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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 January 3, 1999.
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 8, 1999, based upon the closing sales price of the Common
Stock of $8.75 per share on that date, as reported on the NASDAQ/NMS Stock
Market, was approximately $50,187,856. 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 8, 1999, Registrant had outstanding 12,691,398 shares of Common
Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Annual Report to Shareholders for the fiscal year
ended January 3, 1999 are incorporated by reference into Parts II and IV of this
Report. Portions of the Proxy Statement for the Registrant's 1999 Annual Meeting
of Shareholders to be held May 19, 1999 are incorporated by reference in Part
III of this Report.
PART I
This Annual Report on Form 10-K contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act") and Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), that involve risks and uncertainties. The reader
is cautioned that the actual results of SOS Staffing Services, Inc. will differ
(and may differ materially) from the results discussed in such forward-looking
statements. Factors that could cause or contribute to such differences include
those factors discussed herein under "Factors That May Affect Future Results"
and elsewhere in this Report generally.
ITEM 1. BUSINESS
--------
General
SOS Staffing Services, Inc. ("SOS" or the "Company") is a leading
provider of staffing and consulting services in the western states. As of
January 3, 1999, SOS operated a network of 149 offices located in 17 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.
Since the completion of the Company's initial public offering (the
"IPO") in 1995, the Company has acquired 46 staffing and consulting companies,
representing 73 offices. The Company's network of offices has increased from 42,
at the time of the IPO, to 149, as of January 3, 1999. Sixteen of the
acquisitions completed since July 1996 were IT staffing and consulting
companies, which have allowed the Company to diversify the mix of services
provided to include higher margin services. Additional acquisitions have added
other specialty services, including medical administrative support,
professional, mining, geology, hydrology, high-end administrative and
accounting, 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:
Targeted Customers and Projects. Historically, in the commercial
staffing segment, 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.
The Company's IT division pursues 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. The Company focuses on smaller specialty projects at these larger
businesses or as support in larger projects. The Company believes that it has
developed competitive advantages in serving mid-sized and larger 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.
Pursue Opportunities in Smaller 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
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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 frequently achieved significant penetration and has often become the
dominant provider of staffing services.
Deliver Higher Margin Services. The Company's operating results since
1991 have been significantly enhanced by its strategy of delivering 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, permanent placement, 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, IT, 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 central management information 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 has consolidated its IT staffing, consulting and
outsourcing operations into Inteliant Corporation, a wholly-owned subsidiary of
the Company ("Inteliant") and has developed a support system tailored to the
specific needs of IT customers. Inteliant has responsibility for accounting
(including accounts payable, accounts receivable, and purchasing), marketing,
recruiting, and training. Other functions such as workers' compensation and
other insurance services and legal review have been centralized at the Company's
corporate headquarters.
To encourage an entrepreneurial approach to field management, the
Company has established financial targets and 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.
3
Growth Strategy
Management believes the Company has substantial opportunities to expand
its office network and the range of services it offers to its customers. Since
completing its IPO in June 1995, the Company has added a total of 107 offices
through internal growth and acquisitions. The Company intends, for the
foreseeable future, to concentrate on strengthening its internal office network
by focusing on internal growth.
Focus on Internal Growth. During the last five years, the Company has
maintained a strong internal revenue growth rate. The Company's internal growth
strategy consists of the following:
o 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 provide incentives to field and local
managers to focus on business development within existing offices.
o 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.
o Expand Service Offerings. The Company is actively seeking to
expand the range of IT services it offers to its customers to
include electronic commerce solutions, Internet/intranet
consulting, off-site application development, web enablement,
telecommunications systems solutions and expanded outsourcing
capabilities in the areas of help-desk management and data-center
monitoring. The Company intends to expand its vendor on-premise
business, pursuant to which SOS manages all of the customer's
staffing requirements on-site. Additionally, the Company plans to
expand its offering of high-end administrative services as well as
accounting and financial services. The Company also intends to
further develop partnering relationships under which SOS works
with other staffing providers to meet the customer's staffing
requirements.
o 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
between and within its commercial and IT operations.
Through integration of existing processes, consolidating operations,
and providing resources to existing offices, the Company anticipates that it
will be in a better position to exploit potential services that complement the
Company's operations. Additionally, the Company believes it will be able to
respond more efficiently to the demands of its existing customers while
expanding its offerings to new customers.
Operations
Services Offered. The Company offers a broad range of commercial
staffing and IT staffing, consulting, and outsourcing services. Generally, the
commercial segment provides light industrial, clerical and industrial services
through SOS Staffing Services, Skill Staff, Industrial Specialists, TOPS and
Century Personnel offices. The commercial segment also offers other specialized
services provided by offices such as SOS Technical Services (engineers,
chemists, geologists, designers, drafters, illustrators, artists, writers and
other technical personnel), AccountStaff (accountants, bookkeepers, auditors,
data entry personnel and financial analysts), PAMS (medical administrative
4
services), National Collex (collection services and project billing for medical
facilities), Devon & Devon and Truex (high-end administrative staffing and
permanent placement), CGS Personnel (mining, mineral exploration and
environmental staffing) and Mortgage Staffing (loan servicing and loan
productions professionals).
The Company's commercial staffing services also include professional
employer services such as payrolling, outsourcing, on-site and administrative
professional services. Payrolling typically involves the transfer of a
customer's short-term seasonal or special use employees to the Company's payroll
for a designated period. Outsourcing represents a growing trend among businesses
to contract with third parties to provide a particular function or business
department for an agreed price over a designated period. On-site services
involve locating a regular SOS employee at the customer's place of business to
manage all of the customer's temporary staffing requirements. 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 January 3, 1999, the
Company also provided professional employer organization services on a limited
basis, which offers to SOS customers the benefits of employee leasing.
Historically, the Company has provided IT staffing, consulting and
outsourcing services under the business names of acquired IT business units;
however, in 1998, the Company combined all of its IT services into Inteliant.
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 providing business solutions and typically
include managing application development, enterprise resource planning systems
implementation, e-commerce enablement, telecommunications consulting and
operations engineering. Company consultants provide innovative ideas, insight
and experience to address the customer's business needs 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 or teams. The Company also delivers IT outsourcing services to
customers who turn over to Inteliant personnel the management and staffing of
specific IT functions.
Branch Offices. The Company provides commercial staffing services
through a network of 127 offices located in 15 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 service-specific specialty offices provide specialty
services. In smaller markets, SOS offices offer a broader variety of commercial
staffing services including specialty services. Through acquisitions and
internal development, the Company also has commercial staffing offices in
California, Hawaii, Kansas, Missouri, Oregon, Texas, and Washington.
The Company provides IT staffing and consulting services from 22 IT
offices located throughout the western states and mid-west plus Massachusetts
and North Dakota. The Company's IT staffing and consulting offices generally
serve larger geographic areas than SOS commercial staffing offices, principally
due to the 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 United States, rather than the "hub and spoke" approach
used by the Company to expand its network of commercial staffing offices.
The Company estimates the capital cost of establishing a new office
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.
5
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, cold calls 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, help desk and data-center monitoring. 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 programs 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 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. The Company follows a rigorous screening and interview process
before referring 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. In addition, the Company has the ability to issue
paychecks to commercial staffing employees on a daily basis for work performed.
Customers. Historically, commercial staffing customers have consisted
primarily of small to mid-size customers. Management believes there remains
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 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 performed by larger national consulting
6
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, national branding with the
"Inteliant Corporation" name, as well as its expansion into larger metropolitan
areas, will lead to additional opportunities to provide IT services to mid-size
and larger customers.
No customer accounted for more than two percent of the Company's
consolidated net service revenues during the 1998 fiscal year and the Company's
top ten customers accounted for less than eight percent of service revenues
during the same period. Approximately 14% of the Company's service revenues
generated in the IT segment during the 1998 fiscal year were obtained from two
national customers within the telecommunications industry, and the top ten
customers in that segment account for approximately 20% of total segment
revenues. Management believes, however, that these customers do not represent a
substantial credit or business risk and feel that the segment has adequate
diversification and resources to be protected in the event of the loss of any of
these customers.
Risk Management Program. SOS is responsible for all employee-related
expenses for its staff and temporary 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 $250,000 per incident. Employees in Nevada, Washington, Wyoming, and
North Dakota 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 that seek to limit claims through employee training and avoidance of
high-risk job assignments such as roofing or logging. Except where prohibited by
law, all 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 most
of the Company's commercial staffing offices. The centralized system is designed
to support Company-wide operations such as payroll, billing, accounting and
sales and management reports. The Company has some operations, obtained through
acquisition, that have their own centralized systems in place. Systems have been
implemented to automate the reporting of these entities to the Company; however,
the Company does not anticipate immediately replacing the existing systems at
these locations.
The Company has recently upgraded the corporate and commercial staffing
segment's financial systems with plans to upgrade additional information
processing functions in 1999 and beyond. The new system provides for greater
flexibility in back office functions while interfacing well with the front
office operations at the branch level. All files are backed up routinely and
stored off-site. 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
The Company has developed a central management information system for
use by the Company's IT offices. All of the Company's 22 IT offices are linked
to a central management information system. The Company anticipates that its IT
system will be connected to the Company's existing system for certain common
functions; however, the IT system is designed to accommodate the different
business cycles and processes associated with the IT industry.
7
Year 2000
The management of the Company believes that it is adequately addressing
the year 2000 ("Y2K") problem. In short, the Y2K problem is a result of IT
equipment and systems being designed to recognize the year portion of a date as
two rather than four digits, which means that years coded "00" are recognized by
many systems as the year 1900, not the year 2000. As a result, certain hardware
and software products may not properly function or may fail beginning in year
2000.
As part of the Company's internal quality system based on the
principles of ISO 9002, the Company has formed an internal task force to
identify, address, and remedy Y2K issues. The Company's information system for
its primary commercial staffing operations has been tested and is believed to be
Y2K compliant. Additionally, the Company is currently implementing new financial
system software that has been warranted by the developer to be Y2K compliant.
The Company is also in the process of assessing and testing the information
systems of Inteliant and other independent systems within the Company. The
Company anticipates that such assessment and testing will be completed by
mid-1999.
The Company has identified suppliers of critical services and products
and has sent questionnaires to each such supplier concerning Y2K compliance. The
Company will continue to monitor the compliance of each such supplier through
1999 and beyond. New vendors are also required to provide information concerning
Y2K compliance. The Company is following a similar process for Inteliant and
other independent operations within the Company.
The Company has also sent questionnaires to each of its major customers
regarding the status of Y2K compliance. The Company will continue to monitor the
compliance of each such customer through 1999 and beyond. The Company has
amended its credit application required for each new customer requesting
disclosure of Y2K compliance. The Company is following a similar process for
Inteliant and other independent operations within the Company.
The Company is currently developing an assessment program for each of
its branch offices to assess imbedded chip technology for Y2K compliance. Many
products or systems contain imbedded computer chips that may or may not be Y2K
compliant. Examples of such items include elevators, alarm systems, HVAC units
and thermostats, telephone and voicemail systems. The Company believes that its
assessment of imbedded chip technology will be completed by mid-1999.
Based on current information, the Company does not believe that its
internal systems will fail because of the Y2K problem or cause an interruption
in the delivery of services to its customers. In the event such systems fail,
the Company believes that it has adequate manual systems that would allow for
continued delivery of services to customers. Management does not foresee
significant liability to third parties if the Company's systems are not Y2K
compliant. However, the Company faces two major risks related to Y2K that could
have a material adverse affect on the business of the Company. The first major
Y2K risk is service disruption from third-party suppliers of critical services,
such as telephone, electrical and banking services. As part of its critical
suppliers' assessment, the Company is monitoring and seeking assurance of Y2K
compliance from such suppliers. The second major risk is that the operations of
the customers of the Company will be disrupted by the Y2K problem (either
internally or because of third-party service providers) which could result in a
decrease in or the cessation of the need for the Company's services.
The Company has not yet approved a formal contingency plan for Y2K
issues. The Company expects to have a formal contingency plan in place during
fiscal 1999.
The Company estimates that approximately $150,000 will be incurred in
verifying its Y2K compliance. The majority of costs will be directed to
independent sources for testing of the procedures the Company has implemented.
The costs related to the Company's Y2K compliance program have not had, and are
not expected to have, a material impact on the Company's financial condition,
results of operations or cash flows.
8
Competition
The Company's competitors consist 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 and consulting 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 and consulting employees
to assign in a timely manner, matching of customer requirements with available
resources, competitive pricing and satisfactory work production. The Company
believes its strong emphasis on providing service and value to its customers and
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, Centech, Devon & Devon, Skill Staff,
AccountStaff, TSI, Industrial Specialists, SOS Technical Services, ServCom, PAMS
Employment Services, National Collex, CGS Personnel, Mortgage Staffing, TOPS
Staffing Services, Truex, Inteliant, and other trade names. The Company has
registered or reserved the majority of these names in the appropriate states.
Staff Employees
At January 3, 1999, the Company had approximately 1,400 staff
employees, of which, approximately 650 are billable. The Company's training
department provides general and job specific training to all staff employees,
including continuing training with experienced counterparts. None of the
Company's staff employees is covered by collective bargaining agreements. The
Company considers its relationship with its staff employees to be good.
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 and Section 21E of the Exchange Act. 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
9
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 statements. 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 integrate and expand the Company's
offering of IT services, 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
----------
As of January 3, 1999, the Company provided services through 149
offices in 17 states. These offices typically consist of 1,200 to 5,000 square
feet and are generally 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
Transactions"). The Company believes that the terms of the lease are at least as
favorable as could be obtained from any unrelated third party.
ITEM 3. LEGAL PROCEEDINGS
-----------------
In the ordinary course of its business, the Company is periodically
threatened with or named as a defendant in various lawsuits or administrative
proceedings. The Company maintains insurance in such amounts and with such
coverage and deductibles as management believes to be reasonable and prudent.
The principal risks covered by insurance include workers' compensation, personal
injury, bodily injury, property damage, errors and omissions, fidelity losses,
employer practices liability and general liability.
There is no pending litigation that the Company currently anticipates
will have a material adverse effect on the Company's financial condition or
results of operations.
10
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
No matters were submitted to a vote of security holders during the
fourth quarter of the 53 weeks ended January 3, 1999.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
---------------------------------------------------------------------
The information required by this Item is incorporated by reference to
page 37 of the Company's 1998 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 1998 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 16 of the Company's 1998 Annual Report to Shareholders.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------
The Company is exposed to interest rate changes primarily in relation
to its 1998 Amended Credit Facility and its 1998 Senior Debt Placement. At
January 3, 1999, the Company's outstanding borrowings on the Credit Facility
were $4.9 million while outstanding borrowings on the Senior Debt Placement were
$35.0 million. The Company's interest rate risk management objective is to limit
the impact of interest rate changes on earnings and cash flows and to lower its
overall borrowing costs. To achieve this objective the Company borrows against
its credit facility at variable interest rates. The Company's senior debt
placement bears interest at a fixed interest rate. For fixed rate debt, interest
rate changes generally affect the fair value of the debt, but not the earnings
or cash flows of the Company. Changes in the fair market value of fixed rate
debt generally will not have a significant impact on the Company unless the
Company is required to refinance such debt. At January 3, 1999, the carrying
value of the senior debt placement approximated its fair value.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
------------------------------------------
The information required by this item is incorporated by reference to
pages 17 through 35 of the Company's 1998 Annual Report to Shareholders.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
-----------------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
None
11
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 19, 1999 (the "Proxy Statement"), not later that 120 days
after January 3, 1999, and certain information included therein is incorporated
herein by reference. Only those sections of the Proxy Statement specifically
identified below which address the items set forth herein are incorporated by
reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
--------------------------------------------------
The information required by this Item is incorporated by reference to
the sections entitled "Election of Directors" and "Executive Officers" in the
Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
----------------------
The information required by this Item is incorporated by reference to
the sections entitled "Election of Directors-Director Compensation" and
"Executive Officers-Executive Compensation" in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------
The information required by this Item is incorporated by reference to
the section entitled "Principal Holders of Voting Securities" in the Proxy
Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
The information required by this item is incorporated by reference to
the section entitled "Certain Relationships and Related Transactions" in the
Proxy Statement.
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 17 through 23 of the Company's
1998 Annual Report to Shareholders:
Consolidated Balance Sheets--As of January 3, 1999 and December 28,
1997
Consolidated Statements of Income--For the Fiscal Years Ended January
3, 1999, December 28, 1997 and December 29, 1996.
Consolidated Statements of Shareholders' Equity--For the Fiscal Years
Ended January 3, 1999, December 28, 1997 and December 29, 1996.
Consolidated Statements of Cash Flows--For the Fiscal Years Ended
January 3, 1999, December 28, 1997 and December 29, 1996.
12
Notes to Consolidated Financial Statements
Report of Independent Public Accountants
2. Financial Statement Schedules
-----------------------------
No schedules submitted
(c) Exhibits:
Exhibit Incorporated by Filed Herewith
No. Exhibit Reference
- --------------- ------------------------------------------------------ ------------------- -----------------
3.1 Amended and Restated Articles of Incorporation of (1)
the Company
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.
Reinhold, Rand F. Reinhold, Rena R. Qualls and Robb (1)
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
13
Exhibit Incorporated by Filed Herewith
No. Exhibit Reference
- --------------- ------------------------------------------------------ ------------------- -----------------
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
10.10 Asset Purchase Agreement between the Company, Aquas, (9)
Inc. and Abacab Software, Inc. effective August 19,
1998
10.11 Note Purchase Agreement dated September 1, 1999. (10)
10.12 Amended Credit Agreement dated July 27, 1998 by and (10)
among the Company, The First National Bank of
Chicago and First Security Bank, N.A., together with
Security Agreement and Revolving Credit Notes
13 Annual Report to Shareholders for the year ended (10)
January 3, 1999, incorporated by reference into
Items 5 through 8 of this Annual Report on Form 10-K
and, except as so incorporated by reference, the
Annual Report to Shareholders is not deemed to be
filed as part of this Report.
21 Subsidiaries of the Company (10)
23.2 Consent of Independent Public Accountants (10)
27 Financial Data Schedule (10)
(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.
14
(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) Incorporated by reference to the exhibits to an Amendment to Current
Report on Form 8-K/A filed by the Company on August 19, 1998.
(10) Filed herewith and attached to this Report following page 13 hereof.
(d) Financial Statement Schedules:
------------------------------
No schedules submitted.
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 31, 1999 By: /s/ Gary B. Crook
-----------------------
Gary B. Crook
Executive Vice President,
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 31, 1999
------------------
JoAnn W. Wagner Chief Executive Officer
(principal executive officer)
/s/ Gary B. Crook Executive Vice President and Chief March 31, 1999
- -----------------
Gary B. Crook Financial Officer
(principal accounting officer)
/s/ Michael A. Jones Director and March 31, 1999
- --------------------
Michael A. Jones Executive Vice President
/s/ Richard J. Tripp Director and March 31, 1999
- --------------------
Richard J. Tripp Senior Vice President
/s/ Stanley R. deWaal Director March 31, 1999
- ---------------------
Stanley R. deWaal
/s/ Samuel C. Freitag Director March 31, 1999
--------------------
Samuel Freitag
/s/ R. Thayne Robson Director March 31, 1999
- --------------------
R. Thayne Robson
/s/ Randolph K. Rolf Director March 31, 1999
- --------------------
Randolph K. Rolf
16