1 Index to Exhibits on page 28 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2000 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934(NO FEE REQUIRED) For the transition period from to --------------- ---------------- Commission file number 0-1088 KELLY SERVICES, INC. ------------------------------------------------------ (Exact Name of Registrant as specified in its Charter) Delaware 38-1510762 ------------------------ ------------------------------------ (State of Incorporation) (IRS Employer Identification Number) 999 West Big Beaver Road, Troy, Michigan 48084 ------------------------------------------- ---------- (Address of Principal Executive Office) (Zip Code) (248) 362-4444 ---------------------------------------------------- (Registrant's Telephone Number, Including Area Code) Securities Registered Pursuant to Section 12(b) of the Act: None Securities Registered Pursuant to Section 12(g) of the Act: Title of each class Name of each exchange on which registered Class A Common NASDAQ/NMS Class B Common NASDAQ/NMS Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No[_] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] --- The aggregate market value of the Class B common stock, par value $1.00, the only class of the registrant's securities with voting rights, held by non-affiliates of the registrant on March 9, 2001, was $7,525,509 based upon the closing price of $27.13 per share. Registrant had 32,327,062 shares of Class A and 3,493,809 of Class B common stock, par value $1.00, outstanding as of March 15, 2001. Documents Incorporated by Reference ----------------------------------- The proxy statement of the registrant with respect to the 2001 Annual Meeting of Stockholders is incorporated by reference in Part III. Dated: March 27, 2001 2 PART I ------ ITEM 1. DESCRIPTION OF BUSINESS. (a) General Development of Business. Registrant, a successor to the ------------------------------- business established by William R. Kelly in 1946, was incorporated under the laws of Delaware on August 27, 1952. Throughout its existence, registrant has been engaged in the business of providing staffing services to customers. During the last fiscal year, registrant continued to provide staffing services to a diversified group of customers. Registrant completed three acquisitions during 2000. The first was the acquisition of Extra ETT in Spain, which specializes in staffing for the automotive industry and expands the Registrant's global automotive staffing services to three continents. The second was the acquisition of the ProStaff Group, a leading Milwaukee, Wisconsin staffing company. ProStaff operates under four brand names, including ProStaff Preferred, Accountants Preferred, HRfirst and Connectivity IT. The third was the acquisition of the Business Trends Group, which includes Business Trends Pte Ltd and BTI Consultants Pte Ltd, both headquartered in Singapore, with offices in Southeast Asia. (b) Financial Information about Industry Segments. The Company divides its --------------------------------------------- operations into three segments: (1) U.S. Commercial Staffing, (2) Professional, Technical and Staffing Alternatives (PTSA) and (3) International. PTSA includes the following: Kelly Scientific Resources, Kelly Healthcare Resources, Kelly Assisted Living Services, Inc., Automotive Services Group, Kelly Engineering Resources, Kelly Information Technology Resources, Kelly Law Registry, Kelly Financial Resources, National Payroll Services, Kelly Management Services, Kelly Staff Leasing, Inc., Kelly Human Resource Consulting and General Contractor Services. The financial information concerning registrant is included in Item 8 in Part II of this filing. (c) Narrative Description of Business. --------------------------------- (i) Principal Services Rendered. Registrant, and its subsidiaries, --------------------------- which are service organizations, provide staffing services to a diversified group of customers through offices located in major cities of North America (United States, Canada, Puerto Rico, and Mexico), Europe (Belgium, Denmark, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Norway, Russia, Spain, Sweden, Switzerland and the United Kingdom) and the Asia-Pacific region (Australia, Malaysia, New Zealand, the Philippines and Singapore). These services are generally furnished under the name of Kelly Services. U.S. Commercial Staffing includes office services, merchandising, electronic assembly, light industrial, call centers and educational staffing services. PTSA includes technical skills related to engineering, information technology, scientific, accounting and finance, legal, healthcare, human resource consulting and management services. Staff leasing services are provided under the name of Kelly Staff Leasing, Inc., a wholly owned subsidiary of registrant. Home care services to those who need help with their daily living needs and personal care are furnished under the name of Kelly Assisted Living Services, Inc., which is a wholly owned subsidiary of registrant. Registrant performs these staffing services through its employees by assigning them to work on the premises of registrant's customers. The staffing services furnished by registrant afford economies and flexibility to its customers in meeting uneven or peak work loads caused by such predictable factors as vacations, inventories, month-end activities, special projects or new promotions and such non-predictable factors as illnesses or emergencies. When work peaks occur which cannot be handled by the customer's normal staff, the customer can temporarily supplement regular personnel by the use of registrant's services. The cost and inconvenience to the customer of hiring additional employees, including advertising, interviewing, screening, testing and training are eliminated. Also, recordkeeping is simplified because the customer pays an hourly rate, based on hours of service furnished by registrant. Registrant serves a wide cross-section of customers from industry, commerce, the professions, government and individuals. During recent years approximately 200,000 customers, including the largest corporations in the world, use registrant's services. There have been no significant changes in the services rendered or in the markets or methods of distribution since the beginning of registrant's fiscal year. Registrant operates through approximately 2,200 domestic and international offices located in North America, Europe and the Asia-Pacific region. Each office provides the services of one or more of the divisions or subsidiaries and is operated directly by the registrant. 3 (ii) New Services. There are no new industry segments that the ------------ registrant is planning to enter or new service areas that will require a material investment of assets. (iii) Raw Materials. Registrant is involved in a service business and ------------- raw materials are nonexistent in the business. (iv) Service Marks. Registrant is the owner of numerous service ------------- marks, which are registered with the United States Patent and Trade Mark Office and in foreign countries. (v) Seasonal Business Implications. Registrant's business is not ------------------------------ seasonal. (vi) Working Capital. Registrant believes there are no unusual or --------------- special working capital requirements in the staffing services industry. (vii) Customers. The business of registrant and its subsidiaries is --------- not dependent upon either a single customer or a limited number of customers. (viii) Backlog. Backlog of orders is not material to the business of ------- registrant. (ix) Government Contracts. Although registrant conducts business -------------------- under various government contracts, that portion of registrant's business is not significant. (x) Competition. Registrant is one of the largest global suppliers ----------- of staffing services. In the United States, there are approximately 100 national competitors, and approximately 20,000 organizations locally compete in varying degrees in different localities where registrant operates local offices. In foreign markets there are several similar levels of global, national and local competitors. The most significant competitive factors worldwide are geographic coverage, breadth of service, service quality and price. (xi) Research Activities. Registrant's expenditure for research and ------------------- the number of people involved are not material. (xii) Environmental Matters. Registrant is involved in a service --------------------- business and is not generally affected by federal, state and local provisions regulating the discharge of materials into the environment. (xiii) Employees. Registrant and subsidiaries employ on a full time --------- basis approximately 1,400 persons at its headquarters in Troy, Michigan, and approximately 7,700 persons in branch offices operated directly by registrant. Registrant employed in the last fiscal year approximately 770,000 men and women for temporary periods. As the employer of its temporary work force, registrant is responsible for and pays Social Security, Medicare and health care taxes, workers' compensation, unemployment compensation taxes, liability insurance and other similar costs (or their equivalents outside the United States) and is responsible for payroll deductions of Social Security, Medicare and income taxes. Although the services may be provided in the office of the registrant's customer, registrant remains the employer of its temporary employees with responsibility for their assignment and reassignment. (d) Foreign Operations. For information regarding sales, earnings from ------------------ operations and long-lived assets by domestic and foreign operations, reference is made to the information presented in the Segment Disclosures note to the consolidated financial statements presented in Item 8 in Part II of this report. ITEM 2. PROPERTIES. - ------------------- Registrant owns the premises in Troy, Michigan, from which its headquarters, subsidiaries and divisional offices are presently operated. Registrant purchased the original headquarters building in Troy, Michigan, in 1977 and has expanded operations into additional buildings that were purchased in 1991, 1997 and 2001. The combined usable floor space for the headquarters complex approximates 350,000 square feet, plus leased space nearby of 63,000 square feet. The buildings are in good condition, are considered to be adequate for the uses to which they are being put and are in regular use. In addition, registrant owns vacant land in Troy and northern Oakland County, Michigan, for future expansion. Registrant's branch offices are conducted from premises which are leased. A majority of the leases are for fixed terms, from one to five years. Registrant owns virtually all office furniture and equipment used in its headquarters building and branch offices. 4 ITEM 3. LEGAL PROCEEDINGS. - -------------------------- Claims against the registrant are not considered by management and counsel to be material. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. - ------------------------------------------------------------ There were no matters submitted to a vote of security holders in the fourth quarter of 2000. PART II ------- ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER - ------------------------------------------------------------------------- MATTERS. - ------- Kelly Services' stock is traded over-the-counter in the NASDAQ National Market System (NMS). The high and low selling prices for the Class A common stock and Class B common stock as quoted by the National Association of Securities Dealers, Inc. and the dividends paid on the common stock for each quarterly period in the last two fiscal years are reported below: The number of holders of record and individual participants of the Class A and Class B common stock, par value $1.00, of registrant were 4,469 and 415, respectively, as of March 15, 2001.
Per share amounts (in dollars) ------------------------------------------------------------ First Second Third Fourth Quarter Quarter Quarter Quarter Year ---------- ---------- ---------- ---------- ---------- 2000 Class A common High................ $ 26.25 $ 25.00 $ 26.88 $ 29.00 $ 29.00 Low................. 23.00 22.06 22.13 20.25 20.25 Class B common High................ 26.75 24.13 24.81 25.50 26.75 Low................. 22.00 22.50 24.00 24.50 22.00 Dividends.............. .24 .25 .25 .25 .99 1999 Class A common High................ $ 32.50 $ 32.50 $ 31.63 $ 30.75 $ 32.50 Low................. 24.13 25.00 25.38 22.88 22.88 Class B common High................ 29.38 29.75 30.88 29.88 30.88 Low................. 28.25 26.25 23.75 24.00 23.75 Dividends.............. .23 .24 .24 .24 .95 5 ITEM 6. SELECTED FINANCIAL DATA. - --------------------------------- The following table summarizes selected financial information of Kelly Services, Inc. and its subsidiaries for each of the most recent six fiscal years. This table should be read in conjunction with other financial information of the registrant including "Management's Discussion and Analysis of Financial Condition and Results of Operations" and financial statements included elsewhere herein. (1) Fiscal year included 53 weeks. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS - -------------------------------------------------------------------------------- OF OPERATIONS. - ------------- Results of Operations 2000 versus 1999 Sales reached a record $4.487 billion in 2000, an increase of 5.1% compared to the $4.269 billion for 1999. Sales in the U.S. Commercial Staffing segment grew by 3.8% for the full year. Sales growth improved consistently from a decrease of 0.4% in the first quarter, to 2.0%, 5.8% and 7.8% growth in the second, third and fourth quarters, respectively. Professional, Technical and Staffing Alternatives (PTSA) sales grew by 12.3% compared to last year. Within the PTSA segment, growth was particularly strong in the science, healthcare and staff leasing business units. The strong U.S. dollar significantly weakened translated sales for the International segment. International sales grew by 1.6% as compared to 1999. However, on a constant currency basis, international sales growth was 9.9%. International sales represented 25% of total Company sales in 2000 and 1999. The 2000 gross profit rate averaged 17.7%, which was 0.2% lower than the 17.9% rate earned in 1999. This reflected an increase in the gross profit rate of PTSA, offset by lower rates in the U.S. Commercial and International segments. Selling, general and administrative expenses expressed as a percentage of sales were 14.4% as compared to 14.6% last year. Selling, general and administrative expenses in 2000 included a pretax gain on the sale of undeveloped land of $8.6 million. Excluding the gain on the sale of land, the selling, general and administrative rate would have been 14.6%, consistent with the prior year. Additionally, the expense rate in 2000 reflected the elimination of Year 2000 Project costs, offset in part by increased depreciation expenses associated with the Company's technology investments. Earnings from operations totaled $145.7 million, a 1.2% increase from the $144.0 million reported for 1999. Earnings were 3.2% of sales as compared to 3.4% for 1999.
(1) (In millions except per share amounts) 2000 1999 1998 1997 1996 1995 - ---------------------------------------- -------- -------- -------- -------- -------- -------- Sales of services $4,487.3 $4,269.1 $4,092.3 $3,852.9 $3,302.3 $2,689.8 Earnings before taxes 145.3 143.7 143.6 137.0 122.9 113.3 Net earnings 87.2 85.1 84.7 80.8 73.0 69.5 Per share data: Basic earnings per share 2.44 2.37 2.24 2.12 1.92 1.83 Diluted earnings per share 2.43 2.36 2.23 2.12 1.91 1.83 Dividends per share Classes A and B common 0.99 0.95 0.91 0.87 0.83 0.78 Working capital 288.5 284.9 293.4 363.6 336.6 316.0 Total assets 1,089.6 1,033.7 964.2 967.2 838.9 718.7 6 U.S. Commercial earnings decreased 4.2% in 2000, due to a continued shift to larger corporate account business, which negatively impacted gross margins and operating earnings. U.S. Commercial gross margins may continue to decrease in 2001 as the Company pursues its strategy of shifting the customer mix to a larger proportion of large corporate and national accounts. PTSA earnings increased 31.0% from 1999, reflecting sales growth of 12.3%, combined with a significant gross profit rate increase and favorable expense leverage. International earnings decreased 33.2% from 1999, reflecting the impact of unfavorable foreign currency translation on international results. In addition, significantly lower operating results in the U.K. reflected the slowing economy and the costs associated with turnover of senior country management positions. Net interest expense was $409 thousand compared to $241 thousand last year. This reflected higher average borrowing levels and higher interest rates throughout the year. The effective income tax rate was 40.0% in 2000 as compared to 40.8% in 1999, reflecting continued reductions in the Company's consolidated state and local tax rate. Net earnings totaled a record $87.2 million in 2000, a 2.4% increase over 1999. The rate of return on sales was 1.9%, compared with last year's 2.0% rate. Basic earnings per share were $2.44 or 3.0% over last year. Diluted earnings per share for 2000 were $2.43, a 3.0% increase compared to $2.36 for 1999. Results of Operations 1999 versus 1998 Sales for the 52-week fiscal year reached $4.269 billion in 1999, an increase of 4.3% compared to the $4.092 billion for the 53-week fiscal year in 1998. Sales increased 5.6% when compared to an adjusted 52-week 1998 period. Sales in the U.S. Commercial Staffing segment declined slightly by 0.7% compared to the 53-week 1998, while PTSA sales grew by 8.4% compared to the prior year. International sales grew by 12.4% as compared to 1998. International sales represented 25% of total Company sales in 1999, as compared to 24% in 1998. The 1999 gross profit rate averaged 17.9%, which was consistent with the 17.9% rate earned in 1998. Selling, general and administrative expenses expressed as a percentage of sales were 14.6% as compared to 14.4% in 1998. The increase in expenses as a percentage of sales was attributable to the Year 2000 Project expenses and increased depreciation associated with the deployment of the Oracle finance and administration systems, and proprietary front office branch automation technology. Earnings from operations totaled $144.0 million, a 2.4% increase from the $140.6 million reported for the 53-week 1998. Earnings were 3.4% of sales as compared to 3.4% for the 53-week period in 1998. Net interest expense was $0.2 million compared to prior year's net interest income of $3.0 million. The decrease was attributable to lower cash balances than in 1998, as a result of a 30% increase in capital expenditures, and $76 million utilized in the share repurchase program, which was completed midway through the fourth quarter of 1998. The effective income tax rate was 40.8%, slightly lower than prior year's 41.0% rate, reflecting reductions in the Company's consolidated state and local tax rate. Net earnings totaled $85.1 million in 1999, a 0.5% increase over the 53- week 1998. The rate of return on sales was 2.0%, compared with prior year's 2.1% rate. Basic earnings per share were $2.37 or 5.8% over 1998. Diluted earnings per share for 1999 were $2.36, a 5.8% increase compared to $2.23 for the 53-week 1998. Liquidity and Capital Resources Cash and short-term investments totaled $46 million at the end of 2000, down from $60 million at year-end 1999. Accounts receivable totaled $632 million at year end as compared to $602 million at year-end 1999. The global days sales outstanding were 51 days, which is consistent with 1999. Global DSO may increase in 2001 if U.S. economic growth slows. 7 Short-term debt totaled $58 million, which is up from $47 million last year, primarily reflecting an acquisition in Singapore. All short-term borrowings are foreign currency denominated and provide a partial balance sheet hedge against foreign exchange fluctuations. The Company's working capital position was $288 million at the end of 2000, an increase of $4 million from 1999 and decrease of $5 million from 1998. The current ratio was 1.6 in 2000 and 1999 and 1.7 in 1998. Capital expenditures for 2000 totaled $54 million, a planned decrease from the $77 million spent in 1999. For 2001, capital expenditures are expected to total between $50 to $55 million, and will be funded primarily by cash generated from operations. In addition, in January 2001, the Company purchased a fully leased commercial office building and the underlying land at a cost of $11.8 million. The building will be used for future business expansion. Assets totaled $1.090 billion in 2000 compared to $1.034 billion in 1999. In 1998, assets totaled $964 million. The return on average assets was 8.2% in 2000, 8.5% in 1999 and 8.8% in 1998. Stockholders' equity was $623 million in 2000, which represents 7.1% growth over 1999. In 1999, stockholders' equity was 8.3% above 1998. The return on average stockholders' equity was 14.5% in 2000, 15.2% in 1999 and 15.4% in 1998. Dividends paid per common share were $.99 in 2000, an increase of 4.2% over 1999 dividends of $.95 per share. Dividends in 1998 were $.91 per share. The Company's financial position remains strong. The Company continues to carry no long-term debt and expects to meet its growth requirements principally through cash generated from operations. Market Risk-Sensitive Instruments and Positions The Company does not hold or invest in derivative contracts. The Company is exposed to foreign currency risk primarily due to its net investment in foreign subsidiaries. This risk is mitigated by the use of the Company's multi-currency line of credit. This credit facility is used to borrow in local currencies which mitigates the exchange rate risk resulting from foreign currency-denominated net investments fluctuating in relation to the U.S. dollar. In addition, the Company is exposed to interest rate risks through its use of the multi-currency line of credit. Overall, the Company's holdings and positions in market risk-sensitive instruments do not subject the Company to material risk. Adoption of the Euro A segment of the Company's information technology programs is devoted to changes necessary to deal with the introduction of a European single currency (the euro). The transition period for implementation is January 1, 1999 through January 1, 2002. The Company does not expect that introduction and use of the euro will result in any material effect on its results of operations. Forward-Looking Statements Except for the historical statements and discussions contained herein, statements contained in this report relate to future events that are subject to risks and uncertainties, such as: competition, changing market and economic conditions, currency fluctuations, changes in laws and regulations, the Company's ability to effectively implement and manage its information technology programs and other factors discussed in the report and in the Company's filings with the Securities and Exchange Commission. Actual results may differ materially from any projections contained herein. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. - ---------------------------------------------------- The financial statements and supplementary data required by this Item are set forth in the accompanying index on page 11 of this filing and are presented in pages 12-27. ITEM 9. DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. - ------------------------------------------------------------------------------ None. 8 PART III -------- Information required by Part III with respect to Directors and Executive Officers of the registrant, except as set forth under the title "Executive Officers of the Registrant" which is included on page 8, (Item 10), Executive Compensation (Item 11), Security Ownership of Certain Beneficial Owners and Management (Item 12), and Certain Relationships and Related Transactions (Item 13) is to be included in a definitive proxy statement filed by the registrant not later than 120 days after the close of its fiscal year and such proxy statement, when filed, is incorporated herein by reference. ITEM 10. EXECUTIVE OFFICERS OF THE REGISTRANT. - ---------------------------------------------- (1) Each officer serves continuously until termination of employment or removal by the Board of Directors.
Served as an Business Experience Name/Office Age Officer Since (1) During Last 5 Years - ------------------------ --- ----------------- -------------------------------- Terence E. Adderley 67 1961 Served as officer of registrant. Chairman, President and Chief Executive Officer Carl T. Camden 46 1995 Served as officer of registrant. Executive Vice President William K. Gerber 47 1998 Served as officer of registrant since Executive Vice President and April, 1998. Prior thereto, served as Chief Financial Officer Vice President of Finance at The Limited, Inc. Tommi A. White 50 1993 Served as officer of registrant. Executive Vice President Michael L. Durik 52 1999 Served as officer of registrant since Senior Vice President July, 1999. From 1993 was owner of MLD Management, an independent consulting firm. Arlene Grimsley 53 1994 Served as officer of registrant. Senior Vice President George M. Reardon 53 1998 Served as officer of registrant since Senior Vice President, June, 1998. From 1994, served in General Counsel and Secretary private practice in Houston, Texas. 9 PART IV ------- ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. - -------------------------------------------------------------------------- (a) The following documents are filed as part of this report: (1) Financial statements - Report of Independent Accountants Statements of Earnings for the three fiscal years ended December 31, 2000 Statements of Cash Flows for the three fiscal years ended December 31, 2000 Balance Sheets at December 31, 2000, January 2, 2000 and January 3, 1999 Statements of Stockholders' Equity for the three fiscal years ended December 31, 2000 Notes to Financial Statements (2) Financial Statement Schedule - For the three fiscal years ended December 31, 2000: Schedule II - Valuation Reserves All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto. (3) The Exhibits are listed in the Index to Exhibits Required by Item 601 of Regulation S-K at Item (c) below and included at page 28 which is incorporated herein by reference. No additional financial information has been provided for the registrant as an individual company since the total amount of net assets of subsidiaries which are restricted as to transfer to the registrant through intercompany loans, advances or cash dividends does not exceed 25 percent of total consolidated net assets at December 31, 2000. (b) No reports on Form 8-K were filed during the last quarter of the period covered by this report. (c) The Index to Exhibits and required Exhibits are included following the Financial Statement Schedule beginning at page 28 of this filing. (d) The Index to Financial Statements and Supplemental Schedule is included following the signatures beginning at page 11 of this filing. 10 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: March 27, 2001 KELLY SERVICES, INC. -------------------- Registrant By /s/ W. K. Gerber ---------------------- W. K. Gerber Executive Vice President and Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Date: March 27, 2001 * T. E. Adderley --------------------------------- T. E. Adderley Chairman, President, Chief Executive Officer and Director (Principal Executive Officer) Date: March 27, 2001 * C. V. Fricke --------------------------------- C. V. Fricke Director Date: March 27, 2001 * M. A. Fay, O.P. --------------------------------- M. A. Fay, O.P. Director Date: March 27, 2001 * V. G. Istock --------------------------------- V. G. Istock Director Date: March 27, 2001 * B. J. White --------------------------------- B. J. White Director Date: March 27, 2001 /s/ W. K. Gerber --------------------------------- W. K. Gerber Executive Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) Date: March 27, 2001 *By /s/ W. K. Gerber --------------------------------- W. K. Gerber Attorney-in-Fact 11 INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTAL SCHEDULE Kelly Services, Inc. and Subsidiaries
Page Reference in Report on Form 10-K -------------- Report of Independent Accountants 12 Statements of Earnings for the three fiscal years ended December 31, 2000 13 Statements of Cash Flows for the three fiscal years ended December 31, 2000 14 Balance Sheets at December 31, 2000, January 2, 2000 and January 3, 1999 15 Statements of Stockholders' Equity for the three fiscal years ended December 31, 2000 16 Notes to Financial Statements 17 - 26 Financial Statement Schedule - Schedule II - Valuation Reserves 27 12 REPORT OF INDEPENDENT ACCOUNTANTS To the Stockholders and Board of Directors of Kelly Services, Inc. In our opinion, the accompanying financial statements listed in the index on page 11 present fairly, in all material respects, the financial position of Kelly Services, Inc. and its subsidiaries at December 31, 2000, January 2, 2000 and January 3, 1999, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing on page 11 presents fairly, in all material respects, the information set forth therein when read in conjunction with the related financial statements. These financial statements and financial statement schedule are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, 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 our opinion. /s/ PricewaterhouseCoopers LLP - ------------------------------ PricewaterhouseCoopers LLP Detroit, Michigan January 23, 2001 13 STATEMENTS OF EARNINGS Kelly Services, Inc. and Subsidiaries See accompanying Notes to Financial Statements. (1) Fiscal year included 53 weeks.
(1) 2000 1999 1998 -------------- ------------- ---------------- (In thousands of dollars except per share items) Sales of services $ 4,487,291 $ 4,269,113 $ 4,092,251 Cost of services 3,694,982 3,503,052 3,360,976 -------------- ------------- ---------------- Gross profit 792,309 766,061 731,275 Selling, general and administrative expenses (Note 3) 646,624 622,110 590,659 -------------- ------------- ---------------- Earnings from operations 145,685 143,951 140,616 Interest (expense) income, net (409) (241) 2,999 -------------- ------------- ---------------- Earnings before income taxes 145,276 143,710 143,615 Income taxes 58,100 58,600 58,900 -------------- ------------- ---------------- Net earnings $ 87,176 $ 85,110 $ 84,715 ============== ============= ================ Basic earnings per share $ 2.44 $ 2.37 $ 2.24 Diluted earnings per share $ 2.43 $ 2.36 $ 2.23 Dividends per share $ .99 $ .95 $ .91 Average shares outstanding (thousands): Basic 35,721 35,854 37,745 Diluted 35,843 36,030 37,945 14 STATEMENTS OF CASH FLOWS Kelly Services, Inc. and Subsidiaries See accompanying Notes to Financial Statements. (1) Fiscal year included 53 weeks.
(1) 2000 1999 1998 --------- --------- --------- (In thousands of dollars) Cash flows from operating activities Net earnings $ 87,176 $ 85,110 $ 84,715 Noncash adjustments: Depreciation and amortization 39,465 36,238 28,865 Gain on disposition of property (8,567) -- -- Changes in certain working capital components (29,217) (5,884) 2,925 --------- --------- --------- Net cash from operating activities 88,857 115,464 116,505 Cash flows from investing activities Capital expenditures (54,237) (76,696) (59,089) Short-term investments 3,624 6,051 55,232 Increase in other assets (8,018) (10,872) (11,133) Acquisition of companies, net of cash received (20,923) (5,557) (3,385) Proceeds from disposition of property 10,309 -- -- --------- --------- --------- Net cash from investing activities (69,245) (87,074) (18,375) Cash flows from financing activities Increase (decrease) in short-term borrowings 10,629 (419) (7,329) Dividend payments (35,303) (34,041) (34,237) Exercise of stock options and other 85 854 2,494 Purchase of treasury stock (5,737) (551) (75,949) --------- --------- --------- Net cash from financing activities (30,326) (34,157) (115,021) Net change in cash and equivalents (10,714) (5,767) (16,891) Cash and equivalents at beginning of year 54,032 59,799 76,690 --------- --------- --------- Cash and equivalents at end of year $ 43,318 $ 54,032 $ 59,799 ========= ========= ========= 15 BALANCE SHEETS Kelly Services, Inc. and Subsidiaries See accompanying Notes to Financial Statements.
2000 1999 1998 ----------- ----------- ----------- (In thousands of dollars) ASSETS - ------ Current Assets Cash and equivalents $ 43,318 $ 54,032 $ 59,799 Short-term investments 2,394 6,018 12,069 Accounts receivable, less allowances of $13,614, $13,575 and $13,035, respectively 631,771 602,485 584,653 Prepaid expenses and other current assets 24,903 22,801 15,012 Deferred taxes 52,209 50,832 48,343 ----------- ----------- ----------- Total current assets 754,595 736,168 719,876 Property and Equipment Land and buildings 44,971 49,458 44,135 Equipment, furniture and leasehold improvements 253,666 231,654 179,707 Accumulated depreciation (97,552) (94,112) (77,491) ----------- ----------- ----------- Total property and equipment 201,085 187,000 146,351 Intangibles and Other Assets 133,896 110,523 98,020 ----------- ----------- ----------- Total Assets $ 1,089,576 $ 1,033,691 $ 964,247 =========== =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY - ------------------------------------ Current Liabilities Short-term borrowings $ 57,839 $ 47,210 $ 47,629 Accounts payable 69,375 73,516 79,089 Payroll and related taxes 234,807 215,706 195,670 Accrued insurance 55,272 65,881 66,830 Income and other taxes 48,814 49,005 37,265 ----------- ----------- ----------- Total current liabilities 466,107 451,318 426,483 Stockholders' Equity Capital stock, $1.00 par value Class A common stock, shares issued 36,609,040 at 2000, 36,602,210 at 1999 and 36,540,770 at 1998 36,609 36,602 36,541 Class B common stock, shares issued 3,506,826 at 2000, 3,513,656 at 1999 and 3,575,096 at 1998 3,507 3,514 3,575 Treasury stock, at cost Class A common stock, 4,363,578 shares at 2000, 4,234,524 shares at 1999 and 4,301,321 at 1998 (84,251) (80,538) (81,669) Class B common stock, 12,817 shares at 2000 and 7,767 shares at 1999 and 1998 (371) (248) (248) Paid-in capital 16,371 15,761 14,844 Earnings invested in the business 675,388 623,564 572,517 Accumulated foreign currency adjustments (23,784) (16,282) (7,796) ----------- ----------- ----------- Total stockholders' equity 623,469 582,373 537,764 ----------- ----------- ----------- Total Liabilities and Stockholders' Equity $ 1,089,576 $ 1,033,691 $ 964,247 =========== =========== =========== 16 STATEMENTS OF STOCKHOLDERS' EQUITY Kelly Services, Inc. and Subsidiaries See accompanying Notes to Financial Statements. (1) Fiscal year included 53 weeks.
(1) 2000 1999 1998 --------- --------- --------- (In thousands of dollars) Capital Stock Class A common stock Balance at beginning of year $ 36,602 $ 36,541 $ 36,538 Conversions from Class B 7 61 3 --------- --------- --------- Balance at end of year 36,609 36,602 36,541 Class B common stock Balance at beginning of year 3,514 3,575 3,578 Conversions to Class A (7) (61) (3) --------- --------- --------- Balance at end of year 3,507 3,514 3,575 Treasury Stock Class A common stock Balance at beginning of year (80,538) (81,669) (6,029) Exercise of stock options, restricted stock awards and other 1,379 1,438 144 Treasury stock issued for acquisitions 522 244 102 Purchase of treasury stock (5,614) (551) (75,886) --------- --------- --------- Balance at end of year (84,251) (80,538) (81,669) Class B common stock Balance at beginning of year (248) (248) (185) Purchase of treasury stock (123) -- (63) --------- --------- --------- Balance at end of year (371) (248) (248) Paid-in Capital Balance at beginning of year 15,761 14,844 10,980 Exercise of stock options, restricted stock awards and other 498 808 3,036 Treasury stock issued for acquisitions 112 109 828 --------- --------- --------- Balance at end of year 16,371 15,761 14,844 Earnings Invested in the Business Balance at beginning of year 623,564 572,517 522,039 Net earnings 87,176 85,110 84,715 Dividends (35,352) (34,063) (34,237) --------- --------- --------- Balance at end of year 675,388 623,564 572,517 Accumulated Foreign Currency Adjustments Balance at beginning of year (16,282) (7,796) (7,092) Equity adjustment for foreign currency (7,502) (8,486) (704) --------- --------- --------- Balance at end of year (23,784) (16,282) (7,796) --------- --------- --------- Stockholders' Equity at end of year $ 623,469 $ 582,373 $ 537,764 ========= ========= ========= Comprehensive Income Net earnings $ 87,176 $ 85,110 $ 84,715 Other comprehensive income - Foreign currency adjustments (7,502) (8,486) (704) --------- --------- --------- Comprehensive Income $ 79,674 $ 76,624 $ 84,011 ========= ========= ========= 17 NOTES TO FINANCIAL STATEMENTS Kelly Services, Inc. and Subsidiaries (In thousands of dollars except share and per share items) 1. Summary of Significant Accounting Policies Fiscal Year. The Company's fiscal year ends on the Sunday nearest to December 31. The three most recent years ended on December 31, 2000 (2000), January 2, 2000 (1999) and January 3, 1999 (1998). Principles of Consolidation. The financial statements include the accounts and operations of the Company and its subsidiaries, all of which are wholly owned. All significant intercompany accounts and transactions have been eliminated. Foreign Currency Translation. Substantially all of the Company's international subsidiaries use their local currency as their functional currency. Revenue and expense accounts of foreign subsidiaries are translated to U.S. dollars at average exchange rates, while assets and liabilities are translated to U.S. dollars at year-end exchange rates. Resulting translation adjustments are reported as accumulated foreign currency adjustments in stockholders' equity. Revenue Recognition. Revenue from sales of services is recognized as services are provided by the temporary, contract or leased employees. Revenue from permanent placement services is recognized at the time the permanent placement candidate begins full-time employment. Advertising Expenses. Advertising expenses, which are expensed as incurred, were $15,800, $15,000 and $14,000 in 2000, 1999 and 1998, respectively. Use of Estimates. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Actual results could differ from those estimates. Cash and Equivalents. Cash and equivalents are stated at cost, which approximates market. The Company considers securities with original maturities of three months or less to be cash and equivalents. Property and Equipment. Property and equipment are stated at cost and are depreciated over their estimated useful lives, principally by the straight-line method. Estimated useful lives range from 15 to 45 years for land improvements, buildings and building improvements, 5 years for equipment, furniture and leasehold improvements and 3 to 12 years for computer hardware and software. The Company capitalizes professional fees and internal payroll costs incurred in the development of software for internal use in accordance with Statement of Position 98-1. Depreciation expense was $37,200 for 2000, $33,900 for 1999 and $25,400 for 1998. Intangible Assets. Purchased intangible assets, other than goodwill, are valued at acquisition cost and are amortized over their respective useful lives (up to 10 years) on a straight-line basis. Goodwill derived from acquisitions is capitalized and amortized over periods ranging from 20 to 40 years. The Company periodically assesses the recoverability of its goodwill based upon projected future cash flows. Restatements. Certain prior year amounts have been reclassified to conform with the current presentation. 2. Short-term Investments Short-term investments are classified as available for sale and include federal, state and local government obligations of approximately 40% in 2000, 60% in 1999 and 80% in 1998. The entire short-term investments balance in 2000 and 1998 was due within one year. Short-term investments due within one year totaled $5,800 in 1999, with the balance due within two years. The carrying amounts approximate market value at December 31, 2000, January 2, 2000 and January 3, 1999. Interest income was $2,770, $2,272 and $6,206, respectively, for the years 2000, 1999 and 1998. 18 NOTES TO FINANCIAL STATEMENTS (continued) Kelly Services, Inc. and Subsidiaries (In thousands of dollars except share and per share items) 3. Land Sale On October 9, 2000, the Company sold undeveloped land for $10,309. The Company recognized a pretax gain of $8,567, which is included in selling, general and administrative expenses. The proceeds from the sale of property were used on January 8, 2001 for the purchase of an office building that will be utilized by the Company for future expansion. For tax purposes, the transaction will be treated as an IRS Code Section 1031 tax-free exchange. 4. Intangibles and Other Assets Intangibles and other assets include goodwill of $86,900, $67,900 and $64,100 at year-ends 2000, 1999 and 1998, respectively. Accumulated amortization of goodwill at 2000, 1999 and 1998 was $9,500, $7,900 and $6,900, respectively. Goodwill and other intangible amortization expense was $2,300 in 2000 and 1999 and $3,500 in 1998. Other assets include investments used to fund a nonqualified retirement plan and cash values of life insurance on the lives of certain officers and key employees. 5. Short-term Borrowings The Company has a committed $100 million, five-year multi-currency revolving credit facility to be used to fund working capital, acquisitions, and for general corporate purposes. The facility expires in 2003. The interest rate applicable to borrowings under the line of credit is 20 basis points over LIBOR and may include additional costs if the funds are drawn from certain countries. Borrowings under this arrangement were $50,382, $47,210 and $47,629 at year-ends 2000, 1999 and 1998, respectively. During September 2000, the Company arranged an $8,250 one-year credit facility to be used to fund its Singapore acquisition. At December 31, 2000, the outstanding balance totaled $7,457 at a weighted average interest rate of 3.7%. All of the borrowings are foreign currency denominated and support the Company's international working capital position. The carrying amounts of the Company's borrowings under the lines of credit described above approximate their fair values. Interest expense, interest payments and weighted average interest rates related to the short-term borrowings for 2000, 1999 and 1998 were as follows: 2000 1999 1998 ---------- ---------- ---------- Interest expense $ 3,179 $ 2,513 $ 3,207 Interest payments 2,672 2,567 3,956 Weighted average interest rate 5.5% 4.6% 5.3% 6. Capitalization The authorized capital stock of the Company is 100,000,000 shares of Class A common stock and 10,000,000 shares of Class B common stock. Class A shares have no voting rights and are not convertible. Class B shares have voting rights and are convertible into Class A shares on a share-for-share basis at any time. Both classes of stock have identical rights in the event of liquidation. During 2000, the Company repurchased 227,500 shares of its Class A common stock. The total value of the Class A shares repurchased was $5,614. The Company also repurchased 5,050 shares of its Class B common stock during 2000 at a total cost of $123. During December 1999, the Company repurchased 22,500 shares of its Class A common stock. The total value of the Class A shares repurchased was $551. During 1998, the Company repurchased 2,500,000 shares of its Class A common stock in negotiated transactions from the William R. Kelly Trust. The total value of the Class A shares repurchased was $75,886. In addition, the Company repurchased 1,937 Class B shares at a total cost of $63. 19 NOTES TO FINANCIAL STATEMENTS (continued) Kelly Services, Inc. and Subsidiaries (In thousands of dollars except share and per share items) 7. Earnings Per Share The reconciliations of earnings per share computations for the fiscal years 2000, 1999 and 1998 were as follows: Stock options to purchase 2,309,000, 1,162,000 and 458,000 shares of common stock at a weighted average price per share of $27.30, $31.52 and $35.17 were outstanding during 2000, 1999 and 1998, respectively, but were not included in the computation of diluted earnings per share. The exercise prices of these options were greater than the average market price of the common shares and the options were therefore anti-dilutive. 8. Supplemental Cash Flow Information Changes in certain working capital components, as disclosed in the statements of cash flows, for the years 2000, 1999 and 1998 were as follows:
2000 1999 1998 ------------ ------------ ------------ Net earnings $ 87,176 $ 85,110 $ 84,715 ============ ============ ============ Determination of shares (thousands): Weighted average common shares outstanding 35,721 35,854 37,745 Effect of dilutive securities: Stock options - 41 90 Restricted and performance awards and other 122 135 110 ------------ ------------ ------------ Weighted average common shares outstanding - assuming dilution 35,843 36,030 37,945 ============ ============ ============ Earnings per share - basic $ 2.44 $ 2.37 $ 2.24 Earnings per share - assuming dilution $ 2.43 $ 2.36 $ 2.23 Cash flows from short-term investments for 2000, 1999 and 1998 were as follows: 2000 1999 1998 ---------- ----------- ------------ Sales/Maturities $ 937,084 $ 905,326 $ 1,645,815 Purchases (933,460) (899,275) (1,590,583) ---------- ----------- ------------ Total $ 3,624 $ 6,051 $ 55,232 ========== =========== ============
2000 1999 1998 ----------- ----------- ---------- Increase in accounts receivable $ (31,748) $ (26,972) $ (12,712) Increase in prepaid expenses and other current (2,997) (9,138) (2,277) assets Increase in deferred taxes (593) (2,678) (6,501) Increase (decrease) in accounts payable (5,678) (3,059) 16,582 Increase (decrease) in payroll and related taxes 22,208 23,614 (1,219) Increase (decrease) in accrued insurance (10,590) (924) 5,755 Increase in income and other taxes 181 13,273 3,297 ----------- ----------- ---------- Total $ (29,217) $ (5,884) $ 2,925 =========== =========== ========== 20 NOTES TO FINANCIAL STATEMENTS (continued) Kelly Services, Inc. and Subsidiaries (In thousands of dollars except share and per share items) 9. Retirement Benefits The Company provides a qualified defined contribution plan covering substantially all full-time employees, except officers and certain other management employees. Upon approval by the Board of Directors, a contribution based on eligible wages is funded annually. The plan offers a savings feature with Company matching contributions. Assets of this plan are held by an independent trustee for the sole benefit of participating employees. A nonqualified benefit plan is provided for officers and certain other management employees. Upon approval by the Board of Directors, a contribution based on eligible wages is set aside annually. This plan also includes provisions for salary deferrals and Company matching contributions. Amounts provided for retirement benefits totaled $5,300 in 2000, $7,600 in 1999 and $7,000 in 1998. 10. Income Taxes Pretax income (loss) for the years 2000, 1999 and 1998 was taxed under the following jurisdictions: 2000 1999 1998 ---------- ---------- ----------- Domestic $ 149,431 $ 134,572 $ 134,731 Foreign (4,155) 9,138 8,884 ---------- ---------- ----------- Total $ 145,276 $ 143,710 $ 143,615 ========== ========== =========== The provision for income taxes was as follows: 2000 1999 1998 ---------- ----------- ---------- Current tax expense: U.S. federal $ 43,151 $ 42,898 $ 47,599 U.S. state and local 10,840 11,500 12,000 Foreign 4,702 6,880 5,802 ---------- ----------- ---------- Total current 58,693 61,278 65,401 Total deferred (593) (2,678) (6,501) ---------- ----------- ---------- Total provision $ 58,100 $ 58,600 $ 58,900 ========== =========== ========== Deferred tax assets (liabilities) are comprised of the following: 2000 1999 1998 ---------- ----------- ---------- Depreciation and amortization $ (8,628) $ (6,420) $ (5,307) Employee compensation and benefit plans 26,055 23,276 22,845 Workers' compensation 19,127 22,352 22,428 Bad debt reserves 4,237 3,896 3,789 Loss carryforwards 6,271 4,793 3,453 Other, net 6,728 6,053 4,198 Valuation allowance (1,581) (3,118) (3,063) ---------- ----------- ---------- Total deferred tax assets 52,209 50,832 48,343 Total deferred tax liabilities (741) (1,044) (1,279) ---------- ----------- ---------- Total $ 51,468 $ 49,788 $ 47,064 ========== =========== ========== 21 NOTES TO FINANCIAL STATEMENTS (continued) Kelly Services, Inc. and Subsidiaries (In thousands of dollars except share and per share items) The differences between income taxes for financial reporting purposes and the U.S. statutory rate are as follows: The net tax effect of foreign loss carryforwards at December 31, 2000 totaled $6,271 which expire as follows: Year Amount ------------- --------- 2001-2003 $ - 2004-2006 320 2007-2010 1,261 No expiration 4,690 --------- Total $ 6,271 ========= The Company has established a valuation allowance for loss carryforwards related to certain foreign operations, which management believes may not be realizable. Provision has not been made for U.S. or additional foreign income taxes on an estimated $11,100 of undistributed earnings of foreign subsidiaries, which are permanently reinvested. If such earnings were to be remitted, management believes that U.S. foreign tax credits would largely eliminate any such U.S. and foreign income taxes. The Company paid income taxes of $58,800 in 2000, $53,400 in 1999 and $65,700 in 1998. 11. Performance Incentive Plan Under the Performance Incentive Plan (the "Plan"), the Company may grant stock options (both incentive and nonqualified), stock appreciation rights (SARs), restricted awards and performance awards to key employees utilizing the Company's Class A stock. Stock options may not be granted at prices less than the fair market value on the date of grant, nor for a term exceeding 10 years. The Plan provides that the maximum number of shares available for grants is 10 percent of the outstanding Class A stock, adjusted for Plan activity over the preceding five years. Shares available for future grants at the end of 2000, 1999 and 1998 were 1,283,000, 946,000 and 1,213,000, respectively. The Company applies Accounting Principles Board Opinion 25 and related Interpretations in accounting for the Plan. Accordingly, no compensation cost has been recognized for incentive and nonqualified stock options. If compensation cost had been determined based on the fair value at the grant dates for awards under the Plan consistent with the method of Statement of Financial Accounting Standards 123, Accounting for Stock-Based Compensation, the Company's net income would have been reduced by $1,729, $1,487 and $1,135 for 2000, 1999 and 1998, respectively; basic earnings per share would have been reduced by $.05 in 2000, $.04 in 1999 and $.03 in 1998; and diluted earnings per share would have been reduced by $.05 in 2000, $.04 in 1999 and $.03 in 1998. Since stock options generally become exercisable over several years and additional grants are likely to be made in future years, the pro forma amounts for compensation cost may not be indicative of the effects on net income and earnings per share for future years.
2000 1999 1998 --------- --------- ----------- Income tax based on statutory rate 35.0 % 35.0 % 35.0 % State income taxes, net of federal benefit 4.9 5.2 5.4 Other, net 0.1 0.6 0.6 --------- --------- ----------- Total 40.0 % 40.8 % 41.0 % ========= ========= =========== 22 NOTES TO FINANCIAL STATEMENTS (continued) Kelly Services, Inc. and Subsidiaries (In thousands of dollars except share and per share items) The fair value of each option included in the following tables is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions: 2000 1999 1998 ---------- --------- ----------- Dividend yield 4.0 % 4.0 % 3.0 % Risk-free interest rate 5.9 % 5.7 % 5.3 % Expected volatility 29.0 % 30.0 % 31.0 % Expected lives 6 yrs 6 yrs 6 yrs A summary of the status of stock option grants under the Plan as of December 31, 2000, January 2, 2000 and January 3, 1999, and changes during the years ended on those dates, is presented as follows: Weighted Avg. 2000: Options Exercise Price ------------ -------------- Outstanding at beginning of year 1,592,000 $28.77 Granted 730,000 24.01 Exercised (2,000) 24.77 Cancelled (197,000) 27.15 ------------ Outstanding at end of year 2,123,000 $27.29 ============ Options exercisable at year end 763,000 $29.05 Weighted average fair value of options granted during the year $5.98 1999: Outstanding at beginning of year 1,330,000 $30.78 Granted 592,000 25.05 Exercised (32,000) 26.80 Cancelled (298,000) 30.54 ------------ Outstanding at end of year 1,592,000 $28.77 ============ Options exercisable at year end 552,000 $29.08 Weighted average fair value of options granted during the year $6.30 1998: Outstanding at beginning of year 1,160,000 $28.68 Granted 448,000 35.16 Exercised (104,000) 28.15 Cancelled (174,000) 29.67 ------------ Outstanding at end of year 1,330,000 $30.78 ============ Options exercisable at year end 404,000 $28.07 Weighted average fair value of options granted during the year $10.06 23 NOTES TO FINANCIAL STATEMENTS (continued) Kelly Services, Inc. and Subsidiaries (In thousands of dollars except share and per share items) The following table summarizes information about options outstanding at December 31, 2000: Restricted awards are issued to certain key employees and are subject to forfeiture until the end of an established restriction period. Restricted awards totaling 105,400, 87,000 and 14,500 shares were granted under the Plan during 2000, 1999 and 1998, respectively. The weighted average grant date price of such awards was $24.02, $26.55 and $35.64 for 2000, 1999 and 1998, respectively. Restricted awards outstanding totaled 165,000, 104,000 and 36,200 shares at year-ends 2000, 1999 and 1998, respectively, and have a weighted average remaining life of 1.9 years at December 31, 2000. Under the Plan, performance awards may be granted to certain key employees, the payout of which is determined by the degree of attainment of objectively determinable performance goals over the established relevant performance period. No performance awards were granted during 2000 or 1999. Performance awards totaling 51,500 shares were granted under the Plan during 1998. The weighted average grant date prices of such awards were $34.94 for 1998. There were no unearned performance awards outstanding at December 31, 2000. Unearned performance awards outstanding at year-ends 1999 and 1998 were 70,000 and 115,200, respectively. Total compensation cost recognized for restricted and performance awards was $2,000, $1,000 and $2,000 for 2000, 1999 and 1998, respectively. As of December 31, 2000, no SARs have been granted under the Plan. 12. Lease Commitments The Company conducts its field operations primarily from leased facilities. The following is a schedule by fiscal year of future minimum lease commitments as of December 31, 2000: Fiscal year: 2001 $ 37,700 2002 29,100 2003 21,000 2004 13,600 2005 8,900 Later years 23,500 ------------ Total $ 133,800 ============ Lease expense for 2000, 1999 and 1998 amounted to $45,100, $43,100 and $38,600, respectively.
Options Outstanding Options Exercisable ------------------------------------- ---------------------------------- Weighted Number Average Weighted Weighted Range of Outstanding Remaining Average Number Average Exercise as of Life Exercise Exercisable Exercise Prices 12/31/00 (Years) Price as of 12/31/00 Price ----------------- ----------- ------------ ---------- ---------------------------------- $22.50-24.00 642,000 9.21 $23.97 - $ - $24.01-24.50 446,000 8.31 24.48 100,000 24.50 $24.51-28.00 248,000 5.20 26.56 209,000 26.51 $28.01-29.00 244,000 6.45 28.22 137,000 28.19 $29.01-33.00 219,000 5.09 30.57 183,000 30.48 $33.01-38.50 324,000 7.10 35.33 134,000 35.32 ----------- ------------ ---------- --------------- --------------- $22.50-38.50 2,123,000 7.49 $27.29 763,000 $29.05 =========== ============ ========== =============== =============== 24 NOTES TO FINANCIAL STATEMENTS (continued) Kelly Services, Inc. and Subsidiaries (In thousands of dollars except share and per share items) 13. Contingencies The Company is subject to various legal proceedings, claims and liabilities which arise in the ordinary course of its business. Litigation is subject to many uncertainties, the outcome of individual litigated matters is not predictable with assurance and it is reasonably possible that some of the foregoing matters could be decided unfavorably to the Company. Although the amount of the liability at December 31, 2000 with respect to these matters cannot be ascertained, the Company believes that any resulting liability will not be material to the financial statements of the Company at December 31, 2000. 14. Segment Disclosures The Company has determined that its reportable segments are those that are based on the Company's method of internal reporting, which disaggregates its business by segment. The Company's reportable segments are: (1) U.S. Commercial Staffing, (2) Professional, Technical and Staffing Alternatives (PTSA) and (3) International. The accounting policies of the segments are the same as those described in the "Summary of Significant Accounting Policies." During 2000, international operations were conducted in Australia, Belgium, Canada, Denmark, France, Germany, Ireland, Italy, Luxembourg, Malaysia, Mexico, the Netherlands, New Zealand, Norway, the Philippines, Puerto Rico, Russia, Singapore, Spain, Sweden, Switzerland and the United Kingdom. The following table presents information about the reported operating income of the Company for the fiscal years 2000, 1999 and 1998. Segment data presented is net of intersegment revenues. Asset information by reportable segment is not reported, since the Company does not produce such information internally. 2000 1999 1998 52 weeks 52 weeks 53 weeks ----------- ---------- --------- Sales: U.S. Commercial Staffing $ 2,332,900 $ 2,247,000 $ 2,262,700 PTSA 1,052,900 937,800 864,800 International 1,101,500 1,084,300 964,800 --------- --------- --------- Consolidated Total $ 4,487,300 $ 4,269,100 $ 4,092,300 ========= ========= ========= Earnings from Operations: U.S. Commercial Staffing $ 189,700 $ 198,000 $ 197,400 PTSA 72,800 55,600 44,000 International 22,500 33,600 29,200 Corporate (139,300) (143,200) (130,000) --------- --------- --------- Consolidated Total $ 145,700 $ 144,000 $ 140,600 ========= ========= ========= 25 NOTES TO FINANCIAL STATEMENTS (continued) Kelly Services, Inc. and Subsidiaries (In thousands of dollars except share and per share items) Specified items included in segment earnings for the fiscal years 2000, 1999 and 1998 were as follows: 2000 1999 1998 52 weeks 52 weeks 53 weeks -------- -------- -------- Depreciation and Amortization: U.S. Commercial Staffing $ 5,881 $ 5,911 $ 6,237 PTSA 2,597 2,395 1,977 International 11,137 11,228 10,262 Corporate 19,850 16,704 10,389 -------- -------- ------- Consolidated Total $ 39,465 $ 36,238 $ 28,865 ======== ======== ======= Interest Income: U.S. Commercial Staffing $ - $ - $ - PTSA 107 23 141 International 630 615 783 Corporate 2,033 1,634 5,282 -------- -------- ------- Consolidated Total $ 2,770 $ 2,272 $ 6,206 ======== ======== ======= Interest Expense: U.S. Commercial Staffing $ - $ - $ - PTSA - - - International 3,020 2,389 3,207 Corporate 159 124 - -------- -------- ------- Consolidated Total $ 3,179 $ 2,513 $ 3,207 ======== ======== ======= A summary of long-lived assets information by geographic area as of the years ended 2000, 1999 and 1998 follows: 2000 1999 1998 ------- ------- ------- Long-Lived Assets: Domestic $ 256,300 $ 223,000 $ 170,500 International 78,700 74,500 73,900 ------- ------- ------- Total $ 335,000 $ 297,500 $ 244,400 ======= ======= ======= Long-lived assets include Property and Equipment and Intangibles and Other Assets. No single foreign country's long-lived assets were material to the consolidated long-lived assets of the Company. Foreign revenue is based on the country in which the legal subsidiary is domiciled. No single foreign country's revenue was material to the consolidated revenues of the Company. 26 NOTES TO FINANCIAL STATEMENTS (continued) Kelly Services, Inc. and Subsidiaries SELECTED QUARTERLY FINANCIAL DATA (unaudited) (1) Earnings per share amounts for each quarter are required to be computed independently and may not equal the amounts computed for the total year.
First Second Third Fourth Quarter Quarter Quarter Quarter Year ------------ ------------- ----------- ----------- ----------- (In thousands of dollars except per share items) Sales of services 2000............................... $1,080,069 $1,106,740 $1,154,480 $1,146,002 $4,487,291 1999............................... 1,025,959 1,066,783 1,092,002 1,084,369 4,269,113 1998 (53 weeks).................... 959,382 1,001,286 1,032,875 1,098,708 4,092,251 Cost of services 2000............................... 892,095 909,731 948,683 944,473 3,694,982 1999............................... 846,828 876,809 893,900 885,515 3,503,052 1998 (53 weeks).................... 791,472 823,542 846,094 899,868 3,360,976 Selling, general and administrative 2000............................... 161,406 160,342 162,017 162,859 646,624 1999............................... 153,539 154,841 155,390 158,340 622,110 1998 (53 weeks).................... 143,069 143,584 145,404 158,602 590,659 Net earnings 2000............................... 16,060 21,825 26,003 23,288 87,176 1999............................... 15,188 20,734 25,018 24,170 85,110 1998 (53 weeks).................... 15,064 20,623 24,903 24,125 84,715 (1) Basic earnings per share 2000............................... .45 .61 .73 .65 2.44 1999............................... .42 .58 .70 .67 2.37 1998 (53 weeks).................... .39 .54 .65 .66 2.24 (1) Diluted earnings per share 2000............................... .45 .61 .73 .65 2.43 1999............................... .42 .58 .69 .67 2.36 1998 (53 weeks).................... .39 .54 .65 .66 2.23 Dividends per share 2000............................... .24 .25 .25 .25 .99 1999............................... .23 .24 .24 .24 .95 1998............................... .22 .23 .23 .23 .91 27 SCHEDULE II - VALUATION RESERVES Kelly Services, Inc. and Subsidiaries December 31, 2000 (In thousands of dollars)
Additions --------------------------- Balance at Charged to Deductions - Balance beginning costs and uncollectible at end of year expenses accounts of year ----------- ------------- ------------ ----------- Description - ----------- Fifty-two weeks ended December 31, 2000: - --------------------------------------- Reserve deducted in the balance sheet from the assets to which it applies - Allowance for doubtful accounts $13,575 $7,977 $7,938 $13,614 =========== ============= ============ =========== Fifty-two weeks ended January 2, 2000: - ------------------------------------- Reserve deducted in the balance sheet from the assets to which it applies - Allowance for doubtful accounts $13,035 $5,125 $4,585 $13,575 =========== ============= ============ =========== Fifty-three weeks ended January 3, 1999: - --------------------------------------- Reserve deducted in the balance sheet from the assets to which it applies - Allowance for doubtful accounts $12,375 $7,355 $6,695 $13,035 =========== ============= ============ =========== 28 INDEX TO EXHIBITS REQUIRED BY ITEM 601, REGULATION S-K ---------------------
Exhibit No. Description Document - ----------- ----------- -------- 3.1 Certificate of Incorporation. (Reference is made to Exhibit 3.2 to the Form 10-Q for the quarterly period ended June 30, 1996, filed with the Commission in August, 1996, which is incorporated herein by reference). 3.2 By-laws. (Reference is made to Exhibit 3 to the Form 10-Q for the quarterly period ended September 29, 1996, filed with the Commission in November, 1996, which is incorporated herein by reference). 4 Rights of security holders are defined in Articles Fourth, Fifth, Seventh, Eighth, Ninth, Tenth, Eleventh, Twelfth, Thirteenth, Fourteenth and Fifteenth of the Certificate of Incorporation. (Reference is made to Exhibit 3.2 to the Form 10-Q for the quarterly period ended June 30, 1996, filed with the Commission in August, 1996, which is incorporated herein by reference). 10.1 Short-Term Incentive Plan, as amended and restated on March 23, 1998. (Reference is made to Exhibit 10 to the Form 10-Q for the quarterly period ended June 28, 1998, filed with the Commission in August, 1998, which is incorporated herein by reference). 10.2 Kelly Services, Inc. Amended and Restated Performance Incentive Plan. (Reference is made to Exhibit A to the Definitive Proxy for the fiscal year ended January 2, 2000, filed with the Commission in April, 2000 and Exhibit B to the Definitive Proxy for the fiscal year ended December 31, 1995, filed with the Commission in April, 1996, which are incorporated herein by reference). 10.3 Kelly Services, Inc. 1999 Non-Employee Directors Stock Option Plan. (Reference is made to Exhibit A to the Definitive Proxy for the fiscal year ended January 3, 1999, filed with the Commission in April, 1999, which is incorporated herein by reference). 21 Subsidiaries of Registrant. 2 23 Consent of Independent Accountants. 3 24 Power of Attorney. 4
1 SUBSIDIARIES OF REGISTRANT Kelly Services, Inc.
State/Jurisdiction Subsidiary of Incorporation Business Name - ---------------------------------------------------- ------------------ ------------------------------ Kelly Services (Canada), Ltd. Canada Kelly Temporary Services Kelly Properties, Inc. Michigan Kelly Properties Kelly Services (Ireland), Ltd. Delaware Kelly Services (a subsidiary of Kelly Properties, Inc.) Kelly Services (UK), Ltd. United Kingdom Kelly Temporary Services (a subsidiary of Kelly Properties, Inc.) Kelly Assisted Living Services, Inc. Delaware Kelly Assisted Living Services Kelly Services (Australia), Ltd. Delaware Kelly Temporary Services Kelly Services (New Zealand), Ltd. Delaware Kelly Temporary Services Kelly Professional Services (France), Inc. Delaware Kelly Professional Services Kelly Services of Denmark, Inc. Delaware Kelly Services (Danmark) Kelly Services (Nederland), B.V. The Netherlands Kelly Uitzendburo Kelly Services Norge A.S. Norway Kelly Bemmanings/oslinger (a subsidiary of Kelly Services (Nederland), B.V.) Kelly de Mexico, S.A. de C.V. Mexico Kelly Temporary Services KSI Acquisition Corporation California Kelly Staff Leasing Kelly Services (Suisse) Holding S.A. Switzerland Kelly Services Suisse Kelly Services France S.A. France Kelly Services France Kelly Services Interim, S.A. France Kelly Services Interim (a subsidiary of Kelly Services France S.A.) Competences RH SARL France Kelly Formation (a subsidiary of Kelly Services France S.A.) Kelly Services Luxembourg S.A.R.L. Luxembourg Kelly Services Kelly Services Italia Srl Italy Kelly Services (a subsidiary of Kelly Services, Inc. and Kelly Properties, Inc.) Kelly Services (Societa di fornitura di lavaro Italy Kelly Services Italia SpA temporaneo) SpA (a subsidiary of Kelly Services, Inc. and Kelly Properties, Inc.) 2 SUBSIDIARIES OF REGISTRANT (continued) Kelly Services, Inc.
State/Jurisdiction Subsidiary of Incorporation Business Name - ------------------------------------------------ ------------------ -------------------------------------- Kelly Services Iberia Holding Company, S.L. Spain Kelly Services E.T.T. Kelly Services Empleo Empresa de Trabajo Spain Kelly Services E.T.T. Temporal, S.L. (a subsidiary of Kelly Services Iberia Holding Company, S.L.) Kelly Services Seleccion y Formacion, S.L. Spain Kelly Services E.T.T. (a subsidiary of Kelly Services Iberia Holding Company, S.L.) Kelly Services CIS, Inc. Delaware Kelly Services ooo Kelly Services Russia Kelly Services (a subsidiary of Daylesford Investments Limited, a Cyprus Holding Company) Kelly Services Deutschland GmbH Germany Kelly Services Kelly Services Consulting GmbH Germany Kelly Services (a subsidiary of Kelly Services Deutschland GmbH) Kelly Services Interim (Belgium) S.A., N.V. Belgium Kelly Services Interim (a subsidiary of Kelly Services, Inc. and Kelly Properties, Inc.) Kelly Services Select (Belgium) S.A., N.V. Belgium Kelly Services Select (a subsidiary of Kelly Services, Inc. and Kelly Properties, Inc.) Kelly Services Sverige A.B. Sweden Help Personal A.B. LabStaff Pty. Ltd. Australia LabStaff (a subsidiary of Kelly Services (Australia), Ltd.) Interim Job S.A.R.L. Luxembourg Interim Job (a subsidiary of Kelly Services Luxembourg S.A.R.L.) Kellament Properties, Inc. Delaware ProStaff Kelly Services Holding (Singapore) Pte. Ltd. Singapore Kelly Services Holding (Singapore) Business Trends Pte. Ltd. Singapore Business Trends (a subsidiary of Kelly Services Holding (Singapore) Pte. Ltd.) 3 SUBSIDIARIES OF REGISTRANT (continued) Kelly Services, Inc.
State/Jurisdiction Subsidiary of Incorporation Business Name - ------------------------------------------ ----------------- ------------------------- BTI Consultants Pte. Ltd. Singapore BTI Consultants (a subsidiary of Kelly Services Holding (Singapore) Pte. Ltd.) Agensi Pekerjaan Business Trends Sdn. Bhd. Malaysia Business Trends Agensi Pekerjaan BTI Consultants Sdn. Bhd. Malaysia BTI Consultants Kelly Receivables Services, LLC Delaware Kelly Receivables Services
1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements on Forms S-8 (Nos. 2-85867, 33-48782 and 33-51239) and on Form S-3 (No. 333-79329) of Kelly Services, Inc. of our report dated January 23, 2001, relating to the financial statements and financial statement schedule, which appears in this Form 10-K. /s/ PricewaterhouseCoopers LLP - ------------------------------ PricewaterhouseCoopers LLP Detroit, Michigan March 27, 2001
1 POWER OF ATTORNEY Each of the undersigned directors of Kelly Services, Inc. does hereby appoint each of George M. Reardon and William K. Gerber, signing singly, his true and lawful attorneys, to execute for and on behalf of the undersigned the Form 10-K Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2000, to be filed with the Securities and Exchange Commission in Washington, D.C. under the provisions of the Securities Exchange Act of 1934, as amended, and any and all amendments to said Form 10-K whether said amendments add to, delete from or otherwise alter the Form 10-K, or add to or withdraw any exhibit or exhibits, schedule or schedules to be filed therewith, and any and all instruments necessary or incidental in connection therewith, hereby granting unto said attorneys and each of them full power and authority to do and perform in the name and on behalf of each of the undersigned, and in any and all capacities, every act and thing whatsoever required or necessary to be done in the exercise of any of the rights and powers herein granted, as fully and to all intents and purposes as each of the undersigned might or could do in person, hereby ratifying and approving the acts of said attorneys and each of them. IN WITNESS WHEREOF the undersigned have caused this Power of Attorney to be executed as of this 12th day of February, 2001. /s/ Terence E. Adderley -------------------------------- Terence E. Adderley /s/ Maureen A. Fay, O.P. -------------------------------- Maureen A. Fay, O.P. /s/ Cedric V. Fricke -------------------------------- Cedric V. Fricke /s/ Verne G. Istock -------------------------------- Verne G. Istock /s/ B. Joseph White -------------------------------- B. Joseph White