SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 28, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________to__________
Commission File Number 0-26094
SOS STAFFING SERVICES, INC.
(Exact name of registrant as specified in its charter)
Utah 87-0295503
(State or other jurisdiction (I.R.S. Employer ID No.)
of incorporation)
1415 South Main Street
Salt Lake City, Utah 84115
(Address of principal executive offices)
(801) 484-4400
(Telephone number)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months ( or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filings
requirements for the past 90 days.
Yes____X______ No___________
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class of Common Stock Outstanding at August 5, 1998
--------------------- -----------------------------
Common Stock, $0.01 par value 12,680,998
1
<PAGE>
TABLE OF CONTENTS
Part I - Financial Information
Item 1. Financial Statements Page(s)
-------
Condensed Consolidated Balance Sheets
As of June 28, 1998 and December 28, 1997 3-4
Condensed Consolidated Statements of Income
For the Thirteen and Twenty-six Weeks Ended
June 28, 1998 and June 29,1997 5
Condensed Consolidated Statements of Cash Flows
For the Twenty-six Weeks Ended
June 28, 1998 and June 29, 1997 6-7
Notes to Condensed Consolidated Financial Statements 8-10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11-12
Item 3. Quantitative and Qualitative Discussion About Market Risk 12
Part II - Other Information
Item 1. Legal Proceedings 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 5. Other Information 13-14
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
2
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
SOS STAFFING SERVICES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
June 28, December 28,
1998 1997
-------------------- --------------------
<S> <C> <C>
CURRENT ASSETS: (Unaudited)
Cash and cash equivalents $ 5,620,072 $ 20,462,647
Accounts receivable, net 41,528,721 32,982,075
Current portion of workers' compensation deposit 461,653 475,549
Prepaid expenses and other 1,088,146 729,697
Deferred tax asset 1,698,249 1,238,955
-------------------- --------------------
Total current assets 50,396,841 55,888,923
-------------------- --------------------
PROPERTY AND EQUIPMENT, at cost:
Computer equipment 3,603,822 2,852,320
Office equipment 3,761,314 2,241,392
Leasehold improvements and other 1,409,412 1,286,134
-------------------- --------------------
8,774,548 6,379,846
Less accumulated depreciation and amortization (3,023,386) (2,353,511)
-------------------- --------------------
Total property and equipment, net 5,751,162 4,026,335
-------------------- --------------------
OTHER ASSETS:
Workers' compensation deposit, less current portion 106,369 106,369
Intangible assets, net 90,053,726 57,456,417
Deposits and other assets 806,194 811,527
-------------------- --------------------
Total other assets 90,966,289 58,374,313
-------------------- --------------------
Total assets $ 147,114,292 $ 118,289,571
==================== ====================
</TABLE>
The accompanying notes to condensed consolidated
financial statements are an integral part of these
condensed consolidated balance sheets.
3
<PAGE>
SOS STAFFING SERVICES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
June 28, December 28,
1998 1997
--------------------- --------------------
<S> <C> <C>
CURRENT LIABILITIES: (Unaudited)
Accounts payable $ 2,459,530 $ 971,775
Accrued payroll costs 4,077,359 3,566,859
Current portion of workers' compensation reserve 2,066,990 2,537,995
Accrued liabilities 1,084,550 663,042
Income taxes payable 93,074 946,611
Accrued acquisition costs and earnouts 2,730,042 4,412,658
--------------------- --------------------
Total current liabilities 12,511,545 13,098,940
--------------------- --------------------
LONG -TERM LIABILITIES:
Workers' compensation reserve, less current portion 477,982 535,580
Notes payable 23,000,000 -
Deferred income tax liability 748,012 193,762
Deferred compensation liability 298,285 126,206
--------------------- --------------------
Total long-term liabilities 24,524,279 855,548
--------------------- --------------------
SHAREHOLDERS' EQUITY:
Common stock 126,749 126,530
Additional paid-in capital 91,463,671 91,152,122
Retained earnings 18,488,048 13,056,431
--------------------
---------------------
Total shareholders' equity 110,078,468 104,335,083
--------------------- --------------------
Total liabilities and shareholders' equity $ 147,114,292 $ 118,289,571
===================== ====================
</TABLE>
The accompanying notes to condensed consolidated
financial statements are an integral part of these
condensed consolidated balance sheets.
4
<PAGE>
SOS STAFFING SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
13 Weeks Ended 26 Weeks Ended
-------------------------------------------- --------------------------------------------
June 28, 1998 June 29, 1997 June 28, 1998 June 29, 1997
-------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C> <C>
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
SERVICE REVENUES $ 82,413,997 $ 46,518,025 $ 152,572,299 $ 87,364,110
DIRECT COSTS OF SERVICES 63,157,616 36,308,265 117,309,598 68,447,274
-------------------- --------------------- --------------------- ---------------------
Gross profit 19,256,381 10,209,760 35,262,701 18,916,836
-------------------- --------------------- --------------------- ---------------------
OPERATING EXPENSES:
Selling, general and
administrative 13,089,650 7,227,173 24,443,362 13,584,303
Intangibles amortization 891,586 292,669 1,651,673 567,662
-------------------- --------------------- --------------------- ---------------------
Total operating expenses 13,981,236 7,519,842 26,095,035 14,151,965
-------------------- --------------------- --------------------- ---------------------
INCOME FROM OPERATIONS 5,275,145 2,689,918 9,167,666 4,764,871
-------------------- --------------------- --------------------- ---------------------
OTHER INCOME (EXPENSE):
Interest expense (240,155) (37,209) (273,114) (74,070)
Interest income 108,222 154,482 218,024 238,123
Other, net (29,412) (28,670) 31,560 33,069
-------------------- --------------------- --------------------- ---------------------
Total other income (expense),net (161,345) 88,603 (23,530) 197,122
-------------------- --------------------- --------------------- ---------------------
INCOME BEFORE PROVISION
FOR INCOME TAXES 5,113,800 2,778,521 9,144,136 4,961,993
PROVISION FOR INCOME TAXES (2,078,932) (1,139,392) (3,712,519) (2,005,111)
-------------------- --------------------- --------------------- ---------------------
NET INCOME $ 3,034,868 $ 1,639,129 $ 5,431,617 $ 2,956,882
==================== ===================== ===================== =====================
NET INCOME PER COMMON SHARE:
Basic $ 0.24 $ 0.18 $ 0.43 $ 0.33
Diluted $ 0.24 $ 0.18 $ 0.42 $ 0.33
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING:
Basic 12,670,797 9,038,225 12,665,505 9,012,500
Diluted 12,871,709 9,132,474 12,859,304 9,096,448
</TABLE>
The accompanying notes to condensed consolidated
financial statements are an integral part of
these condensed consolidated statements.
5
<PAGE>
SOS STAFFING SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Increase (Decrease) in Cash and Cash Equivalents
26 Weeks Ended
--------------------------------------------
June 28, June 29,
1998 1997
--------------------- --------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES: (Unaudited) (Unaudited)
Net income $ 5,431,617 $ 2,956,882
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 2,274,048 836,930
Deferred income taxes 94,956 (300,635)
Loss on disposition of assets 11,611 4,336
Changes in operating assets and liabilities:
Accounts receivable, net (7,388,803) (2,713,032)
Workers' compensation deposit 13,896 (100,001)
Prepaid expenses and other (312,424) 11,051
Amounts due from related parties - 14,246
Deposits and other assets 177,412 (340,874)
Accounts payable 1,487,755 (199,623)
Accrued payroll costs 510,500 256,429
Workers' compensation reserve (528,603) 377,774
Accrued liabilities 145,485 75,997
Income taxes payable (853,537) (269,226)
--------------------- --------------------
Net cash provided by operating activities 1,063,913 610,254
--------------------- --------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (2,033,228) (674,415)
Cash paid for acquisitions and earnouts (37,245,028) (4,220,023)
Proceeds from sale of property and equipment 60,000 -
--------------------- --------------------
Net cash used in investing activities $ (39,218,256) $ (4,894,438)
--------------------- --------------------
</TABLE>
The accompanying notes to condensed consolidated
financial statements are an integral part of these
condensed consolidated statements.
6
<PAGE>
SOS STAFFING SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash and Cash Equivalents
<TABLE>
<CAPTION>
26 Weeks Ended
--------------------------------------------
June 28, June 29,
1998 1997
--------------------- --------------------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES: (Unaudited) (Unaudited)
Proceeds from issuance of common stock, net $ - $ 3,004,300
Proceeds from exercise of employee stock options 311,768 29,788
Net borrowings on line of credit - 507,668
Proceeds from long-term borrowings 23,000,000 -
--------------------- --------------------
Net cash provided by financing activities 23,311,768 3,541,756
--------------------- --------------------
NET DECREASE IN CASH
AND CASH EQUIVALENTS (14,842,575) (742,428)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 20,462,647 5,784,651
--------------------- --------------------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 5,620,072 $ 5,042,223
===================== ====================
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ 259,060 $ 62,819
Income taxes $ 4,471,100 $ 2,510,376
</TABLE>
The accompanying notes to condensed consolidated
financial statements are an integral part of these
condensed consolidated statements.
7
<PAGE>
SOS STAFFING SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Basis of Presentation
The accompanying condensed consolidated financial statements have been
prepared by the Company, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations. These condensed consolidated financial statements reflect
all adjustments (consisting only of normal recurring adjustments), which in the
opinion of management, are necessary to present fairly the results of operations
of the Company for the periods presented. It is suggested that these condensed
consolidated financial statements be read in conjunction with the condensed
consolidated financial statements and the notes thereto included in the
Company's Annual Report to Shareholders on Form 10-K.
The results of operations for the thirteen and twenty-six week periods
ended June 28, 1998 are not necessarily indicative of the results to be expected
for the full year.
Note 2. Net Income Per Common Share
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 following is a reconciliation of the numerator and denominator used
to calculate Basic and Diluted EPS:
<TABLE>
<CAPTION>
Thirteen Weeks Ended June 28, 1998 Thirteen Weeks Ended June 29, 1997
-------------------------------------------- -----------------------------------------
Per-Share Per-Share
Income Shares Amount Income Shares Amount
------------ ------------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS $3,034,868 12,670,797 $0.24 $1,639,129 9,038,225 $0.18
Effect of stock options -- 200,912 -- -- 94,249 --
============ ============= ========== =========== ========== ===========
Diluted EPS $3,034,868 12,871,709 $0.24 $1,639,129 9,132,474 $0.18
============ ============= ========== =========== ========== ===========
</TABLE>
<TABLE>
<CAPTION>
Twenty-six Weeks Ended June 28, 1998 Twenty-six Weeks Ended June 29, 1997
-------------------------------------------- -----------------------------------------
Per-Share Per-Share
Income Shares Amount Income Shares Amount
------------ ------------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS $5,431,617 12,665,505 $0.43 $2,956,882 9,012,500 $0.33
Effect of stock options -- 193,799 -- -- 83.948 --
============ ============= ========== =========== ========== ===========
Diluted EPS $5,431,617 12,859,304 $0.42 $2,956,882 9,096,448 $0.33
============ ============= ========== =========== ========== ===========
</TABLE>
Note 3. Acquisitions
All of the Company's acquisitions have been accounted for using the
purchase method. Certain acquisitions have contingent earnout components of the
purchase price. Earnout amounts are accrued when payments become probable which
also increase the amount of goodwill related to the acquisition.
8
<PAGE>
During the twenty-six weeks ended June 28, 1998, the Company acquired
certain assets or stock and substantially all of the operations of eight
businesses. The aggregate purchase price was approximately $27.0 million. Six of
the acquisitions have contingent future earnouts up to a combined maximum of
$26.6 million. The excess of the initial purchase price (excluding earnouts)
over the estimated fair market value of the acquired assets, less liabilities
assumed, was approximately $25.5 million which has been allocated to goodwill
and other intangibles assets.
Earnouts and Acquisition Costs - During the twenty-six weeks ended June
28, 1998 the Company paid earnouts totaling $10.2 million. As of June 28, 1998
accrued acquisition costs and earnouts totaled $2.7 million.
Pro Forma Acquisition Information--Unaudited
The unaudited pro forma acquisition information for the twenty-six
weeks ended June 28, 1998 and June 29, 1997 presents the results of operations
of material acquisitions which were completed during the twenty-six weeks ended
June 28, 1998 as if the acquisitions had occurred at the beginning of each
twenty-six week period. The results of operations give effect to certain
adjustments, including amortization of intangible assets, interest expense on
debt borrowings utilized to fund certain acquisitions, income taxes and shares
outstanding. 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 period or of the
results which may occur in the future.
Unaudited pro forma results of operations
(In thousands, except per share data)
26 Weeks Ended
--------------
June 28, 1998 June 29, 1997
------------- -------------
Service revenues $ 160,288 $ 110,614
Gross profit 37,142 24,425
Income from operations 9,939 6,869
Net income $ 5,724 $ 3,929
=========== ===========
Net income per common share:
Basic $ 0.45 $ 0.39
============ ============
Diluted $ 0.45 $ 0.39
============ ============
Note 4. Legal Matters
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 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.
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.
9
<PAGE>
Note 5. Equity Transactions
During the twenty-six weeks ended June 28, 1998, pursuant to the terms
of the Company's incentive stock option plan, options to purchase 23,046 shares
of common stock were exercised by employees and the Company received $311,768.
Note 6. Subsequent Events
Subsequent to June 28, 1998, the Company purchased assets and
substantially all of the operations of one business for an aggregate purchase
price of approximately $5.5 million.
Effective July 27, 1998, the Company renegotiated its secured revolving
credit facility of $35 million to a $40 million unsecured facility which will
expire in July 2001.
The Company is presently engaged in negotiating the terms of a private
placement of $35 million of senior unsecured debt, consisting of two pieces. The
first piece is a $30 million senior unsecured note with a final ten year
maturity and an average maturity of seven years at a 6.95% coupon rate. The
second piece is a $5 million senior unsecured note with a coupon rate of 6.72%
due in single payment in 2003. Funding of the debt is contingent upon the
execution of final note agreements and other conditions. If closed, the Company
presently intends to use the proceeds from the debt placement to pay off the
current long-term borrowings under the Company's revolving credit facility.
There can be no assurance that this transaction will be completed, or that if
the transaction is completed, the final terms of the transaction will be
consistent with those described above.
10
<PAGE>
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction
with the condensed consolidated financial statements of the Company and notes
thereto appearing elsewhere in this report. The Company's fiscal year consists
of a 52-or 53-week period ending on the Sunday closest to December 31.
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
unaudited income statement.
<TABLE>
<CAPTION>
13 Weeks Ended 26 Weeks Ended
-------------- --------------
June 28, June 29, June 28, June 29,
1998 1997 1998 1997
---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Service revenues 100.0% 100.0% 100.0% 100.0%
Direct cost of services 76.6 78.1 76.9 78.3
------ ------ ------ ------
Gross profit 23.4 21.9 23.1 21.7
------ ------ ------ ------
Operating expenses:
Selling, general and administrative 15.9 15.5 16.0 15.6
Intangibles amortization 1.1 0.6 1.1 0.6
------ ------ ------ ------
Total operating expenses 17.0 16.1 17.1 16.2
------ ------ ------ ------
Operating income 6.4% 5.8% 6.0% 5.5%
======== ======== ======== ========
</TABLE>
Service Revenues. Service revenues increased by $35.9 million, or
77.2%, to $82.4 million for the thirteen weeks ended June 28, 1998, compared to
$46.5 million for the thirteen weeks ended June 29, 1997. Of the $35.9 million
increase, approximately $29.9 million was attributable to offices acquired
during 1997 and 1998, $5.8 million was attributable to increased revenues from
comparable offices and $0.2 million was attributable to opening new offices. For
the twenty-six weeks ended June 28, 1998 service revenues increased by $65.2
million, or 74.6%, to $152.6 million, compared to $87.4 million for the
twenty-six weeks ended June 29, 1997. Of the $65.2 million increase,
approximately $52.1 million was attributable to offices acquired during 1997 and
1998, $12.4 million was attributable to increased revenues from comparable
offices and $0.7 million was attributable to opening new offices. The increase
in service revenues from comparable offices was also generally consistent with
increases in hours billed, customers served and temporary staffing employees
utilized.
Gross Profit. Gross profit as a percentage of service revenues for the
thirteen weeks ended June 28, 1998 and June 29, 1997 was 23.4% and 21.9%
respectively. Gross profit as a percentage of service revenues for the
twenty-six weeks ended June 28, 1998 and June 29, 1997 was 23.1% and 21.7%,
respectively. The increase in gross profit was primarily due to a shift in
business mix towards the information technology business segment, which
typically generates higher gross margins.
Operating Expenses. Operating expenses as a percentage of service
revenues for the thirteen weeks ended June 28, 1998 and June 29, 1997 were 17.0%
and 16.1%, respectively. The increase for the thirteen weeks was largely
attributable to an increase in selling, general and administrative expenses and
amortization of intangible assets. The increase in selling, general and
administrative expenses as a percentage of service revenues was attributable to
a shift towards the information technology segment, where cost structures are
higher. Operating expenses as a percentage of service revenues for the
twenty-six weeks ended June 28, 1998 and June 29, 1997 were 17.1% and 16.2%,
respectively. The increase for the twenty-six weeks was largely attributable to
an increase in selling, general and administrative expenses and amortization of
intangible assets. The increase in selling, general and administrative expenses
as a percentage of service revenues was attributable to a shift towards the
information technology segment, where cost structures are higher. In addition,
during the first quarter of 1998, the Company made investments in training,
marketing and divisional support, as well as the addition of a more competitive
benefit package geared towards the information technology and specialty area.
11
<PAGE>
Income Taxes. The effective combined Federal and state income tax rate
for the thirteen weeks ended June 28, 1998 and June 29, 1997 was 40.7% and
41.0%, respectively. The effective combined federal and state income tax rate
for the twenty-six weeks ended June 28, 1998 and June 29, 1997 was 40.6% and
40.4%, respectively.
Liquidity and Capital Resources
For the twenty-six weeks ended June 28, 1998 net cash provided by
operating activities was $1.1 million compared to net cash provided by operating
activities of $0.6 million for the twenty-six weeks ended June 29, 1997. The
increase in operating cash flow was primarily a result of higher net income and
increased depreciation and amortization.
The Company's investing activities used $2.0 million to purchase
property and equipment, and $37.2 million to acquire businesses and to pay
acquisition earnouts. See Note 3 to the condensed consolidated financial
statements of the Company for a description of certain terms of these
acquisitions.
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 the
underwriters of this offering 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 $56.8 million.
The Company's primary sources of short-term and long-term liquidity and
capital resources at June 28, 1998 were cash flows from operating activities and
borrowings from the revolving credit facility. The Company's revolving credit
facility increased from $35 million to $40 million effective July 27, 1998. As
of June 28, 1998 the Company had outstanding borrowings of $23 million on the
long-term portion of the revolving credit facility. Short-term borrowings bear
interest at the prime rate charged by the Company's lender which is periodically
adjusted (at June 28, 1998, 8.50%), and long-term borrowings which bear interest
at LIBOR plus 1.75% (currently at approximately 7.44%). The Company also had
letters of credit of $4.0 million outstanding at June 28, 1998, 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 June 28, 1998, $8.0 million was available for borrowings or additional
letters of credit under the line of credit. Management believes that the present
credit facility, together with cash reserves and cash flow from operations will
be sufficient to fund the Company's operations and capital expenditure
requirements. Funds for future acquisitions, if undertaken, would only be
available in the near term if the Company completes its pending $35 million
private placement of senior unsecured debt which is contingent upon the
conditions described in Note 6 to the condensed consolidated financial
statements. However, if the Company were to expand its operations significantly,
especially through unanticipated acquisitions, additional capital may be
required. There can be no assurance that the Company will be able to obtain
additional capital at acceptable rates.
Item 3. Qualitative and Quantitative Disclosures About Market Risk
Not Required
12
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
In the ordinary course of its business, the Company is periodically
threatened with or named as a defendant in various lawsuits. 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 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.
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
On May 13, 1998, the Company held its Annual Meeting of Shareholders
(the "Annual Meeting"). 10,764,110 shareholders were present in person or by
proxy at the Annual Meeting. As of the record date for the Annual Meeting, March
23, 1998, there were 12,665,462 shares issued, outstanding and entitled to vote
at the Annual Meeting. At the Annual Meeting, the shareholders of the Company
elected three directors of the Company, JoAnn W. Wagner, Peter R. Sollenne and
Samuel C. Freitag, to serve three-year terms expiring at the annual meeting of
shareholders of the Company to be held in 2001.
The election results were as follows: JoAnn W. Wagner, 10,564,995 votes
cast in favor, Peter R. Sollenne, 10,563,990 votes cast in favor and Samuel C.
Freitag, 10,558,745 votes cast in favor. In addition to the election of the
foregoing directors, Randolph K. Rolf, Stanley R. deWaal and Annette Strauss
continue to serve as directors of the Company with terms expiring at the
Company's 1999 annual meeting of shareholders and R. Thayne Robson, Howard W.
Scott, and Richard J. Tripp continue to serve as directors of the Company with
terms expiring at the Company's 2000 annual meeting of shareholders.
At the Annual Meeting, the shareholders of the Company also approved an
amendment to the Company's 1995 Stock Incentive Plan (the "Plan") to increase
the aggregate number of shares available for issuance upon the exercise of
options granted under the Plan to 1,800,000. The number of votes cast in favor
of the proposal was 8,652,943, the number of votes opposed was 644,889, the
number of abstentions was 71,709 and the number of broker nonvotes was
1,394,569.
Additionally, the shareholders of the Company approved a proposal to
ratify the appointment of Arthur Andersen LLP as independent auditors of the
Company for the fiscal year ending January 3, 1999. The number of votes cast in
favor of the proposal was 10,215,631, the number of votes opposed was 48,615,
the number of abstentions was 499,864 and the number of broker nonvotes was 0.
Item 5. Other Information
In connection with recent revisions to Rule 14a-8 and related rules
promulgated under the Securities Exchange Act of 1934, as amended, the Company
has elected to provide the following information regarding discretionary proxy
voting at the Company's 1999 annual meeting of shareholders (the "1999
Meeting"). If a shareholder desiring to advance a proposal for consideration at
13
<PAGE>
the Company's 1999 Meeting fails to notify the Company of the proposal at least
45 days prior to the month and day of mailing the Company's proxy statement
relating to the 1998 annual meeting of shareholders (March 30), then management
proxies will be allowed to use their discretionary voting authority when the
proposal is raised at the 1999 Meeting, without any discussion of the matter in
the Company's proxy statement.
Item 6. Exhibits and Reports on Form 8-K.
a) Exhibit 27 - Financial Data Schedule, filed herewith.
b) Reports on Form 8-K during the quarter for which this report is
filed.
On May 29, 1998, the Company filed a report on Form 8-K, with
a report date of May 14, 1998, to report the acquisition of
substantially all the assets of Aquas, Inc. and Abacab Software, Inc.
No financial statements were filed with this Form 8-K.
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SOS STAFFING SERVICES, INC.
Registrant
Dated: August 12, 1998 /s/ Howard W. Scott
-------------------
Howard W. Scott
Chief Executive Officer
Dated: August 12, 1998 /s/ Gary B. Crook
-----------------
Gary B. Crook
Executive Vice President and
Chief Financial Officer
15
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