2000 Annual Report Australia Belgium Canada Denmark France Germany India Indonesia Ireland Italy Luxembourg Malaysia Mexico Netherlands New Zealand Norway Philippines Puerto Rico Russia Singapore Spain Sweden Switzerland Thailand United Kingdom United States C o n t e n t s Page Financial Highlights ______________________________________________________ 1 To Our Stockholders ____________________________________________________ 2 Growing to Meet Every Customer’s Needs__________________________________ 4 Building Our Foundation in Asia __________________________________________ 6 A Year of European Expansion ____________________________________________ 8 Strengthening Our Presence in Mexico ________________________________ 10 Directors and Officers ____________________________________________________ 12 Financial Contents ______________________________________________________ 13 S t a t e m e n t o f B u s i n e s s Kelly Services, Inc. is a leading global provider of staffing services. Kelly provides employees within service lines ranging from finance, education and information technology, to health care, HR consulting and scientific. Kelly offers human resource solutions that include temporary staffing, outsourcing, staff leasing, vendor on-site and full-time placement. F i n a n c i a l H i g h l i g h t s Sales of services $4,487,291 $4,269,113 + 5.1% Earnings before income taxes 145,276 143,710 + 1.1% CHANGE 1999 2000 (In thousands of dollars except per share items) Income taxes Net earnings Basic earnings per share Diluted earnings per share Dividends per share Working capital Stockholders’ equity Total assets 58,100 58,600 - 0.9% 87,176 85,110 + 2.4% 2.44 2.43 .99 2.37 2.36 .95 + 3.0% + 3.0% + 4.2% 288,488 284,850 + 1.3% 623,469 582,373 + 7.1% 1,089,576 1,033,691 + 5.4% $4.5 $4.3 $4.1 $3.9 $3.3 $2.43 $2.36 $.99 $.95 $.91 $.87 $.83 $2.23 $2.12 $1.91 96 97 98 99 00 96 97 98 99 00 96 97 98 99 00 Sales of Services (billions of dollars) Diluted Earnings Per Share Dividends Per Share PAGE 1 To O u r S t o c k h o l d e r s The Year in Brief In January of 2001, we lowered our fourth-quarter 2000 2000 was a challenging earnings estimate and indicated we were uncertain year for Kelly Services. about the economic outlook and its impact on our Early in the year, I business in 2001. announced a realignment of U.S. Commercial management in order to reverse declining sales in our U.S. Commercial business. The realignment effort was successful and sales began to trend positive. Terence E. Adderley Chairman, President and Chief Executive Officer The U.S. dollar continued to strengthen against the euro and sterling, creating an unfavorable currency translation when converting local currency to dollars. Therefore, our reported sales understate our true sales, measured in local currency, by nearly 10% in the International segment. Also, early in the year, our United Kingdom executive management team experienced near total turnover. Sales and earnings in the U.K. were almost immediately impacted. In spite of these difficulties, the strong performance of our Professional, Technical and Staffing Alternatives (PTSA) businesses combined with the continuing improvement in U.S. Commercial enabled us to produce three quarters of sales and earnings gains over the prior year. Financial Performance In spite of the fourth-quarter results, based on the strength of the first three quarters and including an $8.6 million pre-tax gain from a fourth-quarter sale of land, the year 2000 marked the 9th consecutive year of increased sales and earnings per share. Sales totaled approximately $4.5 billion, a 5% increase over 1999. Net earnings were $87.2 million, up 2.4% from the previous year. Diluted earnings per share rose 3.0% to $2.43 in 2000. For the 29th consecutive year, the annual dividend was increased. The quarterly dividend on Class A and B common stock was raised 4.2% to 25 cents per share. Business Expansion We successfully expanded our base of operations in 2000 in all three segments – U.S. Commercial, PTSA and International. An important part of our U.S. Commercial strategy was to improve our performance in cities with low market share. For example, the acquisition of the ProStaff Group in Milwaukee expanded our presence in that rapidly growing market. We also concentrated on Kelly Educational Staffing, a new product for U.S. In the fourth quarter, the slowing U.S. and European Commercial. We now provide substitute teachers for economies reduced sales and earnings growth. The more than 700 schools across 27 states. traditional fourth-quarter peak in holiday demand did not occur for U.S. Commercial. The slowdown in the automotive sector affected both PTSA and U.S. Commercial sales. Furthermore, a general housecleaning in the U.K. further reduced International sales and earnings. PAGE 2 We significantly expanded our PTSA branch network and introduced one new service, Kelly HR Consulting. This new service provides consulting in staffing-related areas such as recruiting, training and quality and serves as an extension of our core competencies. In the International division, we expanded into Asia by Contrary to popular myth, staffing is not recession- acquiring the Singapore-based Business Trends Group. proof. Companies do not lay off their permanent The acquisition extended Kelly’s global coverage to workforce and replace them with temporary workers Singapore, India, Indonesia, Malaysia, the Philippines in a recession. Temporary employees are often the and Thailand. We also acquired Extra ETT in Spain, first to be let go in a recession and the first to be which specializes in staffing for the automotive industry. brought back at the beginning of a recovery. Kelly now provides automotive staffing on three conti- nents. The continuing globalization of Kelly Services is highlighted in the theme section of this report. Senior Management Changes There were several key senior management changes this past year. We created the role of senior vice presi- dent and general manager of U.S. Commercial in April and appointed Arlene Grimsley, formerly the head of the PTSA division, to this position. Staffing growth is very dependent upon Gross Domestic Product growth and workforce availability. Given the uncertainty of the economic forecasts, we are still uncertain about near-term growth rates. Looking beyond 2001, however, we believe we have positioned the company to return to double-digit sales and earnings growth. Concluding Comments Kelly has a strong balance sheet and the experience to Also in April, Andrew Watt, formerly general manager weather even a lengthy recession. When the economic of the Middle Markets commercial division, was named recovery begins, we expect to be well-positioned to senior vice president and general manager of the again grow quickly. PTSA division. We are focused on the basics that underpin success in Rolf Kleiner, formerly the head of our PTSA Science our business: selling, recruiting, hiring, filling orders, the and Healthcare Group, was appointed to lead our maintenance of customers and temporary employees, International efforts in December 2000. and increasing productivity. We are committed to doing Additional senior vice president appointments include George Corona, division general manager of Middle Markets; Carol Johnson, division general manager of Metro Markets; and Bernard Tommasini, regional manager, Western Europe. this better than anyone else on behalf of our customers and our temporary employees. Looking Forward T.E. Adderley In January of 2001, we stated we did not know if Chairman, President and Chief Executive Officer the economy was at the beginning of an economic Kelly Services, Inc. slowdown or of a recession. Economists still disagree. But we do know that even if it is only an economic slowdown, it may be severe. PAGE 3 G r o w i n g t o M e e t E v e r y C u s t o m e r ’ s N e e d s As a global company serving global customers, Kelly Services strives to provide the right people and the right human resource solutions, wherever we are needed. Our global strategy is supported by a continued focus on personal service at the local level – from sending a car through Mexican villages offering candidates a ride to our office, to assigning scientists for the first time in a country, to operating an on-campus career training center at an Asian university – time and time again, we show our commitment to serving our customers and employees. Our recent expansion into six Asian countries with the acquisition of the Business Trends Group is an example of our global positioning strategy. FRANCE FRANCE PAGE 4 MALAYSIA MALAYSIA K e l l y S c i e n t i f i c R e s o u r c e s , K e l l y C o n n e c t a n d K e l l y A u t o m o t i v e S e r v i c e s h a v e a l l b e e n d e p l o y e d i n t e r n a t i o n a l l y. MEXICO MEXICO UNITED KINGDOM UNITED KINGDOM PAGE 5 B u i l d i n g O u r F o u n d a t i o n i n A s i a Kelly Services’ philosophy is to serve our customers wherever they need us. In 2000, Kelly acquired Business Trends Group, an Asian staffing company headquartered in Singapore. We have worked with Business Trends for more than a decade. We were delighted to formally bring the companies together. Business Trends has been in business for more than 20 years and has developed a reputation for being “Asia’s Own Quality Staffing Dhirendra Shantilal, Vice President and Managing Director, Asia Company.” They provide temporary staffing and permanent placement services, contract staffing and payroll administration. BTI Consultants, a subsidiary of Business Trends, offers executive search and selection services. The acquisition of Business Trends extends our staffing services to Asia. With offices in Singapore, India, Indonesia, Malaysia, the Philippines and Thailand, we will directly serve many of our multinational customers. Laletha Nithiyanandan, Founder and Director, Asia With over 170 full-time employees, Business Trends operates 17 offices in six countries. PAGE 6 Dhirendra Shantilal is vice president and managing director of the company. Founder Laletha Nithiyanandan has remained with the company as a director. The company is number one in market share in Malaysia and number two in Singapore. Innovative Recruiting … The Business Trends Career Centre branch at Temasek Polytechnic (university) offers hands-on training in staffing practices for business students specializing in human resource management. Staffing consultant Elly Harlim trains a new group of third-year business students at the Career Centre as part of their internship program. S i n g a p o r e a t a G l a n c e G e o g r a p h y : S i n g a p o r e I s l a n d a n d 6 0 s m a l l e r i s l a n d s A r e a : 2 5 2 s q . m i l e s ( 6 4 6 s q . k m ) P o p u l a t i o n : 4 . 0 m i l l i o n P e o p l e : 7 6 % C h i n e s e , 1 4 % M a l a y, 7 % I n d i a n L a n g u a g e : M a l a y, M a n d a r i n , Ta m i l a n d E n g l i s h I n d u s t r y : S h i p p i n g , b a n k i n g , t o u r i s m , o i l r e f i n i n g a n d e l e c t r o n i c s K n o w n f o r : H i g h - t e c h w i z a r d r y a n d a l s o a s t h e f o o d c a p i t a l o f A s i a PAGE 7 A Ye a r o f E u ro p e a n E x p a n s i o n Established in 1995, Kelly Scientific Resources (KSR) has grown into a $200 million global business with over 70 locations in North America, Europe and Asia-Pacific. As the world’s largest provider of staffing and human resource solutions to the scientific business community, KSR delivers its services from a network of offices located in the major business centers on three continents. Kelly Scientific Resources was the first scientific staffing company to enter France, Germany, Switzerland and Spain. We have defined scientific staffing in the European market. Our service, quality and consistency have also established KSR as the world-class benchmark and the preferred staffing company in our European markets. KSR’s global operations have a strong focus on career guidance and consulting services. The Kelly Science Learning Center, our online university, allows us to provide stronger, more knowledgeable and experienced candidates. Synthetic Organic Chemist Prafula Khoila was assigned at London’s Novartis Institute for Medical Sciences in June 2000. e c n 8 ns in Fra er ’9 b e m p pte R o S e K S ds into 9 n ary ’9 a p c x e R e b e u S Q K u n a J ns in ustralia 9 e p y ’9 R o a S M A K o ns in erto Ric 9 ust ’9 e p R o S u K P g u A e m o d g 9 ns in th er ’9 d Kin e p b R o nite cto S O U K 9 d n er ’9 b e m p R o e v o S N K S ns in witzerla ds to ester, d n gla n E 0 n ust ’0 a p x R e S K h c n a M g u A nto 8 h c n e U.S. ns in Toro R bra ary ’9 e th First K utsid e p o o S u n a J PAGE 8 United Kingdom KSR opened in 1999 in Ealing, London. A second office opened in Manchester in 2000 to serve our growing customers. Led by Manager Audrey McCulloch, we now have more than 100 KSR customers in the U.K. France KSR pioneered scientific staffing in France, turning a concept into a reality and establishing the standard for the French market. Manager Laurence Friteau opened our Paris office in 1998, and in 2000 she oversaw the addition of our Lyon office to serve the biotechnology and pharmaceutical markets. Audrey McCulloch, KSR Manager, United Kingdom 0 er ’0 ns in b e m p pte R o erm S e G K S y n a ain p ns in S ustralia ds 0 er ’0 erth, A n a p x b R e cto to P S O K 0 er ’0 e p b R o cto S O K e c n 0 ds er ’0 n, Fra n a b p m x R e e to Ly c e S D K o Laurence Friteau, Ph.D., KSR Manager, France PAGE 9 S t r e n g t h e n i n g O u r P r e s e n c e i n M e x i c o In order to serve Mexican headquartered accounts and the national requests of global companies, Kelly sought a broader presence in Mexico. We found an ideal fit in a Guadalajara staffing company owned by entrepreneur Richard Binier. In October 1999, Kelly Services purchased his company, with 14 offices, 130 staff members and a solid customer base. Today, business has more than doubled in Mexico. We have grown the operations to more than 40 offices and on-sites and 350 staff members. Richard Binier, Vice President and General Manager, Mexico The Internet and advertising – basic necessities in the U.S. and other countries – are not readily available in all of Mexico. So how do you recruit hundreds of employees at a time to fill the needs of leading technology companies in an area with such barriers? Cars drive through villages where few people have transportation, offering rides to the Kelly office where candidates are assessed and interviewed. PAGE 10 A t K e l l y o f f i c e s a r o u n d t h e w o r l d , w e s c r e e n , i n t e r v i e w , t e s t a n d t r a i n u n t i l w e a r e s a t i s f i e d w i t h e a c h c a n d i d a t e – a n d w e d o i t m o r e t h a n a m i l l i o n t i m e s e a c h y e a r w i t h m e t h o d s a d a p t e d t o e a c h c o u n t r y. Tents are set up adjacent to businesses and in other high-traffic areas to welcome people passing by. PAGE 11 D i r e c t o r s a n d O f f i c e r s Board of Directors From left to right: Verne G. Istock Retired Chairman/ President, Bank One Corporation Maureen A. Fay, O.P., Ph.D. President, University of Detroit Mercy Terence E. Adderley Chairman, President and Chief Executive Officer B. Joseph White Dean, University of Michigan Business School Cedric V. Fricke Professor Emeritus, The University of Michigan-Dearborn Senior Officers Terence E. Adderley Chairman, President and Chief Executive Officer James H. Bradley Senior Vice President, Administration Carol J. Johnson Senior Vice President and Division General Manager James A. Tanchon Senior Vice President, Global Sales Carl T. Camden Executive Vice President, Field Operations, Sales and Marketing Joan M. Brancheau Senior Vice President and General Manager, Strategic Customer Relationships William K. Gerber Executive Vice President and Chief Financial Officer George S. Corona Senior Vice President and Division General Manager Rolf E. Kleiner Senior Vice President and Division General Manager George M. Reardon Senior Vice President, General Counsel and Secretary Bernard Tommasini Senior Vice President and Regional Manager, Western Europe Andrew R. Watt Senior Vice President and Division General Manager Tommi A. White Executive Vice President, Chief Administrative and Technology Officer PAGE 12 Michael L. Durik Senior Vice President, Human Resources Larry J. Seyfarth Senior Vice President, Technical Services Group Michael S. Webster Senior Vice President and Division General Manager Arlene G. Grimsley Senior Vice President and Division General Manager Officers Steven S. Armstrong Sherry A. Drew Susan J. Marks Lori L. Sakorafis D. Craig Atkinson J. Kyle Duncan Timothy G. McAward Carleta C. Sandeen Brian C. Ault Shaun M. Fracassi Timothy T. McClain Virginia A. Scaduto Robert A. Belec Sandra W. Galac Dane D. McSpedon Aly A.E. Schambourg Richard Binier Paul M. Hampton Jonathan D. Means Michelle C. Schorr Paul A. Bordonaro Cullen F. Hanlon W. Edward Meisenheimer Lynn G. Schwartz Dirk P.M.W. Bosma Heidi L. Hanes* Lisa R. Miller Teresa E. Setting Peter F. Brixius Jane M. Brown Matthew L. Harvill Gregory C. Morrow Dhirendra Shantilal William L. Heinz Michael S. Morrow Bradley J. Shaw Sandra W. Brown Christine M. Hoebermann Teresa A. Moskus Debra S. Sheehan Jeanine E. Burgen Bonnie D. Huber Terrence T. Murphy Michael S. Butler Thomas P. Huizenga Brian P. Nowak Eileen M. Candels Charles G. Jackson Carolyn J. Palmer Glenn L. Sorrie Allen J. Sowers J. Leon Stanek Lorenzo Caporaletti Donald P. Kingston Deborah L. Perrault Richard G. Struble Mary Ann Carey Jeannie D. Koziol Juanita L. Pierman Michael J. Tilley Daniel D. Catlin Gregory S. Kruger Antonina M. Ramsey Thomas L. Totte Carol J. Clement Nicole M. Lewis* Nicholas F. Regaldi Andrew P. Trestrail Catherine H. Cobb Wilma I. Lopez Diane E. Reynolds Tami A. Troxell Cheryl F. Courier Richard J. Lueders Marc J.M. Riou Josefa Vidal Michael E. Debs Robert J. Lyons Ingrid A. Roberts Barbara A. Wilson Jacqueline B. Devin Kaye C. Manikowski Marc W. Rosenow Larry D. Worthen John P. Drew *Effective April 1, 2001 F i n a n c i a l C o n t e n t s Page Eleven Year Financial Summary_____________________________________14 Statements of Earnings____________________________________________16 Statements of Cash Flows _________________________________________17 Balance Sheets___________________________________________________18 Statements of Stockholders’ Equity__________________________________20 Notes to Financial Statements ______________________________________21 Financial Review__________________________________________________27 Report of Independent Accountants _________________________________29 Selected Quarterly Financial Data__________________________________30 Common Stock Price Information___________________________________31 Stockholders’ Information _________________________________________32 PAGE 13 E l e v e n Ye a r F i n a n c i a l S u m m a r y Kelly Services, Inc. and Subsidiaries 10 Year Growth Rates(1) 5 Year 1 Year 2000 1999 Operating Results (In millions of dollars) Sales of services.................................................. Cost of services.................................................. Gross profit ........................................................ Selling, general and administrative(5)............... Earnings from operations ................................. Interest (expense) income, net ......................... Earnings before taxes........................................ Income taxes ...................................................... Net earnings....................................................... Dividends............................................................ Summary of total taxes(3) ................................... Financial Position (In millions of dollars) Current assets .................................................... Current liabilities................................................ Working capital.................................................. Net property and equipment ........................... Total assets ......................................................... Stockholders’ equity.......................................... Capital expenditures ......................................... Depreciation and amortization......................... Common Stock Data(4) Earnings per share Basic................................................................ Diluted............................................................ Dividends per share: Classes A and B .............. Stockholders’ equity (book value) per share ..... Stock price per share: Class A at year end .... 2.6% 2.5 6.4 6.9 (1.1) 11.9% 12.9 8.3 9.6 4.0 N/A 2.5 3.3 2.0 5.9 10.7 10.8% 11.5 7.9 8.2 6.5 N/A 5.1 5.8 4.6 3.6 9.5 6.7% 6.2% 16.0 0.0 18.2 9.4 6.3 16.3 15.4 14.0 (1.8) 19.0 8.7 5.5 9.8 11.7 5.9% 5.8 4.9 6.9 (3.2) 5.1% $ 4,487.3 3,695.0 5.5 792.3 3.4 646.6 3.9 145.7 1.2 (0.4) 69.7 145.3 1.1 58.1 (0.9) 87.2 2.4 35.3 3.7 445.8 5.9 2.5% $ 754.6 466.1 3.3 288.5 1.3 201.1 7.5 1,089.6 5.4 623.5 7.1 54.2 (29.3) 39.5 8.9 $ 4,269.1 3,503.1 766.0 622.1 143.9 (0.2) 143.7 58.6 85.1 34.0 421.1 $ 736.2 451.3 284.9 187.0 1,033.7 582.4 76.7 36.2 3.0% $ 3.0 4.2 7.5 (6.0) 2.44 2.43 .99 17.45 23.63 $ 2.37 2.36 .95 16.23 25.13 Number of common shares outstanding at year end (thousands) ................................ Average number of shares outstanding (thousands) 35,739 35,874 Basic ................................................................................................................................ Diluted ............................................................................................................................ Stock splits .......................................................................................................................... 35,721 35,843 — 35,854 36,030 — Financial Ratios(1) Return on sales ................................................................................................................... Return on average assets .................................................................................................. Return on average stockholders’ equity.......................................................................... Effective tax rate ................................................................................................................. Current assets to current liabilities (current ratio) ........................................................... Price earnings ratio at year end ........................................................................................ 1.9% 8.2% 14.5% 40.0% 1.6 9.7 2.0% 8.5% 15.2% 40.8% 1.6 10.6 (1) Growth rates and financial ratios calculated based on data rounded to thousands. (2) Fiscal year included 53 weeks. (3) Consists of payroll taxes and federal, state and local taxes. (4) Shares consist of Class A and B common stock adjusted for all stock splits. (5) For 2000, includes a gain on the sale of land of $8.6 million. For 1999, 1998 and 1997, includes Year 2000 expenses of $11 million, $8 million and $1 million, respectively. Note: Certain prior year amounts have been reclassified to conform with the current presentation. PAGE 14 1998(2) 1997 1996 1995 1994 1993 1992(2) 1991 1990 $ 4,092.3 3,361.0 731.3 590.7 140.6 3.0 143.6 58.9 84.7 34.2 416.2 $ 719.9 426.5 293.4 146.4 964.2 537.8 59.1 28.9 $ 3,852.9 3,171.6 681.3 545.5 135.8 1.2 137.0 56.2 80.8 33.2 388.2 $ 771.0 407.4 363.6 112.7 967.2 559.8 39.7 28.3 $ 3,302.3 2,689.5 612.8 491.8 121.0 1.9 122.9 49.9 73.0 31.6 339.7 $ 658.6 322.0 336.6 97.7 838.9 516.9 36.5 26.1 $ 2,689.8 2,148.4 541.4 435.1 106.3 7.0 113.3 43.8 69.5 29.6 283.5 $ 558.6 242.6 316.0 84.4 718.7 476.1 34.0 22.7 $ 2,362.6 1,899.6 463.0 370.9 92.1 6.4 98.5 37.4 61.1 26.6 246.4 $ 526.7 210.9 315.8 70.2 642.4 431.5 18.4 19.1 $ 1,954.5 1,573.8 380.7 316.8 63.9 7.0 70.9 26.3 44.6 23.8 202.4 $ 447.1 155.9 291.2 68.3 542.1 386.2 16.1 17.5 $ 1,712.7 1,372.4 340.3 289.1 51.2 9.8 61.0 21.8 39.2 22.0 173.2 $ 408.6 128.8 279.8 69.3 496.1 367.3 32.4 14.7 $ 1,424.3 1,115.7 308.6 262.0 46.6 13.6 60.2 21.6 38.6 21.7 143.0 $ 411.4 124.4 287.0 51.5 479.4 355.0 23.5 10.5 $ 1,456.3 1,098.5 357.8 259.0 98.8 14.2 113.0 41.8 71.2 19.8 162.0 $ 393.2 106.0 287.2 37.9 443.8 337.8 12.0 9.5 $ 2.24 2.23 .91 15.02 31.75 $ 2.12 2.12 .87 14.67 29.25 $ 1.92 1.91 .83 13.58 27.50 $ 1.83 1.83 .78 12.52 27.75 $ 1.61 1.61 .70 11.37 27.50 $ 1.18 1.18 .63 10.23 27.75 $ 1.04 1.04 .58 9.74 35.00 $ 1.03 1.02 .57 9.43 22.00 $ 1.89 1.89 .53 8.98 26.38 35,807 38,163 38,059 38,015 37,963 37,755 37,706 37,624 37,603 37,745 37,945 — 38,099 38,191 — 38,043 38,133 — 37,993 38,057 — 37,956 38,005 — 37,728 37,761 5 for 4 37,668 37,711 — 37,616 37,679 — 37,586 37,644 — 2.1% 8.8% 15.4% 41.0% 1.7 14.2 2.1% 8.9% 15.0% 41.0% 1.9 13.8 2.2% 9.4% 14.7% 40.6% 2.0 14.4 2.6% 10.2% 15.3% 38.7% 2.3 15.2 2.6% 10.3% 14.9% 38.0% 2.5 17.1 2.3% 8.6% 11.8% 37.1% 2.9 23.5 2.3% 8.0% 10.9% 35.7% 3.2 33.7 2.7% 8.4% 11.1% 35.9% 3.3 21.6 4.9% 17.0% 22.9% 37.0% 3.7 14.0 PAGE 15 S t a t e m e n t s o f E a r n i n g s Kelly Services, Inc. and Subsidiaries 2000 1999 1998(1) (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 Net earnings .............................................................................. $ 87,176 Basic earnings per share............................................................. $ Diluted earnings per share........................................................ $ Dividends per share ................................................................... $ 2.44 2.43 .99 58,600 85,110 2.37 2.36 .95 $ $ $ $ 58,900 84,715 2.24 2.23 .91 $ $ $ $ Average shares outstanding (thousands): Basic........................................................................................ Diluted .................................................................................... 35,721 35,843 35,854 36,030 37,745 37,945 See accompanying Notes to Financial Statements. (1) Fiscal year included 53 weeks. PAGE 16 S t a t e m e n t s o f C a s h F l o w s Kelly Services, Inc. and Subsidiaries 2000 1999 1998(1) (In thousands of dollars) Cash flows from operating activities Net earnings .......................................................................... $ 87,176 $ 85,110 $ 84,715 Noncash adjustments: Depreciation and amortization........................................ 39,465 Gain on disposition of property...................................... (8,567) Changes in certain working capital components ............... (29,217) 36,238 — (5,884) 28,865 — 2,925 Net cash from operating activities ............................. 88,857 115,464 116,505 Cash flows from investing activities Capital expenditures ............................................................. (54,237) Short-term investments......................................................... Increase in other assets......................................................... 3,624 (8,018) Acquisition of companies, net of cash received................. (20,923) Proceeds from disposition of property................................ 10,309 (76,696) 6,051 (10,872) (5,557) — (59,089) 55,232 (11,133) (3,385) — Net cash from investing activities............................... (69,245) (87,074) (18,375) Cash flows from financing activities Increase (decrease) in short-term borrowings ..................... 10,629 Dividend payments ............................................................... (35,303) Exercise of stock options and other .................................... 85 Purchase of treasury stock .................................................... (5,737) (419) (34,041) 854 (551) (7,329) (34,237) 2,494 (75,949) Net cash from financing activities ............................... (30,326) (34,157) (115,021) Net change in cash and equivalents..................................... (10,714) Cash and equivalents at beginning of year......................... 54,032 (5,767) 59,799 (16,891) 76,690 Cash and equivalents at end of year.................................... $ 43,318 $ 54,032 $ 59,799 See accompanying Notes to Financial Statements. (1) Fiscal year included 53 weeks. PAGE 17 B a l a n c e S h e e t s Kelly Services, Inc. and Subsidiaries ASSETS Current Assets 2000 1999 1998 (In thousands of dollars) 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 .................... Prepaid expenses and other current assets........................ Deferred taxes ....................................................................... 631,771 602,485 584,653 24,903 52,209 22,801 50,832 15,012 48,343 Total current assets ...................................................... 754,595 736,168 719,876 Property and Equipment Land and buildings ................................................................ 44,971 Equipment, furniture and leasehold improvements .......... 253,666 Accumulated depreciation................................................... (97,552) Total property and equipment .................................... 201,085 49,458 231,654 (94,112) 187,000 44,135 179,707 (77,491) 146,351 Intangibles and Other Assets ................................................. 133,896 110,523 98,020 Total Assets................................................................................ $ 1,089,576 $ 1,033,691 $ 964,247 See accompanying Notes to Financial Statements. PAGE 18 LIABILITIES AND STOCKHOLDERS’ EQUITY 2000 1999 1998 Current Liabilities (In thousands of dollars) Short-term borrowings ............................................................ $ 57,839 $ 47,210 $ 47,629 Accounts payable .................................................................... 69,375 Payroll and related taxes......................................................... 234,807 Accrued insurance ................................................................... Income and other taxes .......................................................... 55,272 48,814 73,516 215,706 65,881 49,005 79,089 195,670 66,830 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............... Class B common stock, shares issued 3,506,826 at 2000, 3,513,656 at 1999 and 3,575,096 at 1998.............. Treasury stock, at cost Class A common stock, 4,363,578 shares at 2000, 4,234,524 at 1999 and 4,301,321 at 1998............................. 36,609 36,602 36,541 3,507 3,514 3,575 (84,251) (80,538) (81,669) Class B common stock, 12,817 shares at 2000 and............ 7,767 at 1999 and 1998 ......................................................... (371) Paid-in capital........................................................................... 16,371 Earnings invested in the business .......................................... 675,388 Accumulated foreign currency adjustments.......................... (23,784) Total stockholders’ equity............................................ 623,469 (248) 15,761 623,564 (16,282) 582,373 (248) 14,844 572,517 (7,796) 537,764 Total Liabilities and Stockholders’ Equity............................ $ 1,089,576 $ 1,033,691 $ 964,247 See accompanying Notes to Financial Statements. PAGE 19 S t a t e m e n t s o f S t o c k h o l d e r s ’ E q u i t y Kelly Services, Inc. and Subsidiaries Capital Stock Class A common stock 2000 1999 1998(1) (In thousands of dollars) Balance at beginning of year............................................ $ Conversions from Class B.................................................. Balance at end of year....................................................... $ 36,602 7 36,609 $ 36,541 61 36,602 36,538 3 36,541 Class B common stock Balance at beginning of year............................................ Conversions to Class A...................................................... Balance at end of year....................................................... 3,514 (7) 3,507 3,575 (61) 3,514 3,578 (3) 3,575 (80,538) (81,669) (6,029) Treasury Stock Class A common stock Balance at beginning of year............................................ Exercise of stock options, restricted stock awards and other .......................................................................... Treasury stock issued for acquisitions .............................. Purchase of treasury stock................................................. 1,379 522 (5,614) Balance at end of year....................................................... (84,251) Class B common stock Balance at beginning of year............................................ Purchase of treasury stock................................................. Balance at end of year....................................................... Paid-in Capital Balance at beginning of year............................................ Exercise of stock options, restricted stock awards and other .......................................................................... Treasury stock issued for acquisitions .............................. (248) (123) (371) 15,761 498 112 Balance at end of year....................................................... 16,371 Earnings Invested in the Business Balance at beginning of year............................................ Net earnings ....................................................................... Dividends ............................................................................ Balance at end of year....................................................... Accumulated Foreign Currency Adjustments Balance at beginning of year............................................ Equity adjustment for foreign currency........................... Balance at end of year....................................................... 623,564 87,176 (35,352) 675,388 (16,282) (7,502) (23,784) Stockholders’ Equity at end of year ..................................... $ 623,469 Comprehensive Income Net earnings ...................................................................... $ Other comprehensive income — Foreign 87,176 currency adjustments ...................................................... (7,502) Comprehensive income .................................................... $ 79,674 See accompanying Notes to Financial Statements. (1) Fiscal year included 53 weeks. PAGE 20 1,438 244 (551) (80,538) (248) — (248) 14,844 808 109 15,761 572,517 85,110 (34,063) 623,564 (7,796) (8,486) (16,282) 582,373 85,110 (8,486) 76,624 $ $ $ 144 102 (75,886) (81,669) (185) (63) (248) 10,980 3,036 828 14,844 522,039 84,715 (34,237) 572,517 (7,092) (704) (7,796) 537,764 84,715 (704) 84,011 $ $ $ N o t e s t o F i n a n c i a l S t a t e m e n t s Kelly Services, Inc. and Subsidiaries (In thousands of dollars except share and per share items) 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. 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. 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 trans- lated 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. PAGE 21 N o t e s t o F i n a n c i a l S t a t e m e n t s Kelly Services, Inc. and Subsidiaries (In thousands of dollars except share and per share items) 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 arrange- ment 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..................... 3,956 Weighted average interest rate.............................. 2,567 2,672 4.6% 5.5% 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. PAGE 22 7. Earnings Per Share The reconciliations of earnings per share computations for the fiscal 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......................... Restricted and performance awards and other .................. Weighted average common shares outstanding — assuming dilution.................. Earnings per share — basic..... $ Earnings per share — — 122 41 135 90 110 35,843 36,030 37,945 2.44 $ 2.37 $ 2.24 assuming dilution.................. $ 2.43 $ 2.36 $ 2.23 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: Increase in accounts receivable .............................. $(31,748) $ (26,972) $ (12,712) 2000 1999 1998 Increase in prepaid expenses and other current assets ........................ Increase in deferred (2,997) (9,138) (2,277) 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 Cash flows from short-term investments for 2000, 1999 and 1998 were as follows: Deferred tax assets (liabilities) are comprised of the following: 2000 1999 1998 2000 1999 1998 Depreciation and Sales/Maturities ............... $ 937,084 (933,460) Purchases.......................... $ 905,326 $ 1,645,815 (1,590,583) (899,275) Total .................................. $ 3,624 $ 6,051 $ 55,232 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 (4,155) Foreign.............................. $ 134,572 9,138 $ 134,731 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 10,840 U.S. state and local....... 4,702 Foreign .......................... $ 42,898 11,500 6,880 $ 47,599 12,000 5,802 Total current .................. Total deferred................... 58,693 (593) 61,278 (2,678) 65,401 (6,501) Total provision.................. $ 58,100 $ 58,600 $ 58,900 amortization........................ $ (8,628) $ (6,420) $ (5,307) Employee compensation and benefit plans ............... Workers’ compensation ........ Bad debt reserves ................. Loss carryforwards ................. Other, net ............................... Valuation allowance............... Total deferred tax assets....... Total deferred tax liabilities .. 26,055 19,127 4,237 6,271 6,728 (1,581) 52,209 (741) 23,276 22,352 3,896 4,793 6,053 (3,118) 50,832 (1,044) 22,845 22,428 3,789 3,453 4,198 (3,063) 48,343 (1,279) Total ........................................ $ 51,468 $ 49,788 $ 47,064 The differences between income taxes for financial reporting purposes and the U.S. statutory rate are as follows: 2000 1999 1998 Income tax based on statutory rate........................... 35.0% 35.0% 35.0% State income taxes, net of federal benefit ............. Other, net ................................... 4.9 0.1 5.2 0.6 5.4 0.6 Total............................................. 40.0% 40.8% 41.0% 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...................... 2007-2010...................... No expiration................ — 320 1,261 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. PAGE 23 N o t e s t o F i n a n c i a l S t a t e m e n t s Kelly Services, Inc. and Subsidiaries (In thousands of dollars except share and per share items) 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. 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: Dividend yield............................ Risk-free interest rate ................ Expected volatility...................... Expected lives ............................ 2000 4.0% 5.9% 29.0% 6 yrs 1999 4.0% 5.7% 30.0% 6 yrs 1998 3.0% 5.3% 31.0% 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: Options Weighted Avg. Exercise Price 2000: Outstanding at beginning of year...... 1,592,000 730,000 Granted................................................. (2,000) Exercised .............................................. Cancelled.............................................. (197,000) Outstanding at end of year ................ 2,123,000 $28.77 24.01 24.77 27.15 $27.29 Options exercisable at year end ........ Weighted average fair value of options granted during the year ....... 763,000 $29.05 $5.98 1999: Outstanding at beginning of year...... 1,330,000 592,000 Granted................................................. (32,000) Exercised .............................................. Cancelled.............................................. (298,000) Outstanding at end of year ................ 1,592,000 $30.78 25.05 26.80 30.54 $28.77 Options exercisable at year end ........ Weighted average fair value of options granted during the year ....... 552,000 $29.08 $6.30 1998: Outstanding at beginning of year...... 1,160,000 448,000 Granted................................................. (104,000) Exercised .............................................. Cancelled.............................................. (174,000) Outstanding at end of year ................ 1,330,000 $28.68 35.16 28.15 29.67 $30.78 Options exercisable at year end ........ Weighted average fair value of options granted during the year ....... 404,000 $28.07 $10.06 The following table summarizes information about options outstanding at December 31, 2000: Options Outstanding Options Exercisable Range of Exercise Prices Number Outstanding as of 12/31/00 $22.50-24.00 $24.01-24.50 $24.51-28.00 $28.01-29.00 $29.01-33.00 $33.01-38.50 642,000 446,000 248,000 244,000 219,000 324,000 $22.50-38.50 2,123,000 Weighted Average Remaining Life (Years) 9.21 8.31 5.20 6.45 5.09 7.10 7.49 Weighted Average Exercise Price $23.97 24.48 26.56 28.22 30.57 35.33 $27.29 Number Exercisable as of 12/31/00 Weighted Average Exercise Price — $ — 24.50 26.51 28.19 30.48 35.32 100,000 209,000 137,000 183,000 134,000 763,000 $29.05 PAGE 24 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 29,100 2002 .......................... 21,000 2003 .......................... 13,600 2004 .......................... 2005 .......................... 8,900 23,500 Later years ................ Total .......................... $133,800 Lease expense for 2000, 1999 and 1998 amounted to $45,100, $43,100 and $38,600, respectively. 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 52 weeks 1999 52 weeks 1998 53 weeks Sales: U.S. Commercial Staffing..... $2,332,900 1,052,900 PTSA ...................................... 1,101,500 International .......................... $2,247,000 937,800 1,084,300 $2,262,700 864,800 964,800 Consolidated Total............. $4,487,300 $4,269,100 $4,092,300 Earnings from Operations: U.S. Commercial Staffing..... $ 189,700 72,800 PTSA ...................................... 22,500 International .......................... (139,300) Corporate.............................. $ 198,000 55,600 33,600 (143,200) $ 197,400 44,000 29,200 (130,000) Consolidated Total............. $ 145,700 $ 144,000 $ 140,600 PAGE 25 N o t e s t o F i n a n c i a l S t a t e m e n t s 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 52 weeks 1999 52 weeks 1998 53 weeks Depreciation and Amortization: U.S. Commercial Staffing ......... $ 5,881 2,597 PTSA........................................... 11,137 International .............................. 19,850 Corporate .................................. $ 5,911 $ 6,237 1,977 10,262 10,389 2,395 11,228 16,704 Consolidated Total ................. $ 39,465 $ 36,238 $ 28,865 Interest Income: U.S. Commercial Staffing ......... $ PTSA........................................... International .............................. Corporate .................................. — $ 107 630 2,033 — $ 23 615 1,634 — 141 783 5,282 Consolidated Total ................. $ 2,770 $ 2,272 $ 6,206 Interest Expense: U.S. Commercial Staffing ......... $ PTSA........................................... International .............................. Corporate .................................. — $ — 3,020 159 — $ — 2,389 124 — — 3,207 — 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 73,900 International.......................... 78,700 74,500 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. PAGE 26 F i n a n c i a l R e v i e w Kelly Services, Inc. and Subsidiaries 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. 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. PAGE 27 F i n a n c i a l R e v i e w Kelly Services, Inc. and Subsidiaries 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. 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. PAGE 28 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. R e p o r t o f I n d e p e n d e n t A c c o u n t a n t s To the Stockholders and Board of Directors of Kelly Services, Inc. In our opinion, the accompanying balance sheets and the related statements of earnings, of cash flows and of stockholders’ equity, as set forth on pages 16 through 26, 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. 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 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. Detroit, Michigan January 23, 2001 PAGE 29 S e l e c t e d Q u a r t e r l y F i n a n c i a l D a t a ( u n a u d i t e d ) Kelly Services, Inc. and Subsidiaries First Quarter Second Quarter Third Quarter Fourth Quarter Year (In thousands of dollars except per share items) Sales of services 2000 .......................................................... $1,080,069 1,025,959 1999 .......................................................... 959,382 1998 (53 weeks)........................................ $1,106,740 1,066,783 1,001,286 $1,154,480 1,092,002 1,032,875 $1,146,002 1,084,369 1,098,708 $4,487,291 4,269,113 4,092,251 Cost of services 2000 .......................................................... 1999 .......................................................... 1998 (53 weeks)........................................ 892,095 846,828 791,472 909,731 876,809 823,542 Selling, general and administrative 2000 .......................................................... 1999 .......................................................... 1998 (53 weeks)........................................ 161,406 153,539 143,069 160,342 154,841 143,584 Net earnings 2000 .......................................................... 1999 .......................................................... 1998 (53 weeks)........................................ 16,060 15,188 15,064 21,825 20,734 20,623 948,683 893,900 846,094 162,017 155,390 145,404 26,003 25,018 24,903 944,473 885,515 899,868 3,694,982 3,503,052 3,360,976 162,859 158,340 158,602 23,288 24,170 24,125 646,624 622,110 590,659 87,176 85,110 84,715 Basic earnings per share(1) 2000 .......................................................... 1999 .......................................................... 1998 (53 weeks)........................................ Diluted earnings per share(1) 2000 .......................................................... 1999 .......................................................... 1998 (53 weeks)........................................ Dividends per share 2000 .......................................................... 1999 .......................................................... 1998 .......................................................... .45 .42 .39 .45 .42 .39 .24 .23 .22 .61 .58 .54 .61 .58 .54 .25 .24 .23 .73 .70 .65 .73 .69 .65 .25 .24 .23 .65 .67 .66 .65 .67 .66 .25 .24 .23 2.44 2.37 2.24 2.43 2.36 2.23 .99 .95 .91 (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. PAGE 30 C o m m o n S t o c k P r i c e I n f o r m a t i o n Kelly Services, Inc. and Subsidiaries First Quarter Second Quarter Third Quarter Fourth Quarter Year 2000 Class A common High .......................................................... Low............................................................ Final .......................................................... Class B common High .......................................................... Low............................................................ Final .......................................................... $ 26.25 23.00 23.94 26.75 22.00 23.00 $ 25.00 22.06 23.13 24.13 22.50 24.13 $ 26.88 22.13 23.63 24.81 24.00 24.75 $ 29.00 20.25 23.63 25.50 24.50 24.56 $ 29.00 20.25 23.63 26.75 22.00 24.56 1999 Class A common High .......................................................... Low............................................................ Final .......................................................... Class B common High .......................................................... Low............................................................ Final .......................................................... 1998 Class A common High .......................................................... Low............................................................ Final .......................................................... Class B common High .......................................................... Low............................................................ Final .......................................................... 32.50 24.13 26.75 29.38 28.25 29.00 37.75 29.25 37.13 58.75 29.50 38.00 32.50 25.00 31.50 29.75 26.25 28.75 38.50 30.25 32.38 38.00 34.00 34.50 31.63 25.38 27.81 30.88 23.75 28.00 35.63 25.63 28.38 36.25 29.00 29.00 30.75 22.88 25.13 29.88 24.00 24.00 35.13 23.75 31.75 33.50 28.75 31.00 32.50 22.88 25.13 30.88 23.75 24.00 38.50 23.75 31.75 58.75 28.75 31.00 PAGE 31 S t o c k h o l d e r s ’ I n f o r m a t i o n Kelly Services, Inc. and Subsidiaries Dividend Reinvestment and Direct Stock Purchase Plan Registered shareholders can purchase additional shares of Kelly’s Class A common stock through Kelly’s Dividend Reinvestment and Direct Stock Purchase Plan. Initial purchases of Kelly’s Class A common stock can also be made through this Plan. Participation is voluntary and allows for automatic reinvestment of cash dividends, direct cash investments, and safekeeping of stock certificates. For more information about this service visit our website address: www.kellyservices.com and select Investor Relations or contact Investor Relations at Kelly. Stock Listings Kelly Services Class A and Class B common stock trade on the Nasdaq Stock MarketSM under the symbols: KELYA and KELYB. List of Trademarks in this Annual Report The following is a list of trademarks of Kelly Services, Inc. used in the 2000 Annual Report to Stockholders: Asia’s Own Quality Staffing Company, BTI Consultants, Business Trends, Extra ETT, Kelly, Kelly Automotive Services, KellyConnect, Kelly Educational Staffing, Kelly HR Consulting, Kelly Scientific Resources, Kelly Science Learning Center, Kelly Services, KSR, and ProStaff. Forward-Looking Statements This report contains forward-looking statements relating to future events that are subject to risks and uncertainties more fully described on page 28. Actual results may differ materially. Kelly Services, Inc. Corporate Headquarters 999 West Big Beaver Road Troy, Michigan 48084 (248) 362-4444 www.kellyservices.com Annual Meeting The Annual Meeting of stockholders will be held on Monday, May 14, 2001 at 11:00 a.m. (EST), at the Corporate Headquarters of the Company. All stock- holders are invited to attend. Stock Transfer Agent & Registrar State Street Bank & Trust Company C/O Equiserve, L.P. P.O. Box 43011 Providence, RI 02940-3011 For assistance with transfers of stock to another name, lost or destroyed stock certificates, lost dividend checks, direct deposit of dividends, consolidation of accounts or change of addresses, please contact Equiserve toll free at (800) 829-8259, 8:00 a.m. – 5:00 p.m. (EST), or visit their website address – www.equiserve.com. You may also contact Kelly’s Director of Investor Relations. Independent Accountants PricewaterhouseCoopers LLP 400 Renaissance Center Detroit, Michigan 48243 Financial Reports for Stockholders Stockholders, security analysts and interested investors may obtain additional quantities of this annual report, the Company’s quarterly reports, as well as a copy of the Company’s Annual Report to the Securities and Exchange Commission on Form 10-K, without charge, by addressing requests to the Director of Investor Relations at the Corporate Headquarters. Quarterly financial information can also be found at the Kelly Services website. Investor Relations Contact Director, Investor Relations Kelly Services, Inc. 999 West Big Beaver Road Troy, Michigan 48084 Telephone: (248) 244-4586 PAGE 32 Printed on Recycled Paper