.
ITEM 3. LEGAL PROCEEDINGS
-----------------
In the ordinary course of its business, the Company is periodically
threatened with or named as a defendant in various lawsuits or administrative
proceedings. The Company maintains insurance in such amounts and with such
coverage and deductibles as management believes to be reasonable and prudent.
The principal risks covered by insurance include workers' compensation, personal
injury, bodily injury, property damage, errors and omissions, fidelity losses,
employer practices liability and general liability.
In September 1999, Interliant, Inc. ("Plaintiff") commenced an action
in the United States District Court for the Southern District of Texas, Houston
Division, against the Company and its wholly owned subsidiary, Inteliant
Corporation. The lawsuit alleges, among other things, that the Company's use of
the "Inteliant" mark infringes upon Plaintiff's mark, "Interliant." In addition
to the federal trademark infringement claims, Plaintiff alleges unfair
competition based on the Company's use of the Inteliant mark, common law
infringement and dilution. In the Complaint, Plaintiff has made a demand for an
unspecified amount of damages, as well as for an injunction prohibiting the
Company's use of the Inteliant mark. Based on information from its trademark
8
counsel, the Company believes that it has valid substantive and equitable
defenses to the lawsuit, including that the Inteliant mark is phonetically
dissimilar to Interliant, the use of the Inteliant mark does not infringe upon
Plaintiff's mark, and its use is not confusing or likely to cause confusion.
Notwithstanding the Company's belief, the outcome of any litigation, including
this action, is not certain. If Plaintiff were to prevail in the action, the
Company would be required to stop the use of the Inteliant mark and to possibly
pay damages. The Company does not believe that the cost of changing the mark or
the amount of any damages would have a material adverse impact on the Company's
financial condition or results of operations.
There is no other pending litigation that the Company currently
anticipates will have a material adverse effect on the Company's financial
condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
No matters were submitted to a vote of security holders during the
fourth quarter of the 52 weeks ended January 2, 2000.
9
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
---------------------------------------------------------------------
The information required by this Item is incorporated by reference to
page F-41 of the Company's 1999 Annual Report to Shareholders.
ITEM 6. SELECTED FINANCIAL DATA
-----------------------
The information required by this Item is incorporated by reference to
page F-1 of the Company's 1999 Annual Report to Shareholders.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
-----------------------------------------------------------------------
OF OPERATIONS
-------------
The information required by this item is incorporated by reference to
pages F-9 through F-16 of the Company's 1999 Annual Report to Shareholders.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------
The Company is exposed to interest rate changes primarily in relation
to its 1998 Amended Credit Facility and its 1998 Senior Debt Placement. At
January 2, 2000, the Company's outstanding borrowings on the Credit Facility
were $20.0 million, while outstanding borrowings on the Senior Debt Placement
were $35.0 million. The Company's interest rate risk management objective is to
limit the impact of interest rate changes on earnings and cash flows and to
lower its overall borrowing costs. To achieve this objective the Company borrows
against its credit facility at variable interest rates. The Company's senior
debt placement bears interest at a fixed interest rate. For fixed rate debt,
interest rate changes generally affect the fair value of the debt, but not the
earnings or cash flows of the Company. Changes in the fair market value of fixed
rate debt generally will not have a significant impact on the Company unless the
Company is required to refinance such debt. At January 2, 2000, the fair value
of the Company's long-term debt is estimated by discounting expected cash flows
at a bank's prime rate. At January 2, 2000 the carrying amount of $35.0 million
is reflected in the consolidated balance sheets. The estimated fair value of the
unsecured notes, using a discount rate of 8.5% over the expected maturities of
the obligations, is approximately $32.6 million.
.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
------------------------------------------
The information required by this item is incorporated by reference to
pages F-17 through F-36 of the Company's 1999 Annual Report to Shareholders.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
-----------------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
None
10
Financial Highlights.........................................................F-1
Shareholder Letter...........................................................F-2
The Company..................................................................F-4
Management's Discussion and Analysis
of Financial Condition and Results of Operations........................F-9
Consolidated Financial Statement and Notes..................................F-17
Report of Independent Public Accountants....................................F-38
Financial Highlights
(in thousands, except per share data)
Fiscal Year (52/53 Weeks) Ended
1999 1998(3) 1997 1996 1995(1)
-----------------------------------------------------------------------
Statement of Income Data:
Service revenues $ 371,054 $ 330,327 $ 209,251 $ 136,163 $ 87,533
Gross profit 85,804 75,939 46,711 27,574 18,180
Income from operations 12,564 16,777 12,350 6,707 4,321
Net income(1) 5,351 9,858 7,526 4,030 2,940
Earnings per share
Basic $ 0.42 $ 0.78 $ 0.78 $ 0.59 $ 0.54
Diluted 0.42 0.77 0.77 0.59 0.43
Weighted average common shares
Basic 12,691 12,675 9,654 6,780 4,985
Diluted(2) 12,699 12,810 9,780 6,838 6,229
Balance Sheet Data:
Working capital $ 37,969 $ 26,989 $ 42,791 $ 17,012 $ 9,645
Total assets 200,624 182,909 118,290 47,293 19,327
Total debt 55,687 39,925 - - 1,450
Shareholders' equity 120,086 114,606 104,336 36,834 14,668
(1) The Company completed its initial public offering ("IPO") in July 1995 and
in connection therewith terminated its S Corporation election. Net income
for fiscal 1995 has been adjusted to reflect a pro forma provision for
income taxes.
(2) Prior to the completion of its IPO, the Company distributed approximately
$8.0 million of its accounts receivable to its S Corporation shareholders.
The weighted average common shares outstanding for diluted earnings per
share for 1995 reflects the issuance of 1,230,769 shares at an offering
price of $6.50 per share.
(3) In accordance with Industry practice, the Company reclassed approximately
$1,257,000 in commissions related to permanent placement revenues as a
component of direct cost of services rather than as selling, general, and
administrative expenses.
F-1
Dear Shareholder:
1999 was a year of strengthening our human capital. It was a year of advancing
our market position; a year of developing many aspects of SOS Staffing Services.
The goal was simple--to ensure that we provide better people for better jobs.
In the last year, we made several investments in our people and our technology
in order to deliver quality service to our customers. Notably, we developed our
internal staff by refining our training programs and incorporating ART (the
philosophy of "attracting, retaining and training"). We also developed LCI
(Learner Controlled Instruction) and certification programs to help ensure a
well-trained staff.
Three key executives joined the management team in 1999: Tom Sansom, as
President of the Commercial Division; Brad Stewart, as Executive Vice President
and Chief Financial Officer; and John Schaffer, who was promoted to President of
Inteliant.
Tom has 35 years of experience with national firms in the staffing industry. He
joined SOS in December of 1999. Recently, he was named to the SOS board of
directors. Tom is an experienced leader who has made great contributions in the
industry. We are delighted to welcome him to the SOS board of directors and know
that he will be a valuable asset as we continue to execute our strategic plans.
Brad Stewart, Executive Vice President and Chief Financial Officer, also
recently joined the SOS team. He is a Certified Public Accountant (CPA) and has
more than 15 years of broad experience, including eight years in public
accounting with Arthur Andersen and several years in executive leadership roles
with both Marker International and The Murdock Group.
In March of 1999, John Schaffer was appointed President of the Company's
Inteliant subsidiary. Schaffer joined SOS Staffing Services in 1997 with the
Company's acquisition of JesCo Technical Services, Inc. (Kirkland, Wash.), which
he founded in 1992. John has nearly 15 years' experience in IT management and
consulting, including technology enablement, operations audit, financial system
implementation, release management, and customer service and support.
With an experienced management team at the helm, we are primed for growth.
F-2
SOS recently formed a strategic alliance with BioLynx.Com(R), a company based in
San Antonio, Texas, providing Internet access to employee time and attendance
tracking. Their innovative HandPunch(TM) solution is based on biometric
technology (the statistical study of biological data). Research indicates that
clients using the BioLynx.Com(R) service could potentially save substantial
payroll dollars by eliminating inaccurate time reporting and data entry errors,
and by automating the link to current payroll systems. The system will allow
users to access time and attendance data over the Internet.
Customer satisfaction continues to be a focal point for SOS. During 1999, SOS
provided approximately 100,000 employees to more than 15,000 clients in 28
states (primarily in the western U.S.). Several of our largest customers have
used the Company's service for more than 20 years. We strive to provide our
lifetime customers with value-added services. We listen to and act on feedback
from our clients, as evidenced by increasingly positive rankings on our annual
customer surveys.
SOS made investments in technology in 1999, concentrating on system-integration
and enterprise-wide time and billing solutions for Inteliant. We also enhanced
the "apply on-line" and "order on-line" features of our Internet web site. Web
recruiting continues to enable SOS to fill unique and specialized positions.
Service revenues for the 52 weeks ended January 2, 2000 were $371.1 million
compared to $330.3 million for the 53 weeks ended January 3, 1999, an increase
of 12.4%. Net income for fiscal 1999 was $5.4 million compared to $9.9 million
for fiscal 1998, a decrease of 45.5%. Diluted earnings per common share amounted
to $0.42 for the 52 weeks ended January 2, 2000 and $0.77 for the 53 weeks ended
January 3, 1999.
The increase in service revenues for 1999 was attributable to internal growth in
the Company's comparable offices and acquired businesses. The decrease in net
income was a result of higher operating expenses related to acquired companies
with higher operating cost structures than the remainder of the Company's
operations. In addition, the Company recognized increased amortization expense
from certain earnout programs associated with the Company's acquisitions.
All in all, 1999 has been a year of focusing on our people, our services, our
customers and our technology. We are confident that these investments are well
chosen and will result in a stronger company going forward.
I want to acknowledge the interest and support of our investors. We remain
enthusiastic about the future of SOS, and we pledge our best efforts to our
mutual success.
Sincerely,
/s/JoAnn W. Wagner
- ------------------
JoAnn W. Wagner
Chairman of the Board,
President and
Chief Executive Officer
F-3
Our success has always been linked to recognizing what we do best--and then
finding ways to do it even better. In 1999 we improved upon our strengths and
reinforced SOS Staffing Services' growing reputation as a provider of
innovative, quality staffing services. We are confident these changes will help
us continue expanding our services and growing our company.
Inteliant Corporation
Our information technology subsidiary, Inteliant Corporation, made major strides
in 1999 to integrate its operations into five targeted high-growth regions with
strategic lines of business.
Inteliant initiated its e-commerce and customer relationship management (CRM)
practice areas to complement its traditional strengths in technology and
Internet solutions. As a result, Inteliant has evolved to become a unique
national provider of IT consulting services for Fortune 1000, mid-tier and early
stage customers.
Inteliant continues to expand its communications industry expertise with
existing clients and its new involvement in the Competitive Local Exchange
Carriers (CLEC) space. Inteliant will leverage its already strong position in
the communications industry to upsell several of its new practices, including
e-commerce and CRM.
F-4
Inteliant is now poised to execute a full-service IT consulting plan that
includes increased brand identity, additional markets and enhanced employee
opportunity--enabling it to attract and retain highly skilled consultants and
staff members.
SOS TEAM
SOS has developed recruiting into an ART: Attracting, Retaining and Training.
Because the quality of our staff directly affects the quality of our services,
we go to great lengths to ensure our people are properly trained and effective
in their positions.Our new Learner Controlled Instruction (LCI) training and
certification program, resulting from months of extensive development by the
Company, is highly effective in its ability to teach and test employees on our
operational procedures and methods. Within three days of being hired, new staff
employees begin a step-by-step LCI certification process that includes ongoing
updates on our best practices.
Since LCI is self-paced, it results in effective learning with less supervisory
effort and cost. Coupled with the Rembrandt(R) personality profile, LCI helps us
accurately determine a new employee's potential for success within the unique
SOS service model. Our customers receive the ultimate benefit in responsive,
efficient staffing.
SOS ASSOCIATES
We provide qualified individuals to our customers. Our slogan, "Better People,
Better Jobs," communicates our commitment to thoroughly screen our employees,
guarantee their performance and provide them with valuable career opportunities.
We use SkillCheck(R) to evaluate applicants on their software, clerical and
professional skills. We can also create customized tests and training to satisfy
a customer's specific need. The result is more accurate placement, which saves
SOS and its customers time and money--and enhances customer and employee
satisfaction.
F-5
SOS CUSTOMERS
Customer satisfaction, a key component of any company's success, improved
considerably for SOS in 1999. Nearly 90 percent of the commercial-staffing
customers surveyed rated SOS "good" or "excellent" compared with their
expectations.
Several of our largest customers have been with SOS for more than 20 years. The
loyalty of these businesses is evidence of our quality service.
SOS-BIOLYNX.COM(R) PARTNERSHIP
SOS now has the ability to help businesses save a substantial amount of their
payroll costs through the BioLynx.Com(R) time-tracking system. Our exclusive
agreement with BioLynx.Com, a company based in San Antonio, Texas, positions SOS
as a progressive, full-service human resource partner--rather than just another
vendor.
Through BioLynx.Com's Internet-based tracking services, SOS can give customers
on-demand, global access to employee time and attendance records. This
technology amounts to a much more convenient, efficient tool for businesses to
manage their human resource capital.
F-6
SOS INTERNET RECRUITING
- -----------------------
Our use of new technology places SOS at the forefront of the Internet recruiting
explosion. As we continue to embrace the World Wide Web as a recruiting tool, we
are increasingly able to provide our customers with timely delivery of qualified
people.
The SOS web site, which features online application capability, is quickly
becoming a high-profile recruiting tool that benefits online job seekers,
employers and the Company. Each month sosstaffing.com receives up to 400,000
hits and 1,200 resumes online. These figures continue to rise as we maintain a
targeted Internet advertising banner campaign with U S West(R) and sustain
top-level registration with the Web's most popular search engines.
F-7
(GRAPHIC OMITTED)
ALASKA
Juneau
ARIZONA
Kingman
Phoenix (4)
Prescott
Sierra Vista
Tempe
Tucson (4)
Yuma
CALIFORNIA
Carlsbad
Cupertino
Escondido
Irvine
Lake Forest
Newport Beach
Palo Alto
Pleasanton
San Diego (3)
San Francisco (2)
San Jose
Sunnyvale (2)
Tustin
Venice
COLORADO
Aspen
Aurora
Carbondale
Colorado Springs (3)
Cortez
Craig
Delta
Denver (7)
Durango
Eagle-Vail
Frisco
Ft. Collins
Grand Junction (3)
Greeley
Longmont
Montrose
Northglenn
Pueblo
Rifle
Steamboat Springs
HAWAII
Aiea
Honolulu
IDAHO
Boise
Burley
Idaho Falls
Pocatello
Twin Falls
KANSAS
Kansas City
Lawrence
Olathe
Overland Park (2)
Prairie Village
Topeka
MASSACHUSETTS
Quincy
MISSOURI
Independence (2)
Joplin
Kansas City (3)
Lee's Summit
Liberty
F-8
MONTANA
Billings
Great Falls
NEVADA
Carson City
Elko
Las Vegas (4)
Reno (2)
Sparks
NEW MEXICO
Albuquerque (2)
Clovis
Farmington
Roswell
NORTH DAKOTA
Bismarck
OREGON
Portland (2)
TEXAS
Abilene
Amarillo
Dallas (3)
Fort Worth
Irving
Lubbock
Midland
San Antonio
UTAH
American Fork
Bountiful
Cedar City
Layton
Logan
Murray
Ogden (3)
Orem (2)
Price
Provo
Richfield
Salt Lake City (8)
Spanish Fork
St. George
Vernal
West Jordan
West Valley City (2)
WASHINGTON
Kirkland
Renton
Spokane
Vancouver
WYOMING
Cheyenne
Evanston
Rock Springs
F-8A
Management's Discussion and Analysis
of Financial Condition and Results of Operations
F-9
Management's Discussion and Analysis of Financial Condition and Results of
Operations
The following discussion should be read in conjunction with the consolidated
financial statements of SOS Staffing Services, Inc. ("SOS" or 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.
General: The Company provides a full range of commercial staffing and
information technology ("IT") services through a network of offices located in
18 states. Generally, the Company has entered key metropolitan areas by
initially acquiring or opening a central or "hub" office, and subsequently
developing additional offices in smaller surrounding markets. As offices reach
certain thresholds, the Company often divides them into one or more additional
offices resulting in greater efficiency, profitability and market penetration.
Since the completion of the Company's initial public offering (the "IPO"), the
Company's network of offices has increased, through acquisitions and new office
openings, from 42 to 150, as of January 2, 2000. The purchase prices of
acquisitions have ranged from approximately $15,000 to $15,000,000, plus
contingent earnouts; while capital costs of new office openings, excluding
working capital requirements, have typically ranged from $10,000 to $50,000. To
date, most of the Company's internally developed offices have achieved
profitability within 6 to 12 months, while offices resulting from the division
of existing larger offices are usually profitable from inception.
Contingent earnout agreements are often negotiated as a component of the
purchase price of new acquisitions. An earnout arrangement may be necessary when
the Company believes future consideration may more accurately reflect the
appropriate value for the acquired business and enhance the likelihood of
successfully integrating the acquired company into SOS, or to align the
interests of the Company and the sellers.
Business Segments: The Company's operations are grouped into two identifiable
operating segments: commercial staffing and IT. The commercial staffing segment
provides staffing solutions to companies by furnishing temporary clerical,
industrial, light-industrial, engineering, and professional services. The IT
segment provides e-business solutions (including customer relationship
management, enterprise resource planning, and Internet technology), technology
solutions, outsourcing, management consulting services and staffing.
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:
Fiscal Year (52/53 Weeks) Ended
--------------------------
Consolidated 1999 1998 1997
- ------------ --------------------------
Service revenues 100.0% 100.0% 100.0%
Direct cost of services 76.9 77.0 77.7
--------------------------
Gross profit 23.1 23.0
--------------------------
Operating expenses:
Selling, general and administrative 18.2 16.3 15.7
expenses 1.5 1.2 0.7
Intangibles amortization
Organization realignments -- 0.4 --
--------------------------
Total operating expenses 19.7 17.9 16.4
--------------------------
Income from operations 3.4% 5.1% 5.9%
--------------------------
F-10
Fiscal Year (52/53 Weeks) Ended
-------------------------------
Commercial Staffing Segment 1999 1998 1997
- --------------------------- ----- ----- -----
Service revenues 100.0% 100.0% 100.0%
Direct cost of services 79.0 79.4 79.3
----- ----- -----
Gross profit 21.0 20.6 20.7
----- ----- -----
Operating expenses:
Selling, general and administrative
expenses 16.1 15.1 13.9
Intangibles amortization 1.0 0.7 0.4
----- ----- -----
Total operating expenses 17.1 15.8 14.3
----- ----- -----
Income from operations 3.9% 4.8% 6.4%
----- ----- -----
IT Segment
Service revenues 100.0% 100.0% 100.0%
Direct cost of services 71.3 69.1 68.5
----- ----- -----
Gross profit 28.7 30.9 31.5
----- ----- -----
Operating expenses:
Selling, general and administrative
expenses 20.9 16.9 18.9
Intangibles amortization 2.9 2.7 2.5
Organization realignments -- 1.0 --
----- ----- -----
Total operating expenses 23.8 20.6 21.4
----- ----- -----
Income from operations 4.9% 10.3% 10.1%
----- ----- -----
Fiscal 1999 Compared to Fiscal 1998
- -----------------------------------
Consolidated
Service Revenues: Service revenues for the fifty-two week period ended January
2, 2000 were $371.1 million, an increase of $40.8 million, or 12.4%, compared to
service revenues of $330.3 million for the fifty-three week period ended January
3, 1999. Of the $40.8 million increase, $20.6 million was attributable to newly
acquired businesses while $20.2 million was from internal growth (including new
offices offset by office closures).
The commercial staffing segment contributed approximately 73% of total service
revenues for fiscal 1999, compared to 76% of total service revenues for fiscal
1998. The IT segment contributed approximately 27% of total service revenues in
fiscal 1999 compared to 24% in fiscal 1998. This increase reflects management's
emphasis on the development of solutions based practices.
Gross Profit: In accordance with industry practice, during the fifty-two weeks
ended January 2, 2000, the Company made the decision to classify commissions
related to permanent placement revenues as a component of direct cost of
services rather than as selling, general and administrative expenses. The amount
reclassified for the fifty-three week period ended January 3, 1999 was
approximately $1.3 million.
Gross profit for the fifty-two weeks ended January 2, 2000 was $85.8 million
compared to $75.9 million for the fifty-three weeks ended January 3, 1999, an
increase of $9.9 million or 13.0%. Gross profit margin was 23.1%, compared to
23.0% for the same comparative period.
Operating Expenses: Total operating expenses, as a percentage of revenues,
increased to 19.7% for the fifty-two weeks ended January 2, 2000 from 17.9% for
the fifty-three weeks ended January 3, 1999. The change was due primarily to
operating expenses of acquired companies which have higher operating cost
structures than the remainder of the Company's operations, increased
amortization expense from acquisitions and earnouts, and an increase in the
Company's credit losses during the year.
F-11
Income from Operations: Income from operations decreased approximately $4.2
million, or 25.0%, to $12.6 million for the fifty-two weeks ended January 2,
2000 from $16.8 million for the fifty-three weeks ended January 3, 1999.
Operating margin was 3.4% for the fiscal year ended January 2, 2000 compared to
5.1% for the fiscal year ended January 3, 1999. The decrease in operating margin
was due primarily to the increase in operating expenses.
Income Taxes: The effective combined federal and state income tax rate was 37.7%
for the fifty-two weeks ended January 2, 2000 compared to 37.0% for the
fifty-three weeks ended January 3, 1999. The increase in the combined tax rate
was due primarily to an increase in non-deductible amortization relating to
certain acquisitions and increased operations in states that assess higher state
tax rates. This increase was partially offset by an increase in income tax
credits earned through specific government-sponsored hiring incentives. These
government-sponsored programs are expected to continue to moderate the Company's
future effective tax rate to the extent these programs or similar programs
remain in effect.
Commercial Staffing Segment
Service Revenues: Substantially all of the commercial staffing segment's service
revenues are based on the time worked by its temporary staffing employees on
customer assignments and from permanent placement of personnel with customers.
Service revenues generated from temporary assignments are recognized as income
at the time service is provided, while service revenues generated from permanent
placement services are recognized at the time the customer agrees to hire a
candidate supplied by the Company. Service revenues for the commercial staffing
segment increased by $20.7 million, or 8.2%, to $273.6 million for the fifty-two
weeks ended January 2, 2000, compared to $252.9 million for the fifty-three
weeks ended January 3, 1999. Of the $20.7 million increase, approximately $2.3
million was contributed by new offices (offset by office closures); $10.2
million was attributable to offices acquired that do not have operations
included in the prior year; and $8.2 million was attributable to increased
revenues from comparable offices.
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. Gross profit margin
for the fifty-two week period ended January 2, 2000 was 21.0%, compared to 20.6%
for the fifty-three week period ended January 3, 1999.
Operating Expenses: Operating expenses include, among other things, staff
employee compensation, rent, recruitment and retention of temporary staffing
employees, costs associated with opening new offices, depreciation, intangibles
amortization and advertising.
Total operating expenses as a percentage of service revenues were 17.1% for the
fifty-two week period ended January 2, 2000 and 15.8% for the fifty-three week
period ended January 3, 1999.
Operating expenses, excluding intangibles amortization, as a percentage of
service revenues for the fifty-two week period ended January 2, 2000 were 16.1%
compared to 15.1% for the fifty-three week period ended January 3, 1999. The
increase was attributable primarily to the operations of acquired businesses
with higher operating cost structures than the remainder of the Company's
operations, an increase in credit losses experienced during the year, and an
increase in depreciation, primarily related to implementation of the Company's
new financial system software and related systems.
Intangible amortization increased 44.4% to $2.6 million for the fifty-two week
period ended January 2, 2000, from $1.8 million for the fifty-three week period
ended January 3, 1999. Intangible amortization as a percentage of service
revenues was 1.0% and 0.7% for the same comparable reporting period. The
increase is due primarily to increased earnouts paid in fiscal 1999 and full
year amortization of entities acquired in fiscal 1998.
F-12
Income from Operations: Income from operations for the fifty-two week period
ended January 2, 2000 was $10.8 million, a decrease of $1.4 million, or 11.5%,
from $12.2 million for the fifty-three week period ended January 3, 1999.
Operating margin was 3.9%, compared to 4.8% for the same comparable reporting
period. The decrease in operating margin was due largely to increases in
selling, general and administrative expenses and intangibles amortization.
IT Segment
Service Revenues: As with the commercial staffing segment, IT segment service
revenues are generally based on the time worked by consulting and temporary
staffing and consulting employees on customer assignments, or when staff is
placed on a permanent basis with the customer. Service revenues, including
inter-company revenues, increased $21.9 million, or 27.9%, to $100.5 million for
the fifty-two week period ended January 2, 2000, from $78.6 million for the
fifty-three week period ended January 3, 1999. The change was due in part to
internal growth (the development of new offices and contributions from
comparable offices offset by office closures), which accounted for approximately
$12.0 million, while approximately $9.9 million was attributable to offices
acquired that do not have operations included in the prior year.
Gross Profit: The Company defines gross profit as service revenues less the cost
of providing services. Such costs include wages, employer payroll taxes (FICA,
unemployment and other general payroll taxes), workers' compensation costs
related to consulting and temporary staffing and consulting employees, and other
payroll benefits; costs related to outside consultants and independent
contractors utilized by the Company; and other direct costs associated with any
consulting engagement. Gross profit margin for the fifty-two weeks ended January
2, 2000 was 28.7% compared to 30.9% for the fifty-three weeks ended January 3,
1999. The decrease in gross profit margin was due primarily to a reduction in
higher-margin consulting engagements as customers began to closeout Y2K-related
projects and postpone new projects until after January 1, 2000, coupled with the
retention and additional hiring of key employees in strategic business lines.
Operating Expenses: Total operating expenses as a percentage of revenues were
23.8% for the fifty-two week period ended January 2, 2000 and 20.6% for the
fifty-three week period ended January 3, 1999. Operating expenses, excluding
intangibles amortization and organization realignments, as a percentage of
service revenues for the fifty-two week period ended January 2, 2000 were 20.9%
compared to 16.9% for the fifty-three week period ended January 3, 1999. The
increase reflects the acquisition of companies with higher operating cost
structures, an increase in credit losses, as well as additional management
changes and costs related to relocating the Company's Inteliant subsidiary.
Intangible amortization increased to $2.9 million for the fifty-two weeks ended
January 2, 2000 from $2.1 million for the fifty-three weeks ended January 3,
1999. Intangible amortization as a percentage of revenues was 2.9% and 2.7% for
the same comparable reporting periods. The increase was due primarily to
increased earnouts paid in fiscal 1999 and full year amortization of entities
acquired in fiscal 1998.
Income from Operations: Income from operations for fiscal 1999 was $4.9 million,
a decrease of $3.0 million, or 38.0%, from $7.9 million in fiscal 1998.
Operating margin for fiscal 1999 was 4.9%, compared to 10.3% in 1998. The
decrease in income from operations is a factor of reduced gross margin
percentage coupled with increased operating expenses.
Fiscal 1998 Compared to Fiscal 1997
- -----------------------------------
Consolidated
Service Revenues: Service revenues for fiscal 1998 were $330.3 million, an
increase of $121.0 million, or 57.8%, compared to revenues of $209.3 million in
F-13
fiscal 1997. Of the $121.0 million increase, approximately $99.2 million was
attributable to newly acquired businesses, $18.6 million was from internal
growth (including new offices offset by office closures), and an additional $3.2
million was realized due to fiscal 1998 containing 53 weeks compared to 52 weeks
for fiscal 1997.
The commercial staffing segment contributed approximately 76% of total service
revenues for fiscal 1998, compared to 85% of total service revenues for fiscal
1997. The IT segment contributed approximately 24% of total service revenues in
fiscal 1998 compared to 15% in fiscal 1997. This reflects management's emphasis
on acquisitions of IT-related enterprises.
Gross Profit: Gross profit for fiscal 1998 was $75.9 million compared to $46.7
million for fiscal 1997, an increase of $29.2 million or 62.5%. Gross profit
margin for fiscal 1998 was 23.0%, compared to 22.3% in fiscal 1997, reflecting
the increased mix of higher-margin IT business.
Operating Expenses: Total operating expenses, as a percentage of revenues,
increased to 17.9% for fiscal 1998 from 16.4% in fiscal 1997. The increase was
due principally to organization realignment costs of approximately $1.4 million,
an increase in intangibles amortization, and acquisitions of companies that
operate in regions with higher staffing and facility costs.
Of the $1.4 million in organization realignment costs, $0.5 million was incurred
in establishing and launching the Company's Inteliant tradename, and another
$0.3 million was incurred by streamlining management in the IT segment. In the
commercial staffing segment, $0.1 million was incurred in realignment costs, and
$0.5 million was incurred as a result of corporate management changes.
Income from Operations: Income from operations increased approximately $4.4
million, or 35.5%, to $16.8 million in fiscal 1998 compared to $12.4 million in
fiscal 1997. Operating margin, as a percentage of revenues, was 5.1% in fiscal
1998 compared to 5.9% in fiscal 1997. The decrease in operating margin was due
primarily to the increase in operating expenses.
Income Taxes: The Company's effective combined federal and state income tax rate
was 37.0% in fiscal 1998 compared to 40.4% in fiscal 1997. The decrease in the
combined tax rate was due primarily to income tax credits earned through
specific government-sponsored hiring incentives. These programs are expected to
continue to decrease the Company's future effective tax rate, to the extent
these programs or similar programs remain in effect. The reduction offered by
tax credits was partially offset by an increase in non-deductible amortization
relating to certain acquisitions and increased operations in states which assess
higher state tax rates.
Commercial Staffing Segment
Service Revenues: Service revenues for the commercial staffing segment increased
by $75.3 million, or 42.4%, to $252.9 million for fiscal 1998, compared to
$177.6 million for fiscal 1997. Of the $75.3 million increase, approximately
$3.0 million was attributable to the additional week in the fiscal year;
approximately $1.4 million was contributed by new offices; approximately $58.2
million was attributable to offices acquired during 1997 and 1998; and
approximately $12.7 million was attributable to increased revenues from
comparable offices.
Gross Profit: The Company defines gross profit as service revenues less the cost
of providing services, which includes wages of temporary staffing employees,
employer payroll taxes (FICA, unemployment and other general payroll costs) and
workers' compensation costs. Gross profit margin for fiscal 1998 was 20.6%,
compared to 20.7% in fiscal 1997.
Operating Expenses: Operating expenses include, among other things, staff
compensation, rent, recruitment and retention of temporary staffing employees,
costs associated with opening new offices, depreciation, amortization and
advertising.
Operating expenses, excluding organization realignment costs and intangibles
amortization, as a percentage of service revenues for fiscal year 1998 were
F-14
15.1% compared to 13.9% for fiscal 1997. The increase was attributable to the
operations of acquired businesses with higher operating cost structures than the
remainder of the Company's operations, an increase in credit losses experienced
during the year, and an increase in depreciation.
Intangible amortization increased to $1.8 million from $0.7 million, or 157.1%,
for fiscal 1998 compared to fiscal 1997. Intangible amortization as a percentage
of service revenues was 0.7% and 0.4% for fiscal 1998 and fiscal 1997,
respectively. The increase was due to increased acquisitions and earnouts for
1998 and 1997.
During fiscal 1998, in an effort to streamline the reporting process from the
different regions, a level of management was eliminated. Costs of approximately
$0.1 million were incurred in this organization realignment. Management feels
that the new organization will allow the commercial staffing segment to respond
to issues and events with greater efficiency.
Total operating expenses as a percentage of service revenues were 15.8% and
14.3% for fiscal 1998 and fiscal 1997, respectively.
Income from Operations: Income from operations for fiscal 1998 was $12.2
million, an increase of $0.8 million, or 7.0%, from $11.4 million in fiscal
1997. Operating margin for fiscal 1998 was 4.8%, compared to 6.4% in 1997. The
decrease in operating margin was due largely to an increase in selling, general
and administrative expenses and intangibles amortization.
IT Segment
Service Revenues: Service revenues, including inter-company revenues, increased
$46.9 million, or 147.9%, to $78.6 million in fiscal 1998, compared to $31.7
million in fiscal 1997. The change was primarily attributable to acquisitions
that accounted for approximately $41.0 million. Internal growth (the development
of new offices and contributions from comparable offices) accounted for
approximately $5.7 million; and an additional $0.2 million was recognized as a
result of the fiscal year containing 53 weeks compared to 52 weeks in the prior
fiscal year.
Gross Profit: The Company defines gross profit as service revenues less the cost
of providing services. Such costs include wages of staffing and consulting
employees, outside consultants and independent contractors hired by the Company,
employer payroll taxes (FICA, unemployment and other general payroll costs),
workers' compensation costs, and other direct costs associated with any
consulting engagement. Gross profit for fiscal 1998 was $23.9 million, an
increase of $13.9 million, or 139%, compared to $10.0 million in fiscal 1997.
Gross profit margin for fiscal 1998 was 30.9% compared to 31.5% in fiscal 1997.
Operating Expenses: Operating expenses, excluding intangibles amortization and
organization realignments, as a percentage of service revenues for fiscal 1998
and fiscal 1997 were 16.9% and 18.9%, respectively. Intangible amortization
increased to $2.1 million for fiscal 1998 compared to $0.8 million for fiscal
1997. Intangible amortization as a percentage of revenues was 2.7% and 2.5% for
the same comparable reporting periods. The increase was due primarily to
increased acquisitions and earnouts for 1998.
Organization realignment costs of $0.8 million, or 1.0% of revenues, resulted
from personnel changes and costs associated with realigning and launching the
Inteliant identity for the IT segment.
Total operating expenses as a percentage of revenues were 20.6% and 21.4% for
fiscal 1998 and fiscal 1997, respectively.
Income from Operations: Income from operations for fiscal 1998 was $7.9 million,
an increase of $4.7 million, or 146.9%, from $3.2 million in fiscal 1997.
Operating margin for fiscal 1998 was 10.3%, compared to 10.1% in fiscal 1997.
F-15
Liquidity and Capital Resources
- -------------------------------
For the fiscal year ended January 2, 2000 net cash provided by operating
activities was $12.9 million, compared to $9.9 million for the fiscal year ended
January 3, 1999. The change in operating cash flow was primarily a result of a
net increase of $4.8 million in certain working capital components including
accounts receivable, workers' compensation and other accrued liabilities, offset
by a decrease of $1.8 million in net income adjusted by non-cash items such as
depreciation and amortization.
The Company's investing activities for the fifty-two weeks ended January 2, 2000
used $31.4 million, compared to $64.4 million for the fifty-three weeks ended
January 3, 1999. For the fifty-two weeks ended January 2, 2000 the Company's
investing activities used approximately $4.3 million to purchase property and
equipment compared to $4.4 million for the fifty-three weeks ended January 3,
1999; and approximately $28.6 million for acquisition costs and earnouts during
the fifty-two weeks ended January 2, 2000 compared to $60.0 million for the
fifty-three weeks ended January 3, 1999. In September 1999, the Company sold
certain fixed assets for $1.5 million in a sale-leaseback transaction. The lease
is being treated as an operating lease and the gain of approximately $0.1
million is being amortized over the five-year term of the lease.
The Company's financing activities provided net proceeds of $15.7 million for
the fifty-two weeks ended January 2, 2000, primarily from borrowings against the
Company's revolving credit facility, compared to $39.3 million for the
fifty-three weeks ended January 3, 1999. The unsecured credit facility provides
for maximum borrowings of $40 million. The agreement, which provides for both
short-term and long-term borrowings, expires in July 2001. Short-term borrowings
bear interest at a bank's prime rate (8.5% at January 2, 2000). Long-term
borrowings bear interest at LIBOR plus an "applicable margin" (currently 2.0%)
dependent on certain financial ratios (average rate of 8.17% at January 2,
2000). As of January 2, 2000, $12.9 million was available for borrowings or
additional letters of credit.
Management believes that the present credit facilities, together with cash
reserves and cash flow from operations, will be sufficient to fund the Company's
operations and capital expenditure requirements for at least the next twelve
months. However, if the Company were to expand its operations significantly,
especially through acquisitions, additional capital may be required. There can
be no assurance that the Company will be able to obtain additional capital at
acceptable rates.
Seasonality
- -----------
The Company's business follows the seasonal trends of its customers' business.
Historically, the commercial staffing segment has experienced lower revenues in
the first quarter with revenues accelerating during the second and third
quarters and then starting to slow again during the fourth quarter. The IT
segment does not experience the same level of seasonality associated with the
commercial staffing segment.
Impact of Inflation
- -------------------
The Company believes that over the past three years inflation has not had a
significant impact on the Company's results of operations.
F-16
Consolidated Financial Statements and Notes
F-17
SOS STAFFING SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
As of January 2, 2000 and January 3, 1999
ASSETS
(in thousands)
January 2, January 3,
2000 1999
--------- ---------
CURRENT ASSETS
Cash and cash equivalents $ 2,577 $ 5,315
Accounts receivable, less allowances
of $1,606 and $762, respectively 50,070 44,627
Current portion of workers' compensation
deposit 600 462
Prepaid expenses and other 973 1,054
Deferred income tax asset 3,666 1,849
Income tax receivable 676 571
--------- ---------
Total current assets 58,562 53,878
--------- ---------
PROPERTY AND EQUIPMENT, at cost
Computer equipment 6,806 5,977
Office equipment 4,520 2,917
Leasehold improvements and other 1,967 1,553
--------- ---------
13,293 10,447
Less: accumulated depreciation and
amortization (5,454) (3,103)
--------- ---------
Total property and equipment, net 7,839 7,344
--------- ---------
OTHER ASSETS
Workers' compensation deposit, less
current portion 106 106
Intangible assets, less accumulated
amortization of $10,959 and $5,872,
respectively 131,995 119,709
Deposits and other assets 2,122 1,872
--------- ---------
Total other assets 134,223 121,687
--------- ---------
Total assets $ 200,624 $ 182,909
========= =========
The accompanying notes to consolidated finanfcial statements are an
integral part of these consolidated statements.
F-18
SOS STAFFING SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
As of January 2, 2000 and January 3, 1999
LIABILITIES AND SHAREHOLDERS' EQUITY
(in thousands, except per share data)
January 2, January 3,
2000 1999
-------- --------
CURRENT LIABILITIES
Accounts payable $ 2,521 $ 3,350
Accrued payroll costs 7,213 6,805
Current portion of workers' compensation reserve 4,223 2,358
Accrued liabilities 5,912 2,163
Current portion of notes payable 414 313
Accrued acquisition costs and earnouts 310 11,900
-------- --------
Total current liabilities 20,593 26,889
-------- --------
LONG-TERM LIABILITIES
Notes payable, less current portion 55,273 39,612
Workers' compensation reserve, less current portion 973 478
Deferred income tax liability 2,923 927
Deferred compensation liabilities 776 397
-------- --------
Total long-term liabilities 59,945 41,414
-------- --------
COMMITMENTS AND CONTINGENCIES
(Notes 3 and 5)
SHAREHOLDERS' EQUITY
Common stock $0.01 par value 20,000 shares
authorized 12,692 and 12,689 shares issued
and outstanding, respectively 127 127
Additional paid-in capital 91,693 91,564
Retained earnings 28,266 22,915
-------- --------
Total shareholders' equity 120,086 114,606
-------- --------
Total liabilities and shareholders' equity $200,624 $182,909
======== ========
The accompanying notes to consolidated finanfcial statements are an
integral part of these consolidated statements.
F-19
SOS STAFFING SERVICES, INC.
CONSOLIDATED STATEMENTS OF INCOME
For the Fiscal Years Ended January 2,2000, January 3, 1999 and December 28, 1997
(in thousands, except per share data)
Fiscal Year (52/53 Weeks)
1999 1998 1997
--------- --------- ---------
SERVICE REVENUES $ 371,054 $ 330,327 $ 209,251
DIRECT COST OF SERVICES 285,250 254,388 162,540
--------- --------- ---------
Gross Profit 85,804 75,939 46,711
--------- --------- ---------
OPERATING EXPENSES:
Selling, general and administrative 67,758 53,821 32,868
Organization realignments -- 1,395 --
Intangibles and amortization 5,482 3,946 1,493
--------- --------- ---------
Total operating expenses 73,240 59,162 34,361
--------- --------- ---------
INCOME FROM OPERATIONS 12,564 16,777 12,350
--------- --------- ---------
OTHER INCOME (EXPENSE):
Interest expense (4,104) (1,660) (368)
Interest income 129 229 498
Other, net (5) 299 145
--------- --------- ---------
Total, net 3,980 1,132 275
--------- --------- ---------
INCOME BEFORE PROVISION FOR
INCOME TAXES
PROVISION FOR INCOME TAXES (3,233) (5,787) (5,099)
--------- --------- ---------
NET INCOME $ 5,351 $ 9,858 $ 7,526
========= ========= =========
NET INCOME PER COMMON SHARE:
Basic $ 0.42 $ 0.78 $ 0.78
Diluted 0.42 0.77 0.77
WEIGHTED AVERAGE COMMON SHARES:
Basic 12,691 12,675 9,654
Diluted 12,699 12,810 9,780
The accompanying notes to consolidated finanfcial statements are an
integral part of these consolidated statements.
F-20
SOS STAFFING SERVICES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the Fiscal Years Ended
January 2, 2000, January 3, 1999 and December 28, 1997
(in thousands)
Additional
Common Stock Paid-in Retained
Shares Amount Capital Earnings Total
------ -------- -------- -------- --------
BALANCE, December 29, 1996 8,706 $ 87 $ 31,216 $ 5,531 $ 36,834
Exercise of stock options 17 1 143 -- 144
Sale of common stock, net 3,930 39 59,793 -- 59,832
Net income -- -- -- 7,526 7,526
------ -------- -------- -------- --------
BALANCE, December 28, 1997 12,653 127 91,152 13,057 104,336
Exercise of stock options 36 -- 412 -- 412
Net income -- -- -- 9,858 9,858
------ -------- -------- -------- --------
BALANCE, January 3, 1999 12,689 127 91,564 22,915 114,606
Exercise of stock options 2 -- 22 -- 22
Tax benefit of disqualifying
dispositions of stock -- -- 107 -- 107
Net income -- -- -- 5,351 5,351
------ -------- -------- -------- --------
BALANCE, January 2, 2000 12,691 $ 127 $ 91,693 $ 28,266 $120,086
====== ======== ======== ======== ========
The accompanying notes to consolidated finanfcial statements are an
integral part of these consolidated statements.
F-21
SOS STAFFING SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Fiscal Years Ended January 2, 2000, January
3, 1999 and December 28, 1997
(in thousands)
Fiscal Year (52/53 Weeks)
1999 1998 1997
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 5,351 $ 9,858 $ 7,526
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 8,094 5,360 2,157
Deferred income taxes 179 123 (596)
Loss on disposition of assets 19 50 27
Changes in operating assets and liabilities:
Accounts receivable, net (5,720) (8,864) (12,449)
Workers' compensation deposit (138) 14 135
Prepaid expenses and other 81 (228) (289)
Amounts due from related parties -- -- (18)
Deposits and other assets (18) (789) (312)
Accounts payable (829) 2,378 371
Accrued payroll costs 409 3,239 1,456
Workers' compensation reserve 2,360 (238) 1,196
Accrued liabilities 3,255 484 (625)
Income taxes payable/receivable (105) (1,518) 480
-------- -------- --------
Net cash provided by (used in) 12,938 9,869 (941)
operating activities
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for acquisitions of businesses (32) (41,080) (38,575)
Purchases of property and equipment (4,346) (4,431) (1,830)
Payments on acquisition earnouts (28,611) (18,903) (3,955)
Proceeds from sale of property and equipment 1,598 60 3
-------- -------- --------
Net cash used in investing activities (31,391) (64,354) (44,357)
-------- -------- --------
The accompanying notes to consolidated finanfcial statements are an
integral part of these consolidated statements.
F-22
SOS STAFFING SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
For the Fiscal Years Ended January 2,
2000, January 3, 1999 and December 28, 1997
(in thousands)
Fiscal Year (52/53 Weeks)
1999 1998 1997
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net $ -- $ -- $ 59,832
Proceeds from exercise of employee stock options 129 412 144
Proceeds from long-term borrowings 22,000 62,000 13,000
Payments on long-term borrowings (6,414) (23,075) (13,000)
-------- -------- --------
Net cash provided by financing activities 15,715 39,337 59,976
-------- -------- --------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (2,738) (15,148) 14,678
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 5,315 20,463 5,785
-------- -------- --------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 2,577 $ 5,315 $ 20,463
======== ======== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 3,908 $ 1,223 $ 226
Income taxes 3,332 7,322 5,169
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
The following table sets forth information relating to the Company's
acquisitions of certain businesses (see Note 3):
Fiscal Year (52/53 Weeks)
--------------------------------------------------------
1999 1998 1997
-------------- ------------------ ------------------
Fair value of assets acquired $ 32 $ 45,247 $ 40,443
Liabilities assumed -- 1,016 880
Notes payable issued in connection with acquisition -- 2,935 798
Accrued acquisition costs and earnouts -- 11,900 3,413
During fiscal year 1997, amounts receivables from TSI, totaling approximately
$0.6 million, were offset against the acquisition note payable (see Note 10).
The accompanying notes to consolidated finanfcial statements are an
integral part of these consolidated statements.
F-23
Notes to Consolidated Financial Statements
1. Nature of Operations
SOS Staffing Services, Inc. ("SOS" or the "Company") is a leading provider of
staffing and consulting services in the Western United States and Massachusetts.
As of January 2, 2000, SOS operated a network of 150 offices located in 18
states. The Company provides a broad range of commercial staffing and
information technology ("IT") services. Commercial staffing services include
light industrial, clerical, industrial, technical and other professional
services. IT services consist of e-business solutions (including customer
relationship management, enterprise resource planning, and internet technology),
technology solutions, outsourcing, communications, and staffing services in
IT-related fields.
2. Summary of Significant Accounting Policies
Fiscal Year - The Company's fiscal year ends on the Sunday closest to December
31, which results in a 52- or 53-week year. Fiscal year ended January 2, 2000
("fiscal 1999"), and fiscal year ended December 28, 1997 ("fiscal 1997") each
contained 52 weeks. Fiscal year ended January 3, 1999 ("fiscal 1998") contained
53 weeks.
Principles of Consolidation - The consolidated financial statements include the
accounts of SOS Staffing Services, Inc. and its wholly owned subsidiaries,
ServCom Staff Management, Inc. ("ServCom"), SOS Collection Services, Inc. and
Inteliant Corporation ("Inteliant"). All significant intercompany transactions
have been eliminated in consolidation.
Use of Estimates - The preparation of financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities, and disclosure of contingent assets and liabilities at
the date of the financial statements, and the reported amounts of revenues and
expenses during the reported periods. Actual results could differ from those
estimates.
Revenue Recognition - Service revenues generated from temporary assignments and
consulting engagements 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.
Cash and Cash Equivalents - The Company considers highly liquid investments with
an original maturity of three months or less to be cash and cash equivalents.
Cash and cash equivalents consist of various money market accounts and are
recorded at cost, which approximates market value.
Property and Equipment - Property and equipment are stated at cost and are
depreciated using the straight-line method over their estimated useful lives.
Leasehold improvements are amortized over the terms of the respective leases or
the estimated economic lives of the assets whichever is shorter. The
depreciation and amortization periods are as follows:
Computer equipment 2 - 7 years
Office equipment 3 - 7 years
Leasehold improvements and other 5 - 17 years
Upon retirement or other disposition of property and equipment, the cost and
related accumulated depreciation and amortization are removed from the accounts.
The resulting gain or loss is reflected in income. Major renewals and
improvements are capitalized while minor expenditures for maintenance and
repairs are charged to expense as incurred.
F-24
Workers' Compensation - For fiscal 1999 and 1998, the Company maintained
workers' compensation insurance with ACE USA ("ACE") (formerly CIGNA Property
and Casualty) for claims in excess of a loss cap of $300,000 and $250,000 per
incident, respectively. Under the terms of the ACE agreement, the Company is
required to fund into a deposit account an amount for payment of claims. The
fund is replenished monthly based on actual payments made by ACE during the
previous month. Some states do not permit private insurance for workers'
compensation; where this is the case, the Company is covered by appropriate
state insurance funds.
The Company has established reserve amounts based upon information provided by
the insurance companies as to the status of claims plus development factors for
incurred but not yet reported claims and anticipated future changes in
underlying case reserves. Such reserve amounts are only estimates and there can
be no assurance that the Company's future workers' compensation obligations will
not exceed the amount of its reserves. However, management believes that the
difference between the amounts recorded for its estimated liability and the
costs of settling the actual claims will not be material to the results of
operations.
1999 1998
--------- ---------
Goodwill $ 138,473 $ 121,529
Non-compete agreements 2,984 2,996
Other intangible assets 1,497 1,056
--------- ---------
) Total 142,954 125,581
Less: accumulated amortization (10,959) (5,872
--------- ---------
$ 131,995 $ 119,709
--------- ---------
Intangible Assets - Intangible assets consist of the following amounts as of
January 2, 2000 and January 3, 1999 (in thousands):
Goodwill is 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.
Accounting for the Impairment of Long-Lived Assets -The Company accounts for
impairment of long-lived assets in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of." SFAS No. 121
requires that long-lived assets, including goodwill, be reviewed for impairment
whenever events or changes in circumstances indicate that the book value of the
asset may not be recoverable. The Company evaluates, at each balance sheet date,
whether events or circumstances have occurred that indicate possible impairment.
In accordance with SFAS No. 121, the Company uses an estimate of the future
undiscounted net cash flows of the related asset over the remaining life in
measuring whether the assets are recoverable.
Income Taxes - The Company recognizes deferred income tax assets or liabilities
for expected future tax consequences of events that have been recognized in the
financial statements or tax returns. Under this method, deferred income tax
assets or liabilities are determined based upon the difference between the
financial and income tax basis of assets and liabilities using enacted tax rates
expected to apply when differences are expected to be settled or realized.
Net Income Per Common Stock - Basic net income per common share ("Basic EPS")
excludes dilution and is computed by dividing net income by the weighted-average
number of common shares outstanding during the year. Diluted net income per
common share ("Diluted EPS") reflects the potential dilution that could occur if
stock options or other common stock equivalents were exercised or converted into
common stock. The computation of Diluted EPS does not assume exercise or
conversion of securities that would have an antidilutive effect on net income
per common share.
F-25
Following is a reconciliation of the numerator and denominator of Basic EPS to
the numerator and denominator of Diluted EPS for all years presented (in
thousands, except per share amounts):
Net Income Shares Per-Share
(Numerator) (Denominator) Amount
------ ------ ------
Fiscal 1999
Basic EPS $5,351 12,691 $ 0.42
Effect of stock options -- 8
------ ------ ------
Diluted EPS $5,351 12,699 $ 0.42
====== ====== ======
Fiscal 1998
Basic EPS $9,858 12,675 $ 0.78
Effect of stock options -- 135
------ ------ ------
Diluted EPS $9,858 12,810 $ 0.77
====== ====== ======
Fiscal 1997
Basic EPS $7,526 9,654 $ 0.78
Effect of stock options -- 126
------ ------ ------
Diluted EPS $7,526 9,780 $ 0.77
====== ====== ======
At the end of fiscal 1999, 1998 and 1997, there were outstanding options to
purchase 931,000, 375,000 and 284,000, shares of common stock, respectively,
that were not included in the computation of Diluted EPS because the options'
exercise prices were greater than the average market price of the common shares.
Concentrations of Credit Risk - The Company's financial instruments that
potentially subject the Company to concentrations of credit risk consist
principally of cash and trade receivables. In the normal course of business, the
Company provides credit terms to its customers. The Company believes its
portfolio of accounts receivable is well diversified, and as a result, its
concentrations of credit risks are minimal. The Company performs ongoing credit
evaluations of its customers and maintains allowances for possible losses, but
typically does not require collateral.
Fair Value of Financial Instruments - The Company's financial instruments
consist primarily of cash and cash equivalents and debt obligations. As a result
of changes in certain bank's prime interest rates, the Company estimates that
the fair value of its unsecured debt obligations has decreased. The fair value
of the Company's long-term debt is estimated by discounting expected cash flows
at a bank's prime rate. At January 2, 2000 the carrying amount of $35.0 million
is reflected in the consolidated balance sheets. The estimated fair value of the
unsecured notes, using a discount rate of 8.5% over the expected maturities of
the obligations, is approximately $32.6 million.
Reclassifications - Certain reclassifications have been made to the fiscal 1998
consolidated financial statements to conform to the current year's presentation.
In accordance with industry practice, the Company made the decision to classify
commissions related to permanent placement revenues as a component of direct
cost of services rather than as selling, general and administrative expenses.
The amount reclassified for the fifty-three week period ended January 3, 1999
was approximately $1,257,000.
3. Acquisitions
All of the Company's acquisitions have been accounted for using the purchase
method, and the excess of the purchase price over the estimated fair value of
F-26
the acquired assets less liabilities assumed has been allocated to goodwill and
other intangible assets. Certain acquisitions have contingent earnout components
of the purchase price that are typically based on achieving some pre-defined
performance level. The Company's maximum potential earnout liability at January
2, 2000 was approximately $17.0 million. Earnout amounts accrued increase the
amount of goodwill related to the acquisition. The following is a summary of
acquisitions during fiscal 1999, 1998 and 1997 (in thousands):
Max. Earnout Amount
Remaining As Allocated to
Date Acquired Purchase Price of 1/2/00 Intangible Assets
--------------- --------------- ---------------- -----------------
1999 Acquisitions: Various $ 32 $ -- $ 32
--------------- ---------------- -----------------
1998 Acquisitions:
Mortgage Staffing, Inc. January $ 3,754 $ -- $ 3,714
Hutton, Graber, & Assoc, Inc. January 1,803 -- 1,770
Computer Professional Resources, Inc. February 4,720 286 4,218
TOPS Staffing Services, Inc. March 6,143 -- 5,944
Aquas, Inc. May 9,590 5,152 9,570
Abacab Software, Inc. May 7,642 7,341 7,018
NeoSoft, Inc. July 10,966 3,828 10,439
Sterling Truex, Inc. September 7,514 -- 7,283
Devon & Devon Personnel Services, Inc. September 4,208 -- 3,763
Others Various 2,697 357 2,683
--------------- ---------------- -----------------
$ 59,037 $ 16,964 $ 56,402
--------------- ---------------- -----------------
1997 Acquisitions:
Computer Group, Inc. January $ 2,747 $ -- $ 2,647
Bedford Consultants, Inc. July 5,028 -- 4,409
Telecom Project Assistance, Inc. July 5,386 -- 5,292
Execusoft, Inc. August 7,805 -- 7,747
JesCo Technical Services, Inc. October 11,853 -- 11,818
Century Personnel, Inc. October 24,863 -- 24,761
Others Various 6,113 -- 5,170
--------------- ---------------- -----------------
$ 63,795 $ -- $ 61,844
--------------- ---------------- -----------------
Pro Forma Acquisition Information: The unaudited pro forma acquisition
information for fiscal 1998 presents the results of operations as if the 1998
acquisitions had occurred at the beginning of fiscal 1998. Acquisitions made in
fiscal 1999 are immaterial and do not have a significant impact on the proforma
results. The results of operations give effect to certain adjustments, including
amortization of intangible assets, interest expense on acquisition debt, the
reduction in expenses for the difference between compensation of employees prior
to the acquisition and their compensation following the acquisition, income
taxes and the additional common shares deemed to be outstanding as the result of
the Company's public offerings. The pro forma results have been prepared for
comparative purposes only and do not purport to be indicative of what would have
occurred had the acquisitions been made at the beginning of fiscal 1998 as
described above or of the results that may occur in the future.
F-27
Unaudited Pro Forma Results of Operations
-----------------------------------------
(in thousands, except per share data)
-------------------------------------
1998
----------------
Service Revenues $ 348,388
Income from operations 20,118
Net income 11,288
Diluted EPS 0.88
4. Credit Facilities
The Company has an unsecured revolving credit facility with certain banks that
provides for maximum borrowings of $40 million. The credit agreement, which
provides for both short-term and long-term borrowings, expires in July 2001.
Short-term borrowings bear interest at a bank's prime rate (8.5% at January 2,
2000). Long-term borrowings bear interest at LIBOR plus an applicable margin,
ranging from 1.0% to 2.0%, dependent on certain financial ratios; the current
applicable margin is 2.0%. The agreement contains an annual commitment fee of
three-eighths of one percent on any unused portion, payable quarterly.
At January 2, 2000, the Company had $20.0 million in long-term borrowings
outstanding ($11.0 million at 8.17% and $9.0 million at 8.18%). The Company also
had letters of credit of $7.1 million outstanding for purposes of securing its
workers' compensation premium obligation. The aggregate amount of such letters
of credit reduces the borrowing availability on the line of credit. At January
2, 2000, $12.9 million was available for borrowings or additional letters of
credit.
The Company also has outstanding $35 million of senior unsecured notes
consisting of two pieces. The first piece consists of senior unsecured notes in
the aggregate amount of $30 million with a final ten-year maturity and an
average maturity of seven years at a 6.95% coupon rate. The second piece
consists of senior unsecured notes in the aggregate amount of $5 million with a
coupon rate of 6.72% due in a single payment in 2003.
The Company's unsecured revolving credit facility and its senior unsecured note
agreement contain certain restrictive covenants including certain debt ratios,
maintenance of a minimum net worth and restrictions on the sale of capital
assets. As of January 2, 2000, the Company was in compliance with the covenants.
In connection with the terms and conditions of an acquisition, the Company also
has a promissory note payable with a balance of approximately $0.7 million. The
note bears interest at an annual rate of 8%. The principal amount of the note,
together with interest, is due and payable in equal quarterly installments
through September 2001. The note is subject to set-off for any indemnification
claims the Company may have against the payee.
The maturities on outstanding long-term debt are as follows (in thousands):
Fiscal Year Ending
2000 $ 414
2001 20,274
2002 4,286
2003 9,286
2004 4,286
Beyond 17,141
---------
$ 55,687
=========
F-28
5. Commitments and Contingencies
Noncancelable Operating Leases - The Company leases office facilities under
noncancelable operating leases. Management expects that, in the normal course of
business, leases that expire will be renewed or replaced by other leases. The
Company leases certain of these facilities from various related parties. (See
Note 9.)
Future minimum lease payments under non-cancelable operating leases are as
follows (in thousands):
Fiscal Year Ending
2000 $ 4,091
2001 3,311
2002 2,472
2003 1,282
2004 364
Beyond 20
--------
$ 11,540
========
Facility rental expense for fiscal 1999, 1998 and 1997 totaled approximately
$4,691,000, $4,120,000, and $2,154,000, respectively.
During fiscal 1999, the Company sold certain computer hardware and software with
a net book value of approximately $1.5 million for approximately $1.6 million.
The Company agreed to lease back such computer hardware and software under an
operating lease agreement. The terms of the agreement require annual minimum
lease payments of approximately $358,000 payable in monthly installments. The
resulting gain on the sale of approximately $0.1 million is being amortized over
the lease term of five years.
Legal Matters - In the ordinary course of business, the Company is periodically
threatened with or named as a defendant in various lawsuits or administrative
actions. The Company maintains insurance in such amounts and with such coverage
and deductibles as management believes to be reasonable and prudent; however,
there can be no assurance that such insurance will be adequate to cover all
risks to which the Company may be exposed. The principal risks covered by
insurance include workers' compensation, personal injury, bodily injury,
property damage, employer practices liability, errors and omissions, fidelity
losses and general liability.
In September 1999, Interliant, Inc. ("Plaintiff") commenced an action in the
United States District Court for the Southern District of Texas, Houston
Division, against the Company and its wholly owned subsidiary, Inteliant
Corporation. The lawsuit alleges, among other things, that the Company's use of
the "Inteliant" mark infringes upon Plaintiff's mark, "Interliant." In addition
to the federal trademark infringement claims, Plaintiff alleges unfair
competition based on the Company's use of the Inteliant mark, common law
infringement and dilution. In the Complaint, Plaintiff has made a demand for an
unspecified amount of damages, as well as for an injunction prohibiting the
Company's use of the Inteliant mark. Based on information from its trademark
counsel, the Company believes that it has valid substantive and equitable
defenses to the lawsuit, including that the Inteliant mark is phonetically
dissimilar to Interliant, the use of the Inteliant mark does not infringe upon
Plaintiff's mark, and its use is not confusing or likely to cause confusion.
Notwithstanding the Company's belief, the outcome of any litigation, including
this action, is not certain. If Plaintiff were to prevail in the action, the
Company would be required to stop the use of the Inteliant mark and to possibly
pay damages. The Company does not believe that the cost of changing the mark or
the amount of any damages would have a material adverse impact on the Company's
financial condition or results of operations.
F-29
There is no other pending or threatened litigation that the Company currently
anticipates will have a material adverse effect on the Company's financial
condition or results of operations.
6. Income Taxes
The components of the provision for income taxes for fiscal 1999, 1998 and 1997
are as follows (in thousands):
1999 1998 1997
---------------- ----------------- ----------------
Current provision -
Federal $ 2,508 $ 4,881 $ 4,797
State 546 783 899
---------------- ----------------- ----------------
$ 3,054 $ 5,664 $ 5,696
---------------- ----------------- ----------------
Deferred provision (benefit) -
Federal 150 103 (503)
State 29 20 (94)
---------------- ----------------- ----------------
179 123 (597)
---------------- ----------------- ----------------
Total provision for income taxes $ 3,233 $ 5,787 $ 5,099
---------------- ----------------- ----------------
The following is a reconciliation between the statutory federal income tax rate
and the Company's effective income tax rate which is derived by dividing the
provision for income taxes by income before provision for income taxes for
fiscal 1999, 1998 and 1997:
1999 1998 1997
----------------- ---------------- -----------------
Statutory federal income tax rate 34.1% 34.4% 34.3%
State income taxes net of federal benefit 4.3 4.3 3.9
Government sponsored hiring incentives (9.9) (4.1) --
Non-deductible intangible amortization 10.1 4.9 4.1
Other (0.9) (2.5) (1.9)
----------------- ---------------- -----------------
37.7% 37.0% 40.4%
================= ================ =================
The components of the deferred income tax assets and liabilities at January 2,
2000 and January 3, 1999 are as follows (in thousands):
1999 1998
------- -------
Deferred income tax assets -
Workers' compensation reserves $ 2,037 $ 1,112
Allowance for doubtful accounts 630 325
Accrued liabilities 998 527
Other 448 134
------- -------
4,113 2,098
------- -------
Deferred income tax liabilities -
Depreciation and amortization (3,253) (1,063)
Cash to accrual adjustments -- (44)
Other (117) (69)
------- -------
(3,370) (1,176)
------- -------
Net deferred income tax asset $ 743 $ 922
======= =======
F-30
1999 1998
------- -------
Balance sheet classification -
Current asset $ 3,666 $ 1,849
Long-term liability (2,923) (927)
------- -------
$ 743 $ 922
------- -------
7. Stock Based Compensation
As of January 2, 2000, the Company had a stock incentive plan, which is
described below. The Company applies Accounting Principles Board ("APB") Opinion
No. 25 and related interpretations in accounting for its plan under which no
compensation cost has been recognized. Had compensation cost been determined
consistent with SFAS No. 123, "Accounting for Stock-Based Compensation," the
Company's net income and earnings per share for fiscal 1999, 1998 and 1997 would
approximate the pro forma amounts below (in thousands, except per share data):
1999 1998 1997
---------------- ----------------- ----------------
Net income -
As reported $ 5,351 $ 9,858 $ 7,526
Pro forma 3,893 7,849 6,081
Diluted EPS -
As reported $ 0.42 $ 0.77 $ 0.77
Pro forma 0.32 0.62 0.62
Stock Price Assumptions - The fair value of each option grant has been estimated
on the grant date using the Black-Scholes option-pricing model with the
following assumptions used for grants in fiscal 1999, 1998 and 1997, in
calculating compensation cost: expected stock price volatility of 63 % for
fiscal 1999, 64 % for fiscal 1998, and 56 % for fiscal 1997; an average
risk-free interest rate of 6.4 % for fiscal 1999, 5.3 % for fiscal 1998 and 6.2
% for fiscal 1997; and an expected life of five years for director options and
seven years for employee options for fiscal 1999, 1998 and 1997.
Stock Incentive Plan - The Company established a stock incentive plan (the
"Plan") which allows for the issuance of a maximum of 1.8 million shares of
common stock to officers, directors, consultants and other key employees. The
Plan allows for the grant of incentive or nonqualified options, stock
appreciation rights, restricted shares of common stock or stock units and is
administered by the compensation committee of the Company's board of directors.
Incentive options and nonqualified options are granted at not less than 100% of
the fair market value of the underlying common stock on the date of grant. At
January 2, 2000 the Plan had approximately 377,000 options available to grant.
The Company's board of directors determines the number, type of award and terms
and conditions, including any vesting conditions. For fiscal 1999, 1998, and
1997 only incentive and nonqualified options had been granted under the Plan.
Generally, employee stock options partially vest at the date of grant and on
each of the next four or five anniversary dates thereafter. The Plan also
provides for an annual grant to non-employee directors of 1,000 options, which
are immediately exercisable on the date of grant. Stock options granted to
employees expire no later than ten years from the date of grant and stock
options granted to directors expire no later than five years from the date of
grant.
F-31
A summary of the stock option activity is as follows (in thousands, except per
share data):
Weighted
Average
Exercise Price
Employees Directors Per Share
---------------- ----------------- ----------------
Outstanding at December 29, 1996 249 43 $ 8.68
Granted 270 14 16.95
Exercised (17) - 8.41
Forfeited (5) - 9.69
---------------- ----------------- ----------------
Outstanding at December 28, 1997 497 57 12.92
Granted 681 60 12.57
Exercised (36) 11.59
Forfeited (116) (9) 17.06
---------------- ----------------- ----------------
Outstanding at January 3, 1999 1,026 108 12.29
Granted 434 24 5.40
Exercised (3) 7.82
Forfeited (224) (4) 12.60
---------------- ----------------- ----------------
Outstanding at January 2, 2000 1,233 128 10.08
---------------- ----------------- ----------------
Exercisable at January 2, 2000 445 135 $ 10.93
================ ================= ================
The weighted average fair value of options granted was $3.67, $7.53, and $10.73
for grants made during fiscal 1999, 1998 and 1997, respectively. The following
is additional information with respect to the stock options (shares in
thousands):
Weighted-
Average
Outstanding as Remaining Weighted-Average Exercisable At Weighted-Average
Exercise Price Range of January 2, Contractual Exercise Price January Exercise Price
2000 Yearly Life 2, 2000
- --------------------- ------------------ ------------------ -------------------- ------------------ --------------------
$4.37 - $10.54 922 8.7 $ 6.29 356 $ 6.80
10.55 - 16.72 132 6.3 14.59 83 14.33
16.73 - 22.88 307 8.0 19.51 141 19.33
------------------ ------------------ -------------------- ------------------ --------------------
1,361 8.3 $ 10.08 580 $ 10.93
================== ================== ==================== ================== ====================
8. Employee Benefit Plans
The Company has a 401(k) defined contribution plan. Employee contributions may
be invested in several alternatives. Company contributions to the plan,
including matching contributions, may be made at the discretion of the Company.
The Company's contributions to the plan were approximately $440,000, $348,000,
and $60,000 for fiscal 1999, 1998 and 1997, respectively.
The Company also has a deferred compensation plan for certain key officers and
employees that provide the opportunity to defer a portion of their compensation.
Amounts deferred are held in a Rabbi Trust, which invests in various mutual
funds as directed by the participants. The trust assets are recorded as a
long-term other asset on the accompanying consolidated balance sheet because
such amounts are subject to the claim of creditors. The Company's deferred
F-32
compensation liability represents amounts deferred by participants plus any
earnings on the trust assets. For the fifty-two weeks ended January 2, 2000 and
the fifty-three weeks ended January 3, 1999, deferred compensation liabilities
were approximately $776,000 and $397,000, respectively.
During fiscal 1999 the Company adopted an Employee Stock Purchase Plan whereby
employees may designate a portion of their salaries to be used to purchase
shares of the Company. Employees purchase shares at the average market price of
all shares bought for all employees participating during a designated period.
All shares are purchased through an independent broker off the open market. The
Company pays all brokerage and transactional fees related to the purchase.
9. Related Party Transactions
In December 1997, the Company purchased certain assets and substantially all of
the business of TSI of Utah, Inc. ("TSIU"), a company that provides industrial
temporary staffing services and was incorporated by an adult son of certain
significant shareholders of the Company, for approximately $1,285,000; of which
$600,000 was paid in cash with the remaining $685,000 in a note payable. As of
the date of acquisition the Company had receivables of approximately $625,000
due from TSIU that were used to reduce the note payable to TSIU. The excess of
the initial purchase price over the estimated fair value of the acquired
tangible assets was approximately $1,270,000, of which $1,190,000 has been
allocated to goodwill and approximately $80,000 has been allocated to other
intangible assets.
The Company leases its corporate office building from the adult children of
certain significant shareholders of the Company under a ten-year lease agreement
with an option to renew for ten additional years. Rental expense during fiscal
1999, 1998 and 1997 amounted to approximately $103,000, $87,000, and $86,000,
respectively. Future minimum lease payments related to this lease will average
approximately $103,000 each fiscal year. The Company believes that the terms of
the lease are at least as favorable as the terms that could have been obtained
from an unaffiliated third party in a similar transaction.
During fiscal 1999, two of the adult children of certain significant
shareholders leased employees from ServCom. ServCom generated revenues totaling
approximately $437,000 related to leasing employees to the companies owned by
these adult children. During fiscal 1998, ServCom generated revenues totaling
approximately $270,500 related to leasing employees to the companies owned by
these adult children. Outstanding receivables at January 3, 1999 related to
these agreements totaled approximately $38,000.The Company believes that the
terms of this relationship are similar to those that would be given to an
unaffiliated third party in a similar agreement.
During fiscal 1999 the Company contributed approximately $297,000 in cash and
other assets to a joint venture with a former employee whereby the Company would
own 49% of the newly-formed venture, Bency & Associates LLC. The carrying value
of the venture at January 2, 2000 was approximately $264,000. The joint venture
is being accounted for using the equity method of accounting. As part of the
agreement the Company agreed to provide a credit facility of $500,000
terminating December 31, 2000. The agreement provides for interest at a bank's
prime rate less 1% (7.5% at January 2, 2000) on the first $100,000 for the first
six months, with the rate increasing to a bank's prime rate (8.5% at January 2,
2000) for any amount over $100,000 or after six months. At January 2, 2000
borrowings under this credit facility were approximately $225,000, reflected in
other assets on the balance sheet. Interest earned for the 52-weeks ended
January 2, 2000 was approximately $2,000.
10. Subsequent Events
Subsequent to the balance sheet date, the Company approved a plan whereby
Inteliant Corporation would be re-domesticated from New Mexico to Delaware. The
F-33
re-domestication was effectuated through a merger of Inteliant Corporation - New
Mexico and a newly formed wholly owned subsidiary, Inteliant Corporation -
Delaware ("Inteliant"). Inteliant's articles of incorporation authorize the
issuance of 50,000,000 shares common stock $.001 par value and 10,000,000 shares
preferred stock $.01 par value. Currently 30,000,000 shares of common stock are
issued and outstanding and held entirely by the Company.
Additionally, the Company, as the sole shareholder of Inteliant, also approved
the Inteliant Corporation 2000 Stock Option Plan (the "Plan") for the benefit of
its employees, officers and directors. The Plan, administered by Inteliant's
board of directors, allows for the grant of options to purchase a maximum of
10,000,000 shares of Inteliant's common stock. It is the intent of the Company
to use the Plan to attract and retain skilled IT professionals needed to
implement the Company's business plan. The number of options to be granted, the
vesting schedule of such grants and other conditions of each grant is
established by Inteliant's board of directors. The grants will be issued at the
fair market value.
11. Segment Reporting
The Company accounts for segment operations in accordance with Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information." Pursuant to SFAS No. 131 an operating
segment is defined as "a component of an enterprise: 1) that engages in business
activities from which it may earn revenues and incur expenses, 2) for which
discrete financial information is available, and 3) that is regularly reviewed
by the enterprise's chief operating decision maker to make decisions about
allocation of resources.
Based on the types of services offered to customers, the Company has identified
two reportable operating segments: commercial staffing and IT. The commercial
staffing segment provides staffing solutions to companies by furnishing
temporary clerical, industrial, light-industrial, and professional services. The
IT segment provides staffing, outsourcing, and consulting services in IT-related
fields.
The accounting policies of the operating segments are the same as those
described in the summary of significant accounting policies (Note 2).
F-34
Information concerning continuing operations by operating segment for fiscal
1999, 1998 and 1997 is as follows (in thousands):
Fiscal Year (52/53 Week)
-------------------------------------------------
1999 1998 1997
--------------- ---------------- ----------------
Revenues
Commercial $ 273,626 $ 252,917 $ 177,551
IT 100,533 78,597 31,700
Other (3,105) (1,185) --
--------------- ---------------- ----------------
$ 371,054 $ 330,329 $ 209,251
=============== =============== =================
Income from Operations
Commercial $ 10,773 $ 12,177 $ 11,438
IT 4,868 7,901 3,183
Other (unallocated) (3,077) (3,301) (2,271)
--------------- ---------------- ----------------
$ 12,564 $ 16,777 $ 12,350
=============== =============== =================
Depreciation and Amortization
Commercial $ 4,046 $ 2,826 $ 1,195
IT 4,048 2,534 962
--------------- ---------------- ----------------
$ 8,094 $ 5,360 $ 2,157
=============== =============== =================
Identifiable Assets
Commercial $ 98,520 $ 97,339 $ 81,114
IT 97,055 82,552 35,356
Other (unallocated) 5,049 3,018 1,820
--------------- ---------------- ----------------
$ 200,624 $ 182,909 $ 118,290
=============== =============== =================
Additions to Long-Lived Assets(1)
Commercial $ 4,837 $ 31,681 $ 20,482
IT 17,982 27,993 19,475
--------------- --------------- -----------------
$ 22,819 $ 59,674 $ 39,957
=============== =============== =================
(1) Includes property & equipment and intangible asset additions
F-35
12. Selected Quarterly Financial Data (Unaudited)
A summary of quarterly financial information for fiscal 1999 and 1998 is as
follows (in thousands, except per share data):
First Quarter Second Quarter Third Quarter Fourth Quarter
-------------- --------------- --------------- ---------------
Fiscal 1999:
Service revenues $ 84,043 $ 92,419 $ 98,725 $ 95,867
Gross profit 19,769 22,378 22,889 20,768
Net income 343 1,603 2,539 866
Net income per common share:
Basic 0.03 0.13 0.20 0.07
Diluted 0.03 0.13 0.20 0.07
Fiscal 1998:
Gross profit 15,855 19,124 20,217 20,744
Net income 2,397 3,035 3,404 1,022
Net income per common share:
Basic 0.19 0.24 0.27 0.08
Diluted 0.19 0.24 0.27 0.08
F-36
This page left blank intentionally
F-37
Report of Independent Public Accountants
To SOS Staffing Services, Inc.:
We have audited the accompanying consolidated balance sheets of SOS Staffing
Services, Inc. (a Utah Corporation) and subsidiaries as of January 2, 2000 and
January 3, 1999, and the related consolidated statements of income,
shareholders' equity and cash flows for each of three fiscal years in the period
ended January 2, 2000. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of SOS Staffing
Services, Inc. and subsidiaries as of January 2, 2000 and January 3, 1999, and
the results of their operations and their cash flows for each of the three
fiscal years in the period ended January 2, 2000 in conformity with accounting
principles generally accepted in the United States.
/s/Arthur Andersen LLP
- ----------------------
ARTHUR ANDERSEN LLP
Salt Lake City, Utah February 9, 2000 (except with respect to the matters
discussed in note 10 as to which the date is February 22, 2000)
F-38
(SOS LOGO)
NASDAQ/NMS: SOSS
F-39
This Page left blank intentionally
F-40
Corporate Information
- ---------------------
Shareholder inquiries should be directed to:
Investor Relations
SOS Staffing Services, Inc.
1415 South Main Street
Salt Lake City, UT 84115
Telephone: (801) 484-4400
www.sosstaffing.com
e-mail: [email protected]
Transfer Agent and Registrar
- ----------------------------
Zions First National Bank, N.A.
Stock Transfer Services
1 South Main Street
Salt Lake City, Utah 84101
Independent Accountants
- -----------------------
Arthur Andersen LLP
15 West South Temple
Suite 700
Salt Lake City, Utah 84101-1533
Investor Relations
- ------------------
Jordan Richard Assoc.
1846 South 1200 East
PO Box 52210
Salt Lake City, Utah 84111
Stock Listing
- -------------
SOS Staffing Services, Inc.'s common stock is traded on the Nasdaq National
Market tier of The Nasdaq Stock Market under the symbol: "SOSS". The stock table
abbreviation is "SOS Stffg".
Form 10-K
- ---------
Copies of the Company's annual report to the Securities and Exchange Commission
on Form 10-K may be obtained, without charge, by contacting the Investor
Relations Department at SOS Staffing Services, Inc.
F-41
Common Stock Data
- -----------------
As of March 6, 2000, the Company had 74 stockholders of record. Based upon
shareholder mailings, the Company believes that there are in excess of 4,000
shareholders of beneficial interest. The following table sets forth the high and
low sales prices of the Company's common stock for the periods indicated:
High Low
1997
First Quarter 13 3/8 10
Second Quarter 15 3/4 10 7/8
Third Quarter 19 1/2 14 5/8
Fourth Quarter 24 16 1/2
1998
First Quarter 26 3/8 17 1/4
Second Quarter 27 17 1/8
Third Quarter 21 5/8 12
Fourth Quarter 14 1/2 6 1/2
1999
First Quarter 10 7
Second Quarter 8 1/8 5
Third Quarter 6 15/16 5
Fourth Quarter 7 3 3/4
On March 6, 2000, the closing price of the Company's common stock, as reported
on the Nasdaq National Market was 5 1/8.
Since the Company's initial public offering, the Company has not paid any
dividends. The Company currently intends to retain future earnings for its
operations and expansion of its business and does not anticipate paying any cash
dividends in the future.
Annual Meeting
- --------------
Shareholders and other interested parties are invited to attend the Annual
Meeting of Shareholders on May 17, 2000 at 1:30 p.m. (Mountain Daylight Time).
The meeting will be held at the Wyndham Hotel, located at 215 West South Temple
in Salt Lake City, Utah.
F-42
Directors and Officers
- ----------------------
JoAnn W. Wagner
Chairman of the Board
Chief Executive Officer and President
SOS Staffing Services, Inc.
Stanley R. deWaal(1)
Director
Vice President Century Business Services
Salt Lake City, Utah
Samuel C. Freitag(1,2)
Director
Senior Managing Director
George K. Baum Merchant Banc, L.L.C.
Kansas City, Missouri
R. Thayne Robson(1,2)
Director
Professor of Management and Research & Professor of Economics,
Univ. of Utah
Salt Lake City, Utah
Randolph K. Rolf(2)
Director
Vero Beach, Florida
Thomas K. Sansom
Director
Senior Vice President
President Commercial Division
Richard J. Tripp
Director
Senior Vice President
Brad L. Stewart
Executive Vice President
Chief Financial Officer
Dennis N. Emery
Senior Vice President Finance and
Controller
John E. Schaffer
Senior Vice President
President Inteliant Corporation
W.B. Collings
Vice President, Treasurer and
Assistant Secretary
John K. Morrison
Vice President, Secretary and
General Counsel
(1) Member, Audit Committee
(2) Member, Compensation Committee
F-43
PART III
The information required by this Part III is omitted from this Report
in that the Company will file with the Securities and Exchange Commission a
definitive proxy statement for the Annual Meeting of Shareholders of the Company
to be held on May 17, 2000 (the "Proxy Statement"), not later than 120 days
after January 2, 2000, and certain information included therein is incorporated
herein by reference. Only those sections of the Proxy Statement specifically
identified below which address the items set forth herein are incorporated by
reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
--------------------------------------------------
The information required by this Item is incorporated by reference to
the sections entitled "Election of Directors" and "Executive Officers" in the
Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
----------------------
The information required by this Item is incorporated by reference to
the sections entitled "Election of Directors-Director Compensation" and
"Executive Officers-Executive Compensation" in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------
The information required by this Item is incorporated by reference to
the section entitled "Principal Holders of Voting Securities" in the Proxy
Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
The information required by this item is incorporated by reference to
the section entitled "Certain Relationships and Related Transactions" in the
Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
---------------------------------------------------------------
(a) The following documents are filed as part of this Report:
1. Consolidated Financial Statements: The following Consolidated Financial
Statements of the Company and Report of Independent Public Accountants,
are incorporated by reference to pages 17 through 38 of the Company's
1999 Annual Report to Shareholders:
Consolidated Balance Sheets--As of January 2, 2000 and January 3, 1999.
Consolidated Statements of Income--For the Fiscal Years Ended January
2, 2000, January 3, 1999 and December 28, 1997.
Consolidated Statements of Shareholders' Equity--For the Fiscal Years
Ended January 2, 2000, January 3, 1999 and December 28, 1997.
11
Consolidated Statements of Cash Flows--For the Fiscal Years Ended
January 2, 2000, January 3, 1999, and December 28, 1997.
Notes to Consolidated Financial Statements
Report of Independent Public Accountants
2. Financial Statement Schedules
-----------------------------
No schedules submitted
(c) Exhibits:
--------
Exhibit Incorporated by Filed
No. Exhibit Reference Herewith
- --------------------------------------------------------------------------------
3.1 Amended and Restated Articles of Incorporation of (1)
the Company
3.2 Amended and Restated Bylaws of the Company (1)
4.3 Amended and Restated Bylaws of the Company (1)
10.1 SOS Staffing Services, Inc. Stock Incentive Plan (3)
10.2 Form of Employment Agreement entered into by the (1)
10.3 Form of Consulting Agreement between the Company (2)
10.4 Lease Agreement between the Company and Reed F.
10.5 Credit Agreement dated as of July 11, 1996 by and (4)
10.6 Note Purchase Agreement dated September 1, 1999. (5)
12
Exhibit Incorporated by Filed Herewith
No. Exhibit Reference
- -----------------------------------------------------------------------------------------------------------
10.7 Amended Credit Agreement dated July 27, 1998 by and (5)
among the Company, The First National Bank of
Chicago and First Security Bank, N.A., together with
Security Agreement and Revolving Credit Notes
10.8 First Amendment of Employment Agreement between the (6)
10.9 First Amendment to Amended and Restated Credit (6)
10.10 Inteliant Stock Option Plan (7)
13 Annual Report to Shareholders for the year ended (7)
21 Subsidiaries of the Company (7)
23.2 Consent of Independent Public Accountants (7)
27 Financial Data Schedule (7)
(1) Incorporated by reference to the exhibits to a Registration Statement
on Form S-1 filed by the Company on May 17, 1995, Registration No.
33-92268.
(2) Incorporated by reference to the exhibits to Amendment No. 1 to a
Registration Statement on Form S-1 filed on June 22, 1995, Registration
No. 33-92268.
(3) Incorporated by reference to the exhibits to the Company's Annual
Report of Form 10-K for the year ended December 31, 1995 filed by the
Company on March 29, 1996.
(4) Incorporated by reference to the exhibits to a Quarterly Report on Form
10-Q for the quarter ended September 26, 1996 filed by the Company on
November 14, 1996.
(5) Incorporated by reference to the exhibits to an Annual Report on Form
10-K for the year ended January 3, 1999 filed by the Company on April
2, 1999.
(6) Incorporated by reference to the exhibits to a Quarterly Report on Form
8-K for the quarter ended July 4, 1999 filed by the Company on August
18, 1999.
(7) Filed herewith and attached to this Report following page 16 hereof.
(d) Financial Statement Schedules:
-----------------------------
No schedules submitted.
13
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereto duly authorized.
SOS STAFFING SERVICES, INC.
Date: March 31, 2000 By:/s/ Brad L. Stewart
-------------------------
Brad L. Stewart
Executive Vice President and
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Name Title Date
- ---- ----- ----
/s/ JoAnn W. Wagner Chairman of the Board and March 31, 2000
- ------------------ Chief Executive Officer
JoAnn w. Wagner (principal accounting officer)
/s/ Brad L. Stewart Executive Vice President and Chief March 31, 2000
- ------------------- Financial Officer
Brad L. Stewart (principal accounting officer)
/s/ Thomas K. Sansom Director and March 31, 2000
- -------------------- Senior Vice President
Thomas K. Sanson
/s/ Richard J. Tripp Director and March 31, 2000
- -------------------- Senior Vice President
Richard J. Tripp
/s/ Stanley R. deWaal Director March 31, 2000
- ---------------------
Stanly R. dewaal
/s/ Samuel C. Freitag Director March 31, 2000
--------------------
Samuel C. Freitag
/s/ R. Thayne Robson Director March 31, 2000
- --------------------
R. Thayne Robson
/s/ Randolph K. Rolf Director March 31, 2000
- --------------------
Randolph K. Rolf