SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 29, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________to__________
Commission File Number 0-26094
SOS STAFFING SERVICES, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Utah 87-0295503
- ---------------------------- ------------------------
(State or other jurisdiction (I.R.S. Employer ID No.)
of incorporation)
1415 South Main Street
Salt Lake City, Utah 84115
----------------------------------------
(Address of principal executive offices)
(801) 484-4400
------------------
(Telephone number)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filings
requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class of Common Stock Outstanding at November 4, 2002
--------------------- -------------------------------
Common Stock, $0.01 par value 12,691,398
1
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item Page
---- ----
Item 1. Unaudited Financial Statements
Condensed Consolidated Balance Sheets
As of September 29, 2002 and December 30, 2001 3
Condensed Consolidated Statements of Operations
For the 13- and 39-week periods
ended September 29, 2002 and September 30, 2001 5
Condensed Consolidated Statements of Cash Flows
For the 13- and 39-week periods
ended September 29, 2002 and September 30, 2001 6
Notes to Condensed Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations 16
Item 3. Qualitative and Quantitative Disclosures About Market Risk 22
Item 4. Controls and Procedures 23
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 24
Item 4. Submission of Matters to a Vote of Security Holders 24
Item 6. Exhibits and Reports on Form 8-K 24
Signatures 25
Certifications 26
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
SOS STAFFING SERVICES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS
(in thousands)
September 29, 2002 December 30, 2001
------------------ -----------------
CURRENT ASSETS
Cash and cash equivalents $ 18 $ 879
Restricted cash 1,033 --
Accounts receivable, less allowances of
$1,193 and $2,267, respectively 18,639 21,995
Income taxes receivable 3,856 367
Prepaid expenses and other 1,218 1,126
-------- --------
Total current assets 24,764 24,367
-------- --------
PROPERTY AND EQUIPMENT, at cost
Computer equipment 5,390 6,082
Office equipment 3,450 3,808
Leasehold improvements and other 1,670 1,887
-------- --------
10,510 11,777
Less accumulated depreciation and amortization (7,027) (7,269)
-------- --------
Total property and equipment, net 3,483 4,508
-------- --------
OTHER ASSETS
Intangible assets, net 31,215 48,060
Deposits and other assets 1,762 1,808
-------- --------
Total other assets 32,977 49,868
-------- --------
Total assets $ 61,224 $ 78,743
-------- --------
The accompanying notes are an integral part
of these condensed consolidated statements
3
SOS STAFFING SERVICES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)
(Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
(in thousands)
September 29, 2002 December 30, 2001
------------------ -----------------
CURRENT LIABILITIES
Current portion of notes payable $ 12,761 $ 5,668
Line of credit 2,816 --
Accounts payable 917 1,571
Accrued payroll costs 1,894 3,492
Current portion of workers' compensation reserve 4,424 4,484
Accrued liabilities 2,172 4,799
-------- --------
Total current liabilities 24,984 20,014
-------- --------
LONG-TERM LIABILITIES
Notes payable, less current portion 11,807 23,427
Workers' compensation reserve, less current portion 1,020 1,018
Deferred compensation and other liabilities 686 743
-------- --------
Total long-term liabilities 13,513 25,188
-------- --------
COMMITMENTS AND CONTINGENCIES
(Notes 4, 6 and 7)
SHAREHOLDERS' EQUITY
Common stock 127 127
Additional paid-in capital 91,693 91,693
Accumulated deficit (69,093) (58,279)
-------- --------
Total shareholders' equity 22,727 33,541
-------- --------
Total liabilities and shareholders' equity $ 61,224 $ 78,743
-------- --------
The accompanying notes are an integral part
of these condensed consolidated statements
4
SOS STAFFING SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except per share data)
13 Weeks Ended 39 Weeks Ended
-------------------------------- ----------------------------------
September 29, September 30, September 29, September 30,
2002 2001 2002 2001
------------- ------------ ------------- ------------
SERVICE REVENUES $ 48,849 $ 57,785 $ 137,075 $ 163,115
DIRECT COST OF SERVICES 38,876 45,331 109,708 127,769
--------- --------- --------- ---------
Gross profit 9,973 12,454 27,367 35,346
--------- --------- --------- ---------
OPERATING EXPENSES:
Selling, general and administrative 8,095 9,819 23,922 28,452
Depreciation and amortization 420 920 1,255 2,702
Restructuring charges -- 204 609 1,115
--------- --------- --------- ---------
Total operating expenses 8,515 10,943 25,786 32,269
--------- --------- --------- ---------
INCOME FROM OPERATIONS 1,458 1,511 1,581 3,077
--------- --------- --------- ---------
OTHER INCOME (EXPENSE):
Interest expense (743) (839) (2,532) (2,387)
Other, net (7) 85 10 171
--------- --------- --------- ---------
Total other expense, net (750) (754) (2,522) (2,216)
--------- --------- --------- ---------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
708 757 (941) 861
INCOME TAX BENEFIT -- 5 7,927 --
--------- --------- --------- ---------
INCOME FROM CONTINUING OPERATIONS 708 762 6,986 861
LOSS FROM DISCONTINUED OPERATIONS (Note 4) (81) (33,140) (1,717) (36,151)
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE (net of
income tax of $0) -- -- (16,083) --
--------- --------- --------- ---------
NET INCOME (LOSS) $ 627 $ (32,378) $ (10,814) $ (35,290)
--------- --------- --------- ---------
BASIC AND DILUTED INCOME (LOSS) PER COMMON SHARE:
Income from continuing operations $ 0.06 $ 0.06 $ 0.55 $ 0.07
Loss from discontinued operations (0.01) (2.61) (0.13) (2.85)
Loss from cumulative effect of change in accounting
principle -- -- (1.27) --
--------- --------- --------- ---------
Net income (loss) $ 0.05 $ (2.55) $ (0.85) $ (2.78)
--------- --------- --------- ---------
The accompanying notes are an integral part
of these condensed consolidated statements
5
SOS STAFFING SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
39 Weeks Ended
September 29, 2002 September 30, 2001
------------------ ------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(10,814) $(35,290)
Adjustments to reconcile net loss
to net cash provided by operating activities:
Cumulative effect of change in accounting principle
16,083 --
Depreciation and amortization 1,255 2,702
Loss from discontinued operations 730 37,731
Deferred income taxes -- (2,765)
Loss on disposition of assets -- 77
Changes in operating assets and liabilities:
Restricted cash (1,033) --
Accounts receivable, net 3,356 16,124
Prepaid expenses and other (47) (69)
Income taxes receivable (3,489) 7,963
Deposits and other assets -- (110)
Accounts payable (654) (1,895)
Accrued payroll costs (1,597) (6,338)
Workers' compensation reserve (58) (517)
Accrued liabilities (2,684) 73
-------- --------
Net cash provided by operating activities 1,048 17,686
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Issuance of notes receivable -- (2,421)
Purchases of property and equipment (208) (1,251)
Proceeds from sale of property and equipment 10 --
Payments of acquisition costs and earnouts -- (2,218)
-------- --------
Net cash used in investing activities (198) (5,890)
-------- --------
The accompanying notes are an integral part
of these condensed consolidated statements
6
SOS STAFFING SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Unaudited)
(in thousands)
39 Weeks Ended
September 29, 2002 September 30, 2001
------------------ ------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings $ 13,456 $ 26,992
Principal payments on borrowings (15,167) (38,020)
-------- --------
Net cash used in financing activities (1,711) (11,028)
-------- --------
NET (DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS (861) 768
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 879 1,185
-------- --------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 18 $ 1,953
-------- --------
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid (received) during the period for:
Interest $ 3,011 $ 3,199
Income taxes (4,437) (7,690)
The accompanying notes are an integral part
of these condensed consolidated statements
7
SOS STAFFING SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
have been prepared by the Company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
disclosures normally included in financial statements prepared in accordance
with accounting principles generally accepted in the United States of America
have been condensed or omitted pursuant to such rules and regulations. These
condensed consolidated financial statements reflect all adjustments (consisting
only of normal recurring adjustments) that, in the opinion of management, are
necessary to present fairly the results of operations of the Company for the
periods presented. It is suggested that these condensed consolidated financial
statements be read in conjunction with the consolidated financial statements and
the notes thereto included in the Company's Annual Report on Form 10-K for the
fiscal year ended December 30, 2001.
In order to conform to the current period presentation, certain
reclassifications have been made to the prior period financial statements. Due
to the presentation of discontinued operations for the sale of Inteliant
Corporation ("Inteliant"), ServCom Staff Management, Inc. ("ServCom") and the
Company's Truex division ("Truex"), all periods in the accompanying consolidated
condensed financial statements have been presented on a comparable basis.
The results of operations for the interim periods indicated are not
necessarily indicative of the results to be expected for the full year.
Note 2. Cash
Bank overdrafts: Under the Company's cash management system,
outstanding checks pending clearance that are considered for accounting purposes
to be overdraft balances are included as part of the Company's line of credit.
The current amount of overdraft balances is $1.6 million.
Restricted cash: During the 39-week period ended September 29, 2002,
the Company renewed its workers' compensation policy. Under the terms of this
renewed policy, the Company is required to provide a letter of credit of $10.0
million plus $1.0 million in cash to collateralize future claims payments under
the policy. The cash amount is carried at fair value and is restricted as to
withdrawal until December 2002. The restricted cash is held in the Company's
name with a major financial institution.
Note 3. Earnings Per Share
Basic earnings (loss) per share ("EPS") is calculated by dividing net
income (loss) by the weighted-average number of common shares outstanding for
the period. Diluted EPS is calculated by dividing net income (loss) by the
weighted-average number of common shares outstanding plus the assumed exercise
of all dilutive securities using the treasury stock method or the "as converted"
method, as appropriate. During periods of net loss from continuing operations,
all common stock equivalents are excluded from the diluted EPS calculation.
The following is a reconciliation of the numerator and denominator used
to calculate basic and diluted income (loss) from continuing operations per
common share for the periods presented (in thousands, except per share amounts):
13 Weeks Ended September 29, 2002 13 Weeks Ended September 30, 2001
-------------------------------------------------------------------------------------------
Income from Income from
continuing Per Share continuing Per Share
operations Shares Amount operations Shares Amount
-------------------------------------------------------------------------------------------
Basic $ 708 12,691 $ 0.06 $ 762 12,691 $ 0.06
Effect of stock options -- 100
------------------------ --------------------------
Diluted $ 708 12,691 $ 0.06 $ 762 12,791 $ 0.06
------------------------ --------------------------
8
39 Weeks Ended September 29, 2002 39 Weeks Ended September 30, 2001
-------------------------------------------------------------------------------------------
Income from Income from
continuing Per Share continuing Per Share
operations Shares Amount operations Shares Amount
-------------------------------------------------------------------------------------------
Basic $ 6,986 12,691 $ 0.55 $ 861 12,691 $ 0.07
Effect of stock options -- 51
------------------------- --------------------------
Diluted $ 6,986 12,691 $ 0.55 $ 861 12,742 $ 0.07
------------------------- --------------------------
At the end of the 13- and 39-week periods ended September 29, 2002
there were outstanding options to purchase approximately 1,499,000 shares of
common stock and 1,495,000 shares of common stock, respectively, that were not
included in the computation of diluted income from continuing operations per
common share because the exercise price of the option was greater than the
average market price of the common shares. At the end of the 13- and 39-week
periods ended September 30, 2001 there were outstanding options to purchase
approximately 825,000 shares of common stock that were not included in the
computation of diluted income from continuing operations per common share
because the exercise price of the option was greater than the average market
price of the common shares.
Note 4. Discontinued Operations
In fiscal 2000, the Company disposed of all of its assets related to
its information technology ("IT") consulting business. During the 13-week period
ended September 29, 2002, the Company settled an outstanding claim relating to
the disposed IT consulting business (see Note 6). In connection with the
resolution of the matter, the Company had recorded an additional charge of
approximately $292,000 to discontinued operations during the second quarter of
fiscal 2002. Additionally, as part of the sale of the IT consulting business,
the Company assigned certain lease agreements to the acquiring company, with the
respective landlords reserving their rights against the Company in the event of
default by the assignee. Subsequent to the sale of the IT consulting business,
the acquiring company ceased operations in some areas and defaulted on some of
the assumed lease agreements; the Company believes that its claims against the
assignee are of no value, as the assignee is believed to be insolvent.
Consequently, during the 39-week period ended September 29, 2002, the Company
recorded an additional $215,000 charge to discontinued operations for accrued
lease payments with respect to the properties abandoned by the purchaser of the
IT consulting business.
In November 2001, the Company resolved to sell or abandon the assets
of its IT staffing business, which represented the remaining assets and business
of Inteliant. During the 39-week period ended September 29, 2002, the Company
consummated the following transactions in relation to its discontinued IT
staffing businesses:
o On February 25, 2002, the Company entered into an asset purchase agreement
with Abacab Software, Inc. ("Abacab"), pursuant to which the Company sold
certain assets of Inteliant's northern California operations for contingent
payments not to exceed $600,000 in the aggregate over three years following
the closing date of the transaction, based on the gross profit of the
business acquired by Abacab. Abacab also assumed liabilities of
approximately $40,000. The Company retained accounts receivable of
approximately $1.1 million, of which approximately $209,000 was outstanding
as of September 29, 2002. The Company originally acquired a portion of the
assets sold in the transaction from Abacab. The principal of Abacab was
engaged by the Company as an independent consultant and was managing the
Company's northern California operations at the time of the closing of the
transaction.
o Effective March 11, 2002, the Company settled a dispute with NeoSoft, Inc.
("NeoSoft"), whose assets had been acquired by Inteliant in July 1998.
During fiscal 2001, Neosoft and its former principal stockholder had alleged
that the Company owed more than the final earnout payment paid by the
Company pursuant to the purchase agreement with Neosoft. Under the terms of
the settlement, the Company paid NeoSoft $550,000 and transferred the
NeoSoft operations back to NeoSoft. In return, the Company retained all of
the accounts receivable and unbilled revenue of approximately $639,000, most
of which has been collected. As part of the settlement, the Company has paid
NeoSoft 15% of all accounts receivable collected as consideration for
NeoSoft's assistance in collecting the receivables. Additionally, NeoSoft
assumed approximately $53,000 in accrued paid time off liability and assumed
all operating leases. Furthermore, the parties released all claims
including, without limitation, any claims arising under the original asset
purchase agreement and under the former principal stockholder's original
employment agreement. The former principal stockholder of Neosoft was
employed by the Company at the time of the closing of the transaction and
was managing the Company's Neosoft operations.
9
o Effective May 6, 2002, the Company sold certain assets related to the Kansas
City, Missouri and Denver, Colorado ("Central States") operations of
Inteliant for contingent payments not to exceed $1,000,000 in the aggregate
over three years following the closing date of the transaction, based on the
gross profit of the business acquired by the buyer. The buyer also assumed
liabilities of approximately $40,000. Additionally, the Company retained
accounts receivable of approximately $500,000, of which approximately
$46,000 was outstanding as of September 29, 2002. The buyer was employed by
the Company as the manager of the Central States operations at the time of
the closing of the transaction.
In addition, during fiscal 2001, the Company formalized a plan to sell
its wholly owned subsidiary, ServCom, a professional employer organization. On
December 31, 2001, the Company sold substantially all of the assets of this
business to an unrelated entity. The Company retained accounts receivable of
approximately $480,000, of which approximately $142,000 was outstanding as of
September 29, 2002. The terms of the transaction were immaterial to the
financial results of the Company.
As a result of a number of factors primarily related to the extended
economic downturn in the San Francisco area beginning in late fiscal 2000, the
Company made a number of changes in its Truex division, including reducing the
number of employees and closing a number of offices, in order to try to maintain
the division's profitability. During the second quarter of fiscal 2002, due to
continued declining revenues, the Company determined to sell its Truex division.
In accordance with Statement of Financial Accounting Standards ("SFAS") No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets," the Company
reclassified assets of its Truex operations, including trademarks and trade
names and an allocated portion of goodwill, as assets held for sale. Likewise,
SFAS No. 144 requires the carrying amount of assets reclassified as held for
sale to be reduced to the estimated fair value less selling costs. The Company
estimated that the Truex assets had no fair value and consequently recorded a
charge of approximately $40,000 for the write-off of property and equipment;
additionally, the Company wrote off the remaining value of intangible assets and
trademarks and trade names associated with Truex of approximately $421,000 and
wrote off goodwill of approximately $286,000. These charges are reflected in
"operating and other expenses" in the table below. In August 2002, the Company
entered into an agreement pursuant to which the Company transferred the Truex
business and trade name to an unrelated entity for contingent payments not to
exceed $300,000 in the aggregate over one year following the closing date of the
transaction, based on the gross profit of the business acquired. Any contingent
consideration will be recorded in discontinued operations when received.
Operating results of the discontinued operations for the 13- and
39-week periods ended September 29, 2002 and September 30, 2001 have been
classified as discontinued operations in the accompanying consolidated financial
statements as follows (in thousands):
13 Weeks Ended 39 Weeks Ended
September September September 29, September
29, 2002 30, 2001 2002 30, 2001
-------------- ------------- --------------- -------------
IT Consulting
Revenues $ -- $ -- $ -- $ --
Cost of sales -- -- -- --
-------------- ------------- --------------- -------------
Gross profit -- -- -- --
Operating and other expenses (10) -- 497 4,328
-------------- ------------- --------------- -------------
Income (loss) from discontinued operations before
income tax 10 -- (497) (4,328)
Income tax benefit -- -- -- 1,701
-------------- ------------- --------------- -------------
Income (loss) from discontinued operations $ 10 $ -- $ (497) $ (2,627)
-------------- ------------- --------------- -------------
10
13 Weeks Ended 39 Weeks Ended
September September September 29, September
29, 2002 30, 2001 2002 30, 2001
-------------- ------------- --------------- -------------
IT Staffing and ServCom
Revenues $ -- $ 11,495 $ 2,735 $ 41,193
Cost of sales -- 10,055 2,267 33,937
-------------- ------------- --------------- -------------
Gross profit -- 1,440 468 7,256
Operating and other expenses (75) 35,063 726 41,020
-------------- ------------- --------------- -------------
Loss from discontinued operations before income tax
(75) (33,623) (258) (33,764)
Income tax benefit -- 573 -- 575
-------------- ------------- --------------- -------------
Loss from discontinued operations $ (75) $ (33,050) $ (258) $ (33,189)
-------------- ------------- --------------- -------------
-------------- ------------- --------------- -------------
Truex
Revenues $ 60 $ 380 $ 437 $ 1,666
Cost of sales 44 236 281 1,000
-------------- ------------- --------------- -------------
Gross profit 16 144 156 666
Operating and other expenses (32) 294 1,118 1,216
-------------- ------------- --------------- -------------
Loss from discontinued operations before income tax
(16) (150) (962) (550)
Income tax benefit -- 60 -- 215
-------------- ------------- --------------- -------------
Loss from discontinued operations (16) (90) (962) (335)
-------------- ------------- --------------- -------------
Total loss from discontinued operations net of income tax
$ (81) $ (33,140) $ (1,717) $ (36,151)
-------------- ------------- --------------- -------------
Note 5. Intangible Assets
As of the beginning of fiscal 2002, the Company adopted the provisions
of SFAS No. 142, "Goodwill and Other Intangible Assets." The provisions of SFAS
No. 142 prohibit the amortization of goodwill and certain intangible assets that
are deemed to have indefinite lives and require that such assets be tested for
impairment annually, or more frequently if events or changes in circumstances
indicate that the asset might be impaired, and written down to fair value. In
order to assess the fair value of its goodwill and indefinite-lived intangible
assets as of the adoption date, the Company engaged an independent valuation
firm to assist in determining the fair value. The valuation process appraised
the Company's assets and liabilities using a combination of present value and
multiple of earnings valuation techniques. Based upon the results of the
valuation, the Company wrote off $8.0 million of goodwill and $8.1 million in
trademarks and trade names as a cumulative effect of the change in accounting
principle during the first quarter of fiscal 2002.
During the fourth quarter of fiscal 2002, the Company expects to
perform its required annual impairment test of goodwill and other intangible
assets in accordance with SFAS No. 142. The Company has not determined the
amount of impairment, if any. However, given the continued decline in its market
capitalization, it is possible that a significant impairment charge to income
from continuing operations will be recorded in the fourth quarter.
As of September 29, 2002 and December 30, 2001, intangible assets
consisted of the following (in thousands):
11
September 29, 2002 December 30, 2001
------------------------ ----------------------
Goodwill $ 24,202 $ 37,119
Trademarks and trade names, indefinite-lived 6,959 18,046
Other definite-lived intangibles 1,993 2,426
------------------------ ----------------------
33,154 57,591
Less accumulated amortization (1,939) (9,531)
------------------------ ----------------------
Net intangible assets $ 31,215 $ 48,060
------------------------ ----------------------
The following table provides a reconciliation of reported income from
continuing operations for the 13- and 39-week periods ended September 29, 2002
and September 30, 2001 to the adjusted income from continuing operations,
excluding amortization expense relating to goodwill and trademarks and trade
names:
13 Weeks 39 Weeks
--------------------------------- -----------------------------------
September 29, September 30, September 29, September 30,
2002 2001 2002 2001
--------------- --------------- -------------- ---------------
Reported income from continuing operations $ 708 $ 762 $ 6,986 $ 861
Add back: Goodwill amortization, net of income taxes -- 167 -- 501
Add back: Trademark and trade names amortization, net
of income taxes -- 74 -- 223
--------------- --------------- -------------- ---------------
Adjusted income from continuing operations $ 708 $ 1,003 $ 6,986 $ 1,585
=============== =============== ============== ===============
Basic and diluted income from continuing operations
per common share:
Reported income $ 0.06 $ 0.06 $ 0.55 $ 0.07
Goodwill amortization net of income taxes -- 0.01 -- 0.04
Trademark and trade names amortization, net of
income taxes -- 0.01 -- 0.01
--------------- --------------- -------------- ---------------
Adjusted income from continuing operations $ 0.06 $ 0.08 $ 0.55 $ 0.12
=============== =============== ============== ===============
Note 6. Legal Matters
In the ordinary course of its business, the Company is periodically
threatened with or named as a defendant in various lawsuits or administrative
proceedings. The Company maintains insurance in such amounts and with such
coverage and deductibles as management believes to be reasonable and prudent.
The principal risks covered by insurance include workers' compensation, personal
injury, bodily injury, property damage, errors and omissions, fidelity losses,
employer practices liability and general liability.
On April 11, 2001, Royalty Carpet Mills, Inc. ("Royalty") filed a
complaint against Inteliant for breach of contract for services to be provided
by Inteliant and for professional negligence in the state of California (the
"Complaint"). The Complaint requested unspecified damages, consequential
damages, and attorneys' fees and costs. Royalty sought damages of approximately
$1.9 million. Royalty subsequently raised its demand to $3.0 million. Inteliant
denied the allegations set forth in the Complaint and filed various
counterclaims against Royalty.
During the 13-week period ended September 29, 2002, the parties settled
the litigation related to the Complaint, which included the release of Inteliant
and the Company, and their respective affiliates, from all claims or potential
claims, whether known or unknown. Neither party admitted any fault or
wrongdoing. Under the terms of the settlement agreement, Inteliant paid Royalty
$500,000 and Inteliant's insurance carrier paid Royalty an additional $600,000,
for a total settlement of $1.1 million. Inteliant's insurance carrier also paid
Inteliant's defense costs, including attorneys' fees. Also in connection with
the settlement, Inteliant waived all coverage claims against its insurance
carrier. During the second quarter of fiscal 2002 Inteliant had accrued $500,000
for settlement of the claim. The matter is closed.
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.
12
Note 7. Credit Facility and Notes Payable
On April 15, 2002, the Company entered into a Fifth Amendment to the
Amended and Restated Credit Agreement and Waiver (the "Fifth Credit Amendment")
with its lenders to extend the Company's line of credit. Pursuant to the Fifth
Credit Amendment, the Company's line of credit was reduced from $18.0 million to
$16.0 million, $6.0 million of which is available for borrowing in cash, reduced
as provided below, with a maturity date of September 1, 2003, and $10.0 million
of which is available under letters of credit to be issued solely as required by
the Company's workers' compensation insurance providers, with a maturity date of
January 1, 2004. The Fifth Credit Amendment provides for borrowings at the prime
rate (4.75% as of September 29, 2002) plus 3.0 percentage points through and
including June 30, 2003, after which time borrowings under the facility will be
charged an interest rate equal to the then-current prime rate plus 3.5
percentage points. The Company paid its lenders approximately $78,000 upon
execution of the Fifth Credit Amendment and a supplemental fee of $250,000 will
be due on September 1, 2003, unless all amounts outstanding under the revolving
credit facility are paid in full and the facility is terminated on or before
such date. In addition, the Company paid $313,000 of the outstanding borrowings
under the revolving credit facility upon execution of the Fifth Credit
Amendment. The Company also paid an additional $470,000 of the outstanding
borrowings under the revolving credit facility on September 15, 2002 and will
pay an additional $559,000 on December 15, 2002. Such payments permanently
reduce the line of credit available to the Company for borrowing in cash to less
than the $6.0 million stated above. In addition, certain financial covenants of
the Company were modified. As of September 29, 2002, the Company was in
compliance with all covenants. As of September 29, 2002, the Company had
outstanding borrowings under the revolving credit facility of approximately $2.8
million, which includes $1.6 million of outstanding checks pending clearance
(see Note 2), and borrowing availability of $1.1 million.
Also on April 15, 2002, the Company entered into an Amendment No. 3 to
Note Purchase Agreement ("Amendment No. 3") with its noteholders. The Company's
noteholders consented to the Company entering into the Fifth Credit Amendment
described above. Pursuant to Amendment No. 3, the Company's Series A Notes bear
interest at the rate of 9.22% per annum beginning as of April 1, 2002 through,
but excluding, June 30, 2003, and at the rate of 9.72% per annum from June 30,
2003 until the Series A Notes become due and payable. The Company's Series B
Notes bear interest at the rate of 9.45% per annum beginning as of April 1, 2002
through, but excluding, June 30, 2003, and at the rate of 9.95% per annum from
June 30, 2003 until the Series B Notes become due and payable. Under the payment
terms of Amendment No. 3 the Company has classified approximately $12.8 million
of its senior notes as a current liability as of September 29, 2002.
Pursuant to Amendment No. 3, any overdue payments on the Series A Notes
bear interest at the greater of 2% over the interest rate currently in effect as
stated above or 2% over the prime rate of The First National Bank of Chicago. In
addition, the Company paid $687,000 of the principal amount of the senior notes
upon execution of Amendment No. 3. The Company paid an additional $1,030,500 of
the principal amount of the senior notes on September 15, 2002 and will pay an
additional $1,227,000 on December 15, 2002.
Amendment No. 3 also provides for optional or mandatory prepayments, as
the case may be, upon the occurrence of certain events including, but not
limited to, a change of control, transfer of property or issuance of equity
securities of the Company. In addition, Amendment No. 3 provides that the
Company pay to its lenders and its noteholders a portion of any federal, state
or local tax refund or repayment, which amount shall be distributed pursuant to
the Amended and Restated Intercreditor Agreement dated as of April 15, 2002
among the Collateral Agent, the Company's lenders and the Company's noteholders.
Any such prepayments paid to the Company's lenders also will be treated as a
permanent reduction in the line of credit available to the Company for borrowing
in cash under the revolving credit facility. As of September 29, 2002, as a
result of income tax refunds received and accounts receivable collected from
disposed operations, the Company had paid approximately $2.8 million to its
noteholders and $1.6 million to its lenders, which subsequently reduced the
borrowings available under its line of credit. The Company expects to receive
tax refunds of $3.9 million in 2003, which the Company will use, as required, to
pay $2.5 million to its noteholders and $1.4 million to its lenders, further
reducing its line of credit availability.
As consideration for their approval of Amendment No. 3, the Company
paid an amendment fee to its noteholders of $145,475, as well as fees and
expenses of the noteholders' special counsel. In addition, the Company paid to
each noteholder accrued but unpaid interest on such holder's notes for the
period beginning March 1, 2002 through and including June 30, 2002. Also
pursuant to Amendment No. 3, the Company is required to pay on September 1, 2003
13
a supplemental note fee of $250,000, which amount will be waived if the Company
has paid all amounts due and outstanding under the note purchase agreements
prior to such date. Also, certain financial covenants of the Company were
modified. In the event the Company fails to comply with such covenants as
modified, Amendment No. 3 provides that the noteholders may, at their discretion
and at the expense of the Company, retain a financial advisor to review and
advise the noteholders and the Company upon the financial status of the Company.
The security agreement dated as of July 30, 2001 remains in place pursuant to
Amendment No. 3.
The Company's amended credit facility matures in September 2003. The
Company intends to refinance its credit facility and the note purchase
agreements prior to September 2003 in order to obtain sufficient capital to
continue to fund the Company's operations after the expiration of the current
credit facility. Although management is confident that new financing can be
negotiated, there can be no assurance that the Company will be able to obtain
sufficient funds at acceptable terms. If the Company were to experience a
significant downturn in its business or fail to negotiate a new credit facility,
additional capital would be required in order to continue operations.
Note 8. Restructuring Charges and Lease Obligations
For the period ended September 29, 2002, the Company continued under
its plan to streamline its corporate structure by consolidating or closing
branch offices in under-performing markets. Although the Company has not
incurred any additional restructuring costs during the 13-week period ended
September 29, 2002, during the 39-week period ended September 29, 2002, the
Company recorded a restructuring charge of approximately $609,000, primarily
related to a change in the estimate of future lease obligations and severance
costs associated with the elimination of a senior executive position. The
Company is endeavoring to reduce potential future lease payments by subleasing
abandoned facilities or negotiating discounted buyouts of such lease contracts.
Consequently, the Company's estimates may change based on its ability to
effectively reduce such future lease payments. The activity impacting the
accrual for restructuring charges and other lease obligations related to
discontinued operations is summarized in the table below (in thousands):
December 30, September 29,
2001 Charges Utilized 2002
-------------------- -------------------- -------------------- --------------------
Contractual lease obligations $ 514 $ 335 $ (511) $ 338
Reductions in workforce -- 233 (233) --
Other costs 47 41 (25) 63
-------------------- -------------------- -------------------- --------------------
Total restructuring 561 609 (769) 401
Contractual lease obligations
related to discontinued
operations 442 285 (345) 382
-------------------- -------------------- -------------------- --------------------
Total $ 1,003 $ 894 $ (1,114) $ 783
-------------------- -------------------- -------------------- --------------------
As noted previously, the Company has subleased some of the facilities
for which it is contractually obligated, and in such instances, has reduced the
amount of the liability carried on the Company's books by the anticipated
sublease payments from such properties. However, as discussed in Note 4.
"Discontinued Operations," if the sublesee defaults on its lease obligations,
the Company is liable for any lease payments outstanding. The following table
presents the Company's future lease obligations and the expected sublease
payments by year for its subleased facilities (in thousands):
Fiscal Year Lease Expected sublease Net remaining
Ending obligations payments liability
---------------- ----------------- -------------------- -----------------
2002 $ 294 $ 136 $ 158
2003 931 608 323
2004 274 200 65
2005 203 128 75
2006 80 60 19
Beyond 80 10 80
----------------- -------------------- -----------------
$ 1,862 $ 1,142 $ 720
================= ==================== =================
14
Note 9. Income Taxes
On March 9, 2002, the Job Creation and Work Assistance Act of 2002 (the
"2002 Job Act"), which includes certain provisions that provide favorable tax
treatment for the Company, was signed into law. Among such provisions is the
extension of the net operating loss carryback period from two years to five
years for net operating losses arising in tax years ending in 2001 and 2002.
These provisions also allow companies to use the net operating loss carrybacks
and carryforwards to offset 100% of alternative minimum taxable income. In
accordance with SFAS No. 109, "Accounting for Income Taxes," the effect of the
change in the law was accounted for in the first quarter of fiscal 2002, the
period in which the law became effective. In accordance with the provisions of
the 2002 Job Act, the Company recognized a tax benefit of approximately $7.9
million related to expected loss carrybacks.
During the 39-week period ended September 29, 2002, the Company
received approximately $4.4 million in income tax refunds. The Company expects
that, as a result of the completion of the sale of its IT and Truex operations,
it will generate a taxable loss for fiscal 2002, a portion of which will be
available for carryback against its 1997 tax year. As a result, the Company
anticipates receiving in fiscal year 2003 an additional $3.9 million in income
tax refunds (including approximately $200,000 in state refunds) related to the
carryback of the Company's net operating loss to 1997.
As of September 29, 2002, the Company has recorded a tax valuation
allowance for its entire net deferred income tax assets of approximately $26.1
million. The valuation allowance was recorded given the cumulative losses
incurred by the Company and the Company's belief that it is more likely than not
that the Company will be unable to recover the net deferred tax assets.
Note 10. Recent Accounting Pronouncements
In July 2002, the Financial Accounting Standards Board issued SFAS No.
146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS
No. 146 addresses financial accounting and reporting for costs associated with
exit or disposal activities and nullifies Emerging Issues Task Force Issue No.
94-3, "Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (Including Certain Costs Incurred in a Restructuring)"
("EITF 94-3"). SFAS No. 146 requires recognition of a liability for a cost
associated with an exit or disposal activity when the liability is incurred, as
opposed to when the entity commits to an exit plan under EITF 94-3. The Company
is required to adopt the provisions of SFAS No. 146 for exit or disposal
activities that are initiated after December 31, 2002.
15
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction
with the condensed consolidated financial statements of the Company and notes
thereto appearing elsewhere in this report. The Company's fiscal year consists
of a 52- or 53-week period ending on the Sunday closest to December 31. The
Company's critical accounting policies are described in its Annual Report on
Form 10-K for the fiscal year ended December 30, 2001.
Recent Developments
On April 22, 2002, the Company was notified by Nasdaq that it was not
in compliance with the $1.00 minimum bid price per share requirement for
continued listing on the Nasdaq National Market ("NNM"). The Company was unable
to achieve compliance with such listing requirement during the grace period
provided by Nasdaq and, consequently, on August 12, 2002, the Company
transferred to the SmallCap Market. As a result of such transfer, the Company
was granted an additional grace period to regain compliance with the minimum bid
price per share requirement, which grace period has been further extended to
April 21, 2003. If the Company's minimum bid price per share closes at or above
the $1.00 per share minimum required bid price for at least 10 consecutive
trading days, the Company will have regained compliance with such requirement.
If during the SmallCap Market grace period the closing bid price of the
Company's stock is $1.00 per share or more for 30 consecutive trading days, then
the Company may be eligible to transfer its common stock back to the NNM,
provided all other requirements for continued listing on that market are met. If
the Company has not met the minimum bid price and all other listing requirements
at the expiration of the grace period, the common stock may be subject to
delisting from the SmallCap Market, subject to an appeals process, in which
event the Company's securities may be quoted in the over-the-counter market.
Delisting could make trading shares of the Company's common stock difficult,
potentially leading to a further decline in the stock price. In addition,
investors may find it difficult to sell the Company's common stock or to obtain
accurate quotations of the share price of the common stock.
Effective December 31, 2001, the Company adopted SFAS No. 142,
"Goodwill and Other Intangible Assets." In accordance with SFAS No. 142, the
Company discontinued the amortization of goodwill and identifiable intangible
assets that have indefinite useful lives. Intangible assets that have finite
useful lives, such as non-compete agreements, will continue to be amortized over
their useful lives. Pursuant to the conditions set forth in SFAS No. 142, the
Company recorded an impairment loss of approximately $16.1 million as a
cumulative effect of a change in accounting principle in the first quarter of
fiscal 2002. Additionally, during the fourth quarter of fiscal 2002, the Company
expects to perform its required annual impairment test of goodwill and other
intangible assets in accordance with SFAS No. 142. The Company has not
determined the amount of impairment, if any. However, given the continued
decline in its market capitalization, it is possible that a significant
impairment charge to income from continuing operations will be recorded in the
fourth quarter.
In September 2002, the Auditing Standards Board issued an
interpretation regarding financial statements previously audited by auditors
whose operations have ceased operations. Such interpretation states that, in the
event a corporation's previous auditor has ceased operations and is unable to
issue a report on financial statements of previous years that reflect
discontinued operations, a re-audit must be performed for such years. During
2002, the Company discontinued and sold its Truex operations. As a result, the
Company is required to reflect the current year results from operations of Truex
as discontinued operations. All comparative prior periods must have a comparable
presentation for financial reporting purposes. The Company's previous auditor,
Arthur Andersen LLP, has ceased operations and is no longer employed by the
Company. As a result, Arthur Andersen LLP is unable to issue a report on the
financial statements reflecting the discontinued operations for the fiscal years
2001 and 2000. The Company anticipates engaging its current auditor, KPMG LLP,
to perform the re-audit of such fiscal years. The re-audit of prior years is
only being conducted as a result of the recent Auditing Standards Board
interpretation and is not due to any known inaccuracies in previously reported
results or any change in the financial condition of the Company.
Discontinued Operations
In fiscal 2000, the Company disposed of all of its assets related to
its information technology ("IT") consulting business. During the 13-week period
ended September 29, 2002, the Company settled an outstanding claim relating to
16
the disposed IT consulting business (see Part II, Item 1. Legal Proceedings). In
connection with the resolution of the matter, the Company had recorded an
additional charge of approximately $292,000 to discontinued operations during
the second quarter of fiscal 2002. Additionally, as part of the sale of the IT
consulting business, the Company assigned certain lease agreements to the
acquiring company, with the respective landlords reserving their rights against
the Company in the event of default by the assignee. Subsequent to the sale of
the IT consulting business, the acquiring company ceased operations in some
areas and defaulted on some of the assumed lease agreements. The Company
believes that its claims against the assignee are of no value, as the assignee
is believed to be insolvent. Consequently, during the 39-week period ended
September 29, 2002, the Company recorded an additional $215,000 charge to
discontinued operations for accrued lease payments with respect to the
properties abandoned by the purchaser of the IT consulting business.
In November 2001, the Company resolved to sell or abandon the assets
of its IT staffing business, which represented the remaining assets and business
of Inteliant Corporation ("Inteliant"). During the 39-week period ended
September 29, 2002, the Company consummated the following transactions in
relation to its discontinued IT staffing businesses:
o On February 25, 2002, the Company entered into an asset purchase agreement
with Abacab Software, Inc. ("Abacab"), pursuant to which the Company sold
certain assets of Inteliant's northern California operations for contingent
payments not to exceed $600,000 in the aggregate over three years following
the closing date of the transaction, based on the gross profit of the
business acquired by Abacab. Abacab also assumed liabilities of
approximately $40,000. The Company retained accounts receivable of
approximately $1.1 million, of which approximately $209,000 was outstanding
as of September 29, 2002. The Company originally acquired a portion of the
assets sold in the transaction from Abacab. The principal of Abacab was
engaged by the Company as an independent consultant and was managing the
Company's northern California operations at the time of the closing of the
transaction.
o Effective March 11, 2002, the Company settled a dispute with NeoSoft, Inc.
("NeoSoft"), whose assets had been acquired by Inteliant in July 1998.
During fiscal 2001, Neosoft and its former principal stockholder had alleged
that the Company owed more than the final earnout payment paid by the
Company pursuant to the purchase agreement with Neosoft. Under the terms of
the settlement, the Company paid NeoSoft $550,000 and transferred the
NeoSoft operations back to NeoSoft. In return, the Company retained all of
the accounts receivable and unbilled revenue of approximately $639,000, most
of which has been collected. As part of the settlement, the Company has paid
NeoSoft 15% of all accounts receivable collected as consideration for
NeoSoft's assistance in collecting the receivables. Additionally, NeoSoft
assumed approximately $53,000 in accrued paid time off liability and assumed
all operating leases. Furthermore, the parties released all claims
including, without limitation, any claims arising under the original asset
purchase agreement and under the former principal stockholder's original
employment agreement. The former principal stockholder of Neosoft was
employed by the Company at the time of the closing of the transaction and
was managing the Company's Neosoft operations.
o Effective May 6, 2002, the Company sold certain assets related to the Kansas
City, Missouri and Denver, Colorado ("Central States") operations of
Inteliant for contingent payments not to exceed $1,000,000 in the aggregate
over three years following the closing date of the transaction, based on the
gross profit of the business acquired by the buyer. The buyer also assumed
liabilities of approximately $40,000. Additionally, the Company retained
accounts receivable of approximately $500,000, of which approximately
$46,000 was outstanding as of September 29, 2002. The buyer was employed by
the Company as the manager of the Central States operations at the time of
the closing of the transaction.
In addition, during fiscal 2001, the Company formalized a plan to sell
its wholly owned subsidiary, ServCom Staff Management, Inc. ("ServCom"), a
professional employee organization. On December 31, 2001, the Company sold
substantially all of the assets of this business to an unrelated entity. The
Company retained accounts receivable of approximately $480,000, of which
approximately $142,000 was outstanding as of September 29, 2002. The terms of
the transaction were immaterial to the financial results of the Company.
As a result of a number of factors primarily related to the extended
economic downturn in the San Francisco area beginning in late fiscal 2000, the
Company made a number of changes in its Truex division, including reducing the
number of employees and closing a number of offices, in order to try to maintain
the division's profitability. During the second quarter of fiscal 2002, due to
continued declining revenues, the Company determined to sell its Truex division.
In accordance with Statement of Financial Accounting Standards ("SFAS") No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets," the Company
reclassified assets of its Truex operations, including trademarks and trade
names and an allocated portion of goodwill, as assets held for sale. Likewise,
17
SFAS No. 144 requires the carrying amount of assets reclassified as held for
sale to be reduced to the estimated fair value less selling costs. The Company
estimated that the Truex assets had no fair value and consequently recorded a
charge of approximately $40,000 for the write-off of property and equipment;
additionally, the Company wrote off the remaining value of intangible assets and
trademarks and trade names associated with Truex of approximately $421,000 and
wrote off goodwill of approximately $286,000. In August, 2002, the Company
entered into an agreement pursuant to which the Company transferred the Truex
business and trade name to an unrelated entity for contingent payments not to
exceed $300,000 in the aggregate over one year following the closing date of the
transaction, based on the gross profit of the business acquired. Any contingent
consideration will be recorded in discontinued operations when received.
Results of Continuing Operations
The following table sets forth, for the periods indicated, the
percentage relationship to service revenues of selected income statement items
for the Company on a consolidated basis:
13 Weeks Ended 39 Weeks Ended
----------------------------------- ------------------------------------
September 29, September 30, September 29, September 30,
2002 2001 2002 2001
------------------ ---------------- ------------------ -----------------
Service revenues 100.0% 100.0% 100.0% 100.0%
Direct cost of services 79.6 78.4 80.0 78.3
------------------ ---------------- ------------------ -----------------
Gross profit 20.4 21.6 20.0 21.7
------------------ ---------------- ------------------ -----------------
Operating expenses:
Selling, general and administrative expenses 16.6 17.0 17.4 17.4
Depreciation and amortization 0.8 1.6 0.9 1.7
Restructuring charges -- 0.4 0.5 0.7
------------------ ---------------- ------------------ -----------------
Total operating expenses 17.4 19.0 18.8 19.8
------------------ ---------------- ------------------ -----------------
Income from operations 3.0% 2.6% 1.2% 1.9%
------------------ ---------------- ------------------ -----------------
Service Revenues: Service revenues for the 13-week period ended
September 29, 2002 were $48.8 million, a decrease of $9.0 million, or 15.6%,
compared to revenues of $57.8 million for the 13-week period ended September 30,
2001. Service revenues for the 39-week period ended September 29, 2002 decreased
$26.0 million, or 15.9%, to $137.1 million, compared to service revenues of
$163.1 million for the 39-week period ended September 30, 2002. The decrease for
both the 13- and 39-week periods ended September 29, 2002, compared to the
comparable periods of the prior year, was due primarily to reduced demand for
temporary services as a result of the broad downturn in the economy. The Company
also has experienced a significant decrease in permanent placement revenues.
Gross Profit: The Company defines gross profit as service revenues less
the cost of providing services, which includes: wages and permanent placement
commissions, employer payroll taxes (FICA, unemployment and other general
payroll taxes), workers' compensation costs related to staffing employees and
permanent placement counselors and other temporary payroll benefits; costs
related to independent contractors utilized by the Company; and other direct
costs. Gross profit for the 13-week periods ended September 29, 2002 and
September 30, 2001 was $10.0 million and $12.5 million, respectively, a decrease
of $2.5 million, or 20%. For the 13-week periods ended September 29, 2002 and
September 30, 2001, gross profit margin was 20.4% and 21.6%, respectively. Gross
profit for the 39-week periods ended September 29, 2002 and September 30, 2001
was $27.4 million and $35.3 million, respectively, a decrease of $7.9 million,
or 22.4%. For the 39-week periods ended September 29, 2002 and September 30,
2001, gross profit margin was 20.0% and 21.7%, respectively. The margin declines
for both the 13- and 39-week periods ended September 29, 2002, compared to the
comparable periods of the prior year, were primarily the result of increased
pricing competition for staffing services, higher workers' compensation
insurance costs and a reduction in the higher margin permanent placement
business. As part of the Company's renewed workers' compensation insurance for
fiscal 2002, the Company was required to pay higher premium costs. Although some
of the increased costs have been passed through as price increases to its
customers, given the competitive nature of the staffing industry, the Company
has not been able to pass through all cost increases. Accordingly, the Company
believes that its gross margin could be negatively impacted throughout fiscal
2002.
18
Operating Expenses: Operating expenses include, among other things,
staff employee compensation, rent, depreciation, intangibles amortization and
advertising. Total operating expenses as a percentage of service revenues
declined to 17.4% for the 13-week period ended September 29, 2002, compared to
19.0% for the 13-week period ended September 30, 2001, due primarily to cost
savings being realized as a result of the Company's restructuring efforts and a
reduction in recognized intangible amortization relating to the adoption of SFAS
No. 142. Total operating expenses as a percentage of service revenues was 18.8%
for the 39-week period ended September 29, 2002, compared to 19.8% for the
39-week period ended September 30, 2001. The reduction was due primarily to a
reduction in recognized intangible amortization related to the adoption of SFAS
No. 142 and a reduction in restructuring costs incurred by the Company.
Selling, general and administrative expenses ("SG&A"), as a percentage
of service revenues, for the 13-week period ended September 29, 2002 were 16.6%,
compared to 17.0% for the 13-week period ended September 30, 2001. The decrease
in SG&A as a percentage of service revenues was due primarily to the cost
reduction plan implemented by the Company. For the 39-week periods ended
September 29, 2002 and September 30, 2001, SG&A expenses, as a percentage of
service revenues, remained constant at 17.4%.
Restructuring charges for the 39-week period ended September 29, 2002
related primarily to the closure and consolidation of under-performing branch
offices as well as reductions in personnel. The Company is endeavoring to reduce
potential future lease payments by subleasing the closed facilities or
negotiating discounted buyouts of the lease contracts. Consequently, the
Company's estimates may change based on its ability to effectively reduce such
future lease payments.
As noted previously, the Company has subleased some of the facilities
for which it is contractually obligated, and in such instances has reduced the
amount of the liability carried on the Company's books by the anticipated
sublease payments from such properties. However, as noted in the Company's
discussion of discontinued operations, if the sublessee defaults on its lease
obligations the Company is liable for any remaining lease payments, which could
have a negative impact on the Company's future profitability. Currently, the
Company has entered into sublease agreements with respect to seven facilities,
which represents approximately $1.1 million in sublease payments to the Company.
The Company currently does not anticipate that any of the current sublease
holders will default on their obligations.
Income from Operations: Income from operations remained constant at
$1.5 million for the 13-week periods ended September 29, 2002 and September 30,
2001. Operating margin was 3.0%, compared to 2.6% for the comparable period of
the prior year. For the 39-week periods ended September 29, 2002 and September
30, 2001, income from operations was $1.6 million and $3.1 million,
respectively. Operating margin was 1.2% and 1.9% for the same periods,
respectively. The decrease in operating margin was due largely to a decrease in
gross profit.
Income Taxes: During the 39-week period ended September 29, 2002, the
Company received approximately $4.4 million in income tax refunds. The Company
expects that, as a result of the completion of the sale of its IT and Truex
operations, it will generate a taxable loss for fiscal 2002, a portion of which
will be available for carryback against its 1997 tax year. As a result, the
Company anticipates receiving an additional approximately $3.9 million in
federal and state income tax refunds in fiscal 2003 with respect to the 2002
fiscal year. The refunds are primarily a result of the Company's recognition,
during the first quarter of fiscal 2002, of a federal tax benefit of
approximately $7.9 million, due primarily to the enactment of the Job Creation
and Work Assistance Act of 2002 (the "2002 Job Act"), which was signed into law
on March 9, 2002. The 2002 Job Act contains certain provisions that provide
favorable tax treatment for the Company. Among such provisions is the extension
of the net operating loss carryback period from two years to five years for net
operating losses arising in tax years ending in 2001 and 2002. These provisions
also allow companies to use the net operating loss carrybacks to offset 100
percent of alternative minimum taxable income. In accordance with SFAS No. 109,
"Accounting for Income Taxes," the effect of the change in the law has been
accounted for in the first quarter of fiscal 2002, the period in which the law
became effective.
As of September 29, 2002, the Company has recorded a tax valuation
allowance for its entire net deferred income tax assets of approximately $26.1
million. The valuation allowance was recorded given the cumulative losses
incurred by the Company and the Company's belief that it is more likely than not
that the Company will be unable to recover the net deferred tax assets.
19
Liquidity and Capital Resources
For the 39-week period ended September 29, 2002, net cash provided by
operating activities was approximately $1.0 million, compared to net cash
provided by operating activities of approximately $17.7 million for the 39-week
period ended September 30, 2001. The change in operating cash flow was primarily
a result of the net loss of the Company coupled with a net decrease in cash
provided from certain working capital components, consisting primarily of
collections on accounts receivable (primarily related to IT consulting) and
collection of income tax refunds. Additionally, during the 39-week period ended
September 29, 2002, the Company renewed its workers' compensation policy. Under
the terms of this renewed policy, the Company is required to provide a letter of
credit of $10.0 million plus $1.0 million in cash to collateralize future claims
payments under the policy. The cash amount is carried at fair value and is
restricted as to withdrawal until the Company renews its workers' compensation
policy in December 2002. The restricted cash is held in the Company's name with
a major financial institution.
The Company's investing activities for the 39-week period ended
September 29, 2002 used approximately $198,000, compared to $5.9 million for the
39-week period ended September 30, 2001. All investing activities for the
39-week period ended September 29, 2002 were used to purchase property and
equipment. By comparison, the Company used approximately $1.2 million to
purchase property and equipment, approximately $2.2 million for payments on
acquisition earnouts and approximately $2.4 million for a working capital loan
to the purchaser of certain assets of the Company during the 39-week period
ended September 30, 2001.
Net cash used by the Company's financing activities for the 39-week
period ended September 29, 2002 was approximately $1.7 million, primarily due to
payments to the Company's senior noteholders and on the Company's credit
facility. Net cash used in the Company's financing activities for the comparable
prior year period ended September 30, 2001 was approximately $11.0 million,
attributable primarily to payments to the Company's senior noteholders and to
payments on the Company's revolving credit facility.
As of September 29, 2002 the Company had outstanding borrowings under
its revolving credit facility, as amended, of approximately $2.8 million, with a
maturity date of September 1, 2003. Additionally, the Company's outstanding
borrowings on the senior notes, as amended, were approximately $24.6 million, of
which approximately $12.8 million is due and payable within the next 12 months.
As required by both the lenders and the noteholders, the Company intends to
engage an investment banking firm by January 31, 2003 for the purpose of
refinancing both the senior notes and the revolving line of credit.
On April 15, 2002, the Company entered into a Fifth Amendment to the
Amended and Restated Credit Agreement and Waiver (the "Fifth Credit Amendment")
with its lenders to extend the Company's line of credit. Pursuant to the Fifth
Credit Amendment, the Company's line of credit was reduced from $18.0 million to
$16.0 million, $6.0 million of which is available for borrowing in cash, reduced
as provided below, with a maturity date of September 1, 2003, and $10.0 million
of which is available under letters of credit to be issued solely as required by
the Company's workers' compensation insurance providers, with a maturity date of
January 1, 2004. The Fifth Credit Amendment provides for borrowings at the prime
rate (4.75% as of September 29, 2002) plus 3.0 percentage points through and
including June 30, 2003, after which time borrowings under the facility will be
charged an interest rate equal to the then-current prime rate plus 3.5
percentage points. The Company paid its lenders approximately $78,000 upon
execution of the Fifth Credit Amendment and a supplemental fee of $250,000 will
be due on September 1, 2003, unless all amounts outstanding under the revolving
credit facility are paid in full and the facility is terminated on or before
such date. In addition, the Company paid $313,000 of the outstanding borrowings
under the revolving credit facility upon execution of the Fifth Credit
Amendment. The Company paid an additional $470,000 of the outstanding borrowings
under the revolving credit facility on September 15, 2002 and will pay an
additional $559,000 on December 15, 2002. Such payments permanently reduce the
line of credit available to the Company for borrowing in cash to less than the
$6.0 million stated above. In addition, certain financial covenants of the
Company have been modified. As of September 29, 2002, the Company was in
compliance with all covenants. As of September 29, 2002, the Company had
borrowing availability of $1.1 million under the line of credit.
Also on April 15, 2002, the Company entered into an Amendment No. 3 to
Note Purchase Agreement ("Amendment No. 3") with its noteholders. The Company's
noteholders consented to the Company entering into the Fifth Credit Amendment
described above. Pursuant to Amendment No. 3, the Company's Series A Notes bear
interest at the rate of 9.22% per annum beginning as of April 1, 2002 through,
but excluding, June 30, 2003, and at the rate of 9.72% per annum from June 30,
20
2003 until the Series A Notes become due and payable. The Company's Series B
Notes bear interest at the rate of 9.45% per annum beginning as of April 1, 2002
through, but excluding, June 30, 2003, and at the rate of 9.95% per annum from
June 30, 2003 until the Series B Notes become due and payable.
Pursuant to Amendment No. 3, any overdue payments on the Series A Notes
bear interest at the greater of 2% over the interest rate currently in effect as
stated above or 2% over the prime rate of The First National Bank of Chicago. In
addition, the Company paid $687,000 of the principal amount of the senior notes
upon execution of Amendment No. 3. The Company paid an additional $1,030,500 of
the principal amount of the senior notes on September 15, 2002 and will pay an
additional $1,227,000 on December 15, 2002.
Amendment No. 3 also provides for optional or mandatory prepayments, as
the case may be, upon the occurrence of certain events including, but not
limited to, a change of control, transfer of property or issuance of equity
securities of the Company. In addition, Amendment No. 3 provides that the
Company pay to its lenders and its noteholders a portion of any federal, state
or local tax refund or repayment, which amount shall be distributed pursuant to
the Amended and Restated Intercreditor Agreement dated as of April 15, 2002
among the Collateral Agent, the Company's lenders and the Company's noteholders.
Any such prepayments paid to the Company's lenders also will be treated as a
permanent reduction in the line of credit available to the Company for borrowing
in cash under the revolving credit facility. As of September 29, 2002, as a
result of income tax refunds received and accounts receivable collected from
disposed operations, the Company had paid approximately $2.8 million to its
noteholders and $1.6 million to its lenders, which subsequently reduced the
borrowings available under its line of credit. The Company expects to receive
tax refunds of approximately $3.9 million in 2003, which the Company will use,
as required, to pay $2.5 million to its noteholders and $1.4 million to its
lenders, further reducing its line of credit availability.
As consideration for their approval of Amendment No. 3, the Company
paid an amendment fee to its noteholders of $145,475, as well as fees and
expenses of the noteholders' special counsel. In addition, the Company paid to
each noteholder accrued but unpaid interest on such holder's notes for the
period beginning March 1, 2002 through and including June 30, 2002. Also
pursuant to Amendment No. 3, the Company is required to pay on September 1, 2003
a supplemental note fee of $250,000, which amount will be waived if the Company
has paid all amounts due and outstanding under the note purchase agreements
prior to such date. Also, certain financial covenants of the Company were
modified. In the event the Company fails to comply with such covenants as
modified, Amendment No. 3 provides that the noteholders may, at their discretion
and at the expense of the Company, retain a financial advisor to review and
advise the noteholders and the Company upon the financial status of the Company.
The security agreement dated as of July 30, 2001 remains in place pursuant to
Amendment No. 3.
For the period ended September 29, 2002, the Company continued under
its plan to streamline its corporate structure by consolidating or closing
branch offices in under-performing markets. Although the Company has not
incurred any significant restructuring costs during the 13-week period ended
September 29, 2002, during the 39-week period ended September 29, 2002, the
Company recorded a restructuring charge of approximately $609,000, primarily
related to a change in the estimate of future lease obligations and severance
costs associated with the elimination of a senior executive position. The
Company is endeavoring to reduce potential future lease payments by subleasing
abandoned facilities or negotiating discounted buyouts of such lease contracts.
Consequently, the Company's estimates may change based on its ability to
effectively reduce such future lease payments. At September 29, 2002, the
remaining accrued lease costs totaled approximately $720,000. Also as noted in
Part II, Item 1. Legal Proceedings, the Company negotiated a settlement of an
outstanding claim against its subsidiary, Inteliant. As a result of the
negotiated settlement, Inteliant paid $500,000 to the plaintiff to settle the
claims in addition to amounts paid by the Company's insurance carrier. The
Company had accrued for the settlement during the second quarter of fiscal 2002.
Restructuring costs in the future are not expected to have a material
impact on the liquidity or capital resources of the Company.
The Company's amended credit facility matures in September 2003. The
Company intends to refinance its credit facility and the note purchase
agreements prior to September 2003 in order to obtain sufficient capital to
continue to fund the Company's operations after the expiration of the current
credit facility. Although management is confident that new financing can be
negotiated, there can be no assurance that the Company will be able to obtain
sufficient funds at acceptable terms. If the Company were to experience a
significant downturn in its business or fail to negotiate a new credit facility,
additional capital would be required in order to continue operations.
21
Seasonality
The Company's business follows the seasonal trends of its customers'
businesses. Historically, the Company's business has experienced lower revenues
in the first quarter, with revenues accelerating during the second and third
quarters and then slowing again during the fourth quarter.
Forward-looking Statements
Statements contained in this report that are not purely historical are
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. All forward-looking statements involve risks and
uncertainties. Forward-looking statements contained in this report include
statements regarding the Company's opportunities, existing and proposed service
offerings, market opportunities, expectations, goals, revenues, financial
performance, strategies and intentions for the future and are indicated by the
use of words such as "believe," "expect," "intend," "anticipate," "likely,"
"plan" and other words of similar meaning. All forward-looking statements
included in this report are made as of the date hereof and are based on
information available to the Company as of such date. The Company assumes no
obligation to update any forward-looking statement. Readers are cautioned that
all forward-looking statements involve risks, uncertainties and other factors
that could cause the Company's actual results to differ materially from those
anticipated in such statements including but not limited to the Company's
ability to attract and retain staff, temporary and other employees needed to
implement the Company's business plan and to meet customer needs; failure of the
Company to secure adequate finances to continue to fund its current operations;
and the successful hiring, training and retention of qualified field management.
Future results also could be affected by other factors associated with the
operation of the Company's business, including: the Company's ability to secure
adequate and favorable financing to continue to fund its current operations;
economic fluctuations; existing and emerging competition; changes in demands for
the Company's services; the Company's ability to maintain profit margins in the
face of pricing pressures; and the unanticipated results of future or pending
litigation. Risk factors, cautionary statements and other conditions, including
economic, competitive, governmental and technology factors that could cause
actual results to differ from the Company's current expectations, are discussed
in the Company's 2001 Annual Report on Form 10-K.
Item 3. Qualitative and Quantitative Disclosures About Market Risk
The Company is exposed to interest rate changes primarily in relation
to its revolving credit facility and its senior secured notes. The Company's
interest rate risk management objective is to limit the impact of interest rate
changes on earnings and cash flows and to lower its overall borrowing costs. The
Company's senior debt placement bears interest at a fixed interest rate. For
fixed rate debt, interest rate changes generally affect the fair value of the
debt, but not the earnings or cash flows of the Company. Changes in the fair
market value of fixed rate debt generally will not have a significant impact on
the Company unless the Company is required to refinance such debt.
Revolving Credit Facility: The Company's revolving credit facility bears
interest at the prime rate plus 3.0%; at September 29, 2002, such prime rate was
4.75%. For the period ended September 29, 2002, the Company had approximately
$2.8 million in advances outstanding under the revolving credit facility.
Senior Notes: For the period ended September 29, 2002, the Company's outstanding
borrowings on the senior notes were $24.6 million, with a weighted average fixed
interest rate of 9.42%. As stated above, any changes in the fair value of the
senior notes generally will not have a significant impact on the Company unless
the Company is required to refinance the senior notes. The fair value of the
Company's senior notes is estimated by discounting expected cash flows at the
prime rate, 4.75% at September 29, 2002, plus 3.0%. Using such discount rate
over the expected maturities of the senior notes, the Company calculates that
the estimated fair value of the obligations on the senior notes, using a
discount rate of 7.75% over the expected maturities of the obligations, is
approximately $25.4 million. If the discount rate were to increase by 10% to
8.5%, the estimated fair value of the obligation on the unsecured notes would be
approximately $25.1 million. If the discount rate were to decrease by 10% to
7.0%, the estimated fair value of the obligation on the unsecured notes would be
approximately $25.8 million.
22
Item 4. Controls and Procedures
As required by Rule 13a-15 under the Exchange Act, within the 90 days
prior to the filing date of this report, the Company carried out an evaluation
of the effectiveness of the design and operation of the Company's disclosure
controls and procedures. This evaluation was carried out under the supervision
and with the participation of the Company's management, including the Company's
Chief Executive Officer and Chief Financial Officer. Based upon that evaluation,
the Company's Chief Executive Officer and Chief Financial Officer concluded that
the Company's disclosure controls and procedures are effective. There have been
no significant changes in the Company's internal controls or in other factors
that could significantly affect internal controls subsequent to the date the
Company carried out its evaluation.
Disclosure controls and procedures are controls and other procedures
that are designed to ensure that information required to be disclosed in Company
reports filed or submitted under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission's rules and forms. Disclosure controls and procedures
include controls and procedures designed to ensure that information required to
be disclosed in Company reports filed under the Exchange Act is accumulated and
communicated to management, including the Company's Chief Executive Officer and
Chief Financial Officer as appropriate, to allow timely decisions regarding
required disclosure.
23
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
In the ordinary course of its business, the Company is periodically
threatened with or named as a defendant in various lawsuits or administrative
proceedings. The Company maintains insurance in such amounts and with such
coverage and deductibles as management believes to be reasonable and prudent.
The principal risks covered by insurance include workers' compensation, personal
injury, bodily injury, property damage, errors and omissions, fidelity losses,
employer practices liability and general liability.
On April 11, 2001, Royalty Carpet Mills, Inc. ("Royalty") filed a
complaint against Inteliant for breach of contract for services to be provided
by Inteliant and for professional negligence in the state of California (the
"Complaint"). The Complaint requested unspecified damages, consequential
damages, and attorneys' fees and costs. Royalty sought damages of approximately
$1.9 million. Royalty subsequently raised its demand to $3.0 million. Inteliant
denied the allegations set forth in the Complaint and filed various
counterclaims against Royalty.
During the 13-week period ended September 29, 2002, the parties settled
the litigation related to the Complaint, which included the release of
Inteliant, the Company and their respective affiliates, from all claims or
potential claims, whether known or unknown. Neither party admitted any fault or
wrongdoing. Under the terms of the settlement agreement, Inteliant paid Royalty
$500,000 and Inteliant's insurance carrier paid Royalty an additional $600,000,
for a total settlement of $1.1 million. Inteliant's insurance carrier also paid
Inteliant's defense costs, including attorneys' fees. Also in connection with
the settlement, Inteliant waived all coverage claims against its insurance
carrier. During the second quarter of fiscal 2002 Inteliant had accrued $500,000
for settlement of the claim. The matter is closed.
There is no other pending litigation that the Company currently
anticipates will have a material adverse effect on the Company's financial
condition or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
No items were submitted for a shareholder vote during the 13-week
period ended September 29, 2002.
Item 6. Exhibits and Reports on Form 8-K.
a) None.
b) None.
c) Exhibits:
Exhibit No. Incorporated by Filed
Exhibit Reference Herewith
- -------------------------------------------------------------------------------------------------------------------
99.1 Certification of Chief Executive Officer (1)
99.2 Certification of Chief Financial Officer (1)
(1) Filed herewith and attached to this Report following page 27 hereof.
24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
SOS STAFFING SERVICES, INC.
Dated: November 13, 2002 /s/ JoAnn W. Wagner
------------------------------
JoAnn W. Wagner
Chairman, President and
Chief Executive Officer
Dated: November 13, 2002 /s/ Kevin Hardy
------------------------------
Kevin Hardy
Senior Vice President and
Chief Financial Officer
25
Certification
I, JoAnn W. Wagner, certify that:
1. I have reviewed this quarterly report on Form 10-Q of SOS Staffing Services,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls;
and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Dated: November 13, 2002 /s/ JoAnn W. Wagner
----------------------------
JoAnn W. Wagner
Chairman, President and
Chief Executive Officer
26
Certification
I, Kevin Hardy, certify that:
1. I have reviewed this quarterly report on Form 10-Q of SOS Staffing Services,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls;
and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Dated: November 13, 2002 /s/ Kevin Hardy
-----------------------------
Kevin Hardy
Senior Vice President and
Chief Financial Officer
27
Certification
(Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002)
I, JoAnn W. Wagner, chief executive officer of SOS Staffing Services, Inc. (the
"Company"), do hereby certify as follows:
1. The quarterly report on Form 10-Q of the Company for the period ended
September 29, 2002 fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
2. The information contained in such Form 10-Q fairly presents, in all material
respects, the financial condition and results of operations of the Company.
IN WITNESS WHEREOF, I have executed this Certification this 13th day of
November, 2002.
/s/ JoAnn W. Wagner
----------------------------
JoAnn W. Wagner
Chairman, President and
Chief Executive Officer
28
Certification
(Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002)
I, Kevin Hardy, chief financial officer of SOS Staffing Services, Inc. (the
"Company"), do hereby certify as follows:
1. The quarterly report on Form 10-Q of the Company for the period ended
September 29, 2002 fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
2. The information contained in such Form 10-Q fairly presents, in all material
respects, the financial condition and results of operations of the Company.
IN WITNESS WHEREOF, I have executed this Certification this 13th day of
November, 2002.
/s/ Kevin Hardy
-------------------------------------------
Kevin Hardy
Senior Vice President and
Chief Financial Officer