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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 December 31, 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 5, 2001, based upon the closing sales price of the Common
Stock of $1.25 per share on that date as reported on the NASDAQ/NNM Stock
Market, was approximately $7,574,877. 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 5, 2001, the Registrant had outstanding 12,691,398 shares of Common
Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Registrant's 2001 Annual Meeting of
Shareholders to be held May 18, 2001 are incorporated by reference in Part III
of this Report.
1
PART I
This Annual Report on Form 10-K (the "Report") 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.
may 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 services in the western United States. As of December 31, 2000, SOS
operated a network of 135 offices located in 17 states. The Company provides a
broad range of commercial and information technology ("IT") staffing services.
Commercial staffing services include light industrial, clerical, industrial,
technical, specialty and other professional services. IT staffing services
consist primarily of computer programming, system design, analysis and
administration, network and systems management and software and documentation
development.
The Company's commercial staffing offices are supported by centralized
administrative functions at corporate headquarters that include marketing, human
resources and training, 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 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, human resources and training.
Other functions such as workers' compensation and other insurance services and
legal review have been centralized at the Company's corporate headquarters.
Discontinued Operations
On December 29, 2000, pursuant to an Asset Purchase Agreement (the
"Purchase Agreement") dated as of the same date by and between Inteliant, the
Company and Herrick Douglass, Inc. ("HD"), Inteliant sold to HD its consulting
division for a sales price of $1.0 million cash at closing, and contingent
payments totaling up to $3.5 million during the four years following the closing
date based on the gross margin of the newly combined businesses of HD. The
consulting division sold to HD consisted of a full suite of IT consulting,
e-business and telecommunication services, which were marketed to Fortune 1000,
mid-tier and early stage companies. Pursuant to the Purchase Agreement,
Inteliant retained approximately $9.0 million in accounts receivable
attributable to the consulting division. Additionally, the Company agreed to
extend a one year subordinated loan to HD of up to a maximum of $3.5 million to
meet the operating needs of the combined businesses, $1.0 million of which was
extended to HD at closing. The Company recognized a loss of approximately $28.0
million, net of a tax benefit of approximately $11.2 million, on disposition of
assets related to the sale.
In connection with the transaction, the Company entered into an Amendment
to Note Purchase Agreement (the "Amendment") to amend the Note Purchase
Agreement (the "Note Purchase Agreement") dated September 1, 1998 by and among
SOS and certain lenders (the "Lenders"), pursuant to which the Lenders consented
to the transaction. Under the Amendment, SOS and the Lenders agreed to a
reduction of the minimum Consolidated Net Worth (as defined in the Note Purchase
Agreement) requirement of SOS. As consideration for the Amendment, SOS agreed to
pay the Lenders 50% of: (i) the proceeds of the accounts receivable retained in
the transaction, (ii) the contingent payments as provided in the Purchase
Agreement (the "Contingent Payments") and (iii) estimated tax refunds of
approximately $8.0 million (the "Tax Refund"), of which approximately $6.9
million has been received from the IRS as of March 29, 2001. Under the
Amendment, such prepayments are to be applied to reduce the principal amount of
the last required payments under the Note Purchase Agreement.
2
Also in connection with the transaction, on December 29, 2000 SOS entered
into a Second Amendment to Amended and Restated Credit Agreement (the "Second
Amendment") with certain lenders (the "Lenders") under its Amended and Restated
Credit Agreement dated as of July 27, 1998 (the "Credit Agreement"). Pursuant to
the Second Amendment, the Lenders consented to the transaction and agreed to
amend certain financial covenants in the Credit Agreement to permit SOS to
consummate the transaction without violating any such covenants. The modified
covenants included a decrease in the amount of Net Worth (as defined in the
Credit Agreement) required of SOS and its consolidated subsidiaries. In
addition, SOS agreed to distribute to the Lenders the remaining 50% of the
proceeds of the accounts receivable retained in the transaction, the Contingent
Payments and the Tax Refund. The Second Amendment also provided for a reduction
in the aggregate commitment (as defined in the Credit Agreement) from $40
million to $30 million.
Continuing Operations
Segment Financial Information
The Company's continuing operations are grouped into two identifiable
operating segments: commercial staffing and IT staffing. The commercial staffing
segment provides supplemental staffing to companies by furnishing temporary
clerical, light-industrial, industrial, technical and professional services. The
IT segment primarily provides temporary and contract-to-hire staffing services,
including computer programming, system design, analysis and administration,
network and systems management and software and documentation development. IT
staffing services are similar in many respects to commercial staffing services;
however, IT services generally require increased specialization and technical
skills, carry significantly higher hourly bill and pay rates and involve
substantially longer job assignments.
Financial information concerning the Company's segments is included in Item
8 in Part II of this report.
Description of Business by Segment
Commercial Staffing Segment
Principal services and markets: Historically, the Company's commercial
staffing segment customers have consisted primarily of small to mid-sized
companies. Sales to these businesses are developed either locally or regionally.
Generally, the commercial staffing segment provides clerical, light industrial
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, designers, drafters, illustrators,
artists, writers and other technical personnel), AccountStaff (accountants,
bookkeepers, auditors, data entry personnel and financial analysts), Devon &
Devon and Truex (administrative staffing and permanent placement) and CGS
Personnel (mining and mineral exploration engineers, geologists and
hydrologists).
The Company's commercial staffing services also include services such as
payrolling, outsourcing, on-site and other professional services:
o 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.
o 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.
o 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.
o Other 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 testing includes comprehensive testing, with results processed
through an independent certified laboratory.
o Risk management services include on-site safety inspection and consulting
services.
3
The Company also provides, on a limited basis, professional employer
organization services (employee leasing) through ServCom Staff Management, Inc.,
a wholly owned subsidiary.
In the commercial staffing segment, the Company has focused on initially
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 in order to market and
deliver services to surrounding smaller markets and to cross-sell other
specialty staffing services. In these markets, the Company frequently has
achieved significant penetration and often has become the dominant provider of
staffing services.
Additionally, the Company targets large multi-state companies through its
national marketing team. 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 125
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
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. The Company
intends, for the foreseeable future, to concentrate on strengthening its office
network by capitalizing on its present infrastructure and leveraging existing
resources to develop internal growth.
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.
Trademarks: The Company uses a variety of trademarks and trade names which
generally are 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: Management believes significant opportunities remain to deliver
profitable commercial staffing services to small and mid-sized 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 the 2000 fiscal year, 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 also are 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.
4
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 advantages.
Information Technology Segment
Principal services and markets: The Company's IT segment primarily provides
temporary and contract-to-hire staffing services, including computer
programming, system design, analysis and administration, network and systems
management and software and documentation development. Services of the IT
segment are marketed to Fortune 1000, mid-tier, early stage companies,
government agencies and educational institutions. 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 10 offices located throughout the western United States and
Massachusetts. The Company's IT 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 office network will include efforts to
position IT offices in strategic locations throughout the United States, rather
than the approach of establishing hubs and expanding from locations, which
approach is used by the Company to expand its network of commercial staffing
offices.
Seasonality: Because IT projects and assignments are not typically tied to
cyclical production schedules or seasonal buying trends, this segment does not
experience the level of seasonality associated with the Company's commercial
staffing segment.
Customers: The Company's IT segment pursues customers who are generally
larger than many of the Company's commercial staffing customers. The Company
focuses on smaller specialty projects at these larger businesses or functions as
support in larger projects. The Company believes that it has developed
competitive advantages in serving mid-sized and larger businesses 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 during the 2000 fiscal year.
Competition: As with commercial staffing, the Company's IT 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. The Company competes for qualified 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 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 December 31, 2000, the Company had approximately 590 staff employees in
its commercial staffing segment and approximately 410 staff employees in its IT
segment, of which approximately 330 were billable. Of the 330 billable staff
employees, approximately 225 are employed by the Company through the H-1B visa
program, whereby foreign workers with unique skill sets can find employment in
the U.S. for a period of up to six years. 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.
5
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 as well as to prospects. The Company
emphasizes long-term professional 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 specific IT staffing
needs. Many of the Company's existing and prospective IT customers routinely
outsource IT functions, such as programming and help desk. The Company's IT
staffing 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 U.S. 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 IT recruiting efforts rely heavily upon industry contacts,
personal networks, referrals from existing and former IT personnel, professional
associations and other IT related organizations. The Company follows a rigorous
screening and interview process before referring qualified candidates to
customers for on-site interviews.
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, an insurer, with a loss cap of $300,000 per occurrence and an aggregate
cap of approximately $10.8 million, adjusted based on actual payroll. Employees
in Washington and Wyoming 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 also has developed workers' compensation loss control programs
that seek to limit claims through employee training and avoidance of high-risk
job assignments such as underground mining, 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.
6
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 and plans to upgrade additional information-processing
functions. The new system provides for greater flexibility in back office
functions while interfacing 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 10 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 and intentions
for the future and are indicated by the use of the words "believe", "expect",
"anticipate", "plan" 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 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 recent decline in the IT sector and the downturn in the broader
economic environment have had an impact on the Company's ability to expand its
IT related businesses. To the extent the downturn in this segment continues, the
Company may experience decreased customer demand for some of its billable staff
employees, including its H-1B visa employees, resulting in a deterioration of
gross profit margins. Additionally, recent legislation passed in Congress allows
individuals previously issued an H-1B visa to accept new employment upon the
filing of a separate request by a different employer, subject to the final
approval of the request. This allows for increased portability of employees with
H-1B status between employers. The impact of this new legislation potentially
could increase both the cost of H-1B labor and visa applications, as employees
who move to other employment are replaced with greater frequency. Although the
Company already has seen a decrease in demand for H-1B labor due to the downturn
in the IT sector, the Company may experience additional adverse impact from this
legislation when the IT sector begins to rebound. Because service revenues
generated from H1-B related business in fiscal 2000 were approximately 71% of
the IT segment's total revenues from continuing operations, a significant
decrease in demand for H1-B labor could have a material adverse impact on the
Company's IT segment revenues in the future.
7
In addition, the Company's future results may 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, failure of the Company to renew its current
credit facility, which expires in July 2001, on favorable terms or not at all,
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 also will
be affected by other factors associated with the operation of the Company's
business, including the Company's response to existing and emerging competition,
demand for the Company's services, the Company's ability to maintain profit
margins in the face of pricing pressures, the Company's efforts to develop and
maintain customer and employee relationships, economic fluctuations,
employee-related risks and expenses, and the unanticipated results of pending or
future litigation.
As of December 31, 2000, the Company's consolidated balance sheet reflected
approximately $92.0 million of goodwill and other intangible assets, a
substantial portion of total assets at such date. The Company's intangible
assets may increase in future periods if additional acquisitions are
consummated. Amortization of these additional intangibles would, in turn, have a
negative impact on earnings. In addition, the Company continuously evaluates
whether events and circumstances have occurred that indicate the remaining
balance of intangible assets may not be recoverable. When factors indicate that
assets should be evaluated for possible impairment, the Company may be required
to reduce the carrying value of intangible assets, which could harm operating
results during the periods in which such a reduction is recognized. The Company
may be required to write down intangible assets in future periods.
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, as
well as by other factors identified from time to time in the Company's periodic
reports to the Securities and Exchange Commission.
ITEM 2. PROPERTIES
As of December 31, 2000, the Company provided services through 135 offices
in 17 states. These offices typically consist of 1,000 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 the adult children of certain significant shareholders of the
Company for a term ending on March 31, 2005, with an option to renew for 10
additional years. 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. filed a complaint against the Company
and Inteliant, alleging that Inteliant's name and trademark infringed
Interliant's trademark rights. Effective January 1, 2001, the parties entered
into a settlement agreement whereby (1) Interliant dismissed the lawsuit, (2)
Inteliant may continue to use the Inteliant tradename and trademark without
challenge, and (3) each side is to bear its own attorney's fees and costs
incurred in connection with the lawsuit. The Company believes that the
provisions of the settlement agreement are not likely to have a material impact
on the operations or financial results of the Company.
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.
8
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 December 31, 2000.
9
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Stock Listing
The Company's common stock, par value $0.01 per share (the "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".
As of March 5, 2001, the Company had 67 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 bid prices of the Common
Stock for the periods indicated:
High Low
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 15/16 7
Second Quarter-------------------------------------------- 8 1/8 5
Third Quarter--------------------------------------------- 6 15/16 5
Fourth Quarter-------------------------------------------- 7 3 3/4
2000
First Quarter--------------------------------------------- 5 11/16 4
Second Quarter-------------------------------------------- 4 3/4 2 5/8
Third Quarter--------------------------------------------- 3 3/16 2
Fourth Quarter-------------------------------------------- 3 5/8 1
On March 5, 2001, the closing price of the Company's Common Stock, as
reported on the Nasdaq National Market, was 1 1/4.
The Company has never 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.
10
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial data for the Company
derived from the Company's consolidated financial statements. The selected
financial data should be read in conjunction with Item 7 "Management's
Discussion and Analysis of Financial Condition and Results of Operations," the
consolidated financial statements and the related notes thereto, included
elsewhere in this report.
Fiscal Year (52/53 Weeks) Ended
--------------- -------------- --------------- --------------- ---------------
2000 1999(1) 1998(1) 1997(1) 1996(1)
--------------- -------------- --------------- --------------- ---------------
Statement of Operations Data: (in thousands, except per share data)
Service revenues $ 334,391 $ 322,130 $ 295,448 $ 194,155 $ 135,329
Gross profit 74,664 72,353 63,945 40,843 27,166
Income from operations 6,593 9,962 12,513 10,484 6,491
Income from continuing operations 1,196 4,015 7,331 6,557 3,906
(Loss) income from discontinued
operations, net of tax (30,397) 1,336 2,527 969 123
Net (loss) income (29,201) 5,351 9,858 7,526 4,029
Income from continuing operations per
common share
Basic $ 0.09 $ 0.32 $ 0.58 $ 0.68 $ 0.58
Diluted 0.09 0.32 0.57 0.67 0.57
Net (loss) income per common share
Basic $ (2.30) $ 0.42 $ 0.78 $ 0.78 $ 0.59
Diluted (2.30) 0.42 0.77 0.77 0.59
Weighted average common shares
Basic 12,691 12,691 12,675 9,654 6,780
Diluted 12,692 12,699 12,810 9,780 6,838
Balance Sheet Data:
Working capital $ 20,012 $ 37,969 $ 26,989 $ 42,791 $ 17,012
Total assets 161,388 200,624 182,909 118,290 47,293
Total debt 44,273 55,687 39,925 -- --
Shareholders' equity 90,885 120,086 114,606 104,336 36,834
(1) In fiscal 2000, the Company sold the consulting division of its Inteliant
subsidiary. The statement of operations data for this division is reflected as
discontinued operations for all years presented.
11
ITEM 7. 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. 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 and information
technology staffing services through a network of 135 offices located in 17
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.
Discontinued Operations: On December 29, 2000, pursuant to an Asset
Purchase Agreement (the "Purchase Agreement") dated as of the same date by and
between Inteliant, the Company and Herrick Douglass, Inc. ("HD"), Inteliant sold
to HD its consulting division for a sales price of $1.0 million cash at closing,
and contingent payments totaling up to $3.5 million during the four years
following the closing date based on the gross margin of the newly combined
businesses of HD. The consulting division sold to HD consisted of a full suite
of IT consulting, e-business and telecommunication services, which were marketed
to Fortune 1000, mid-tier, early stage companies, government agencies and
educational institutions, and the related tangible and intangible assets.
Pursuant to the Purchase Agreement, Inteliant retained approximately $9.0
million in accounts receivable attributable to the consulting division.
Additionally, the Company agreed to extend a one year subordinated loan to HD of
up to a maximum of $3.5 million to meet the operating needs of the combined
businesses, $1.0 million of which was extended to HD at closing. The Company
recognized a loss of approximately $28.0 million, net of a tax benefit of
approximately $11.2 million, on disposition of assets related to the sale. The
loss consisted primarily of the elimination of net assets of approximately $37.8
million offset by net proceeds of $1.0 million cash. Additional expenses of
approximately $2.4 million, including change of control bonuses, legal and
professional fees and other transaction related charges, were incurred as part
of the transaction.
In connection with the transaction, SOS entered into an Amendment to Note
Purchase Agreement (the "Amendment"), to amend the Note Purchase Agreement (the
"Note Purchase Agreement") dated September 1, 1998 by and among SOS and certain
lenders (the "Lenders"), pursuant to which the Lenders consented to the
transaction. Under the Amendment, SOS agreed to amend the Note Purchase
Agreement to reduce the minimum Consolidated Net Worth (as defined in the Note
Purchase Agreement) requirement of SOS. As consideration for the Amendment, SOS
agreed to pay the Lenders 50% of: (i) the proceeds of the accounts receivable
retained in the transaction, (ii) the contingent payments as provided in the
Purchase Agreement (the "Contingent Payments") and (iii) estimated tax refunds
of approximately $8.0 million (the "Tax Refund"), of which approximately $6.9
million has been received from the IRS as of March 29, 2001. Under the
Amendment, such prepayments are to be applied to reduce the principal amount of
the last required payments under the Note Purchase Agreement.
Also in connection with the transaction, on December 29, 2000 SOS entered
into a Second Amendment to Amended and Restated Credit Agreement (the "Second
Amendment") with certain lenders (the "Lenders") under its Amended and Restated
Credit Agreement dated as of July 27, 1998 (the "Credit Agreement"). Pursuant to
the Second Amendment, the Lenders consented to the transaction and agreed to
amend certain financial covenants in the Credit Agreement to permit SOS to
consummate the transaction without violating any such covenant. The modified
covenants included a decrease in the amount of Net Worth (as defined in the
Credit Agreement) required of SOS and its consolidated subsidiaries. In
addition, SOS agreed to distribute to the Lenders the remaining 50% of the
proceeds of the accounts receivable retained in the transaction, the Contingent
Payments and the Tax Refund. The Second Amendment also provided for a reduction
in the Aggregate Commitment (as defined in the Credit Agreement) to $30 million.
The sales price and all negotiations relating to the transaction were on an
arm's length basis.
Business Segments: The Company's continuing operations are grouped into two
identifiable operating segments: commercial staffing and IT staffing. The
commercial staffing segment provides supplemental staffing to companies by
furnishing temporary clerical, light-industrial, industrial, technical and
professional services. The IT segment primarily provides temporary and
contract-to-hire staffing services, including computer programming, system
design, analysis and administration, network and systems management and software
and documentation development. IT staffing services are similar in many respects
to commercial staffing services; however, IT services generally require
increased specialization and technical skills, carry significantly higher hourly
bill and pay rates and involve substantially longer job assignments.
12
Results of Operations: The following table sets forth, for the periods
indicated, the percentage relationship to service revenues of selected
continuing operations items for the Company on a consolidated basis and by
operating segment:
Fiscal Year (52/53 Weeks) Ended
----------------------------------------------
Consolidated 2000 1999 1998
---------------- --------------- -------------
Service revenues 100.0% 100.0% 100.0%
Direct cost of services 77.7 77.5 78.4
---------------- --------------- -------------
Gross profit 22.3 22.5 21.6
---------------- --------------- -------------
Operating expenses:
Selling, general and administrative expenses 18.2 18.1 16.0
Intangibles amortization 1.3 1.2 0.9
Loss on impairment of goodwill and intangibles 0.9 -- --
Organization realignments -- -- 0.5
---------------- --------------- -------------
Total operating expenses 20.4 19.3 17.4
---------------- --------------- -------------
Income from operations 1.9% 3.2% 4.2%
================ =============== =============
Commercial Staffing Segment
Service revenues 100.0% 100.0% 100.0%
Direct cost of services 79.1 79.0 79.4
---------------- --------------- -------------
Gross profit 20.9 21.0 20.6
---------------- --------------- -------------
Operating expenses:
Selling, general and administrative expenses 16.0 16.1 15.1
Intangibles amortization 1.0 1.0 0.7
Loss on impairment of goodwill and intangibles 1.0 -- --
---------------- --------------- -------------
Total operating expenses 18.0 17.1 15.8
---------------- --------------- -------------
Income from operations 2.9% 3.9% 4.8%
================ =============== =============
IT Segment
Service revenues 100.0% 100.0% 100.0%
Direct cost of services 70.0 70.2 72.7
---------------- --------------- -------------
Gross profit 30.0 29.8 27.3
---------------- --------------- -------------
Operating expenses:
Selling, general and administrative expenses 22.7 22.5 15.0
Intangibles amortization 3.2 2.9 2.1
Organization realignments -- -- 1.9
---------------- --------------- -------------
Total operating expenses 25.9 25.4 19.0
---------------- --------------- -------------
Income from operations 4.1% 4.4% 8.3%
================ =============== =============
Fiscal 2000 Compared to Fiscal 1999 (from continuing operations)
Consolidated
Service Revenues: Service revenues for the 52-week period ended December 31,
2000 were $334.4 million, an increase of $12.3 million, or 3.8%, compared to
service revenues of $322.1 million for the 52-week period ended January 2, 2000.
The $12.3 million increase was due primarily to an increase of $14.3 million
from comparable offices, offset by a loss of revenues of $2.0 million from
offices that were closed (net of new office openings).
Gross Profit: Gross profit for the 52 weeks ended December 31, 2000 was $74.7
million, compared to $72.4 million for the 52 weeks ended January 2, 2000, an
increase of $2.3 million, or 3.2%. Gross profit margin was 22.3%, compared to
22.5% for the comparable period of the prior year. The slight margin decline
from the comparable period of the prior year was primarily a result of a
reduction in higher margin permanent placement business in the commercial
staffing segment.
13
Operating Expenses: Total operating expenses, as a percentage of revenues,
increased to 20.4% for the 52 weeks ended December 31, 2000 from 19.3% for the
52 weeks ended January 2, 2000. As discussed below in Commercial Staffing
Segment, the change was due primarily to a write-off of impaired goodwill and
intangible assets of approximately $3.1 million.
Income from Operations: Income from operations decreased approximately $3.4
million, or 34.0%, to $6.6 million for the 52 weeks ended December 31, 2000 from
$10.0 million for the 52 weeks ended January 2, 2000. Operating margin was 1.9%
for the fiscal year ended December 31, 2000, compared to 3.2% for the fiscal
year ended January 2, 2000. The decrease in operating margin was due primarily
to the increase in operating expenses, specifically the write-off of
intangibles.
Income Taxes: The effective combined federal and state income tax rate on income
from continuing operations was 42.6% for the 52 weeks ended December 31, 2000,
compared to 32.9% for the 52 weeks ended January 2, 2000. The increase in the
effective tax rate was due primarily to an increase in non-deductible
amortization relating to certain acquisitions.
Commercial Staffing Segment
Service Revenues: Substantially all of the service revenues of the commercial
staffing segment 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 $8.9 million, or 3.3%, to $282.5 million for the
52 weeks ended December 31, 2000, compared to $273.6 million for the 52 weeks
ended January 2, 2000. Of the increase, approximately $5.6 million was
attributable to revenues from new offices (offset by office closures), while an
additional $3.3 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 52-week period ended December 31, 2000 was 20.9%, compared to 21.0% for
the 52-week period ended January 2, 2000. The margin decline from the comparable
period of the prior year was primarily a result of a reduction in higher margin
permanent placement business.
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 18.0% for the 52-week period ended December 31, 2000 and
17.1% for the 52-week period ended January 2, 2000.
Operating expenses, excluding intangibles amortization and write-off of
intangibles, as a percentage of service revenues for the 52-week period ended
December 31, 2000 remained relatively stable at 16.0%, compared to 16.1% for the
52-week period ended January 2, 2000.
Excluding the write-off of impaired goodwill and intangibles discussed
below, intangibles amortization remained constant at $2.5 million for the
52-week periods ended December 31, 2000 and January 2, 2000. Intangibles
amortization as a percentage of service revenues was 1.0% for the 52 weeks ended
December 31, 2000 and January 2, 2000.
The Company evaluates, at each balance sheet date, whether events or
circumstances have occurred that indicates possible impairment. 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. When such
estimate of the future undiscounted cash flows is less than the carrying amount
of goodwill, a potential impairment exists. During the 52 weeks ended December
31, 2000, management determined to abandon certain specialty lines of business
and concentrate on more core services provided by SOS in those markets. As a
result of the change in the operational focus in these markets, the projected
cash flows were less than the carrying amount of the associated intangible
asset. Therefore, goodwill and other intangibles of approximately $3.1 million
relating to those specific acquisitions were determined to be impaired and were
written-off
14
Income from Operations: Income from operations for the 52-week period ended
December 31, 2000 was $8.2 million, a decrease of $2.6 million, or 24.1%, from
$10.8 million for the 52-week period ended January 2, 2000. Operating margin was
2.9%, compared to 3.9% for the comparable period of the prior year. The decrease
in operating margin was due largely to the write-off of intangibles.
IT Segment
Service Revenues: As with the commercial staffing segment, the IT segment
service revenues are generally based on the time worked by staffing employees on
customer assignments, or when staff is placed on a permanent basis with the
customer. Service revenues, including inter-company revenues, increased $0.4
million, or 0.8%, to $52.0 million for the 52-week period ended December 31,
2000 from $51.6 million for the 52-week period ended January 2, 2000. The change
was due primarily to an increase in revenues from comparable offices of
approximately $8.1 million, offset by a reduction in revenues related to offices
closed during fiscal 2000 of approximately $7.7 million.
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 staffing employees and other payroll benefits; costs related to
independent contractors utilized by the Company; and other direct costs. Gross
profit margin for the 52 weeks ended December 31, 2000 remained relatively
constant at 30.0%, compared to 29.8% for the 52 weeks ended January 2, 2000.
Operating Expenses: Total operating expenses as a percentage of revenues were
25.9% for the 52-week period ended December 31, 2000 and 25.4% for the 52-week
period ended January 2, 2000. Operating expenses, excluding intangibles
amortization, as a percentage of service revenues for the 52-week period ended
December 31, 2000 were 22.7%, compared to 22.5% for the 52-week period ended
January 2, 2000. The increase in operating expenses, as a percentage of service
revenues, was due primarily to increased costs related to continued
implementation of common back-office systems throughout the segment and staffing
costs associated with recruiting, training and retaining the necessary personnel
to implement the operating model.
Intangibles amortization increased to $1.7 million for the 52 weeks ended
December 31, 2000 from $1.5 million for the 52 weeks ended January 2, 2000.
Intangibles amortization as a percentage of revenues was 3.2% and 2.9% for the
comparable period of the prior year. The increase was due primarily to
amortization on acquisition earnouts paid and capitalized in fiscal 2000.
Income from Operations: Income from operations for fiscal 2000 was $2.1 million,
a decrease of $0.2 million, or 8.7%, from $2.3 million in fiscal 1999. Operating
margin for fiscal 2000 was 4.1%, compared to 4.4% in fiscal 1999. The decrease
in income from operations was primarily a factor of increased operating
expenses.
Fiscal 1999 Compared to Fiscal 1998 (from continuing operations)
Consolidated
Service Revenues: Service revenues for the 52-week period ended January 2, 2000
were $322.1 million, an increase of $26.7 million, or 9.0%, compared to service
revenues of $295.4 million for the 53-week period ended January 3, 1999. Of the
$26.7 million increase, $20.6 million was attributable to newly acquired
businesses, while $6.1 million was from internal growth (including new offices
offset by office closures).
Gross Profit: In accordance with industry practice, during the 52 weeks ended
January 2, 2000, the Company decided 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 53-week period ended January 3, 1999 was approximately $1.3 million.
Gross profit for the 52 weeks ended January 2, 2000 was $72.4 million,
compared to $63.9 million for the 53 weeks ended January 3, 1999, an increase of
$8.5 million, or 13.3%. Gross profit margin was 22.5%, compared to 21.6% for the
comparative period of the prior year. The increase in gross profit margin was
due primarily to the increase in higher margin IT related business.
15
Operating Expenses: Total operating expenses, as a percentage of revenues,
increased to 19.3% for the 52 weeks ended January 2, 2000 from 17.4% for the 53
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.
Income from Operations: Income from operations decreased approximately $2.5
million, or 20.0%, to $10.0 million for the 52 weeks ended January 2, 2000 from
$12.5 million for the 53 weeks ended January 3, 1999. Operating margin was 3.2%
for the fiscal year ended January 2, 2000, compared to 4.2% 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 on income
from operations was 32.9% for the 52 weeks ended January 2, 2000, compared to
35.6% for the 53 weeks ended January 3, 1999. The decrease in the effective tax
rate was due primarily to an increase in income tax credits earned through
specific government-sponsored hiring incentives.
Commercial Staffing Segment
Service Revenues: Substantially all of the service revenues of the commercial
staffing segment 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
52 weeks ended January 2, 2000, compared to $252.9 million for the 52 weeks
ended January 2, 2000. 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 did 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 52-week period ended January 2, 2000 remained relatively constant at
21.0%, compared to 20.6% for the 53 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 52-week period ended January 2, 2000 and
15.8% for the 53-week period ended January 3, 1999.
Operating expenses, excluding intangibles amortization, as a percentage of
service revenues for the 52-week period ended January 2, 2000 were 16.1%,
compared to 15.1% for the 53-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.
Intangibles amortization increased 38.9% to $2.5 million for the 52-week
period ended January 2, 2000, from $1.8 million for the 53-week period ended
January 3, 1999. Intangibles amortization as a percentage of service revenues
was 1.0% and 0.7% for the comparable period of the prior year. The increase is
due primarily to earnouts paid in fiscal 1999 and full year amortization of
entities acquired in fiscal 1998.
Income from Operations: Income from operations for the 52-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 53-week period ended January 3, 1999. Operating margin was
3.9%, compared to 4.8% for the comparable period of the prior year. The decrease
in operating margin was due largely to increases in selling, general and
administrative expenses and intangibles amortization.
16
IT Segment
Service Revenues: As with the commercial staffing segment, the IT segment
service revenues are generally based on the time worked by temporary staffing
employees on customer assignments, or when staff is placed on a permanent basis
with the customer. Service revenues, including inter-company revenues, increased
$7.9 million, or 18.1%, to $51.6 million for the 52-week period ended January 2,
2000 from $43.7 million for the 53-week period ended January 3, 1999. The change
was due in part to approximately $9.9 million contributed from offices acquired
that did not have operations included in the prior year. The increase in service
revenues contributed by newly acquired offices was offset in part by a decrease
in service revenues from internal growth (service revenues from comparable
offices and the development of new offices, offset by office closures) of
approximately $2.1 million.
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 staffing employees, and other payroll benefits; costs related to
independent contractors utilized by the Company; and other direct costs. Gross
profit margin for the 52 weeks ended January 2, 2000 was 29.8%, compared to
27.3% for the 53 weeks ended January 3, 1999. The increase in gross profit
margin was due primarily to an increase in higher margin temporary staffing
assignments as customers continued to upgrade existing IT systems, processes and
procedures in anticipation of becoming Y2K compliant.
Operating Expenses: Total operating expenses as a percentage of revenues were
25.4% for the 52-week period ended January 2, 2000 and 19.0% for the 53-week
period ended January 3, 1999. Operating expenses, excluding intangibles
amortization and organization realignments, as a percentage of service revenues
for the 52-week period ended January 2, 2000 were 22.5%, compared to 15.0% for
the 53-week period ended January 3, 1999. The increase reflects the acquisition
of companies with higher operating cost structures, an increase in credit
losses, and additional management changes and costs related to relocating the
Company's Inteliant subsidiary offices.
Intangibles amortization increased to $1.5 million for the 52 weeks ended
January 2, 2000 from $0.9 million for the 53 weeks ended January 3, 1999.
Intangibles amortization as a percentage of revenues was 2.9% compared to 2.1%
for the comparable period of the prior year. The increase was due primarily to
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 $2.3
million, a decrease of $1.3 million, or 36.1%, from $3.6 million in fiscal 1998.
Operating margin for fiscal 1999 was 4.4%, compared to 8.3% in 1998. The
decrease in income from operations resulted from increased operating expenses,
partially offset by gross profit margin increases.
Liquidity and Capital Resources
For the fiscal year ended December 31, 2000 net cash provided by operating
activities was $17.5 million, compared to $12.9 million for the fiscal year
ended January 2, 2000. The change in operating cash flow was primarily a result
of a net increase of $3.5 million in net (loss) income adjusted by non-cash
items, including depreciation and amortization and loss on disposition of
discontinued operations, coupled with an increase in certain working capital
components including (i) an acceleration in the collection of the Company's
accounts receivable, such that net accounts receivable decreased $5.2 million;
and (ii) increases in accrued payroll costs and worker's compensation reserves.
The cash provided by these changes in working capital was offset primarily by an
increase in the income tax receivable.
The Company's investing activities for the 52 weeks ended December 31, 2000
used $7.5 million of cash, compared to $31.4 million of cash for the 52 weeks
ended January 2, 2000. For the 52 weeks ended December 31, 2000, the Company
purchased property and equipment of $2.9 million, compared to $4.3 million for
the 52 weeks ended January 2, 2000. The Company also paid approximately $3.4
million for acquisition costs and earnouts during the 52 weeks ended December
31, 2000, compared to $28.6 million for the 52 weeks ended January 2, 2000. The
Company also used approximately $1.2 million for investment in Biolynx, Inc., an
early stage enterprise. For the 52 weeks ended December 31, 2000, in connection
with the sale of the IT consulting division, the Company received $1.0 million
in cash compared to proceeds from the sale of assets of approximately $1.5
million in a sale-leaseback transaction for the 52 weeks ended January 2, 2000.
Additionally, the Company agreed to extend a one year subordinated loan to HD of
up to a maximum of $3.5 million to meet the operating needs of the combined
businesses, $1.0 million of which was extended at the close of the transaction
in the form of a note receivable.
17
The Company's financing activities used approximately $11.4 million of cash
for the 52 weeks ended December 31, 2000, primarily for payments against the
Company's revolving credit facility, compared to $15.7 million of cash provided
by financing activities for the 52 weeks ended January 2, 2000, primarily from
borrowings against the Company's revolving credit facility. On December 29, 2000
SOS entered into a Second Amendment to Amended and Restated Credit Agreement
(the "Second Amendment") with certain lenders (the "Lenders") under its Amended
and Restated Credit Agreement dated as of July 27, 1998 (the "Credit
Agreement"). Pursuant to the Second Amendment, the Lenders consented to the
transaction and agreed to amend certain financial covenants in the Credit
Agreement to permit SOS to consummate the transaction without violating any such
covenants. The modified covenants included a decrease in the amount of Net Worth
(as defined in the Credit Agreement) required of SOS and its consolidated
subsidiaries. In addition, SOS agreed to distribute to the Lenders 50% of the
proceeds of the accounts receivable retained in the transaction, the Contingent
Payments and the Tax Refund. The Second Amendment also provided for a reduction
in the aggregate commitment (as defined in the Credit Agreement) from $40
million to $30 million.. The agreement establishing the credit facility, which
provides for any combination of both Floating Rate Advances and Fixed Rate
Advances, as defined by the credit facility, expires in July 2001. Floating Rate
Advances bear interest at a bank's prime rate and Fixed Rate Advances bear
interest at LIBOR plus an applicable margin, ranging from 1.0% to 2.0%, based
upon certain financial ratios; the current applicable margin is 2.0%. The
agreement contains an annual commitment fee of three-eighths of one percent on
the unused portion, payable quarterly. As of December 31, 2000, $14.3 million
was available for borrowings or additional letters of credit.
The Company also has outstanding $35 million of senior unsecured notes
consisting of two components. The first component consists of senior unsecured
notes in the aggregate amount of $30 million with a final ten-year maturity and
an average maturity of seven years at a 6.95% coupon rate. The second component
consists of senior unsecured notes in the aggregate amount of $5 million with a
coupon rate of 6.72% due in a single payment in 2003. In connection with the
sale the IT consulting division, as described in Note 3 to the financial
statements contained herein, SOS entered into an Amendment to Note Purchase
Agreement (the "Amendment") to amend the Note Purchase Agreement (the "Note
Purchase Agreement") dated September 1, 1998 by and among SOS and certain
investors (the "Investors"), pursuant to which the Investors consented to the
transaction. Under the Amendment, SOS agreed to amend the Note Purchase
Agreement to reduce the minimum Consolidated Net Worth (as defined in the Note
Purchase Agreement) requirement of SOS. As consideration for the Amendment, SOS
agreed to pay the Investors 50% of: (i) proceeds of the accounts receivable of
approximately $9.0 million retained in the transaction, (ii) contingent payments
of approximately $3.5 million as provided in the Purchase Agreement and (iii)
estimated tax refunds of approximately $8.0 million. Under the Amendment, such
prepayments are to be applied to reduce the principal amount of the last
required payments under the Note Purchase Agreement.
The Company intends to renew its credit facility before its expiration on
July 1, 2001, and is currently negotiating with certain banks for the most
favorable terms. The Company believes that it may not be able to renew such
facility, which is currently unsecured, either through its existing lenders or
new lenders unless it grants to such lenders a security interest in at least a
majority of its assets, including accounts receivable. However, under the Note
Purchase Agreement, the Company shall not incur, assume or suffer to exist any
Lien upon any of its assets currently or hereafter owned, or upon the income or
profits thereof, other than, among other permitted Liens, Liens securing
Indebtedness of the Company so long as all Priority Debt does not exceed 15% of
Consolidated Net Worth (all terms capitalized in this sentence but not otherwise
defined herein shall have the meanings ascribed to them in the Note Purchase
Agreement). In order to grant a security interest as is likely to be required by
the lenders under the credit facility, the Company must obtain the consent of
the holders of the senior unsecured notes to a waiver of such covenant of the
Note Purchase Agreement. In the event that the holders of the senior unsecured
notes require that the Company also grant a security interest to such holders as
a condition to such consent, the Company believes that it would have
insufficient assets to secure both debt obligations.
Management believes that the present credit facility and the credit
facility it is currently negotiating, together with cash reserves and cash flow
from operations, will be sufficient to fund the Company's operations and meet
debt service and capital expenditure requirements for at least the next twelve
months. However, if the Company were to expand its operations significantly
experience a significant downturn in its business or fail to negotiate a new
credit facility, additional capital may be required. Although management is
confident that the credit facility will be renewed, there can be no assurance
that the Company will be able to obtain additional capital at acceptable rates.
18
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 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.
Impact of Recent Accounting Pronouncements
The Financial Accounting Standards Board issued Standard of Financial
Accounting Statements ("SFAS") No. 133, "Accounting for Derivative Instruments
and Hedging Activities." This statement establishes accounting and reporting
standards requiring that every derivative instrument be recorded on the balance
sheet as either an asset or liability measured at fair value and that changes in
the derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. SFAS No. 133, as amended by SFAS No. 137, is
effective for fiscal quarters of fiscal years beginning after June 15, 2000. As
a result, the Company will adopt the provisions of SFAS No. 133 in the first
quarter of 2001. As of December 31, 2000, the Company did not have any
derivative instruments. As a result, the Company expects that the implementation
of SFAS No. 133 will not have any impact on the Company's results of operations
and financial position.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to interest rate changes primarily in relation to
its revolving credit facility and its senior unsecured notes. The Company's
interest rate risk management objective is to limit the impact of interest rate
changes on earnings and cash flows and to lower its overall borrowing costs. To
manage its market risk within its revolving credit facility, the Company is able
to borrow against the facility at either (i) the bank's prime rate, or (ii)
LIBOR plus an applicable margin for a fixed period of time. The Company's senior
debt placement bears interest at a fixed interest rate. For fixed rate debt,
interest rate changes generally affect the fair value of the debt, but not the
earnings or cash flows of the Company. Changes in the fair market value of fixed
rate debt generally will not have a significant impact on the Company unless the
Company is required to refinance such debt.
Revolving Credit Facility: The credit agreement, which provides for any
combination of both Floating Rate Advances and Fixed Rate Advances, expires in
July 2001. Floating Rate Advances bear interest at a bank's prime rate, 9.5% at
December 31, 2000. Fixed Rate Advances bear interest at LIBOR plus an applicable
margin, ranging from 1.0% to 2.0%, based upon certain financial ratios; the
current applicable margin is 2.0%. At December 31, 2000, the Company had $9.0
million in fixed-rate advances outstanding at an average rate of 6.6% plus the
applicable margin of 2%. If the LIBOR rate increased by 10% to 7.3%, interest
expense related to the revolving credit facility would increase by approximately
$63,000.
Senior Notes: At December 31, 2000, the Company's outstanding borrowings on
the senior notes were $35.0 million with a weighted average fixed interest rate
of 6.92%. The fair value of the Company's senior notes is estimated by
discounting expected cash flows at a bank's prime rate. At December 31, 2000,
the carrying amount of $35.0 million is reflected in the consolidated balance
sheet. The estimated fair value of the obligation on the unsecured notes, using
a discount rate of 9.5% over the expected maturities of the obligations, is
approximately $31.9 million. If the discount rate were to increase by 10% to
10.5%, the estimated fair value of the obligation on the unsecured notes would
be approximately $30.8 million. If the discount rate were to decrease by 10% to
8.5%, the estimated fair value of the obligation on the unsecured notes would be
approximately $33.1 million.
19
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
Consolidated Financial Statements of the Company meeting the requirements
of Regulation S-X are filed on the succeeding pages of this Item 8 of this
Annual Report on Form 10-K, as listed below:
Page
Report of Independent Public Accountants.................................................21
Consolidated Balance Sheets as of December 31, 2000 and January 2, 2000..................22
Consolidated Statements of Operations for the 52 weeks ended
December 31, 2000, January 2, 2000 and the 53 weeks ended January 3, 1999...........24
Consolidated Statements of Shareholders' Equity for the 52 weeks ended
December 31, 2000, January 2, 2000 and the 53 weeks ended January 3, 1999...........26
Consolidated Statements of Cash Flows for the 52 weeks ended
December 31, 2000, January 2, 2000 and the 53 weeks ended January 3, 1999...........27
Notes to Consolidated Financial Statements...............................................29
Other schedules required under Regulation S-X are listed in Item 14 of this
Annual Report on Form 10-K.
20
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 December 31, 2000 and
January 2, 2000, and the related consolidated statements of operations,
shareholders' equity and cash flows for each of the three fiscal years in the
period ended December 31, 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 December 31, 2000 and January 2, 2000, and
the results of their operations and their cash flows for each of the three
fiscal years in the period ended December 31, 2000 in conformity with accounting
principles generally accepted in the United States.
By: /s/ ARTHUR ANDERSEN LLP
- ---------------------------
ARTHUR ANDERSEN LLP
Salt Lake City, Utah
February 7, 2001
21
SOS STAFFING SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
As of December 31, 2000 and January 2, 2000
ASSETS
(in thousands)
December 31, January 2,
2000 2000
------------------ -----------------
CURRENT ASSETS
Cash and cash equivalents $ 1,185 $ 2,577
Accounts receivable, less allowances of
$2,916 and $1,606, respectively 44,488 50,070
Current portion of workers' compensation deposit 213 600
Prepaid expenses and other 1,032 973
Deferred income tax asset 5,852 3,666
Income tax receivable 8,088 676
------------------ -----------------
Total current assets 60,858 58,562
------------------ -----------------
PROPERTY AND EQUIPMENT, at cost
Computer equipment 3,935 6,806
Office equipment 4,009 4,520
Leasehold improvements and other 1,834 1,967
------------------ -----------------
9,778 13,293
Less: accumulated depreciation and amortization (5,456) (5,454)
------------------ -----------------
Total property and equipment, net 4,322 7,839
------------------ -----------------
OTHER ASSETS
Workers' compensation deposit, less current portion -- 106
Intangible assets, less accumulated amortization
of $14,979 and $10,959, respectively 92,007 131,995
Deposits and other assets 4,201 2,122
------------------ -----------------
Total other assets 96,208 134,223
------------------ -----------------
$ 161,388 $ 200,624
================== =================
The accompanying notes to consolidated financial statements are an integral part
of these consolidated balance sheets.
22
SOS STAFFING SERVICES, INC.
CONSOLIDATED BALANCE SHEETS (continued)
As of December 31, 2000 and January 2, 2000
LIABILITIES AND SHAREHOLDERS' EQUITY
(in thousands, except per share data)
December 31, January 2,
2000 2000
----------------- -----------------
CURRENT LIABILITIES
Line of credit $ 9,000 $ --
Current portion of notes payable 8,273 414
Accounts payable 2,667 2,521
Accrued payroll costs 10,196 7,213
Current portion of workers' compensation reserve 4,689 4,223
Accrued liabilities 5,966 5,912
Accrued acquisition costs and earnouts 55 310
----------------- -----------------
Total current liabilities 40,846 20,593
----------------- -----------------
LONG-TERM LIABILITIES
Notes payable, less current portion 27,000 55,273
Workers' compensation reserve, less current portion 1,064 973
Deferred income tax liability 652 2,923
Deferred compensation liabilities 941 776
----------------- -----------------
Total long-term liabilities 29,657 59,945
----------------- -----------------
COMMITMENTS AND CONTINGENCIES
(Notes 4 and 6)
SHAREHOLDERS' EQUITY
Common stock $0.01 par value, 20,000 shares authorized,
12,691 shares issued and outstanding 127 127
Additional paid-in capital 91,693 91,693
Accumulated (deficit) earnings (935) 28,266
----------------- -----------------
Total shareholders' equity 90,885 120,086
----------------- -----------------
$ 161,388 $ 200,624
================= =================
The accompanying notes to consolidated financial statements are an integral part
of these consolidated balance sheets.
23
SOS STAFFING SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Fiscal Years Ended December 31, 2000, January 2, 2000 and January 3,
1999
(in thousands, except per share data)
Fiscal Year (52/53 Weeks)
----------------------------------------------------------
2000 1999 1998
---------------- --------------- --------------
SERVICE REVENUES $ 334,391 $ 322,130 $ 295,448
DIRECT COST OF SERVICES 259,727 249,777 231,503
---------------- --------------- --------------
Gross Profit 74,664 72,353 63,945
---------------- --------------- --------------
OPERATING EXPENSES:
Selling, general and administrative 60,741 58,375 47,345
Intangibles amortization 4,228 4,016 2,692
Loss on impairment of goodwill and intangibles 3,102 -- --
Organization realignments -- -- 1,395
---------------- --------------- --------------
Total operating expenses 68,071 62,391 51,432
---------------- --------------- --------------
INCOME FROM OPERATIONS 6,593 9,962 12,513
---------------- --------------- --------------
OTHER INCOME (EXPENSE):
Interest expense (4,069) (4,104) (1,660)
Interest income 181 129 237
Other, net (621) (5) 298
---------------- ---------------- --------------
Total, net (4,509) (3,980) (1,125)
---------------- --------------- --------------
INCOME BEFORE PROVISION FOR INCOME TAXES
2,084 5,982 11,388
PROVISION FOR INCOME TAXES (888) (1,967) (4,057)
---------------- --------------- --------------
INCOME FROM CONTINUING OPERATIONS 1,196 4,015 7,331
---------------- --------------- --------------
The accompanying notes to consolidated financial statements are an integral part
of these consolidated balance sheets.
24
SOS STAFFING SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Continued) For the Fiscal Years Ended December 31,
2000, January 2, 2000 and January 3, 1999
(in thousands, except per share data)
Fiscal Year (52/53 Weeks)
----------------------------------------------------------
2000 1999 1998
---------------- --------------- --------------
DISCONTINUED OPERATIONS
(Loss) income from discontinued operations (net
of income tax (benefit) provision of ($1,242),
$1,266 and $1,730, respectively) $ (2,443) $ 1,336 $ 2,527
Loss from sale of discontinued operations (net of
income tax benefit of $11,225) (27,954) -- --
---------------- --------------- --------------
Total discontinued operations (30,397) 1,336 2,527
NET (LOSS) INCOME $ (29,201) $ 5,351 $ 9,858
================ =============== ==============
BASIC (LOSS) INCOME PER COMMON SHARE:
Income from continuing operations $ 0.09 $ 0.32 $ 0.58
(Loss) income from discontinued operations (2.39) 0.10 0.20
---------------- --------------- --------------
Net (loss) income $ (2.30) 0.42 0.78
================ =============== ==============
DILUTED (LOSS) INCOME PER COMMON SHARE:
Income from continuing operations $ 0.09 $ 0.32 $ 0.57
(Loss) income from discontinued operations (2.39) 0.10 0.20
---------------- --------------- --------------
Net (loss) income $ (2.30) $ 0.42 $ 0.77
================ =============== ==============
WEIGHTED AVERAGE COMMON SHARES:
Basic 12,691 12,691 12,675
Diluted 12,692 12,699 12,810
The accompanying notes to consolidated financial statements are an integral part
of these consolidated balance sheets.
25
SOS STAFFING SERVICES, INC.
CONSOLIDATED STATEMENTS OF
SHAREHOLDERS' EQUITY For the Fiscal Years Ended
December 31, 2000, January 2, 2000 and January 3, 1999
(in thousands)
Common Stock Additional Accumulated
------------------------- Paid-in Earnings
Shares Amount Capital (Deficit) Total
----------- ------------- ------------- ------------- ---------------
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
Net loss -- -- -- (29,201) (29,201)
----------- ------------- ------------- ------------- ---------------
BALANCE, December 31, 2000 12,691 $ 127 $ 91,693 $ ( 935) $ 90,885
=========== ============= ============= ============= ===============
The accompanying notes to consolidated financial statements are an integral part
of these consolidated balance sheets.
26
SOS STAFFING SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Fiscal Years Ended December 31, 2000,
January 2, 2000 and January 3, 1999
(in thousands)
Fiscal Year (52/53 Weeks)
----------------------------------------------------
2000 1999 1998
----------------- --------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (29,201) $ 5,351 $ 9,858
Adjustments to reconcile net (loss) income
to net cash provided by operating activities:
Depreciation and amortization 11,727 8,094 5,360
Deferred income taxes (4,457) 179 123
Loss on disposition of assets 27 19 50
Loss on disposition of discontinued operations 39,179 -- --
Changes in operating assets and liabilities:
Accounts receivable, net 5,180 (5,720) (8,864)
Workers' compensation deposit 493 (138) 14
Prepaid expenses and other (189) 81 (228)
Deposits and other assets 308 (18) (789)
Accounts payable 146 (829) 2,378
Accrued payroll costs 1,834 409 3,239
Workers' compensation reserve 557 2,360 (238)
Accrued liabilities (665) 3,255 484
Income taxes (7,412) (105) (1,518)
----------------- --------------- --------------
Net cash provided by operating activities 17,527 12,938 9,869
----------------- --------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in equity securities (1,250) -- --
Cash paid for acquisitions of businesses -- (32) (41,080)
Purchases of property and equipment (2,918) (4,346) (4,431)
Payments on acquisition earnouts (3,358) (28,611) (18,903)
Proceeds from sale of property and equipment 22 1,598 60
Proceeds from sale of the IT consulting division 1,000 -- --
Issuance of note receivable (1,000) -- --
----------------- --------------- --------------
Net cash used in investing activities (7,504) (31,391) (64,354)
----------------- --------------- --------------
The accompanying notes to consolidated financial statements are an integral part
of these consolidated balance sheets.
27
SOS STAFFING SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued) For the Fiscal Years Ended December 31,
2000, January 2, 2000 and January 3, 1999
(in thousands)
Fiscal Year (52/53 Weeks)
-----------------------------------------------------
2000 1999 1998
----------------- --------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of employee stock options $ -- $ 129 $ 412
Proceeds from borrowings 13,288 22,000 62,000
Principal payments on borrowings (24,703) (6,414) (23,075)
----------------- --------------- ---------------
Net cash (used in) provided by financing (11,415) 15,715 39,337
activities
----------------- --------------- ---------------
NET DECREASE IN CASH
AND CASH EQUIVALENTS (1,392) (2,738) (15,148)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 2,577 5,315 20,463
----------------- --------------- ---------------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 1,185 $ 2,577 $ 5,315
================= =============== ===============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 4,004 $ 3,908 $ 1,223
Income taxes 290 3,332 7,322
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
In fiscal 1998, the fair value of assets acquired was approximately $45,247,
liabilities assumed were approximately $1,016, notes payable issued in
connection with acquisitions were approximately $2,935 and accrued acquisition
costs and earnouts were approximately $11,900. (see Note 4).
The accompanying notes to consolidated financial statements are an integral part
of these consolidated balance sheets.
28
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 primarily in the Western United States. As
of December 31, 2000, SOS operated a network of 135 offices located in 17
states. The Company provides a broad range of commercial and information
technology ("IT") staffing services. Commercial staffing services include light
industrial, clerical, industrial, technical and other professional services. IT
staffing services generally consist of permanent placement, temporary-to-hire
and staffing services (including computer programming, system design, analysis
and administration, network and systems management and software and
documentation development).
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. The fiscal year ended December 31,
2000 ("fiscal 2000"), and the fiscal year ended January 2, 2000 ("fiscal 1999")
each contained 52 weeks. The 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, Devon
and Devon Personnel Services, Inc., ServCom Staff Management, Inc., 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 employees on customer
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.
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.
29
Deposits and Other Assets - The Company's deposits and other assets at December
31, 2000 and January 2, 2000 consisted primarily of the following (in
thousands):
2000 1999
------------- -------------
Investment in Biolynx, Inc. common stock $ 1,250 $ --
Notes receivable,
less valuation allowance of
$500 and $0 respectively 1,000 225
Restricted investments 941 776
Deposits and other 1,010 1,121
------------- -------------
$ 4,201 $ 2,122
============= =============
In April 2000, the Company purchased a 12.5% interest in a privately held
company, Biolynx, Inc. for $1.3 million in cash. The investment is being
accounted for using the cost basis.
Notes receivable at December 31, 2000 consisted of notes receivable issued
to Herrick Douglas for $1.0 million as part of a subordinated loan agreement
(see Note 3) and a note receivable to Bency and Associates (see Note 10) for
$0.5 million, offset by an allowance for notes receivable of $0.5 million. Notes
receivable at January 2, 2000 consisted of notes receivable to Bency and
Associates of approximately $0.2 million.
Restricted investments are comprised of mutual fund securities held in a
"Rabbi Trust" for payment to the participants of the Company's deferred
compensation plan (see Note 9). The Company accounts for its restricted
investments as trading securities in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in
Debt and Equity Securities." The Company determines the proper classification of
investments at the time of purchase and reassesses such designations at each
balance sheet date.
Intangible Assets - Intangible assets consist of the following amounts as of
December 31, 2000 and January 2, 2000 (in thousands):
2000 1999
--------------- -------------
Goodwill $ 84,365 $ 117,530
Trademarks and tradenames 19,260 20,943
Non-compete agreements 2,507 2,984
Other intangible assets 854 1,497
--------------- -------------
106,986 142,954
Less:
Accumulated amortization goodwill (10,361) (6,998)
Accumulated amortization trademarks and tradenames (2,135) (1,494)
Accumulated amortization non-compete agreements (1,744) (1,739)
Accumulated amortization other intangible assets (739) (728)
--------------- -------------
Net intangible assets $ 92,007 $ 131,995
=============== =============
During fiscal 2000, the following intangible assets were disposed of in
conjunction with the sale of Inteliant's consulting division (Note 3) (in
thousands):
Goodwill $ 36,173
Trademarks and tradenames 1,684
Non-compete agreements 190
Other intangible assets 396
---------------
38,443
Less:
Accumulated amortization goodwill (3,614)
Accumulated amortization trademarks and tradenames (196)
Accumulated amortization non-compete agreements (177)
Accumulated amortization other intangible assets (201)
---------------
Net intangible assets $ 34,255
===============
30
Goodwill and trademarks and tradenames are amortized using the
straight-line method over 30 years; non-compete agreements and other intangible
assets are generally being amortized using the straight-line method over three
to six years.
Workers' Compensation - For fiscal 2000 and fiscal 1999, the Company maintained
workers' compensation insurance with ACE USA, an insurer, ("ACE") for claims in
excess of a loss cap of $300,000 per incident. 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.
Accounting for the Impairment of Long-Lived Assets-Long-lived assets,
including goodwill and other intangible assets, are 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 indicates possible
impairment. 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. When such estimate of the future undiscounted cash flows
is less than the carrying amount of goodwill, a potential impairment exists.
During fiscal 2000, executive management determined to abandon certain
specialty lines of business in certain markets, including the specialized
mortgage staffing business, and concentrate on developing more traditional
services supplied by the Company in those markets. New management was put in
place at these locations, recruiting was modified to find temporary employees to
compete in more traditional markets and the emphasis has been changed to attract
clients more in line with the core business of the Company. As a result of the
change in operational focus in these markets, the revised projected cash flows
were less than the carrying amount of the associated intangible asset.
Therefore, assets of approximately $3.1 million relating to those specific
acquisitions were determined to be impaired and were written-off.
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.
Income From Continuing Operations Per Common Share - Basic income from
continuing operations per common share ("Basic EPS") excludes dilution and is
computed by dividing income by the weighted-average number of common shares
outstanding during the year. Diluted income from continuing operations 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 income from
continuing operations per common share.
31
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):
Income from
Continuing
Operations Shares Per-Share
(Numerator) (Denominator) Amount
--------------- -------------- --------------
Fiscal 2000
Basic EPS $ 1,196 12,691 $ 0.09
Effect of stock options 1
--------------- --------------
Diluted EPS $ 1,196 12,692 $ 0.09
=============== ==============
Fiscal 1999
Basic EPS $ 4,015 12,691 $ 0.32
Effect of stock options 8
--------------- --------------
Diluted EPS $ 4,015 12,699 $ 0.32
=============== ==============
Fiscal 1998
Basic EPS $ 7,331 12,675 $ 0.58
Effect of stock options 135
--------------- --------------
Diluted EPS $ 7,331 12,810 $ 0.57
=============== ==============
At the end of fiscal 2000, fiscal 1999 and fiscal 1998, there were
outstanding options to purchase 824,000, 931,000 and 375,000, 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 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 debt obligations. The estimated fair value of the unsecured
notes, using a discount rate of 9.5% over the expected maturities of the
obligations, is approximately $31.9 million.. The fair value of the Company's
long-term debt is estimated by discounting expected cash flows at a bank's prime
rate. At December 31, 2000 the carrying amount of $35.0 million is reflected in
the consolidated balance sheets.
3. Discontinued Operations
On December 29, 2000, pursuant to an Asset Purchase Agreement (the
"Purchase Agreement") dated as of the same date by and between Inteliant, the
Company and Herrick Douglass, Inc. ("HD"), Inteliant sold to HD its consulting
division for a sales price of $1.0 million cash at closing, and contingent
payments totaling up to $3.5 million during the four years following the closing
date based on the gross margin of the newly combined businesses of HD. The
consulting division sold to HD consisted of a full suite of IT consulting,
e-business and telecommunication services, which are marketed to Fortune 1000,
mid-tier, early stage companies, government agencies and educational
institutions, and related tangible and intangible assets. Pursuant to the
Purchase Agreement, Inteliant retained approximately $9.0 million in accounts
receivable attributable to the consulting division. Additionally, the Company
agreed to extend a one year subordinated loan to HD of up to a maximum of $3.5
million to meet the operating needs of the combined businesses, $1.0 million of
which was extended to HD at closing. The Company recognized a loss of
approximately $28.0 million, net of a tax benefit of approximately $11.2
million, on disposition of assets related to the sale. Pursuant to the Purchase
Agreement, any outstanding balance under the note receivable accrues interest at
10% per annum, and is due December 31, 2001. The note is secured pursuant to (a)
a Loan and Stock Pledge Agreement, which, among other things, contains a pledge
of 51% of HD's stock and (b) a Security Agreement, which contains the grant of a
security interest in all of HD's assets junior to HD's primary lender. The sales
price and all negotiations relating to the transaction were on an arm's length
basis.
32
Operating results of the discontinued consulting division for fiscal 2000,
fiscal 1999 and fiscal 1998 have been classified as discontinued operations in
the accompanying consolidated financial statements as follows (in thousands):
2000 1999 1998
--------------- ------------- --------------
Revenues $ 37,169 $ 48,924 $ 34,879
Cost of sales 26,667 35,473 22,885
--------------- ------------- --------------
Gross profit 10,502 13,451 11,994
Operating and other expenses 14,187 10,849 7,737
--------------- ------------- --------------
(Loss) income from discontinued operations (3,685) 2,602 4,257
before income tax
Income tax (benefit) provision (1,242) 1,266 1,730
--------------- ------------- --------------
(Loss) income from discontinued operations (2,443) 1,336 2,527
=============== ============= ==============
The loss on disposal for fiscal 2000 consisted primarily of the elimination
of net assets of approximately $37.8 million (including intangible assets net of
accumulated amortization of approximately $34.3 million, net property and
equipment and other assets of approximately $3.5 million) offset by proceeds of
$1.0 million. Additional expenses of approximately $2.4 million, primarily
change of control bonuses, professional and legal fees and other transaction
related charges, were incurred as part of the transaction. These amounts are
included in the loss from the sale of discontinued operations in the
accompanying consolidated financial statements.
4. 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 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 December 31, 2000 was approximately $4.5 million. Earnout amounts
accrued increase the amount of goodwill related to the acquisition. There were
no material acquisitions during fiscal 2000 or fiscal 1999. During fiscal 1998,
the Company paid approximately $62.1 million for various acquisitions, including
earnounts accrued and paid subsequent to the purchase date, of which
approximately $59.5 million was allocated to intangible assets.
5. Credit Facilities
The Company has an unsecured credit facility with certain lenders (the
"Lenders") under its Amended and Restated Credit Agreement (the "Credit
Agreement") dated as of July 27, 1998. In connection with the sale of the
Company's IT consulting division as described in Note 3, on December 29, 2000,
the Company entered into a Second Amendment to Amended and Restated Credit
Agreement (the "Second Amendment") with the Lenders to provide for maximum
borrowings of $30 million. The Credit Agreement, as amended, which provides for
any combination of both Floating Rate Advances and Fixed Rate Advances, expires
in July 2001. Floating Rate Advances bear interest at a bank's prime rate, 9.5%
at December 31, 2000. Fixed Rate Advances bear interest at LIBOR plus an
applicable margin, ranging from 1.0% to 2.0%, based upon certain financial
ratios; the current applicable margin is 2.0%. The Credit Agreement contains an
annual commitment fee of three-eighths of one percent on any unused portion,
payable quarterly. The Company intends to renew the credit facility before it
expires. Pursuant to the Second Amendment, the Lenders consented to the
transaction and agreed to amend certain financial covenants in the Credit
Agreement to permit SOS to consummate the transaction without violating any such
covenants. The modified covenants included a decrease in the amount of Net Worth
(as defined in the Credit Agreement) required of SOS and its consolidated
subsidiaries. In addition, SOS agreed to distribute to the Lenders 50% of the
proceeds of accounts receivable of approximately $9.0 million retained in the
transaction, estimated contingent payments of up to approximately $3.5 million
and estimated tax refunds of approximately $8.0 million, as defined in the
Second Amendment.
33
At December 31, 2000, the Company had $9.0 million in long-term borrowings
outstanding ($2.0 million at 8.56% and $7.0 million at 8.71%). The Company also
had letters of credit of $6.7 million outstanding for purposes of securing its
workers' compensation premium obligation. The outstanding letters of credit
reduces the borrowing availability on the line of credit. At December 31, 2000,
$14.3 million was available for borrowings or additional letters of credit.
The Company also has outstanding $35 million of senior unsecured notes
consisting of two 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. In connection with the
sale of certain assets, as described in Note 3, SOS entered into an Amendment to
Note Purchase Agreement ("Amendment") to amend the Note Purchase Agreement (the
"Note Purchase Agreement") dated September 1, 1998 by and among SOS and certain
investors (the "Investors"), pursuant to which the Investors consented to the
transaction. Under the Amendment, SOS agreed to amend the Note Purchase
Agreement to reduce the minimum Consolidated Net Worth (as defined in the Note
Purchase Agreement) requirement. As consideration for the Amendment, SOS agreed
to pay the Investors 50% of: (i) the proceeds of the accounts receivable
retained in the transaction, (ii) the contingent payments as provided in the
Purchase Agreement and (iii) estimated tax refunds of approximately $8.0
million. Under the Amendment, such prepayments are to be applied to reduce the
principal amount of the last required payments under the Note Purchase
Agreement.
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 December 31, 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 $0.3 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 borrowings are as follows (in thousands):
Fiscal Year Ending
2001 $ 17,273
2002 4,286
2003 9,286
2004 4,286
2005 4,286
Beyond 4,856
-------------
44,273
Less current portion (17,273)
-------------
$ 27,000
=============
6. 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 10).
34
Future minimum lease payments under non-cancelable operating leases are as
follows (in thousands):
Fiscal Year Ending
2001 $ 4,158
2002 3,141
2003 1,978
2004 780
2005 221
-------------
$ 10,278
=============
Facility rental expense for continuing operations for fiscal 2000, fiscal
1999 and fiscal 1998 totaled approximately $4.0 million, $3.7 million, and $3.1
million, respectively.
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. filed a complaint against the Company
and its subsidiary Inteliant, alleging that Inteliant's name and trademark
infringed Interliant's trademark rights. Effective January 1, 2001, the parties
entered into a settlement agreement whereby 1) Interliant dismissed the lawsuit,
2) Inteliant may continue to use the Inteliant tradename and trademark without
challenge, and 3) each side is to bear its own attorney's fees and costs
incurred in connection with the lawsuit. The Company believes that the
provisions of the settlement agreement are not likely to have a material impact
on the operations or financial results of the Company.
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.
7. Income Taxes
The components of the provision for income taxes from continuing operations
for fiscal 2000, fiscal 1999 and fiscal 1998 are as follows (in thousands):
2000 1999 1998
-------------- ------------- --------------
Current provision:
Federal $ 3,668 $ 1,468 $ 3,390
State 185 320 544
-------------- ------------- --------------
3,853 1,788 3,934
-------------- ------------- --------------
Deferred (benefit) provision:
Federal (2,557) 150 103
State (408) 29 20
-------------- ------------- --------------
(2,965) 179 123
-------------- ------------- --------------
Total provision for income taxes $ 888 $ 1,967 $ 4,057
============== ============= ==============
35
The following is a reconciliation between the statutory federal income tax
rate on income from continuing operations and the Company's effective income tax
rate on income from continuing operations which is derived by dividing the
provision for income taxes by income before provision for income taxes for
fiscal 2000, fiscal 1999 and fiscal 1998:
2000 1999 1998
-------------- ---------------- --------------
Statutory federal income tax rate 34.0% 34.0% 34.0%
State income taxes net of federal benefit 3.3 4.3 4.3
Government sponsored hiring incentives (19.2) (14.2) (3.3)
Non-deductible intangible amortization 20.6 6.9 4.5
Other 3.9 1.9 (3.9)
-------------- ---------------- --------------
42.6% 32.9% 35.6%
============== ================ ==============
The components of the deferred income tax assets and liabilities at
December 31, 2000 and January 2, 2000 are as follows (in thousands):
2000 1999
------------- ---------------
Deferred income tax assets:
Workers' compensation reserves $ 2,068 $ 2,037
Allowance for doubtful accounts 1,339 630
Government sponsored tax credits carryforward 1,300 --
Accrued liabilities 912 998
State net operating loss carryforwards 900 --
Other 1,231 448
------------- ---------------
7,750 4,113
------------- ---------------
Deferred income tax liabilities:
Depreciation and amortization (2,050) (3,253)
Other (500) (117)
------------- ---------------
(2,550) (3,370)
------------- ---------------
Net deferred income tax asset $ 5,200 $ 743
============= ===============
Balance sheet classification:
Current asset $ 5,852 $ 3,666
Long-term liability (652) (2,923)
------------- ---------------
$ 5,200 $ 743
============= ===============
The Company has determined that no valuation allowance is required with
respect to its deferred income tax assets as of December 31, 2000 and January 2,
2000. The Company believes that it is more likely than not that its future
taxable income will be sufficient to realize the net deferred tax assets. It is
possible that the Company's estimates could change in the near term and it may
become necessary to record a valuation allowance in future periods, which would
adversely affect the Company's results of operations.
8. Stock Based Compensation
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
December 31, 2000 the Plan had approximately 733,000 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 2000, fiscal
1999 and fiscal 1998 only incentive and nonqualified options were 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.
36
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 28, 1997 497 57 $ 12.92
Granted 681 60 12.57
Exercised (36) 0 11.59
Forfeited (116) (9) 17.06
-------------- ------------- --------------
Outstanding at January 3, 1997 1,026 108 12.29
Granted 434 24 5.40
Exercised (3) 0 7.82
Forfeited (224) (4) 12.60
-------------- ------------- --------------
Outstanding at January 2, 2000 1,233 128 10.08
Granted 276 10 3.30
Forfeited (556) (86) 9.63
-------------- ------------- --------------
Outstanding at December 31, 2000 953 52 $ 8.42
============== ============= ==============
Exercisable at December 31, 2000 411 75 $ 9.94
============== ============= ==============
The following is additional information with respect to the stock options
(shares in thousands):
Weighted-
Average
Outstanding as of Remaining Weighted-Average Exercisable At Weighted-Average
Exercise Price December 31, Contractual Exercise December 31, Exercise
Range 2000 Yearly Life Price 2000 Price
- --------------------- ------------------- ----------------- -------------------- ----------------- ------------------
$ 2.50 - $ 9.29 713 8.6 $ 4.77 290 $ 5.42
9.30 - 16.09 77 4.1 11.22 65 11.09
16.10 - 22.88 215 7.0 19.57 131 19.41
------------------- ----------------- -------------------- ----------------- ------------------
1,005 7.9 $ 8.42 486 $ 9.94
=================== ================= ==================== ================= ==================
Stock Price Assumptions - SOS Options: 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 2000, fiscal 1999 and
fiscal 1998, in calculating compensation cost: expected stock price volatility
of 73% for fiscal 2000, 63% for fiscal 1999, and 64% for fiscal 1998; an average
risk-free interest rate of 6.0% for fiscal 2000, 6.4% for fiscal 1999 and 5.3%
for fiscal 1998; and an expected life of five years for director options and
seven years for employee options for fiscal 2000, fiscal 1999 and fiscal 1998.
The weighted-average fair value of options granted was $1.89, $3.67, and $7.53
for grants made during fiscal 2000, fiscal 1999 and fiscal 1998, respectively.
Inteliant Stock Option Plan - The Company has adopted the Inteliant Corporation
Stock Option Plan (the "Inteliant Plan") for the benefit of Inteliant's
employees, officers and directors. The Inteliant 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. The number of options
granted, the vesting schedule of such grants and other conditions of each grant
is established by Inteliant's board of directors. The grants are issued at fair
value as determined by independent valuation. As of December 31, 2000 only
non-qualified options have been granted.
37
A summary of the stock option activity for the Inteliant Plan is as follows (in
thousands, except per share data):
Weighted
Average
Exercise Price
Options Per Share
------------ ---------------
Granted 4,052 $ 2.00
Forfeited (2,449) 2.00
------------ ----------------
Outstanding at December 31, 2000 1,603 2.00
============ ================
Exercisable at December 31, 2000 401 $ 2.00
============ ================
At December 31, 2000 all outstanding options are priced at $2.00. Total
options outstanding are 1,603,000 with a weighted average remaining contractual
yearly life of 9.4 years. There were approximately 401,000 options exercisable
at a weighted average exercise price of $2.00.
Stock Price Assumptions - Inteliant Options: 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 2000 in
calculating compensation cost: expected stock price volatility of 73%, an
average risk-free rate of 6.0% and an expected life of 3.57 years for options.
As a market value is determined from independent valuation on a periodic basis,
the original valuation was used as average market value.
Proforma Compensation Expense - The Company applies Accounting Principles Board
Opinion No. 25 and related interpretations in accounting for its options issued
under the Plan and the Inteliant 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 2000, fiscal 1999 and fiscal 1998 would approximate the pro
forma amounts below (in thousands, except per share data):
2000 1999 1998
---------------- ----------------- ----------------
Income from Continuing Operations-
As reported $ 1,196 $ 4,015 $ 7,331
Pro forma (1,667) 2,557 5,322
Diluted EPS -
As reported $ 0.09 $ 0.32 $ 0.57
Pro forma (0.13) 0.20 0.42
9. 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 $348,000, $440,000,
and $348,000 for fiscal 2000, fiscal 1999 and fiscal 1998, 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 and/or the Company's common stock as directed by the
participants. The trust assets are recorded as a long-term asset in the
accompanying consolidated balance sheet because such amounts are subject to the
claims of creditors. The corresponding deferred compensation liability
represents amounts deferred by participants plus any earnings on the trust
assets. At December 31, 2000 and January 2, 2000, the deferred compensation
liabilities were approximately $941,000 and $776,000, respectively.
38
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. The fees paid by the Company have not been significant.
10. Related Party Transactions
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
2000, fiscal 1999 and fiscal 1998 amounted to approximately $83,000, $81,000 and
$81,000, respectively. Future minimum lease payments related to this lease will
average approximately $85,000 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, 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 ("Bency"). The
joint venture is being accounted for using the equity method of accounting. As
part of the agreement the Company agreed to provide a note receivable of
$500,000 terminating December 31, 2000. At December 31, 2000 borrowings under
this note receivable were approximately $500,000, reflected in other assets on
in the accompanying balance sheet. Interest earned for fiscal 2000 was
approximately $24,000. Under the original terms of the note receivable, Bency
was to repay the entire outstanding balance by December 31, 2000, but was unable
to satisfy the terms of that agreement. Consequently, the Company has
established reserves for the entire amount due at December 31, 2000. Subsequent
to year-end, the terms of the note receivable were renegotiated as follows:
Bency will make monthly interest payments at a fixed rate of 9.0% through
December 31, 2001. Beginning January 2002, Bency will make monthly principal and
interest payments of approximately $16,000 for the succeeding 36 months.
39
11. Segment Reporting
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 temporary and contract-to-hire staffing
services (including computer programming, system design, analysis and
administration, network and systems management and software and documentation
development).
The accounting policies of the operating segments are the same as those
described in the summary of significant accounting policies (Note 2).
Information concerning continuing operations by operating segment for
fiscal 2000, fiscal 1999 and fiscal 1998 is as follows (in thousands):
Fiscal Year (52/53 Weeks)
------------------------------------------------
2000 1999 1998
------------- --------------- ----------------
Revenues
Commercial $ 282,453 $ 273,626 $ 252,917
IT 51,953 51,609 43,718
Other (15) (3,105) (1,187)
-------------- ---------------- ----------------
$ 334,391 $ 322,130 $ 295,448
============== ================ ================
Income from Operations
Commercial $ 8,242 $ 10,773 $ 12,177
IT 2,096 2,266 3,637
Other (unallocated) (3,745) (3,077) (3,301)
-------------- ---------------- ----------------
$ 6,593 $ 9,962 $ 12,513
============== ================ ================
Depreciation and Amortization
Commercial(2) $ 7,183 $ 4,046 $ 2,826
IT 2,294 1,483 916
-------------- ---------------- ----------------
$ 9,477 $ 5,529 $ 3,742
============== ================ ================
Identifiable Assets
Commercial $ 94,901 $ 98,520 $ 97,339
IT 60,423 97,055 82,552
Other (unallocated) 6,064 5,049 3,018
-------------- ---------------- ----------------
$ 161,388 $ 200,624 $ 182,909
============== ================ ================
Additions to Long-Lived Assets(2)
Commercial $ 987 $ 4,837 $ 31,681
IT 5,035 17,982 27,993
-------------- ---------------- ----------------
$ 6,022 $ 22,819 $ 59,674
============== ================ ================
(1) Depreciation and amortization in fiscal 2000 includes the write off of
goodwill and intangibles of approximately $3.1 million.
(2) Includes property & equipment and intangible asset additions.
40
12. Selected Quarterly Financial Data (Unaudited)
A summary of quarterly financial information for fiscal 2000 and fiscal
1999 is as follows (in thousands, except per share data):
First Quarter Second Quarter Third Quarter Fourth Quarter
--------------- --------------- -------------- ---------------
Fiscal 2000:
Service revenues $ 80,301 $ 84,424 $ 86,904 $ 81,763
Gross profit 18,215 18,482 20,129 17,838
Income (loss) from continuing operations(1) 237 547 1,922 (1,510)
Loss from discontinued operations (518) (466) (432) (1,027)
Loss on sale of discontinued operations -- -- -- (27,954)
Net (loss) income (281) 81 1,490 (30,491)
Basic (loss) income per common share:
Income from continuing operations $ 0.02 $ 0.04 $ 0.15 $ (0.12)
(Loss) income from discontinued operations (0.04) (0.03) (0.03) (2.28)
--------------- --------------- -------------- ---------------
Net (loss) income $ (0.02) $ 0.01 $ 0.12 $ (2.40)
=============== =============== ============== ===============
Diluted (loss) income per common share:
Income from continuing operations $ 0.02 $ 0.04 $ 0.15 $ (0.12)
(Loss) income from discontinued operations (0.04) (0.03) (0.03) (2.28)
--------------- --------------- -------------- ---------------
Net (loss) income $ (0.02) $ 0.01 $ 0.12 $ (2.40)
=============== =============== ============== ===============
Fiscal 1999:
Service revenues $ 73,023 $ 79,289 $ 85,209 $ 84,608
Gross profit 16,165 18,328 19,624 18,236
(Loss) income from continuing operations (105) 1,014 2,000 1,106
Income (loss) from discontinued operations 448 589 539 (240)
Net income 343 1,603 2,539 866
Basic (loss) income per common share:
Income from continuing operations $ (0.01) $ 0.08 $ 0.16 $ 0.09
(Loss) income from discontinued operations 0.04 0.05 0.04 (0.02)
--------------- --------------- -------------- ---------------
Net (loss) income $ 0.03 $ 0.13 $ 0.20 $ 0.07
=============== =============== ============== ===============
Diluted (loss) income per common share:
Income from continuing operations $ (0.01) $ 0.08 $ 0.16 $ 0.09
(Loss) income from discontinued operations 0.04 0.05 0.04 (0.02)
--------------- --------------- -------------- ---------------
Net (loss) income $ 0.03 $ 0.13 $ 0.20 $ 0.07
=============== =============== ============== ===============
(1) Income (loss) from continuing operations includes a write off of goodwill
and intangibles of $3.1 million during the fourth quarter of fiscal 2000.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
41
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 18, 2001 (the "Proxy Statement"), not later than 120 days
after December 31, 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) Financial Statements, Financial Statement Schedules and Exhibits:
1. Consolidated Financial Statements:
The Consolidated Financial Statements of the Company and its subsidiaries
filed as a part of this Annual Report on Form 10-K are listed in Item 8 of
the Annual Report on Form 10-K, which listing is hereby incorporated herein
by reference.
2. Financial Statement Schedules
The following financial consolidated statement schedules of SOS Staffing
Services, Inc. are included in item 14(d) hereof:
o Report of independent public accountants on financial statement schedule.
o Schedule II - Valuation and qualifying accounts.
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions or are not applicable, and
therefore have been omitted.
42
(b) Reports on Form 8-K
The Company's current report on Form 8-K filed on January 12, 2001.
(c) Exhibits:
Exhibit Incorporated by Filed Herewith
No. Exhibit Reference
- --------- ------------------------------------------------------ -------------------- ----------------
3.1 Amended and Restated Articles of Incorporation of (1)
the Company
3.2 Amended and Restated Bylaws of the Company (1)
4.2 Amended and Restated Articles of Incorporation of (1)
the Company
4.3 Amended and Restated Bylaws of the Company (1)
10.1 SOS Staffing Services, Inc. Stock Incentive Plan (3)
dated May 4, 1995, as amended
10.2 Form of Employment Agreement entered into by the (1)
Company and each of Messrs. Richard J. Tripp, John
E. Schaffer, Thomas K. Sansom, and Brad L. Stewart.
10.3 Form of Consulting Agreement between the Company (2)
and Ms. JoAnn W. Wagner, effective as of July 1, 1995
10.4 Lease Agreement between the Company and Reed F. (1)
Reinhold, Rand F. Reinhold, Rena R. Qualls and Robb
F. Reinhold, dated April 1, 1995, covering the
Company's corporate office building
10.5 Credit Agreement dated as of July 11, 1996 by and (4)
among the Company, First Security Bank, N.A. and NBD
Bank, together with Security Agreement and Revolving
Credit Notes
10.6 Note Purchase Agreement dated September 1, 1999. (5)
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)
Company and JoAnn W. Wagner.
43
Exhibit Incorporated by Filed Herewith
No. Exhibit Reference
- ---------------- ------------------------------------------------------ -------------------- ----------------
10.9 First Amendment to Amended and Restated Credit (6)
Agreement dated June 3, 1999 by and among the
Company and certain banks
10.10 Inteliant Stock Option Plan (7)
10.11 Asset Purchase Agreement dated as of December 29, (8)
2000 by and between Inteliant Corporation, SOS
Staffing Services, Inc. and Herrick Douglas
10.12 Amendment to Note Purchase Agreement dated January (8)
12, 2001 with effect as of December 22, 2000 between
SOS Staffing Services, Inc. and certain entities
listed as Purchasers on the signature pages thereto
10.13 Second Amendment to Amended and Restated Credit (8)
Agreement dated as of December 29, 2000 by and among
SOS Staffing Services, Inc., certain Lenders, First
Security Bank, N.A., as administrative agent, and
Bank One, N.A., as documentation agent
21 Subsidiaries of the Company (9)
23.2 Consent of Independent Public Accountants (9)
(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 Current Report on Form
8-K for the quarter ended July 4, 1999 filed by the Company on August
18, 1999.
(7) Incorporated by reference to the exhibits to an Annual Report on Form
10-KA for the year ended January 2, 2000 filed by the Company on April
3, 2000.
(8) ncorporated by reference to the exhibits to a Current Report on From
8-K for the quarter ended December 31, 2000 filed by the Company on
January 12, 2001.
(9) Filed herewith and attached to this Report following page 44 hereof.
(d) Financial Statement Schedules:
44
Schedule II
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
To SOS Staffing Services:
We have audited in accordance with auditing standards generally accepted in
the United States, the consolidated financial statements included in SOS
Staffing Services, Inc. Form 10-K, and have issued our report thereon dated
February 7, 2001. Our audits were made for the purpose of forming an opinion on
those statements taken as a whole. The schedule listed in Item 14(d) is the
responsibility of the Company's management and is presented for the purpose of
complying with the Securities and Exchange Commission's rules and is not part of
the basic financial statements. The schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
By: /s/ ARTHUR ANDERSEN LLP
- ---------------------------
ARTHUR ANDERSEN LLP
Salt Lake City, Utah
February 7, 2001
45
SOS STAFFING SERVICES, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(In Thousands)
ALLOWANCE FOR DOUBTFUL ACCOUNTS
Balance at Charged to bad Deductions
beginning of debt expense (Write-off of Balance at end
period Other bad debts) of period
--------------- ----------------- ------------- --------------- -----------------
December 31, 2000------------- $ 1,606 $ 2,618 $ -- $ (1,308) $ 2,916
January 2, 2000--------------- 762 2,385 -- (1,541) 1,606
January 3, 1999--------------- 678 949 -- (865) 762
ALLOWANCE FOR NOTES RECEIVABLE
Charged to
Balance at other
beginning of non-operating Balance at end
period expense Other Deductions of period
--------------- ----------------- ------------- --------------- -----------------
December 31, 2000------------- $ -- $ 500 $ -- $ -- $ 500
RESERVES FOR COSTS OF DISCONTINUING OPERATIONS
Charged to
Balance at loss from
beginning of discontinued Balance at end
period operations Other Deductions of period
--------------- ----------------- ------------- --------------- -----------------
December 31, 2000------------- $ -- $ 1,991 $ -- $ -- $ 1,991
46
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: April 2, 2001 By: /s/ Kevin Hardy
---------------------
Kevin Hardy
Senior 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 April 2, 2001
------------------
JoAnn W. Wagner Chief Executive Officer
(principal executive officer)
/s/ Kevin Hardy Senior Vice President and Chief April 2, 2001
- --------------- Financial Officer
Kevin Hardy
(principal accounting officer)
/s/ Thomas K. Sansom Director and April 2, 2001
- --------------------
Thomas K. Sansom Senior Vice President
/s/ Richard J. Tripp Director and April 2, 2001
- --------------------
Richard J. Tripp Senior Vice President
/s/ Stanley R. deWaal Director April 2, 2001
- ---------------------
Stanley R. deWaal
/s/ Samuel C. Freitag Director April 2, 2001
--------------------
Samuel C. Freitag
/s/ R. Thayne Robson Director April 2, 2001
- --------------------
R. Thayne Robson
/s/ Randolph K. Rolf Director April 2, 2001
- --------------------
Randolph K. Rolf
/s/ Brad L. Stewart Director April 2, 2001
- -------------------
Brad L. Stewart
47
SUBSIDIARY COMPANIES OF SOS STAFFING SERVICES, INC.
Name of Subsidiary State of Incorporation
Devon and Devon Personnel Services, Inc.----------------- California
Inteliant Corporation------------------------------------ Delaware
ServCom Staff Management, Inc.--------------------------- Utah
SOS Collection Services, Inc.---------------------------- Arizona
48
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
reports dated February 7, 2001 included in this Form 10-K, into the Company's
previously filed Registration Statements on Form S-8, File Nos. 33-96362 and
333-1422.
By: /s/ ARTHUR ANDERSEN LLP
- ---------------------------
ARTHUR ANDERSEN LLP
Salt Lake City, Utah
March 26, 2001
49