1
EXHIBIT 13.1
SELECTED FINANCIAL DATA
FISCAL YEAR ENDED(1)
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF INCOME DATA:
Total revenues .................... $451,344 $360,346 $285,519 $209,003 $153,005
Income before income taxes ........ 23,177 17,424 12,007 6,497 3,802
Provision for income taxes (2) .... 9,271 7,231 7,794 97 57
-------- -------- -------- -------- --------
Net income ........................ $ 13,906 $ 10,193 $ 4,213 $ 6,400 $ 3,745
======== ======== ======== ======== ========
Net income per share, basic ....... $ 1.55 $ 1.15 $ 0.58 $ 0.94 $ 0.55
======== ======== ======== ======== ========
Weighted-average number of shares,
basic ............................. 8,966 8,896 7,225 6,795 6,795
Net income per share, diluted ..... $ 1.50 $ 1.13 $ 0.58 $ 0.94 $ 0.55
======== ======== ======== ======== ========
Weighted-average number of shares,
diluted ........................... 9,297 9,042 7,250 6,795 6,795
PRO FORMA DATA(2):
Income before income taxes ........ 12,007 6,497 3,802
Provision for income taxes ........ 4,923 2,599 1,521
-------- -------- --------
Net income ........................ $ 7,084 $ 3,898 $ 2,281
======== ======== ========
BALANCE SHEET DATA:
Cash and cash equivalents ......... $ 450 $ 5,128 $ 10,959 $ 2,204 $ 1,330
Working capital ................... $ 42,461 $ 39,130 $ 35,341 $ 14,649 $ 10,610
Total assets ...................... $ 89,785 $ 73,806 $ 63,906 $ 43,496 $ 30,490
Long-term debt .................... $ 63 $ 281 $ 734 $ 1,142 $ 851
Shareholders' equity .............. $ 62,437 $ 47,061 $ 36,276 $ 19,308 $ 13,829
(1) The fiscal year end of RemedyTemp, Inc., (the "Company"), including its
wholly-owned subsidiary, Remedy Insurance Group, LTD ("RIG"), is a 52 or
53 week period ending the Sunday closest to September 30. Thus, "fiscal
1998," "fiscal 1997," "fiscal 1996," "fiscal 1995," and "fiscal 1994"
refer to the Company's fiscal years ending September 27, 1998, September
28, 1997, September 29, 1996, October 1, 1995 and October 2, 1994,
respectively. All these fiscal years consisted of 52 weeks.
(2) Prior to the Company's initial public offering (the "Offering") in July
1996, the Company operated 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 reflects 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 Offering resulted in a non-recurring net charge
to actual earnings of $7.8 million in the fourth quarter of fiscal 1996.
See "Notes to Consolidated Financial Statements- Note 4."
6
2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD LOOKING STATEMENTS
In addition to historical information, management's discussion and analysis
includes certain forward-looking statements, including, but not limited to,
those related to the Company's growth and strategies, future operating results
and financial position as well as economic and market events and trends. All
forward-looking statements made by the Company, including such statements
herein, include material risks and uncertainties and are subject to change based
on factors beyond the control of the Company. Accordingly, the Company's actual
results and financial position could differ materially from those expressed or
implied in any forward-looking statement as a result of various factors,
including without limitation those factors described in the Company's filings
with the Securities and Exchange Commission regarding risks affecting the
Company's financial conditions and results of operations. The Company does not
undertake to publicly update or revise its forward-looking statements even if
experience or future changes make it clear that any projected results expressed
or implied therein will not be realized. The following should be read in
conjunction with the Consolidated 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 fiscal months ended September 27, 1998, the Company placed approximately
136,000 temporary workers and provided over 41.0 million hours of staffing
services to approximately 17,000 clients. From the beginning of fiscal 1994
through the end of fiscal 1998, the Company added 140 offices, for a total of
234 offices and increased revenues and income before taxes at compound annual
growth rates of approximately 30.1% and 65.7%, respectively, to $451.3 million
and $23.2 million, respectively.
OPERATIONS
The Company's revenues are derived from Company-owned offices (direct
sales) and independently-managed offices (licensed 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 operating costs relating to its office. The licensee
employs all management staff affiliated with its office, but the Company employs
all temporary personnel affiliated with the licensed office, handles invoicing
and collecting clients' accounts, and remits to the licensee 60%-70% of the
office's gross profit. However, the Company's share of the licensed gross profit
is never less than 7.5% of licensee's gross billings, with the exception of
national accounts on which the Company's fee is reduced to compensate for lower
gross margins. The amount of gross profit paid to the licensee is based on the
level of hours billed during the contract year.
As of September 27, 1998, there were 19 independently-managed offices
operating as franchises and 117 operating as licensed offices. In general,
independently-managed offices opened from 1987 to 1990 are operated as
franchises, and independently-managed offices opened since 1990 are operated as
licensed offices. 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 licensed
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 is reduced,
royalty income will decrease.
The table on the following page sets forth 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.
Average billings per office is computed by dividing the relevant billings by the
number of related offices. The Company's long-term revenue growth depends in
part upon its ability to continue to attract new clients, retain existing
clients and open new offices, as well as its ability to enhance the sales of
existing offices beyond historical levels.
7
3
FISCAL YEAR ENDED
-----------------------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
COMPANY-OWNED OFFICES
Number of offices ............. 98 86 68 63 59
Average hours billed per office 241,216 233,233 248,062 217,907 192,857
Total billings ................ $274,577 $221,679 $184,564 $144,646 $119,042
Average billings per office ... $ 2,802 $ 2,578 $ 2,714 $ 2,296 $ 2,018
LICENSED OFFICES
Number of offices ............. 117 93 73 58 39
Average hours billed per office 118,494 123,813 117,373 96,545 80,801
Total billings ................ $173,764 $135,532 $ 98,003 $ 61,377 $ 31,201
Average billings per office ... $ 1,485 $ 1,457 $ 1,343 $ 1,058 $ 800
FRANCHISED OFFICES
Number of offices ............. 19 20 20 21 21
Average hours billed per office 184,679 190,345 190,674 175,699 163,402
Total billings ................ $ 45,371 $ 46,526 $ 44,304 $ 41,095 $ 36,027
Average billings per office ... $ 2,388 $ 2,326 $ 2,215 $ 1,957 $ 1,716
Royalties ..................... $ 2,812 $ 2,948 $ 2,811 $ 2,751 $ 2,462
TOTAL OFFICES ................. 234 199 161 142 119
TOTAL SYSTEM-WIDE BILLINGS .... $493,712 $403,737 $326,871 $247,118 $186,270
AVERAGE HOURS BILLED PER OFFICE 175,265 177,786 181,677 162,096 150,936
TOTAL COMPANY REVENUES ........ $451,344 $360,346 $285,519 $209,003 $153,005
WORKERS' COMPENSATION
As of July 22, 1997, the Company began a self-insured workers' compensation
program for direct and licensed offices, administered through RIG. Management
believes RIG enables the Company to control its claims administration, allocate
safety resources where they are needed and develop efficient and cost effective
methods of financing workers' compensation. The Company is responsible for
individual claims up to $250,000 and has purchased excess liability coverage for
individual claims greater than $250,000 and aggregate claims greater than $7.5
million. This aggregate stop-loss coverage is based on projected levels of
workers' compensation wages and will vary to the extent that actual wage levels
differ from the projection. See "Notes to Consolidated Financial Statements-
Note 1."
RESULTS OF OPERATIONS
Fiscal 1998 Compared to Fiscal 1997
Total revenues increased 25.3% or $91.0 million to $451.3 million for
fiscal 1998 from $360.3 million for fiscal 1997. This increase was primarily
attributable to volume increases that resulted from increased billings at
existing offices and expansion of services, including EDGE(R) and call center
activity, and from 35 new offices opened during fiscal 1998.
Although the annual increase in total revenues generally is consistent
with the Company's historical performance as a public company, the Company
recently experienced extraordinary price competition from a national staffing
provider on one of the Company's existing high volume, low gross margin clients.
As of December 1998, the Company discontinued providing service to this client
for various reasons, including the Company's strategic emphasis on maintaining
acceptable gross margin levels on all client accounts. In light of the
significant market demand for the Company's staffing services from clients and
potential clients who accept the Company's customary gross margin requirements,
the Company believes that it should be able to continue to maintain its gross
margin requirements and to expand its business on that basis, however, no
assurance in this regard can be given. Future revenue increases depend
significantly on the Company's ability to continue to attract new clients,
retain existing clients, open new offices and manage newly opened offices to
maturity.
Total cost of direct and licensed sales, which consists of wages and other
expenses related to the temporary associates, increased 25.4% or $69.6 million
to $344.1 million for fiscal 1998 from $274.5 million for fiscal 1997. Total
cost of direct and licensed sales as a percentage of revenues remained constant.
8
4
Licensees' share of gross profit represents the net payments to licensees
based upon a percentage of gross profit generated by the licensed operation. The
percentage of gross profit earned by the licensee is based on the number of
hours billed. Under the Company's license arrangements, the Company's share of
gross profit cannot be less than 7.5% of the licensed operation sales, with the
exception of national accounts on which the Company's fee is reduced to
compensate for lower gross margins. Licensees' share of gross profit increased
31.2% or $7.2 million to $30.1 million for 1998 from $23.0 million for fiscal
1998. Licensees' share of gross profit as a percentage of total revenues
increased to 6.7% for fiscal 1998 from 6.4% for fiscal 1997. This change
resulted from an increase to 38.5% from 37.6% in the amount of licensed revenues
as a percentage of total revenue. Licensees' share of gross profit as a
percentage of licensees' total gross profit increased by 0.5% during fiscal 1998
due to an increase in hours billed at existing licensed offices.
Selling, general and administrative expenses, which include depreciation
and amortization, increased 17.3% or $8.2 million to $55.3 million for fiscal
1998 from $47.1 million for fiscal 1997. Selling, general and administrative
expenses as a percentage of total revenues decreased to 12.3% for fiscal 1998
from 13.1% for fiscal 1997, due to the Company's total revenues expanding more
rapidly than selling, general and administrative expenses. The Company has
controlled growth in selling, general and administrative expenses by tightening
cost controls through budgetary analysis and implementation of more stringent
hiring and compensation guidelines. The Company expects selling, general and
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 38.5% or $6.1 million to $21.8 million for
fiscal 1998 from $15.8 million for fiscal 1997 due to the factors described
above. Operating income as a percentage of revenues increased to 4.8% for fiscal
1998 from 4.4% for fiscal 1997.
Income before income taxes increased 33.0% or $5.8 million to $23.2
million for fiscal 1998 from $17.4 million for fiscal 1997 due to the factors
described above. As a percentage of total revenues, income before income taxes
increased to 5.1% in 1998 from 4.8% in fiscal 1997.
Fiscal 1997 Compared to Fiscal 1996
Total revenues increased 26.2% or $74.8 million to $360.3 million for
fiscal 1997 from $285.5 million for fiscal 1996. This increase was primarily
attributable to volume increases that resulted from increased billings at
existing offices and expansion of services, including EDGE(R) and call center
activity, and from 38 new offices opened during fiscal 1997.
Total cost of direct and licensed sales, which consists of wages and other
expenses related to the temporary associates, increased 27.1% or $58.5 million
to $274.5 million for fiscal 1997 from $216.0 million for fiscal 1996. Total
cost of direct and licensed sales as a percentage of revenues increased to 76.2%
for fiscal 1997 from 75.7% for fiscal 1996. This increase was due to the
expansion of revenue growth in the light industrial business, which generally
has lower gross margin rates than the clerical and office automation business.
The Company's 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 licensed operation.
Licensees' share of gross profit increased 41.0% or $6.7 million to $23.0
million for 1997 from $16.3 million for fiscal 1996. Licensees' share of gross
profit as a percentage of total revenues increased to 6.4% for fiscal 1997 from
5.7% for fiscal 1996. This change resulted from an increase to 37.6% from 34.3%
in the amount of total licensed revenues as a percentage of total revenue.
Licensees' share of gross profit as a percentage of licensed offices total gross
profit increased by 1.2% during fiscal 1997 due to an increase in hours billed
at existing licensed offices.
Selling, general and administrative expenses, which include depreciation
and amortization, increased 12.2% or $5.1 million to $47.1 million for fiscal
1997 from $42.0 million for fiscal 1996. Selling, general and administrative
expenses as a percentage of total revenues decreased to 13.1% for fiscal 1997
from 14.7% for fiscal 1996, due to the Company's total revenues expanding more
rapidly than selling, general and administrative expenses. The Company has
controlled growth in selling, general and administrative expenses by tightening
cost controls through budgetary analysis and implementation of more stringent
hiring and compensation guidelines.
Operating income increased 40.3% or $4.5 million to $15.8 million for
fiscal 1997 from $11.2 million for fiscal 1996 due to the factors described
above. Operating income as a percentage of revenues increased to 4.4% for fiscal
1997 from 3.9% for fiscal 1996.
9
5
Income before income taxes increased 45.1% or $5.4 million to $17.4
million for fiscal 1997 from $12.0 million for fiscal 1996 due to the factors
described above. As a percentage of total revenues, income before income taxes
increased to 4.8% in 1997 from 4.2% in fiscal 1996.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities was $6.2 million and $1.7 million in
fiscal 1998 and fiscal 1997, respectively. Cash provided by operating activities
was significantly impacted by increases in working capital primarily resulting
from a substantial increase in business volumes. Additionally, and as discussed
below, the Company was required to pay $3.0 million in additional tax
installments during both fiscal years 1998 and 1997 resulting from the
termination of its S corporation status in fiscal year 1996.
Cash used for purchases of fixed assets was $10.6 million and $4.1 million
in fiscal 1998 and fiscal 1997, respectively. The increase in fiscal 1998
primarily resulted from expenditures associated with the Company's new
management information system and the new corporate headquarters. Implementation
of the new management information system is expected to begin and be completed
in fiscal 1999. During fiscal 1999, the Company anticipates capital expenditures
associated with direct office openings and further investments in the Company's
computer-based technologies to approximate $5.0 million.
Prior to the Offering on July 11, 1996, the Company declared distributions
to its pre-Offering shareholders. In accordance with the declaration,
distributions of $3.7 million and $6.6 million were paid to the pre-Offering
shareholders during fiscal 1997 and fiscal 1996, respectively. The final
distribution was completed during fiscal year 1997.
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 method to the accrual method, resulting
in a one-time net charge to earnings in the fourth quarter of fiscal 1996 of
approximately $7.8 million. See "Notes to Consolidated Financial Statements-
Note 4." The Internal Revenue Code allows the Company to recognize the effects
of this termination in its tax returns over a four-year period. This resulted in
additional quarterly installments totaling $3.0 million in both fiscal 1998 and
1997 and may have the same impact in fiscal 1999.
The Company has a revolving line of credit agreement with Bank of America
providing for aggregate borrowings and letters of credit of $30.0 million.
Interest on outstanding borrowings is payable monthly at the bank's reference
rate or, at the Company's discretion, LIBOR plus 1.5%. The line of credit is
unsecured and expires on February 28, 1999. Management intends to renew the line
of credit upon its expiration. The principal use of the line of credit has been
to finance receivables and to provide a letter of credit required in connection
with the Company's workers' compensation self-insurance program. The Company had
no balance outstanding under its line of credit and $6.7 million in undrawn
letters of credit as of September 27, 1998. The bank agreement governing the
line of credit requires the Company to maintain certain financial ratios and
comply with certain restrictive covenants. The Company is in compliance with
these covenants. See "Notes to Consolidated Financial Statements- Note 3."
During fiscal 1998, the Company acquired two franchised offices in Orlando,
Florida. During fiscal 1997, the Company acquired three licensed offices at the
following locations: (i) Grand Rapids, Michigan, (ii) Worthington, Ohio, and
(iii) Atlanta, Georgia, and one franchised office located in Indianapolis,
Indiana. The Company is contemplating the continued selective repurchase of
licensed and franchised offices in certain territories with the intent of
expanding the Company's market presence in such regions.
The Company is contemplating certain strategic acquisitions. Such
acquisitions may have an impact on liquidity depending on the size of the
acquisition.
On October 2, 1998, the Board of Directors authorized the Company to
repurchase its outstanding Class A and/or Class B Common Stock in the open
market or in privately negotiated transactions at the prevailing market prices
not to exceed $5.0 million in aggregate. Through December 14, 1998, the Company
has repurchased 151,900 Class A Common Stock shares at prices ranging from
$12.56 to $15.13.
The Company believes that its levels of working capital and line of credit
are adequate to support present operations and to fund future growth and
business opportunities.
10
6
YEAR 2000 COMPLIANCE
The Company's State of Readiness
Many computer systems and other equipment with embedded chips or processors use
only two digits to represent the year and may be unable to process accurately
certain data before, during or after the Year 2000. Consequently, business and
governmental entities are at risk for possible miscalculations or systems
failures causing disruptions in their business operation. Furthermore, the Year
2000 is a leap year, which may present additional issues for computer systems
and other equipment with embedded chips or processors.
Year 2000 issues may affect the Company's internal systems, including
information technology ("IT") and non-IT systems. The Company is assessing the
readiness of its systems for handling the Year 2000. Although the assessment is
still underway, the Company currently believes that all material IT systems will
be compliant by the Year 2000. The Company is in the final year of a three-year
development and implementation process to replace all of its material IT systems
with a new IT system. The Company believes that the new IT system and the
computer hardware used to operate the system will be Year 2000 compliant. The
Company anticipates that implementation of the new IT system will be completed
for all "back office" systems (i.e. payroll, billing, general ledger, accounts
payable, and accounts receivable) by June of 1999. The Company plans to
implement the "front office" applications (i.e. administration, search and
retrieval of data, and coordination or temporary employees) of the new IT system
to all Company-owned offices by April of 1999 and to all independently-managed
offices by October of 1999. There can be no guarantee that these estimated dates
will be achieved and actual results could differ materially from those
anticipated.
Based on information currently available, the Company believes that it does not
have any material-specific dependencies on its non-IT systems (devices that have
imbedded microprocessors). Accordingly, the Company believes that the Year 2000
poses no material risk to the Company's non-IT systems. The Company intends to
contact its material suppliers of products and services to determine that the
suppliers' operations and the products and services they provide are Year 2000
compliant or to monitor their progress toward Year 2000 compliance. There can be
no assurance that the Company's material suppliers, vendors or other third
parties will not suffer a Year 2000 business disruption. Such failures could
have a material adverse affect on the Company's financial condition and results
of operations.
The Costs to Address the Company's Year 2000 Issues
The Company's new IT system is being implemented for strategic business reasons
unrelated to Year 2000 issues and the implementation schedule was not
accelerated due to Year 2000 issues. Therefore, no specific costs were incurred
to address Year 2000 issues.
The Risks to the Company of Year 2000 Issues
Although unclear at this time, the Company believes that its exposure to Year
2000 risks are unlikely to have a material effect on the Company's results of
operations, liquidity and financial condition. The Company anticipates that the
new IT system will be implemented prior to the Year 2000 and such system is
believed to be Year 2000 compliant. Although the Company expects to implement
its new IT system prior to the Year 2000, there is no guarantee that this result
will be achieved. Consequently, the Company believes that its most reasonably
likely worst case Year 2000 scenario is that the new IT system is not
implemented on time. Such a scenario could disrupt the Company's business and
therefore could have a material adverse effect on the financial condition and
results of operations. Additionally, if any third parties that provide goods or
services that are critical to the Company's business fail to appropriately
address their Year 2000 issues, there could be a material adverse effect on the
Company's financial condition and results of operations.
The Company's Contingency Plans
The Company has not completed the systems integration testing of the new IT
system. Accordingly, the Company has not fully assessed its risks from potential
Year 2000 failure of the new IT system and, therefore has not yet developed any
Year 2000-specific contingency plans. The Company intends to develop such
contingency plans if the results of systems integration testing identify a
business function at risk. Additionally, should an unforeseen delay in the
implementation of the Company's new IT system occur, failure to meet critical
milestones in the Company's implementation plans would provide advance notice,
and steps would be taken so that Year 2000 issues could be corrected in the
Company's existing IT system to avoid a material impact on the Company's ability
to conduct business. The likely impact on such existing IT systems would be in
"from-to" reporting and date printing which the Company believes it can correct
without material loss in business operation or function. Additionally, the
Company is currently undertaking steps to identify its material vendors and to
formulate a system to understand material third parties' ability to continue
providing services and products after the Year 2000. The Company intends to
monitor its material suppliers, vendors, and distributors to avoid any business
interruption in the Year 2000, including formulating contingency plans. However,
the Company can neither predict nor assure the successful outcome of such third
parties' remediation efforts.
11
7
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 consolidated financial statements.
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 National 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 for fiscal 1998 and fiscal
1997:
FOR THE THREE MONTHS ENDED
-----------------------------------------------------------
DECEMBER 28, MARCH 29, JUNE 28, SEPTEMBER 27,
1997 1998 1998 1998
---- ---- ---- ----
High .......................... $ 28.13 $ 32.63 $ 36.25 $ 29.25
Low............................ $ 20.00 $ 18.75 $ 23.69 $ 17.50
DECEMBER 29, MARCH 30, JUNE 29, SEPTEMBER 28,
1996 1997 1997 1997
---- ---- ---- ----
High .......................... $ 22.50 $ 20.00 $ 18.75 $ 22.75
Low............................ $ 14.25 $ 15.13 $ 14.88 $ 17.00
As of December 15, 1998, there were an estimated 1,750 shareholders of
record of the Company's Class A Common Stock and ten shareholders of record of
the Company's Class B Common Stock.
Except for the S corporation distributions prior to the Offering and the
declared dividend to the Company's pre-Offering shareholders as discussed in
Note 1 to the Consolidated 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.
12
8
REMEDYTEMP, INC.
CONSOLIDATED BALANCE SHEET
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
ASSETS
SEPTEMBER 27, SEPTEMBER 28,
1998 1997
--------- -------
Current assets:
Cash and cash equivalents ............................................................... $ 450 $ 5,128
Accounts receivable, net of allowance for doubtful accounts of $2,647
and $2,612, respectively .............................................................. 63,660 55,751
Prepaid expenses and other current assets ............................................... 3,401 1,987
Deferred income taxes (Note 4) .......................................................... 2,235 349
------- -------
Total current assets ............................................................. 69,746 63,215
Fixed assets, net (Note 2) ................................................................. 15,184 7,184
Other assets, net (Note 5) ................................................................. 2,567 2,502
Deferred income taxes (Note 4) ............................................................. 501 --
Goodwill, net of accumulated amortization of $152 and $20 (Note 6), respectively ........... 1,787 905
------- -------
$89,785 $73,806
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ........................................................................ $ 3,033 $ 4,082
Accrued workers' compensation ........................................................... 5,535 2,905
Accrued payroll, benefits and related costs ............................................. 13,604 11,489
Accrued licensees' share of gross profit ................................................ 3,194 2,225
Other accrued expenses .................................................................. 865 1,148
Income taxes payable (Note 4) ........................................................... 809 1,783
Current portion of capitalized lease obligation (Note 7) ................................ 245 453
------- -------
Total current liabilities ........................................................ 27,285 24,085
Deferred income taxes (Note 4) ............................................................. -- 2,379
Capitalized lease obligation (Note 7) ...................................................... 63 281
------- -------
27,348 26,745
------- -------
Commitments and contingent liabilities (Note 7)
Shareholders' equity:
Preferred Stock, $.01 par value; authorized 5,000 shares; none outstanding
Class A Common Stock, $.01 par value; authorized 50,000 shares;
7,206 and 5,930 issued and outstanding at September 27, 1998 and September
28, 1997, respectively ................................................................ 72 60
Class B Non-Voting Common Stock, $.01 par value; authorized 4,530 shares;
1,806 and 2,997 issued and outstanding at September 27, 1998
and September 28, 1997, respectively .................................................. 18 30
Additional paid-in capital ................................................................. 34,732 33,262
Retained earnings .......................................................................... 27,615 13,709
------- -------
Total shareholders' equity ................................................................. 62,437 47,061
------- -------
$89,785 $73,806
======= =======
See accompanying notes to consolidated financial statements.
13
9
REMEDYTEMP, INC.
CONSOLIDATED STATEMENT OF INCOME
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
SEPTEMBER 27, SEPTEMBER 28, SEPTEMBER 29,
1998 1997 1996
----------- ----------- -------
Direct sales ............................. $ 274,577 $ 221,679 $ 184,564
Licensed sales ........................... 173,764 135,532 98,003
Franchise royalties ...................... 2,812 2,948 2,811
Initial license and franchise fees ....... 191 187 141
--------- --------- ---------
Total revenues .................... 451,344 360,346 285,519
Cost of direct sales ..................... 214,870 173,148 142,643
Cost of licensed sales ................... 129,219 101,327 73,347
Licensees' share of gross profit ......... 30,138 22,970 16,287
Selling and administrative expenses ...... 52,577 44,647 39,974
Depreciation and amortization ............ 2,723 2,501 2,043
--------- --------- ---------
Income from operations ............ 21,817 15,753 11,225
Other income:
Interest income (expense), net ......... 263 480 (64)
Other, net ............................. 1,097 1,191 846
--------- --------- ---------
Income before provision for income taxes . 23,177 17,424 12,007
Provision for income taxes (Note 4) ...... 9,271 7,231 7,794
--------- --------- ---------
Net income ............................... $ 13,906 $ 10,193 $ 4,213
========= ========= =========
Net income per share, basic (Note 9) ..... $ 1.55 $ 1.15 $ 0.58
========= ========= =========
Weighted-average number of shares, basic . 8,966 8,896 7,225
========= ========= =========
Net income per share, diluted (Note 9) ... $ 1.50 $ 1.13 $ 0.58
========= ========= =========
Weighted-average number of shares,
diluted ................................ 9,297 9,042 7,250
========= ========= =========
See accompanying notes to consolidated financial statements.
14
10
REMEDYTEMP, INC.
CONSOLIDATED 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 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 the 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..................... (701) (701)
Special distributions to
pre-Offering shareholders in
connection with the Offering
(Note 1)......................... (9,952) (9,952)
----- ------ ------ ------ --------- ------- -------
Balance at September 29, 1996.......... 5,830 58 3,058 31 32,671 3,516 36,276
Activity of Employee Stock Purchase
Plan............................. 12 163 163
Stock option activity............... 27 1 428 429
Conversion upon transfer to
non-affiliates................... 61 1 (61) (1)
Net income........................... 10,193 10,193
----- ------ ------ ------ --------- ------- -------
Balance at September 28, 1997.......... 5,930 60 2,997 30 33,262 13,709 47,061
Activity of Employee Stock Purchase
Plan............................. 19 313 313
Stock option activity............... 66 857 857
Tax benefits from option activity... 300 300
Conversion upon transfer to
non-affiliates................... 1,191 12 (1,191) (12)
Net income........................... 13,906 13,906
----- ------ ------ ------ --------- ------- -------
Balance at September 27, 1998.......... 7,206 $ 72 1,806 $ 18 $ 34,732 $27,615 $62,437
===== ====== ====== ====== ========= ======= =======
See accompanying notes to consolidated financial statements.
15
11
REMEDYTEMP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
SEPTEMBER 27, SEPTEMBER 28, SEPTEMBER 29,
Cash flows (used in) provided by operating activities: 1998 1997 1996
----------- ---------- -------
Net income .................................................. $ 13,906 $ 10,193 $ 4,213
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization ........................... 2,723 2,501 2,043
Provision for losses on accounts receivable ............. 1,519 1,276 1,621
Gain on sale of workers' compensation liability ......... (1,438)
Deferred taxes .......................................... (4,546) (4,938) 6,501
Changes in assets and liabilities:
Accounts receivable ................................... (9,428) (14,690) (10,890)
Prepaid expenses and other current assets ............. (1,414) 354 82
Other assets .......................................... (65) (776) (265)
Accounts payable ...................................... (1,049) 3,149 414
Accrued workers' compensation ......................... 2,630 2,355 (4,745)
Accrued payroll, benefits and related costs ........... 2,115 1,433 2,991
Accrued licensees' share of gross profit .............. 969 837 184
Other accrued expenses ................................ (283) (563) 1,520
Income taxes payable .................................. (894) 616 1,083
-------- -------- --------
Net cash provided by operating activities ................... 6,183 1,747 3,314
-------- -------- --------
Cash flows (used in) provided by investing activities:
Purchase of fixed assets .................................... (10,591) (4,138) (3,230)
Purchase of franchises, net of assets acquired .............. (1,014) (925) --
Sale (purchase) of investments .............................. -- 1,016 (1,016)
-------- -------- --------
Net cash used in investing activities ....................... (11,605) (4,047) (4,246)
-------- -------- --------
Cash flows (used in) provided by financing activities:
Borrowings under line of credit agreement ................... 1,000 100 16,098
Repayments under line of credit agreement ................... (1,000) (100) (22,798)
Repayments under capital lease obligation ................... (426) (416) (375)
Proceeds from stock option activity ......................... 857 429 --
Proceeds from Employee Stock Purchase Plan activity ......... 313 163 --
Net proceeds from the Offering .............................. 23,408
Distributions to pre-Offering shareholders .................. -- (3,707) (6,646)
-------- -------- --------
Net cash provided by (used in) financing activities ......... 744 (3,531) 9,687
-------- -------- --------
Net (decrease) increase in cash and cash equivalents .......... (4,678) (5,831) 8,755
Cash and cash equivalents at beginning of period .............. 5,128 10,959 2,204
-------- -------- --------
Cash and cash equivalents at end of period .................... $ 450 $ 5,128 $ 10,959
======== ======== ========
Other cash flow information:
Cash paid during the period for interest .................... $ 98 $ 110 $ 327
Cash paid during the period for income taxes ................ $ 15,011 $ 9,981 $ 97
Non-cash financing activities:
Utilization of tax benefit from disqualifying dispositions .. $ (80) $ -- $ --
Tax benefit from disqualifying dispositions recorded into
additional paid-in capital ................................. $ 300 $ -- $ --
See accompanying notes to consolidated financial statements.
16
12
REMEDYTEMP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
The consolidated financial statements include the accounts of RemedyTemp,
Inc. (the "Company") including its wholly-owned subsidiary, Remedy Insurance
Group, LTD ("RIG"). See workers' compensation below. All significant
intercompany transactions and balances have been eliminated.
Description of business
The Company's principal business is providing temporary personnel to
businesses and industry nationwide.
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 Amended and Restated
Articles of Incorporation, certain mergers and as otherwise required by law. The
Class B Common Stock automatically converts 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 Robert E. McDonough, Sr.
or (iii) the tenth anniversary of the completion of the Company's initial public
offering (the "Offering") described below.
Initial Public Offering
On July 16, 1996, the Company completed the "Offering" of 3,565 shares of
its Class A Common Stock at $13.00 per share, 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 were $23,408, after deduction of the underwriting discount of $1,905 and
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 1998, 1997 and 1996 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 franchised and licensed operations.
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 consolidated financial statements. Fees are paid to the Company
based upon a percentage of the gross sales generated by the franchised operation
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 consolidated financial statements and are reported
as "Licensed sales" and "Cost of licensed sales," respectively. 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" in the consolidated statement of
income.
17
13
REMEDYTEMP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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 of the Company have been performed, and is
reported by the Company as "Initial license and 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 consolidated financial statements
The preparation of consolidated 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
consolidated 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.
Fixed assets
Fixed assets are stated at cost less accumulated depreciation. 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
computer equipment. Major improvements to leased office space are capitalized
and amortized over the shorter of their useful lives or the term of the lease.
The Company currently capitalizes the costs of purchased internal-use
software as well as internal and external software development costs related to
its new management information system. These capitalized costs are included in
property, plant and equipment and are amortized over their estimated useful
life, not to exceed five years.
In March of 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1 (SOP 98-1), "Accounting for the costs of
computer software developed or obtained for internal use" which the Company will
be required to adopt beginning in fiscal 2000. Management is currently assessing
the impact of SOP 98-1 but does not anticipate the adoption will have a
significant impact on the Company's current capitalization practices.
Goodwill
Goodwill consists of the excess of purchase price over the fair value of
net assets of businesses acquired and is amortized on a straight line basis over
20 years. The Company regularly reviews the individual components of the balance
and recognizes any decline in value on a current basis.
Workers' compensation
As of July 22, 1997, RIG began providing direct and licensed offices with a
self-insured workers' compensation program. Management believes that RIG enables
the Company to control its claims administration, allocate safety resources
where they are needed and develop efficient methods of financing workers'
compensation. RIG, an offshore insurance captive domiciled in Bermuda, was
incorporated and funded with an amount of $600 of restricted cash which is
classified on the consolidated balance sheet as other assets. RIG is a component
of the Company's strategic plan to renew the workers' compensation self-insured
program for its operations nationwide. The Company utilizes Lindsey Morden, a
national Third Party Administrator to administer claims nationally, and Reliance
National Indemnity Company to provide stop-loss insurance coverage. This
stop-loss coverage will pay individual claims greater than $250 and aggregate
claims greater than $7,500, based on projected levels of workers' compensation
wages. This aggregate stop loss will vary to the extent that actual wage levels
differ from the projection.
Prior to July 22, 1996, the Company's workers' compensation risk was
self-insured in California. On July 22, 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
$1,438 (reflected as a reduction in selling and administrative expenses for the
fiscal year ended September 29, 1996). 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 had similar
guaranteed cost policies.
18
14
REMEDYTEMP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Other income
Other income consists primarily of fees collected from customers on past
due accounts receivable balances in the amounts of $1,091, $1,411 and $1,064,
for the years ended September 27, 1998, September 28, 1997 and September 29,
1996, respectively.
Income taxes
The Company records income taxes in accordance with the provisions of
Statement of Financial Accounting Standards No. 109 (SFAS No. 109), "Accounting
for Income Taxes." SFAS No. 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
consolidated financial statements or tax returns. In estimating future tax
consequences, SFAS No. 109 generally considers all expected future events
including enactments of changes in the tax law or rates.
Accounting for stock-based compensation
The Company accounts for its stock compensation plans under Accounting
Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees" and
related interpretations. The disclosures required under Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS
No.123) have been included in Note 9.
2. FIXED ASSETS
SEPTEMBER 27, SEPTEMBER 28,
1998 1997
----------- -----------
Computer equipment and software..... $ 10,502 $ 8,516
Furniture and fixtures.............. 6,429 4,352
Leasehold improvements.............. 3,638 2,302
Construction in progress............ 7,175 2,597
----------- -----------
27,744 17,767
Less accumulated depreciation....... (12,560) (10,583)
----------- -----------
$ 15,184 $ 7,184
=========== ===========
Included in the above computer equipment are capitalized leases and related
accumulated depreciation of $2,050 and $1,818 at September 27, 1998,
respectively and $2,050 and $1,408 at September 28, 1997, respectively.
Construction in progress primarily relates to expenditures for the Company's
development and implementation of a new Company-wide management information
system.
3. LINE OF CREDIT
The Company has a revolving line of credit agreement with Bank of America,
dated August 25, 1997, which provides for aggregate borrowings and letters of
credit of $30,000. Interest on outstanding borrowings is payable monthly at the
bank's reference rate (8.5% at September 27, 1998) or, at the Company's
election, LIBOR plus 1.5 %. The line of credit is unsecured and expires on
February 28, 1999. Management intends to renew the line of credit upon its
expiration. The principal uses of the line of credit have been to finance
receivables and to provide a letter of credit required in connection with the
Company's workers' compensation self-insurance program.
At September 27, 1998 and September 28, 1997 the Company had no balances
outstanding under its line of credit agreement. The Company had outstanding
undrawn letters of credit of $6,700 and $150 at September 27, 1998 and September
28, 1997, respectively. Under the provisions of the line of credit agreement,
the Company must maintain certain financial ratios and comply with certain
restrictive covenants. The Company was in compliance with these requirements for
the fiscal years ended September 27, 1998 and September 28, 1997, respectively.
19
15
REMEDYTEMP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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 consolidated financial statements. 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 liability related to the net
change required to adjust the deferred tax assets and liabilities to their
appropriate values utilizing C corporation rates.
The Company's provision for income taxes for the three fiscal years ended
September 27, 1998 consists of the following:
SEPTEMBER 27, SEPTEMBER 28, SEPTEMBER 29,
1998 1997 1996
------------- ------------- -------------
Current tax expense:
Federal............................................ $ 11,042 $ 9,983 $ 1,123
State.............................................. 2,775 2,186 170
------------- ------------- -------------
Total current......................... 13,817 12,169 1,293
------------- ------------- -------------
Deferred tax expense:
Federal............................................ (3,960) (4,375) (1,122)
State.............................................. (586) (563) (170)
Deferred tax provision resulting from termination
of S corporation status...................... - - 7,793
------------- ------------- -------------
Total deferred........................ (4,546) (4,938) 6,501
------------- ------------- -------------
Total provision for income taxes...... $ 9,271 $ 7,231 $ 7,794
============= ============= =============
The composition of the deferred tax assets (liabilities) at September
27, 1998 and September 28, 1997 is listed below.
SEPTEMBER 27, SEPTEMBER 28,
1998 1997
------------ ------------
Reserves and accrued liabilities.......................... $ 5,219 $ 3,333
Depreciation ............................................. 501 606
------------ ------------
Gross deferred tax assets.................... 5,720 3,939
------------ ------------
S corporation cash basis accounting adjustment............ (2,984) (5,969)
------------ ------------
Gross deferred tax liabilities............... (2,984) (5,969)
------------ ------------
Net deferred tax assets (liabilities)..................... $ 2,736 $ (2,030)
============ ============
The provision for income taxes differs from 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 27, SEPTEMBER 28, SEPTEMBER 29,
1998 1997 1996*
---- ---- -----
Federal tax computed at statutory rate........ 35.0% 35.0% 35.0%
State taxes, net of federal benefit........... 5.3% 5.5% 5.0%
Other......................................... (0.3)% 1.0% 1.0%
-------------- ------------- -----------
Total provision for income taxes.............. 40.0% 41.5% 41.0%
============= ============= ===========
* - pro forma due to prior S Corporation status
20
16
REMEDYTEMP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
5. RELATED PARTY TRANSACTIONS
Prior to the completion of the Offering, the Company's Board of Directors
declared a distribution of $4,952 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 distribution, net of advances for the quarterly
estimated tax payments of the pre-Offering shareholders, was paid in fiscal
1997.
Prior to July, 1997, the Company leased its corporate facility from the
largest shareholder and Chairman of the Company, Robert E. McDonough, Sr. The
lease provided 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 through July
1997. Rent expense paid to the largest shareholder totaled $0, $238, and $301
for the years ended September 27, 1998, September 28, 1997, and September 29,
1996, respectively.
Included in other assets at September 27, 1998 and September 28, 1997 are
advances and notes receivable due from employees and officers of the Company in
the amount of $62 and $310, respectively.
6. REPURCHASE OF FRANCHISED AND LICENSED OFFICES
During fiscal 1998, the Company acquired two franchised offices in Orlando,
Florida. During fiscal 1997, the Company acquired three licensed offices at the
following locations: (i) Grand Rapids, Michigan, (ii) Worthington, Ohio, and
(iii) Atlanta, Georgia, and one franchised office located in Indianapolis,
Indiana. Results of operations for the acquired licensed and franchised offices
are recorded in accordance with the Company's related revenue recognition policy
(Note 1) until the acquisition date. Subsequent to the acquisition date, the
direct office revenue recognition policy is utilized. Had the results of
operations for the franchised offices been shown as of the beginning of the
current and preceding fiscal years, the consolidated financial information would
not be significantly different. These acquisitions were accounted for under the
purchase method of accounting. The combined purchase prices were allocated
primarily to goodwill and are being amortized over a twenty-year life. The
Company is contemplating the continued selective repurchase of licensed and
franchised offices in certain territories with the intent of expanding the
Company's market presence in such regions.
7. COMMITMENTS AND CONTINGENT LIABILITIES
The Company leases its corporate facility, Company-owned 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 $2,867, $2,298 and
$2,220 for the years ended September 27, 1998, September 28, 1997 and September
29, 1996, respectively.
On April 17, 1997, the Company executed a lease for new corporate
headquarters. The lease agreement provides for leased premises approximating
52,500 square feet in size, at a fixed rate of $1.93 per square foot per month,
for a fixed term of five and one-half years from the date of occupancy. The base
rent includes amounts for operating costs, which include, but are not limited
to, property taxes, utilities, supplies, repairs and maintenance, janitorial
staff, security staff and insurance premiums on the building. In addition to
base rent, after the first year of occupancy the Company is obligated to pay a
portion of the increase in operating costs and real property taxes for the
leased premises. The Company has an option to renew the lease after the initial
term for an additional term of five years. The Company moved into its new
corporate headquarters in September 1998.
21
17
REMEDYTEMP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Future minimum lease commitments under all noncancellable capital and
operating leases as of September 27, 1998 are as follows:
CAPITAL OPERATING
FISCAL YEAR LEASES LEASES
------- -------
1999 ....... $ 245 $ 3,592
2000 ....... 62 2,879
2001 ....... 1 2,484
2002 ....... -- 2,142
2003 ....... -- 1,668
------- -------
Total $ 308 $12,765
======= =======
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 consolidated financial position, results of
operations or cash flows.
8. EMPLOYEE BENEFIT PLAN
401(k) plan
The Company has an employee savings plan which permits participants to make
contributions by salary reduction pursuant to section 401(k) of the Internal
Revenue Code. The plan is open to qualified full-time and temporary employees
who earn less than $80 per year. The annual amount of employer contributions to
the plan 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 fiscal years
ended September 27, 1998.
9. SHAREHOLDERS' EQUITY
Employee Stock Purchase Plan
In connection with the Offering, the Company implemented its 1996 Employee
Stock Purchase Plan (the "Purchase Plan"). 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 shares granted is the lower of 85% of
the market price of the stock on the first or last day of each six month
purchase period. The Purchase Plan commenced on October 1, 1996. During fiscal
1998, 19 shares were purchased at prices between $13.18 and $20.82. During
fiscal 1997, a total of 12 shares were purchased at a price of $13.18 per share.
Stock Incentive Plan
In connection with the Offering, the Company implemented its 1996 Stock
Incentive Plan (the "Incentive Plan") for officers, directors and key employees
of the Company. A total of 900 shares were reserved for issuance under the
Incentive Plan. In February, 1998, an amendment to the Incentive Plan was
approved by a vote of the Company's shareholders to reserve an additional 325
shares for issuance under the Incentive 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 Leadership, Development and
Compensation Committee of the Board of Directors. Options granted to
non-employee, non-officer directors prior to the Offering were immediately
exercisable. Options granted to non-employee, non-officer directors subsequent
to the Offering are typically 50% exercisable immediately and 50% exercisable
upon the date of the next annual shareholders meeting. Grants for 263 shares at
prices between $17.93 and $29.00 per share were made during fiscal year 1998.
Stock Ownership Plan for Outside Directors
Prior to March 16, 1998, non-employee directors received an annual cash
retainer of $18. Effective March 16, 1998, the Company implemented its
Non-Employee Director Compensation and Deferral Plan (the "Director Plan").
Under the Director Plan, non-employee, non-officer directors receive an annual
retainer in the form of shares of Common Stock with a total value of $18 on the
date of the director's election and/or subsequent reelection to the Board (the
"Director Shares"). When issued, the Director Shares are held in trust, on a
deferred basis until a director is no longer a director of the Company.
Participation in the Director Plan is mandatory. During the seven fiscal months
ended September 27, 1998, the Company reserved a total of 2 shares to be issued
no later than ten business days after the next annual shareholders meeting, to
be held February 17, 1999.
22
18
REMEDYTEMP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
COO Option Grant
In January 1998, the Company hired a Chief Operations Officer for the first
time. Greg Palmer has assumed this responsibility and comes to the Company with
over 13 years of successful operational experience in the staffing industry.
Under the employment agreement between the Company and Greg Palmer, 125 options
were granted on December 16, 1997 at a price of $20.72, the fair market value of
Class A Common Stock on that date. This grant was approved by a vote of the
Company's shareholders at the Company's Annual Meeting of Shareholders on
February 18, 1998. The shares are exercisable over a five year period, were
granted outside the Incentive Plan and will expire ten years from the grant
date.
Earnings per share calculation
During the first fiscal quarter of 1998, the Company adopted Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS No. 128")
which became effective for financial statements issued for periods ending after
December 15, 1997. SFAS No. 128 replaces the previous presentation of earnings
per share on the Statement of Income with a dual presentation of Basic Earnings
Per Share ("Basic EPS") and Diluted Earnings Per Share ("Diluted EPS"). Basic
EPS excludes dilution and is computed by dividing net income by the
weighted-average number of common shares outstanding during the period. Diluted
EPS reflects the potential dilution that could occur if stock options and other
commitments to issue Common Stock were exercised, resulting in the issuance of
Common Stock that then shared in the earnings of the Company. As required by
SFAS 128, all prior period EPS data has been restated to conform with the
provisions of this statement. Basic and Diluted EPS under SFAS No. 128 do not
differ materially from Primary Earnings Per Share as previously presented. The
table below sets forth the computation of Basic and Diluted EPS under SFAS 128:
SEPTEMBER 27, SEPTEMBER 28, SEPTEMBER 29,
1998 1997 1996
-------- -------- --------
BASIC EPS
Income available to common shareholders.............. $ 13,906 $ 10,193 $ 4,213
Weighted-average number of shares, basic............. 8,966 8,896 7,225
BASIC EPS......................................... $ 1.55 $ 1.15 $ 0.58
======== ======== ========
DILUTED EPS
Income available to common shareholders.............. $ 13,906 $ 10,193 $ 4,213
Weighted-average number of shares, basic............. 8,966 8,896 7,225
Effect of dilutive securities:
Stock options..................................... 331 146 25
-------- -------- --------
Weighted-average number of shares - assuming
dilution.......................................... 9,297 9,042 7,250
DILUTED EPS....................................... $ 1.50 $ 1.13 $ 0.58
======== ======== ========
The Company has adopted the disclosure provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." Accordingly, no compensation cost has
been recognized for the stock and option plans. Had compensation cost for all
stock and option plans been determined based on the fair value at the grant date
of awards in fiscal 1998, 1997, and 1996 consistent with the provisions of SFAS
No. 123, the Company's net income and net income per share would have been
reduced to the pro forma amounts indicated below:
September 27, 1998 September 28, 1997 September 29, 1996
------------------ ------------------ ------------------
Net income - as reported $ 13,906 $ 10,193 $ 4,213
Net income - pro forma $ 12,355 $ 9,514 $ 3,942
Basic earnings per share - as reported $ 1.55 $ 1.15 $ 0.58
Basic earnings per share - pro forma $ 1.38 $ 1.07 $ 0.55
Diluted earnings per share - as reported $ 1.50 $ 1.13 $ 0.58
Diluted earnings per share - pro forma $ 1.34 $ 1.05 $ 0.54
23
19
REMEDYTEMP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The fair value of each option grant has been estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted-average
assumptions for the grants in fiscal 1998, 1997 and 1996, respectively: dividend
yield of 0.0%, 0.0% and 0.0%; risk free interest rate of 5.81%, 6.48% and 6.61%;
expected volatility of 31.0%, 30.0% and 30.0% and expected lives of 2.9, 2.8 and
4.7 years. The weighted-average per share estimated fair value at the date of
grant for options granted during fiscal 1998, 1997 and 1996 was $6.24, $4.26 and
$4.88, respectively.
The following table summarizes the activity relating to all stock and option
plans:
Incentive Plan Purchase Options Outside
Options Plan Stock Incentive Plan
---------------------- -------------------- --------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
Option outstanding October 1, 1995 ... -- -- -- -- -- --
Options granted ...................... 443.0 $ 13.00 -- -- -- --
Options canceled ..................... (3.6) $ 13.00 -- -- --
------- --------- ----- --------- ----- ------
Option outstanding September 29, 1996 439.4 $ 13.00 -- -- -- --
Options granted ...................... 280.0 $ 15.55 23.6 $ 13.18 -- --
Options canceled ..................... (21.4) $ 14.46 -- -- -- --
Options exercised .................... (26.4) $ 13.00 (12.3) $ 13.18 --
------- --------- ------- --------- ------- ------
Options outstanding September 28, 1997 671.6 11.3 --
Options granted ...................... 262.8 $ 21.63 15.5 $ 19.49 125.0 $20.72
Options canceled ..................... (55.4) $ 14.95 -- -- -- --
Options exercised .................... (65.6) $ 13.98 (18.8) $ 16.46 -- --
------- --------- ------- --------- ------- ------
Options outstanding September 27, 1998 813.4 8.0 125.0
======= ======= ======
The number of exercisable options outstanding for the fiscal years ended
1998, 1997 and 1996 under the plans were 241.6, 114.5 and 61.0 shares,
respectively, at weighted-average prices of $15.14, $13.00 and $13.00 per share,
respectively. The following table summarizes information about stock options
outstanding at September 27, 1998:
Options Outstanding Options exercisable
--------------------------------------------------------------------- --------------------------------
Weighted-
Average
Shares Remaining Weighted-Average Shares Weighted-Average
Exercise Price Outstanding Life Price Exercisable Price
-------------- ----------- --------- ---------------- ----------- ----------------
$10.00 - $13.00 327.1 7.8 years $ 13.00 137.2 $ 13.00
$13.01 - $16.00 218.1 8.6 years $ 15.31 61.4 $ 15.31
$16.01 - $20.00 59.5 8.2 years $ 18.57 23.0 $ 18.84
$20.01 - $25.00 306.7 9.2 years $ 21.12 15.0 $ 24.69
$25.01 - $30.00 35.0 9.5 years $ 26.59 5.0 $ 26.19
24
20
REMEDYTEMP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
10. SUBSEQUENT EVENT (UNAUDITED)
On October 2, 1998, the Board of Directors authorized the Company to
repurchase its outstanding Class A and/or Class B Common Stock in the open
market or in privately negotiated transactions at the prevailing market prices
not to exceed $5,000 in aggregate. Subsequent to year end, through December 14,
1998, the Company has repurchased 151.9 Class A Common Stock shares at prices
ranging from $12.56 to $15.13.
11. UNAUDITED CONSOLIDATED QUARTERLY INFORMATION
FOR THE THREE MONTHS ENDED
---------------------------------------------------------
DECEMBER 28, MARCH 29, JUNE 28, SEPTEMBER 27,
1997 1998 1998 1998
---- ---- ---- ----
Total revenues ............................. $111,145 $109,607 $113,388 $117,204
Total cost of direct and licensed sales .... $ 85,300 $ 84,041 $ 85,946 $ 88,802
Licensees' share of gross profit ........... $ 6,936 $ 6,937 $ 7,771 $ 8,494
Selling, general and administrative expenses $ 13,294 $ 13,906 $ 13,934 $ 14,166
Net income ................................. $ 3,515 $ 2,986 $ 3,540 $ 3,865
Net income per share, basic ................ $ 0.39 $ 0.33 $ 0.39 $ 0.43
Net income per share, diluted .............. $ 0.38 $ 0.32 $ 0.38 $ 0.42
FOR THE THREE MONTHS ENDED
---------------------------------------------------------
DECEMBER 29, MARCH 30, JUNE 29, SEPTEMBER 28,
1996 1997 1997 1997
---- ---- ---- ----
Total revenues ............................. $ 84,563 $ 83,587 $ 92,287 $ 99,909
Total cost of direct and licensed sales .... $ 64,313 $ 63,702 $ 70,058 $ 76,402
Licensees' share of gross profit ........... $ 5,015 $ 5,289 $ 6,153 $ 6,513
Selling, general and administrative expenses $ 11,280 $ 11,519 $ 12,087 $ 12,262
Net income ................................. $ 2,557 $ 2,040 $ 2,571 $ 3,025
Net income per share, basic ................ $ 0.29 $ 0.23 $ 0.29 $ 0.34
Net income per share, diluted .............. $ 0.28 $ 0.23 $ 0.29 $ 0.33
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of RemedyTemp, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, of shareholders' equity and of cash flows
present fairly, in all material respects, the financial position of RemedyTemp,
Inc. and its subsidiary (the "Company") at September 27, 1998, and September 28,
1997, and the results of their operations and their cash flows for each of the
three fiscal years in the period ended September 27, 1998, 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.
/s/ PRICE WATERHOUSECOOPERS LLP
PricewaterhouseCoopers LLP
Costa Mesa, California
November 13, 1998
25