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 28, 1997.
Transition Report Pursuant to Section 13 or 15(d) of the Securities
----- Exchange Act of 1934
Commission File Number: 0-26094
SOS STAFFING SERVICES, INC.
(Exact name of Registrant as specified in its charter)
Utah 87-0295503
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1415 South Main Street, Salt Lake City, Utah 84115
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (801) 484-4400
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common stock, $0.01 par value
(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
The aggregate market value of the Common Stock held by non-affiliates of the
Registrant, on March 2, 1998, based upon the closing sales price of the Common
Stock of $20.813 per share on that date, as reported on the NASDAQ Stock Market,
was approximately $188,920,600. 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 2, 1998, Registrant had outstanding 12,660,162 shares of Common
Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Annual Report to Shareholders for the fiscal year
ended December 28, 1997 are incorporated by reference into Parts II and IV of
this Report. Portions of the Proxy Statement for Registrant's 1997 Annual
Meeting of Shareholders to be held May 13, 1998 are incorporated by reference in
Part III of this Report.
<PAGE>
PART I
ITEM 1. BUSINESS
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General
SOS Staffing Services, Inc. ("SOS" or the "Company") is a leading
provider of staffing and consulting services in the western states. As of
December 28, 1997, SOS operated a network of 134 offices in 18 states. The
Company provides a broad range of commercial staffing and information technology
("IT") services. Commercial staffing services include light industrial,
clerical, industrial, technical, specialty and other professional services. IT
services consist of staffing, consulting and outsourcing services such as
systems design, programming, network and systems management and business
consulting. During the 52 weeks ended December 28, 1997, the Company provided
approximately 78,000 staffing employees to more than 10,000 businesses,
professional and service organizations and government agencies.
Since completing its initial public offering in July 1995, the Company
has aggressively pursued an acquisition program, having acquired 34 staffing and
consulting companies with 56 offices, consisting of 42 commercial staffing
offices and 14 IT staffing and consulting offices. Ten of the acquisitions
completed since July 1996 were of IT staffing and consulting companies, which
have allowed the Company to diversify the mix of staffing services provided to
include higher margin services. On a pro forma basis, revenues from IT staffing
services represented 22% of total revenues for the 1997 fiscal year compared to
5% of total revenues for the 52 weeks ended December 28. 1997. Additional
acquisitions have added other specialty services, including medical
administrative support, professional mining, geology, hydrology and
environmental services.
Business Strategy
The Company's goal is to enhance its profitability through a focused
business strategy. The Company has identified the following key elements of its
strategy, which management believes are critical to the Company's success:
Focus on Small to Mid-Size Customers and Projects. Historically, the
Company's customers have consisted primarily of small to mid-size companies.
Sales to these businesses tend to generate higher margins than larger national
accounts. The Company believes that focusing on small to mid-sized customers and
smaller projects limits its exposure to margin pressure associated with large
national contracts and volume discounts. In the IT segment, the Company focuses
on smaller specialty projects, often at larger businesses or as support in
larger projects. The Company believes that it has developed competitive
advantages in serving small and mid-sized businesses and projects by tailoring
its operations to meet local customer needs, including the establishment of
strong customer relationships through local marketing efforts, quality service
and community involvement.
Deliver Higher Margin Services. The Company's operating results since
1991 have been significantly enhanced by its strategy to deliver higher margin
services. Over the past several years, the Company has focused its efforts on
expanding its range of services to include higher margin specialty services such
as IT staffing and consulting, administrative staffing support services for
medical facilities and other professional services. The Company has
de-emphasized marketing to accounts where competitive pricing makes margins
unacceptable or to accounts where workers' compensation costs adversely affect
profitability.
Offer a Broad Range of Services. The Company's strategy includes
offering its customers a broad range of staffing services, including light
industrial, clerical, IT, industrial, technical and other professional services,
as well as a range of consulting services (including telephony, information
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technology and general business consulting, as well as strategic planning). The
Company also provides related services to its customers, including payrolling,
skill and drug testing, risk management consulting and other professional
staffing services. 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. The Company is also expanding its
on-site services, in which SOS locates an on-site manager at the customer's
facility to manage all of the customer's employee staffing requirements.
Provide Centralized Support and Encourage Entrepreneurial Management.
The Company's commercial staffing offices are supported by centralized functions
at corporate headquarters that include marketing, recruiting, training and
retention programs, as well as workers' compensation and other insurance
services, accounts payable, purchasing, credit, legal review and other
administrative support services. Generally, each staffing office has access to
the Company's computer system and its proprietary software that provides
information on customer requirements, available applicants, staffing employees
on assignment and other information which facilitates efficient response to
customer job orders. The Company is expanding IT staffing, consulting and
outsourcing operations and is developing a centralized support system tailored
to the specific needs of IT customers. This integration will be completed in
1998.
To encourage an entrepreneurial approach to field management, the
Company has established financial targets and quality performance standards
which are utilized at all offices. A substantial portion of the Company's field
management compensation is incentive-driven and based upon meeting financial
targets and quality standards. Managers are also given considerable discretion
to price services and to respond to specific customer requirements.
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 its customers by developing knowledge of
customers' businesses, responding promptly to customer orders and monitoring job
performance and customer satisfaction. The Company targets customer accounts
where service and quality are perceived to be as important as pricing of
services. This allows the Company to be more selective and to provide higher
quality services while maintaining desired margins.
Pursue Opportunities in Small Markets. In the commercial staffing
segment, SOS has focused on opening hub offices in key metropolitan areas
followed by establishing offices in surrounding markets. This decentralized
office management strategy locates multiple offices in close proximity to
customers and staffing employees. The Company believes this strategy has allowed
it to rapidly gain market share with low entry costs. Once a hub office has been
established, the Company focuses on leveraging hub office resources to market
and deliver services to surrounding smaller markets and to cross-sell IT and
other specialty staffing services. In these markets, which are often too small
to attract substantial competition from national staffing companies, the Company
has quickly achieved significant penetration and has often become the dominant
provider of staffing services.
Growth Strategy
Management believes the Company has substantial opportunities to expand
its office network and the range of services it offers to its customers. The
Company's growth strategy is comprised of two elements: Continued focus on
internal growth and pursuit of additional acquisitions. Since completing its
initial public offering in July 1995, the Company has added a total of 36
offices through internal growth and 56 offices through acquisitions.
Focus on Internal Growth. A principal element of the Company's growth
strategy has been its focus on internal growth. During the last five years, the
Company has maintained an average annual internal revenue growth rate in excess
of 20%. The Company's internal growth strategy consists of the following:
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- Increase Penetration of Existing Markets. The Company continually
seeks to add new customers and offices in the geographic markets
it currently serves. In many instances, the Company pursues such
penetration by establishing a "hub" office from which it can
develop additional offices within a metropolitan area. SOS also
intends to introduce complementary or specialty services in
existing markets and incentivizes field and local managers to
focus on business development within existing offices.
- Enter New Markets. The Company plans to open new branches in
markets not currently served by existing offices. Frequently, the
Company enters new markets by establishing a "hub" office located
in a central location. The Company then opens new offices in
surrounding markets which benefit from the administrative support
and resources of the hub office. This strategy has enabled the
Company to enter many smaller markets cost effectively.
- Expand Service Offerings. The Company is actively seeking to
expand the range of IT services it offers to its customers to
include expanded outsourcing capabilities and network oversight
and management, and to add to its existing telephony consulting
business. The Company intends to expand its vendor on-premise
business, pursuant to which SOS manages all of the customer's
staffing requirements on-site. The Company also intends to further
develop partnering relationships under which SOS works with other
staffing providers to meet the customer's staffing requirements.
- Cross-sell Services. The Company actively seeks to cross-sell
commercial staffing and IT staffing and consulting services to
existing customers. Through incentive compensation arrangements,
the Company actively encourages referrals and cross-selling among
and within its commercial, specialty and IT operations.
Pursue Acquisitions. The Company intends to continue to pursue
acquisitions as a key element of its growth strategy. In targeting acquisitions,
SOS focuses on businesses with (i) a history of profitable operations, (ii) a
strong management team, (iii) a strong local market position, (iv) services that
complement the Company's operations and (v) compatible corporate philosophies
and culture.
- Enter New Markets. The Company intends to target strategic
acquisitions in new markets where the Company seeks to establish
staffing operations, particularly in the western states.
- Acquire Complementary Businesses in Existing Markets. The Company
intends to acquire complementary businesses or specialty lines of
business that enhance the services provided by existing offices.
The Company also targets businesses in its existing markets as a
means of increasing market share.
- Acquire New Services. The Company intends to pursue acquisitions
of staffing businesses that will expand its service offerings. The
Company's acquisition of ten IT companies since July 1996 has
significantly strengthened the Company's IT staffing and
consulting offerings. As the Company identifies staffing
businesses in attractive niches, the Company intends to pursue
strategic acquisitions to facilitate its entry into such niches.
Operations
Services Offered. The Company offers a broad range of commercial
staffing and IT staffing, consulting, and outsourcing services. Generally, the
Company provides light industrial, clerical and industrial services through SOS
Staffing Services, Skill Staff Industrial Specialists and Century Personnel
offices, while technical and other specialty services are provided by specialty
offices such as SOS Technical Services (engineers, chemists, geologists,
designers, drafters, illustrators, artists, writers and other technical
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personnel), AccountStaff (accountants, bookkeepers, auditors, data entry
personnel and financial analysts), PAMS (medical administrative services),
National Collex (collection services and project billing for medical facilities)
and CGS Personnel (mining, mineral exploration and environmental staffing).
Consulting and outsourcing services are provided under the names of Wolfe &
Associates, Telecom Project Assistance and JesCo Technical Services. IT staffing
services are provided under various names. The Company intends to adopt a common
name for its IT staffing, consulting and outsourcing services.
The Company's commercial staffing services also include professional
employer services such as payrolling, outsourcing, on-site and administrative
professional services provided through SOS Staffing Services and ServCom
offices. 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. Administrative professional services
offer SOS customers skills testing, drug testing and risk management services.
Skills testing available to SOS customers includes 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. As of December 28, 1997, the Company also provided
professional employer organization services on a limited basis to approximately
60 customers, representing approximately 425 employees, which offers to SOS
customers the benefits of employee leasing.
The Company's IT services consist of IT staffing, consulting and
outsourcing services. The Company's IT staffing services include computer
programming, system design, analysis and administration, network and systems
management and software and documentation development. IT staffing services are
similar in many respects to commercial staffing services; however, IT services
generally require increased specialization and technical skill, carry
significantly higher hourly rates and involve substantially longer job
assignments. The Company's IT consulting services are focused on solving the
customer's organizational problems and typically include telephony services,
general business consulting, organizational analysis, technology consulting and
strategic planning. Company consultants provide innovative ideas, insight and
experience to address the customer's organizational problems, then work with the
customer to implement strategic solutions. IT consulting engagements typically
last six months to one year and may require the services of several specialized
consultants. The Company also delivers IT outsourcing services to customers who
turn over to SOS personnel the management and staffing of specific business
operations. Historically, the Company has provided IT staffing, consulting and
outsourcing services under the business names of acquired IT business units;
however, as the Company integrates acquired IT companies into its consolidated
IT operations, the Company intends to adopt common business names for use
throughout the Company's IT branch network during 1998.
Branch Offices. The Company provides commercial staffing and IT
staffing and consulting services through a network of 134 offices located in 18
states. The Company currently operates at least one office in every market in
the Mountain States (Arizona, Colorado, Idaho, Montana, New Mexico, Nevada,
Utah, and Wyoming) with a population base in excess of 100,000 people. In larger
markets, the Company generally provides light industrial and clerical personnel
through SOS Staffing Services offices, while specialty services are provided by
service-specific specialty offices. In smaller markets, SOS offices offer a
broader variety of commercial staffing services including specialty services.
The Company currently provides commercial staffing services through a network of
SOS Staffing Services, Century Personnel, Skill Staff, SOS Technical Services,
AccountStaff, Industrial Specialist, PAMS, ServCom and CGS offices.
The Company estimates the capital cost of establishing a new commercial
staffing offices ranges from $15,000 to $50,000, exclusive of working capital
requirements. The Company's new offices have historically achieved profitability
in six to 12 months, while offices created by division of an existing office are
usually profitable from inception.
The Company provides IT staffing and consulting services from 18 IT
offices. The Company's IT staffing and consulting offices generally serve larger
geographic areas than SOS commercial staffing offices principally due to the
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increased specialization associated with IT services. The Company's strategy of
integrating and expanding its existing IT staffing and consulting office network
will include efforts to position IT offices in strategic locations throughout
the western states, rather than the "hub and spoke" approach used by the Company
to expand its network of commercial staffing offices.
Sales and Marketing. SOS generally markets its commercial staffing
services through its network of offices whose managers, supported by the
Company's marketing staff, make regular personal sales visits to larger accounts
and prospects. The Company emphasizes long-term personal relationships with its
customers and develops these relationships through regular contact, periodic
assessment of customer requirements and regular monitoring of employee
performance. New customers are 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. In addition, the Company uses the Internet to support its
marketing efforts.
The Company's IT sales and marketing efforts may include the activities
described above, but are generally more focused to address IT staffing and
consulting needs which are typical of specific customers. Many of the Company's
existing and prospective IT customers routinely outsource IT functions, such as
programming, data entry and network administration. The Company's IT staffing
and consulting personnel seek to identify IT requirements of its customers and
promote IT services designed to meet those requirements. In addition to personal
sales visits, targeted mailings and telephone solicitations, the Company's IT
personnel actively promote the Company's services through cross-selling
complementary IT services to existing customers and participate in industry
trade associations.
Recruiting. The Company believes a key element of its growth and
profitability has been its ability to recruit and retain qualified staffing
personnel. In an effort to attract commercial staffing personnel, the Company
employs recruiters who regularly visit schools and professional associations and
present career development program to various organizations. In addition, the
Company obtains applicants from referrals by its staffing employees and from
advertising on radio, television, in the Yellow Pages and through other print
media. The Company has recently begun to utilize the Internet to recruit
professional, IT and technical staffing employees. Each applicant for a
commercial staffing position is interviewed with emphasis on past work
experience, personal characteristics and individual skills. The Company utilizes
the Dictionary of Occupational Titles ("DOT Codes") published by the Department
of Labor to evaluate and assign staffing employees. The Company maintains
software-training programs at its offices for applicants and employees who may
be trained and tested at no cost to the applicant, employee or Company customer.
The Company's efforts to recruit IT staffing and consulting personnel
frequently include some or all of the recruiting activities employed by the
Company's commercial staffing offices, but typically rely more heavily on
identifying potential employees who possess specialized education, training or
work experience. Frequently, the Company will screen prospective IT personnel
based solely upon resume submissions, then refer qualified candidates to
customers for on-site interviews. The Company's IT recruiting efforts also rely
heavily upon industry contacts, personal networks and referrals from existing
and former IT personnel.
To promote loyalty and retention among its staffing employees, the
Company provides its 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 and Staffing Services ("NATSS"). In addition, the Company has the
ability to issue paychecks to commercial staffing employees during the same week
worked.
Customers. During the 52 weeks ended December 28, 1997, the Company
provided approximately 78,000 staffing employees to more than 10,000 businesses,
professional and service organizations and government agencies. No customer
accounted for more then 2% of the Company's service revenues during the period
and the Company's top ten customers accounted for less than 11% of service
revenues during the same period. Historically, the Company's customers have
consisted primarily of small to mid-size commercial staffing customers.
Management believes there remain significant opportunities to deliver profitable
commercial staffing services to small and mid-size customers, who are less
likely to require substantial volume discounts than larger, nationwide
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companies. As the Company expands its network into larger cities in the western
states, the Company anticipates that it will provide commercial staffing
services to larger customers who focus on value rather than cost, but will
continue to focus its efforts on attracting and providing quality services to
small and mid-size companies located in such larger cities.
The Company's IT customer base, which consists primarily of IT
customers served by companies acquired by SOS since July 1996, includes
customers who are generally larger than many of the Company's commercial
staffing customers. Many of the Company's IT customers are Fortune 1000
companies, government agencies and educational institutions. Many of the
projects are smaller in scope than those done by large national companies. On
larger projects, the Company frequently provides service in a supporting role to
the project manager. The Company anticipates that its increased focus on IT
staffing and consulting, as well as its expansion into larger metropolitan
areas, will lead to additional opportunities to provide IT services to mid-size
and larger customers.
Risk Management Program. SOS is responsible for all employee-related
expenses for its staff employees including workers' compensation, unemployment
insurance, social security taxes, state and local taxes and other general
payroll expenses. The Company has implemented a deductible workers' compensation
program through CIGNA Property and Casualty ("CIGNA") with a loss cap of
$200,000 per incident. Staffing employees in Nevada, Washington and Wyoming are
insured through those states' insurance funds because private insurance is not
permitted in those states. The Company employs a full-time professional risk
manager and staff who work closely with the insurance carrier to manage claims
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 staffing employees are
required to agree in advance to drug testing following any work-related accident
and all major accidents are investigated. The Company, in cooperation with its
insurer, monitors all claims and regularly reviews the claims with an emphasis
on early closure.
Information Systems
The Company's central management information system is linked to all of
the Company's larger commercial staffing offices. Smaller offices utilize
stand-alone computers or batch access software for routine office functions. The
centralized system is designed to support Company-wide operations such as
payroll, billing, accounting and sales and management reports.
Six of the Company's 18 IT offices are linked to the Company's central
management information system, while substantially all of the remaining offices
continue to utilize systems in place at the time of their acquisition by SOS.
The Company is developing a central management information system for use by the
Company's IT offices. The Company anticipates that its IT system will be
connected to the Company's existing system for certain common functions;
however, the IT system will be designed to accommodate the different business
cycles and processes associated with the IT industry.
The current 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 routinely and stored off-site and
critical files are backed up on a daily basis. The present system has capacity
to service the Company's anticipated growth without significant capital
expenditures for the foreseeable future.
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Year 2000
The Company's information systems have been made substantially
compliant with Year 2000 requirements. Reviews are beginning of the Company's
key vendors' compliance with these requirements. No determination of material
compliance or noncompliance of key vendors can be made at this time.
Competition
The staffing industry is comprised of national, regional and local
companies operating offices throughout the nation, making the industry highly
competitive and highly fragmented, with limited barriers to entry. The Company
faces intense competition from large national and international companies with
substantially greater financial and marketing resources than those of the
Company, as well as strong local and regional staffing companies.
The Company competes for qualified staffing employees and for customers
who require the services of such employees. The principal competitive factors in
attracting and retaining qualified staffing employees are competitive salaries
and benefits, quality and frequency of assignments and responsiveness to
employee needs. The 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 staffing employees.
The principal competitive factors in obtaining customers are a strong
sales and marketing program, having qualified staffing employees to assign in a
timely manner, matching of customer requirements with available staffing
employees, competitive pricing and satisfactory work production. The Company
believes its strong emphasis on providing service and value to its customers and
staffing employees are important competitive advantages.
Seasonality
The Company's business follows the seasonal trends of its customers'
businesses. Historically, the Company has experienced lower revenues in the
first quarter due to the seasonal trends of its customers and lower overall
economic activity.
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, Century Personnel, Skill Staff, AccountStaff, TSI, Industrial
Specialists, SOS Technical Services, ServCom, PAMS Employment Services, National
Collex, CGS Personnel, Wolfe & Associates, Impact Staffing, The Performance
Group, Computer Group, Inc., Telecom Project Assistance, Bedford Consultants,
Execusoft, JesCo Technical Services, CenTech, and Prestige Consulting trade
names. The Company has registered or reserved the majority of these names in the
appropriate states. The Company anticipates that at some future date the trade
names used in its IT staffing, consulting and outsourcing operations, including
Wolfe & Associates, Impact Staffing, The Performance Group, Computer Group,
Inc., Telecom Project Assistance, Bedford Consultants, Execusoft, JesCo
Technical Services, CenTech and Prestige Consulting may be modified or changed
to reflect their common business focus.
Staff Employees
At December 28, 1997, the Company had approximately 776 staff employees
consisting of 14 senior managers, 127 field managers, 119 consultants and 516
other staff employees. The Company's training department provides general and
job specific training to all staff employees, including continuing training with
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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.
Factors that May Affect Future Results
The statements contained in this Annual Report on Form 10-K that are
not purely historical are "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. All forward-looking statements
involve various risks and uncertainties. Forward-looking statements contained in
this Report include statements regarding the Company's acquisition plans and
opportunities, existing and proposed service offerings, market opportunities,
expectations, goals, revenues, financial performance, strategies, intentions for
the future and any other statements to the effect that the Company or its
management "believes", "expects", "anticipates", "plans" or other similar
expressions. Such forward-looking statements are included under Item 1.
"Business", Item 2. "Properties", Item 3. "Legal Proceedings" and Item 7.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." All forward-looking statements included in this Report are made as
of the date hereof, based on information available to the Company as of such
date, and the Company assumes no obligation to update any forward-looking
statement. It is important to note that such statements may not prove to be
accurate, and that the Company's actual results and future events could differ
materially from those anticipated in such statements. Many factors could cause
actual results to differ materially from the Company's expectations, including,
without limitation, the factors identified below.
The Company's future results will be impacted by, among other factors,
the Company's ability to implement its growth strategy, which, in turn, is
dependent upon a number of factors, including the availability of working
capital to support such growth, plans to expand the Company's offering of IT
staffing services, competition for attractive acquisition opportunities, the
Company's ability to integrate the operations of acquired businesses,
management's ability and resources to implement the growth strategy and the
successful hiring, training and retention of qualified field management. Future
results will also be affected by other factors associated with the operation of
the Company's business, including the Company's response to existing and
emerging competition, demand for the Company's services, effects associated with
the recent transition within the Company's senior management, the Company's
ability to maintain profit margins in the face of pricing pressures, the
Company's efforts to develop and maintain customer and employee relationships,
economic fluctuations and employee-related risks and expenses.
All subsequent written and oral forward-looking statements attributable
to the Company or persons acting on its behalf are expressly qualified in their
entirety by this section and other factors included elsewhere in this Report.
You also should consult other factors identified from time to time in the
Company's periodic reports to the Securities and Exchange Commission.
ITEM 2. PROPERTIES
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As of December 28, 1997, the Company provided staffing services through
134 offices in 18 states. These offices typically consist of 1,200 to 5,000
square feet and are leased by the Company for terms of three to five years.
Offices in larger or smaller markets may vary in size from the typical office.
The Company does not expect that maintaining or finding suitable lease space at
reasonable rates in its markets or in areas where the Company contemplates
expansion will be difficult.
The Company's executive and administrative offices are located in Salt
Lake City, Utah. The premises consist of approximately 15,600 square feet and
are leased from a related party for a term ending on March 31, 2005, with an
option to renew for 10 additional years (see "Certain Relationship and Related
Parties"). The Company believes that the lease terms are at least as favorable
as could be obtained from any unrelated third party.
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ITEM 3. LEGAL PROCEEDINGS
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In the ordinary course of its business, the Company is periodically
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 worker's compensation, personal injury, bodily injury,
property damage, errors and omissions, fidelity losses and general liability.
In June 1997, a former customer of the Company commenced litigation
against the Company in Second District Court, Davis County, State of Utah,
alleging breach of contract, negligence, fraud and misrepresentation. The
allegations are based upon the alleged theft of surplus military goods from the
former customer's warehouse by a former temporary employee of the Company. The
plaintiff is seeking special, general, consequential, punitive and other damages
in an amount in excess of $7 million. In September 1997, the Company filed a
motion to dismiss the negligence claim based on the pleadings and filed an
answer to the complaints denying the material allegations and asserting several
affirmative defenses. In December 1997, the judge denied the Company's motion to
dismiss without prejudice. The Company believes the claim is without merit and
that the Company has valid defenses to all of the allegations raised by the
plaintiff.
There is no other pending litigation that the Company currently
anticipates will have a material adverse effect on the Company's financial
condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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No matters were submitted to a vote of security holders during the
fourth quarter of the 52 weeks ended December 28, 1997.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
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The information required by this Item is incorporated by reference to
page 33 of the Company's 1997 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 1997 Annual Report to Shareholders.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
-----------------------------------------------------------------------
OF OPERATIONS
-------------
The information required by this item in incorporated by reference to
pages 9 through 12 of the Company's 1997 Annual Report to Shareholders.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------
Not applicable
10
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
------------------------------------------
The information required by this item in incorporated by reference to
pages 13 through 32 of the Company's 1997 Annual Report to Shareholders.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
---------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
None
PART III
The information required by this Part III is omitted from this Report
in that the Company will file with the Securities and Exchange Commission a
definitive proxy statement for the Annual Meeting of Shareholders of the Company
to be held on May 13, 1998 (the "Proxy Statement"), not later that 120 days
after December 28, 1997, 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", "Executive Officers" and "Key
Employees" 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 TRANSATIONS
---------------------------------------------
The information required by this item is incorporated by reference to
the section entitled "Certain Relationships and Related Transactions" in the
Proxy Statement.
11
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
---------------------------------------------------------------
(a) The following documents are filed as part of this Report:
1. Consolidated Financial Statements: The following Consolidated Financial
Statements of the Company and Report of Independent Public Accountants,
are incorporated by reference to pages 13 through 32 of the Company's
1997 Annual Report to Shareholders:
Consolidated Balance Sheets--As of December 28, 1997, and December 29,
1996
Consolidated Statements of Income--For the Fiscal Years Ended December
28, 1997, December 29, 1996, and December 31, 1995. Consolidated
Statements of Shareholders' Equity--For the Fiscal Years Ended December
28, 1997, December 29, 1996 and December 31, 1995.
Consolidated Statements of Cash Flows--For the Fiscal Years Ended
December 28, 1997, December 29, 1996, and December 31, 1995.
Notes to Consolidated Financial Statements
Report of Independent Public Accountants
2. Financial Statement Schedules
No schedules submitted
(b) Reports on Form 8-K:
--------------------
On October 14, 1997, the Company filed a Current Report on Form 8-K,
dated October 2, 1997, which the Company subsequently amended by filing
an Amendment to Current Report on Form 8-K/A on October 15, 1997. The
Report, as amended, was filed for the purpose of reporting the
Company's acquisition of certain assets and substantially all of the
business operations of Century Personnel, Inc., and M.A. Jones
Enterprises, Inc. (collectively, "Century"). No financial statements
were filed with the Current Report or the subsequent amendment;
however, on November 24, 1997, the Company filed an Amendment to
Current Report on Form 8-K/A for the purpose of providing the financial
statements and pro forma financial information required in connection
with the Company's acquisition of Century's assets and business
operations.
On November 12, 1997, the Company filed an Amendment No. 1 to Current
Report on Form 8-K/A for the purpose of amending a Current Report on
Form 8-K, dated September 15, 1997, in order to provide financial
statements and pro forma financial information required in connection
with the Company's acquisition of certain assets and substantially all
of the business operations of JesCo Technical Services, Inc.
(c) Exhibits:
---------
<TABLE>
<CAPTION>
Exhibit Incorporated by Filed Herewith
No. Exhibit Reference
- --------------- ------------------------------------------------------ ------------------- -----------------
<S> <C> <C> <C>
3.1 Amended and Restated Articles of Incorporation of (1)
the Company
12
<PAGE>
<CAPTION>
Exhibit Incorporated by Filed Herewith
No. Exhibit Reference
- --------------- ------------------------------------------------------ ------------------- -----------------
<S> <C> <C> <C>
3.2 Amended and Restated Bylaws of the Company (1)
4.2 Amended and Restated Articles of Incorporation of (1)
the Company
4.3 Amended and Restated Bylaws of the Company (1)
10.1 SOS Staffing Services, Inc. Stock Incentive Plan (3)
dated May 4, 1995, as amended
10.2 Form of Employment Agreement entered into by the (1)
Company and each of Messrs. Richard 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 Credit Agreement dated as of July 11, 1996 by and (4)
among the Company, First Security Bank, N.A. and NBD
Bank, together with Security Agreement and Revolving
Credit Notes
10.6 Stock Purchase Agreement between the Company, Wolfe (5)
& Associates, Inc. and certain shareholders of Wolfe
& Associates, Inc. dated November 5, 1996
10.7 Asset Purchase Agreement between the Company, (6)
Execusoft, Inc. and the principals of Execusoft,
Inc., effective as of August 27, 1997
10.8 Asset Purchase Agreement between Wolfe & Associates, (7)
Inc., the Company, JesCo Technical Services, Inc.,
and John E. Shaffer, effective September 28, 1997
10.9 Asset Purchase Agreement between the Company, (8)
Century Personnel, Inc., M.A. Jones Enterprises,
Inc. and Michael A. Jones, effective October 27, 1997
13 Annual Report to Shareholders for the year ended (9)
December 28, 1997 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.
13
<PAGE>
<CAPTION>
Exhibit Incorporated by Filed Herewith
No. Exhibit Reference
- --------------- ------------------------------------------------------ ------------------- -----------------
<S> <C> <C>
21 Subsidiaries of the Company (9)
23.2 Consent of Independent Public Accountants (9)
27 Financial Data Schedule (9)
</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 of Form 10-K for the year ended December 31, 1995 filed by the
Company on March 29, 1996.
(4) Incorporated by reference to the exhibits to a Quarterly Report on Form
10-Q for the quarter ended September 26, 1996 filed by the Company on
November 14, 1996.
(5) Incorporated by reference to the exhibits to a Current Report on Form
8-K filed by the Company on November 14, 1996.
(6) Incorporated by reference to the exhibits to a Current Report on Form
8-K filed by the Company on September 3, 1997.
(7) Incorporated by reference to the exhibits to a Current Report on Form
8-K filed by the Company on September 18, 1997.
(8) Incorporated by reference to the exhibits to an Amendment to Current
Report on Form 8-K/A filed by the Company on October 15, 1997.
(9) Filed herewith and attached to this Report following page 13 hereof.
(d) Financial Statement Schedules:
------------------------------
No schedules submitted.
14
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereto duly authorized.
SOS STAFFING SERVICES, INC.
Date: March 23, 1998 By: /s/ Gary B. Crook
-----------------
Gary B. Crook
Executive 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/ JoAnn W. Wagner Chairman of the Board and March 23, 1998
------------------ Executive Vice President
JoAnn W. Wagner
/s/ Howard W. Scott, Jr. Director, Chief Executive March 23, 1998
----------------------- Officer (Principal Executive
Howard W. Scott, Jr. Officer)
/s/ Peter R. Sollenne Director, President and Chief March 23, 1998
- --------------------- Operating Officer
Peter R. Sollenne
/s/ Gary B. Crook Executive Vice President, Treasurer March 23, 1998
- ----------------- and Chief Financial Officer
Gary B. Crook (Principal Financial and Accounting
Officer)
/s/ Richard J. Tripp Director and March 23, 1998
- --------------------
Richard J. Tripp Senior Vice President
/s/ Stanley R. deWaal Director March 23, 1998
- ---------------------
Stanley R. deWaal
/s/ Samuel C. Freitag Director March 23, 1998
--------------------
Samuel Freitag
/s/ R. Thayne Robson Director March 23, 1998
- --------------------
R. Thayne Robson
/s/ Randolph K. Rolf Director March 23, 1998
- --------------------
Randolph K. Rolf
/s/ Annette Strauss Director March 23, 1998
- -------------------
Annette Strauss
15
Corporate Profile
- -----------------
Founded in 1973, SOS Staffing Services, Inc. offers a broad range of commercial
staffingservices, as well as information technology (IT) staffing, outsourcing
and consulting. In the twoand one-half years since SOS' initial public offering,
the company has more than doubled in size and scope. In July 1995, the company
had 42 offices in five states; as of year end 1997, SOS operated more than 130
offices in 18 states.SOS is dedicated to the principles of ISO-9000, an
internationally recognized standard for quality products and services. Each
office and the special talents of each employee are committed toproviding a
quality system of support to SOS customers.
Contents
- --------
Financial Highlights ...................................................... 1
Letter to Shareholders .................................................... 2
25 Years of Excellence .................................................... 4
Commercial Division ....................................................... 5
Information Technology Division ........................................... 6
Board of Directors and Executive Officers ................................. 7
Management's Discussion and Analysis
of Financial Condition and Results of Operations ..................... 9
Consolidated Financial Statements and Notes ............................... 13
Report of Independent Public Accountants .................................. 32
NASDAQ/NMS: SOSS
[Graphic Omitted]
Statements contained in this Annual Report that are not purely historical are
"forward-looking statements" within the meaning of Section 21E of the Securities
Exchange Act of 1934, as amended. The Company assumes no obligation to update
any such forward-looking statements. Readers are cautioned that all
forward-looking statements involve risks, uncertainties and other factors that
could cause the Company's actual results to differ materially from those
anticipated in such statements, including but not limited to the Company's
efforts to expand its offering of services, the Company's acquisition efforts
and its ability to integrate the operations of acquired businesses, the recent
transition within the Company's management, economic fluctuations, existing and
emerging competition, and demand for the Company's services. Other factors,
including economic, competitive, governmental, and technological factors, are
discussed in the Company's Annual Report on Form 10-K and other reports to the
Securities and Exchange Commission.
<PAGE>
Financial Highlights
(in thousands, except per share data)
<TABLE>
<CAPTION>
Fiscal Year (52/53 Weeks) Ended
-------------------------------
1997 1996 1995(1) 1994(1) 1993
---- ---- ------- ------- ----
Statement of Income Data:
<S> <C> <C> <C> <C> <C>
Service revenues $209,251 $136,164 $ 87,533 $ 63,740 $ 49,433
Gross profit 46,711 27,575 18,180 12,418 8,349O
Operating income 12,351 6,707 4,321 2,372 1,033
Net income(1) $ 7,526 $ 4,029 $ 2,940 $ 2,427 $ 1,113
Earnings per share
Basic $ 0.78 $ 0.59 $ 0.54 $ 0.44
Diluted 0.77 0.59 0.43 0.35
Weighted average common shares
Basic 9,654 6,780 4,985 4,500
Diluted(2) 9,781 6,838 6,229 5,731
Balance Sheet Data:
Working capital $ 42,790 $ 17,012 $ 9,645 $ 5,057 $ 4,330
Total assets 118,290 47,293 19,327 11,597 7,458
Total debt -- -- 1,450 2,780 806
Shareholders' equity $104,335 $ 36,834 $ 14,668 $ 7,098 $ 5,171
</TABLE>
(1) The Company completed its initial public offering (IPO) in July 1995 and in
connection therewith terminated its S Corporation election. Net income for
fiscal 1995 and 1994 has been adjusted to reflect a pro forma provision for
income taxes. In addition, prior to the IPO, the Company compensated Richard D.
Reinhold, its former CEO, at levels sufficient to pay income taxes associated
with its S Corporation status. For fiscal 1995, the Company entered into an
employment contract with Mr. Reinhold which provided for annual compensation of
$195,000. Net income for fiscal 1994 has been adjusted to reflect CEO
compensation in such amount, resulting in an increase to net income of
approximately $787,000.
(2) Prior to the completion of its IPO, the Company distributed approximately
$8.0 million of its accounts receivable to itsS Corporation shareholders. The
weighted average common shares outstanding for diluted earnings per share for
1995 and 1994 reflects 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.
[Graphic Omitted] [Graphic Omitted] [Graphic Omitted]
1
<PAGE>
Dear Shareholder,
In 1997, SOS Staffing Services enjoyed another solid year, characterized by
record revenues and earnings. For the year ended December 28, 1997, net income
increased 87 percent to $7.5 million, or $0.77 per share, on service revenues of
$209.3 million, up 54 percent. For the comparable period in 1996, the company
posted net income of $4.0 million, or $0.59 per share, on service revenues of
$136.2 million. Net income per common share increased 31 percent and reflects a
43 percent increase in diluted weighted average common shares resulting from
equity offerings completed in December 1996 and October 1997.
SOS expanded its business in 1997, with 14 acquisitions and internal growth
exceeding 22 percent. The number of branches increased from 87 offices located
in 11 states at the end of 1996 to more than 130 located in 18 states at year
end 1997.
Capitalizing on Favorable Industry Trends
SOS' growth in 1997 reflected the increasing popularity among companies
nationwide of incorporating staffing and consulting services as part of their
competitive strategies. These companies seek greater control over organizational
growth and risk, and have discovered the value and flexibility that our services
afford.
Changing attitudes in the workforce continue to shape the staffing industry.
Among many individuals in today's labor market, becoming a temporary employee
has become a popular means of getting one's foot in the door with a particular
company or industry. An increasing number of professionals, especially in the
information technology arena, prefer to offer their specialized talents as a
consultant or on a temporary basis. These employees enjoy a career characterized
by job satisfaction, personal and professional mobility, work-schedule
flexibility, and the freedom to utilize and hone skills in a variety of tasks
and projects.
SOS account managers and customer service representatives facilitate customer
and employee relationships. Through commitment to customer satisfaction and
attention to detail, SOS has strengthened its reputation as a top-quality
provider of employment staffing and consulting solutions to corporate customers
and employees alike.
Adding to the Mix
As the needs of our customers expand to include new geographic regions and
employee skill sets, SOS has enhanced its position as a full-service staffing
company, a concept that is being fostered through our program of strategic
acquisitions.
During 1997, acquisition activity yielded SOS a number of solid commercial, IT
and specialty staffing organizations. The purchase of Century Personnel, Inc.,
completed in October, was the largest in SOS history, exemplifying the type of
enterprise that we have sought to add to our operating mix throughout the year.
Specifically, these are companies that offer dynamic, entrepreneurial
management; a strong market position in key geographic regions or service
niches; a proven commitment to customer service; and the potential for
operational synergies with existing SOS operations. This strategy facilitated
our penetration into new markets in 1997 and helped us expand those positions
already established.
2
<PAGE>
The balance sheetremains strong and positions SOS to
effectively pursue its acquisition strategy in 1998.Cash balances and working
capital were bolstered by a secondary common stock offering in October. Coupled
with an available credit facility of over $30 million, these balances help SOS
enter the new year capitalized to consider new acquisition opportunities.
SOS Leadership Positioned for the Future
During 1997 and the first quarter of 1998, SOS witnessed a transition in its
core of organizational leadership, as the company prepared itself to compete in
the next decade. JoAnn W. Wagner, who has served as an SOS director since 1995
and executive vice president since August 1997, was named as chairman of the
board in February 1998.
In August 1997, Howard W. Scott, Jr. was appointed chief executive officer after
serving more than two years as SOS' president and chief operating officer.
Assuming the roles of president and chief operating officer is Peter R.
Sollenne, who in February 1998 was appointed to serve on the board of directors
in the seat left vacant by retired chairman Richard D. Reinhold. And, in
November 1997, two seats were added to the board with the appointments of Samuel
C. Freitag, senior managing director of a multimillion-dollar capital management
firm, and former Dallas mayor Annette Strauss.
Later in this report we highlight each member of SOS' executive management.
These directors and officers represent a diverse group of experienced
individuals. Together, this team extends its thanks to retired chairman and
founder Dick Reinhold for his tireless service and unwavering commitment over
the last 25 years. His energy, leadership and vision have prepared us well to
enhance our position, as we compete throughout the next decade.
Reaching the Silver, Going for Gold
This year, SOS celebrates its silver anniversary. We take pride in this
accomplishment, as achieving this 25-year milestone in the highly competitive
staffing industry has proven to be every bit as challenging as it has been
rewarding. It has taken the concerted efforts of many to make SOS as strong and
sound as it is today, and we express our appreciation to all who have
contributed along the way. We applaud SOS' staff, consultants and dedicated team
of temporary employees, whose efforts have added so much in the pursuit of
company goals.
Having briefly recognized the past, we now turn our focus to SOS' future, which
continues to shine as brightly as ever. And, as we look to that future, we
remain convinced that only by renewing our commitment to excellence may we
expect to celebrate a golden anniversary in another 25 years. Having readied
ourselves to capitalize on new opportunities in a consolidating industry, SOS is
indeed "going for gold," as we pledge our best efforts toward maximizing
long-term shareholder value in 1998. We appreciate your support and look forward
to reporting to you in future months.
Sincerely,
/s/Joann W. Wagner /s/Howard W. Scott, Jr. /s/Peter R. Solenne
JoAnn W. Wagner Howard W. Scott, Jr. Peter R. Sollenne
Chairman of the Board Chief Executive Officer President and Chief
Operating Officer
3
<PAGE>
25 Years of Excellence
When Dick Reinhold and Russ Christen started SOSStaffing Services in January
1973, the temporary staffing industry was far different from what it has become
today. In 1973, most businesses viewed temporary staffing merely as "emergency
help." Since then, however, economic forces and changing attitudes toward work
have created an atmosphere where temporary staffing has become an integral part
of doing business, and one in which SOSStaffing Services has thrived.
SOS offers a broad range of staffing and consulting solutions through its two
divisions. The commercial division offers staffing services in a variety of
clerical, industrial, light industrial, technical and professional fields. The
information technology (IT) division provides staffing, outsourcing and
consulting services, all designed to help businesses become more competitive
technologically. In 25 years, SOS has grown from one office in Salt Lake City to
more than 130 offices today, located in 18 states throughout the western United
States.
As SOS has expanded, both operationally and geographically, its dedication to
quality service and responsiveness has remained constant. "For 25 years, SOShas
built its reputation on the strength of face-to-face customer relationships in
all aspects of our business," says CEO Howard W. Scott, Jr. "As a service
company, we recognize that relationships are one of the most important products
we sell, and by empowering our field organization to develop and service these
relationships locally, we are more effective in tailoring our business
partnership to suit the needs of each customer."
The results speak for themselves. In 1997, for the second consecutive year, SOS
received national recognition in the international periodical Forbes Magazine.
The magazine listed SOS Staffing Services among its "200 Best Small Companies in
America." SOS' commitment to excellence was further reflected in 1997 when the
company was granted ISO-9002 registration, a globally recognized standard for
quality products and services.
"It is amazing how far SOS and the staffing industry have come in 25 years,"
says Scott, "and I'm proud to have been a part of the team that has made it all
happen."
4
<PAGE>
Commercial Division
The largest SOS business division is its commercial staffing division, which
provides staffing solutions to companies by providing temporary clerical,
industrial, light industrial, technical and professional services.
SOS operates under several different service-specific names, reflecting the
broad variety of niche markets that the company serves. Examples in the
commercial division include AccountStaff (accounting and finance), Mortgage
Staffing, Inc. (mortgage services), SkillStaff (construction and manufacturing),
and Patient Account Management Services (medical administrative support) to name
a few. Each enterprise leverages its own strengths and marketing expertise to
most effectively service its target market. At the same time, the segments
benefit from being connected to a larger network that shares resources, as well
as important market intelligence.
The commercial division is separated into three geographic operating regions.
Richard J. Tripp is the senior vice president of the Pacific division, which
includes U.S. states along the West Coast as well as Arizona and Nevada. Steve
Whitworth serves as vice president of the Central division, comprised of Texas,
Louisiana and the Mountain States. And, Michael Jones oversees operations as
vice president of the Midwest division. The Midwest division includes Century
Personnel in Kansas and Missouri. Before its acquisition by SOS, Century
Personnel had been named to Inc. Magazine's list of America's 100 fastest
growing companies for three consecutive years.
"The geographic distribution of these divisions reflects the strategic expansion
that took place during 1997," says JoAnn W. Wagner, chairman of the board. "By
determining those opportunities that facilitate SOS' entry into key, untapped
markets, we have established footholds in locations throughout the western
United States." Seven of SOS' 14 acquisitions in 1997 were additions to its
commercial division, while the division's internal growth was also strong,
exceeding 22 percent.
5
<PAGE>
Information Technology Division
As technology continues to change the way the world does business, demand for
information-technology (IT) specialists, both temporary staffing and consulting,
has grown substantially.
"The rapid evolution of information technologies has forced businesses to `get
smart' fast or risk competing at a disadvantage," says Curtis L. Wolfe,
president of the information technology division. "For many businesses, however,
accurately determining IT needs and integrating their systems effectively is an
inexact science at best. That's where SOS comes in."
SOS' IT division is subdivided by function to include staffing, outsourcing and
consulting services. Because customers have become increasingly reliant upon
quality IT assistance, these services offer higher growth opportunities and
profit margins relative to commercial staffing services. Consequently, SOS
focused much of its acquisition efforts in 1997 on identifying solid,
well-managed IT staffing and consulting companies to complement existing
operations.
IT revenue as a percentage of total revenue increased from 5 percent in 1996 to
approximately 22 percent by the end of 1997. Many of these IT-related
acquisitions have already begun to contribute to the bottom line, and SOS seeks
to achieve even greater economies of scale in 1998 as the company continues to
integrate IT back-office operations.
"Over the next five years," says President and Chief Operating Officer Peter R.
Sollenne, "we plan to achieve a better balance between our commercial staffing
and information technology business segments. This mix enables us to maintain
our position as a full-service staffing enterprise while increasing the number
of opportunities to enhance the bottom line with high-margin IT revenue."
6
<PAGE>
Board of Directors & Executive Officers
Richard D. Reinhold, chairman emeritus, founded SOS Staffing Services in 1973.
For 25 years, Dick served as chairman, and, in February of this year, announced
his retirement. Prior to his two-and-a-half decades with SOS, Dick held
management positions in a number of national temporary staffing service firms,
including Greyhound Temporary Services, where he served as vice president. Dick
is proud to have served a term as the president of the National Association of
Temporary Services (NATSS) and two terms as president of the Utah Association of
Temporary Services.
JoAnn W. Wagner has served on the board since 1995 and, in February 1998, was
named as chairman of the board. JoAnn, also the company's executive vice
president, has held a number of positions while at SOS, including director,
consultant and vice chairman. JoAnn has more than 25 years of staffing industry
experience and has added tremendous value toward the execution of SOS'
acquisition strategy. Throughout her career, she has served in a variety of
executive management roles and on a number of boards of directors.
JoAnn was elected the president of NATSS from 1991 to 1992.
Howard W. Scott, Jr., chief executive officer and a director, enjoys 35 years of
experience in the staffing industry. Howard joined SOSas vice president in 1994
and served as president and chief operating officer from 1995 to 1997. The
company has benefited from his executive management experience, which includes
three years as president of Dunhill Personnel System, Inc. and 13 years as
president of CDI Temporary Services, a subsidiary of CDI Corp. Howard served two
terms as the president of NATSS, and in 1993 was awarded its highest honor, the
NATSS Leadership Hall of Fame Award.
Peter R. Sollenne, who joined SOS as president and chief operating officer in
August 1997, was named as a director in 1998. Peter's diverse background
includes experience in a number of operations, marketing and finance roles. He
most recently served as president of the commercial staffing division at
Personnel Group of America, Inc. (PGA). Peter's experience includes more than 10
years with national automobile fleet leasing companies, serving five years as
senior vice president of sales and marketing and five years as senior vice
president of finance.
Stanley R. deWaal was elected a director in 1995. Stan is currently the
president and a director of DeWaal, Keeler & Co., a Utah-based professional
corporation of certified public accountants which Stan co-founded in 1975. He
has been a licensed certified public accountant since 1967 and currently serves
on the board of directors for the Hansen Planetarium, a not-for-profit
organization in Salt Lake City.
Samuel C. Freitag, director, is currently the senior managing director for
George K. Baum Merchant Banc, L.L.C. Sam has served George K. Baum & Co. in
various roles, including as vice chairman, director of investment banking, vice
president of corporate finance and a member of the company's management
committee, where he was responsible for overseeing all investment activities.
SOS is pleased to have added Sam and his solid finance background to the board
of directors during 1997.
7
<PAGE>
Board of Directors & Executive Officers - Continued
R. Thayne Robson, a director since 1995, enjoys more than 20 years' tenure as a
professor in the economics department and management and research department of
the University of Utah. In addition to serving on the boards of many Utah-based
companies, Thayne is currently the director of the Utah Bureau of Economic and
Business Research. He is actively involved with numerous civic and community
endeavors, including as a member of the Utah Governor's Economic Coordinating
Committee and the executive committee of the Economic Development Corporation of
Utah.
Randolph K. Rolf has been a director since 1995. He is currently the chairman of
the board, president and chief executive officer of Unitog Company. Based in
Kansas City, Missouri, Unitog is a publicly traded company that manufactures,
sells and rents industrial uniforms. Randy has served as its chairman since 1991
and as its president and chief executive officer since 1988.
Annette Strauss, director, joined the board of directors during 1997. Annette is
the former Mayor of Dallas, Texas, and is currently active as a director,
officer or trustee with a number of business, government, education and
philanthropic organizations. SOSis delighted to add Annette and her diverse
background to the board this year.
Richard J. Tripp has been with SOS since 1973. Richard is a director, as well as
senior vice president of the company's Pacific Division. In addition to his
roles as a director and executive officer, he has honed his knowledge of the
staffing industry by serving in positions company-wide, including as an office
and area manager. Richard's background includes serving two terms as president
of the Utah Association of Temporary Services, a position he held from 1987 to
1989.
Gary B. Crook, executive vice president, chief financial officer and treasurer
joined SOS Staffing Services in 1995. Gary's career spans more than two decades,
during which he has served in a number of managerial and advisory roles. Such
roles have included tenure as vice president and controller of Food-4-Less
Supermarkets, Inc.; vice president - administration and controller of American
Stores' subsidiary Alpha Beta Company; and consultant and acting CFO to Al
Azizia - Panda United, Inc., a Saudi Arabian-based grocery retailing and
distribution company.
8
<PAGE>
Management's Discussion and Analysis
of Financial Condition and Results of Operations
9
<PAGE>
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 18 states. Since the completion of the Company's initial
public offering (the "IPO") in July 1995, the network has grown from 42 to 134
offices as of December 28, 1997. The Company expanded its office network by
acquiring existing staffing service companies and opening new offices,
principally in the 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 often divides them into one or
more additional offices resulting in greater efficiency, profitability and
market penetration.
During the period from the IPO through December 28, 1997, the Company acquired
34 staffing and consulting companies, representing 56 offices. The purchase
prices of these acquisitions have ranged from $15,000 to $15,000,000, plus
contingent earnouts. The Company often negotiates an earnout component of the
purchase price paid for acquisitions, when the Company believes future
consideration may more accurately reflect the appropriate value for the acquired
business, aligns the interests of the Company and the sellers and enhances the
likelihood of successfully integrating the acquired company into SOS.
During the period from the IPO through December 28, 1997, the Company also
opened 36 new offices through internal expansion. Capital costs of new office
openings, excluding working capital requirements, have typically ranged from
$10,000 to $50,000. To date, most of the Company's internally developed offices
have achieved profitability within 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
-------------------------------
1997 1996 1995
-------------------------------
Service revenues 100.0% 100.0% 100.0%
Direct cost of services 77.7 79.7 79.3
-------------------------------
Gross profit 22.3 20.3 20.7
-------------------------------
Operating expenses:
Selling, general and administrative expenses 15.7 15.1 15.8
Intangible amortization 0.7 0.3 --
-------------------------------
Total operating expenses 16.4 15.4 15.8
-------------------------------
Operating income 5.9% 4.9% 4.9%
===============================
Fiscal 1997 Compared to Fiscal 1996
Service Revenues - Substantially all of the Company's service revenues are based
on the time worked by its temporary staffing and consulting employees on
customer assignments. Service revenues are recognized as income at the time
services are provided. Service revenues for fiscal 1997 were $209.3 million, an
increase of $73.1 million, or 54% from $136.2 million in fiscal 1996. Of the
$73.1 million increase, $45.7 million was attributable to acquisitions, $19.0
million was attributable to comparable offices and $8.4 million was attributable
to new offices. The increase in service revenues of comparable offices was
generally consistent with increases in hours billed.
10
<PAGE>
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 1997 was $46.7 million, an
increase of $19.1 million, or 69%, compared to $27.6 million in fiscal 1996.
Gross profit margin for fiscal 1997 was 22.3% compared to 20.3% in fiscal 1996,
reflecting the increased mix of higher margin information technology business.
Gross profit margin varies depending on the types of services provided.
Operating Expenses - Operating expenses include (among other things)
compensation of staff, rent, recruitment and retention of temporary staffing
employees and consultants, costs associated with opening new offices, unbillable
consultant time, depreciation, amortization and advertising. Operating expenses
amounted to $34.4 million, or 16.4% of service revenues, in fiscal 1997,
compared to $20.9 million, or 15.4% of service revenues, in fiscal 1996.
Expenses have generally increased as service revenues and the number of offices
have increased. The increase in operating expenses as a percentage of revenues
was attributable to higher intangible amortization from acquisitions and the
higher mix of information technology business where selling, general and
administrative expenses are higher.
Operating Income - Operating income for fiscal 1997 was $12.4 million, an
increase of $5.7 million, or 84%, from $6.7 million in fiscal 1996. Operating
margin for fiscal 1997 was 5.9%, compared to 4.9% in 1996. The increase in
operating margin was due largely to the increase in information technology
business.
Income Taxes - The effective combined federal and state income tax rate was
40.4% in fiscal 1997 compared to 38.1% in fiscal 1996. The increase in the
combined tax rate was due to an increase in non-deductible amortization relating
to certain acquisitions and increased operations in states which assess higher
state tax rates.
Fiscal 1996 Compared to Fiscal 1995
Service Revenues - 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.
Gross Profit - 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.
Operating Expenses - Operating 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. The decrease in operating expenses as a percentage of
service revenues resulted from improved operating leverage attributable to
revenue growth partially offset by an increase in amortization of intangible
assets.
Operating Income - Operating income for fiscal 1996 was $6.7 million, an
increase of $2.4 million, or 55%, from $4.3 million in fiscal 1995. Operating
margin for both fiscal 1996 and fiscal 1995 was 4.9%.
Income Taxes - The effective combined federal and state income tax rates for
fiscal 1996 and fiscal 1995 were 38.1% and 39.2%, respectively.
11
<PAGE>
Liquidity and Capital Resources
For fiscal 1997 net cash used in operating activities was $0.9 million compared
to net cash used in operating activities of $2.4 million for fiscal 1996. The
decrease in cash used in operating activities was a result of higher net income
and increased depreciation and amortization.
The Company's investing activities during fiscal 1997 used $1.8 million to
purchase property and equipment, $38.6 million to purchase assets of acquired
businesses and $4.0 million to pay earnouts on acquisitions. See the Notes to
the Company's Consolidated Financial Statements for a summary description of the
material terms of the acquisitions completed during fiscal 1997.
The Company's financing activities during fiscal 1997 included proceeds from two
equity offerings. Net proceeds of a 3.6 million new share offering completed in
October 1997 amounted to $56.8 million. Net proceeds from the exercise of an
overallotment option to purchase 330,000 shares in January 1997 amounted to $3.0
million. As of December 28, 1997, the Company had used approximately $23.1
million of the offering proceeds to pay down long-term and short-term debt, and
the remainder of the proceeds to fund acquisitions, which included the payment
of acquisition earnouts, and for working capital and general corporate purposes.
The Company's primary sources of short term liquidity and capital resources
during fiscal 1997 were cash flows from operating activities and a secured line
of credit with a bank. The Company's line of credit currently allows for maximum
borrowings of $35 million. At December 28, 1997, the Company had no outstanding
borrowings on the line of credit. Short-term borrowings bear interest at the
prime rate charged from time to time by the Company's lender (at December 28,
1997, 8.5%). Long-term borrowings bear interest at LIBOR plus 1.75% (at December
28, 1997, approximately 7.5%). The rate related to the amount over LIBOR may
increase based upon certain financial ratios. The Company also had letters of
credit of $3.0 million outstanding at December 28, 1997, for purposes of
securing its workers' compensation premium obligation. The aggregate amount of
such letters of credit reduces the borrowing availability on the line of credit.
At December 28, 1997, $32.0 million was available for borrowings or additional
letters of credit under the line of credit. Management believes that the credit
facility, together with cash reserves (including remaining cash from the
recently completed equity offering) and cash flow from operations, will be
sufficient to fund the Company's operations, capital expenditures, and
acquisitions for at least the next 12 months.
Seasonality
The Company's business follows the seasonal trends of its customers' business.
Historically, the Company has experienced lower revenues in the first quarter
due to seasonal trends of its customers and lower overall economic activity.
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.
Year-2000 Compliance
The Company has substantially completed the required changes to make its
information systems Year-2000 compliant. The Company is now beginning to review
the compliance status of its key vendors. The process is ongoing with no results
having yet been determined.
12
<PAGE>
Consolidated Financial Statements and Notes
13
<PAGE>
<TABLE>
SOS STAFFING SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
As of December 28, 1997 and December 29, 1996
ASSETS
<CAPTION>
1997 1996
----------------------------------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 20,462,647 $ 5,784,651
Accounts receivable, less allowances of
$678,000 and $459,000, respectively 32,982,075 19,114,117
Current portion of workers' compensation deposit 475,549 610,473
Prepaid expenses and other 729,697 305,151
Deferred tax asset 1,238,955 661,645
Amounts due from related parties -- 406,376
----------------------------------------
Total current assets 55,888,923 26,882,413
----------------------------------------
PROPERTY AND EQUIPMENT, at cost:
Computer equipment 2,852,320 1,399,408
Office equipment 2,241,392 1,461,945
Leasehold improvements and other 1,286,134 969,208
----------------------------------------
6,379,846 3,830,561
Less accumulated depreciation and amortization (2,353,511) (1,698,080)
----------------------------------------
Total property and equipment, net 4,026,335 2,132,481
----------------------------------------
OTHER ASSETS:
Workers' compensation deposit, less current portion 106,369 106,369
Intangible assets, less accumulated amortization
of $1,941,000 and $457,000, respectively 57,456,417 17,798,588
Deposits and other assets 811,527 372,973
----------------------------------------
Total other assets 58,374,313 18,277,930
----------------------------------------
Total assets $ 118,289,571 $ 47,292,824
========================================
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated balance sheets.
14
<PAGE>
<TABLE>
SOS STAFFING SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
As of December 28, 1997 and December 29, 1996
LIABILITIES AND SHAREHOLDERS' EQUITY
<CAPTION>
1997 1996
--------------------------------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 971,775 $ 600,504
Accrued payroll costs 3,566,859 2,110,554
Current portion of workers' compensation reserve 2,537,995 1,501,669
Accrued liabilities 663,042 408,027
Income taxes payable 946,611 466,726
Accrued acquisition earnouts 4,412,658 4,782,689
--------------------------------
Total current liabilities 13,098,940 9,870,169
--------------------------------
LONG-TERM LIABILITIES:
Workers' compensation reserve, less current portion 535,580 375,418
Deferred income tax liability 193,762 213,056
Deferred compensation liability 126,206 --
--------------------------------
Total long-term liabilities 855,548 588,474
--------------------------------
COMMITMENTS AND CONTINGENCIES (Notes 2, 3, and 5)
SHAREHOLDERS' EQUITY:
Common stock $0.01 par value 20,000,000 shares authorized;
12,653,002 and 8,706,020 shares issued
and outstanding, respectively 126,530 87,060
Additional paid-in capital 91,152,122 31,216,917
Retained earnings 13,056,431 5,530,204
--------------------------------
Total shareholders' equity 104,335,083 36,834,181
--------------------------------
Total liabilities and shareholders' equity $118,289,571 $ 47,292,824
================================
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated balance sheets.
15
<PAGE>
<TABLE>
SOS STAFFING SERVICES, INC.
CONSOLIDATED STATEMENTS OF INCOME
For the Fiscal Years Ended December 28, 1997, December 29, 1996 and December 31, 1995
<CAPTION>
Fiscal Year (52 Weeks) Ended
----------------------------------------------------
1997 1996 1995
----------------------------------------------------
<S> <C> <C> <C>
SERVICE REVENUES $ 209,250,847 $ 136,163,973 $ 87,532,903
DIRECT COST OF SERVICES 162,539,859 108,589,322 69,353,212
----------------------------------------------------
Gross profit 46,710,988 27,574,651 18,179,691
----------------------------------------------------
OPERATING EXPENSES:
Selling, general and administrative 32,867,550 20,397,240 13,826,034
Intangibles and amortization 1,492,637 470,119 32,566
----------------------------------------------------
Total operating expenses 34,360,187 20,867,359 13,858,600
----------------------------------------------------
INCOME FROM OPERATIONS 12,350,801 6,707,292 4,321,091
----------------------------------------------------
OTHER INCOME (EXPENSE):
Interest expense (368,145) (301,207) (145,646)
Interest income 497,661 90,793 109,684
Other, net 145,386 13,695 120,604
----------------------------------------------------
Total, net 274,902 (196,719) 84,642
----------------------------------------------------
INCOME BEFORE PROVISION
FOR INCOME TAXES 12,625,703 6,510,573 4,405,733
PROVISION FOR INCOME TAXES
(including pro forma for 1995; see Note 8) (5,099,476) (2,481,413) (1,728,653)
----------------------------------------------------
NET INCOME $ 7,526,277 $ 4,029,160 $ 2,677,080
====================================================
NET INCOME PER COMMON SHARE:
Basic $ 0.78 $ 0.59 $ 0.54
Diluted $ 0.77 $ 0.59 $ 0.43
WEIGHTED AVERAGE COMMON SHARES:
Basic 9,654,204 6,780,400 4,984,616
Diluted 9,780,505 6,838,479 6,229,021
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated balance sheets.
16
<PAGE>
<TABLE>
SOS STAFFING SERVICES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<CAPTION>
Common Stock Additional
------------------------------- Paid-in Retained
Shares Amount Capital Earnings Total
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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
Exercise of stock options 16,982 170 142,630 -- 142,800
Sale of common stock, net 3,930,000 39,300 59,792,575 -- 59,831,875
Net income -- -- -- 7,526,227 7,526,227
--------------------------------------------------------------------------------
BALANCE, December 28, 1997 12,653,002 $ 126,530 $ 91,152,122 $ 13,056,431 $ 104,335,083
================================================================================
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated balance sheets.
17
<PAGE>
<TABLE>
SOS STAFFING SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Fiscal Years Ended December 28, 1997, December 29, 1996 and December 31, 1995
Increase (Decrease) in Cash and Cash Equivalents
<CAPTION>
Fiscal Year (52 Weeks) Ended
-----------------------------------------------
1997 1996 1995
-----------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 7,526,227 $ 4,029,160 $ 2,939,942
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation and amortization 2,156,882 854,902 374,114
Deferred income taxes (596,604) (825,941) 274,352
Loss on disposition of assets 26,927 63,030 3,554
Changes in operating assets and liabilities:
Accounts receivable, net (12,448,572) (8,785,524) (10,740,788)
Workers' compensation deposit 134,924 (6,021) 1,277,178
Prepaid expenses and other (288,556) (127,943) (128,033)
Amounts due from related parties (17,521) 54,521 (445,881)
Deposits and other assets (312,348) (84,969) 7,667
Accounts payable 371,271 391,177 29,742
Accrued payroll costs 1,456,305 529,247 685,683
Workers' compensation reserve 1,196,488 957,338 (35,989)
Accrued liabilities (624,956) 219,439 57,650
Income taxes payable 479,885 301,961 74,576
-----------------------------------------------
Net cash used in operating activities (939,648) (2,429,623) (5,626,233)
-----------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for acquisition of businesses (38,574,952) (10,162,026) (1,340,707)
Principal payment of note related to acquisition -- (1,450,000) --
Purchases of property and equipment (1,829,547) (683,889) (684,092)
Payments on acquisition earnouts (3,955,275) (239,139) (29,800)
Deposits related to acquisition of certain assets -- -- 236,078
Proceeds from sale of property and equipment 2,743 -- --
-----------------------------------------------
Net cash used in investing activities (44,357,031) (12,535,054) (1,818,521)
-----------------------------------------------
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated balance sheets.
18
<PAGE>
<TABLE>
SOS STAFFING SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Fiscal Years Ended December 28, 1997, December 29, 1996 and December 31, 1995
<CAPTION>
Fiscal Year (52 Weeks) Ended
----------------------------------------------
1997 1996 1995
----------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net $ 59,831,875 $ 18,098,350 $ 12,629,345
Proceeds from exercise of employee stock options 142,800 39,130 --
Repayments on line of credit, net -- -- (2,530,251)
Proceeds from long-term debt 13,000,000 11,000,000 --
Principal payments on long-term debt (13,000,000) (11,105,541) (550,000)
Capital contribution from shareholders -- -- 750,000
Distributions to shareholders -- -- (750,000)
----------------------------------------------
Net cash provided by financing activities 59,974,675 18,031,939 9,549,094
----------------------------------------------
NET INCREASE IN CASH AND CASH
EQUIVALENTS 14,677,996 3,067,262 2,104,340
CASH AND CASH EQUIVALENTS
AT BEGINNING OF YEAR 5,784,651 2,717,389 613,049
----------------------------------------------
CASH AND CASH EQUIVALENTS
AT END OF YEAR $ 20,462,647 $ 5,784,651 $ 2,717,389
==============================================
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the year for:
Income taxes $ 5,168,820 $ 2,902,393 $ 1,117,214
Interest 225,776 280,018 134,917
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
The following table sets for information relating to the Company's acquisitions
of certain business (see Note 3):
Fair value of assets acquired $ 39,553,495 $ 14,980,167 $ 3,433,773
Liabilities assumed 879,971 139,379 --
Notes payable issued in connection with acquisition 797,837 -- 1,750,000
Accrued acquisition earnouts 3,412,816 4,678,762 343,066
</TABLE>
During fiscal year 1997, amounts receivable from TSI totaling approximately $0.6
million were offset against the acquisition note payable (see Note 11).
During fiscal year 1995 the Company distributed approximately $8.0 million of
its accounts receivable to its S Corporation shareholders (see Note 7).
The accompanying notes to consolidated financial statements
are an integral part of these consolidated balance sheets.
19
<PAGE>
Notes to Consolidated Financial Statements
(1) Nature of Operations
SOS Staffing Services, Inc. and subsidiaries (collectively the "Company")
is a provider of temporary staffing services in 18 western states of the
U.S. The Company provides a broad range of commercial staffing and
information technology ("IT") services. Commercial staffing services
include light industrial, clerical, industrial, technical and other
professional services. IT services consist of staffing, consulting and
outsourcing services such as system design, programming, network and
systems management and business consulting.
(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 28, 1997 (fiscal 1997), December 29, 1996 (fiscal 1996) and
December 31, 1995 (fiscal 1995) each contained 52 weeks.
Principles of Consolidation - The consolidated financial statements include
the accounts of SOS Staffing Services, Inc. and its wholly owned
subsidiaries, Bedford Consultants, Inc., ServCom Staff Management, Inc.,
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 - Revenues are recognized at the time 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. Cash and cash equivalents consist of various money market
accounts and short-term municipal bonds and are recorded at cost, which
approximates market value.
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.
20
<PAGE>
Workers' Compensation - For fiscal years 1997 and 1996, the Company
maintained workers' compensation insurance with CIGNA Property and Casualty
("CIGNA") for claims in excess of a loss cap of $200,000 per incident,
except with respect to certain divisions which are covered by state
insurance funds in states where private insurance is not permitted. Under
the terms of the CIGNA 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 fiscal year 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 were 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 were paid. AIG was required to
refund to the Company 60% 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 the insurance companies as to the status of claims plus development
factors for incurred but not yet reported claims and anticipated future
changes in underlying case reserves. Such reserve amounts are only
estimates and there can be no assurance that the Company's future workers'
compensation obligations will not exceed the amount of its reserves.
However, management believes that the difference between the amounts
recorded for its estimated liability and the costs of settling the actual
claims will not be material to the results of operations.
Intangible Assets - Intangible assets consist of the following amounts as
of December 28, 1997 and December 29, 1996:
1997 1996
-------------------------------------
Goodwill $ 56,551,253 $ 16,648,361
Non-compete agreements 2,013,187 1,393,187
Employee and customer lists 832,837 214,435
-------------------------------------
Total 59,397,277 18,255,983
Less accumulated amortization (1,940,860) (457,395)
-------------------------------------
$ 57,456,417 $ 17,798,588
=====================================
Goodwill is amortized using the straight-line method over 30 years. The
non-compete agreements and employee and customer lists 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." 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.
21
<PAGE>
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).
Net Income Per Common Stock - Basic net income per common share ("Basic
EPS") excludes dilution and is computed by dividing net income by the
weighted-average number of common shares outstanding during the year.
Diluted net income per common share ("Diluted EPS") reflects the potential
dilution that could occur if stock options or other common stock
equivalents were exercised or converted into common stock. The computation
of Diluted EPS does not assume exercise or conversion of securities that
would have an antidilutive effect on net income per common share. Net
income per common share amounts and share data have been restated for all
years presented to reflect Basic and Diluted EPS.
Following is a reconciliation of the numerator and denominator of Basic EPS
to the numerator and denominator of Diluted EPS for all years presented:
<TABLE>
<CAPTION>
Net Income Shares Per-Share
(Numerator) (Denominator) Amount
---------------------------------------------------
<S> <C> <C> <C>
Fiscal 1997:
Basic EPS $ 7,526,227 9,654,204 $ 0.78
Effect of stock options - 126,301
----------------------------------
Diluted EPS $ 7,526,227 9,780,505 $ 0.77
----------------------------------
Fiscal 1996:
Basic EPS $ 4,029,160 6,780,400 $ 0.59
Effect of stock options - 58,079
----------------------------------
Diluted EPS $ 4,029,160 6,838,479 $ 0.59
----------------------------------
Fiscal 1995:
Basic EPS $ 2,677,080 4,984,616 $ 0.54
Effect of stock options - 13,636
Effect of shareholder distribution (see Note 7) - 1,230,769
----------------------------------
Diluted EPS $ 2,677,080 6,229,021 $ 0.43
==================================
</TABLE>
At the end of fiscal 1997, 1996 and 1995, there were outstanding options to
purchase 284,000, 39,000 and 13,500 shares of common stock, respectively
that were not included in the computation of Diluted EPS because the
options' exercise prices were greater than the average market price of the
common shares.
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 $.01 par value per share.
This stock split has been retroactively reflected in the consolidated
financial statements.
22
<PAGE>
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.
Recent Accounting Pronouncement - In June 1997, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 131,
"Disclosures About Segments of an Enterprise and Related Information." This
statement establishes new standards for public companies to report
information about operating segments, products and services, geographic
areas and major customers. This statement is effective for periods
beginning after December 15, 1997.
Reclassifications - Certain reclassifications have been made to the fiscal
1996 consolidated financial statements to conform to the current year's
presentation.
(3) Acquisitions
All of the Company's acquisitions have been accounted for using the
purchase method, and the excess of the purchase price over the estimated
fair value of the acquired assets less liabilities assumed has been
allocated to goodwill and other intangible assets. Certain acquisitions
have contingent earnout components of the purchase price. Earnout amounts
accrued increase the amount of goodwill related to the acquisition. The
following is a summary of acquisitions during fiscal years 1997, 1996 and
1995:
<TABLE>
<CAPTION>
Max. Earnout Amt. Allocated
Date Purchase Remaining to Intangible
Acquired Price(1) As of 12/28/97 Assets
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
1997 Acquisitions:
Computer Group, Inc.(2) January $ 2,747,000 $ 1,300,000 $ 2,647,000
Bedford Consultants, Inc.(2) July 3,803,000 1,900,000 3,184,000
Telecom Project Assistance, Inc. July 2,005,000 4,000,000 1,911,000
Execusoft, Inc. August 5,005,000 5,000,000 4,947,000
JesCo Technical Services, Inc. October 4,851,000 7,000,000 4,816,000
Century Personnel, Inc.,
M.A. Jones Enterprises, Inc. October 15,030,000 10,000,000 14,928,000
Others Various 6,113,000 625,000 5,170,000
-------------------------------------------------------------------
$ 39,554,000 $ 29,825,000 $ 37,603,000
===================================================================
1996 Acquisitions:
Abacus Consulting Group, Inc.
Abacus Consultants, Inc.,
The Performance Professionals July $ 5,063,000 $ -- $ 5,043,000
Wolfe & Associates, Inc.(2) November 8,185,000 4,000 8,228,000
Others Various 4,367,000 -- 4,203,000
-------------------------------------------------------------------
$ 17,615,000 $ 4,000 $ 17,474,000
===================================================================
1995 Acquisitions:
PAMS Temporary Employment Service
Inc., National Collex Corporation December $ 2,591,000 $ -- $ 2,545,000
Others Various 1,415,000 -- 1,356,000
-------------------------------------------------------------------
$ 4,006,000 $ -- $ 3,901,000
===================================================================
</TABLE>
- ------------------------------
(1) Includes earnout amounts paid or accrued as of December 28, 1997 and
direct acquisition costs
(2) Stock acquisitions
23
<PAGE>
Pro Forma Acquisition Information - Unaudited - The unaudited pro forma
acquisition information for fiscal years 1997 and 1996 presents the results
of operations as if the 1997 and 1996 acquisitions has occurred at the
beginning of fiscal 1996. The results of operations give effect to certain
adjustments, including amortization of intangible assets, interest expense
on acquisition debt, the reduction in expenses for the difference between
compensation of employees prior to the acquisition and their compensation
following the acquisition, income taxes and the additional common shares
deemed to be outstanding as the result of the Company's public offerings.
The pro forma results have been prepared for comparative purposes only and
do not purport to be indicative of what would have occurred had the
acquisitions been made at the beginning of the applicable years 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)
1997 1996
-----------------------------------
Service Revenues $ 253,667 $ 192,315
Income from operations 16,383 8,576
Net income 9,807 4,842
Diluted EPS 0.88 0.45
(4) Line of Credit
The Company has a secured line of credit agreement with certain banks which
provides for maximum borrowings of $35 million. The agreement, which
provides for both short-term and long-term borrowings, expires in October
2000. Short-term borrowings bear interest at a bank's prime rate (8.5% at
December 28, 1997) and long-term borrowings bear interest at LIBOR plus
1.75% (7.5% at December 28, 1997). The rate related to the amount over
LIBOR may increase based upon certain financial ratios. The agreement
contains a commitment fee of three-eighths of one percent on the unused
portion which is payable quarterly. Borrowings under the agreement are
secured by substantially all of the assets of the Company. The agreement
provides for letters of credit of $7 million, which reduces the borrowing
availability under the line of credit. As of December 28, 1997, there were
outstanding letters of credit of $3 million for purposes of securing the
Company's workers' compensation premium obligation. As of December 28,
1997, total availability under the line of credit was $32 million and no
borrowings were outstanding. During fiscal 1997, the maximum outstanding
balances of short-term and long-term borrowings under the agreement were
$10.0 million and $13.0 million, respectively. The weighted average
interest rates of the short-term and long-term borrowings were 8.5% and
7.5%, respectively.
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 28, 1997, 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 various related
parties. (See Note 11.)
24
<PAGE>
Future minimum lease payments under noncancelable operating leases are as
follows:
Fiscal Year Ending
1998 $ 2,493,565
1999 2,069,370
2000 1,237,444
2001 611,583
2002 414,909
Thereafter 483,025
------------------
$ 7,309,896
==================
Facility rental expense for the fiscal years 1997, 1996 and 1995 totaled
approximately $2,154,000, $1,110,000 and $649,000 respectively.
Legal Matters - In June 1997, a former customer of the Company commenced
litigation against the Company alleging breach of contract, negligence,
fraud and misrepresentation. The allegations are based upon the alleged
theft of surplus military goods from the former customer's warehouse by a
former temporary employee of the Company. The plaintiff is seeking damages
in excess of $7 million. In September 1997, the Company filed a motion to
dismiss the negligence claim and filed an answer to the complaints denying
the material allegations and asserting several affirmative defenses. In
December 1997, the judge denied the Company's motion to dismiss without
prejudice. The Company believes the claim is without merit and has not
recorded any amounts in the accompanying financial statements related to
this claim.
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 or results of
operations of the Company.
(6) Public Offerings
In October 1997, the Company completed a secondary public offering of its
common stock and issued 3,000,000 shares of common stock. In addition, at
this same time, the underwriters exercised their overallotment option to
purchase an additional 600,000 common shares. The proceeds received from
the offering and the exercise of the overallotment option, net of
underwriting commissions and offering costs, totaled approximately
$56,832,000.
In December 1996, the Company completed a secondary public offering and
issued 2,000,000 shares of common stock. The proceeds received from the
offering net of underwriting commissions and offering costs, totaled
approximately $18,098,000. In connection with the December 1996 secondary
offering, the underwriters exercised their overallotment option to purchase
330,000 common shares in January 1997. The Company received net proceeds of
approximately $3,000,000 from the exercise of the overallotment option.
In July 1995, the Company completed an initial public offering and issued
2,200,000 shares of common stock. The proceeds received from the offering,
net of underwriting commissions and offering costs totaled approximately
$12,629,000.
25
<PAGE>
(7) Distribution 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. 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 had
occurred at the beginning of 1995.
(8) 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. For fiscal year 1995, the Company's
provision for income taxes is presented on a pro forma basis as if the
election had been terminated at the beginning of fiscal 1995.
The components of the provision for income taxes for fiscal years 1997,
1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-----------------------------------------------------------
<S> <C> <C> <C>
Current provision -
Federal $ 4,796,915 $ 2,859,353 $ 1,030,662
State 899,165 448,001 160,777
-----------------------------------------------------------
5,696,080 3,307,354 1,191,439
-----------------------------------------------------------
Deferred provision (benefit) -
Federal (502,710) (714,062) (152,956)
State (93,894) (111,879) (17,692)
Change from S Corporation status -- -- 445,000
-----------------------------------------------------------
(596,604) (825,941) 274,352
-----------------------------------------------------------
Pro forma adjustment -- -- 262,862
-----------------------------------------------------------
Total provision for income taxes $ 5,099,476 $ 2,481,413 $ 1,728,653
===========================================================
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 1997, 1996 and 1995:
<CAPTION>
1997 1996 1995
-----------------------------------------------------------
Statutory federal income tax rate 34.3% 34.0% 34.0%
State income taxes, net of federal benefit 3.9 3.4 3.3
Other 2.2 0.7 1.9
-----------------------------------------------------------
40.4% 38.1% 39.2%
-----------------------------------------------------------
</TABLE>
26
<PAGE>
The components of the deferred tax assets and liabilities at December 28,
1997 and December 29, 1996 are as follows:
1997 1996
----------------------------------
Deferred income tax assets -
Workers' compensation reserves $ 1,159,917 $ 713,293
Allowance for doubtful accounts 283,138 200,336
Other 208,611 148,822
----------------------------------
1,651,666 1,062,451
==================================
Deferred income tax liabilities -
Cash to accrual adjustments (301,212) (559,360)
Depreciation (105,769) (37,758)
Other (199,492) (16,744)
----------------------------------
(606,473) (613,862)
----------------------------------
Net deferred income tax asset $ 1,045,193 $ 448,589
==================================
Balance sheet classification -
Current asset $ 1,238,955 $ 661,645
Long-term liability (193,762) (213,056)
----------------------------------
$ 1,045,193 $ 448,589
==================================
(9) Stock Based Compensation
As of December 28, 1997, the Company had a stock incentive plan which is
described below. The Company applies Accounting Principles Board ("APB")
Opinion No. 25 and related interpretations in accounting for its plan under
which no compensation cost has been recognized. Had compensation cost been
determined consistent with SFAS No. 123, "Accounting for Stock-Based
Compensation," the Company's net income and earnings per share for fiscal
1997, 1996 and 1995 would approximate the pro forma amounts below (in
thousands except per share data):
1997 1996 1995
-------------------------------------------
Net income
As reported $ 7,526 $ 4,029 $ 2,677
Pro forma 6,081 3,735 2,563
Diluted EPS
As reported $ 0.77 $ 0.59 $ 0.43
Pro forma 0.62 0.55 0.41
Because the SFAS No. 123 method of accounting has not been applied to
options granted prior to January 1, 1995, and due to the nature and timing
of the options grants, the resulting pro forma compensation cost may not be
indicative of future years.
Stock Price Assumptions - The fair value of each option grant has been
estimated on the grant date using the Black-Scholes option-pricing model
with the following assumptions used for grants in fiscal years 1997, 1996
and 1995, in calculating compensation cost: expected stock price volatility
of 56 percent for 1997, 47 percent for both fiscal 1996 and 1995, and an
average risk-free interest rate of 6.2 percent for all years, and an
expected life of five years for director options and seven years for
employee options for fiscal 1997, 1996 and 1995.
27
<PAGE>
Stock Incentive Plan - The Company established a stock incentive plan (the
"Plan") which allows for the issuance of a maximum of 800,000 shares of
common stock to officers, directors, consultants and other key employees.
The Plan allows for the grant of incentive or nonqualified options, stock
appreciation rights, restricted shares of common stock or stock units and
is administered by the 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 1997, 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 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. 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
-------------------------------------------
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
Granted 270,000 14,000 16.95
Exercised (16,982) -- 8.41
Forfeited (5,280) -- 9.69
-------------------------------------------
Outstanding at December 28, 1997 496,878 57,000 12.92
===========================================
Exercisable at December 28, 1997 147,816 29,000 $ 11.46
===========================================
</TABLE>
28
<PAGE>
The weighted average fair value of options granted was $10.73, $5.91, and
$3.82 for grants made during fiscal years 1997, 1996 and 1995,
respectively. The following is additional information with respect to the
stock options:
<TABLE>
<CAPTION>
Weighted-
Outstanding Average
as of Remaining Weighted- Exercisable Weighted-
Exercise Price December 28, Contractual Average At December 28, Average
Range 1997 Life Exercise Price 1997 Exercise Price
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$6.50 - $9.50 199,478 7.5 $ 7.77 85,748 $ 7.57
9.51 - 13.56 74,400 7.0 11.32 30,400 11.43
13.57 - 19.38 280,000 8.9 17.02 60,668 16.96
-----------------------------------------------------------------------------------------------
553,878 8.1 $ 12.92 176,816 $ 11.46
-----------------------------------------------------------------------------------------------
</TABLE>
(10) Employee Benefit Plans
The Company has a 401(k) defined contribution plan. Employee contributions
may be invested in several alternatives. Company contributions to the plan,
including matching contributions, may be made at the discretion of the
Company. The Company's contributions to the plan were approximately
$60,000, $48,000 and $30,000 for the fiscal years 1997, 1996 and 1995
respectively.
During 1997, the Company established a deferred compensation plan for
certain key officers and employees that provides the opportunity to defer a
portion of their compensation. Amounts deferred are held in a Rabbi Trust
which invests in various mutual funds as directed by the participants. The
trust assets are recorded as a long-term other asset on the accompanying
consolidated balance sheet because such amounts are subject to the claim of
creditors. The Company's deferred compensation liability represents amounts
deferred by participants plus any earnings on the trust assets. This amount
totaled approximately $126,000 at December 28, 1997.
(11) Related Party Transactions
In December 1997, the Company purchased certain assets and substantially
all of the business of TSI of Utah, Inc. ("TSIU"), a company that provides
industrial temporary staffing services and was incorporated by an adult son
of certain significant shareholders of the Company, for approximately
$1,285,000, of which $600,000 was paid in cash with the remaining $685,000
in a note payable. The excess of the initial purchase price over the
estimated fair value of the acquired tangible assets was approximately
$1,270,000 of which $1,190,000 has been allocated to goodwill and
approximately $80,000 has been allocated to other intangible assets.
29
<PAGE>
Prior to the acquisition, TSIU had entered into a franchise agreement with
the Company to use the TSI name. Under the franchise agreement the Company
agreed to fund employee costs and collect customer billings on behalf of
TSIU. The Company received a service fee based upon a percentage of TSIU's
gross profit. As of the date of acquisition, the Company had receivables of
approximately $625,000 due from TSIU that were used to reduce the note
payable to TSIU. As of December 29, 1996 the Company had receivables due
from TSIU of approximately $462,000 which were secured by outstanding
receivables of TSIU of approximately $472,000. During fiscal years 1997,
1996 and 1995, the Company recorded service fee revenues of approximately
$133,000, $126,000 and $43,000 respectively, relating to the agreement. The
Company believes that the terms of the franchise agreement were at least as
favorable as the terms that could have been obtained from an unaffiliated
third party in a similar transaction.
The Company leases its corporate office building from the adult children of
certain significant shareholders of the Company under a ten-year lease
agreement with an option to renew for ten additional years. Rental expense
during fiscal 1997, 1996 and 1995 amounted to approximately $86,000,
$77,000 and $65,000 respectively. Future minimum lease payments related to
this lease will average approximately $97,000 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. During 1997 this note, along with all accrued
interest, was repaid to the Company. The note was unsecured, accrued
interest at ten percent per annum and was due on demand. The note
receivable was included in other long-term assets in the accompanying
consolidated balance sheet.
During 1997, the Company entered into an employment agreement with one of
its directors to assist and advise the Company with respect to identifying
and evaluating potential acquisitions. Prior to her employment, the Company
had a consulting agreement with this director to perform the same
functions. Compensation under the consulting agreement was $3,500 per
month, which includes the $1,000 per board meeting fee otherwise payable.
For the fiscal years 1997, 1996 and 1995, consulting expense was $24,500,
$42,000 and $21,000 respectively.
(12) Subsequent Events
Subsequent to year-end 1997, the Company purchased two commercial staffing
and one IT consulting company for approximately $6,110,000 and contingent
future earnouts. The Company intends to account for each of these
acquisitions as a purchase.
30
<PAGE>
(13) Selected Quarterly Financial Data (Unaudited)
A summary of quarterly financial information for fiscal years 1997 and 1996
is as follows (dollars in thousands except per share date):
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------------------------------------------------------
<S> <C> <C> <C> <C> 1997:
Service revenues $ 40,846 $ 46,518 $ 54,389 $ 67,498
Gross profit 8,707 10,210 12,353 15,441
Net income 1,318 1,639 2,115 2,454
Net income per common share:
Basic 0.15 0.18 0.23 0.21
Diluted 0.15 0.18 0.23 0.21
1996:
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:
Basic 0.11 0.13 0.20 0.15
Diluted 0.11 0.13 0.20 0.15
</TABLE>
31
<PAGE>
Report of Independent Public Accountants
To SOS Staffing Services, Inc.:
We have audited the accompanying consolidated balance sheets of SOS
Staffing Services, Inc. (a Utah Corporation) and subsidiaries as of
December 28, 1997 and December 29, 1996, and the related consolidated
statements of income, shareholders' equity and cash flows for each of three
fiscal years in the period ended December 28, 1997. 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 28, 1997 and
December 29, 1996, and the results of their operations and their cash flows
for each of the three fiscal years in the period ended December 28, 1997 in
conformity with generally accepted accounting principles.
/s/Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Salt Lake City, Utah
January 30, 1998
32
<PAGE>
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
e-mail: [email protected]
Transfer Agent and Registrar
- ----------------------------
Zions First National Bank, N.A.
Stock Transfer Services
1 South Main Street
Salt Lake City, Utah 84101
Telephone: (801) 524-4812
Independent Accountants
- -----------------------
Arthur Andersen LLP
36 South State Street
Suite 1260
Salt Lake City, Utah 84111
Telephone: (801) 533-0820
Investor Relations
- ------------------
Jordan Richard Assoc.
350 South 400 East
Suite 206
Salt Lake City, Utah 84111
Telephone: (801) 595-8611
Stock Listing
- -------------
SOS Staffing Services, Inc.'s common stock is traded on the Nasdaq National
Market tier of The Nasdaq Stock Market under the Symbol: "SOSS". The stock table
abbreviation is "SOS Stffg".
Form 10-K
- ---------
Copies of the Company's annual report to the Securities and Exchange Commission
on Form 10-K may be obtained, without charge, by contacting the Investor
Relations Department at SOS Staffing Services, Inc.
Common Stock Data
- -----------------
As of March 2, 1998, the Company had 66 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) 7 1/8 6 1/2
Third Quarter 8 1/2 9 3/4
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
1997
First Quarter 13 3/8 10
Second Quarter 15 3/4 10 7/8
Third Quarter 19 1/2 14 5/8
Fourth Quarter 24 16 1/2
On March 2, 1998, the closing price of the Company's common stock, as reported
on the NASDAQ National Market was 20 13/16.
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.
Annual Meeting
- --------------
Shareholders and other interested parties are invited to attend the Annual
Meeting of Shareholders on Wednesday, May 13, 1998 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.
Directors and Officers
- ----------------------
JoAnn W. Wagner
Chairman of the Board
Executive Vice President
Howard W. Scott, Jr.
Director
Chief Executive Officer
Peter R. Sollenne
Director
President and Chief Operating Officer
Stanley R. deWaal(1)
Director
President, DeWaal Keeler & Co., P.C.
Salt Lake City, Utah
Samuel C. Freitag(1)
Director
Senior Managing Director
George K. Baum Merchant Banc, L.L.C.
Kansas City, Missouri
R. Thayne Robson(1,2)
Director
Professor of Management and Research &
Professor of Economics, Univ. of Utah
Salt Lake City, Utah
Randolph K. Rolf(2)
Director
Chief Executive Officer, Unitog Company
Kansas City, Missouri
Annette Strauss(2)
Director
Dallas, Texas
Richard J. Tripp
Director
Senior Vice President
Gary B. Crook
Executive Vice President,
Chief Financial Officer & Treasurer
W.B. Collings
Vice President, Controller & Asst. Secretary
John K. Morrison
General Counsel and Secretary
(1) Member, Audit Committee
(2) Member, Compensation Committee
Exhibit 21
Subsidiary Companies of
SOS Staffing Services, Inc.
Name of Subsidiary State of Incorporation
- ------------------ ----------------------
Bedford Consultants, Inc. California
Computer Group, Inc. Washington
Computer Professional Resources, Inc. Kansas
ServCom Staff Management, Inc. Utah
SOS Collection Services, Inc. Arizona
SOS Information Technology Company Utah
Wolfe & Associates, Inc. New Mexico
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.
ARTHUR ANDERSEN LLP
Salt Lake City, Utah
March 25, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-28-1997
<PERIOD-START> DEC-30-1996
<PERIOD-END> DEC-28-1997
<CASH> 20462647
<SECURITIES> 0
<RECEIVABLES> 33660075
<ALLOWANCES> (678000)
<INVENTORY> 0
<CURRENT-ASSETS> 55888923
<PP&E> 6379846
<DEPRECIATION> (2353511)
<TOTAL-ASSETS> 118289571
<CURRENT-LIABILITIES> 13098940
<BONDS> 0
0
0
<COMMON> 126530
<OTHER-SE> 104208553
<TOTAL-LIABILITY-AND-EQUITY> 118289571
<SALES> 0
<TOTAL-REVENUES> 209250847
<CGS> 0
<TOTAL-COSTS> 162539859
<OTHER-EXPENSES> 33071556
<LOSS-PROVISION> 645584
<INTEREST-EXPENSE> 368145
<INCOME-PRETAX> 12625703
<INCOME-TAX> 5099476
<INCOME-CONTINUING> 7526277
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7526277
<EPS-PRIMARY> 0.78
<EPS-DILUTED> 0.77
</TABLE>
