Corporate Information: Annual Reports

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
The Company's fiscal year ends on the Sunday nearest to December 31. The three most recent years ended on January 2, 2000 (1999), January 3, 1999 (1998) and December 28, 1997 (1997).

The financial statements consolidate the accounts and operations of the Company and its subsidiaries, all of which are wholly owned, after elimination of all intercompany accounts and transactions.

The Company divides its operations into three segments: (1) U.S. Commercial Staffing, (2) Professional, Technical and Staffing Alternatives and (3) International. The accounts of the Company's foreign operations are trans- lated at appropriate rates of exchange. Revenues, costs and expenses of foreign subsidiaries are translated to U.S. dollars at average-period exchange rates. Assets and liabilities of foreign subsidiaries are translated to U.S. dollars at year-end exchange rates with the effects of these translation adjustments being reported as a separate component of accumulated other comprehensive income in stockholders' equity.

Foreign operations are conducted in Australia, Belgium, Canada, Denmark, France, Germany, Ireland, Italy, Luxembourg, Mexico, the Netherlands, New Zealand, Norway, Puerto Rico, Russia, Spain, Sweden, Switzerland and the United Kingdom. Refer to the Segment Disclosures footnote for additional information.

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.

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.

Certain prior year amounts have been reclassified to conform with the current presentation.

2. Current Assets
Cash and equivalents are stated at cost, which approximates market. Included are highly liquid debt instruments with original maturities of three months or less.

Short-term investments are debt instruments having original maturities of more than three months and are classified as available for sale. Of these investments, federal, state and local government obligations comprised approximately 60% in 1999, 80% in 1998 and 70% in 1997. Short-term investments due within one year totaled $5,800 in 1999 and $64,000 in 1997, with the balance due within two years.

The entire short-term investments balance in 1998 was due within one year. The difference between carrying amounts and market was not material at January 2, 2000, January 3, 1999, and December 28, 1997.

Interest income was $2,272, $6,206 and $4,390, respectively, for the years 1999, 1998 and 1997.

3. Supplemental Cash Flow Information
Changes in certain working capital components, as disclosed in the statements of cash flows, for the years 1999, 1998 and 1997 were as follows:

	1999	1998	1997
Increase in accounts receivable	$(26,972)	$(12,712)	$(27,444)
Increase in prepaid expenses and other current assets	(9,138)	(2,277)	(1,499)
Increase in deferred taxes	(2,655)	(6,389)	(11,732)
Increase (decrease) in accounts payable	(3,059)	16,582	16,094
Increase (decrease) in payroll and related taxes	22,575	(1,905)	47,319
Increase (decrease) in accrued insurance	(924)	5,755	7,981
Increase in income and other taxes	13,250	3,185	8,032

Total	$(6,923)	$2,239	$38,751

Cash flows from short-term investments for 1999, 1998 and 1997 were as follows:

	1999	1998	1997
Sales/Maturities	$905,326	$1,645,815	$1,749,954
Purchases	(899,275)	(1,590,583)	(1,789,220)

Total	$(6,051)	$55,232	$(39,266)

4. Property and Equipment
Properties are stated at cost and include expenditures for additions and major improvements. 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. Fully depreciated assets are eliminated from the accounts. For financial reporting purposes, assets 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. Depreciation expense was $33,900 for 1999, $25,400 for 1998 and $22,900 for 1997.

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 January 2, 2000:

Fiscal Year:
	2000	$43,400
	2001	30,000
	2002	22,000
	2003	14,800
	2004	8,600
	Later years	16,400

	Total	$135,200

Lease expense for 1999, 1998 and 1997 amounted to $43,100, $38,600 and $35,900, respectively.

5. Intangibles and Other Assets
Intangibles and other assets include goodwill of $67,900, $64,100 and $56,000 at year-ends 1999, 1998 and 1997, respectively. Goodwill, which represents the excess of cost over net assets of businesses acquired, is amortized on a straight-line basis over periods not exceeding 40 years. Accumulated amortization of goodwill at 1999, 1998 and 1997 was $7,900, $6,900 and $5,300, respectively. Goodwill and other intangible amortization expense was $2,300, $3,500 and $5,400 in 1999, 1998 and 1997, respectively.

The Company periodically reviews the specific carrying amounts of goodwill and has determined that no impairments have occurred. Such reviews are based on various analyses including profitability projections and management's judgment of the related business' ability to achieve sufficient profitability.

Other assets include deposits and cash values of life insurance on the lives of officers and key employees.

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 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. On September 29, 1998, and November 24, 1998, the Company repurchased 1,500,000 and 1,000,000 shares of its Class A common stock, respectively, 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.

7. Earnings Per Share
The reconciliations of earnings per share computations for the fiscal years 1999, 1998 and 1997 were as follows:

	1999	1998	1997
Net earnings	$85,110	$84,715	$80,780

Determination of shares (thousands):
Weighted average common shares outstanding	35,854	37,745	38,099
Effect of dilutive securities:
Stock options	41	90	61
Restricted and performance awards and other	135	110	31

Weighted average common
shares outstanding - assuming dilution	36,030	37,945	38,191

Earnings per share - basic	$2.37	$2.23	$2.12
Earnings per share - assuming dilution	$2.36	$2.23	$2.12

Stock options to purchase 1,162,000, 458,000 and 423,000 shares of common stock at a weighted average price per share of $24.98, $35.17 and $31.02 were out-standing during 1999, 1998 and 1997, respectively, but were not included in the computation of diluted earnings per share. The options' exercise price was greater than the average market price of the common shares and was anti-dilutive.

8. Short-term Borrowings
Short-term borrowings of $47,210, $47,629 and $54,958 were outstanding at year-ends 1999, 1998 and 1997, respectively. Weighted average interest rates were 4.6%, 5.3% and 7.8% at year-ends 1999, 1998 and 1997, respectively. Interest expense and payments related to the short-term borrowings for 1999, 1998 and 1997 were as follows:

	1999	1998	1997
Interest expense	$2,513	$3,207	$3,174
Interest payments	2,567	3,956	2,174

During the fourth quarter of 1998 the Company entered into 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 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. 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 value.

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 $7,600 in 1999, $7,000 in 1998 and $6,300 in 1997.

10. Income Taxes
Pretax income for the years 1999, 1998 and 1997 was taxed under the following jurisdictions:

	1999	1998	1997
Domestic	$134,572	$134,731	$129,533
Foreign	9,138	8,884	7,447

Total	$143,710	$143,615	$136,980

The provision for income taxes was as follows:

	1999	1998	1997
Current tax expense:
U.S. federal	$42,898	$47,599	$52,517
U.S. state and local	11,500	12,000	10,715
Foreign	6,880	5,802	4,405

Total current	61,278	65,401	67,637
Total deferred	(2,678)	(6,501)	(11,437)

Total provision	$58,600	$58,900	$56,200

Deferred tax assets (liabilities) are comprised of the following:

	1999	1998	1997
Depreciation and amortization	$(6,420)	$(5,307)	$(5,604)
Employee compensation and benefit plans	23,276	22,845	19,143
Workers' compensation	22,352	22,428	19,811
Loss carryforwards	4,793	3,453	2,946
Other, net	9,949	7,987	8,322
Valuation allowance	(3,118)	(3,063)	(2,663)

Total deferred tax assets	50,832	48,343	41,955
Total deferred tax liabilities	(1,044)	(1,279)	(1,363)

Total	$49,788	$47,064	$40,592

The differences between income taxes for financial reporting purposes and the U.S. statutory rate are as follows:

	1999	1998	1997
Income tax based on statutory rate	35.0%	35.0%	35.0%
State income taxes, net of federal benefit	5.2	5.4	5.1
Other, net	0.6	0.6	0.9

Total	40.8%	41.0%	41.0%

The Company has loss carryforwards at January 2, 2000, totaling $4,793 which expire as follows:

Year	Amount
2000	$8
2001	423
2002	196
2003-2009	1,082
No expiration	3,084

Total	$4,793

A valuation allowance of $3,118 has been recorded against the loss carryforwards. The valuation allowance is provided on the tax benefits unless it is considered more likely than not that the benefit will be realized.

Provision has not been made for U.S. or additional foreign income taxes on an estimated $15,700 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 $53,400 in 1999, $65,700 in 1998 and $64,300 in 1997.

11. Performance Incentive Plan
Under the 1992 Performance Incentive Plan as amended and restated in 1996 (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 to exceed 10 years. The Plan provides that the maximum number of shares available for grants is 7-1/2 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 1999, 1998 and 1997 were 946,000, 1,213,000 and 1,149,000, 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 $1,487, $1,135 and $809 for 1999, 1998 and 1997, respectively; basic earnings per share would have been reduced by $.04 in 1999, $.03 in 1998 and $.02 in 1997; and diluted earnings per share would have been reduced by $.04 in 1999 and $.03 in 1998 and 1997.

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 used for grants in 1999, 1998 and 1997, respectively: dividend yield of 4.0 percent in 1999 and 3.0 percent in 1998 and 1997, expected volatility of 30, 31 and 30 percent, risk-free interest rates of 5.7, 5.3 and 5.9 percent and expected lives of six years in 1999 and 1998, and seven years in 1997.

A summary of the status of stock option grants under the Plan as of January 2, 2000, January 3, 1999 and December 28, 1997, and changes during the years ended on those dates, is presented as follows:

	Options	Weighted Avg. Exercise Price
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

1997:
Outstanding at beginning of year	1,022,000	$28.69
Granted	434,000	28.50
Exercised	(90,000)	27.76
Cancelled	(206,000)	28.72

Outstanding at end of year	1,160,000	$28.68

Options exercisable at year end	280,000	$27.70
Weighted average fair value of options granted during the year	$8.69

The following table summarizes information about options outstanding at January 2, 2000:

	Options Outstanding			Options Exercisable
Range of Exercise Prices	Number Outstanding as of 1/2/000	Weighted Average Remaining Life (Years)	Weighted Average Exercise Price	Number Exercisable as of 1/2/00	Weighted Average Exercise Price
$24.00-24.50	448,000	9.15	$24.50	2,000	$24.50
$24.51-28.00	285,000	6.08	26.52	223,000	26.44
$28.01-29.00	264,000	7.44	28.23	93,000	28.19
$29.01-33.00	255,000	6.03	30.60	160,000	30.51
$33.01-38.50	340,000	8.10	35.32	74,000	35.27

$24.00-38.50	1,592,000	7.59	$28.77	552,000	$29.08

As of January 2, 2000, no SARs have been granted under the Plan. Restricted awards are issued to certain key employees and are subject to forfeiture until the end of an established restriction period. Restricted awards totaling 87,000, 14,500 and 38,900 shares were granted under the Plan during 1999, 1998 and 1997, respectively. The weighted average grant date price of such awards was $26.55, $35.64 and $29.58 for 1999, 1998 and 1997, respectively. Restricted awards outstanding totaled 104,000, 36,200 and 52,800 shares at year-ends 1999, 1998 and 1997, respectively, and have a weighted average remaining life of 2.2 years at January 2, 2000.

Under the Plan, performance awards may be granted to senior executive officers, 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 1999. Performance awards totaling 51,500 and 44,500 shares were granted under the Plan during 1998 and 1997, respectively. The weighted average grant date prices of such awards were $34.94 and $28.06 for 1998 and 1997, respectively. Unearned performance awards outstanding at year-ends 1999, 1998 and 1997 were 70,000, 115,200 and 76,300, respectively, and have a weighted average remaining life of six months at January 2, 2000. Total compensation cost recognized for restricted and performance awards was $1,000, $2,000 and $1,400 for 1999, 1998 and 1997, respectively.

12. 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 January 2, 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 January 2, 2000.

13. Segment Disclosures
In 1998, the Company adopted Statement of Financial Accounting Standards (SFAS) 131, Disclosures About Segments of an Enterprise and Related Information, which revises reporting and disclosure requirements for operating segments.

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."

The following table presents information about the reported operating income of the Company for the fiscal years 1999, 1998 and 1997. 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.

	1999 52 weeks	1998 53 weeks	1997 52 weeks
Sales:
U.S. Commercial Staffing	$2,247,700	$2,263,500	$2,201,000
PTSA	937,100	864,000	797,400
International	1,084,300	964,800	854,500

Consolidated Total	$4,269,100	$4,092,300	$3,852,900


Earnings from Operations:
U.S. Commercial Staffing	$198,600	$200,500	$194,800
PTSA	55,000	44,100	37,400
International	33,600	29,600	20,500
Corporate	(143,200)	(133,600)	(116,900)


Consolidated Total	$144,000	$140,600	$135,800

Specified items included in segment earnings from operations for the fiscal years 1999, 1998 and 1997 were as follows:

	1999 52 weeks	1998 53 weeks	1997 52 weeks
Depreciation and Amortization:
U.S. Commercial Staffing	$5,911	$6,237	$7,531
PTSA	2,395	1,977	1,972
International	11,228	10,262	9,213
Corporate	16,704	10,389	9,625

Consolidated Total	$36,238	$28,865	$28,341


Interest Income:
U.S. Commercial Staffing
PTSA	23	141	57
International	615	783	492
Corporate	1,634	5,282	3,841

Consolidated Total	$2,272	$6,206	$4,390


Interest Expense:
U.S. Commercial Staffing
PTSA
International	2,389	3,207	2,774
Corporate	124		400

Consolidated Total	$2,513	$3,207	$3,174

The following is long-lived assets information by geographic area as of the years ended 1999, 1998 and 1997:

	1999 52 weeks	1998 53 weeks	1997 52 weeks
Depreciation and Amortization:
U.S. Commercial Staffing	$5,911	$6,237	$7,531
PTSA	2,395	1,977	1,972
International	11,228	10,262	9,213
Corporate	16,704	10,389	9,625

Consolidated Total	$36,238	$28,865	$28,341


Interest Income:
U.S. Commercial Staffing
PTSA	23	141	57
International	615	783	492
Corporate	1,634	5,282	3,841

Consolidated Total	$2,272	$6,206	$4,390


Interest Expense:
U.S. Commercial Staffing
PTSA
International	2,389	3,207	2,774
Corporate	124		400

Consolidated Total	$2,513	$3,207	$3,174

The following is long-lived assets information by geographic area as of the years ended 1999, 1998 and 1997:

	1999	1998	1997
Long-Lived Assets:
Domestic	$223,000	$170,500	$130,000
International	74,500	73,900	66,300

Total	$297,500	$244,400	$196,300

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.

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