UNITED STATES
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 March 30, 2003
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 by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the last practicable date.
Class of Common Stock Outstanding at May 13, 2003
----------------------------- ---------------------------
Common Stock, $0.01 par value 12,691,398
1
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets
As of March 30, 2003 and December 29, 2002 .................................... 3
Condensed Consolidated Statements of Operations
For the 13 Weeks Ended March 30, 2003 and March 31, 2002 ...................... 5
Condensed Consolidated Statements of Cash Flows
For the 13 Weeks Ended March 30, 2003 and March 31, 2002 ...................... 6
Notes to Condensed Consolidated Financial Statements ................................... 8
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations ....................................... 14
Item 3. Qualitative and Quantitative Disclosures About Market Risk .............................. 21
Item 4. Controls and Procedures ................................................................. 21
PART II - OTHER INFORMATION
Item 1. Legal Proceedings ....................................................................... 23
Item 6. Exhibits and Reports on Form 8-K ........................................................ 23
Signatures ...................................................................................... 24
Certifications .................................................................................. 25
2
PART I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
SOS STAFFING SERVICES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS
(in thousands)
March 30, December 29,
2003 2002
-------- ----------
CURRENT ASSETS
Cash and cash equivalents $ 631 $ 495
Accounts receivable, less allowances of
$851 and $1,031, respectively 13,694 15,130
Prepaid expenses and other 2,220 741
Income tax receivable 3,821 3,806
-------- --------
Total current assets 20,366 20,172
-------- --------
PROPERTY AND EQUIPMENT, at cost
Computer equipment 4,709 4,899
Office equipment 2,855 2,855
Leasehold improvements and other 909 1,351
-------- --------
8,473 9,105
Less accumulated depreciation and amortization (5,910) (6,182)
-------- --------
Total property and equipment, net 2,563 2,923
-------- --------
OTHER ASSETS
Intangible assets, net 17,261 17,340
Restricted cash 1,333 1,333
Deposits and other assets 1,152 1,485
-------- --------
Total other assets 19,746 20,158
-------- --------
Total assets $ 42,675 $ 43,253
-------- --------
See accompanying notes to condensed consolidated financial statements.
3
SOS STAFFING SERVICES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)
(Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
(in thousands)
March 30, December 29,
2003 2002
---------- -----------
CURRENT LIABILITIES
Current portion of workers' compensation reserve $ 3,606 $ 3,713
Accrued payroll costs 1,745 1,766
Accrued liabilities 1,638 1,775
Current portion of notes payable 1,374 1,374
Accounts payable 359 666
-------- --------
Total current liabilities 8,722 9,294
-------- --------
LONG-TERM LIABILITIES
Notes payable, less current portion 21,938 21,967
Line of credit 2,481 994
Workers' compensation reserve, less current portion 1,696 1,747
Deferred compensation liabilities and other long-term
liabilities 633 719
-------- --------
Total long-term liabilities 26,748 25,427
-------- --------
COMMITMENTS AND CONTINGENCIES
(Notes 6 and 8)
SHAREHOLDERS' EQUITY
Common stock 127 127
Additional paid-in capital 91,693 91,693
Accumulated deficit (84,615) (83,288)
-------- --------
Total shareholders' equity 7,205 8,532
-------- --------
Total liabilities and shareholders' equity $ 42,675 $ 43,253
-------- --------
See accompanying notes to condensed consolidated financial statements.
4
SOS STAFFING SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands)
13 Weeks Ended
March 30, March 31,
2003 2002
-------- --------
REVENUE $ 35,867 $ 41,939
DIRECT COST OF SERVICES 28,860 33,782
-------- --------
Gross profit 7,007 8,157
-------- --------
OPERATING EXPENSES:
Selling, general and administrative 6,970 7,911
Depreciation and amortization 491 430
Finance advisory costs 171 --
Restructuring charges -- 345
-------- --------
Total operating expenses 7,632 8,686
-------- --------
LOSS FROM OPERATIONS (625) (529)
-------- --------
OTHER INCOME (EXPENSE):
Interest expense (720) (923)
Interest income 4 7
Other, net 21 10
-------- --------
Total, net (695) (906)
-------- --------
LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
(1,320) (1,435)
INCOME TAX BENEFIT -- 7,927
-------- --------
(LOSS) INCOME FROM CONTINUING OPERATIONS (1,320) 6,492
LOSS FROM DISCONTINUED OPERATIONS (7) (417)
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
-- (16,083)
-------- --------
NET LOSS $ (1,327) $(10,008)
-------- --------
BASIC AND DILUTED INCOME (LOSS) PER COMMON SHARE:
(Loss) income from continuing operations $ (0.10) $ 0.51
Loss from discontinued operations (0.00) (0.03)
Loss from cumulative effect of change in accounting
principle -- (1.27)
-------- --------
Net loss $ (0.10) $ (0.79)
-------- --------
See accompanying notes to condensed consolidated financial statements.
5
SOS STAFFING SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
13 Weeks Ended
March 30, March 31,
2003 2002
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,327) $(10,008)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization 487 460
Deferred income taxes -- (4,240)
Loss on disposition of assets 4 --
Loss on disposal of discontinued operations -- 312
Loss on cumulative change in accounting principle -- 16,083
Changes in operating assets and liabilities:
Restricted cash -- (1,033)
Accounts receivable, net 1,436 4,290
Workers' compensation deposit 47 --
Prepaid expenses and other (1,526) (413)
Deposits and other assets 331 (183)
Accounts payable (307) (1,102)
Accrued payroll costs (21) (1,180)
Workers' compensation reserve (158) (341)
Accrued liabilities (215) (1,342)
Income taxes receivable (15) (3,632)
-------- --------
Net cash used in operating activities (1,264) (2,329)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (58) (251)
Proceeds from sale of property and equipment -- 10
-------- --------
Net cash used in investing activities (58) (241)
-------- --------
See accompanying notes to condensed consolidated financial statements.
6
SOS STAFFING SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Unaudited)
(in thousands)
13 Weeks Ended
March 30, March 31,
2003 2002
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings $ 2,100 $ 7,487
Principal payments on long-term borrowings (642) (301)
------- -------
Net cash provided by financing activities
1,458 7,186
------- -------
NET INCREASE IN CASH
AND CASH EQUIVALENTS 136 4,616
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 495 879
------- -------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 631 $ 5,495
------- -------
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid (received) during the period for:
Interest $ 677 $ 1,387
Income taxes 15 (55)
See accompanying notes to condensed consolidated financial statements.
7
SOS STAFFING SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Basis of Presentation
The accompanying unaudited interim condensed consolidated financial
statements have been prepared by the Company, without audit, pursuant to the
rules and regulations of the Securities and Exchange Commission. Certain
information and disclosures normally included in financial statements prepared
in accordance with accounting principles generally accepted in the United States
have been condensed or omitted pursuant to such rules and regulations. These
condensed consolidated financial statements reflect all adjustments (consisting
only of normal recurring adjustments) that, in the opinion of management, are
necessary to present fairly the results of operations of the Company for the
periods presented. It is suggested that these condensed consolidated financial
statements be read in conjunction with the consolidated financial statements and
the notes thereto included in the Company's Annual Report on Form 10-K for the
fiscal year ended December 29, 2002.
In order to conform to the current period presentation, certain
reclassifications have been made to the prior period financial statements.
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.
Restricted cash: During the 13-week period ended March 30, 2003, the
Company renewed its workers' compensation policy for the first six months of
fiscal 2003. Under the terms of this renewed policy, the Company is required to
provide letters of credit not to exceed $10.0 million plus restricted cash of
$1.3 million as collateral for future claims payments under the insurance plan.
The cash amount is carried at fair value and is restricted as to withdrawal. The
restricted cash is held in the Company's name with a major financial
institution.
Note 3. Earnings Per Share
Basic earnings 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 March 30, 2003 13 Weeks Ended March 31, 2002
-------------------------------------------------------------------------------------------
Loss from Income from
continuing Per Share continuing Per Share
operations Shares Amount operations Shares Amount
-------------------------------------------------------------------------------------------
Basic $ (1,320) 12,691 $ (0.10) $ 6,492 12,691 $ 0.51
Effect of stock options -- 3
---------------------------- --------------------------------
Diluted $ (1,320) 12,691 $ (0.10) $ 6,492 12,694 $ 0.51
---------------------------- --------------------------------
For the 13-week period ended March 30, 2003, there were outstanding
options to purchase 1,655,000 shares of common stock that were not included in
the computation of diluted income from continuing operations per common share
8
because of the Company's loss from continuing operations. For the 13-week period
ended March 31, 2002 there were outstanding options to purchase approximately
1,140,000 shares of common stock that were not included in the computation of
diluted income from continuing operations per common share because the exercise
prices of such options were greater than the average market price of the common
shares.
Note 4. Accounting for Stock-Based Compensation
The Company measures compensation cost for employee stock options and
similar equity instruments using the intrinsic value-based method of accounting
prescribed by Accounting Principles Board Opinion No. 25 ("APB 25"), "Accounting
for Stock Issued to Employees." No stock-based employee compensation cost is
reflected in net loss, as all options granted had an exercise price equal to the
market value of the underlying common stock on the date of grant.
Had compensation cost been determined consistent with SFAS No. 123,
"Accounting for Stock-Based Compensation," the Company's income (loss) from
continuing operations and earnings per share for the 13-week periods ended March
30, 2003 and March 31, 2002 would approximate the pro forma amounts below (in
thousands, except per share data):
2003 2002
----------------- ----------------
(Loss) income from continuing operations-
As reported $ (1,320) $ 6,492
Total fair-value-based option compensation
expense, net of income tax 318 706
----------------- ----------------
Pro forma (1,638) 5,786
----------------- ----------------
Basic and diluted EPS from continuing operations-
As reported $ (0.10) $ 0.51
Pro forma (0.13) 0.44
In determining the fair-value based option compensation expense in the
table above, the fair market value of each option was estimated on the date of
grant using the Black-Scholes option-pricing model based on the following
weighted average assumptions:
2003 2002
----------------- ----------------
Risk free rate of return 2.9% 5.1%
Expected dividend yield 0.0% 0.0%
Volatility 93% 93%
Expected life for director options 5 years 5 years
Expected life for employee options 7 years 7 years
The weighted-average fair value of options granted was $0.28 and $0.66
per share for grants made during the 13-week periods ended March 30, 2003 and
March 31, 2002, respectively.
Note 5. Discontinued Operations
IT Consulting
On December 29, 2000, the Company's wholly owned subsidiary Inteliant
Corporation ("Inteliant") sold to Herrick Douglass, Inc. ("HD") its consulting
division and related tangible and intangible assets. The consulting division
sold to HD consisted of a full suite of information technology consulting,
e-business and telecommunication services, which services were marketed to
Fortune 1000, mid-tier and early stage companies, government agencies and
educational institutions.
In conjunction with the sale of the IT consulting business, the Company
assigned certain lease agreements to different sub-tenants, with the respective
landlords reserving their rights against the Company in the event of default by
such sub-tenant. During the 13-week period ended March 30, 2003, the Company was
informed by one of its sub-tenants that such sub-tenant would more likely than
not default on its sublease obligation. Consequently, during the 13-week period
ended March 30, 2003, the Company recorded an additional $63,000 charge to
discontinued operations for expected losses related to the sublease.
9
IT Staffing and ServCom
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, and treated these actions as discontinued operations beginning in
fiscal 2001. Subsequently, during fiscal 2002, the Company disposed of its
remaining operations with respect to its discontinued IT staffing business.
In addition, during fiscal 2001, the Company formalized a plan to sell
its wholly owned subsidiary ServCom Staff Management, Inc., now known as
Industrial Specialists, Inc. ("ServCom"), and during fiscal 2002, the Company
sold substantially all of the assets of this business to an unrelated entity.
Contingent payments received relating to the sale of the IT staffing
and ServCom assets were $49,000 for the 13-week period ended March 30, 2003.
Truex
During the second quarter of fiscal 2002, due to declining revenues and
the continued economic downturn in the San Francisco, California, region, the
Company determined to sell its Truex division ("Truex"), located in northern
California. 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.
Contingent payments received relating to the transfer of the Truex
business were $7,000 for the 13-week period ended March 30, 2003.
Operating results of the discontinued operations for the 13-week
periods ended March 30, 2003 and March 31, 2002 have been classified as
discontinued operations in the accompanying consolidated financial statements as
follows (in thousands):
2003 2002
---------------- ---------------
IT Consulting
Loss on disposal of discontinued operations $ (63) $ --
Income tax benefit -- --
---------------- ---------------
Net loss on disposal of discontinued operations (63) --
---------------- ---------------
IT Staffing and ServCom
Gain (loss) on disposal of discontinued operations 49 (312)
Income tax benefit -- --
---------------- ---------------
Net gain (loss) on disposal of discontinued operations 49 (312)
---------------- ---------------
Truex
Revenue -- 217
Direct cost of services -- 135
---------------- ---------------
Gross profit -- 82
Operating and other expenses -- 186
---------------- ---------------
Loss from discontinued operations before income taxes -- (104)
Income tax benefit -- --
---------------- ---------------
Loss from discontinued operations -- (104)
---------------- ---------------
Gain on disposal of discontinued operations 7 --
Income tax provision -- --
---------------- ---------------
Net gain on disposal of discontinued operations 7 --
---------------- ---------------
Total loss from discontinued operations, net of income taxes $ (7) $ (416)
---------------- ---------------
10
For the 13-weeks ended March 30, 2003, the total loss from discontinued
operations was due primarily to the receipt of $56,000 in contingent payments
offset by a charge of $63,000 for anticipated losses on one of the Company's
subleased facilities. At March 30, 2003, the Company's accrual for discontinued
operations was $640,000, primarily related to accrued lease costs, net of any
anticipated sublease income, on unused facilities for which the Company still
has a contractual obligation.
Note 6. Non-cancelable Operating Leases
The Company leases office facilities under non-cancelable operating
leases. Some of these leases have renewal options for periods ranging from one
to five years and contain provisions for escalation of rent payments based on
increases in certain costs incurred by the landlord and on Consumer Price Index
adjustments. Management expects that, in the normal course of business, leases
that expire will be renewed or replaced by other leases.
The Company has subleased some of the facilities that are not used by
the Company for which the lease is still in effect and in some instances has
reduced the amount of the liability carried on the Company's books by the
anticipated sublease payments relating to such properties. However, if any of
the sublessees defaults on its lease obligations, the Company would be liable
for any outstanding lease payments. Certain defaults could have a material
impact on the Company's results of financial operations. In addition to the
$126,000 of accrued obligations discussed in Note 10, the Company has $595,000,
net of future lease obligations, accrued at March 30, 2003 for offices of
discontinued operations, which amount is included in accrued liabilities in the
accompanying condensed consolidated balance sheets. The following table presents
the Company's future lease obligations and the expected sublease payments by
year for its subleased facilities (in thousands):
Lease Lease obligations
Fiscal Year obligations on Lease obligations on discontinued Total lease Expected sublease
Ending active offices on closed offices operations obligations payments
- ---------------- ------------------ ------------------- -------------------- -------------------- --------------------
2003 $ 1,124 $ 181 $ 583 $ 1,888 $ 404
2004 850 99 286 1,235 203
2005 375 20 203 598 128
2006 123 -- 71 194 60
2007 58 -- 71 129 10
Beyond -- -- 12 12 --
------------------ ------------------- -------------------- -------------------- --------------------
$ 2,530 $ 300 $ 1,226 $ 4,056 $ 805
------------------ ------------------- -------------------- -------------------- --------------------
Note 7. Intangible Assets
As of March 30, 2003 and December 29, 2002, intangible assets consisted
of the following:
March 30, 2003 December 29, 2002
------------------- ----------------------
Goodwill $ 14,724 $ 14,724
Trademarks and trade names 2,569 2,569
Other definite-lived intangibles 1,994 1,994
------------------- ----------------------
19,287 19,287
Less accumulated amortization (2,026) (1,947)
------------------- ----------------------
Net intangible assets $ 17,261 $ 17,340
------------------- ----------------------
Note 8. 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.
11
There is no pending litigation that the Company currently anticipates
will have a material adverse effect on the Company's financial condition or
results of operations.
Note 9. Credit Facility and Notes Payable
On March 31, 2003, the Company entered into the Sixth Credit Amendment
to the Amended and Restated Credit Agreement and Waiver (the "Sixth Credit
Amendment") with its lenders to extend the Company's line of credit. Pursuant to
the Sixth Credit Amendment, the maturity date of the Company's line of credit
was extended to April 30, 2004. In addition, certain financial covenants under
the Company's credit facility were modified. As provided in the Sixth Credit
Amendment, the Company will pay to its lenders four equal payments of $156,500
in successive months beginning in September 2003. Such payments will permanently
reduce the line of credit available to the Company in cash. However, any such
reductions in the aggregate commitment shall not apply if they would reduce the
cash available for borrowing below $2.5 million. As of March 30, 2003, the
Company had outstanding borrowings under the revolving credit facility of
approximately $2.5 million.
Additionally, under the terms of the Company's amended credit facility,
the Company has letters of credit available of up to $10 million to be issued
solely as required by the Company's workers' compensation insurance provider,
with a maturity date of January 1, 2004. As of March 30, 2003, the Company had
outstanding letters of credit of $9.9 million.
Also on March 31, 2003, the Company entered into an Amendment No. 4 to
Note Purchase Agreement ("Amendment No. 4") with its senior noteholders, whereby
the noteholders modified certain financial covenants under the Company's
existing note purchase agreements. Amendment No. 4 provides that the Company
will pay to the noteholders four equal payments of $343,500 in successive months
beginning in September 2003, to be applied pro rata among the holders of the
Series A and Series B notes. Additionally, the maturity date of the Series A
notes was extended to April 30, 2004. As consideration for Amendment No. 4, the
Company will pay all fees and expenses of the noteholders' special counsel.
Amendment No. 4 and the Sixth Credit Agreement provide that the Company
shall pay to the lenders and the noteholders 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 March 31, 2003 among State
Street Bank and Trust Company, as collateral agent, Wells Fargo Bank, National
Association, as administrative agent and as a lender, and the noteholders (the
"Amended Intercreditor Agreement"). However, if the Company receives any tax
refund arising from the Job Creation and Work Assistance Act of 2002 (the "2002
Job Act") relating to net operating loss carrybacks, the Company will be able to
retain $3.8 million of such refund for working capital purposes and collateral
requirements arising under its credit facility and letters of credit. Any such
prepayments paid to the lenders also will be treated as a permanent reduction in
the line of credit available to the Company for borrowing in cash.
As required by both the credit facility and the note purchase
agreements, the Company has retained a financial advisor to assist in
refinancing, restructuring or recapitalizing the Company. As required by
Amendment No. 4 and the Sixth Credit Amendment, the Company has prepared and has
distributed to prospective investors an offering memorandum for the
recapitalization of the Company's debt obligations. Additionally, the Company is
required to use its best efforts to obtain a firm commitment or signed letter of
intent regarding such recapitalization prior to July 31, 2003. In the event the
Company does not have a firm commitment or signed letter of intent by such date,
the Company will be required to pay $250,000, to be distributed pursuant to the
Amended Intercreditor Agreement. Additionally, the Company is required to pay on
September 1, 2003 a supplemental fee of $250,000 to each of the lenders and the
noteholders, which amount will be waived if the Company has paid all amounts due
and outstanding under its financing agreements prior to such date.
Note 10. Restructuring
At March 30, 2003, the Company's accrued restructuring charges totaled
approximately $126,000 and are included in accrued liabilities in the
accompanying condensed consolidated balance sheet. The activity impacting the
accrual for restructuring charges is summarized in the table below (in
thousands):
12
Contractual
lease
obligations
----------------
Balance at December 29, 2002 155
Charges utilized (29)
----------------
Balance at March 30, 2003 $ 126
----------------
Note 11. Income Taxes
Subsequent to the 13-week period ended March 30, 2003, the Company
filed its fiscal 2002 federal tax refund claim, and, as a result, the Company
anticipates receiving $3.8 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 $7.9 million, due primarily to the enactment of 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 was accounted for in the first
quarter of fiscal 2002, the period in which the law became effective.
Management has concluded that it is more likely than not that the
Company will not have sufficient taxable income within the carryback and
carryforward period permitted by current law to allow for the realization of
certain carryforwards and other tax attributes generating the net deferred tax
asset. Therefore, a valuation allowance has been provided against the net
deferred tax asset of $24.0 million.
13
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction
with the condensed consolidated financial statements of the Company and notes
thereto appearing elsewhere in this report. The Company's fiscal year consists
of a 52- or 53-week period ending on the Sunday closest to December 31.
Critical Accounting Policies
The Company's critical accounting policies for its continuing
operations include the following:
o allowance for doubtful accounts receivable;
o reserves for workers' compensation costs;
o impairment of goodwill and intangibles; and
o reserves for leased facility obligations.
The Company provides customary credit terms to its customers and
generally does not require collateral. The Company performs ongoing credit
evaluations of the financial condition of its customers and maintains an
allowance for doubtful accounts receivable based upon historical collection
experience and expected collectibility of accounts. As of March 30, 2003, the
Company had recorded an allowance for doubtful accounts of $851,000, which
represents 5.9% of the Company's total outstanding accounts receivable. The
actual bad debts may exceed such allowance and the difference from estimates
could be significant.
The Company maintains workers' compensation insurance with ACE, USA
("ACE"), an insurance carrier, with a deductible of $300,000 per occurrence and
no aggregate cap. Under the terms of the insurance policy with ACE, the Company
also has deposited, and is required to maintain on deposit, with ACE an amount
equal to eleven days of claims expenses based on actual expenditures by ACE
during the prior three-month period. The Company also is required to fund into
an account, on a weekly basis, an amount equal to the actual payments made by
ACE on claims during the previous week as reimbursement to ACE for such
payments. If claims payments on any specific claim exceed the deductible amount
of $300,000, the Company is not required to reimburse the fund for those
payments over and above the deductible. Some states in which the Company
operates 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 ACE as to the status of claims plus development factors for incurred
but not yet reported claims and anticipated future changes in underlying case
reserves. On an annual basis, the Company's claims history is subjected to an
independent actuarial review to determine appropriate development factors, which
are used in developing the Company's reserve estimates. As of March 30, 2003,
the workers' compensation reserve totaled $5.3 million. If the development
factors used by the Company were to increase by 10%, the Company's indicated
reserves would increase approximately $271,000 while a reduction in the
development factors of 10% would reduce the indicated reserves by approximately
$172,000. Such reserve amounts are only estimates; the Company's future workers'
compensation obligations may exceed the amount of its reserves and the
difference could be significant.
In accordance with SFAS No. 142, "Goodwill and Other Intangible
Assets," the Company does not amortize goodwill and identifiable intangible
assets that have indefinite useful lives. Intangible assets that have finite
useful lives, such as non-compete agreements, are amortized over their useful
lives. 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. The valuation process employed by the Company to
determine fair value uses a combination of present value and multiple of
earnings valuation techniques. Such valuation methods contain significant
assumptions regarding future financial performance of the Company as well as
assumptions regarding the Company's performance with respect to existing
competitors. There can be no assurance that the Company will be able to achieve
such financial performance and, consequently, future valuations may be
significantly different from the Company's current expectations. Such future
valuations could have a significant impact on the financial results of the
Company.
14
The Company leases office facilities under noncancelable operating
leases. With respect to offices the Company has vacated while the lease is still
in effect, the Company records its estimated liability in the period it leaves
the office space. In some instances, the Company has subleased the facilities
that currently are not used by the Company and has reduced the amount of such
liability carried on the Company's books by the estimated sublease payments
relating to such properties. However, if the subleasees defaults on its lease
obligations, the Company is liable for any outstanding lease payments. As of
March 30, 2003, the Company had reduced its lease liability for closed offices
by approximately $805,000 as a result of estimated sublease income. Although the
Company does not anticipate that any of its subleasees will default on their
lease obligations, no assurance can be given that such a default will not occur.
Certain defaults could have a material impact on the Company's results of
financial operations.
Recent Developments
The Company has renewed its workers' compensation insurance policy with
ACE for fiscal 2003. As part of the renewal, the Company was required to pay in
advance $1.8 million in premium and administrative costs for a six-month policy.
In July 2003, the Company will be required to pay an additional $660,000 to
renew the policy through December 2003. The Company also may be required to post
additional collateral in order to renew the policy. Additionally, the aggregate
cap was eliminated. The Company also is required to pay higher premium costs
under the renewed policy; however, the rates cannot be adjusted from July
through December 2003.
On March 31, 2003, the Company entered into the Sixth Credit Amendment
with its lenders to extend the Company's line of credit. Pursuant to the Sixth
Credit Amendment, the maturity date of the Company's line of credit was extended
to April 30, 2004. In addition, certain financial covenants under the Company's
credit facility were modified. As provided in the Sixth Credit Amendment, the
Company will pay to its lenders four equal payments of $156,500 in successive
months beginning in September 2003. Such payments will permanently reduce the
line of credit available to the Company in cash. However, any such reductions in
the aggregate commitment shall not apply if they would reduce the cash available
for borrowing below $2.5 million. As of March 30, 2003, the Company had
outstanding borrowings under the revolving credit facility of approximately $2.5
million.
Also on March 31, 2003, the Company entered into Amendment No. 4 with
its noteholders, whereby the noteholders modified certain financial covenants
under the Company's existing note purchase agreements. Amendment No. 4 provides
that the Company will pay to its noteholders four equal payments of $343,500 in
successive months beginning in September 2003, to be applied pro rata among the
holders of the Series A and Series B notes. Additionally, the maturity date of
the Series A notes was extended to April 30, 2004. As consideration for
Amendment No. 4, the Company will pay all fees and expenses of the noteholders'
special counsel
Amendment No. 4 and the Sixth Credit Amendment provide that the Company
shall pay to the lenders and the noteholders any federal, state or local tax
refund or repayment, which amount shall be distributed pursuant to the Amended
Intercreditor Agreement. However, if the Company receives any tax refund arising
from the 2002 Job Act relating to net operating loss carrybacks, the Company
will be able to retain $3.8 million of such refund for working capital purposes
and collateral requirements arising under its credit facility and letters of
credit. Any such prepayments paid to the lenders also will be treated as a
permanent reduction in the line of credit available to the Company for borrowing
in cash.
As required by both the credit facility and the note purchase
agreements, the Company has retained a financial advisor to assist in
refinancing, restructuring or recapitalizing the Company. As required by
Amendment No. 4 and the Sixth Credit Amendment, the Company has prepared and has
distributed to prospective investors an offering memorandum for the
recapitalization of the Company's debt obligations. Additionally, the Company is
required to use its best efforts to obtain a firm commitment or signed letter of
intent regarding such recapitalization prior to July 31, 2003. In the event the
Company does not have a firm commitment or signed letter of intent by such date,
the Company will be required to pay $250,000, to be distributed pursuant to the
Amended Intercreditor Agreement. Additionally, the Company is required to pay on
September 1, 2003 a supplemental fee of $250,000 to each of the lenders and the
noteholders, which amount will be waived if the Company has paid all amounts due
and outstanding under its financing agreements prior to such date.
15
Discontinued Operations
IT Consulting
On December 29, 2000, Inteliant sold to HD its consulting division and
related tangible and intangible assets. The consulting division sold to HD
consisted of a full suite of information technology consulting, e-business and
telecommunication services, which services were marketed to Fortune 1000,
mid-tier and early stage companies, government agencies and educational
institutions.
In conjunction with the sale of the IT consulting business, the Company
assigned certain lease agreements to different sub-tenants, with the respective
landlords reserving their rights against the Company in the event of default by
such sub-tenant. During the 13-week period ended March 30, 2003, the Company was
informed by one of its sub-tenants that such sub-tenant would more likely than
not default on its sublease obligation. Consequently, during the 13-week period
ended March 30, 2003, the Company recorded an additional $63,000 charge to
discontinued operations for expected losses related to the sublease.
IT Staffing and ServCom
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, and treated these actions as discontinued operations beginning in
fiscal 2001. Subsequently, during the 52-week period ended December 29, 2002,
the Company disposed of its remaining operations with respect to its
discontinued IT staffing business.
In addition, during fiscal 2001, the Company formalized a plan to sell
ServCom and during fiscal 2002, the Company sold substantially all of the assets
of this business to an unrelated entity.
Contingent payments received relating to the sale of the IT staffing
and ServCom assets were $49,000 for the 13-week period ended March 30, 2003.
Truex
During the second quarter of fiscal 2002, due to declining revenues and
the continued economic downturn in the San Francisco, California, region, the
Company determined to sell Truex. 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.
Contingent payments received relating to the transfer of the Truex
business were $7,000 for the 13-week period ended March 30, 2003.
For the 13-week period ended March 30, 2003, the Company received
contingent payments of $54,000, in the aggregate, for its discontinued
operations.
Results of Continuing 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:
13 Weeks Ended
-------------------------------------
March 30, 2003 March 31, 2002
------------------ ------------------
Service revenues 100.0% 100.0%
Direct cost of services 80.5 80.6
------------------ ------------------
Gross profit 19.5 19.4
------------------ ------------------
Operating expenses:
Selling, general and administrative expenses 19.4 18.9
Depreciation and amortization 1.4 1.0
Finance advisory costs 0.4 --
Restructuring charges -- 0.8
------------------ ------------------
Total operating expenses 21.2 20.7
------------------ ------------------
Loss from operations (1.7%) (1.3%)
------------------ ------------------
16
Revenues: Revenues for the 13-week period ended March 30, 2003 were
$35.9 million, a decrease of $6.0 million, or 14.3%, compared to revenues of
$41.9 million for the 13-week period ended March 31, 2002. The decline in
revenue was attributable to the economic downturn, the closing of
under-performing offices over the past two years and a slowdown in construction
labor requirements within key operating areas.
Gross Profit: The Company defines gross profit as 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 temporary associates and
permanent placement counselors and other temporary payroll benefits; costs
related to independent contractors utilized by the Company; and other direct
costs related to placement of temporary associates. Gross profit for the 13-week
periods ended March 30, 2003 and March 31, 2002 was $7.0 million and $8.2
million, respectively, a decrease of $1.2 million, or 14.6%. For the 13-week
periods ended March 30, 2003 and March 31, 2002, gross profit margin was 19.5%
and 19.4%, respectively. The increase in the Company's gross profit margin was
due primarily to lower labor costs offset somewhat by increased workers
compensation costs and increased unemployment insurance costs. As part of the
Company's renewed workers' compensation insurance for fiscal 2003, the Company
was required to pay higher premium costs. Although some of the increased costs
are expected to be passed through as price increases to its customers, given the
competitive nature of the staffing industry, the Company may not be able to pass
through all cost increases. In addition, the Company anticipates that increases
in workers' compensation rates and unemployment tax rates in states where the
Company is doing business will continue to have a negative impact on gross
profit through the remainder of fiscal 2003.
Operating Expenses: Operating expenses include, among other things,
staff employee compensation, facility costs, information and communication
systems, depreciation, amortization of intangibles and advertising. Total
operating expenses as a percentage of revenues increased to 21.2% for the
13-week period ended March 30, 2003, compared to 20.7% for the 13-week period
ended March 31, 2002. The increase was attributable primarily to the reasons set
forth below.
- Selling, general and administrative expenses ("SG&A") for the
13-week period ended March 30, 2003 were $7.0 million, compared to
$7.9 million for the 13-week period ended March 31, 2002. The
decrease in SG&A was primarily the result of the cost containment
efforts of the Company, including the closing and/or consolidation
of a number of underperforming branches. As a percentage of
revenues, SG&A increased slightly for the 13-week period ended
March 30, 2003 to 19.4%, compared to 18.9% for the 13-week period
ended March 31, 2002. The increase in SG&A as a percentage of
revenues was due primarily to the Company's revenues declining
more rapidly than the corresponding reduction in selling, general
and administrative expenses.
- Depreciation and amortization for the 13-week period ended March
30, 2003 was 1.4%, compared to 1.0% for the 13-week period ended
March 31, 2002. As of December 29, 2002, the Company made the
determination to replace the Century trade with the SOS
Staffing(R) trade name. Consequently, the remaining value of the
Century trade name will be amortized over the first six months of
fiscal 2003. As of March 30, 2003, the Company amortized
approximately $71,000 of the value of the Century trade name.
- As required by both the credit facility and the note purchase
agreements, the Company has retained a financial advisor to assist
in refinancing, restructuring or recapitalizing the Company. As
required by the Company's amended credit facility and amended note
purchase agreements, the Company has prepared and has distributed
to prospective investors an offering memorandum for the
recapitalization of the Company's debt obligations. Additionally,
the Company is required to use its best efforts to obtain a firm
commitment or signed letter of intent regarding such
recapitalization prior to July 31, 2003. The cost to the Company
of such financial advisor and preparation of such offering
memorandum added an additional 0.4% to operating expenses. The
Company expects to incur similar finance advisory costs through
the second quarter of fiscal 2003.
Loss from Operations: Loss from operations for the 13-week period
ended March 30, 2003 was ($625,000), compared to ($529,000) for the 13-week
period ended March 31, 2002. Operating margin was (1.7%), compared to (1.3%) for
the comparable period of the prior year. The decrease in operating margin as a
percentage of revenues was due primarily to the additional costs associated with
the preparation and distribution of the Company's offering memorandum as
previously discussed, as well as the Company's revenues declining more rapidly
than the corresponding reduction in operating expenses.
17
Interest Expense: Interest expense for the 13-week period ended March
30, 2003 was $720,000, compared to $923,000 for the 13-week period ended March
31, 2002, a decrease of $203,000, or 22%. The decrease in the interest expense
was due primarily to reduced debt carried by the Company.
Income Taxes: As of March 30, 2003, the Company had recorded a tax
valuation allowance for its entire net deferred income tax assets of $24.0
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.
Liquidity and Capital Resources
For the 13-week period ended March 30, 2003, net cash used by operating
activities was approximately $1.2 million, compared to net cash used by
operating activities of approximately $2.3 million for the 13-week period ended
March 31, 2002. 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, primarily collections on accounts
receivable.
Additionally, during the 13-week period ended March 30, 2003, the
Company renewed its workers' compensation policy for the first six months of
fiscal 2003. Under the terms of the renewed policy, the Company is required to
maintain $1.3 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. The restricted cash is held in the Company's name with a major
financial institution. Additionally, as part of the renewal, during the 13-week
period ended March 30, 2003 the Company prepaid $1.8 million in premium and
administrative costs for a six-month policy. In July 2003, the Company will be
required to pay an additional $660,000 to continue coverage through December
2003. Pursuant to the policy renewal in July 2003, the Company also may be
required to post additional collateral in addition to any cash payments.
However, there can be no assurance that the Company will be able to post all of
the collateral that might be required by ACE to continue the policy through
December 2003. In the event the policy is not renewed by ACE, the Company would
be required to seek workers' compensation coverage from other carriers,
including carriers of last resort which typically have higher premium costs. The
Company anticipates that increasing workers' compensation costs will continue to
have a negative impact on future operating capital.
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, if any 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 $805,000 in sublease payments to the Company.
Subsequent to the 13-week period ended March 30, 2003, the Company
filed its fiscal 2002 federal tax refund claim, and, as a result, the Company
anticipates receiving an additional $3.8 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 $7.9 million, due primarily to the
enactment of the 2002 Job Act. 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
was accounted for in the first quarter of fiscal 2002, the period in which the
law became effective.
The Company's investing activities for the 13-week period ended March
30, 2003 used approximately $58,000, compared to $241,000 for the 13-week period
ended March 31, 2002. The Company's investing activities were related to the
purchase of property and equipment.
Net cash provided by the Company's financing activities for the 13-week
period ended March 30, 2003 was approximately $1.5 million, primarily due to
borrowings on the Company's revolving credit facility. Net cash provided by the
Company's financing activities for the comparable period ended March 31, 2002,
was approximately $7.2 million, primarily due to borrowings on the Company's
revolving credit facility.
18
As of March 30, 2003, the Company had outstanding borrowings under its
revolving credit facility, as amended, of approximately $2.5 million, with a
maturity date of April 30, 2004. Furthermore, under the terms of the Company's
revolving credit facility, the Company has letters of credit available of up to
$10 million to be issued solely as required by the Company's workers'
compensation insurance provider, with a maturity date of January 1, 2004. As of
March 30, 2003, the Company had outstanding letters of credit of $9.9 million.
Additionally, the Company's outstanding borrowings on the senior notes, as
amended, were approximately $23.3 million. As of March 31, 2003, the Company was
in compliance with all covenants under the terms of both the amended senior note
agreements and the revolving credit facility.
On March 31, 2003, the Company entered into the Sixth Credit Amendment
with its lenders to extend the Company's line of credit. Pursuant to the Sixth
Credit Amendment, the maturity date of the Company's line of credit was extended
to April 30, 2004. In addition, certain financial covenants under the Company's
credit facility were modified. As provided in the Sixth Credit Amendment, the
Company will pay to its lenders four equal payments of $156,500 in successive
months beginning in September 2003. Such payments will permanently reduce the
line of credit available to the Company in cash. However, any such reductions in
the aggregate commitment shall not apply if they would reduce the cash available
for borrowing below $2.5 million. As of March 30, 2003, the Company had
outstanding borrowings under the revolving credit facility of approximately $2.5
million.
Also on March 31, 2003, the Company entered into Amendment No. 4 with
its noteholders, whereby the noteholders modified certain financial covenants
under the Company's existing note purchase agreements. Amendment No. 4 provides
that the Company will pay to the noteholders four equal payments of $343,500 in
successive months beginning in September 2003, to be applied pro rata among the
holders of the Series A and Series B notes. Additionally, the maturity date of
the Series A notes was extended to April 30, 2004. As consideration for
Amendment No. 4, the Company will pay all fees and expenses of the noteholders'
special counsel.
Amendment No. 4 and the Sixth Credit Agreement provide that the Company
shall pay to the lenders and the noteholders any federal, state or local tax
refund or repayment, which amount shall be distributed pursuant to the Amended
Intercreditor Agreement. If the Company receives any tax refund arising from the
2002 Job Act relating to net operating loss carrybacks, the Company will be able
to retain $3.8 million of such refund for working capital purposes and
collateral requirements arising under its credit facility and letters of credit.
Any such prepayments paid to the lenders also will be treated as a permanent
reduction in the line of credit available to the Company for borrowing in cash.
As required by both the lenders and the noteholders, the Company has
retained a financial advisor to assist in refinancing, restructuring or
recapitalizing the Company. As required by Amendment No. 4 and the Sixth Credit
Amendment, the Company has prepared and distributed to prospective investors an
offering memorandum for the recapitalization of the Company's debt obligations.
Additionally, the Company is required to use its best efforts to obtain a firm
commitment or signed letter of intent regarding such recapitalization no later
than July 31, 2003. Although the Company is aggressively pursuing alternate
sources of capital, there can be no assurance that such capital will be
available or, if available, will be extended on terms favorable to the Company
and in amounts adequate to fund the continuing capital requirements of the
Company. In the event the Company does not have a firm commitment or signed
letter of intent by such date, the Company will be required to pay $250,000, to
be distributed to the lenders and the noteholders pursuant to the Amended
Intercreditor Agreement. Additionally, the Company is required to pay on
September 1, 2003 a supplemental fee of $250,000 to each of the lenders and the
noteholders, which amount will be waived if the Company has paid all amounts due
and outstanding under its financing agreements prior to such date.
The Company believes that funds available under its revolving credit
agreement plus cash reserves and cash flow from operations will be sufficient to
meet anticipated needs for working capital, capital expenditures and debt
service obligations, at least through fiscal 2003. If the Company were to
experience a significant downturn in its business, additional capital would be
required in order to continue operations. Should this occur, the Company would
be required to consider a number of strategic alternatives, including the
closure of certain locations or the sale of certain or all of its assets. In the
current economic environment, management believes that any such sale would be at
depressed prices that could be significantly lower than the net book value of
assets sold and may not be sufficient to satisfy its liabilities.
19
The following tables provide information on future payments under the
Company's debt agreements and capital commitments, including maturities on
borrowings and future minimum lease payments under non-cancelable operating
leases (in thousands):
Payments due by period
Contractual
Obligations Total Less than 1 year 1-3 years 4-5 years After 5 years
------------------- ------------------ ------------------ ------------------- -----------------
Long-Term Debt $ 23,312 $ 1,374 $ 17,720 $ 4,218 $ --
Operating Leases 4,056 1,888 2,027 141 --
Lines of Credit 2,481 -- 2,481 -- --
Workers' Compensation 660 660 -- -- --
------------------- ------------------ ------------------ ------------------- -----------------
Total Contractual Cash
Obligations $ 30,509 $ 3,922 $ 22,228 $ 4,359 $ --
------------------- ------------------ ------------------ ------------------- -----------------
Commitment Expiration Period
---------------------------------------------------------------------------
Other Commercial Total Amounts
Commitments Committed Less than 1 year 1-3 years 4-5 years After 5 years
------------------- ------------------ ------------------ ------------------- -----------------
Letters of Credit 10,000 10,000 -- -- --
------------------- ------------------ ------------------ ------------------- -----------------
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;
the Company's ability to integrate the operations of acquired businesses; 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: 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,
the availability of workers' compensation insurance 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 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
20
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 March 30, 2003, the prime rate
was 4.25%. At the end of the 13-week period ended March 30, 2003, the Company
had approximately $2.5 million in advances outstanding under the revolving
credit facility.
Senior Notes: For the 13-week period ended March 30, 2003, the
Company's outstanding borrowings on the senior notes were $23.3 million, with a
weighted average fixed interest rate of 9.92%. 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, 4.25% at March 30, 2003, 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 7.25% over the expected maturities of the obligations,
is approximately $24.4 million. If the discount rate were to increase by 10% to
7.98%, the estimated fair value of the obligation on the unsecured notes would
be approximately $24.1 million. If the discount rate were to decrease by 10% to
6.53%, the estimated fair value of the obligation on the unsecured notes would
be approximately $24.7 million.
Item 4. Controls and Procedures
As required by Rule 13a-15 under the Securities Exchange Act of 1934,
as amended (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.
21
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
In the ordinary course of its business, the Company is periodically
threatened with or named as a defendant in various lawsuits or administrative
proceedings. The Company maintains insurance in such amounts and with such
coverage and deductibles as management believes to be reasonable and prudent.
The principal risks covered by insurance include workers' compensation, personal
injury, bodily injury, property damage, errors and omissions, fidelity losses,
employer practices liability and general liability.
There is no pending litigation that the Company currently anticipates
will have a material adverse effect on the Company's financial condition or
results of operations.
Item 6. Exhibits and Reports on Form 8-K.
a) None.
b) None.
22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SOS STAFFING SERVICES, INC.
Dated: May 14, 2003 /s/ JoAnn W. Wagner
--------------------------
JoAnn W. Wagner
Chairman, President and
Chief Executive Officer
Dated: May 14, 2003 /s/Kevin Hardy
---------------------------
Kevin Hardy
Senior Vice President and
Chief Financial Officer
23
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: May 14, 2003 /s/ JoAnn W. Wagner
-------------------
JoAnn W. Wagner
Chairman, President and
Chief Executive Officer
24
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: May 14, 2003 /s/Kevin Hardy
---------------------------
Kevin Hardy
Senior Vice President and
Chief Financial Officer
25
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
December 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 14th day of May,
2003.
/s/ JoAnn W. Wagner
---------------------------
JoAnn W. Wagner
Chairman, President and
Chief Executive Officer
26
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
December 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 14th day of May,
2003.
/s/ Kevin Hardy
----------------------------------
Kevin Hardy
Senior Vice President and
Chief Financial Officer
27