UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
__X__ Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended December 29, 1996.
______ Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File Number: 0-26094
SOS STAFFING SERVICES, INC.
(Exact name of Registrant as specified in its charter)
Utah 87-0295503
(State or other jurisdiction of I.R.S. Employer
incorporation or organization) Identification No.)
1415 South Main Street, Salt Lake City, Utah 84115
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (801) 484-4400
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered__
None None
Securities registered pursuant to Section 12(g) of the Act:
Common stock, $0.01 par value
(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
The aggregate market value of the Common Stock held by non-affiliates of the
Registrant, on March 3, 1997, based upon the closing sales price of the Common
Stock of $12.125 per share on that date, as reported on the Nasdaq Stock Market,
was approximately $62,898,195. Shares of Common Stock held by each officer and
director and by each person who owns 5% or more of the outstanding Common Stock
have been excluded in that such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily a conclusive determination
for other purposes.
As of March 3, 1997, the Registrant had outstanding 9,037,820 shares of Common
Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Annual Report to Shareholders for the fiscal year
ended December 29, 1996 are incorporated by reference into Parts II and IV of
this Annual Report on Form 10-K. Portions of the Proxy Statement for
Registrant's 1997 Annual Meeting of Shareholders to be held May 14, 1997 are
incorporated by reference in Part III.
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PART I
ITEM 1. BUSINESS
General
SOS Staffing Services, Inc. ("SOS" or the "Company") is a leading
independent regional provider of staffing services in the Mountain States (Utah,
Colorado, Arizona, Nevada, Idaho, Wyoming, New Mexico and Montana). In addition,
the Company has recently expanded its office network into other western states
(California, Oregon and Texas). SOS, a Utah corporation, began business in 1973,
initially doing business as SOS Employment Services and subsequently as SOS
Temporary Services. During 1996, the Company provided over 56,000 clerical,
light industrial, industrial, information technology and technical and
professional temporary staffing employees to approximately 8,000 businesses,
professional and service organizations and government agencies. In addition to
the SOS Staffing Services(R) trademark, the Company does business under
service-specific names in various markets where size permits diversification,
including Skill Staff (construction and manufacturing services), Industrial
Specialists (warehousing and labor services, and trucking), AccountStaff
(accounting services), SOS Technical Services (engineering, programming, design
and other technical services), PAMS (medical administrative support services),
ServCom Management Services (professional employer services), CGS Personnel
(mining, mineral exploration and environmental professional services), The
Performance Group (information technology services), Impact Staffing
(information technology services), and Wolfe & Associates (consulting and
information technology services). In February 1997 the Company purchased the
stock of Computer Group, Inc. (CGI) of Bellevue, Washington. CGI provides
information technology services. The Company's network consisted of 87 offices
as of December 29, 1996. There were 28 offices in Colorado, 24 in Utah, 9 in
Arizona, 6 in Nevada, 5 in Idaho, 4 in Texas, 3 in Wyoming, 3 in California, 2
in Oregon, 2 in New Mexico and 1 in Montana.
Business Strategy
SOS seeks to differentiate its services and enhance its growth and
profitability through the specific business strategies outlined below:
Focus on Higher Margin Business. The Company's operating results since
1991 have been significantly improved by its strategy to focus on higher margin
business. The Company has implemented this business strategy two ways. First,
the Company has expanded its range of services, in part through acquisitions, to
include higher margin specialty services such as information technology,
administrative staffing support services for medical facilities and other
professional staffing and consulting services. The Company intends to continue
to develop its capability to provide qualified employees to the information
technology sector, one of the fastest growing segments of the temporary staffing
industry. Second, the Company has continued its efforts to market temporary
staffing services to higher margin accounts. The Company has de-emphasized
marketing to accounts where competitive pricing makes margins unacceptable or to
accounts where workers' compensation costs adversely affect profitability. As
part of this continuing strategy, managers are trained in flexible pricing of
services.
Wide Variety of Services. The Company's strategy includes offering its
customers a wide variety of temporary staffing services, including clerical,
light industrial, industrial, construction, manufacturing, information
technology and technical and professional services. The Company also provides
related services to its customers including payrolling, professional employer
services, skill and drug testing and risk management consulting. In larger
markets, the Company offers these services through several separate offices
operating under established names. The Company also provides outsourcing
services to customers whereby the Company contracts to perform a particular
business function for an agreed price which includes providing staffing,
equipment and supplies. In a limited number of markets the Company provides
professional employer organization ("PEO") services, which offers to SOS
customers the benefit of employee leasing. The Company is also expanding its
on-site services where SOS locates an on-site manager to manage all of the
customer's temporary employee staffing requirements. The recent acquisition of
Wolfe & Associates allows the Company to provide business strategy, information
technology and telecommunication consulting services and offer staff
augmentation services for any follow-on projects.
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Pursue Opportunities in Smaller Markets. Over the last several years,
SOS has focused on opening hub offices in key metropolitan areas followed by
establishing offices in surrounding markets. This decentralized office
management strategy locates multiple offices in close proximity to customers and
temporary staff employees. The Company believes this strategy has allowed it to
rapidly gain market share with low entry costs. Once a hub office has been
established, the Company focuses on leveraging hub office resources to market
and deliver services to surrounding smaller markets. In these markets, which are
often too small to attract competition from national companies, the Company has
achieved significant penetration in relatively short periods and often becomes
the dominant provider of temporary staffing services.
Provide Entrepreneurial Offices with Strong Central Support. The
Company's offices are supported by strong central functions at corporate
headquarters which include marketing, recruiting and retention programs,
workers' compensation and other insurance services, training, accounts payable,
purchasing, credit, collection, legal review and other administrative support
services. Each office has access to the Company's computer system and its
proprietary software which provides information on customer requirements,
available applicants, temporary staffing employees on assignment and other
information which facilitates efficient response to customer job orders.
The Company has established budgets and quality performance standards
which are utilized at all offices. A substantial portion of region, area,
district and office manager compensation is incentive-based and focused on
meeting budgets and quality standards. Managers are also given considerable
discretion to respond to specific customer requirements. Office managers report
to region, area or district managers who typically have responsibility for three
to ten offices.
Emphasize Service and Value. The Company focuses on providing service
and value to its customers. The Company's staff employees seek to establish and
maintain long-term relationships with customers by developing knowledge of
customers' businesses, responding promptly to customer orders and monitoring job
performance and customer satisfaction. The Company has implemented this strategy
by targeting customer accounts where service and quality are perceived to be as
important as pricing of services, which allows the Company to be more selective
and to provide higher quality staffing while maintaining desired profit margins.
Focus on Risk Management. A significant component of the Company's
direct cost of providing services is workers' compensation expense. The Company
utilizes a comprehensive workers' compensation insurance program that includes
aggregate and occurrence loss caps with full insurance above the loss caps. SOS
utilizes the same insurance carrier to handle claims administration. The Company
has also developed claims avoidance and claims management procedures involving
loss control programs, monitoring of safety conditions at customer locations and
policies which prohibit staffing of high-risk work, such as logging or roofing.
This risk management strategy has favorably impacted rates and contributed to
improvements in gross profit margins. Under the direction of the Company's
professional risk manager, claims are investigated and closely monitored.
Reserves for claims below the loss cap are established by the Company's insurer
and supplemented with additional reserves established by the Company.
Growth Strategy
Management believes the Company has substantial opportunities to expand
the geographic range of its office network and to broaden the range of services
it offers to its customers. The Company's growth strategy is to increase sales,
profitability and market share by increasing revenues from existing offices,
opening offices in the Mountain States and other western states and completing
acquisitions in targeted markets and industry segments. Since its initial public
offering in June 1995, the Company has added a total of 17 offices through
internal growth and 28 offices through acquisitions, resulting in 87 offices as
of December 29, 1996.
Internal Growth. The Company maintains an aggressive posture in
increasing revenues from existing offices. Growth of any specific office is
restricted by its proximity to clients and by the availability of temporary
workers. As offices exceed certain thresholds, SOS has determined that dividing
such offices into one or more additional offices results in continued growth and
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greater recruiting capabilities, market penetration and profitability. Economies
of scale benefit the offices due to common area management and the spreading of
management and administrative costs over a larger revenue base. A key element of
the Company's growth strategy is the establishment of hub offices in key
population areas followed by the clustering of additional offices (including
offices providing specialized staffing services) in existing and surrounding
markets.
The Company estimates the capital cost of establishing a new office
ranges from $10,000 to $25,000, exclusive of working capital requirements. The
Company's new offices have historically achieved profitability in six to twelve
months while offices created by division of an existing office are usually
profitable from inception. The Company currently operates at least one office in
every major market in the Mountain States with a population base in excess of
100,000. SOS has identified over 40 additional potential office sites in smaller
Mountain States markets, specialty office sites in existing markets and office
sites in new markets to which it intends to expand.
Acquisitions. From the date of its initial public offering, the Company
has completed the acquisition of 20 staffing companies in the Mountain States
and other western states. The Company intends to continue to pursue acquisitions
as a key element of its growth strategy. The Company will target acquisitions in
markets in the western United States where the Company seeks to establish or
develop staffing operations, particularly acquisitions of specialty providers
such as information technology companies. The Company will also seek additional
acquisitions in the consulting area to augment the Wolfe & Associates base of
business. In addition, the Company will target major markets in the Mountain
States where the Company seeks to increase its market share and smaller markets
in the Mountain States where SOS does not currently have offices. The Company
has identified a number of potential acquisition candidates that provide
specialized staffing services in the Mountain States and other western states
for continued expansion. In targeting acquisitions, SOS focuses on established
businesses with a history of profitable operations. Acquisition criteria include
the strength of an acquisition candidate's operations, the quality of its
management, its market share and its compatibility with the Company's existing
lines of business. Compatibility may include having lines of business consistent
with those of SOS or specialty lines of business that can be expanded through
the Company's existing office network or compliment existing lines of business.
Management believes the Company's expertise and experience allows acquired
businesses to be integrated into the Company at relatively low incremental costs
and enables fixed costs to be spread over an increasing base.
Operations
Offices. As of December 29, 1996, the Company operated 87 offices in
eleven western states, including 28 in Colorado, 24 in Utah, 9 in Arizona, 6 in
Nevada, 5 in Idaho, 4 in Texas, 3 in Wyoming, 3 in California, 2 in Oregon, 2 in
New Mexico and 1 in Montana. Each of the offices operates as an independent
profit center with each manager having overall responsibility for sales and
marketing, recruiting and retention of temporary staffing employees and customer
relations. An office staff typically consists of the manager and up to six
regular staff personnel who market to the Company's customers, process
applicants, match customer needs with available temporary staffing employees and
monitor temporary staffing employee performance. Office managers report to
region, area or district managers who typically have responsibility for three to
ten offices. The Company has established two regions for management purposes -
Utah and Eastern Colorado. Where possible, the offices are grouped around a hub
office in a key metropolitan center or organized into regions, areas or
districts supervised by an area or district manager. The Company believes that
grouping of offices permits leveraging of marketing and administrative costs and
facilitates market penetration.
During 1996, the Company's light industrial, clerical, industrial,
information technology and technical and professional groups contributed 41%,
20%, 11%, 5% and 5% of revenues, respectively. In addition, the Company offers
payrolling and professional employer services, which contributed approximately
14% and 4% of revenues for 1996, respectively. Payrolling services are offered
in most offices. PEO services (employee leasing) are offered through a single
office under the ServCom tradename. The Company's SOS Staffing Services offices
provide personnel for a wide range of temporary staffing needs. In larger
markets these offices focus on providing clerical and light industrial personnel
while specialty needs, such as construction and industrial services are provided
by specialty offices. In smaller markets, SOS offices offer a broader variety of
temporary staffing services, including these specialty services. The Company's
Skill Staff offices provide temporary staff services in the construction,
manufacturing, steel fabrication, machining, welding and other skilled labor
occupations. Some of the Skill Staff offices are stand-alone, while operations
in smaller markets are combined with a SOS Staffing Services office. Industrial
Specialists offices provide temporary staff laborers, warehouse workers, drivers
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and dock workers. SOS Technical Services offices provide temporary staffing for
customers with technical job requirements, including engineers, chemists,
designers, drafters, technicians, information systems and technology personnel,
system designers, illustrators, artists and writers. The Company's AccountStaff
offices provide temporary staffing for accounting, bookkeeping, auditing, data
entry and financial analysis. The PAMS division specializes in providing
temporary help in the medical administrative support area and, through the trade
name of National Collex, provides collection services and special project
billing services to medical facilities. CGS Personnel provides contract and
temporary geologists and related personnel to the mining, mineral exploration
and environmental industries. During 1996 the Company augmented its capabilities
in the information technology segment with its acquisitions of Wolfe &
Associates, Impact Staffing and The Performance Group. In February 1997, the
Company completed the acquisition of Computer Group, Inc., its fourth
acquisition in the information technology area.
Other Services. The Company offers payrolling, outsourcing and on-site
services. Payrolling typically involves the transfer of a customer's short-term,
seasonal or special-use employees to the Company's payroll for a designated
period. Outsourcing represents a growing trend among businesses to contract with
third parties to provide a particular function or business department for an
agreed price over a designated period. On-site services involve locating a
regular SOS employee at the customer's place of business to manage all of the
customer's temporary staffing requirements. The Company views outsourcing and
on-site services as significant opportunities to expand its business and to
utilize its temporary staffing employees to provide these services. Finally, the
Company provides administrative professional services which offer customers
skills testing, drug testing and risk management services. Skills testing
available to customers through SOS offices include cognitive, personality and
psychological evaluations. Drug tests are confirmed through an independent
certified laboratory. Risk management services include on-site safety inspection
and consulting services. These services are made available to customers for a
fee on a cost-effective and convenient basis.
Customers and Marketing. The Company provided more than 56,000
temporary staffing employees to approximately 8,000 customers in 1996. No
customer accounted for more than three percent of the Company's service revenues
in 1996 and the Company's top ten customers accounted for less than 12% of
service revenues for the same period. SOS's services are marketed through its
network of offices whose managers, supported by the Company's marketing staff,
make regular personal sales visits to larger customers and prospects. The
Company emphasizes long-term personal relationships with customers which are
developed through regular contact, periodic assessment of customer requirements
and regular monitoring of temporary employee performance. New customers are also
obtained through customer referrals, telemarketing and advertising in a variety
of local and regional media, including television, radio, direct mail, Yellow
Pages, newspapers, magazines and trade publications. The Company is also a
sponsor of job fairs and other community events.
Temporary Staffing Employee Recruitment. The Company employs recruiters
who regularly visit schools, clubs and professional associations and present
career development programs to various organizations. In addition, the Company
obtains applicants from referrals by its temporary staffing employees and from
advertising on radio, television, in the Yellow Pages and through other print
media. The SOS Technical division also recruits over the Internet.
At SOS, each applicant is interviewed with emphasis on past work
experience, personal characteristics and individual skills. The Company utilizes
the Dictionary of Occupational Titles ("DOT" codes), published by the U.S.
Department of Labor, to evaluate and assign temporary staffing employees. The
Company maintains software training centers for applicants who may be trained
and tested at no cost to the applicant or to the Company's customers. During
1996, the Company assigned over 56,000 temporary staffing employees to
customers. To promote loyalty and retention among its temporary staffing
employees, the Company emphasizes issuance of paychecks during the same week
worked, and provides its temporary staffing employees with certain employee
benefits, including access to a Section 401(k) defined contribution plan, a
credit union and health insurance programs offered through the National
Association of Temporary Staffing Services ("NATSS").
Risk Management Program. SOS is responsible for all employee-related
expenses for its temporary staff employees, including workers' compensation,
unemployment insurance, social security taxes, state and local taxes and other
general payroll expenses. From 1993 through 1995 the Company maintained a paid
loss retro workers' compensation program through American International Group
("AIG"). Under the terms of that agreement, the Company maintained a loss cap of
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$250,000, except for Skill Staff and ServCom, which maintained loss caps of
$100,000 under a separate policy. In those years, the Company made deposits and
paid premiums and expenses in advance for all anticipated costs to AIG. The
difference between payments made and actual expenses for each year are returned
to the Company over the next succeeding four years. In 1996, the Company
implemented a deductible workers' compensation program through CIGNA Property
and Casualty ("CIGNA"). The loss cap under the new policy is $200,000. Under the
CIGNA program, the Company deposits a one-month escrow for paid losses,
reimburses that escrow deposit monthly for actual losses and pays all other
costs and premiums over the course of the year. CIGNA has assigned full-time
adjusters on-site at the Company's corporate office. The Company believes that
its has benefited, and will continue to benefit, from the change in insurance
carriers, due principally to reduced deposit requirements, reduced excess
insurance premiums and more efficient claims handling. Temporary staffing
employees in Wyoming, Nevada and - most recently - Washington are insured
through those states' insurance funds because private insurance is not permitted
in those states. The Company employs a full-time professional risk manager and
staff who work closely with the insurance carriers to manage claims and
establish appropriate reserves.
The Company has also developed workers' compensation loss control
programs which seek to limit claims through employee training and avoidance of
high-risk job assignments, such as roofing or logging. All temporary staffing
employees are required to agree in advance to drug testing following any
work-related accident and all major accidents are investigated. Finally, all
claims are monitored in cooperation with the Company's insurance carriers with
regular review and emphasis on early closure. The Company believes that its risk
management programs have contributed to improved gross profit margins.
The Company estimates its workers' compensation reserves and expense
for each period based upon an estimate of the costs of reported claims and
incurred but not yet reported claims. These estimates are based upon information
provided by the insurance carrier and historical claims information monitored by
the Company. In addition, the Company provides additional reserves based upon
expected future development of those claims. Such reserve amounts are only
estimates and there can be no assurance that the Company's future workers'
compensation obligations will not exceed the amount of its reserves or that
actual claim costs will not rise in the future. However, management believes
that the difference, if any, between the amounts recorded for its estimated
liability and the costs of settling actual claims, will not be material to the
results of operations.
Seasonality
The Company's business follows the seasonal trends of its customers'
business, which are, in turn, significantly affected by the climate in which the
customers do business. The Company usually experiences higher revenues in its
third quarter because of favorable weather conditions, higher overall economic
activity and hiring of temporary staffing employees to replace student workers
who return to school in August and September. Historically, the Company has
experienced lower revenues in the first quarter due to unfavorable weather
conditions and lower overall economic activity; however, as the Company expands
its office network to include western states with more moderate climates, the
Company may experience less impact from unfavorable weather conditions.
Information Systems
The Company's central management information system is linked to all of
the Company's offices either through a frame-relay system or modem. Smaller
offices also utilize stand-alone computers and software for routine office
functions. The centralized system supports Company-wide operations such as
payroll, billing, accounting and sales management reports. The Company's
retrieval software permits efficient matching of customers' requirements with
available temporary staffing employees. All of the offices acquired by the
Company, with the exception of Wolfe & Associates, have been integrated into the
Company's management information system.
The operating system software utilized by the Company is licensed on a
perpetual royalty-free basis. The Company's proprietary application software is
regularly updated and revised to meet the Company's specific requirements. All
files are backed up daily and stored off-site. The present system has capacity
to service the Company's anticipated growth without significant capital
expenditures for the foreseeable future.
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Competition
The temporary staffing industry is comprised of more than 3,500
national, regional and independent companies operating over 12,000 offices
throughout the nation, making the industry highly competitive and highly
fragmented. The Company faces competition from large national and international
companies, including Manpower Inc., Kelly Services Inc., Adia/Ecco, The Olsten
Corporation, Personnel Group of America and Accustaff, Inc. In addition, SOS
competes with many regional and local temporary service companies.
The Company competes for qualified temporary staffing employees and for
customers who require the services of such employees. The principal competitive
factors in attracting and retaining qualified temporary staffing employees are
competitive salaries and benefits, quality and frequency of assignments and
responsiveness to employee needs. The Company believes that many persons who
seek temporary employment are also seeking regular employment and that the
availability of assignments, which may lead to regular employment, is an
important factor in its ability to attract qualified temporary staffing
employees.
The principal competitive factors in obtaining customers are a strong
sales and marketing program, having qualified temporary staffing employees to
assign in a timely manner, matching of customer requirements with available
temporary staffing employees, pricing services competitively and satisfactory
work production. The Company believes its strong emphasis on providing service
and value to its customers and temporary staffing employees are important
competitive advantages.
Trade Names
The Company uses a variety of trademarks and trade names which are
generally descriptive of the temporary staffing services offered, including SOS
Staffing Services, Skill Staff, AccountStaff, Industrial Specialists, SOS
Technical Services, ServCom, PAMS Employment Services, National Collex, CGS
Personnel, Wolfe & Associates, Impact Staffing and The Performance Group.
Effective in February 1997, the Company began utilizing the Computer Group, Inc.
tradename. The Company has registered or reserved these names in the Mountain
States and in a number of other states where they may be used in the future. The
Company anticipates that at some future date the information technology names of
Wolfe & Associates, Impact Staffing, The Performance Group and Computer Group,
Inc. may be modified or changed to reflect their association.
Employees
At December 29, 1996, the Company had approximately 472 staff employees
including 33 administrative employees, 13 region, area and district managers, 87
office managers and 339 other staff employees. The Company's training department
provides general and job specific training to all Company staff employees,
including continuing training with experienced counterparts. None of the
Company's staff employees is covered by collective bargaining agreements. The
Company considers its relationship with its staff employees to be good.
ITEM 2. PROPERTIES
The Company's executive offices are located in leased office space in
Salt Lake City, Utah. The premises consist of approximately 15,600 square feet
and are leased from a related party for a term ending on March 31, 2005, with an
option to renew for ten additional years. The Company believes that the lease
terms are at least as favorable as could be obtained from any unrelated third
party. The Company also leases office space in various locations in which it
operates for local branch operations including sales, recruiting, dispatching
and customer support operations.
The Company owns substantially all equipment used in its facilities.
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ITEM 3. LEGAL PROCEEDINGS
On February 26, 1996, a former employee of the Company served the
Company with a wrongful termination lawsuit in the Third District Court, Sale
Lake County, Sate of Utah. The complaint seeks compensatory damages in excess of
$4.5 million and punitive damages of $4.0 million. The court entered a final
order dismissing the case in February 1997, however, until May 5, 1997, the
plaintiff may appeal or ask the court to set aside the dismissal. The Company
does not believe there is sufficient basis for either action to be successful.
In the ordinary course of its business, the Company is from time to
time threatened with or named as a defendant in various lawsuits. 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 and general liability.
There is no other pending litigation which the Company currently
anticipates will have a material adverse effect on the Company's financial
condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of fiscal 1996.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS
The information required by this Item is incorporated by reference
to page 25 of the Company's 1996 Annual Report to Shareholders.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this Item is incorporated by reference
to page 1 of the Company's 1996 Annual Report to Shareholders.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The information required by this Item is incorporated by reference to
pages 7 through 9 of the Company's 1996 Annual Report to Shareholders.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
The information required by this Item is incorporated by reference
to pages 10 through 24 of the Company's 1996 Annual Report to Shareholders.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None
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PART III
Certain information required by Part III of this Annual Report on Form
10-K is omitted from this Report in that the Registrant will file a definitive
proxy statement for the Annual Meeting of Shareholders of the Company to be held
on May 14, 1997 as required pursuant to Regulation 14A of the Securities
Exchange Act of 1934, as amended (the "Proxy Statement"), not later than 120
days after the end of the fiscal year covered by this Report and certain
information included therein is incorporated herein by reference. Only those
sections of the Proxy Statement specifically identified below which address the
items set forth herein are incorporated by reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is incorporated by reference to
the sections entitled "Election of Directors" and "Executive Officers" in the
Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to
the sections entitled "Election of Directors-Director Compensation" and
"Executive Officers-Executive Compensation" in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to
the section entitled "Principal Holders of Voting Securities" in the Proxy
Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to
the section entitled "Certain Relationships and Related Transactions" in the
Proxy Statement.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL SATEMENT SCHEDULES AND REPORTS OF FORM 8-K
(a) The following documents are filed as part of this Report:
1. Financial Statements: The following Consolidated Financial Statements
of SOS Staffing Services, Inc. and Report of Arthur Andersen LLP,
Independent Public Accountants, are incorporated by reference to pages
10 through 24 of the Registrant's 1996 Annual Report to Shareholders:
Consolidated Balance Sheets - As of December 29, 1996 and December 31,
1995
Consolidated Statements of Income--For the Fiscal Years Ended December
29, 1996, December 31, 1995 and January 1, 1995
Consolidated Statements of Shareholders' Equity--For the Fiscal Years
Ended December 29, 1996, December 31, 1995 and January 1, 1995
Consolidated Statements of Cash Flows--For the Fiscal Years Ended
December 29, 1996, December 31, 1995 and January 1, 1995
Notes to Consolidated Financial Statements
Report of Arthur Andersen LLP, Independent Public Accountants
2. Financial Statement Schedules:
No schedules submitted
(b) Reports on Form 8-K: During the fourth quarter of fiscal 1996, the
Company filed a Current Report on Form 8-K dated November 6, 1996 with
respect to the acquisition of all of the outstanding common stock of
Wolfe & Associates, Inc., a New Mexico corporation. Wolfe & Associates
is an information technology company providing consulting services,
project management, information systems design, programming and other
information technology related staffing services to private-sector and
public-sector clients throughout the United States.
(c) Exhibits
<TABLE>
<CAPTION>
Incorporated
Exhibit by Filed
No. Exhibit Reference Herewith
<S> <C> <C> <C>
3.1 Amended and Restated Articles of Incorporation (1)
of the Company
3.2 Amended and Restated Bylaws of the Company (1)
4.1 Specimen Certificate of the Company's Common (1)
Stock, par value $.01 per share
4.2 Amended and Restated Articles of Incorporation (1)
of the Company
4.3 Amended and Restated Bylaws of the Company (1)
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Incorporated
<CAPTION>
Exhibit by Filed
No. Exhibit Reference Herewith
<S> <C> <C> <C>
10.1 SOS Staffing Services, Inc. Stock Incentive Plan (3)
dated May 4, 1995, as amended
10.2 Form of Employment Agreement entered into by the (1)
Company and each of Messrs. Richard D. Reinhold,
Howard W. Scott, Jr. and Richard J. Tripp
10.3 Form of Consulting Agreement between the Company (2)
and Ms. JoAnn W. Wagner, effective as of July 1, 1995
10.4 Lease Agreement between the Company and Reed F. (1)
Reinhold, Rand F. Reinhold, Rena R. Qualls and Robb
F. Reinhold, dated April 1, 1995, covering the
Company's Corporate office building
10.5 Assignments of Accounts Receivable from the Company (2)
to Richard D. Reinhold and Sandra E. Reinhold,
dated April 25 and May 15, 1995, and related
Accounts Receivable Servicing Agreement
10.6 Franchise Agreement between the Company and TSI of (1)
Utah, Inc., dated January 1, 1995, as amended
10.7 Asset Purchase Agreement between the Company (3)
and Add-A-Temp, Inc., dated August 15, 1995
10.8 Asset Purchase Agreement between the Company, (3)
Patient Accounting Management Services and National
Collex Corporation, dated November 9, 1995
10.9 Asset Purchase Agreement between the Company and (3)
Geomine Personnel, Inc., dated December 19, 1995
10.10 Credit Agreement dated as of July 11, 1996 by and (4)
among the Company, First Security Bank, N.A. and
NBD Bank, together with Security Agreement and
Revolving Credit Notes
10.11 Stock Purchase Agreement between the Company, Wolfe (5)
& Associates, Inc. and certain shareholders of
Wolfe & Associates, Inc. dated November 5, 1996
13 Annual Report to Shareholders for the year ended (7)
December 29, 1996. Certain portions of this exhibit are
incorporated by reference into Items 5 through 8 of this
Annual Report on Form 10-K and, except as so
incorporated by reference, the Annual Report to
Shareholders is not deemed to be filed as part of this
Report.
21 Subsidiaries of the Company (6)
11
<PAGE>
<CAPTION>
Incorporated
Exhibit by Filed
No. Exhibit Reference Herewith
<S> <C> <C> <C>
23.2 Consent of Arthur Andersen LLP, Independent Public (7)
Accountants
27 Financial Data Schedule (7)
</TABLE>
(1) Incorporated by reference to the exhibits to a Registration Statement
on Form S-1 filed by the Company on May 17, 1995, Registration No.
33-92268.
(2) Incorporated by reference to the exhibits to Amendment No. 1 to a
Registration Statement on Form S-1 filed on June 22, 1995,
Registration No. 33-92268.
(3) Incorporated by reference to the exhibits to the Company's Annual
Report on Form 10-K for the year ended December 31, 1995 filed by the
Company on March 29, 1996.
(4) Incorporated by reference to the exhibits to a Quarterly Report on
Form 10-Q for the quarter ended September 26, 1996 filed by the
Company on November 14, 1996.
(5) Incorporated by reference to the exhibits to a Current Report on Form
8-K filed by the Company on November 14, 1996.
(6) Incorporated by reference to the exhibits to Amendment No. 1 to a
Registration Statement on Form S-1 filed by the Company on December
12, 1996, Registration No. 333-16187.
(7) Filed herewith and attached to this Report following page 13 hereof.
(d) Financial Statement Schedules:
No schedules submitted
12
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereto duly authorized.
SOS STAFFING SERVICES, INC.
By: /s/ Gary B. Crook
Date: March 24, 1997 Gary B. Crook,
Vice President, Treasurer and
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Name Title Date
/s/ Stanley R. deWaal Director March 24, 1997
- ---------------------
Stanley R. deWaal
/s/ Richard D. Reinhold Chairman of the Board and March 24, 1997
- -----------------------
Richard D. Reinhold Chief Executive Officer
/s/ R. Thayne Robson Director March 24, 1997
- --------------------
R. Thayne Robson
/s/ Randolph K. Rolf Director March 24, 1997
- --------------------
Randolph K. Rolf
/s/ Howard W. Scott, Jr. Director, President and March 24, 1997
- ------------------------
Howard W. Scott, Jr. Chief Operating Officer
/s/ Richard J. Tripp Director and March 24, 1997
- --------------------
Richard J. Tripp Senior Vice President
/s/ JoAnn W. Wagner Director March 24, 1997
- -------------------
JoAnn W. Wagner
13
Pursuant to Item 601(b)(13)(ii) of Regulation S-K, only those portions of the
SOS Staffing Services, Inc. 1996 Annual Report to Shareholders which are
incorporated by reference into the Registrant's Annual Report on Form 10-K are
filed in electronic format as an exhibit to such Annual Report on Form 10-K.
<TABLE>
Summary Financial and Operating Data
(Dollars in thousands, except per share data)
<CAPTION>
Fiscal Year (52/53 Weeks) Ended
----------------------------------------------------------------
1996 1995 1994 1993 1992
----------------------------------------------------------------
Statement of Income Data:
<S> <C> <C> <C> <C> <C>
Service revenues $ 136,164 $ 87,533 $ 63,740 $ 49,433 $ 42,034
Gross profit 27,575 18,180 12,418 8,349 6,456
Operating income 6,707 4,321 2,372 1,033 819
Income before pro forma compensation
and provision for income taxes 6,511 4,406 2,427 1,113 867
Net income 4,029 2,940 2,427 $ 1,113 $ 867
------------------------
Pro Forma:
Compensation adjustment(1) - - 787
Provision for income taxes(2) - (263) (1,228)
--------------------------------------
Net income $ 4,029 $ 2,677 $ 1,986
--------------------------------------
Net income per common share $ 0.59 $ 0.43 $ 0.35
--------------------------------------
Weighted average common shares
outstanding (in thousands)(3) 6,838 6,229 5,731
Operating Data:
Offices at period end 87 48 34 22 17
Temporary personnel utilized 56,620 41,854 32,479 27,234 22,689
Hours billed (in thousands) 11,317 7,828 6,326 5,021 4,182
Balance Sheet Data:
Working capital $ 17,012 $ 9,645 $ 5,057 $ 4,330 $ 3,400
Total assets 47,293 19,327 11,597 7,458 6,991
Total debt - 1,450 2,780 806 1,892
Shareholders' equity 36,834 14,668 7,098 5,171 4,058
</TABLE>
(1) Prior to 1995, the Company compensated its Chief Executive Officer at levels
sufficient to pay income taxes associated with the Company's S Corporation
status. Compensation expense for the fiscal years 1994, 1993 and 1992 was
approximately $982,000, $466,000 and $340,000, respectively. Effective January
1995, the Company entered into a three-year employment contract with the Chief
Executive Officer which provides for annual compensation of $195,000. The net
pro forma adjustment for 1994 has the effect of placing the Chief Executive's
compensation at the $195,000 level.
(2) The Company's S Corporation election was terminated on June 26, 1995. The
pro forma provision for income taxes assumes that the Company was subject to
income taxes for the periods presented after giving effect to the pro forma
compensation adjustment described above.
(3) Prior to the Company's initial public offering in June 1995, the company
distributed approximately $8.0 million of its accounts receivable to its S
Corporation shareholders. The pro forma weighted average common shares
outstanding for fiscal 1995 and 1994 reflects the effect of the issuance of
1,230,769 shares at an offering price of $6.50 per share, as if the distribution
had occurred at the beginning of fiscal 1994.
(Graph Omitted) (Graph Omitted)
REVENUE OPERATING INCOME
(Dollars in Millions) (Dollars in Thousands)
1
<PAGE>
Management's Discussion and Analysis
of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the consolidated
financial statements of SOS Staffing Services, Inc. (the "Company") and notes
thereto appearing elsewhere in this report. The company's fiscal year consists
of a 52- or 53-week period ending on the Sunday closest to December 31.
General - The Company provides a full range of staffing services through a
network of offices in eleven states. Since the completion of the company's
initial public offering (the "IPO") in July 1995, the network has grown from 42
to 87 offices as of December 29, 1996. The Company expanded its office network
by acquiring existing staffing service companies and opening new offices in the
Mountain States (Arizona, Colorado, Idaho, Montana, Nevada, New Mexico, Utah,
and Wyoming), as well as other western states. Generally, the Company has
entered key metropolitan areas by initially acquiring or opening a central or
"hub" office, and subsequently developing additional offices in smaller
surrounding markets. As offices reach certain thresholds, the Company divides
them into one or more additional offices resulting in greater efficiency,
profitability and market penetration.
During the period from the IPO through December 29, 1996, the Company acquired
20 staffing companies, representing 28 offices. The purchase prices of these
acquisitions have ranged from $15,000 to $4,000,000, plus contingent earnouts.
The Company has generally negotiated an earnout component of the purchase price
paid for acquisitions, which the Company believes more accurately reflects the
appropriate value for the acquired business, aligns the interests of the Company
and the snhances the likelihood of successfully integrating the acquired company
into SOS.ellers and enhances the likelihood of successfully integrating the
acquired company into SOS.
During the period from the IPO through December 29, 1996, the Company also
opened 17 new offices through internal expansion. Capital costs of new office
openings, excluding working capital requirements, have typically ranged from
$10,000 to $25,000. To date, most of the Company's internally developed offices
have achieved profitability within six to 12 months, while offices resulting
from the division of an existing larger office are usually profitable from
inception.
Results of Operations - The following table sets forth, for the periods
indicated, the percentage relationship to service revenues of selected items in
the Company's income statement:
Fiscal Year (52/53 Weeks) Ended
1996 1995 1994(1)
Service revenues 100.0% 100.0% 100.0%
Direct cost of services 79.7 79.3 80.5
Gross profit 20.3 20.7 19.5
Selling, general and
administrative expenses 15.4 15.8 14.5
Operating income 4.9% 4.9% 5.0%
(1)Adjusted for CEO compensation (see notes to Summary Financial and Operating
Data - page 1).
Fiscal 1996 Compared to Fiscal 1995
Service Revenues - Substantially all of the Company's service revenues are based
on the time worked by its temporary staffing employees on customer assignments.
Service revenues are recognized as income at the time staffing services are
provided. Service revenues for fiscal 1996 were $136.2 million, an increase of
$48.7 million, or 56%, from $87.5 million in fiscal 1995. Of the $48.7 million
increase, $24.1 million was attributable to acquisitions, $20.1 million was
attributable to comparable offices and $4.5 million was attributable to new
offices. The increase in service revenues of comparable offices was generally
consistent with increases in hours billed.
Gross Profit - The Company defines gross profit as service revenues less the
cost of providing services, which includes wages of temporary staffing and
consulting employees, employer payroll taxes (FICA, unemployment and other
general payroll costs) and workers' compensation costs. Gross profit for fiscal
1996 was $27.6 million, an increase of $9.4 million or 52%, compared to $18.2
million in 1995. Gross profit margin for fiscal 1996 was 20.3% compared to 20.7%
in fiscal 1995, reflecting, in part, upward pressure on wages due to lower
unemployment rates in the Company's service areas. Gross profit margin varies
depending on the types of services offered.
7
<PAGE>
Selling, General and Administrative Expenses - Selling, general and
administrative expenses include compensation of regular employees, rent,
recruitment and retention of temporary staffing employees, costs associated with
opening new offices, depreciation and amortization and advertising. Selling,
general and administrative expenses amounted to $20.9 million, or 15.4% of
service revenues, in fiscal 1996 compared to $13.9 million, or 15.8% of service
revenues, in fiscal 1995. Selling, general and administrative expenses have
generally increased as service revenues and the number of offices have
increased.
Operating Income - Operating income for 1996 was $6.7 million, an increase of
$2.4 million, or 55%, from $4.3 million in fisca1 1995. Operating margin for
both fiscal 1996 and fiscal 1995 was 4.9%.
Fiscal 1995 Compared to Fiscal 1994
Service Revenues - Service revenues for fiscal 1995 were $87.5 million, an
increase of $23.8 million, or 37.3%, from $63.7 million in fiscal 1994.
Approximately $14.2 million of the increase was attributable to acquisitions,
approximately $6.6 million was attributable to comparable offices and
approximately $3.0 million was attributable to opening new offices. The increase
in service revenues attributable to comparable offices was consistent with
increases in hours billed, coupled with a better mix of business, resulting in a
higher average bill rate.
Gross Profit - Gross profit for fiscal 1995 was $18.2 million, an increase of
$5.8 million, or 46%, from $12.4 million in fiscal 1994. Gross profit margin for
fiscal 1995 was 20.7%, compared to 19.5% in fiscal 1994. The improvement in
gross profit margin was due primarily to the Company's focus on higher margin
business in each segment where it provides staffing services and its emphasis on
a higher margin mix of business. Gross margins were also positively affected by
continued emphasis on the use of flexible pricing strategies and workers'
compensation loss control.
Selling, General and Administrative Expenses - Selling, general and
administrative expenses for fiscal 1995 amounted to $13.9 million, or 15.8% of
service revenues, compared to $9.3 million (adjusted for CEO compensation), or
14.5% of service revenues, for fiscal 1994. The increase in selling, general and
administrative expenses as a percentage of service revenues was attributable
largely to the addition of personnel at the Company's headquarters and regional
office levels to support the Company's growth, including planned future growth.
Other increases in selling, general and administrative expenses were
attributable to initial costs of opening new offices and integrating newly
acquired offices and costs related to becoming a public company.
Operating Income - Operating income for fiscal 1995 was $4.3 million, an
increase of $1.1 million, or 37%, from $3.2 million (adjusted for CEO
compensation) in fiscal 1994. Operating margin was 4.9% in fiscal 1995 and 5.0%
in fiscal 1994.
Liquidity and Capital Resources
For fiscal 1996, cash used in operating activities was $2.4 million, primarily
as a result of increases in accounts receivable due to increased sales,
partially offset by increases in workers' compensation reserves and various
short-term liabilities. For fiscal 1995, cash used in operating activities was
$5.6 million. The use of cash in operating activities during fiscal 1995 was
impacted by the distribution of $8.0 million in accounts receivable to the
Company's S Corporation shareholders.
The Company's investing activities during fiscal 1996 and fiscal 1995 used cash
in the amounts of $12.5 million and $1.8 million, respectively, principally to
purchase assets of acquired businesses and property and equipment. In February
1997, the Company completed the acquisition of Computer Group, Inc. for $2.7
million in cash and future contingent earnouts. See the Notes to the
Consolidated Financial Statements of the Company appearing elsewhere in this
report for a description of the material terms of these acquisitions.
8
<PAGE>
Cash flows from financing activities during fiscal 1996 amounted to $18.0
million. During fiscal 1996, the Company borrowed $11.0 million on its long-term
debt facility, primarily to fund the Company's acquisitions of temporary
staffing companies. In December 1996, the Company completed its secondary
offering of 2.2 million shares of the Company's common stock (2.0 million in
newly issued shares and 200,000 outstanding shares sold by selling
shareholders), raising $18.1 million in net proceeds. The Company used the
proceeds of the offering to pay off its outstanding debt. In January 1997, the
underwriters exercised their over-allotment option to purchase from the Company
330,000 shares of the Company's common stock, raising additional net proceeds of
approximately $3.0 million. Cash flows from financing activities totaled $9.5
million in fiscal 1995, principally as a result of the Company's sale of 2.2
million shares of common stock in its initial public offering in July 1995.
The Company's primary sources of short-term and long-term liquidity and capital
resources are its cash reserves and a secured line of credit with certain banks.
The Company's line of credit allows for maximum borrowings of $20.0 million. At
the end of fiscal 1996, the Company had no outstanding borrowings under its
credit facility. Borrowings under the short-term portion of the credit facility
bear interest at the lender's prime rate (8.25% at December 29, 1996). The
long-term portion of the credit facility bears interest at LIBOR plus 1.75% (at
December 29, 1996, 7.75%). The Company had commitments for letters of credit of
$3.7 million outstanding at December 29, 1996, for purposes of securing its
worker's compensation premium obligation, which is considered as a reduction of
borrowing availability on the line of credit. At December 29, 1996, $16.3
million was available on the line of credit. Management believes that the
present credit facility, together with cash reserves and cash flow from
operations, is sufficient to fund the Company's operations, capital expenditure
requirements and acquisitions presently anticipated for at least the next 12
months. However, if the Company were to expand its operations significantly,
especially through unanticipated acquisitions, additional capital may be
required. There can be no assurance that the Company will be able to obtain
additional capital at acceptable rates.
Prior to the termination of its Subchapter S election in June 1995, the Company
distributed approximately $8.0 million of its accounts receivable to its S
Corporation shareholders. In addition, during the first half of 1995, the
Company made distributions to shareholders totaling $750,000 for the anticipated
tax applicable to the S Corporation earnings. Prior to the termination of the S
Corporation election, it was determined that the $750,000 was not needed for
such income taxes and the shareholders returned the distributions by
contributing capital to the Company.
Seasonality
The Company's business follows the seasonal trends of its customers' business
which are, in turn, affected by the climate in the states in which the customers
do business. The Company usually experiences higher revenues in its third
quarter because of increased hiring of temporary staffing employees to replace
student workers who return to school in August and September, favorable weather
conditions and higher overall economic activity. Historically, the Company has
experienced lower revenues in the first quarter due to unfavorable weather
conditions and lower overall economic activity; however, as the Company expands
its office network to include western states with more moderate climates, the
Company may experience less impact from unfavorable weather conditions.
Impact of Inflation
The Company believes that over the past three years inflation has not had a
significant impact on the Company's results of operations.
9
<PAGE>
<TABLE>
CONSOLIDATED BALANCE SHEETS
As of December 29, 1996 and December 31, 1995
<CAPTION>
1996 1995
-----------------------------------------------
ASSETS
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 5,784,651 $ 2,717,389
Accounts receivable, less allowances of
$459,000 and $142,600, respectively 19,114,117 9,784,022
Current portion of workers' compensation deposit 610,473 568,658
Prepaid expenses and other 305,151 191,616
Deferred tax asset 661,645 61,803
Amounts due from related parties 406,376 460,897
-----------------------------------------------
Total current assets 26,882,413 13,784,385
-----------------------------------------------
PROPERTY AND EQUIPMENT, at cost:
Computer equipment 1,399,408 1,011,363
Office equipment 1,860,421 1,087,262
Leasehold improvements and other 969,208 789,633
-----------------------------------------------
4,229,037 2,888,258
Less accumulated depreciation and amortization (2,096,556) (1,267,233)
-----------------------------------------------
Total property and equipment, net 2,132,481 1,621,025
-----------------------------------------------
OTHER ASSETS:
Workers' compensation deposit, less current portion 106,369 142,164
Intangible assets, less accumulated amortization of
$457,400 and $50,800, respectively 17,798,588 3,582,924
Deposits and other assets 372,973 196,850
-----------------------------------------------
Total other assets 18,277,930 3,921,938
-----------------------------------------------
Total assets $ 47,292,824 $ 19,327,348
-----------------------------------------------
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
10
<PAGE>
<TABLE>
<CAPTION>
1996 1995
-----------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
<S> <C> <C>
Note payable $ - $ 1,450,000
Accounts payable 600,504 126,349
Accrued payroll costs 2,110,554 1,275,617
Current portion of workers' compensation reserve 1,501,669 735,799
Accrued liabilities 408,027 134,295
Income taxes payable 466,726 74,576
Accrued acquisition earnouts 4,782,689 343,066
-----------------------------------------
Total current liabilities 9,870,169 4,139,702
-----------------------------------------
WORKERS' COMPENSATION RESERVE,
less current portion 375,418 183,950
-----------------------------------------
DEFERRED INCOME TAX LIABILITY 213,056 336,155
-----------------------------------------
COMMITMENTS AND CONTINGENCIES
(Notes 2, 3, and 5)
SHAREHOLDERS' EQUITY:
Common stock $0.01 par value; 20,000,000 shares
authorized; 8,706,020 and 6,700,000 shares
issued and outstanding, respectively 87,060 67,000
Additional paid-in capital 31,216,917 13,099,497
Retained earnings 5,530,204 1,501,044
-----------------------------------------
Total shareholders' equity 36,834,181 14,667,541
-----------------------------------------
Total liabilities and shareholders' equity $ 47,292,824 $ 19,327,348
-----------------------------------------
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
11
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF INCOME
For the Fiscal Years Ended December 29, 1996, December 31, 1995 and January 1, 1995
<CAPTION>
Fiscal Year (52 Weeks) Ended
1996 1995 1994
-----------------------------------------------------------------------
<S> <C> <C> <C>
SERVICE REVENUES $ 136,163,973 $ 87,532,903 $ 63,739,807
DIRECT COSTS OF SERVICES 108,589,322 69,353,212 51,322,089
-----------------------------------------------------------------------
Gross profit 27,574,651 18,179,691 12,417,718
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 20,867,359 13,858,600 10,045,998
-----------------------------------------------------------------------
INCOME FROM OPERATIONS 6,707,292 4,321,091 2,371,720
-----------------------------------------------------------------------
OTHER INCOME (EXPENSE):
Interest expense (301,207) (145,646) (35,492)
Interest income 90,793 109,684 27,041
Other, net 13,695 120,604 64,118
-----------------------------------------------------------------------
Total, net (196,719) 84,642 55,667
-----------------------------------------------------------------------
INCOME BEFORE PROVISION
FOR INCOME TAXES 6,510,573 4,405,733 2,427,387
PROVISION FOR INCOME TAXES (2,481,413) (1,465,791) -
-----------------------------------------------------------------------
NET INCOME $ 4,029,160 $ 2,939,942 $ 2,427,387
-----------------------------------------------------------------------
UNAUDITED PRO FORMA INFORMATION (Note 8):
Income before pro forma adjustments $ 4,029,160 $ 2,939,942 $ 2,427,387
Compensation adjustment - - 786,840
Income taxes adjustment - (262,862) (1,228,160)
-----------------------------------------------------------------------
PRO FORMA NET INCOME $ 4,029,160 $ 2,677,080 $ 1,986,067
-----------------------------------------------------------------------
PRO FORMA NET INCOME
PER COMMON SHARE $ 0.59 $ 0.43 $ 0.35
-----------------------------------------------------------------------
PRO FORMA WEIGHTED AVERAGE
COMMON SHARES OUTSTANDING 6,838,479 6,229,021 5,730,769
-----------------------------------------------------------------------
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
12
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<CAPTION>
Additional
Common Stock Paid-in Retained
Shares Amount Capital Earnings Total
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE, January 2, 1994 4,500,000 $ 45,000 $ - $ 5,125,890 $ 5,170,890
Distributions to shareholders - - - (500,000) (500,000)
Net income - - - 2,427,387 2,427,387
-----------------------------------------------------------------------------
BALANCE, January 1, 1995 4,500,000 45,000 - 7,053,277 7,098,277
Distributions to shareholders - - - (8,750,023) (8,750,023)
Contributions from shareholders - - - 750,000 750,000
Change in tax status - - 492,152 (492,152) -
Sale of common stock, net 2,200,000 22,000 12,607,345 - 12,629,345
Net income - - - 2,939,942 2,939,942
-----------------------------------------------------------------------------
BALANCE, December 31, 1995 6,700,000 67,000 13,099,497 1,501,044 14,667,541
Exercise of stock options 6,020 60 39,070 - 39,130
Sale of common stock, net 2,000,000 20,000 18,078,350 - 18,098,350
Net income - - - 4,029,160 4,029,160
-----------------------------------------------------------------------------
BALANCE, December 29, 1996 8,706,020 $ 87,060 $ 31,216,917 $ 5,530,204 $ 36,834,181
-----------------------------------------------------------------------------
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
13
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Fiscal Years Ended December 29, 1996, December 31, 1995 and January 1,
1995
Increase (Decrease) in Cash and Cash Equivalents
<TABLE>
<CAPTION>
Fiscal Years (52/53 Weeks) Ended
---------------------------------------------------
1996 1995 1994
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income` $ 4,029,160 $ 2,939,942 $ 2,427,387
Adjustments to reconcile net income
to net cash (used in) provided by operating
activities:
Depreciation and amortization 854,902 374,114 184,652
Deferred income taxes (825,941) 274,352 -
Loss on disposition of assets 63,030 3,554 -
Changes in operating assets and liabilities:
Accounts receivable, net (8,785,524) (10,740,788) (1,712,236)
Workers' compensation deposit (6,021) 1,277,178 (886,000)
Prepaid expenses and other (127,943) (128,033) (29,583)
Amounts due from related parties 54,521 (445,881) (2,112)
Deposits and other assets (84,969) 7,667 (82,527)
Accounts payable 391,177 29,742 65,705
Accrued payroll costs 529,247 685,683 (200,741)
Workers' compensation reserve 957,338 (35,989) 325,883
Accrued liabilities 219,439 57,650 47,109
Income taxes payable 301,961 74,576 -
---------------------------------------------------
Net cash (used in) provided by operating activities (2,429,623) (5,626,233) 137,537
---------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for acquisitions of businesses (10,162,026) (1,340,707) (125,000)
Principal payment of note related to acquisition (1,450,000) - -
Purchase of property and equipment (683,889) (684,092) (709,144)
Payments on acquisition earnouts (239,139) (29,800) -
Deposits related to acquisition of certain assets - 236,078 (206,278)
Proceeds from sale of property and equipment - - 7,247
---------------------------------------------------
Net cash used in investing activities (12,535,054) (1,818,521) (1,033,175)
---------------------------------------------------
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
14
<PAGE>
<TABLE>
<CAPTION>
Fiscal Years (52/53 Weeks) Ended
1996 1995 1994
----------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
<S> <C> <C> <C>
Proceeds from issuance of common stock, net $ 18,098,350 $ 12,629,345 $ -
Proceeds from exercise of employee stock options 39,130 - -
Net (repayments) borrowings on line of credit - (2,530,251) 1,724,150
Proceeds from long-term debt 11,000,000 - -
Principal payments on long-term debt (11,105,541) (550,000) -
Capital contribution from shareholders - 750,000 -
Distributions to shareholders - (750,000) (500,000)
----------------------------------------------------
Net cash provided by financing activities 18,031,939 9,549,094 1,224,150
----------------------------------------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 3,067,262 2,104,340 328,512
CASH AND CASH EQUIVALENTS
AT BEGINNING OF YEAR 2,717,389 613,049 284,537
----------------------------------------------------
CASH AND CASH EQUIVALENTS
AT END OF YEAR $ 5,784,651 $ 2,717,389 $ 613,049
----------------------------------------------------
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 280,018 $ 134,917 $ 28,636
Income taxes 2,902,393 1,117,214 -
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
The following table sets forth information relating to the
Company's acquisitions of certain businesses (see Note 3):
Fair value of assets acquired $ 14,980,167 $ 3,433,773 $ 375,000
Liabilities assumed 139,379 - -
Notes payable issued in connection with acquisition - 1,750,000 250,000
Accrued acquisition earnouts 4,678,762 343,066 -
During fiscal year 1995, the Company distributed approximately
$8.0 million of its accounts receivable to its S Corporation
shareholders (see Note 7).
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
15
<PAGE>
(1) Nature of Operations
SOS Staffing Services, Inc. and subsidiaries (collectively the "Company:) is a
regional provider of temporary staffing services in the Western States (Utah,
Colorado, Idaho, Wyoming, Arizona, Nevada, New Mexico, California, Oregon, Texas
and Montana). The Company provides clerical, light industrial, industrial,
technical and professional staffing employees to various businesses,
professional and service organizations and government agencies through its
network of 87 offices. A majority of the Company's business results from its
offices in Utah and Colorado.
(2) Summary of Significant Accounting Policies
Fiscal Year - The Company's fiscal year ends on the Sunday closest to December
31, which results in a 52- or 53-week year. The fiscal years ended December 29,
1996 (fiscal 1996), December 31, 1995 (fiscal 1995), and January 1, 1995 (fiscal
1994) each contained 52 weeks.
Principles of Consolidation - The consolidated financial statements include the
accounts of SOS Staffing Services, Inc. and its wholly owned subsidiaries, SOS
Collection Services, Inc. (d.b.a. National Collex Corporation) and Wolfe &
Associates, Inc. All significant intercompany transactions have been eliminated
in consolidation.
Use of Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reported
periods. Actual results could differ from those estimates.
Revenue Recognition - Service revenues are recognized at the time staffing
services are provided.
Cash and Cash Equivalents - The Company considers highly liquid investments with
an original maturity of three months or less to be cash and cash equivalents. As
of December 29, 1996, included in cash and cash equivalents was a money market
account of approximately $4,007,000 with an investment company.
Property and Equipment - Property and equipment are stated at cost and
depreciated using the straight-line method over their estimated useful lives.
Leasehold improvements are amortized over the terms of the respective leases or
the estimated economic lives of the assets, whichever is shorter. The
depreciation and amortization periods are as follows:
Computer equipment 2 - 5 years
Office equipment 3 - 7 years
Leasehold improvements and other 5 - 17 years
Upon retirement or other disposition of property and equipment, the cost and
related accumulated depreciation and amortization are removed from the accounts.
The resulting gain or loss is reflected in income. Major renewals and
betterments are capitalized while minor expenditures for maintenance and repairs
are charged to expense as incurred.
Workers' Compensation - Effective January 1, 1996, the Company entered into a
workers' compensation insurance arrangement with CIGNA Property and Casualty
("CIGNA"). The policy is a deductible arrangement with coverage for losses over
$200,000 per occurrence. Under the terms of the agreement, the Company is
required to fund into a deposit account, an amount for payment of claims. The
fund is replenished monthly based on actual payments made by CIGNA during the
previous month.
For the fiscal year ended December 31, 1995, the Company had a paid loss retro
workers' compensation insurance arrangement with a unit of American
International Group, Inc. ("AIG"). All of the Company's business divisions were
insured by AIG for losses over $250,000 per occurrence, except with respect to
certain divisions which are covered by a separate policy providing coverage for
losses over $100,000 per occurrence. Under the terms of the arrangement, the
Company was required to fund an estimated premium amount into a deposit account
from which claims are paid. AIG is required to refund to the Company 60 percent
of the unused deposit account balance six months following the policy year with
the remaining balance to be refunded evenly over the succeeding four years.
The Company has established reserve amounts based upon information provided by
CIGNA and AIG as to the status of claims plus development factors for incurred
but not yet reported claims and anticipated future changes in underlying case
reserves. Such reserve amounts are only estimates and there can be no assurance
that the Company's future workers' compensation obligations will not exceed the
amount of its reserves. However, management believes that the difference between
the amounts recorded for its estimated liability and the costs of settling the
actual claims, will not be material to the results of operations.
16
<PAGE>
Intangible Assets - Intangible assets consist of the following amounts as of
December 29, 1996 and December 31, 1995:
1996 1995
-----------------------------------
Goodwill $ 16,648,361 $ 3,385,379
Non-compete agreements 1,393,187 232,687
Employee and customer lists 214,435 15,435
-----------------------------------
Total 18,255,983 3,633,501
Less accumulated amortization (457,395) (50,577)
-----------------------------------
$ 17,798,588 $ 3,582,924
-----------------------------------
Goodwill is amortized using the straight-line method over 30 years. The
non-compete agreements and employee and customer lists and are being amortized
using the straight-line method over three to six years.
Accounting for the Impairment of Long-Lived Assets - The Company accounts for
impairment of long-lived assets in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of", which was issued
in March 1995. SFAS No. 121 requires that long-lived assets be reviewed for
impairment whenever events or changes in circumstances indicate that the book
value of the asset may not be recoverable. The Company evaluates at each balance
sheet date whether events and circumstances have occurred that indicate possible
impairment. In accordance with SFAS No. 121, the Company uses an estimate of the
future undiscounted net cash flows of the related asset over the remaining life
in measuring whether the assets are recoverable. The adoption of SFAS No. 121
did not have a material impact on the Company's 1996 financial position or
results of operations.
Income Taxes - The Company recognizes deferred tax assets or liabilities for
expected future tax consequences of events that have been recognized in the
financial statements or tax returns. Under this method, deferred tax assets or
liabilities are determined based upon the difference between the financial and
income tax bases of assets and liabilities using enacted tax rates expected to
apply when differences are expected to be settled or realized.
Prior to June 26, 1995, the Company had elected for federal and state income tax
purposes to include its taxable income with that of its shareholders (an S
Corporation election). Accordingly, the Company had no provision for income
taxes in its financial statements.
Net Income Per Common Share - Net income per common share is computed using the
weighted average number of common and common equivalent shares outstanding
during the year. Common equivalent shares consist of the Company's common stock
issuable upon exercise of stock options, determined using the treasury stock
method.
Stock Split and Authorized Common Stock - In connection with the Company's
initial public offering in July 1995, the Board of Directors and shareholders
approved a 225 for 1 stock split and a change in the authorized common stock to
20,000,000 shares at $0.01 par value per share. This stock split has been
retroactively reflected in the consolidated financial statements.
Concentrations of Credit Risk - The Company's financial instruments that
potentially subject the Company to concentrations of credit risk consist
principally of cash and trade receivables. In the normal course of business, the
Company provides credit terms to its customers. The Company believes its
portfolio of accounts receivable is well diversified and as a result its
concentrations of credit risk are minimal. The Company performs ongoing credit
evaluations of its customers and maintains allowances for possible losses, but
typically does not require collateral.
(3) Acquisitions
All of the Company's acquisitions have been accounted for using the purchase
method. Certain acquisitions have contingent earnout components of the purchase
price. Earnout amounts accrued increase the amount of goodwill related to the
acquisition.
PAMS Temporary Employment Service, Inc. and National Collex Corporation - In
December 1995, the Company purchased certain assets and substantially all of the
business of PAMS Temporary Employment Service, Inc., and National Collex
Corporation ("PAMS") with operations in Phoenix and Tucson, Arizona. The
purchase price was $1,850,000 plus contingent future earnout payments up to a
maximum of $1,650,000. During 1995 cash of $400,000 was paid and the Company
entered into a promissory note of $1,450,000 which was paid in full in January
1996. The earnout payments are made monthly based upon the achievement of
certain net operating results. The excess of the initial purchase price
(excluding earnouts) over the estimated fair value of the acquired tangible
assets was approximately $1,804,000 and $1,734,000 has been allocated to
goodwill and $70,000 has been allocated to other intangible assets.
17
<PAGE>
Abacus Consulting Group, Inc., Abacus Consultants, Inc., The Performance
Professionals, Inc. - In July 1996, the Company purchased certain assets and
substantially all the business of Abacus Consulting Group, Inc., Abacus
Consultants, Inc., and The Performance Professionals, Inc. ("The Performance
Group") for approximately $3,325,000 and contingent future earnouts up to a
maximum of $1,775,000. The excess of the initial purchase price (excluding
earnouts) over the estimated fair value of the acquired tangible assets was
approximately $3,305,000, of which approximately $2,983,000 has been allocated
to goodwill and approximately $322,000 has been allocated to other intangible
assets.
Wolfe & Associates, Inc. - In November 1996, the Company purchased the stock of
Wolfe & Associates, Inc. ("Wolfe") for approximately $4,000,000 plus contingent
future earnouts up to a maximum of $6,000,000. The excess of the initial
purchase price (excluding earnouts) over the estimated fair value of the
acquired assets less liabilities assumed was approximately $4,044,000, of which
approximately $3,644,000 has been allocated to goodwill and approximately
$400,000 has been allocated to other intangible assets.
Other Businesses Acquired - During fiscal year 1994, the Company purchased
certain assets of a company principally owned by the adult children of certain
shareholders of the Company in exchange for $125,000 in cash and an unsecured
note payable of $250,000 which was paid in full during fiscal year 1995. The
excess of the purchase price over the estimated fair value of the acquired
tangible assets was approximately $286,000, of which all has been allocated to
goodwill.
During fiscal year 1995, the Company acquired certain assets and substantially
all of the operations of six businesses excluding PAMS. The aggregate purchase
price was approximately $1,166,000 and aggregate contingent future earnouts up
to a maximum of approximately $210,000. The excess of the initial aggregate
purchase price (excluding earnouts) over the estimated fair value of the
acquired tangible net assets was approximately $1,107,000, of which $929,000 has
been allocated to goodwill and $178,000 has been allocated to other intangible
assets.
During fiscal year 1996, the Company acquired certain assets and substantially
all of the operations of fourteen businesses excluding The Performance Group and
Wolfe. The aggregate purchase price was approximately $2,545,000 and aggregate
contingent future earnouts up to a maximum of approximately $3,030,000. The
excess of the initial purchase price (excluding earnouts) over the estimated
fair value of the acquired tangible net assets was approximately $2,381,000, of
which $1,744,000 has been allocated to goodwill and $637,000 has been allocated
to other intangible assets.
Earnouts and Acquisition Costs - During fiscal years 1996 and 1995, the Company
paid earnouts totaling $239,139 and $29,800, respectively. As of December 29,
1996 and December 31, 1995, accrued acquisition earnouts totaled $4,782,689 and
$343,066, respectively.
During fiscal years 1996 and 1995, the Company incurred direct acquisition costs
totaling $257,932 and $19,429, respectively, which have been accounted for as
part of the purchase price.
Pro Forma Acquisition Information-Unaudited - The unaudited pro forma
acquisition information for fiscal years 1996 and 1995 presents the results of
operations as if the 1996 and 1995 acquisitions had occurred at the beginning of
fiscal 1995. The results of operations give effect to certain adjustments,
including amortization of intangible assets and interest expense on acquisition
debt. The pro forma results have been prepared for comparative purposes only and
do not purport to be indicative of what would have occurred had the acquisitions
been made at the beginning of the applicable periods as described above or of
the results which may occur in the future.ng of the applicable periods as
described above or of the results which may occur in the future.
Unaudited Pro Forma Results of Operations
(in thousands, except per share data)
1996 1995
---------------------------
Service revenues $150,146 $114,416
Income from operations 6,703 4,698
Net income 3,639 2,438
Net income per common share $ 0.53 $ 0.36
18
<PAGE>
(4) Line of Credit
The Company entered into a secured revolving credit agreement dated as of July
11, 1996 with certain banks. The agreement provides for a maximum commitment of
$20,000,000 to be used for working capital needs and to fund acquisitions. The
commitment expires in July 1999, at which time outstanding borrowings are due
and payable. Borrowings under the agreement are secured by substantially all of
the assets of the Company. The agreement contains a commitment fee of
three-eighths of one percent on the unused portion which is payable quarterly.
As of December 29, 1996, no loans were outstanding under the agreement. The
Company also had letters of credit of $3.7 million outstanding at December 29,
1996 for purposes of securing its workers' compensation premium obligation. The
aggregate amount of such letters of credit, which cannot exceed $7.0 million,
reduces the borrowing availability on the credit line. At December 29, 1996,
$16.3 million was available for borrowings or letters of credit under the
agreement.
The agreement contains certain restrictive covenants including maintenance of a
minimum tangible net worth and restrictions on the amount of capital
expenditures. As of December 29, 1996, the Company was in compliance with the
covenants.
(5) Commitments and Contingencies
Noncancelable Operating Leases - The Company leases office facilities under
noncancelable operating leases. Management expects that, in the normal course of
business, leases that expire will be renewed or replaced by other leases. The
Company leases certain of these facilities from a related party (see Note 12).
Future minimum lease payments under noncancelable operating leases are as
follows:
Fiscal Years Ending
1997 $ 1,298,200
1998 1,046,583
1999 791,565
2000 456,616
2001 162,700
Thereafter 237,843
-------------
$ 3,993,507
-------------
Facility rental expense for the fiscal years 1996, 1995 and 1994 totaled
approximately $1,110,000, $649,000 and $405,000, respectively.
Legal Matters - In February 1996, a former employee of the Company filed a
wrongful termination lawsuit against the Company in Third District Court, Salt
Lake County, State of Utah. The complainant seeks compensatory damages of $4.5
million and punitive damages of $4.0 million. Subsequent to year end, the court
entered a final order dismissing the case. However, until May 5, 1997, the
plaintiff may appeal or ask the court to set aside the dismissal. The Company
does not believe there is sufficient basis for any such action to be successful.
From time to time the Company is involved in legal matters generally incident to
its business. It is the opinion of management, after discussions with legal
counsel, that the ultimate dispositions of these matters will not have a
material impact on the financial condition, liquidity or results of operations
of the Company.
(6) Public Offerings
In December 1996, the Company completed a secondary public offering and issued 2
million shares of common stock. The proceeds received from the offering, net of
underwriting commissions and offering costs, totaled approximately $18,098,000.
In July 1995, the Company completed an initial public offering and issued 2.2
million shares of common stock. The proceeds received from the offering, net of
underwriting commissions and offering costs, totaled approximately $12,629,000.
(7) Distributions to Shareholders
During fiscal year 1995, the Company distributed approximately $8.0 million of
its accounts receivable to its S Corporation shareholders. This distribution
increased the taxable income of the Company, the tax on which was payable by the
S Corporation shareholders. In addition, the Company made distributions to
shareholders totaling $750,000 for the anticipated tax applicable to the S
Corporation earnings. Prior to the termination of the S Corporation election, it
was determined that the $750,000 was not needed for such income taxes and the
shareholders returned the distributions by contributing capital to the Company.
19
<PAGE>
(8) Pro Forma Unaudited Statement of Income Information
Prior to July 1995, the Company compensated the Chief Executive Officer ("CEO")
at levels sufficient to pay income taxes associated with the Company's S
Corporation status. CEO compensation for fiscal year 1994 was $982,000.
Effective January 1995, the Company entered into a three-year employment
contract with the CEO which included annual compensation of $195,000. A net pro
forma compensation adjustment has been made for fiscal year 1994 which had the
effect of placing the compensation at the $195,000 annual level.
The pro forma income taxes adjustment for fiscal years 1995 and 1994 has been
determined assuming the Company had been taxed as a C Corporation for federal
and state income tax purposes, after giving effect to the compensation
adjustment as described above.
The pro forma weighted average common shares outstanding reflects the effect of
the issuance of 1,230,769 shares at the initial public offering price of $6.50
per share, as if the accounts receivable distribution of $8.0 million (see Note
7) had occurred at the beginning of 1994.
(9) Income Taxes
Effective June 26, 1995, the Company's S Corporation election was terminated. In
accordance with SFAS No. 109, the Company recorded a net deferred tax liability
and the related deferred tax provision of $445,000 for the tax effect of the
differences between financial statement and income tax bases of assets and
liabilities that existed at the termination date of the S Corporation election.
The components of the provision for income taxes for fiscal year 1996 and the
period in fiscal 1995 since the termination of the S Corporation status are as
follows:
1996 1995
----------------------------------
Current provision-
Federal $ 2,859,353 $ 1,030,662
State 448,001 160,777
----------------------------------
3,307,354 1,191,439
----------------------------------
Deferred provision (benefit)-
Federal (714,062) (152,956)
State (111,879) (17,692)
Change from S Corporation status - 445,000
----------------------------------
(825,941) 274,352
----------------------------------
Total provision
for income taxes $ 2,481,413 $ 1,465,791
----------------------------------
The following is a reconciliation between the statutory federal income tax rate
and the Company's effective income tax rate which is derived by dividing the
provision for income taxes by income before provision for income taxes for the
fiscal years 1996 and 1995:
1996 1995
----------------------
Statutory federal income
tax rate 34.0% 34.0%
State income taxes,
net of federal benefit 3.4 3.3
Change from S Corporation status - (4.5)
Other 0.7 0.5
----------------------
38.1% 33.3%
----------------------
20
<PAGE>
<TABLE>
The components of the deferred tax assets and liabilities at December 29, 1996
and December 31, 1995 are as follows:
<CAPTION>
1996 1995
-----------------------------------------
Deferred income tax assets
<S> <C> <C>
Workers' compensation reserves $ 713,293 $ 349,505
Allowance for doubtful accounts 200,336 54,203
Other 148,822 9,690
-----------------------------------------
1,062,451 413,398
-----------------------------------------
Deferred income tax liabilities
Cash to accrual adjustments (559,360) (645,248)
Depreciation (37,758) (26,648)
Other (16,744) (15,854)
-----------------------------------------
(613,862) (687,750)
-----------------------------------------
Net deferred income tax asset/(liability) $ 448,589 $ (274,352)
-----------------------------------------
Balance sheet classification 1996 1995
-----------------------------------------
Current asset $ 661,645 $ 61,803
Long-term liability (213,056) (336,155)
-----------------------------------------
$ 448,589 $ (274,352)
-----------------------------------------
</TABLE>
(10) Stock-Based Compensation
As of December 29, 1996, the Company has a stock incentive plan which is
described below. The Company applies Accounting Principles Board ("APB") Opinion
No. 25 and related interpretations in accounting for its plan. SFAS No. 123,
"Accounting for Stock-Based Compensation" was issued during 1995. If fully
adopted, SFAS No. 123 changes the method for recognition of cost on plans
similar to those of the Company. Adoption of this standard is optional; however,
pro forma disclosures had compensation cost for the Company's 1995 and 1996
grants for stock-based compensation plans been determined consistent with SFAS
No. 123, the Company's net income and net income per common share for 1996 and
1995 would approximate the pro forma amounts below (in thousands except per
share data):
1996 1995
-------------------------------
Net income
As reported $ 4,029 $ 2,677
-------------------------------
Pro forma $ 3,735 $ 2,563
-------------------------------
Net income per common share
As reported $ 0.59 $ 0.43
-------------------------------
Pro forma $ 0.55 $ 0.41
-------------------------------
Because the SFAS No. 123 method of accounting has not been applied to options
granted prior to January 1, 1996, and due to the nature and timing of the option
grants, the resulting pro forma compensation cost may not be indicative of
future years.
Stock Price - The fair value of each option grant has been estimated on the
grant date using the Black-Scholes option-pricing model with the following
assumptions used for grants in 1996 and 1995, in calculating compensation cost:
expected stock price volatility of 47 percent for both years, an average
risk-free interest rate of 6.2 percent, and an expected life of five years for
director options and seven years for employee options for both 1996 and 1995.
Stock Incentive Plan - The Company established a stock incentive plan (the
"Plan"). The Plan provides for the issuance of a maximum of 400,000 shares of
common stock to officers, directors, consultants and other key employees.
Subsequent to year end, the Board of Directors of the Company approved a
resolution amending the Stock Option Plan to increase the number of shares
available for option grants by 400,000 shares (see Note 13). The Plan allows for
the grant of incentive or nonqualified options, stock appreciation rights,
restricted shares of common stock or stock units and is administered by the
21
<PAGE>
Board of Directors. Incentive options and nonqualified options are granted at
not less than 100 percent of the fair market value of the underlying common
stock on the date of grant. The Board of Directors determines the number, type
of award and terms and conditions, including any vesting conditions. For fiscal
1996 and 1995 only incentive and nonqualified options had been granted under the
Plan. Employee stock options generally vest 20 percent at the date of grant and
16 percent on each of the next five anniversaries thereafter. Director options
generally vest 20 percent at the date of grant and 20 percent on each of the
next four anniversaries thereafter. The Plan also provides for an annual grant
to non-employee directors of 1,000 options which are immediately exercisable on
the date of grant of which a total of 4,000 options had been granted as of
December 29, 1996. Stock options granted to employees expire no later than ten
years from the date of grant and stock options granted to directors expire no
later than five years from the date of grant.
A summary of the stock option activity is as follows:
<TABLE>
<CAPTION>
Weighted
Avg. Exercise
Price Per
Employees Directors Share
------------------------------------------
<S> <C> <C> <C>
Outstanding at January 1, 1995 - - -
Granted 129,000 20,000 $6.50
Exercised - - -
Forfeited - - -
------------------------------------------
Outstanding at December 31, 1995 129,000 20,000 6.50
Granted 132,200 24,000 10.36
Exercised (5,020) (1,000) 6.50
Forfeited (7,040) - 6.50
------------------------------------------
Outstanding at December 29, 1996 249,140 43,000 $8.68
------------------------------------------
Exercisable at December 29, 1996 66,580 15,000 $8.37
------------------------------------------
</TABLE>
The weighted average fair value of options granted was $5.91 and $3.82 for
grants made during fiscal years 1996 and 1995, respectively. At December 29,
1996, 233,140 of the 292,140 options outstanding have exercise prices between
$6.50 and $9.75, with a weighted average exercise price of $7.92 and a weighted
average remaining contractual life of 8.6 years; 66,580 of these options are
exercisable with a weighted average exercise price of $7.58. The remaining
59,000 options have exercise prices between $10.88 and $12.50, with a weighted
average exercise price of $11.69 and a weighted average remaining contractual
life of 7.6 years; 15,000 of these options are exercisable with a weighted
average exercise price of $11.87.
(11) Employee Benefit Plan
The Company has a 401(k) defined contribution plan. Employee contributions may
be invested in several alternatives. Company contributions to the plan,
including matching contributions, may be made at the discretion of the Company.
The Company's contributions to the plan were approximately $48,000, $30,000 and
$15,000 for the fiscal years 1996, 1995 and 1994, respectively.
(12) Related Party Transactions
During fiscal years 1994, Temporary Services, Inc. ("TSI") paid the Company
$30,500 for management services. In addition, the Company received interest
payments of approximately $19,600 from TSI in fiscal 1994 and guaranteed TSI's
note payable to a bank which note was paid in full by TSI during fiscal 1995.
TSI of Utah, Inc. ("TSIU"), a company incorporated by an adult son of the
Company's majority shareholders, which provides industrial temporary staffing
services has entered into a franchise agreement with the Company to use the TSI
name. Under the franchise agreement, the Company has agreed to fund employee
costs and collect customer billings on behalf of TSIU. The Company receives a
service fee based upon a percentage of TSIU's gross profit. As of December 29,
1996 and December 31, 1995, the Company had receivables due from TSIU of
approximately $462,370 and $460,900, respectively, which are secured by
outstanding receivables of TSIU of approximately $472,000 and $479,000,
respectively. During fiscal years 1996, 1995 and 1994 the Company recorded
service fee revenues of approximately $126,000, $43,000, and $5,400
respectively, relating to the agreement. The Company believes that the terms of
the franchise agreement are at least as favorable as the terms that could have
been obtained from an unaffiliated third party in a similar transaction.
During fiscal year 1994 and part of fiscal year 1995, the Company rented certain
office space on a month-to-month basis from a limited partnership owned
primarily by certain shareholders of the Company and their adult children.
During fiscal years 1995 and 1994, the Company paid rent of $8,400 and $14,400,
respectively.
22
<PAGE>
The Company leases its corporate office building from the adult children of
certain majority shareholders under a ten-year lease agreement with an option to
renew for ten additional years. Rental expense during fiscal 1996, 1995 and 1994
amounted to approximately $76,800, $64,800 and $45,900, respectively. Future
minimum lease payments related to this lease will amount to approximately
$77,000 each fiscal year. The Company believes that the terms of the lease are
at least as favorable as the terms that could have been obtained from an
unaffiliated third party in a similar transaction.
As of December 29, 1996, the Company had a note receivable due from an employee
and officer of one of its subsidiaries in the amount of approximately $91,100.
The note is unsecured, accrues interest at ten percent per annum and is due on
demand. The note receivable is included in other long-term assets in the
accompanying consolidated balance sheet.
The Company has a consulting agreement with a member of the Board of Directors
to assist and advise the Company with respect to identifying and evaluating
potential acquisitions. The agreement may be terminated by either party upon 30
days notice. Compensation under the agreement is $3,500 per month which includes
the $1,000 per Board meeting fee otherwise payable. For the fiscal years 1996
and 1995, consulting expense was $42,000 and $21,000, respectively.
(13) Subsequent Events
Computer Group Inc. - Subsequent to year end, the Company purchased the stock of
Computer Group, Inc. (Seattle, Wash.) for approximately $2.7 million plus future
contingent earnouts. The Company intends to account for this acquisition as a
purchase.
Overallotment Option - In connection with the Company's secondary public
offering completed in December 1996, the underwriters exercised their
overallotment option to purchase 330,000 common shares in January 1997. The
Company received net proceeds of approximately $3.0 million (see Note 6).
Increase in Stock Options - Subsequent to year end, the Board of Directors of
the Company approved a resolution amending the Stock Option Plan to increase the
number of shares available for option grants by 400,000 shares. The increase in
shares available for option grants is subject to shareholder approval at the
Annual Meeting of Shareholders.
(14) Selected Quarterly Financial Data (Unaudited)
A summary of quarterly financial information for fiscal years 1996, 1995 and
1994 is as follows (dollars in thousands except per share data):
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------------------------------------------------------------------
1996
<S> <C> <C> <C> <C>
Service revenues $ 25,034 $ 29,954 $ 37,846 $ 43,330
Gross profit 5,241 6,104 7,754 8,476
Net income 729 890 1,328 1,082
Net income per common share $ 0.11 $ 0.13 $ 0.20 $ 0.15
1995
Service revenues $ 19,573 $ 20,510 $ 23,251 $ 24,199
Gross profit 4,023 4,265 4,908 4,984
Net income 1,080 359 917 584
Pro forma net income 664 512 917 584
Pro forma net income
per common share $ 0.12 $ 0.09 $ 0.14 $ 0.09
1994
Service revenues $ 12,951 $ 14,285 $ 18,105 $ 18,399
Gross profit 2,345 2,719 3,634 3,720
Net income 473 433 979 542
Pro forma net income 310 391 773 512
Pro forma net income
per common share $ 0.05 $ 0.07 $ 0.13 $ 0.09
</TABLE>
23
<PAGE>
To SOS Staffing Services, Inc.:
We have audited the accompanying consolidated balance sheets of SOS Staffing
Services, Inc. (a Utah Corporation) and subsidiaries as of December 29, 1996 and
December 31, 1995, and the related consolidated statements of income,
shareholders' equity and cash flows for each of three fiscal years in the period
ended December 29, 1996. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of SOS Staffing
Services, Inc. and subsidiaries as of December 29, 1996 and December 31, 1995,
and the results of their operations and their cash flows for each of the three
fiscal years in the period ended December 29, 1996 in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Salt Lake City, Utah
January 28, 1997
24
<PAGE>
Directors & Officers
Stanley R. de Waal(1)
Director
President, DeWaal Keeler & Co., P.C.
Salt Lake City, Utah
Richard D. Reinhold
Chairman of the Board
Chief Executive Officer
R. Thayne Robson(1,2)
Director
Professor of Management and
Research & Professor of Economics,
University of Utah
Salt Lake City, Utah
Randolph K. Rolf(2)
Director
Chief Executive Officer,
Unitog Company
Kansas City, Missouri
Howard W. Scott, Jr.
Director
President & Chief Operating Officer
Richard J. Tripp
Director
Senior Vice President,
Administration
JoAnn W. Wagner(1,2)
Director
Business Consultant
Denver, Colorado
Gary B. Crook
Vice President, Chief Financial Officer
& Treasurer
W. B. Collings
Controller & Assistant Secretary
John K. Morrison
General Counsel & Secretary
(1) Member, Audit Committee
(2) Member, Compensation Committee
Shareholder Information
Corporate Information
Shareholder inquiries should be directed to:
Investor Relations
SOS Staffing Services, Inc.
1415 South Main Street
Salt Lake City, Utah 84115
Telephone: (801) 484-4400
www.sosstaffing.com
email: [email protected]
Transfer Agent and Registrar
First Security Bank, N.A.
Stock Transfer Services
79 South Main Street
Salt Lake City, Utah 84111
Telephone: (801) 246-5292
Independent Accountants
Arthur Andersen LLP
36 South State Street
Suite 1260
Salt Lake City, Utah 84111
Telephone: (801) 533-0820
Stock Listing
SOS Staffing Services, Inc.'s common stock is traded on the Nasdaq National
Market tier of The Nasdaq Stock Market under the Symbol: "SOSS". The stock table
abbreviation is "SOS Stffg".
Common Stock Data
SOS Staffing Services, Inc. completed its initial public offering of common
stock in July 1995. As of March 3, 1997, the Company had 73 stockholders of
record. Based upon shareholder mailings, the Company believes that there are in
excess of 2,000 shareholders of beneficial interest.
The following table sets forth the high and low sales prices of the Company's
common stock, beginning June 28, 1995, for the periods indicated:
High Low
1995
- ------------------------------------------------------------
Second Quarter
(Beginning June 28, 1995) 7 1/8 6 1/2
Third Quarter 8 1/2 6 5/8
Fourth Quarter 9 3/4 7 5/8
1996
- ------------------------------------------------------------
First Quarter 13 1/8 8 3/8
Second Quarter 15 10 7/8
Third Quarter 12 7/8 8 3/4
Fourth Quarter 12 7/8 9 1/4
On March 3, 1997 the closing price of the Company's common stock, as reported on
the Nasdaq National Market, was 12 1/8.
There have been no cash dividends paid. The Company currently intends to retain
future earnings for its operations and expansion of its business and does not
anticipate paying any cash dividends in the future.
Form 10-K
Copies of the Company's annual report to the Securities and Exchange Commission
on Form 10-K may be obtained, without charge, by contacting the Investor
Relations Department at SOS Staffing Services, Inc.
Annual Meeting
Shareholders and other interested parties are invited to attend the Annual
Meeting of Shareholders on Wednesday, May 14, 1997 at 1:30 p.m. (Mountain
Daylight Time). The meeting will be held at the Doubletree Hotel, located at 255
South West Temple (Seminar Theater) in Salt Lake City, Utah.
25
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report incorporated by reference in this Form 10-K, into the Company's
previously filed Registration Statements on Form S-8, File Nos. 33-96362 and
333-1422.
/s/Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Salt Lake City, Utah
March 26, 1997
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