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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[ X ] Annual Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
For the fiscal year ended September 29, 1996
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 0-5260
REMEDYTEMP, INC.
(Exact Name of Registrant as Specified in Its Charter)
California 95-2890471
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
32122 Camino Capistrano
San Juan Capistrano, California 92675
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number including area code: (714) 661-1211
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
- ------------------- ----------------------
Class A Common Stock $.01 par value Nasdaq National Market
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 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 registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of the Form 10-K or by
amendment to this Form 10-K. [ ]
The aggregate market value of the Class A Common Stock held by
non-affiliates of the registrant based upon the closing sales price of its
Common Stock on December 20, 1996 on the Nasdaq National Market was $23,792,320.
The number of shares of Class A Common Stock outstanding as of December
16, 1996 was 5,830,100 and the number of shares of Class B Common Stock
outstanding as of December 16, 1996 was 3,058,333.
DOCUMENTS INCORPORATED BY REFERENCE
The registrant will file a definitive Proxy Statement pursuant to
Regulation 14A within 120 days of the end of the fiscal year ended September
29, 1996. Portions of the Company's proxy statement to be mailed to the
shareholders in connection with the Company's annual meeting of shareholders,
scheduled to be held on February 19, 1997, are incorporated by reference in
Part III of this report. Except for the portions expressly incorporated by
reference, the Company's Proxy Statement shall not be deemed to be part of this
report.
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REMEDYTEMP, INC.
1996 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I
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PAGE NO.
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Item 1 Business 3
Item 2 Properties 8
Item 3 Legal Proceedings 8
Item 4 Submission of Matters to a Vote of Security Holders 8
PART II
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Item 5 Market for Registrant's Common Equity and Related
Shareholder Matters 11
Item 6 Selected Financial Data 12
Item 7 Management's Discussion and Analysis of Financial Condition and
Results of Operations 14
Item 8 Financial Statements and Supplementary Data 19
Item 9 Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 19
PART III
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Item 10 Directors and Executive Officers of the Registrant 20
Item 11 Executive Compensation 20
Item 12 Security Ownership of Certain Beneficial Owners and Management 20
Item 13 Certain Relationships and Related Transactions 20
PART IV
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Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K 21
Signatures 22
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PART I
ITEM 1. BUSINESS
In addition to historical information, the description of business below
includes certain forward-looking statements, including those related to the
Company's growth and strategies, future operating results and financial
position as well as economic and market events and trends. The Company's
actual results and financial position could differ materially from those
anticipated in the forward-looking statements as a result of various factors,
including competition, the availability of sufficient personnel, the Company's
ability to sustain historical growth rates and margins and control costs,
market condition and other risks and uncertainties as described below under
the "Risk Factors" section and elsewhere in the Company's Prospectus dated July
10, 1996. The following should be read in conjunction with the Financial
Statements of the Company and Notes thereto.
GENERAL
RemedyTemp, Inc. (The "Company") founded in 1965, and incorporated in
California, is a rapidly growing national provider of clerical and light
industrial temporary staffing services to industrial and service companies,
professional organizations and governmental agencies. The Company provides its
services in 35 states through a network of 161 offices, of which 68 are
Company-owned and 93 are independently-managed. During the twelve months ended
September 29, 1996, the Company placed approximately 109,000 temporary workers,
known as "associates," and provided over 29.3 million hours of staffing
services to over 14,000 clients. From the beginning of fiscal 1993 through the
end of fiscal 1996, the Company added 80 offices and increased revenues and
income before taxes at compound annual growth rates of 32% and 69%,
respectively, to $285.5 million and $12.0 million, respectively.
The Company has positioned itself to take advantage of trends in the
temporary staffing industry, such as increased integration of temporary workers
as a significant, long-term workforce component in both manufacturing and
service-oriented companies and increased outsourcing by companies of certain
staffing functions. The Company focuses on the clerical and light industrial
sectors of the nation's temporary workforce, which together comprise
approximately 60% of the nation's temporary staffing industry revenues,
according to Staffing Industry Association ("SIA"). Through the use of
innovative technologies and value-added services, the Company strives to
partner with its clients to deliver total solutions to their temporary staffing
needs. The Company's expertise in providing associates who possess the skills
and attitudinal characteristics necessary to "fit" into clients' organizations
and perform at a superior level distinguishes the Company as a premium provider
of temporary staffing services.
Over the past three years, the Company has invested significant human and
financial resources in the development of proprietary technologies designed to
enable the Company to provide its clients with premium temporary workers and
unique value-added services. The Company's proprietary technologies are
maintained in three interactive systems: Human Performance Technology
("HPT(SM)"), an innovative series of multimedia evaluations used to profile the
attitudinal characteristics of the Company's associates; IntelliSearch(SM), a
computer database used to classify, search and fit the Company's associates to
job openings using parameters based upon client needs; and Employee Data
Gathering and Evaluation ("EDGE(R)"), a turn-key, proprietary computer system
installed at client locations to coordinate scheduling and track job
performance of a client's entire temporary workforce and to customize invoices
and utilization reports. Management believes that these technologies give the
Company advantages over competing temporary staffing companies that do not
provide similar value-added services.
THE STAFFING INDUSTRY
Revenues for the United States temporary staffing services industry were
projected by SIA, an independent staffing industry publication company, to have
exceeded $41 billion in 1995. This represents an increase of approximately
15.4% over 1994 and, since 1991, industry revenues have increased at a compound
annual rate of approximately 17.7%. Economic and social factors have increased
the portion of the non-farm U.S. workforce working on a temporary basis from
1.0% in 1991 to 1.8% in 1995, according to National Association of Temporary
and Staffing Services ("NATSS"), an independent trade organization for the
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staffing industry. NATSS estimates that there are now approximately 2.2
million workers employed nationwide by temporary staffing services providers.
According to NATSS, more than 90% of all United States businesses utilize
staffing services.
The staffing services industry was once used predominately as a short-term
solution for greater workforce needs during peak production periods and to
replace workers who were abruptly terminated or who were absent due to illness
or vacation. Since the late 1980s, the use of temporary services has evolved
into a permanent and significant component of the staffing plans of many
employers. Corporate restructurings, government regulations, advances in
technology, and the desire by many companies to shift employee costs from a
fixed to a variable expense have resulted in the use of a wide range of
staffing alternatives by businesses. In addition, the high cost of recruitment
and the risk of employment litigation have led to increased use of temporary
staffing as a means of evaluating the qualifications of personnel before hiring
them on a full-time basis, as well as accomplishing reductions in workforce
without the risk of wrongful termination liability.
The clerical and light industrial sectors represent the largest two
sectors of the temporary staffing industry. A staffing industry report by SIA
for 1995 forecasted that the office and clerical sector would account for $13.5
billion or approximately 33% of the temporary staffing industry revenues, while
the light industrial sector would account for $11.0 billion or approximately
27% of industry revenues. According to SIA, from 1991 through 1995, industry
revenues for the office and clerical sector increased by approximately $6.1
billion, representing a compound annual growth rate of approximately 16%, and
industry revenues for the light industrial sector increased by approximately
$6.3 billion, representing a compound annual growth rate of approximately 24%.
In the aggregate, these two sectors constituted approximately 63% of the $19.7
billion increase in industry revenues during the period.
The temporary staffing industry in the United States is highly fragmented
with over 7,000 firms operating approximately 17,000 offices. The Company
believes that no single competitor has more than a 10% share of the national
temporary services market.
OPERATIONS
The Company provides temporary personnel in two industry segments:
clerical and light industrial.
Clerical Services. As use of temporary staffing has become more
prevalent, the range of clerical positions addressed by the Company has
expanded beyond traditional secretarial staff to include a broad range of
general business environment personnel. Clerical services include secretaries,
word processors, office automation workers, data entry operators,
receptionists, accountants, bookkeepers, telemarketers, hosts, computer
operators, and other general office staff.
Light Industrial Services. Light industrial services personnel are
furnished for a variety of assignments including assembly work (such as
mechanical assemblers, general assemblers, solderers and electronic
assemblers), factory work (including merchandise packagers, machine operators,
and pricing and tagging personnel), warehouse work (such as general laborers,
stock clerks, material handlers, order pullers, forklift operators, palletizers
and shipping/receiving clerks), technical work (such as lab technicians,
quality control technicians, bench technicians, test operators, electronic
technicians, inspectors, drafters, checkers, designers, expediters, buyers,
electronic engineers and mechanical engineers) and general services (such as
maintenance and repair personnel, janitors and food service workers).
Office Organization.
The Company provides its services through a network of 161 office
locations, 68 of which are owned and operated by the Company and 93 of which
are operated by franchisees or licensees. The table below shows the geographic
distribution of the Company-owned and independently-managed offices.
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COMPANY-OWNED LICENSED AND TOTAL
OFFICES FRANCHISED OFFICES OFFICES
------------- ------------------ -------
California............ 61 1 62
Western Region(1)..... 5 14 19
Midwestern Region(2).. - 27 27
Southeastern Region(3) 2 37 39
Northeastern Region(4) - 14 14
------------- ------------------ -------
Total................. 68 93 161
============= ================== =======
(1) Includes Arizona, Colorado, Hawaii, Idaho, Nevada, New Mexico, Oregon,
Utah, and Washington.
(2) Includes Illinois, Indiana, Kansas, Michigan, Minnesota, Missouri, Ohio,
and Wisconsin.
(3) Includes Arkansas, Florida, Georgia, Kentucky, Louisiana, North Carolina,
Oklahoma, South Carolina, Tennessee, Texas, and Virginia.
(4) Includes Connecticut, Maryland, Massachusetts, New Jersey, New York, and
Pennsylvania.
Company-Owned Offices
The Company-owned offices are concentrated in California, with locations
in five other states. These offices are organized into three regions, each
managed by a Regional Vice President and other regional staff who provide
operational support for the offices in their regions. Each Company-owned
office has an on-site manager who is accountable for the day-to-day operations
and profitability of that office.
Managers report to their Regional Vice Presidents, and together they are
responsible for sales, client development and retention, recruitment, placement
and retention of associates, and general administration for their respective
offices and regions. The Company believes that its decentralized structure
contributes to the initiative and commitment of its management team and that
its incentive compensation approach motivates managers to increase profits.
Company-owned offices had average sales per office of approximately $2.7
million for fiscal 1996. The Company often pursues a "fill-in" strategy to
expand its market penetration by transferring clients on the periphery of an
existing office's territory to a newly opened office, which can then use those
established accounts as a base for further expansion. The density of
Company-owned offices in certain areas also enables the Company to spread fixed
costs such as advertising, recruiting and administration over a larger revenue
base, and also to share associates and provide clients with superior coverage
and service capabilities. In addition, the Company has divided highly
successful Company-owned offices into separate clerical and light industrial
offices, allowing each to specialize and further penetrate its market.
Independently-Managed Offices
Independently-managed offices, structured in either franchise or license
format, have been an important element of the Company's growth strategy over
the last 8 years. Such offices have enabled the Company to expand into new
markets with highly qualified licensees and without significant capital
expenditures. Most of the Company's offices outside California are
independently-managed. Independent office agreements have ten-year terms and
are renewable for successive five-year terms. Such agreements cover exclusive
geographic territories and contain minimum revenue performance standards.
Franchises. The Company employed a traditional franchise model from 1987
until 1990 and, as of September 29, 1996, 20 of the Company's 93
independently-managed office locations were franchises. Franchisees pay all
lease and working capital costs, fund payroll and collect clients' accounts.
Franchisees pay the Company an initial franchise fee and royalties equal to
approximately 7% of gross billings. Royalty fees are reduced when the
Franchisee serves a national client as they typically have lower margins
causing actual royalties to be 6.3%-7.0% over the last five years. Franchisees
employ all office management staff and all temporary personnel affiliated with
their offices. The Company provides training, the right to use the Company's
service marks and business model, proprietary computer programs, and
operational support.
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Licenses. Since 1990, the Company has recruited new independent office
managers as licensees. The Company switched from franchise format to license
format for its new independently-managed offices to exercise more control over
the collection and tracking of the receivables of the independently-managed
offices and to allow the Company to grow without being limited by the financial
resources of franchisees. As of September 29, 1996, 73 of the Company's 93
independently-managed office locations were licenses. The license format
differs from the franchise format in that the Company acts as the employer of
all temporary personnel affiliated with the office. The Company funds payroll,
collects customer accounts, and remits to licensees 58-70% of gross margin,
depending on hours billed by the particular licensee in the prior contract
year.
CLIENTS
During the twelve months ended September 29, 1996, the Company served
approximately 14,000 clients nationwide. The Company's ten highest volume
clients in fiscal 1996 accounted for approximately 14% of the Company's
system-wide gross billings. No single client accounted for more than 5% of the
Company's system-wide gross billings for fiscal 1996.
COMPETITION
The temporary services industry is highly competitive with limited
barriers to entry. The Company believes that no single competitor has more
than a 10% share of the national temporary services market. The largest
competitors of the Company include Adia Services, Inc., Interim Services, Inc.,
Kelly Services, Inc., Manpower Inc., Norrell Corporation, Robert Half
International, Inc. and The Olsten Corporation. These and other large
competitors have nationwide operations and substantially greater resources than
the Company, which among other things could enable them to attempt to maintain
or increase their market share by reducing prices. In addition, there are a
number of other medium-sized firms that are regional or emphasize specialized
niches and compete with the Company in certain markets where they have a
stronger presence. Finally, numerous small or single-office firms compete
effectively with the Company's offices in their limited areas.
The Company's management believes that the most important competitive
factors in obtaining and retaining its targeted clients are an understanding of
a customer's specific job requirements, the ability to provide qualified
temporary personnel in a timely manner and the quality and price of services.
The primary competitive factors in obtaining qualified candidates for temporary
employment assignments are wages, benefits and responsiveness to work
schedules.
The Company expects ongoing vigorous competition and pricing pressure from
both national and local providers, and there is no assurance that the Company
will be able to maintain or increase its market share or gross margins.
WORKERS' COMPENSATION
Prior to July 22, 1996, Remedy's workers' compensation risk was self
insured in California. On July 22, 1996, Remedy entered into an insurance
contract with an insurance company whereby the insurance company assumed the
Company's existing self insured workers' compensation liability for claims
incurred during the period May 1, 1986 through July 22, 1996. As a result of
the contract, the Company reduced its estimated workers' compensation exposure
by $1.4 million (reflected as a reduction in selling and administrative
expenses). Additionally, the Company purchased a guaranteed cost insurance
policy to cover workers' compensation claims for the period July 22, 1996 to
July 22, 1997. For workers' compensation coverage in states other than
California, the Company has similar guaranteed cost policies that are renewed
annually.
EMPLOYEES
As of September 29, 1996, the Company had a staff of approximately 400
individuals (excluding temporary associates). Approximately 109,000 temporary
employees were placed by the Company during fiscal 1996, of which approximately
51,000 were employed by the Company and approximately 58,000 were
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employed by franchisees. At any given time during 1996, only a portion of
these employees were assigned. The Company has no collective bargaining
agreements and believes its employee relations are good.
GOVERNMENTAL REGULATION
The Company's marketing and sale of franchises and licenses is regulated
by the Federal Trade Commission and by authorities in 19 states. Additionally,
15 of the 35 states in which the Company provides its services require
franchisors to file a registration application, provide notice or qualify for
an exemption. The Company has filed the appropriate registration application
or provided notice in seven of these states and has obtained an exemption from
such registration requirements in the remaining eight states. The Company
files and distributes to prospective franchisees and licensees Franchise
Offering Circulars and other materials in order to comply with such
registration and disclosure requirements. In addition, the Company's ongoing
relationships with its franchisees and licensees are regulated by applicable
federal and state franchise laws.
PROPRIETARY RIGHTS AND SYSTEMS
The Company has developed, either internally or through hired consultants,
its HPT(SM), EDGE(R), and IntelliSearch(SM) computer systems. These proprietary
systems are trade secrets of the Company and the Company has copyrights in
certain software used in these systems.
The Company has registered the service marks REMEDY(R), REMEDY TEMPORARY
SERVICES(R), REMEDYTEMP(R), INTELLIGENT STAFFING(R), HIRE INTELLIGENCE(R),
EDGE(R), V(SM)(R) and THE INTELLIGENT TEMPORARY(R) with the U.S. Patent &
Trademark Office. In addition, the Company asserts ownership of, and has filed
applications with the U.S. Patent & Trademark Office to register, the service
marks HPT(SM), STARS(SM), NON-STOP(SM), INTELLISEARCH(SM) and WE WON'T SEND YOU
A DUMMY(SM). These marks are used by the Company and its licensees and
franchisees.
RISK FACTORS
Among the risks affecting the Company are the following:
Fluctuations in the General Economy. Demand for temporary services is
significantly affected by the general level of economic activity. As economic
activity slows, many companies reduce their use of temporary employees before
undertaking layoffs of their full-time employees. Further, in an economic
downturn, the Company may face pricing pressure from its customers and
increased competition from other staffing companies, which could have a
material adverse effect on the Company's business. Since the Company currently
derives more than half of its system-wide billings from the California market
(approximately 53% in fiscal 1996), an economic downturn in California would
have a greater impact on the Company than if the Company had a more widely
dispersed revenue base.
Competitive Market. The temporary services industry is highly competitive
with limited barriers to entry. The Company competes in national, regional and
local markets with full service agencies and with specialized temporary
services agencies. Many competitors are smaller than the Company but have an
advantage over the Company in discrete geographic markets because of their
stronger local presence. Other competitors are more well known and have
greater marketing and financial resources than the Company, which among other
things could enable them to attempt to maintain or increase their market share
by reducing prices. The Company expects the level of competition to remain
high, and competitive pricing pressures may have an adverse effect on the
Company's operating margins.
Ability to Continue Company Growth. The Company has grown rapidly in
recent years by opening new offices and increasing the volume of services
provided through existing offices. There can be no assurance that the Company
will continue to be able to maintain or expand its market presence in its
current locations or to successfully enter other markets. The ability of the
Company to continue its growth will depend on a number of factors including
existing and emerging competition, the availability of working capital to
support such growth, and the Company's ability to maintain margins in the face
of pricing pressures, find and retain new qualified licensees and office
managers, recruit and train additional qualified temporary personnel, and
manage costs.
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Franchising and Licensing Risks. The Company derives a substantial amount
of its revenues (approximately 35% in fiscal 1996) from franchised and licensed
operations. The ownership of the Company's franchises and licenses is
concentrated, with the ten largest franchisees and licensees together
accounting for approximately 14% of the Company's system-wide billings in
fiscal 1996. The loss of one or more of these relationships, or other
franchisees or licensees who may in the future account for a significant
portion of the Company's revenues, could have an adverse effect on the
Company's results of operations.
ITEM 2. PROPERTIES
The Company does not own any real property. The Company leases its 13,185
square foot national headquarters building in San Juan Capistrano, California
from Robert E. McDonough, Sr., the Company's Chairman. The cost of the leased
space is $25,052 per month ($1.90 per square foot per month). Management
believes that the Company's lease with Mr. McDonough contains terms that are at
least as favorable as those terms that the Company might have obtained for the
lease of similar premises available from an unaffiliated party at the time the
lease was executed. In September 1996 the lease term expired and the lease is
continuing month-to-month pending finalization of a new lease agreement. The
Company has the option to renew the lease for an additional five-year period.
The Company anticipates needing additional headquarters space in the
foreseeable future.
As of September 29, 1996, the Company leased the space occupied by all 68
of its Company-owned offices. See Note 6 of Notes to Financial Statements
regarding the Company's lease commitments. The Company selects the sites for
these offices by evaluating proximity to potential clients and available
temporary personnel. The Company assists its franchisees and licensees in
selecting sites for independently managed offices, but presently does not own
and is not obligated under any leases at these sites.
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company becomes a party to litigation incidental to
its business. The Company maintains insurance coverage that management
believes is reasonable and prudent for the business risks the Company faces,
and in management's opinion no pending legal proceeding is likely to have a
material adverse effect on the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders
during the fourth quarter of the year ended September 29, 1996.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers and key employees of the Company and their ages as
of September 29, 1996 are set forth below.
NAME AGE POSITION(S) HELD
- ------------------------ --- -------------------------------------------------
Robert E. McDonough, Sr. 74 Chairman of the Board of Directors
Paul W. Mikos 51 Chief Executive Officer, President and Director
Alan M. Purdy 56 Senior Vice President and Chief Financial Officer
Jeffrey A. Elias 39 Senior Vice President, Human Resources and Risk
Management
William M. Herbster 44 Vice President, Marketing
Norman H. Leibson 51 Vice President, Information Technology
Rosemary F. Beck 50 Vice President, Operations--Northern Region
Alice M. Bowers 46 Vice President, Operations--Southwest Region
Warren Heeg, Jr. 60 Vice President, Client Relations
Delza de Avellar Neblett 45 Vice President, Operations and Systems
Joseph J. Pulaski 63 Vice President, Light Industrial/Technical
Division
Richard G. Rhydderch 59 Vice President, Franchise/License Development
Karin Somogyi 38 Vice President, Franchise/License Operations
Susan McDonough Mikos 49 Director, Corporate Secretary
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Robert E. McDonough, Sr. has served as Chairman of the Board of Directors
since August 1978. Mr. McDonough founded the Company in 1965 and has been
continuously involved in the management and long-term operation and planning of
the Company since that time. For 29 years, until May 1994, he served as the
Company's Chief Executive Officer. Mr. McDonough is the father of Susan
McDonough Mikos and the father-in-law of Paul W. Mikos.
Paul W. Mikos has served in various positions in the Company since 1977,
including as President since 1985. Mr. Mikos has served as Chief Executive
Officer of the Company since January 1996 and as a Director of the Company
since May 1993. From May 1994 until January 1996, he served as co-Chief
Executive Officer of the Company. Prior to joining the Company, Mr. Mikos
worked for ARA as a Regional Sales Director from August 1976 until October
1977. From July 1968 until August 1976, Mr. Mikos worked for IBM in sales
management. Mr. Mikos is the husband of Susan McDonough Mikos, the brother of
Alice Bowers and the son-in-law of Robert E. McDonough, Sr.
Alan M. Purdy has served as Senior Vice President and Chief Financial
Officer since November 1996 and prior to that as Vice President and Chief
Financial Officer since February 1994. From January 1993 until December 1993,
he was Senior Vice President and Chief Financial Officer of Builder's Emporium,
a division of Collins and Aikman Group, Inc. From March 1988 until August 1992,
he was Senior Vice President and Chief Financial Officer of HUB Distributing,
Inc. (d.b.a. Millers Outpost), a subsidiary of American Retail Group. From
January 1986 until October 1987, he was Senior Vice President and Chief
Financial Officer of Robinson's of Florida, a subsidiary of The May Department
Stores Company. From April 1983 until January 1986, he served as Senior Vice
President and Chief Financial Officer of B. Dalton Booksellers, a subsidiary of
the Dayton Hudson Corp.
Jeffrey A. Elias has served as Senior Vice President, Human Resources and
Risk Management since November 1996 and prior to that as Vice President, Human
Resources and Risk Management since December 1992. From January 1991 to
December 1992, he was Director, Human Resources and Risk Management for Adia
Services, Inc.
William M. Herbster has served as Vice President, Marketing since January
1994. From January 1985 until January 1994, he was with Manpower, Inc., a
temporary staffing company, as Director of U.S. Marketing from April 1990 to
January 1994, Manager of Office Automation Services from September 1987 to
April 1990, and Marketing Manager, Great Lakes and Northeast Region from
January 1985 to September 1987.
Norman H. Leibson has served as Vice President, Information Technology
since November 1994. From March 1992 until November 1994, Mr. Leibson was a
Vice President of HUB Distributing, Inc. (d.b.a. Millers Outpost), a subsidiary
of American Retail Group, and from November 1983 until August 1992, he was a
Vice President of Carter Hawley Hale.
Rosemary F. Beck has served as Vice President, Operations--Northern Region
since February 1992. Ms. Beck came to the Company in 1992 after fourteen years
in the temporary staffing industry with Adia Services, Inc., a temporary
staffing company, where she held various positions including Senior Area Vice
President.
Alice M. Bowers has served as Vice President, Operations--Southwest Region
since March 1995. Ms. Bowers began her tenure at the Company in June 1978 as a
Branch Manager and has served as an Area Leader, Regional Manager, Assistant
Vice President, Operations and Consultant to the Company. Ms. Bowers is the
sister of Paul W. Mikos.
Warren J. Heeg, Jr. has served as Vice President, Client Relations since
April 1996. From July 1994 until March 1996, Mr. Heeg was the Company's Vice
President, Franchise Sales and, from November 1989 until June 1994, he served
as the Company's Vice President, National Accounts.
Delza de Avellar Neblett has served as Vice President, Operations and
Systems since January 1996. Ms. Neblett began her career with the Company in
1988. From August 1992 to October 1994 she served as a Vice President of the
Company, designing and implementing the Company's IntelliSearch(SM), HPT(SM) and
Non-Stop(SM) systems.
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Joseph J. Pulaski has served as Vice President, Light Industrial/Technical
Division since 1990. He began his career with the Company in 1976 and has at
various times held the positions of Director of Marketing and President of the
Company.
Richard G. Rhydderch has served as Vice President, Franchise/License
Development since May 1988. From April 1986 until April 1988, Mr. Rhydderch
was Vice President, Franchise Marketing/Sales for Snelling & Snelling, Inc., an
employment services company. From March 1985 until April 1986, he was National
Franchise Sales Director for Tender Sender, Inc., a shipping and gift-wrap
company.
Karin Somogyi has served as Vice President, Franchise/License Operations
since November 1995. From October 1993 until October 1995, she was the
Company's Assistant Vice President, Franchise Operations. Before joining the
Company, Ms. Somogyi was with Adia Services, Inc., first as Director of
Franchise Services from January 1991 until September 1993, and then as
Franchise Sales Executive from January 1990 until January 1991.
Susan McDonough Mikos has served as the Company's Corporate Secretary
since January 1996 and has been a Director of the Company since November 1992.
For the past five years, Ms. Mikos has been a homemaker. Ms. Mikos is the
daughter of Robert E. McDonough, Sr., and the wife of Paul W. Mikos.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Since July 11, 1996, the Company's Class A Common Stock has been traded on
The Nasdaq Stock Market under the symbol "REMX". Prior to July 11, 1996 the
Company's stock was not publicly traded. The following table sets forth the
high and low sales prices for the Class A Common Stock as reported by The
Nasdaq Stock Market:
1996 High Low
---- ------ ------
Fourth Quarter (July 11 - September 29) $20.25 $13.00
At November 19 1996, there were approximately 1,300 shareholders of record
and approximately 1,200 beneficial shareholders of the Company's Class A Common
Stock, and approximately ten shareholders of record and beneficial shareholders
of the Company's Class B Common Stock.
Except for the S corporation distributions prior to the Company's initial
public offering and the declared dividend to the Company's pre-offering
shareholders as discussed in Note 1 to the financial statements, the Company
has not paid cash dividends on its Class A or Class B Common Stock and does not
anticipate that it will do so in the foreseeable future. The present policy of
the Company is to retain earnings for use in its operations and the expansion
of its business.
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ITEM 6. SELECTED FINANCIAL DATA
The selected financial data with respect to the Company set forth below
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Financial Statements and
Notes thereto. The following selected financial information (other than
"Selected Operating Data") as of and for the fiscal years ended September 29,
1996, October 1, 1995, October 2, 1994, October 3, 1993, and September 27, 1992
has been derived from the audited financial statements of the Company. The pro
forma statement of operations data set forth below does not purport to be
indicative of the results of operations that would have occurred had the
Company's S corporation status terminated at October 1, 1991, or which may be
expected to occur in the future.
FISCAL YEAR ENDED(1)
1996 1995 1994 1993 1992
--------- --------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF INCOME DATA:
Revenues
Direct sales........................ $ 184,564 $ 144,646 $119,042 $103,219 $ 85,651
Licensee sales...................... 98,003 61,377 31,201 16,036 6,472
Franchise royalties................. 2,811 2,751 2,462 1,938 1,608
Initial license fees................ 141 229 300 101 102
---------- --------- -------- -------- --------
Total revenues...................... 285,519 209,003 153,005 121,294 93,833
Cost of direct sales................ 142,643 110,159 92,022 80,195 66,386
Cost of licensee sales.............. 73,347 46,017 24,018 12,281 4,831
Licensees' share of gross profit.... 16,287 10,328 4,857 2,450 1,073
Selling and administrative expenses. 39,974 35,667 27,581 24,245 19,685
Depreciation and amortization....... 2,043 1,453 1,436 848 819
---------- --------- -------- -------- --------
Operating income.................... 11,225 5,379 3,091 1,275 1,039
Other income, net................... 782 1,118 711 582 441
---------- --------- -------- -------- --------
Income before income taxes.......... 12,007 6,497 3,802 1,857 1,480
Provision for income taxes (2)...... 7,794 97 57 46 37
---------- --------- -------- -------- --------
Net income.......................... $ 4,213 $ 6,400 $ 3,745 $ 1,811 $ 1,443
========== ========= ======== ======== ========
PRO FORMA DATA(2):
Income before income taxes.......... $ 12,007 $ 6,497 $ 3,802 $ 1,857 $ 1,480
Provision for income taxes.......... 4,923 2,599 1,521 743 592
---------- --------- -------- -------- --------
Net income.......................... $ 7,084 $ 3,898 $ 2,281 $ 1,114 $ 888
========== ========= ======== ======== ========
Net income per common share(3)...... $ .89 $ .51
Weighted average common shares
outstanding(3)...................... 7,977,000 7,685,000
SELECTED OPERATING DATA(4):
Number of offices(5)................ 161 142 119 94 81
Average hours billed per office(6).. 181,677 162,096 150,936 141,765 129,000
Total system-wide billings(7)....... $ 326,871 $ 247,118 $186,270 $146,388 $115,035
Gross period billings per office(8). 2,030 1,740 1,565 1,557 1,420
BALANCE SHEET DATA:
Cash and cash equivalents........... $ 10,959 $ 2,204 $ 1,330 $ 688 $ 792
Working capital..................... 35,341 14,649 10,610 6,344 6,719
Total assets........................ 63,906 43,496 30,490 21,816 17,687
Long-term debt...................... 734 1,142 851 0 0
Shareholders' equity................ 36,276 19,308 13,829 10,084 9,053
(1) Beginning in fiscal 1992, the Company changed its fiscal year end from
September 30 to a 52 or 53 week period ending the Sunday closest to
September 30. Thus, "fiscal 1996," "fiscal 1995," "fiscal 1994," "fiscal
1993" and "fiscal 1992" refer to the Company's fiscal years ending
September 29, 1996; October 1, 1995; October 2, 1994; October 3, 1993 and
September 27, 1992, respectively. All these fiscal years consisted of 52
weeks except for fiscal 1993 which consisted of 53 weeks.
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(2) Effective as of October 1, 1987, the Company elected to operate as an S
corporation under Subchapter S of the Internal Revenue Code and comparable
provisions of certain state income tax laws. The pro forma income
statement data reflect provisions for federal and state income taxes as if
the Company had been subject to federal and state income taxation as a C
corporation during each of the periods presented. The termination of the
Company's S corporation status in connection with the initial public
offering resulted in a non-recurring net charge to actual earnings of
$7,793 in the fourth quarter of fiscal 1996. This charge was required to
adjust deferred tax assets and liabilities to their appropriate value
utilizing C corporation rates. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Change in Tax Reporting
Status-Charge to Earnings" and "Notes to Financial Statements- Note 4".
(3) Fiscal 1996 and fiscal 1995 pro forma net income per share is computed by
dividing pro forma net income by 7,977 and 7,685, respectively, which is
the weighted average number of shares of Common Stock outstanding during
the period. The fiscal 1996 and fiscal 1995 weighted average number of
shares reflects an estimated 890 shares required to be sold by the Company
to fund the distributions paid to the pre-offering shareholders from the
proceeds of the Company's initial public offering. The fiscal 1995
weighted average number of shares have been revised to give effect to the
actual distributions declared to pre-offering shareholders as opposed to
the estimate used in the Company's Registration Statement on Form S-1 as
described in "Notes to Financial Statements- Note 1".
(4) For a presentation of this information for Company-owned, licensed and
franchised offices, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Operations."
(5) Consists of all Company-owned, licensed and franchised offices at the end
of the relevant period.
(6) Total hours billed for the relevant period by all Company-owned, licensed
and franchised offices divided by the total number of offices system-wide
at the end of the relevant period.
(7) Consists of all services billed to clients by all Company-owned, licensed
and franchised offices. For Company-owned offices and licensed offices,
all billings are Company revenues; for franchised offices, Company
revenues are royalties that range from 6.3%-7.0% of billings over a five
year period.
(8) Total gross billings for the relevant period by all Company-owned,
licensed and franchised offices divided by the total number of offices
system-wide at the end of the relevant period.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
In addition to historical information, management's discussion and
analysis includes certain forward-looking statements, including those related
to the Company's growth and strategies, future operating results and financial
position as well as economic and market events and trends. The Company's
actual results and financial position could differ materially from those
anticipated in the forward-looking statements as a result of various factors,
including competition, the availability of sufficient personnel, the Company's
ability to sustain historical growth rates and margins and control costs,
market conditions and other risks and uncertainties as above under the "Risk
Factors" section and elsewhere in the Company's Prospectus dated July 10, 1996.
The following should be read in conjunction with the Financial Statements of
the Company and Notes thereto.
GENERAL
The Company provides temporary staffing services to industrial and service
companies, professional organizations and governmental agencies. During the
twelve months ended September 29, 1996, the Company placed approximately
109,000 temporary workers and provided over 29.3 million hours of staffing
services to over 14,000 clients. From the beginning of fiscal 1993 through the
end of fiscal 1996, the Company added 80 offices and increased revenues and
income before taxes at compound annual growth rates of approximately 32% and
69%, respectively, to $285.5 million and $12.0 million, respectively.
The Company's fiscal year is a 52 or 53 week period ending on the Sunday
nearest September 30. The fiscal years ended September 29, 1996, October 1,
1995, October 2, 1994 and September 27, 1992 included 52 weeks. The fiscal
year ended October 3, 1993 included 53 weeks.
OPERATIONS
The Company's revenues are derived from Company-owned offices (direct
sales) and independently-managed offices (licensee sales and franchise
royalties). Under the Company's franchise arrangements, the franchisee pays
all lease and working capital costs relating to its office, including funding
payroll and collecting clients' accounts. The franchisee pays the Company an
initial franchise fee and royalties equal to 7% of its gross billings (except
for national accounts on which royalties are paid at a reduced rate). The
Company processes payroll and invoices clients, and the franchisee employs all
management staff and temporary personnel affiliated with its office. Under the
Company's license arrangements, the licensee pays the Company an initial
license fee and pays all lease and working capital costs relating to its
office. The licensee employs all management staff affiliated with its office,
but the Company acts as the employer of all temporary personnel affiliated with
the licensee's office, handles invoicing and collecting clients' accounts, and
remits to the licensee 58%-70% of the office's gross profit. The amount of
gross profit paid to the licensee is based on the level of billed hours
achieved in the prior contract year.
As of September 29, 1996, there were 20 independently-managed offices
operating as franchises and 73 operating as licenses. Independently-managed
offices opened from 1987 to 1990 are operated as franchises, and
independently-managed offices opened since 1990 are operated as licenses. The
Company switched from franchise to license format to exercise more control over
the collection and tracking of the receivables of the independently-managed
offices and to allow the Company to grow without being limited by the financial
resources of franchisees. The number of licensee offices is expected to
increase because new independently-managed offices will be opened in license
format and offices currently operated as franchises may, depending upon various
factors, be converted to license format upon renewal of their franchise
agreements. As the number of franchise offices decrease, royalty income will
decrease.
The table below shows for the last five fiscal years, the number of
Company-owned, franchised and licensed offices and customer billings associated
with each. Total system-wide billings consists of all services billed to
clients by all Company owned and independently managed offices. For the
Company-owned offices and licensed offices, all billings are Company revenues;
for franchised offices, Company revenues are royalties that range from 6.3% -
7.0% of gross billings over the last five years. The Company's long-term
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revenue growth depends in part upon its ability to continue to open new
offices, as well as its ability to enhance the sales of existing offices beyond
historical levels.
FISCAL YEAR ENDED
---------------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
COMPANY-OWNED OFFICES
Number of offices.............. 68 63 59 53 49
Average hours billed per office 248,062 217,907 192,857 172,292 153,365
Total billings................. $184,564 $144,646 $119,042 $103,219 $ 85,651
Average billings per office.... $ 2,714 $ 2,296 $ 2,018 $ 1,948 $ 1,748
LICENSED OFFICES
Number of offices.............. 73 58 39 21 14
Average hours billed per office 117,373 96,545 80,801 74,383 43,480
Total billings................. $ 98,003 $ 61,377 $ 31,201 $ 16,036 $ 6,472
Average billings per office.... $ 1,343 $ 1,058 $ 800 $ 764 $ 462
Initial license fees........... $ 141 $ 229 $ 300 $ 101 $ 102
FRANCHISED OFFICES
Number of Offices.............. 20 21 21 20 18
Average hours billed per office 190,674 175,699 163,402 131,621 129,214
Total billings................. $ 44,304 $ 41,095 $ 36,027 $ 27,133 $ 22,912
Average billings per office.... $ 2,215 $ 1,957 $ 1,716 $ 1,357 $ 1,273
Royalties...................... $ 2,811 $ 2,751 $ 2,462 $ 1,938 $ 1,608
TOTAL OFFICES.................. 161 142 119 94 81
TOTAL SYSTEM-WIDE BILLINGS..... $326,871 $247,118 $186,270 $146,388 $115,035
TOTAL COMPANY REVENUES......... $285,519 $209,003 $153,005 $121,294 $ 93,833
CHANGE IN TAX REPORTING STATUS - CHARGE TO EARNINGS
In connection with the offering the Company terminated its S corporation
status. As a result the Company was required to change its method of
accounting for tax reporting purposes from the cash method to the accrual
method, resulting in a one time charge to earnings in the fourth quarter of
approximately $7.8 million. See "Notes to Financial Statements - Note 4."
RESULTS OF OPERATIONS
The table below shows certain information from the Company's statement of
income expressed as a percentage of revenues for the periods indicated.
FISCAL YEAR ENDED
----------------------
1996 1995 1994
------ ------ ------
Total revenues.............................. 100.0% 100.0% 100.0%
Total cost of direct and licensee sales..... 75.7 74.7 75.8
Licensees' share of gross profit............ 5.7 4.9 3.2
Selling, general and administrative expenses 14.7 17.8 19.0
------ ------ ------
Operating income............................ 3.9 2.6 2.0
Other income, net........................... 0.3 0.5 0.5
------ ------ ------
Income before income taxes.................. 4.2% 3.1% 2.5%
====== ====== ======
Total revenues equal all billings by Company-owned and licensed offices,
initial license fees and royalties on franchise office billings (which ranged
from 6.3% - 6.8% of franchise office billings over the last three years). Cost
of direct and licensee sales consists primarily of salary and other direct
employment expenses for temporary employees. Licensees' share of gross profit
reflects the Company's payment to licensees of 58%-70% of their gross profit
(depending upon the volume of business generated by these offices in the prior
fiscal year). The Company does not anticipate any significant changes in the
rate structure for the license offices. However, the number of license
offices, volume of business and level of gross profit generated by all license
offices may change in the future as the Company strives to open new licensee
offices. The Company's other income consists of revenues from finance charges
on past due accounts, interest income
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net of interest expense and other miscellaneous income. The table below shows
revenues derived from the Company's lines of business for the last three years.
FISCAL YEAR ENDED
-----------------------------
1996 1995 1994
--------- -------- --------
(DOLLARS IN THOUSANDS)
COMPANY-OWNED OFFICES
Clerical................................................ $ 74,557 $ 62,193 $ 58,254
Light industrial and technical.......................... 108,934 81,794 60,166
Other................................................... 1,073 659 622
--------- -------- --------
Total Company-owned offices............................. $ 184,564 $144,646 $119,042
========= ======== ========
LICENSED OFFICES
Clerical................................................ $ 56,168 $ 35,272 $ 20,048
Light industrial and technical.......................... 41,035 25,626 10,986
Other................................................... 800 479 167
--------- -------- --------
Total Licensed offices.................................. $ 98,003 $ 61,377 $ 31,201
========= ======== ========
FRANCHISED OFFICES
Clerical................................................ $ 30,127 $ 26,835 $ 25,400
Light industrial and technical.......................... 13,823 14,013 10,477
Other................................................... 354 247 150
--------- -------- --------
Total Franchised offices................................ $ 44,304 $ 41,095 $ 36,027
========= ======== ========
Fiscal 1996 Compared to Fiscal 1995
Total revenues increased 36.6% or $76.5 million to $285.5 million for
fiscal 1996 from $209.0 million for fiscal 1995, primarily attributable to
volume increases. The volume increases resulted from increased billings at
existing offices and expansion of services, including EDGE(R), and from 19 new
offices opened since the prior period. Future revenue increases depend to a
significant extent on the Company's ability to continue to open new offices and
manage newly opened offices to maturity.
Total cost of direct and licensed sales increased 38.3% or $59.8 million
to $216.0 million for fiscal 1996 from $156.2 million for fiscal 1995. Total
cost of direct and licensed sales as a percentage of revenues increased to
75.7% for fiscal 1996 from 74.7% for fiscal 1995 due primarily to a new high
volume, lower gross margin client. The Company's business mix and cost of
licensed sales as a percentage of licensed sales remained relatively stable.
Licensees' share of gross profit represents the net payments to licensees
based upon a percentage of gross profit generated by the license operation.
Licensees' share of gross profit increased 57.7% or $6.0 million to $16.3
million for 1996 from $10.3 million for fiscal 1995. Licensees' share of gross
profit as a percentage of total revenues increased to 5.7% for fiscal 1996 from
4.9% for fiscal 1995. This change resulted from an increase to 34.3% from
29.4% in the percentage of total licensed revenues as a percentage of total
revenue. The Company expects this trend to continue. Licensees' share of
gross profit as a percentage of licensees' total gross profit declined by 1.1%
during fiscal 1996.
Selling, general and administrative expenses increased 13.2% or $4.9
million to $42.0 million for fiscal 1996 from $37.1 million for fiscal 1995.
Selling, general and administrative expenses as a percentage of total revenues
decreased to 14.7% for fiscal 1996 from 17.8% for fiscal 1995, largely due to
the Company's total revenues expanding more rapidly than selling, general and
administrative expenses. The Company has implemented several cost saving
measures to maintain or reduce its level of selling, general and administrative
expenses as a percentage of total revenue. Such measures include the
installation of a Company-wide expense budgeting program to make corporate
managers more accountable for their operating expenditures and the initiation
of a profit sharing plan, at the office level, to reward office and area
managers based on their office operating profit. During fiscal 1996, the
Company entered into a contract with an insurance company whereby the insurance
company assumed the Company's existing self insured workers' compensation
liability for claims incurred during the period May 1, 1986 through July 22,
1996. As a result of the contract, the Company reduced its estimated workers'
compensation exposure by $1.4 million (reflected as a reduction in selling and
administrative expenses). These cost savings were substantially offset by a
loss reserve recorded for an unfavorable consulting contract. The Company
expects selling, general and
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administrative expenses to increase as the Company continues to pursue its
growth objectives and there can be no assurance that these expenses will not
increase at greater rates in the future, or constitute a greater percentage of
total revenues.
Operating income increased 108.7% or $5.8 million to $11.2 million for
fiscal 1996 from $5.4 million for fiscal 1995 due to the factors described
above. Operating income as a percentage of revenues increased to 3.9% for
fiscal 1996 from 2.6% for fiscal 1995.
Income before income taxes increased 84.8% or $5.5 million to $12.0
million for fiscal 1996 from $6.5 million for fiscal 1995 due to the factors
described above. As a percentage of total revenues, income before income taxes
increased to 4.2% in 1996 from 3.1% in fiscal 1995.
Fiscal 1995 Compared to Fiscal 1994
Total revenues increased 36.6% or $56.0 million to $209.0 million for
fiscal 1995 from $153.0 million for fiscal 1994, primarily attributable to
volume increases. The average billing rate remained relatively stable
throughout the period. The volume increases were primarily attributable to
increased billings at existing offices, expansion of services, including
EDGE(R) and to 23 new offices opened since the prior period.
Total cost of direct and licensed sales increased 34.6% or $40.1 million
to $156.2 million for fiscal 1995 from $116.0 million for fiscal 1994. Total
cost of direct and licensed sales as a percentage of total revenues decreased
to 74.7% in fiscal 1995 from 75.8% in fiscal 1994 due to a favorable business
mix.
Licensees' share of gross profit increased 112.6% or $5.5 million to $10.3
million for fiscal 1995 from $4.9 million for fiscal 1994, mainly due to an
increase in licensees' revenues. As a percentage of total revenues, licensees'
share of gross profit increased to 4.9% in fiscal 1995 from 3.2% in fiscal
1994, due primarily to an increase in sales by licensed offices, partly offset
by a slight decrease in the percentage of licensees' gross profit that the
Company remitted to licensees to 67.2% in fiscal 1995 from 67.6% in fiscal
1994.
Selling, general and administrative expenses increased 27.9% or $8.1
million to $37.1 million for fiscal 1995 from $29.0 million for fiscal 1994.
Selling, general and administrative expenses as a percentage of total revenues
decreased to 17.8% in fiscal 1995 from 19.0% in fiscal 1994, primarily because
the Company's total revenues expanded more rapidly than selling, general and
administrative expenses. Included in general and administrative expenses in
fiscal 1995 was a one-time special bonus of $1.3 million paid to the Company's
founder, Mr. Robert E. McDonough. Excluding this special bonus, selling,
general and administrative expenses as a percentage of total revenues would
have been 17.2% in fiscal 1995.
Operating income increased 74.0% or $2.3 million to $5.4 million for
fiscal 1995 from $3.1 million for fiscal 1994 due to the factors described
above. Operating income as a percentage of total revenues increased to 2.6% in
fiscal 1995 from 2.0% in fiscal 1994. Excluding the one-time special bonus of
$1.3 million described above, operating income increased to $6.7 million or
3.2% of total revenues for fiscal 1995.
Income before income taxes increased 70.9% or $2.7 million to $6.5 million
for fiscal 1995 from $3.8 million for fiscal 1994 due to the factors described
above. As a percentage of total revenues, income before income taxes increased
to 3.1% in fiscal 1995 from 2.5% in fiscal 1994.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity depends primarily upon its net income, accounts
receivable, accounts payable and accrued expenses. Historically, the Company
has financed its operations through cash generated by operating activities and
bank lines of credit. The principal use of cash is for financing of accounts
receivable, particularly during periods of growth. As of September 29, 1996,
the Company had $44.4 million in gross accounts receivable outstanding, with
approximately $30.8 million of the balance less than 30 days old, $8.2 million
30-60 days old, $2.9 million 60-90 days old and $2.5 million over 90 days
outstanding. The nature of the Company's business requires payment of wages to
its temporary personnel on a weekly basis and to its other employees on a
bi-weekly or semi-monthly basis, while payments from clients are generally
received 30
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to 60 days after billing. Due to this timing difference, as revenues have
grown, trade receivables and working capital requirements have increased.
Additional uses of cash include: the development of the Company's technologies,
capital expenditures, repayment of debt and distributions to pre-offering
shareholders for payment of their tax obligations associated with S corporation
earnings. The Company anticipates increased uses of working capital to finance
the opening of new offices and the continued development and implementation of
its technologies. In addition, the Company has commitments related to leased
office space and certain equipment, and anticipates increased lease commitments
in the future resulting from openings of new Company-owned offices and
acquisition of additional headquarters space.
Net cash flow from operating activities was $3.3 million and $.7 million
in fiscal 1996 and fiscal 1995, respectively. The increase in the cash flow
from operating activities for fiscal 1996 as compared to fiscal 1995 was due
primarily to increases in income from operations. This increase was partially
offset by increased funding of accounts receivable resulting from strong
revenue growth during fiscal 1996.
Prior to the Company's initial public offering on July 11, 1996, the
Company declared and paid a distribution to the pre-offering shareholders in an
aggregate amount equal to $5.0 million and the Company declared an additional
amount equal to the pre-offering shareholders' income tax obligations related
to the Company's undistributed S corporation earnings from October 2, 1995
through July 9, 1996, the date preceding the termination of the Company's S
corporation status. The amount of the additional distribution is approximately
$5.0 million which will be paid from the proceeds of the offering. The Company
has paid $.9 of this distribution and intends to make the remaining
distribution in fiscal 1997.
As a result of the offering, the Company received net proceeds of $23.4
million. These proceeds were used to pay $1.3 million of miscellaneous working
capital expenses and to repay indebtedness of $6.0 million, of which $5.0
million related to distributions to the pre-offering shareholders as discussed
above. Additionally, as discussed previously, the Company entered into a
contract with an insurance company whereby the Company transferred its existing
self insured workers' compensation liability for claims incurred during the
period May 1, 1986 through July 22, 1996 for approximately $4.0 million,
subject to final adjustment. The remaining $12.1 million is presently held in
temporary investments.
Cash used for purchases of fixed assets, which are generally for computers
and peripherals and office furniture and equipment, totaled $3.2 million and
$2.9 million for fiscal 1996 and fiscal 1995, respectively. The increase
during fiscal 1996 primarily reflects an expenditure for software. The Company
expects capital expenditures to be approximately $3.6 million over the next 12
months due to anticipated openings of new Company-owned offices and further
investments in the Company's computer-based technologies.
During fiscal 1996, the Company repaid borrowings of $6.7 million
primarily incurred to fund capital expenditures and working capital from fiscal
1995. Distributions of approximately $6.6 million were also made in fiscal
1996 of which $5.0 was a special distribution made to pre-offering shareholders
as discussed above and the remaining amount was to enable the pre-offering
shareholders to pay federal and state income taxes on the Company's S
corporation earnings.
In connection with the offering, the Company terminated its S corporation
status and, as a result, was required to change its overall method of
accounting for tax reporting purposes from the cash basis to the accrual basis
(see Notes to Financial Statements - Note 4). The Internal Revenue Code
requires that the Company recognize the effects of this termination in its tax
returns over a four year period. This may result in additional quarterly tax
installments depending on the Company's results of operations and financial
position in the applicable years.
The Company has a revolving line of credit agreement with Bank of America
and Union Bank providing for aggregate borrowings and letters of credit of
$25.0 million. Interest on outstanding borrowings is payable monthly at the
prime rate or, at the Company's discretion, LIBOR plus 1.95%. The line of
credit is unsecured and expires on February 28, 1997. The principal use of the
line of credit has been to finance receivables, to provide a letter of credit
required in connection with the Company's California workers' compensation
self-insurance program to meet regulatory requirements and to finance prior S
corporation distributions made to shareholders. The Company had $0 outstanding
under its line of credit and $4.0 million in undrawn letters of credit as of
September 29, 1996. The Company is no longer self-insured for worker's
compensation. As a
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result, the Company will no longer be required to maintain a letter of credit
and is in the process of canceling the letter of credit. The bank agreements
governing the lines of credit require the Company to maintain certain financial
ratios and comply with certain restrictive covenants. See "Notes to Financial
Statements- Note 3".
SEASONALITY
The Company's quarterly operating results are affected by the number of
billing days in the quarter and the seasonality of its clients' businesses.
The first fiscal quarter has been historically strong as a result of
manufacturing and retail emphasis on holiday sales. The second fiscal quarter,
from January through March, historically shows little to no growth in
comparable revenues from the first fiscal quarter. Revenue growth has
historically accelerated in each of the third and fourth fiscal quarters as
manufacturers, retailers and service businesses increase their level of
business activity.
INFLATION
The effects of inflation on the Company's operations were not significant
during the periods presented in the financial statements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by Item 8 of this Report is set forth in Item
14(a) under the caption "Financial Statements" as a part of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
Information as to the officers of the Company required by this item is set
forth at the end of Part I of this report under the caption "Executive Officers
of the Registrant." Information as to directors and compliance with Section
16(a) of the Exchange Act, required by this item, is incorporated by reference
from the portion of the Company's definitive proxy statement under the caption
"Proposal 1--Election of Directors" to be filed with the Securities and
Exchange Commission (the "Commission") pursuant to Regulation 14A under the
Exchange Act and mailed to shareholders prior to the Company's annual meeting
of shareholders, which is scheduled to be held February 19, 1996.
ITEM 11. EXECUTIVE COMPENSATION
Information as to Executive Compensation required by this item is
incorporated by reference from the Company's definitive Proxy Statement, under
the caption "Executive Compensation and Other Information", to be filed with
the Commission pursuant to Regulation A and mailed to shareholders prior to the
Company's annual meeting of shareholders, which is scheduled to be held
February 19, 1996.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information as to Security Ownership of Certain Beneficial Owners and
Management required by this item is incorporated by reference from the
Company's definitive Proxy Statement, under the caption "Security Ownership of
Certain Beneficial Owners and Management", to be filed with the Commission
pursuant to Regulation A and mailed to shareholders prior to the Company's
annual meeting of shareholders, which is scheduled to be held February 19,
1996.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information as to Certain Relationships and Certain Transactions required
by this item is incorporated by reference from the Company's definitive Proxy
Statement, under the caption "Certain Transactions", to be filed with the
Commission pursuant to Regulation A and mailed to shareholders prior to the
Company's annual meeting of shareholders, which is scheduled to be held
February 19, 1996.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements, Financial Statement Schedules and Exhibits.
(1) Financial Statements filed as part of this Report are set forth in
the "Index to Financial Statements" on page F-1 of this Report.
(2) The Financial Statement Schedule as set forth in the "Index to
Financial Statements" on page F-1 of this Report is filed as part
of this Report.
(3) The following Exhibits are filed as part of this Report.
NUMBER
EXHIBIT DESCRIPTION
- ------- ------------------------------------------------------------------------------
3.1 Amended and Restated Articles of Incorporation of the Company*
3.2 Amended and Restated Bylaws of the Company*
4.1 Specimen Stock Certificate*
4.2 Shareholder Rights Agreement*
10.1 Robert B. McDonough, Sr. Amended and Restated Employment Agreement*
10.2 Paul W. Mikos Employment Agreement*
10.3 R. Emmett McDonough Employment Agreement*
10.4 Allocation Agreement with R. Emmett McDonough and Related Trusts*
10.5 Registration Rights Agreement with R. Emmett McDonough and Related Trusts*
10.6 Letter regarding terms of employment and potential severance of Alan M. Purdy*
10.7 Deferred Compensation Agreement for Alan M. Purdy*
10.8 Letter regarding potential severance of Jeffrey A. Elias*
10.9 Form of Indemnification Agreement*
10.10 Lease Agreement between RemedyTemp, Inc. and Robert E. McDonough, Sr.*
10.11 RemedyTemp, Inc. 1996 Stock Incentive Plan*
10.12 RemedyTemp, Inc. 1996 Employee Stock Purchase Plan*
10.13 Form of Franchising Agreement for Licensed Offices*
10.14 Form of Franchising Agreement for Franchised Offices*
10.15 Form of Licensing Agreement for IntelliSearch(SM) *
10.16 Credit Agreement among Bank of America National Trust and
Savings Association, Union Bank and RemedyTemp, Inc. as amended*
10.17 Paul W. Mikos Promissory Note*
10.18 Registration Rights Agreement with Robert E. McDonough, Sr.*
11.1 Statement Regarding Computation of Per Share Earnings
23.1 Consent of Independent Accountants
27.1 Financial Data Schedule
* Incorporated by reference from the exhibit of same number to the Registrant's
Registration Statement on Form S-1 (Reg. No. 333-4276), as amended.
(b) Reports on Form 8-K:
No reports on Form 8-K have been filed during the last quarter of the
period covered by this Report.
21
22
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, thereunto duly authorized.
REMEDYTEMP, INC.
/s/ PAUL W. MIKOS
_______________________________________
Paul W. Mikos
President and Chief Executive Officer
December 23, 1996
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.
SIGNATURE TITLE DATE
- ------------------------ ------------------------------------ -----------------
/s/ ROBERT E. MCDONOUGH Chairman of the Board of Directors December 23, 1996
- ---------------------------
Robert E. McDonough, Sr.
/s/ ALAN M. PURDY Senior Vice President and Chief December 23, 1996
- --------------------------- Financial Officer (Principal
Alan M. Purdy Financial Officer)
/s/ SUSAN MCDONOUGH MIKOS Director, Corporate Secretary December 23, 1996
- ---------------------------
Susan McDonough Mikos
/s/ JAMES L. DOTI Director December 23, 1996
- ---------------------------
James L. Doti, Ph.D.
/s/ WILLIAM D. CVENGROS Director December 23, 1996
- ---------------------------
William D. Cvengros
/s/ JOHN P. UNROE Director December 23, 1996
- ---------------------------
John P. Unroe
/s/ JOHN B. ZAEPFEL Director December 23, 1996
- ---------------------------
John B. Zaepfel
22
23
REMEDYTEMP, INC.
INDEX TO FINANCIAL STATEMENTS
FINANCIAL STATEMENTS:
Report of Independent Accountants F-2
Balance Sheet as of September 29, 1996 and October 1, 1995 F-3
Statement of Income for the three fiscal years ended
September 29, 1996, October 1, 1995 and October 2, 1994 F-4
Statement of Shareholders' Equity for the three fiscal
years ended September 29, 1996, October 1, 1995 and
October 2, 1994 F-5
Statement of Cash Flows for the three fiscal years ended
September 29, 1996, October 1, 1995 and October 2, 1994 F-6
Notes to Financial Statements F-7
FINANCIAL STATEMENT SCHEDULE:
For the three fiscal years ended September 29, 1996,
October 1, 1995 and October 2, 1994
VIII - Valuation and Qualifying Accounts F-15
All other schedules are omitted because they are not applicable or the
required information is shown in the financial statements or notes thereto.
F-1
24
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of RemedyTemp, Inc.
In our opinion, the financial statements listed in the index appearing under
Item 14(a)(1) and (2) on page 21 present fairly, in all material respects, the
financial position of RemedyTemp, Inc. at September 29, 1996, and October 1,
1995, and the results of their operations and their cash flows for each of the
three years in the period ended September 29, 1996, in conformity with
generally accepted accounting principles. 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 of these statements in accordance with generally accepted auditing
standards which 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, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Costa Mesa, California
November 15, 1996
F-2
25
REMEDYTEMP, INC.
BALANCE SHEET
(AMOUNTS IN THOUSANDS)
ASSETS
SEPTEMBER 29, OCTOBER 1,
1996 1995
------------- ----------
Current assets:
Cash and cash equivalents............................................ $10,959 $ 2,204
Marketable securities (Note 1)....................................... 1,016
Accounts receivable, net of allowance for doubtful accounts of $2,111
and $1,950 at September 29, 1996 and October 1, 1995, respectively.. 42,337 33,068
Prepaid expenses and other current assets............................ 2,177 2,248
Current portion of net investment in direct financing leases......... 164 175
------- -------
Total current assets................................................. 56,653 37,695
Fixed assets, net (Note 2)........................................... 5,527 4,340
Other assets (Note 5)................................................ 1,262 843
Net investment in direct financing leases............................ 464 618
------- -------
$63,906 $43,496
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable..................................................... $ 933 $ 519
Distributions payable to pre-Offering shareholders (Note 5).......... 4,007
Accrued workers' compensation (Note 1)............................... 550 6,733
Accrued payroll, benefits and related costs.......................... 10,056 7,065
Accrued licensees' share of gross profit............................. 1,388 1,204
Other accrued expenses............................................... 1,711 191
Debt (Note 3)........................................................ 6,700
Income taxes payable................................................. 1,167 84
Current portion of capitalized lease obligation (Note 6)............. 416 383
Deferred income taxes (Note 4)....................................... 1,084 167
------- -------
Total current liabilities............................................ 21,312 23,046
Deferred income taxes (Note 4)....................................... 5,584
Capitalized lease obligation (Note 6)................................ 734 1,142
------- -------
27,630 24,188
------- -------
Commitments and contingent liabilities (Note 6)
Shareholders' equity (Note 9):
Preferred Stock, par value $.01; authorized 5,000 shares;
none outstanding
Class A Common Stock, $.01 par value; authorized 50,000
shares; 5,830 and 2,265 issued and outstanding at
September 29, 1996 and October 1, 1995, respectively................. 58 23
Class B Non-Voting Common Stock, $.01 par value; 3,058 and
4,530 authorized, issued and outstanding at September 29,1996
and October 1, 1995, respectively.................................... 31 45
Additional paid-in capital........................................... 32,671 84
Retained earnings.................................................... 3,516 19,156
------- -------
Total shareholders' equity........................................... 36,276 19,308
------- -------
$63,906 $43,496
======= =======
See accompanying notes to financial statements.
F-3
26
REMEDYTEMP, INC.
STATEMENT OF INCOME
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED
-------------------------------------
SEPTEMBER 29, OCTOBER 1, OCTOBER 2,
1996 1995 1994
------------- ---------- ----------
Direct sales............................ $184,564 $144,646 $119,042
Licensed sales.......................... 98,003 61,377 31,201
Franchise royalties..................... 2,811 2,751 2,462
Initial franchise fees.................. 141 229 300
-------- -------- --------
Total revenues.......................... 285,519 209,003 153,005
Cost of direct sales.................... 142,643 110,159 92,022
Cost of licensed sales.................. 73,347 46,017 24,018
Licensees' share of gross profit........ 16,287 10,328 4,857
Selling and administrative expenses..... 39,974 35,667 27,581
Depreciation and amortization........... 2,043 1,453 1,436
-------- -------- --------
Income from operations.................. 11,225 5,379 3,091
Other income:
Interest expense, net................... (64) (23) (1)
Other, net.............................. 846 1,141 712
-------- -------- --------
Income before provision for income taxes 12,007 6,497 3,802
Provision for income taxes (Note 4)..... 7,794 97 57
-------- -------- --------
Net income.............................. $ 4,213 $ 6,400 $ 3,745
======== ======== ========
Unaudited pro forma data (Notes 1 and 4)
Income before income taxes.............. $ 12,007 $ 6,497 $ 3,802
Provision for income taxes.............. 4,923 2,599 1,521
-------- -------- --------
Pro forma net income.................... $ 7,084 $ 3,898 $ 2,281
======== ======== ========
Pro forma net income per share.......... $ .89 $ .51
======== ========
Weighted average number of shares....... 7,977 7,685
======== ========
See accompanying notes to financial statements.
F-4
27
REMEDYTEMP, INC.
STATEMENT OF SHAREHOLDERS' EQUITY
(AMOUNTS IN THOUSANDS)
CLASS A CLASS B
COMMON STOCK COMMON STOCK ADDITIONAL
-------------- --------------- PAID-IN RETAINED
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS TOTAL
------ ------ ------- ------ --------- -------- --------
Balance at October 3, 1993....... 2,265 $23 4,530 $ 45 $ 84 $ 9,932 $ 10,084
Net income....................... 3,745 3,745
------ --- ------- ----- ------- -------- --------
Balance at October 2, 1994....... 2,265 23 4,530 45 84 13,677 13,829
Net income....................... 6,400 6,400
Distributions to shareholders.... (921) (921)
------ --- ------- ----- ------- -------- --------
Balance at October 1, 1995....... 2,265 23 4,530 45 84 19,156 19,308
Conversion of Common Stock
(Note 1)......................... 1,472 14 (1,472) (14)
Net proceeds from public
Offering of common stock
(Note 1)......................... 2,093 21 23,387 23,408
Reclassification of S Corporation
retained earnings................ 9,200 (9,200)
Net income....................... 4,213 4,213
Distributions to pre-Offering
shareholders (Note 1)............ (10,653) (10,653)
------ --- ------- ----- ------- -------- --------
Balance at September 29, 1996.... 5,830 $58 3,058 $ 31 $32,671 $ 3,516 $ 36,276
====== === ======= ===== ======= ======== ========
See accompanying notes to financial statements.
F-5
28
REMEDYTEMP, INC.
STATEMENT OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
YEAR ENDED
-------------------------------------
SEPTEMBER 29, OCTOBER 1, OCTOBER 2,
1996 1995 1994
------------- ---------- ----------
Cash flows provided by (used in) operating activities:
Net income............................................ $ 4,213 $ 6,400 $ 3,745
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization......................... 2,043 1,453 1,436
Provision for losses on accounts receivable........... 1,621 1,221 890
Workers compensation settlement....................... (1,438)
Deferred taxes........................................ 6,501 35 (14)
Changes in assets and liabilities:
Accounts receivable................................... (10,890) (11,266) (7,820)
Prepaid expenses and other current assets............. 71 (333) (620)
Net investment in direct financing leases............. 165 39 (832)
Other assets.......................................... (419) (313) 335
Accounts payable...................................... 414 423 56
Accrued workers' compensation......................... (4,745) (236) 1,479
Accrued payroll, benefits and related costs........... 2,991 3,150 983
Accrued licensees' share of gross profit.............. 184 649 283
Other accrued expenses................................ 1,520 (517) (41)
Income taxes payable.................................. 1,083
-------- -------- -------
Net cash provided by (used in) operating activities... 3,314 705 (120)
-------- -------- -------
Cash flows used in investing activities:
Purchase of fixed assets.............................. (3,230) (2,933) (1,421)
Purchase of investments............................... (1,016)
-------- -------- -------
Net cash used in investing activities................. (4,246) (2,933) (1,421)
-------- -------- -------
Cash flows provided by financing activities:
Borrowings under line of credit agreement............. 16,098 8,029 3,602
Repayments under line of credit agreement............. (22,798) (4,450) (2,500)
Repayments under capital lease obligation............. (375) (338) (187)
Proceeds from sale/leaseback agreement................ 782 1,268
Net Proceeds from IPO................................. 23,408
Distributions to shareholders......................... (6,646) (921)
-------- -------- -------
Net cash provided by financing activities............. 9,687 3,102 2,183
-------- -------- -------
Net increase in cash and cash equivalents............. 8,755 874 642
Cash and cash equivalents at beginning of period...... 2,204 1,330 688
-------- -------- -------
Cash and cash equivalents at end of period............ $ 10,959 $ 2,204 $ 1,330
======== ======== =======
Supplemental Disclosure of Non Cash Investing and Financing Activities
At September 29, 1996 and October 1, 1995, the Company had declared and
accrued dividends of $4,007 and $0, respectively.
Other cash flow information:
Cash paid during the period for interest............. $ 327 $ 164 $ 89
Cash paid during the period for income taxes......... $ 97 $ 7 $ 1
See accompanying notes to financial statements.
F-6
29
REMEDYTEMP, INC.
NOTES TO FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of business
The Company's principal business is providing temporary personnel to
businesses and industry.
The Company has two classes of Common Stock outstanding: Class A Common
Stock, which has all voting and other rights normally associated with common
stock, and Class B Common Stock, which is identical to the Class A Common Stock
in all respects except that the Class B Common Stock has no voting rights
except with respect to certain amendments of the Company's Articles of
Incorporation, certain mergers and as otherwise required by law. The Class B
Common Stock will automatically convert into Class A Common Stock on a
share-for-share basis upon the earlier of (i) certain transfers to
non-affiliates, (ii) the death or legal incapacity of the Chairman of the
Company, or (iii) the tenth anniversary of the completion of the initial public
Offering described below.
Initial Public Offering
On July 16, 1996, the Company completed an initial public Offering of
3,565 shares of its Class A Common Stock at $13.00 per share (the Offering) of
which 2,093 were sold by the Company and 1,472 were sold by certain pre-Offering
shareholders. The shares sold by the pre-Offering shareholders were originally
Class B Common Stock that automatically converted to Class A Common Stock in
connection with the Offering. The net proceeds to the Company from the sale of
2,093 shares of Class A Common Stock are estimated to be $23,408, after
deduction of the underwriting discount of $1,905 and estimated expenses related
to the Offering of $1,900. A portion of the net proceeds was used to finance
distributions to the Company's pre-Offering shareholders with the remaining
balance reserved for working capital and other general corporate use. The
Company did not receive any of the proceeds from the sale of the shares of
common stock offered by pre-Offering shareholders.
Recapitalization
Concurrent with the Offering, the Company effected (i) a 1.812-for-1 stock
split of its outstanding voting and non-voting common stock, and (ii) an
amendment to the Company's Articles of Incorporation to authorize 5,000 shares
of preferred stock, par value $.01, an increase in the number of voting common
shares authorized from 10,000 to 50,000, a reclassification of the voting and
non-voting common stock, and a decrease in the number of authorized non-voting
common shares from 7,500 to 4,530. Share and per share amounts for all periods
presented have been adjusted to give retroactive effect to the above.
Summary of significant accounting policies
Fiscal year
The Company's fiscal year includes 52 or 53 weeks, ending on the Sunday
closest to September 30. Fiscal years 1996, 1995 and 1994 consisted of 52
weeks.
Revenue recognition
Revenue from the sale of services is recognized at the time the service is
performed. A portion of the Company's revenue is derived from affiliate
operations which consist of franchises and licensed operations.
F-7
30
REMEDYTEMP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Under the Company's franchised operations, the franchisee has the direct
contractual relationship with the customers, holds title to the related
customer receivables and is the legal employer of the temporary employees.
Accordingly, sales and cost of sales generated by the franchised operations are
not included in the Company's financial statements. Fees are paid to the
Company based upon a percentage of the gross sales generated by the franchisee
and such fees are recorded by the Company as "Franchise royalties."
Revenues generated by licensed operations and the related costs of
services are included in the Company's financial statements and are reported as
"Licensed sales," and "Cost of licensed sales," respectively since the Company
has the direct contractual relationship with the customer, holds title to the
related customer receivables and is the legal employer of the temporary
employees. The risks associated with the licensed operations remain with the
Company. "Licensee" refers to the Company's affiliates in their role as
independent contractors and limited agents of the Company in recruiting job
applicants, soliciting job orders, filling those orders and handling collection
matters upon request. The Licensee acts as a limited agent for the Company to
market the Company's services within the Licensee's territory. The net
distribution paid to the Licensee for the services rendered is based on a
percentage of the gross profit generated by the Licensee's operation and is
reflected as "Licensees' share of gross profit."
Both Franchisees and Licensees pay an initial fee for their affiliation
with the Company. This fee is recognized as revenue when substantially all of
the initial services required by the Company have been performed, and is
recorded by the Company as "Initial franchise fees."
Concentrations of credit risk
The Company's financial instruments that potentially subject the Company
to concentrations of credit risk consist principally of trade receivables.
However, concentrations of credit risk are limited due to the large number of
customers comprising the Company's customer base and their dispersion across
different business and geographic areas. Furthermore, the Company routinely
assesses the financial strength of its customers.
Use of estimates in the preparation of financial statements
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 the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
Cash and cash equivalents
For purposes of financial reporting, cash equivalents represent highly
liquid short-term investments with original maturities of less than 90 days.
Marketable securities
Marketable securities consist primarily of U.S. Treasury securities and
other commercial paper. Marketable securities are carried at cost which
approximates fair market value at September 29, 1996.
Fixed assets
Fixed assets are stated at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the related assets,
which are three to five years for furniture and fixtures and
F-8
31
REMEDYTEMP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
computer equipment. Major improvements to leased office space are capitalized
and amortized over the shorter of their useful lives or the terms of the
leases.
Net investment in direct financing leases
During fiscal year 1994, the Company began leasing computer and related
equipment to various franchisees. The leases are accounted for as direct
financing leases as there is no profit recognized and title to the leased
equipment transfers to the franchisee upon conclusion of the lease. The net
investment in direct financing leases represents the future minimum lease
payments less the portion of the future payments relating to unearned interest
income.
Accrued workers' compensation
Prior to July 22, 1996, Remedy's workers' compensation risk was self
insured in California. On July 22, 1996, Remedy entered into a contract with
an insurance company whereby the insurance company assumed the Company's
existing self insured workers' compensation liability for claims incurred
during the period May 1, 1986 through July 22, 1996. As a result of the
contract, the Company reduced its estimated workers' compensation exposure by
$1,438 (reflected as a reduction in selling and administrative expenses).
Additionally, the Company purchased a guaranteed cost insurance policy to cover
workers' compensation claims, in California, for the period July 22, 1996 to
July 22, 1997. For workers' compensation coverage in states other than
California, the Company has similar guaranteed cost policies that are renewed
annually.
Other income
Other income consists primarily of fees collected from customers on past
due accounts receivable balances in the amounts of $1,064, $883 and $ 580, for
the years ended September 29, 1996, October 1, 1995, and October 2, 1994,
respectively.
Income taxes
The Company records income taxes in accordance with the provisions of
Statement of Financial Accounting Standards No. 109 (SFAS 109), "Accounting
for Income Taxes." SFAS 109 is an asset and liability approach that requires
the recognition of deferred tax assets and liabilities for the expected future
tax consequences of events that have been recognized in the Company's financial
statements or tax returns. In estimating future tax consequences, SFAS 109
generally considers all expected future events other than enactment's of
changes in the tax law or rates.
Accounting for stock-based compensation
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 123 (SFAS 123) "Accounting for
Stock-based Compensation," which establishes financial accounting and reporting
standards for stock-based employee compensation. Under SFAS 123, companies are
encouraged, but not required, to adopt a method of accounting for stock
compensation awards based upon the estimated fair value at the date the
options/awards are granted as determined through the use of a pricing model
(the "Fair Value Method"). Companies continuing to account for such awards in
accordance with the existing guidance of Accounting Principles Board Opinion 25
(APB 25) "Accounting for Stock Issued to Employees" will have to disclose, in
the Notes to Financial Statements, the pro forma impact on net income and net
income per share had the Company utilized the Fair Value Method. The Company
anticipates accounting for future stock compensation awards in accordance with
APB 25 with the appropriate footnote disclosure required under SFAS 123. This
statement is applicable for the Company's fiscal year ended September 28, 1997.
F-9
32
REMEDYTEMP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
Pro forma net income and net income per share
Prior to the Offering, the Company elected treatment as an S corporation
for federal and state income tax purposes. Pro forma net income represents net
income after a pro forma tax provision, using a tax rate of 41%, 40% and 40%
for the years ended September 29, 1996, October 1, 1995, and October 2, 1994,
respectively, to reflect the estimated income tax expense of the Company as if
it had been subject to normal federal and state income taxes for the period.
Pro forma net income per share (unaudited) for fiscal 1996 and fiscal 1995
is computed by using the weighted average number of common and common
equivalent shares outstanding during the period, adjusted to include the
estimated number of shares required to be sold by the Company to prepay
distributions to the pre-Offering shareholders totaling $9,952 (890 shares as
calculated based on the net proceeds from the initial public Offering)
including $5,945 of distributions paid during fiscal 1996 and $4,007
distributions payable to the pre-Offering shareholders at September 29, 1996
(Note 5). The fiscal 1995 weighted average number of shares have been revised
to give effect to the actual distributions to pre-Offering shareholders as
opposed to the estimate used in the Company's Registration Statement on Form
S-1. In addition, the computation of pro forma weighted average shares
outstanding gives effect to the stock split effected in connection with the
Offering. Historical net income per share has not been presented in view of
prior period S corporation status.
Reclassifications
Certain reclassifications, which have no effect on retained earnings, have
been made to conform the 1994 and 1995 information to the 1996 presentation.
2. FIXED ASSETS
SEPTEMBER 29, OCTOBER 1,
1996 1995
------------- ----------
Computer equipment........... $ 7,679 $ 5,173
Furniture and fixtures....... 3,980 3,587
Leasehold improvements....... 2,032 1,881
------- -------
13,691 10,641
Less accumulated depreciation (8,164) (6,301)
------- -------
$ 5,527 $ 4,340
======= =======
Included in the above computer equipment are capitalized leases and
related accumulated depreciation of $2,050 and $998 at September 29, 1996,
respectively, and $2,050 and $588 at October 1, 1995, respectively.
3. DEBT
The Company has a revolving line of credit agreement with two banks, which
provides for aggregate borrowings of $25,000. Interest on outstanding
borrowings is payable monthly at the designated bank's reference rate (8.25% at
September 29, 1996) or, at the Company's election, at a fixed rate equal to
LIBOR plus 1.95 percent for a predetermined period. The line of credit
agreement expires on February 28, 1997.
At September 29, 1996 and October 1, 1995 the Company had $0 and $6,700,
respectively, outstanding under its line of credit agreement. The Company had
outstanding undrawn letters of credit of $3,985, and $4,767 at September 29,
1996, and October 1, 1995, respectively. Under the provisions of the line of
credit agreement, the Company must maintain certain financial ratios and must
comply
F-10
33
REMEDYTEMP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
with certain restrictive covenants. The Company was in compliance with these
requirements or had obtained waivers for those requirements for the fiscal year
ended September 29, 1996.
4. INCOME TAXES
Prior to the Offering, the Company elected to be taxed as an S corporation
for federal and state income tax purposes. Pursuant to this election, earnings
or losses were subject to tax at the shareholder level rather than the
corporate level. Therefore, no provision was made for federal income tax on
earnings or losses of the Company in the historical financial statements. Tax
laws relating to S corporations vary by state. In California, the principal
state of operation for the Company, earnings of S corporations are taxed at 1.5
percent and the Company provided state taxes accordingly.
In conjunction with the Offering, the S corporation status was terminated
after July 9, 1996. As a result, the Company was required by the Internal
Revenue Code to change its overall method of accounting for income tax
reporting purposes from the cash basis to the accrual basis. The termination
also resulted in a non-recurring net charge to earnings of $7,793 in the fourth
quarter of fiscal 1996 for additional federal and state income tax expense
related to the net change required to adjust the deferred tax assets and
liabilities to their appropriate value utilizing C corporation rates.
The Company's historical provision for income taxes for the three fiscal
years ended September 29, 1996 consists of the following:
SEPTEMBER 29, OCTOBER 1, OCTOBER 2,
1996 1995 1994
------------- ---------- ----------
Current tax expense:
Federal......................... $ 1,123 $ - $ -
State........................... 170 62 71
------- --- ----
Total current................... 1,293 62 71
------- --- ----
Deferred tax expense:
Federal......................... (1,122) - -
State........................... (170) 35 (14)
Deferred tax provision
resulting from termination of
S corporation status............ 7,793 - -
------- --- ----
Total deferred.................. 6,501 35 (14)
------- --- ----
Total provision for income taxes $ 7,794 $97 $ 57
======= === ====
The composition of the deferred tax liabilities (assets) at September 29, 1996
is listed below. The prior years information is not presented as it is not
comparable given the prior S corporation status.
SEPTEMBER 29,
1996
-------------
Reserves and accrued liabilities.............. $ 1,901
Depreciation.................................. 387
-------
Gross deferred tax assets..................... 2,288
-------
S corporation cash basis accounting adjustment (8,956)
-------
Gross deferred tax liabilities................ (8,956)
-------
Net deferred tax liability.................... $(6,668)
=======
F-11
34
REMEDYTEMP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
The pro forma provision for income taxes differs for the amount of income
tax determined by applying the applicable U.S. statutory income tax rates to
income before taxes as a result of the following differences:
SEPTEMBER 29, OCTOBER 1, OCTOBER 2,
1996 1995 1994
------------- ---------- ----------
Federal tax computed at statutory rate.... 35% 34% 34%
State taxes, net of federal benefit....... 5% 5% 5%
Other..................................... 1% 1% 1%
--- --- ---
Total pro forma provision for income taxes 41% 40% 40%
=== === ===
5. RELATED PARTY TRANSACTIONS
Prior to the completion of the Offering, the Board of Directors declared a
distribution to be paid to the Company's pre-Offering shareholders representing
the estimated income tax obligations of the pre-Offering shareholders on
undistributed S corporation earnings from October 2, 1995 through July 9, 1996,
the date immediately preceding the termination of the S corporation status.
The Company currently estimates that the distribution will be $4,952, however,
the actual distribution may vary pending completion of the final calculation
upon filing the final S corporation tax returns. The estimated distribution,
net of $945 in advances for the quarterly estimated tax payments of the
pre-Offering shareholders, has been accrued at September 29, 1996.
The Company leases its corporate facility from the principal shareholder
of the Company. The lease provides for the payment of property taxes,
insurance and certain other operating expenses applicable to the leased
property by the lessee. In September 1996, the lease expired and the lease
term became month-to-month until a new lease agreement is finalized. Rent
expense paid to the principal shareholder totaled $301 for each of the three
years ended September 29, 1996, October 1, 1995 and October 2, 1994,
respectively.
Included in other assets at September 29, 1996 and October 1, 1995 are
advances and notes receivable due from shareholders and officers of the Company
in the amount of $417 and $313, respectively.
6. COMMITMENTS AND CONTINGENT LIABILITIES
The Company leases its corporate facility, branch offices and certain
equipment under operating leases. The leases typically require the Company to
pay taxes, insurance and certain other operating expenses applicable to the
leased property. Total rent expense was approximately $2,220, $2,209 and
$2,086, for the years ended September 29, 1996, October 1, 1995 and October 2,
1994, respectively.
In 1994, the Company entered into a financing agreement for the purchase
of computer and related equipment. Fixed assets totaling $782 and $1,268 for
the years ended October 1, 1995 and October 2, 1994, respectively, were sold to
and leased back from the bank under this agreement. Based upon the terms of
the agreement, the leases were accounted for as capital leases. There were no
additional transactions under this agreement during fiscal 1996.
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35
REMEDYTEMP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Future minimum lease commitments under all noncancellable capital and
operating leases as of September 29, 1996 are as follows:
FISCAL CAPITAL OPERATING
YEAR LEASES LEASES
- ---- ------- ---------
1997.................. $ 416 $2,011
1998.................. 453 1,070
1999.................. 232 600
2000.................. 49 188
2001.................. 87
------ ------
Total................. $1,150 $3,956
====== ======
The Company is involved in various claims and legal actions arising in the
ordinary course of business. It is the opinion of management, upon the advice
of legal counsel, that the ultimate disposition of these matters will not
materially affect the Company's financial position, results of operations or
cash flows.
7. EMPLOYEE BENEFITS
401(k) plans
In June 1991, the Company established two 401(k) plans. The first is for
all full-time eligible employees and the second is for qualified temporary
employees. The annual amount of employer contributions to the plans is
determined at the discretion of the board of directors, subject to certain
limitations. Eligible participants may make voluntary contributions to the
plan and become fully vested in the Company's contributions over a five-year
period. The Company has made no contributions during the three years ended
September 29, 1996.
Employee Stock Purchase Plan
The Company implemented its 1996 Employee Stock Purchase Plan (the
"Purchase Plan") in connection with the Offering. A total of 250 shares were
reserved for issuance under the Purchase Plan. Under the terms of the Purchase
Plan, eligible employees may purchase shares of the Company's common stock
based on payroll deductions. The purchase price for deductions is the lower of
85% of the market price of the stock on the first or last day of the purchase
period. The Purchase Plan commenced on October 1, 1996.
8. STOCK OPTIONS
In connection with the Offering, the Company implemented its 1996 Stock
Incentive Plan (the "Plan") for officers, directors and key employees of the
Company. A total of 900 shares were reserved for issuance under the "Plan".
Options granted to employees of the Company typically may be exercised within
ten years from the grant date and are exercisable in installments determined by
the Compensation Committee of the Board of Directors. Options granted to
non-employee directors prior to the Offering were immediately exercisable.
Options granted to non-employee directors subsequent to the Offering are
typically 50% exercisable immediately and 50% exercisable upon the date of the
next annual shareholders meeting.
On July 10, 1996, the Company granted options to purchase 422 shares of
Class A Common Stock to certain of its directors, executive officers and
employees at the initial public Offering price of $13.00 per share.
Additionally, on July 25, 1996, the Company granted options to purchase 20
shares of Class A Common Stock to certain of its directors at $13.00 per share.
No compensation expense was recorded in connection with these grants.
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36
REMEDYTEMP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
9. UNAUDITED QUARTERLY INFORMATION
FOR THE THREE MONTHS ENDED
----------------------------------------------------------
DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 29,
1995 1996 1996 1996
---------------- ------------ ----------- -------------
Total revenues................................ $64,681 $65,432 $72,956 $82,450
Total cost of direct and licensee sales....... 48,260 49,589 55,340 62,801
Licensees' share of gross profit.............. 3,711 3,843 4,309 4,424
Selling, general and administrative expenses.. 9,659 10,119 10,361 11,878
Pro forma net income (a)...................... 1,940 1,264 1,884 1,996
Pro forma earnings per share (b).............. 0.25 0.16 0.25 0.23
FOR THE THREE MONTHS ENDED
---------------------------------------------------------
JANUARY 1, APRIL 2, JULY 2, OCTOBER 1,
1995 1995 1995 1995
---------------- ------------ ----------- ------------
Total revenues................................ $46,596 $47,835 $53,468 $61,104
Total cost of direct and licensee sales....... 34,713 35,888 40,050 45,525
Licensees' share of gross profit.............. 1,935 2,239 2,768 3,386
Selling, general and administrative expenses.. 8,464 9,381 9,087 10,188
Pro forma net income (a)...................... 1,041 294 1,205 1,358
(a) Pro forma net income represents net income after a pro forma tax
provision reflecting the estimated income tax expense of the Company as if
it had been subject to federal and state income taxes at C corporation
rates. See "Notes to Financial Statements-Note 1".
(b) See Note 1 to the Financial Statements regarding computation of pro forma
earnings per share. Amounts for the first three quarters of fiscal 1996
differ from those previously reported as the weighted number of shares have
been revised to reflect the actual distribution to pre-Offering
shareholders as opposed to the estimates previously used.
Historical pro forma earnings per share for the fiscal 1995 quarters are
not presented in accordance with SEC requirements under Article 11 of
Regulation S-X.
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37
REMEDYTEMP, INC.
FINANCIAL STATEMENT SCHEDULE
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS
BALANCE AT BALANCE AT
BEGINNING OF END OF
DESCRIPTION PERIOD ADDITIONS DEDUCTIONS (1) PERIOD
- ----------- ------------ --------- -------------- ----------
Allowance for Doubtful
Accounts Receivable:
Year ended September 29, 1996 $1,950 $1,621 $1,460 $2,111
Year ended October 1, 1995 1,492 1,221 763 1,950
Year ended October 2, 1994 953 890 351 1,492
(1) Represents write-offs of bad debts
F-15